A US appeals court Wednesday threw out the insider trading convictions of two portfolio managers, raising the bar for government prosecutions in such cases.
The New York appeals court reversed the convictions of Todd Newman of Diamondback Capital Management and Anthony Chiasson of Level Global Investors, two hedge funds targeted in the government's multi-year crackdown on insider trading.
US prosecutors in May 2013 won jury convictions of both men following a six-week trial on charges that they profited in trades of Dell and Nvidia stocks based on insider information ahead of earnings announcements.
US prosecutors presented the two as "part of a criminal club of portfolio managers and analysts" who obtained lucrative nonpublic information from company insiders and profited from it.
But the three-judge US appeals panel ruled that Newman and Chiasson "were several steps removed from the corporate insiders" at Dell and Nvidia. The insiders had shared the secrets with Wall Street analysts who had then relayed it along to the defendants.
The appeals court said the information the two received was "of a nature regularly and accurately predicted by analyst modelling" and that the defendants could have thought it came from such an calculation, rather than an illicit tip.
"The government presented no evidence that Newman and Chiasson knew they were trading on information obtained from insiders in violation of those insiders' fiduciary duties," the court said.
The three-judge panel said an additional condition of a conviction was that Newman and Chiasson knew that insiders at Dell and Nvidia disclosed secrets "in exchange for a personal benefit."
The judges said prosecutors could not demonstrate that the two knew that those who leaked the information had benefitted or not from it.
Wednesday's decision has been closely watched by other defendants in recent insider cases, including former SAC Capital portfolio manager Michael Steinberg, who was convicted in December 2013 of insider trading in a related case.
US Attorney Preet Bharara, who has led successful prosecutions of officials at SAC and other prominent hedge funds, said the appeals decision "interprets the securities laws in a way that will limit the ability to prosecute people who trade on leaked inside information."
Bharara said the ruling affects "only a subset" of his office's recent cases. These cases were investigated "based on our good faith assessment and understanding of the facts and the law that existed at the time," he said.
"We are still assessing the Court’s decision, which appears in our view to narrow what has constituted illegal insider trading, and are considering our options for further appellate review."