United States v. Newman
773 F.3d 438 (2014)
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Rule of Law:
To sustain a criminal conviction for insider trading against a tippee, the government must prove beyond a reasonable doubt that the tippee knew that the insider disclosed confidential information in exchange for a personal benefit.
Facts:
- An insider at Dell, Rob Ray, disclosed Dell's nonpublic earnings numbers to an analyst, Sandy Goyal.
- Ray and Goyal were business school alumni and casual acquaintances; Goyal provided Ray with career advice, including editing his résumé, some of which occurred before Ray provided any tips.
- An insider at NVIDIA, Chris Choi, disclosed NVIDIA's nonpublic earnings numbers to an acquaintance from church, Hyung Lim.
- The relationship between Choi and Lim was described as 'family friends' who socialized occasionally, and Lim provided nothing of value to Choi in exchange for the information.
- Goyal and Lim passed the information through a chain of other financial analysts, including Jesse Tortora and Spyridon 'Sam' Adondakis.
- Tortora and Adondakis then relayed the tips to their respective portfolio managers, Todd Newman and Anthony Chiasson.
- Newman and Chiasson were three to four levels removed from the corporate insiders and had no knowledge of the insiders or any personal benefit they may have received.
- Newman and Chiasson used the information to execute trades in Dell and NVIDIA stock, earning substantial profits for their respective hedge funds.
Procedural Posture:
- Todd Newman and Anthony Chiasson were charged with securities fraud and conspiracy in the United States District Court for the Southern District of New York.
- At the conclusion of a six-week jury trial, Newman and Chiasson moved for a judgment of acquittal, arguing the government failed to prove the insiders received a personal benefit or that they knew of such a benefit.
- In the alternative, they requested a jury instruction that the jury must find they knew the insider disclosed information for a personal benefit.
- The district court denied the motion for acquittal and rejected the proposed jury instruction.
- The jury returned a verdict of guilty on all counts.
- The district court sentenced Newman and Chiasson to prison and ordered them to pay significant fines and forfeiture.
- Newman and Chiasson (appellants) appealed their convictions to the U.S. Court of Appeals for the Second Circuit, with the United States as the appellee.
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Issue:
Does a tippee's criminal liability for securities fraud require proof that the tippee knew the corporate insider disclosed confidential information in exchange for a personal benefit?
Opinions:
Majority - Barrington D. Parker
Yes. A tippee's liability for insider trading is derivative of the tipper's breach of a fiduciary duty, and a tipper's breach occurs only when confidential information is disclosed in exchange for a personal benefit. Therefore, to be convicted, a tippee must know not only that the information was confidential but also that it was disclosed in exchange for a personal benefit. The court reasoned that under Dirks v. S.E.C., the exchange for a personal benefit is not separate from the breach; it is the breach that constitutes fraud. Without knowledge of the personal benefit, a tippee does not have the requisite mens rea (willfulness) to know they are participating in a fraudulent act. The court also held that the evidence of a personal benefit to the insiders in this case—casual career advice and friendship—was insufficient as a matter of law because it did not suggest a quid pro quo or represent a potential gain of a pecuniary or similarly valuable nature. Finally, the government presented no evidence that Newman or Chiasson knew of any benefit, which is fatal to the prosecution of remote tippees.
Analysis:
This decision significantly raised the evidentiary bar for the government in insider trading prosecutions, particularly against remote tippees. By requiring proof that the tippee knew the insider received a personal benefit, the court made it much more difficult to convict individuals far down a tipping chain. The ruling also narrowed the definition of 'personal benefit,' requiring an exchange that is objective, consequential, and suggests a quid pro quo, rather than mere friendship. This created a higher standard of scienter (guilty knowledge) and curtailed the government's ability to prosecute tippees based on the theory that they should have known the information was improperly sourced.
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