A federal appeals court dealt a blow to the US government’s success in insider trading prosecutions on Wednesday by reversing two convictions with a decision that also jeopardizes a third — and attempts to further define how far prosecutors can push the law in their quest to clean up Wall Street.
The 2nd US Circuit Court of Appeals overturned the convictions of Anthony Chiasson of New York and Todd Newman of Massachusetts, finding that they were too far removed from inside information to be prosecuted. In doing so, the three-judge panel criticized the government for a blitz of Manhattan insider trading prosecutions that resulted in more than 80 convictions since 2008, citing the “novelty of its recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders.”
The court said prior cases generally involved tippees directly participating in the passing of secrets.
“We note that the government has not cited, nor have we found, a single case in which tippees as remote as Newman and Chiasson have been held criminally liable for insider trading,” Circuit Judge Barrington Parker wrote in the majority opinion.
In a statement, US Attorney Preet Bharara said the ruling “interprets the securities laws in a way that will limit the ability to prosecute people who trade on leaked inside information.”
Bharara said it affected only a subset of insider trading prosecutions, although it “appears in our view to narrow what has constituted illegal insider trading,” adding that he would consider appealing.
The appeals court said the US government failed to present sufficient evidence that Chiasson and Newman wilfully engaged in insider trading or conspired to break the law, ordering a lower court judge to dismiss their indictments.
The reversals could jeopardize the insider trading conviction of former SAC Capital portfolio manager Michael Steinberg, which is being challenged on the same principle.
Eugene Goldman, a former US Securities and Exchange Commission enforcement lawyer, said the ruling “could stop multiple insider trading cases in their tracks.”
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