The fight against insider trading on Wall Street has just taken a big hit. The Supreme Court of the United States refused, Monday, October 5, to comment on a ruling by a federal appeals court in January. But this judgment undermines all the case law on this type of fraud by complicating the work of prosecutors to bring proof of cheating.
The case in question concerns Todd Newman, former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of hedge fund Level Global Investors. At the initiative of Preet Bharara, the attorney for the Southern District of Manhattan, the two men were convicted in 2012 for insider trading in respectively 54 and 78 months in prison. But during the appeal trial, to general surprise, the judges felt that the evidence presented by the prosecution was insufficient.
Their argument? Would have had to prove that the accused knew that the source behind the leak had touched a tangible reward for it. Prosecutors, themselves, had only prove that the accused knew that the information was leaked illegally, but not necessarily in exchange for a benefit sounding and stumbling. The appeal court was even further in its reasoning in rejecting the claims of prosecutors under which a professional or friendly advice could be a reward.
Many vulnerable convictions
This interpretation is a revolution in the fight against insider trading. By the admission of Mr. Bharara, the decision of the Court of Appeal weakens over 90% of the cases it has investigated in recent years such as the conviction in 2011 of Raj Rajaratnam, founder of hedge fund Galleon , currently serving a sentence of 11 years in prison. Similarly, Michael Steinberg, a portfolio manager of hedge fund SAC Capital sentenced in 2014 to three years in prison, should step into the breach opened by the Court of Appeal. Besides lawsuits against Steven Cohen, founder of SAC Capital, which should remain a dead letter. In total, Mr. Bharara investigations resulted in eighty-six convictions for insider trading for a single acquittal.
The Department of American justice had placed its hopes on the Supreme Court, arguing that the decision of the Court of Appeal “ unjustifiably hinders the ability to prevent and punish” insider trading. In its application, the Ministry considered that the judgment was: “harm the various stakeholders in the financial markets, analysts scrupulous disadvantage and hinder the government’s ability to protect the fairness and integrity of the stock market” .
The Supreme Court declined to take up the case without giving reasons. The law firm that defends Todd Newman and Anthony Chiasson, while welcoming this outcome, regretted that “unfortunately, this victory comes after several years of raids by the disproportionate government, “ deploring ” baseless attacks against hedge funds, which have led hundreds of innocent employees to lose their jobs “.