By: Mark Tarallo
In its recent decision in United States vs. Newman, the Second Circuit Court of Appeals imposed a significant burden on prosecutors bringing insider trading cases. The Court articulated that in an insider trading case, the prosecution must prove that:
- the corporate insider was entrusted with a fiduciary duty
- the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit;
- the tippee knew of the tipper’s breach, that is, he knew the information was confidential and divulged for personal benefit; and
- the tippee still used that information to trade in a security or tip another individual for personal benefit.
The ruling makes it difficult, if not impossible, to prosecute remote tipees, who learn the insider information from someone other than the corporate insider who makes the original disclosure of confidential information. Given how difficult this standard will be to meet, it is not surprising that the prosecution has appealed the decision. US Attorney Preet Bharara’s office has both asked the three judge panel that issued the Newman opinion to rehear the case, and has requested that the entire US Second Circuit Court of Appeals to review the case en banc. A narrowing or reversal of the Newman ruling is critical to the efforts of prosecutors to continue to bring insider trading cases.
The Newman ruling has already had a negative impact on recent cases. A federal judge sitting in the U.S. District Court in Manhattan vacated the guilty pleas of four men charged with insider trading relating to IBM. Citing Newman as controlling law, Judge Andrew Carter ruled that the guilty pleas must be vacated based on the new standards for insider trading (although he did not go as far as dismissing the charges outright).
For additional information on this topic, please feel free to contact Mark Tarallo.