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Personal Benefit and Insider Trading

After getting more than 80 convictions on insider trading, the tide may be tilting against federal prosecutors at the Southern District of New York (SDNY).1 In United States v. Newman, a case concerning two portfolio managers (Todd Newman and Anthony Chiasson) from two different hedge funds firms, the government charged Newman and Chiasson with insider trading. Analysts at a different hedge fund from Newman and Chiasson obtained the insider information from tipsters at Dell and NVIDIA; then passed the information to analysts at Newman’s firm; analysts at Newman’s firm then passed the information to Newman and then to Chiasson, “making Newman and Chiasson four levels removed from the inside tippers.”2

The government claimed that Newman and Chiasson “willfully participat[ed] in [an]… insider trading scheme by trading in securities based on the inside information illicitly obtained by” a group of analysts who “obtained material, nonpublic information from employees of publicly traded technology companies… and subsequently passed this information to” to Chiasson and Newman.3 The Second Circuit did not agree.

In overturning the convictions, the Second Circuit ruled that instructions to the jury were erroneous because, “ the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive.”4

It is established that for a tippee to be held liable, the tipper must personally “benefit, directly or indirectly, from his disclosure.5 However, what counts as benefit for the tipster does not seem to be clearly defined. In Newman, the Second Circuit ruled that a tippee who receives insider information from a tipster can be found criminally liable only if the government establishes that the tippee knew of the tipper’s “personal benefit” and that the benefit “is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.6 Hence,  “Newman and Chiasson [must have known] that the …[tipsters] at Dell and NVIDIA received a personal benefit in order to be found guilty of insider trading.”7 A tipster’s disclosure of confidential information by itself won’t constitute a breach. In addition, while the “tipper’s gain need not be immediately pecuniary,” the mere fact of friendship or career advice doesn’t suffice as consequential personal benefit.8 In essence, the Court made the notion of personal benefit more difficult for the government to prove.9

Unlike the previous 80 plus convictions the government had won, Newman and Chiasson were third- and fourth-level tippees, making the government case against them tenuous.10 Nonetheless, the Second Circuit’s redefinition of “personal benefit” is already consequential. Many defendants of insider trading are appealing their conviction as a result.11 Michael S. Steinberg, a former manager at SAC Capital Advisors, whose criminal conviction was stayed pending a decision in Newman is now seeking a stay from an administrative decision barring him from security practice “because the district court judge in his criminal case gave the same instruction to the jury that Newman held was erroneous, and because the facts concerning tipper benefit were “necessarily identical” both in his case and in Newman, Steinberg would be entitled to the same relief as the defendants in Newman.12 If the Second Circuit refuses to revisit the logic of their decision in Newman, Mr. Steinberg’s criminal conviction, as well as the convictions of many others, most likely will be overturned.13

A district judge in the Southern District of New York has already vacated the guilty pleas four defendants who shared confidential information about the price at which IBM proposed to purchase shares of SPS. United States v. Conradt, No. 12 CR. 887 ALC, 2015 WL 480419, at *1 (S.D.N.Y. Jan. 22, 2015). The defendants, who previously plead guilty, now claim that they did not know that the person who provided them the inside information had done so in an exchange for personal benefit, despite the fact that the defendant was an acquaintance of the insider.14

One of the Court’s underlying logic in making the personal benefit criteria more stringent is that “it is easy to imagine a … trader who receives a tip and is unaware that his conduct was illegal and therefore wrongful.”15 As such, it won’t be difficult to imagine situations where one can be held liable for an acquaintance’s divulgence of confidential information even though one did not give any personal benefit to the acquaintance.16

However, the Second Circuit misunderstood the nature of insider trading.  Insider trading is difficult for the government to prove.17 Unlike other areas of criminal law where there is some physical evidence (such as rape and homicide), evidence used in insider trading is mostly circumstantial.18 Trading tips and favors is part of the culture at hedge funds, where traders have an idea of who each other are.19 Rarely does someone who receives information, whether normal or inside information, ask about the source of the information.  Traders give each other information for goodwill, and in hope that they will get information in return. Rarely will there be some tangible exchange that can be seen as a benefit. Because trading inside information is so difficult for the government to prove and because the culture at many of these hedge funds is that sharing inside information is acceptable, the Court should not have made the government’s case any harder than it already is.  If the Second Circuit’s ruling stands, it will likely undermine protections against abuses by market insiders and the confidence that the general public has in the markets.20

  1. Matthew Goldstein and Ben Protess, U.S. Attorney Preet Bharara Challenges Insider Trading Ruling NYTIMES (Jan 23, 2015),

  2. United States v. Newman, 773 F.3d 438, 443 (2d Cir. 2014). 

  3. Id. 

  4. Id. 

  5. Dirks v. S.E.C., 463 U.S. 646, 662 (1983). 

  6. Newman at 452. 

  7. See  Id. at 447. 

  8. Id. at 452-54. 

  9. See Petition of the United States of America for Rehearing and Rehearing En Banc at2, United States v. Newman, 773 F.3d 438, 443 (2d Cir. 2014), Docket Nos. 13-1837-cr (L) 13-1917-cr (con). 

  10. John F. Savarese, Second Circuit Overturns Insider Trading Convictions,  HARV. L. BLOG (December 16, 2014 at 2:20 PM),

  11. McGee v. United States of America, 2015 WL 393855 (U.S.); United States v. Conradt, No. 12 CR. 887 ALC, 2015 WL 480419, at *2 (S.D.N.Y. Jan. 22, 2015). 

  12. In the Matter of Michael S. Steinberg, Release No. 4008 (Jan. 27, 2015). 

  13. See  Goldstein, supra note 1. 

  14. Max Stendahl, Newman Ruling Jeopardizes IBM Insider Trading Pleas: Judge, Law360 (Feb. 6, 2015 2:08 PM), 

  15. Newman at 450, quoting United States v. Kaiser, 609 F.3d 556, 569 (2d Cir.2010). 

  16. Newman at 452. 

  17. Why Insider Trading Is Hard to Define, Prove and Prevent , KNOWLEDGE@WHARTON BLOG (Nov 11, 2009), 

  18. See Peter Henning, The Perils of a Circumstantial Insider Trading Case, NYTIMES (June 2, 2014) 

  19. KNOWLEDGE@WHARTON BLOG, supra note 18. 

  20. See Petition of the United States of America for Rehearing and Rehearing En Banc at 3, United States v. Newman, 773 F.3d 438, 443 (2d Cir. 2014), Docket Nos. 13-1837-cr (L) 13-1917-cr (con). 

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Samuel Edandison

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