The U.S. Supreme Court let stand a major insider-trading ruling that threatens at least 10 convictions and creates what the Obama administration calls a road map for securities fraud.
Rejecting an administration appeal without comment, the justices refused to consider reinstating the overturned convictions of hedge fund managers Todd Newman and Anthony Chiasson. Among those who may benefit are SAC Capital Advisors LP’s Michael Steinberg, who is seeking to reverse his own conviction on similar grounds.
The rebuff is a blow to U.S. Attorney Preet Bharara, the New York prosecutor who had racked up more than 80 insider- trading convictions during a six-year attack on crooked fund managers, corporate insiders and consultants. The high court’s action came in a list of orders released on the first day of its new nine-month term.
The ruling was issued by the New York-based federal appeals court that is especially influential in securities-fraud cases. The decision raised the bar for prosecutions stemming from information passed by a corporate insider to a friend, relative or business associate.
President Barack Obama’s administration said the decision immunizes conduct that had long been understood to be criminal. The ruling “insulates from liability deceptive acts that undermine the integrity of the markets,” U.S. Solicitor General Donald Verrilli argued in the government’s appeal.
Convicted Traders
The Supreme Court said in 1983 that people who trade on confidential information can be prosecuted only if the insider reaped a benefit from the leak.
At issue in the appeal was whether that benefit must be a concrete one, as the lower court ruled. The Obama administration argued that it was enough if the insider made a gift of the information to a friend or relative.
Newman, a former portfolio manager at Diamondback Capital Management, and Chiasson, co-founder of Level Global Investors, were part of a group of information-swapping friends who called themselves the “Fight Club,” after a Brad Pitt film.
The two men were convicted of trading based on leaks that started with people at Dell Corp. and Nvidia Corp. In the case of Dell, the information came from an employee in the company’s corporate-development department who gave pre-announcement earnings information to an analyst. The tip eventually reached Newman and Chiasson through analysts who worked for them.