In its first Order of the new term, the Supreme Court declined to review a 2014 opinion issued by the U.S. Court of Appeals for the Second Circuit that makes it more difficult for federal prosecutors to pursue cases against persons involved in insider trading.
Preet Bharara, U.S. Attorney for the Southern District of New York and the man responsible for a years-long crackdown on insider training in the financial industry that led to the prosecution of nearly 100 Wall Street executives, remarked during a conference call with reporters that the Appeals Court’s narrowing of what constitutes insider trading could lead to “a potential bonanza for friends and family of rich people with material non-public information."
The Supreme Court’s action let stand a Second Circuit ruling that overturned the conviction of two Wall Street hedge fund managers, Todd Newman and Anthony Chiasson, on the basis that in their case the government had not shown “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature.” In simpler terms, the court decreed that it is not sufficient to allege that tips were passed in order to deepen a friendship or business relationship without demonstrating that money or other valuables were received as a quid pro quo.
The Second Circuit’s narrower definition of what has historically constituted a “personal benefit” for purposes of an insider trading case and the Supreme Court’s refusal to weigh in on the matter, alters the legal landscape for prosecutors in such cases and will most likely have repercussions for other recent insider trading convictions and ongoing prosecutions. The ruling makes insider-trading cases more difficult to prosecute by setting a higher evidentiary standard for conviction. This may lead federal prosecutors to pursue other angles, such as mail and wire fraud charges, in cases where the evidence will not provide a slam-dunk quid pro quo.
Another option for prosecutors is forum shopping. Since the Second Circuit’s decision has so far not been followed in other circuits, prosecutors may try their luck by bringing insider-trading charges in other federal court districts where other judges may decline to follow the Second Circuit’s narrower definition of “personal benefit.” If that situation ensues, and barring some sort of legislative fix, the issue may yet wind up in the Supreme Court for clarification.