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TUESDAY, DECEMBER 16, 2014

PERSPECTIVE

Insider trading ruling will curtail regulatory authority

By Jason de Bretteville and Justin Bernstein

he 2nd U.S. Circuit Court of Appeals

just made prosecuting insider trading
more difficult. In United States v. Newman, 13-1837 (Dec. 10, 2014), the court held
that to convict a person who traded on insider
information a tippee the government
must prove the tippee knew that an insider
disclosed material nonpublic information for
personal benefit. The opinion has two major
implications for traders.
In Newman, two hedge fund portfolio managers, Todd Newman and Anthony Chiasson,
acquired and traded on technology companies earnings numbers before they were public. But they did not obtain the tips directly
from company insiders. Instead, they were
three or four levels removed from the insiders, having received the information through
a chain of others leading back to the insider.
A jury convicted the two men in 2012, but
the 2nd Circuit reversed their conviction last
week.
The first important implication for traders is
that (in the 2nd Circuit, at least) a tippee who
trades on inside information is not liable for
insider trading unless she knows that the insider who disclosed the information received
a personal benefit for doing so. To be clear,
this notion is not new: Defense attorneys have
long asked that the government be required to
prove tippee knowledge of the tippers personal benefit, and multiple courts have given
such an instruction to jurors. But the Newman
decision indicates that government resistance
against this requirement may be at an end.

The New York Times

Anthony Chiasson leaves Manhattan Federal Court after

being released on bail on charges of insider trading, Jan.
18, 2012, in New York

This means traders who receive a tip indirectly and without knowledge of the circumstances of the initial disclosure are far less
likely to be prosecuted, much less convicted, for insider trading. If a trader is several
degrees removed from the insider, it can be
difficult to prove that she knew the insider
obtained a personal benefit in exchange for
disclosing the material nonpublic information
to the initial tippee.
The second, and perhaps more important
implication of Newman is that it appears to
raise the bar for what constitutes a personal
benefit. Until now, government regulators
have treated as sufficient the mere pleasure
one might get from giving a gift to a friend.
In Newman, the court rejected the notion that
the mere fact of a friendship, particularly
of a casual or social nature, establishes a
personal benefit. What would suffice is less
clear, but the court indicated that the benefit
must be a financial gain or something that

is objective, consequential, and represents at

least a potential gain of a pecuniary or similarly valuable nature.
This definition is far from precise, but it
makes clear that mere proof of social ties is
not enough. Rather, the relationship between
the insider and the tippee must suggest a quid
pro quo exchange that provides a benefit beyond the bond of friendship. For most traders,
this is good news. Under the prior view, the
standard bordered on strict liability. Although
Newman muddies the waters, it has done so
in a way that substantially curtails regulatory authority, and expands the scope of lawful
trading on material nonpublic information.
Jason de Bretteville is a shareholder and
chair of the White Collar, Enforcement Defense & Investigations Practice of Stradling
Yocca Carlson & Rauth PC. Justin Bernstein is an associate in Stradlings business
litigation and securities litigation practices.

Jason de Bretteville
Stradling Yocca Carlson & Rauth

Justin Bernstein
Stradling Yocca Carlson & Rauth

Reprinted with permission from the Daily Journal. 2014 Daily Journal Corporation. All rights reserved. Reprinted by ReprintPros 949-702-5390.