Hedge Fund Managers’ Insider-Trading Convictions Overturned

Dec 10 2014 | 1:32pm ET

A federal appeals court has cleared two hedge-fund managers convicted of insider-trading, a ruling that could reshape the landscape for others accused—or found guilty—of the crime.

The U.S. Second Circuit Court of Appeals today found that federal prosecutors in New York had presented insufficient evidence to warrant the convictions of Level Global Investors co-founder Anthony Chiasson and former Diamondback Capital Management trader Todd Newman. The three-judge panel faulted U.S. District Judge Richard Sullivan, who presided over their trial, who said the government did not need to show that Chiasson and Newman knew that their insider sources were providing information for a personal benefit.

In today’s ruling, the Second Circuit said such a reading of insider-trading laws was “erroneous,” and that such a showing is required.

“Although the government might like the law to be different, nothing in the law requires symmetry of information in the nation’s securities market,” U.S. Circuit Judge Barrington Parker wrote.

The case marks the first reversal on appeal of the 82 insider-trading convictions won by federal prosecutors in New York—but not necessarily the last. For SAC Capital Advisors trader Michael Steinberg, convicted for his role in the same “corrupt circle” as Chiasson and Newman, has raised similar issues in his appeal.

Chiasson and Newman were convicted in 2012 of conspiracy and fraud for having traded on confidential information provided by their analysts, who in turn got it from other hedge fund analysts and corporate insiders. The two argued that they were not aware of the sources of the tips.

“Mr. Chiasson has always conducted himself according to the highest ethical and professional standards in service to many of the world’s leading hedge fund investors who were his clients for years,” Chiasson’s lawyer, Gregory Morvillo, said. “He is deeply gratified that the decision issued today unequivocally re-establishes his innocence under the law – consistent with what Anthony has steadfastly maintained for the duration of this ordeal.”

During the case’s hearing before the Second Circuit, the court indicated that it might well reverse. Parker said that prosecutors’ theory of insider-trading was “amorphous” and criticized them for seeking to have the case go before Sullivan, believed to be more sympathetic to prosecutors in such matters.

Today’s ruling spares Chiasson and Newman prison, as both men have remained free on bail pending appeal. Chiasson was set to serve six-and-a-half years in prison and Newman four-and-a-half.

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