The fallout from the Second Circuit’s decision in United States v. Newman continues and threatens to affect not just future enforcement actions, but pending prosecutions. As we have noted before, the Second Circuit in Newman required that a trader / tippee know that an insider disclosed confidential, non-public information and that the insider did so in exchange for a personal benefit. The benefit must be “of some consequence” and more than mere friendship.

Just a week after the Second Circuit’s ruling, in an insider trading prosecution involving tips relating to a 2009 acquisition by IBM, a court questioned whether there was a sufficient factual basis for guilty pleas that were entered prior to the Second Circuit’s ruling. Others, including Michael Steinberg of SAC Capital Advisors, who was sentenced to three and half years for insider trading (see our coverage here and here) and who received the same flawed jury instruction that the Second Circuit criticized in Newman, may also benefit from the Second Circuit’s decision.

And that’s not all. The decision may touch upon one of the most high-profile insider trading investigations to reach Major League Baseball, the prosecution of former Oriole All-Star third baseman Doug DeCinces and several others. You may recall DeCinces from his two-out, ninth inning walk-off home run from the 1979 season that gave rise to “Orioles Magic.” Or maybe you recall his 1975 Topps rookie baseball card in which he shared real estate with the great Manny Trillo, the second baseman for the 1980 World Champion Phillies.

In any event, the government has alleged that DeCinces received material, non-public information from James Mazzo, the former CEO of Advanced Medical Optics, regarding that company’s pending acquisition by Abbott Laboratories. Although DeCinces is the only MLB player that has been prosecuted from this scheme, the investigation reached the Pantheon of baseball immortality, ensnaring fellow Oriole and Hall of Famer Eddie Murray, who allegedly traded on a tip from DeCinces and ultimately settled with the SEC for over $350,000 (without admitting or denying the allegations). DeCinces similarly settled with the SEC – for $2.5 million – but that didn’t stop federal prosecutors for charging him criminally with insider trading.

Which leads us to Newman. On December 19, DeCinces and his co-defendants (Mazzo and two others who were alleged to have traded on the information received from DeCinces) filed a motion to dismiss the indictment, asserting that the indictment alleged only that DeCinces and Mazzo had a “close friendship,” and did not allege the requisite quid pro quo to establish the requisite “personal benefit” for an insider trading conviction. The defendants distinguished the one allegation that DeCinces “helped” Mazzo purchase a house by noting that there were no allegations that it was a “quid pro quo” or that DeCinces funded the purchase or that Mazzo paid less as a result of the help.

The defendants also rejected the government’s anticipated argument that Newman was distinguishable because it involved a general insider trading claim under Rule 10b-5 and not an insider trading claim relating to tender offers under Rule 14e-3 (or the insider trading scheme statute under 18 U.S.C. § 1348). The defendants asserted that such a distinction was irrelevant because all theories and bases for liability required the government to prove willfulness – an intent to defraud – which was not sustainable under an allegation of “mere friendship.”

Interestingly, in the wake of Newman, the government voluntarily dismissed the Rule 10b-5 charges against the two downstream “sub-tippees.” These defendants argued that the voluntary dismissal was an acknowledgment that the government could not prove that they “knew” the corporate insider received a personal benefit. They further argued that there was no distinction between Rule 10b-5 and Rule 14e-3 (or § 1348) as to them and therefore the remaining charges should be dismissed.

Yesterday, the government shot back. In its response, the government argued: (1) the “downstream” tippee case of Newman didn’t apply to the “direct” tippee case of Mazzo or DeCinces; (2) the indictment alleged all necessary elements and further details regarding the extent of the “personal benefit” were not necessary on the face of the indictment; and (3) neither the Rule 14e-3 nor § 1348 charge requires a breach of a fiduciary duty.

Ultimately, whether DeCinces can apply some of that “Oriole Magic” to his pending insider trading prosecution will be played out at a hearing on the motions on January 12. The fact that DeCinces and his fellow defendants have pulled Newman out of the bullpen in a ninth-inning effort to stave off trial is but one example of how the Second Circuit’s decision is likely to have wide-ranging effects on insider trading prosecutions both current and future.