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U.S. asks Supreme Court to reverse major insider trading ruling


(Reuters) — The U.S. Justice Department asked the Supreme Court on Thursday to reverse a federal appellate court’s insider trading ruling, calling it a “roadmap” for potential criminals that undermined efforts to ensure the “integrity of the security markets.”

Solicitor General Donald Verrilli filed a petition seeking review of a December ruling by the 2nd U.S. Circuit Court of Appeals in New York that reversed the insider trading convictions of hedge fund managers Todd Newman and Anthony Chiasson.

The ruling marked a major setback for an insider trading crackdown underway since 2009 under Manhattan U.S. Attorney Preet Bharara, whose office brought charges against 96 people.

In the petition, Mr. Verrilli wrote that the appeals court decision will “hurt market participants, disadvantage scrupulous market analysts, and impair the government’s ability to protect the fairness and integrity of the securities markets.”

Mr. Newman, a former Diamondback Capital Management portfolio manager, and Mr. Chiasson, co-founder of Level Global Investors, were convicted in 2012 and sentenced to 4-1/2 years and 6-1/2 years in prison, respectively, for engaging in a scheme involving tips about Dell Inc. and Nvidia Corp.

In the Dec. 10 ruling reversing their convictions, a three-judge panel held that prosecutors must prove that a trader knew a tip’s source received something in exchange.

That restriction made securing convictions against traders who heard the information from someone other than the original tipper harder by requiring evidence about their knowledge of what benefit the source obtained.

The court also narrowly defined what constituted a benefit to the tipper by saying it could not be just be a friendship but had to be of “some consequence.”

Federal prosecutors and the U.S. Securities and Exchange Commission have said the decision weakened the fight against insider trading.

In the petition to the Supreme Court, Mr. Verrilli only sought to overturn the 2nd Circuit’s definition of what amounts to an illegal benefit.

Otherwise, he wrote, conduct long understood as prohibited would “elude criminal prosecution — creating an obvious roadmap for unscrupulous insiders and tippees.”

For the U.S. Justice Department, there are no guarantees the Supreme Court will take up the case. A Supreme Court ruling could also potentially back-fire by adopting the 2nd Circuit’s interpretation of insider trading.

Gregory Morvillo, a lawyer for Mr. Chiasson, said his client “remains confident that the carefully reasoned analysis of the 2nd Circuit is well grounded in the facts and the law and will withstand Supreme Court review.”

But Stephen Crimmins, a defense lawyer at Murphy & McGonigle not involved in the case, said the fact the appellate court’s ruling was binding on courts in New York, the home of Wall Street, likely drove prosecutors to determine an appeal of the restrictive ruling was worth it.

“Prosecutors and SEC will have a much tougher job proving their cases,” Mr. Crimmins said. “It’s easy to understand why Preet Bharara and the Justice Department would want ask the Supreme Court to review this.”

A lawyer for Mr. Newman did not immediately respond to a request for comment.

The Supreme Court will decide whether or not to hear the case after it returns from its summer recess in October.