Back in July, in a post titled "The Impending Demise Of The Insider Trading Jihad," I predicted that the convictions of Messrs. Newman and Chiasson for alleged insider trading in the stock of Dell and NVIDIA would be reversed by the Second Circuit. It took a while, but several hours ago, that occurred. Here is the unanimous decision.
This decision completely undermines the basis on which literally dozens of financial professionals have been wrongly convicted of non-crimes and had their lives ruined by the overreaching prosecutors of the Southern District of New York, led by one Preet Bharara. Find yourself the subject of one of these prosecutions and first you get fired from your job; then you face unbelievably huge legal fees that start at about $5 million and can go as high as $20 million, which your former employer may or may not pay (with the government constantly putting on the pressure not to pay); and on conviction you get sentenced to something like 54 months in jail (Newman) or 78 months (Chiasson), and fined another million dollars (Newman) or five (Chiasson), and then hit with "forfeitures" of another almost million (Newman) or two (Chiasson). And you did absolutely nothing wrong.
Among the cognoscenti, the betting for a long time has been that the Second Circuit would reverse these convictions, but it was not known exactly how they would reverse. For example, if the court of appeals finds what it believes is a relatively minor defect in the jury instructions, it can direct that the jury instructions be changed and send the case back to the district court, where the prosecutors can proceed to re-try the case with the new instructions. Well, not this one. Here the court of appeals also found that the prosecutors "failed to present sufficient evidence" to get to a jury at all, and they remanded "with instructions to dismiss the indictment as it pertains to [Newman and Chiasson] with prejudice." Ouch!
How could the prosecutors have gone so badly off the rails? The broad answer is that the prosecutors in our current regime believe that the job of ferreting out information and then making money by trading on that information in the financial markets is wrong, and if you make too much money doing it they will put you in jail whether they have a statute to back them up or not. The particular subject of this "insider trading" prosecution was what the court of appeals calls "remote tippees," that is, people who were not corporate insiders at all but rather financial professionals who make a living by trolling around in the marketplace for tidbits of information on which to trade. Here the tidbits of information originally came from corporate insiders, but the defendants were several levels removed from the insiders, had not compensated the insiders in any way, and knew nothing about whether the insiders had been compensated or not. And in fact, the insiders had not been compensated at all, although the government had a theory, appropriately ridiculed by the court of appeals, that there was "compensation" in the form of sharing information about possible job openings, or something like that.
Here are some key quotes of the court of appeals very appropriately putting the government in its place:
The Government’s overreliance on our prior dicta merely highlights the doctrinal novelty of its recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders. . . . [W]e find no support for the Government’s contention that knowledge of a breach of the duty of confidentiality without knowledge of the personal benefit is sufficient to impose criminal liability. Although the Government might like the law to be different, nothing in the law requires a symmetry of information in the nation’s securities markets.
So let's tote up where the government's so-called insider trading jihad stands today. Just a few months ago when I wrote my prior post in July, the SDNY was claiming a string of 85 straight "insider" trading convictions, a large number of them, as the court of appeals notes, not involving insiders at all, but rather these "remote tippees." Oh, and approximately 79 of the government's 85 convictions were guilty pleas, while only approximately 6 were convictions after trial. The July post was inspired by the first loss after this string, in the prosecution of Rengan Rajaratnam, another "remote tippee." That prosecution crumbled when the district judge refused to buy the government's remote tippee theory, dismissed two counts, let the third go to the jury on a jury instruction unfavorable to the government, and the jury promptly completed the acquittal. That put the government at 1 acquittal and 6 convictions at trial. With today's reversal that record goes to 3 and 4. Oh wait, another on the convicted-at-trial list is a guy named Steinberg who is an even more remote tippee in the same information chain as Newman and Chiasson. His conviction is finished. That makes it 4 acquittals to 3 convictions.
And how about those 79 guilty pleas, Preet? How many of those are remote tippees who did nothing wrong under the law? How many completely innocent people have you had frog-marched into court and forced to falsely admit guilt and feign contrition in order to avoid 5 year (or more) prison terms and $5 million fines and another $5 million of legal fees, while you get yourself some big headlines in the paper as the "sheriff of Wall Street"? Are you now going to do the right thing for these people? I for one am not counting on it.