Appellate Decision Makes Prosecution for Some Insider Trading Cases More Difficult
What is necessary to prove insider trading?
The U.S. Court of Appeals for Second Circuit has sent a message to regulators and prosecutors that aggressive prosecution of those allegedly involved in insider trading has gone too far. According to the federal Securities and Exchange Commission, insider trading is buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security, and “tipping” of such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.
In December the appeals court overturned the 2013 convictions of Todd Newman and Anthony Chiasson. The decision stated in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information in exchange for a personal benefit.
The court voiced its displeasure with the government for the doctrinal novelty of its recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders.
The defendants at issue were several people removed from the original source of the insider information and the court agreed with their interpretation of the law. The defendants interpretation of the law is as follows. The tipper’s breach of a fiduciary duty triggers insider trading liability. That breach is established by showing the benefit received by the tipper. To sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that the insider disclosed confidential information in exchange for a personal benefit. The fact the tippee knew the tipper breached his or her fiduciary duty of confidentiality is not enough. Without direct proof of a tippee’s knowledge of a benefit to the tipper, such knowledge cannot be assumed by the existence of a personal relationship between the two absent proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of pecuniary or similarly valuable nature.
Proof of actual knowledge could be difficult to develop, short of a confession, a wiretap, a smoking gun e-mail or a cooperating informant, especially in this case where the original source of information was several people removed from the defendants
Questions or concerns relating to insider trading and other corporate transactions can be addressed by Longman & Van Grack’s Bethesda and Rockville, Maryland corporate litigation attorneys. They can advise you on how to avoid this type of behavior in the first place so that you do not ever have to worry about being prosecuted by the government. Contact us at (301) 291-5027 for a confidential consultation today.
