Supreme Court lets insider trading reversal stand

Kaja Whitehouse | USA TODAY

Wall Street just won a major victory over Uncle Sam.

In a decision that is expected to undo some of the government's massive insider-trading crackdown, the United States Supreme Court Monday denied review of U.S. vs. Newman, an insider trading case that has been closely watched by Wall Street, prosecutors and the FBI.

The denial lets stand an earlier decision to overturn the convictions of Anthony Chiasson and Todd Newman who were found guilty in 2012 of using inside information to make millions for their hedge funds. In December, the U.S. Court of Appeals for the Second Circuit reversed their convictions in a ruling that addressed long-held questions about how close someone needs to be to the source of an illegal tip to be culpable.

Specifically, the 2nd Circuit appeals court ruled that in order to be convicted of insider trading a person must have direct knowledge of the insider doling out the tips. The court said the government must prove the person being accused of illegal trading was aware that the tipper breached his fiduciary duty and received some sort of benefit, like cash or a job, in exchange for the information provided.

Newman and Chiasson traded on tips they received from their staff analysts, who were found guilty of scouring stock tips from a network of analysts and corporate insiders and then passing them on to their bosses. As a result, their bosses were shielded from direct communication with the tippers, who provided illegal stock tips on companies like Dell and Nvidia.

The Supreme Court's decision not to review the case at the request of the government let's the lower court's decision overturning the conviction stand.

"Mr. Chiasson is deeply gratified by this complete vindication, one that ends the five year ordeal he and his family endured," said his lawyer Greg Morvillo said in a statement. "The Second Circuit Court of Appeals’ pronouncement of Mr. Chiasson’s innocence, as well as that court’s harsh chiding of the government’s tactics, has withstood all challenges and is now final."

It's a blow to Manhattan U.S. Attorney Preet Bharara, who brought the case against the two men and who sought Supreme Court review. It is also expected to have much broader repercussions because it significantly narrows the definition of what is illegal insider trading, and could lead to a litany of other convictions being overturned.

Several people convicted in Bharara's widespread crackdown on insider trading have publicly declared that they, too, want their convictions overturned due to the appeals court decision.

In March, hedge fund manager Michael Kimelman filed a motion to vacate his conviction on the basis that the government provided no evidence that he knew the source of the tips that led to his conviction or that the information was wrongfully obtained.

Another hedge fund manager, SAC Capital's Michael Steinberg, is also expected to benefit from Monday's decision by the highest court in the land.

“Today’s decision by the Supreme Court will now require that Michael Steinberg’s conviction be thrown out as well since it confirms he did not commit any crime," said Barry Berke, Steinberg's lawyer.

The ruling could also reignite efforts by Chiasson's former business partner, David Ganek, to make the U.S. government pay for the demise of their hedge fund Level Global. In March, Ganek sued Bharara, several of his staff and a slew of FBI agents over the 2010 raid of his $4 billion Level Global.

It could also lead to efforts to overturn the guilty pleas of the analysts for Newman, Chiasson and Steinberg, who were also removed from the ultimate source of the tips they passed to their bosses.

Former federal judge Richard Holwell said he was "mildly surprised" by the Supreme Court's decision to not hear the case. "It raised an important issue in the law," said Holwell, who oversaw the insider trading case of hedge fund manager Raj Rajaratnam.

Indeed, a recent decision out of the U.S. Court of Appeals for the Ninth Circuit recently made a ruling opposite of the 2nd Circuit's ruling narrowing the definition of insider trading.

Holwell, who is now a partner at litigation firm Holwell Shuster & Goldberg, said he expects prosecutors to continue to push the issue and thinks the Supreme Court could be forced to "revisit" it down the road.