Is Insider Trading Legal Following Appeals Court Tossing Out Two Hedge Fund Convictions

In a stunning rebuke of Preet Bharara’s insider-trading prosecutions record, Businessweek reports a federal appeals court overturned and threw out the guilty verdicts of two hedge fund managers, Todd Newman and Anthony Chiasson, ruling jury instructions tainted their verdicts and imperiling other cases brought in his multiyear probe. In a 28-page decision that could rewrite the course of insider trading law, sharply curtailing its boundaries, the United States Court of Appeals for the Second Circuit in Manhattan tossed out the case on technicalities which could also lead to the release of SAC’s Michael Steinberg – Bharara’s signature prosecution – as Steinberg’s lawyer remarked, “it sends a loud and clear message that the government will be rebuked when it tries to turn innocent conduct into a crime.” So insider-trading is legal now… with the right lawyer and judge.

As Businessweek explains,

A federal appeals court threw out the guilty verdicts of two hedge fund managers central to Manhattan U.S. Attorney Preet Bharara’s investigation of insider trading, ruling jury instructions tainted their verdicts and imperiling other cases brought in his multiyear probe.

Level Global Investors LP co-founder Anthony Chiasson and ex-Diamondback Capital Management LLC portfolio manager Todd Newman argued their convictions should be overturned because jurors weren’t required to find they knew the source of their illegal tip received some benefit in exchange, an essential element in proving insider trading. The investigations led to the shuttering of the two hedge funds.

The government said jurors only needed to find the men knew the tip was material nonpublic information, and that the tipper was breaching a fiduciary duty by revealing it.

And DealBook notes,

In a 28-page decision (below) that could rewrite the course of insider trading law, sharply curtailing its boundaries, the United States Court of Appeals for the Second Circuit in Manhattan tossed out the case against two former hedge fund traders, Todd Newman and Anthony Chiasson. Citing the trial judge’s “erroneous” instruction to jurors, the court not only overturned the convictions but threw out the cases altogether.

“We conclude that the jury instructions were erroneous and that there was insufficient evidence to support the convictions,” a three-judge panel wrote.

…

For now, the decision imperils at least one other of Mr. Bharara’s milestone insider trading convictions: Michael Steinberg, of SAC Capital Advisors, the once-giant hedge fund Mr. Bharara indicted last year. The judge who presided over Mr. Steinberg’s trial, Richard J. Sullivan, also handled the trial of Mr. Chiasson and Mr. Newman.

In a statement, Mr. Chiasson’s lawyer applauded the decision and its wider consequences.

“Today’s decision is a resounding victory for the rule of law and for Anthony Chiasson personally,” the lawyer, Gregory Morvillo, said. “He is deeply gratified that the decision issued today unequivocally re-establishes his innocence under the law – consistent with what Anthony has steadfastly maintained for the duration of this ordeal.”

Mr. Steinberg’s lawyer, Barry Berke, predicted a similar outcome for his client. “The Second Circuit’s decision clearly means that Michael Steinberg is innocent of any crime and his conviction will be vacated as well,” Mr. Berke said. “It sends a loud and clear message that the government will be rebuked when it tries to turn innocent conduct into a crime, as it did in the case of Mr. Steinberg.”