Improper disclosure of confidential information and insider trading remains very much a focal point for regulators and prosecutors on both sides of the border. As such, policing it within any organization continues to be a priority for compliance officers and directors of all public companies. Uncertainty surrounding what constitutes impermissible insider trading and tipping as a result of various cases in recent years has challenged enforcers, both inside and external to public issuers.

A New York jury found former investment banker Sean Stewart guilty of nine counts of insider trading-related offenses, scoring an important victory for federal prosecutors after the Second Circuit Court of Appeal’s landmark decision in United States v. Newman increased the evidentiary burden needed to secure criminal convictions for insider trading.

Federal prosecutors alleged that Sean Stewart, a former investment banker at JPMorgan Chase and Perella Weinberg Partners, was involved in a scheme to tip off his father, Robert Stewart, a certified public accountant, about five deals involving healthcare company mergers between 2011 and 2015. The prosecution alleged that Robert Stewart used his colleague, Richard Cunniffe, as an intermediary to trade on the leaked confidential information, and that the two split approximately $1.1 million in illicit profits, with the majority going to Cunniffe.

Prosecutors also charged Robert Stewart and Cunniffe, but both pled guilty. Cunniffe cooperated with the government, while Robert Stewart – when the son’s defence counsel tried to compel the father to testify at trial – invoked his Fifth Amendment right against self-incrimination.

The jury ultimately found Sean Stewart guilty, convicting him of two counts of conspiracy, six counts of securities fraud, and a single count of tender offer fraud. An SEC proceeding against Sean Stewart for insider trading and related offences remains pending.

Sean Stewart’s trial was one of the first insider trading cases to be tried in the aftermath of the Second Circuit’s decision in Newman. The landmark ruling in Newman requires that prosecutors in insider trading cases demonstrate that the tippee knew that an insider/tipper disclosed confidential information and that they did so in exchange for a “personal benefit” that “is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature”. Prosecutors cited the elder Stewart’s payment of $10,000 for the photographer at his son’s wedding, as well as the repayment of part of a loan that the father borrowed from the son, as pecuniary benefits satisfying the personal benefit requirement. Sean Stewart’s defence countered that a father paying for his son’s wedding photographer was not the sort of personal benefit contemplated by Newman, and that the personal benefit requirement was not met.

The guilty verdict is a major win for Preet Bharara, U.S. Attorney for the Southern District of New York, showcasing a successful insider trading conviction in light of Newman. As we have discussed in previous posts, the Newman decision has frustrated prosecutors’ insider trading enforcement efforts by increasing the evidentiary burden on the government needed to secure a conviction, leading some prosecutors to drop cases in response. Sean Stewart’s conviction may be a harbinger that prosecutors, in order to satisfy the higher burden set by Newman, will pursue insider trading cases where there is evidence of a monetary quid pro quo. However, this evidentiary burden may be altered by the outcome of the challenge to the Ninth Circuit’s decision in United States v. Salman, to be heard by the U.S. Supreme Court this fall.

The Ninth Court’s decision in Salman has created an apparent circuit split with Newman regarding the interpretation of “personal benefit”. Salman held that receipt of a “tangible benefit” by the insider/tipper is not necessary to secure a conviction, and found in that case that a close relationship between an insider/tipper and his brother was sufficient for finding a gift of confidential information. Although the U.S. Supreme Court refused to hear the federal government’s challenge to Newman last year, it has agreed to hear the challenge to Salman – opening up the prospect that the circuit split may be resolved.

In Canada, there are mixed interpretations on the appropriate evidentiary burden needed in insider trading cases. On the one hand, the OSC’s decisions in Finkelstein and Ageuci (which are both under appeal) found that circumstantial evidence was sufficient proof for establishing violations of securities law – albeit those decisions were without regard to whether the tippee had knowledge of the alleged insider/tipper’s benefit. On the other hand, the Alberta Court of Appeal in Walton v Alberta (Securities Commission) (leave to appeal refused by the Supreme Court of Canada) suggested that mere circumstantial evidence was insufficient – and that something more in terms of evidence was needed – to meet the evidentiary burden for finding a breach of securities law.

How the U.S. Supreme Court approaches Salman, to be heard in the court’s October term, remains to be seen, although Canadian regulators and industry observers will likely be taking note of developments in the United States regarding insider trading.