A U.S. appeals court dealt federal prosecutors a blow in their crackdown on insider trading on Wall Street on Wednesday, overturning the convictions of two former hedge fund managers charged with making illegal trades in technology stocks.
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The 2nd U.S. Circuit Court of Appeals in New York said prosecutors presented insufficient evidence to convict Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.
The court held that defendants can only be convicted of insider trading if the person trading on confidential information knew the original tipper disclosed it in exchange for a personal benefit.
"Although the government might like the law to be different, nothing in the law requires a symmetry of information in the nation's securities markets," U.S. Circuit Judge Barrington Parker wrote for the three-judge panel.
Newman and Chiasson had been sentenced to 4-1/2 years and 6-1/2 years in prison, respectively, and had been out on bail pending appeal.
The case had been closely watched among the white collar defense community for whether the court would impose a heightened standard for proof in insider trading cases.
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It marked a blow for Manhattan U.S. Attorney Preet Bharara, who had secured convictions of 82 other people in insider trading cases since October 2009, with one trial acquittal but never before an appellate reversal.
The ruling could also benefit Michael Steinberg, a SAC Capital portfolio manager convicted in December 2013 and later sentenced to 3-1/2 years in prison. He was indicted in the same conspiracy as Newman and Chiasson and has raised similar arguments on appeal.
Lawyers for Newman, Chiasson and Steinberg and represenatives for Bharara either did not respond to requests for comment or had no immediate comment.
Newman, 50, and Chiasson, 41, were found guilty in 2012 for their roles in a scheme the government said reaped $72 million in illicit profits after trading on inside information about Dell Inc and Nvidia Corp.
Prosecutors said both men traded on tips they received from analysts working at their hedge funds who were members of a "corrupt circle" of investment firm analysts that traded non-public information obtained from employees at various companies.
At their trial, U.S. District Judge Richard Sullivan did not require proof Newman and Chiasson knew insiders at Dell and Nvidia received a benefit. Parker on Wednesday called that instruction "erroneous." (Reporting By Emily Flitter)