The convictions of two individuals—Todd Newman and Anthony Chiasson—for insider trading under United States securities law was set aside by a federal appeals court in New York last week.

The court claimed that, in its prosecution of the defendants, the US government failed to demonstrate that the initial insiders from whom defendants’ liability ultimately derived received sufficient personal benefit to establish their (let alone defendants’) securities law liability. Moreover, said the court, the US government failed to provide any evidence that the defendants knew “they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.”

Mr. Newman—a former portfolio manager at Diamondback Capital Management, LLC—and Mr. Chiasson—a former portfolio manager at Level Global Investors, L.P., were previously charged and convicted of trading in securities based on illegally obtained insider information initially provided by employees at publicly traded technology companies, subsequently shared with analysts at hedge funds and investment firms, and ultimately provided to the defendants. The alleged insider information related to earning announcements of Dell Inc. and Nvidia Corporation prior to the public release of such information in 2008.

The court wrote that three conditions must exist to find criminal liability against an alleged recipient of material non-public information (a so-called “tippee”) for illegal trading on insider information: (1) the corporate insider who was the ultimate source of the information must have had fiduciary duty not to disclose material, nonpublic information; (2) the corporate insider must have breached that duty by disclosing the information to an unauthorized person in exchange for personal benefit; and (3) the tippee alleged to have violated the law must have known or should have known of the breach.

The court concluded that the US government, in its prosecution of defendants, presented insufficient evidence that the corporate insiders received sufficient personal benefit or—even if they did –that defendants knew they were trading on information obtained from persons who had breached their fiduciary duties. Indeed, said the court, "Newman and Chiasson were several steps removed from the corporate insiders and there was no evidence that either was aware of the source of the insider information."