Friday, September 11, 2015

Government Repeats Call for Review of Insider Trading Law ‘Upheaval’

By Kevin Kulling, J.D.

Repeating its call for the Supreme Court to review what it calls an upheaval in insider trading law, the government made its final attempt to persuade the high court to grant its petition to review the Second Circuit’s application of the “personal benefit” test announced in Dirks. The government’s reply brief filed in U.S. v. Newman reiterates the government’s view that the Court’s review is urgently needed to restore certainty and order.

Todd Newman had argued in his response to the government’s petition that the Supreme Court should not take up the review because the Second Circuit’s opinion can be reconciled with Dirks; does not conflict with decisions applying Dirks; can be supported on independent grounds; and does not pose a threat to investors or the integrity of the securities markets. The government reply simply states that each of those submissions is wrong.

U.S. v. Newman. As reported in Securities Regulation Daily on August 27, 2015, the Newman case turns on the remoteness of Newman from insiders who provided information about Dell and NVIDIA to others. According to Newman’s lawyers, Newman was at least three or more steps removed in two separate lines of tippees, one extending from a Dell investor relations department employee, and another that led back to an employee in NVIDIA’s finance department. At Newman’s trial, the government claimed that the Dell employee benefited from career advice he got from another tippee.

In its reply brief, the government reiterated that the Second Circuit’s legal interpretation of “personal benefit” directly conflicts with Dirks; the Second Circuit’s decision conflicts with decisions of circuits that faithfully apply Dirks; respondents’ arguments that the Court should forgo the opportunity to review the Second Circuit’s decision are misguided; absent the Supreme Court’s intervention, the redefinition of the personal-benefit standard will result in significant harm-restricting enforcement of the securities laws against culpable actors, spurring fraudulent activity, undermining the necessary work of legitimate analysts, depriving the financial community of guidance on how to comply with the law, and decreasing public confidence in the securities markets.

The government’s petition asks the Supreme Court to reverse Newman in order to restore the “gift” theory of insider trading announced by the high court in Dirks. Under Dirks, the government said, an insider must personally benefit from the disclosure either through a quid pro quo or by giving confidential information to a trading relative or friend, such that the tip and trade would be akin to trading by the insider, with the profits given to the recipient.

According to the government, the Newman panel’s tougher standard wrote the “gift” theory out of Dirks. “If the personal-benefit test cannot be met by a gift-giver unless an ‘exchange’ takes place, then Dirks’s two categories of personal benefit are collapsed into one—and the entire ‘gift’ discussion in Dirks becomes superfluous,” said the government.

In his Response brief, Newman argued that the Second Circuit did not “reinterpret” Dirks, but rather “conscientiously applied” it. Moreover, Newman said the Second Circuit’s understanding of the personal benefit requirement can be harmonized with Dirks’s gift theory. Specifically, Newman argued that to allow a court to infer a personal benefit from the fact that two people know each other casually would upend Dirks’s purposeful disclosure language, which suggests a more objective test for weighing evidence of friendship.

Procedural history. Newman and Anthony Chiasson were convicted of securities fraud for their role in an insider trading conspiracy following a jury trial. Both received prison sentences. The Second Circuit reversed the convictions and remanded for the district court to dismiss the indictment with prejudice.

At trial the government had argued that Newman and Chiasson, both hedge fund managers, had ample reason to conclude that the information came from insiders who disclosed it for personal reasons. The inside information was passed along a chain of individuals, and eventually came to Newman and Chiasson, who acted on the information.

According to the Supreme Court docket, the case has been distributed for the September 28 conference.