Insider traders look to US Supreme Court for redemption

January 27, 2016

Some of U.S. Attorney for the Southern District of New York Preet Bharara’s biggest catches in a seven-year insider-trading sweep are clinging to one more hope of clearing their names.

Former Goldman Sachs Group Inc. director Rajat Gupta, hedge fund manager Doug Whitman and at least three others insist their conduct was legal and that the U.S. Supreme Court will make that clear when it deals with another insider trading case.

The Supreme Court agreed last week to hear an appeal from California of a man convicted for trading on information provided by a relative, who didn’t get anything in return. It was significant because the high court had refused to review a ruling from the federal appeals court in New York that had earlier set the bar higher, saying a person passing inside knowledge had to at least potentially get some benefit of value, such as money.

The decision by the Supreme Court should resolve the split between the San Francisco court’s case called Salman, and the New York ruling in a case called Newman.

Gupta says he didn’t get a material benefit while Whitman says he didn’t know what, if anything, his sources of inside information received. Both men lost earlier attempts to overturn their convictions.

Personal benefits

“Given that the Supreme Court declined to review the Newman decision, there is good reason to believe that the high court will overrule the Salman decision and deem Newman’s reading of the ‘personal benefit’ element as novel and correct,” Whitman’s lawyers wrote in a Jan. 22 filing with the appeals court.

Whitman is set to ask a federal appeals court Feb. 2 to release him early from a two-year prison term while he challenges his guilty finding.

The top court might have taken the case to draw a clear line between the general understanding of insider trading and the particular details of Newman, said Jill Fisch, a professor at the University of Pennsylvania’s School of Law.

“It could be the case that they want to clarify the fact that Newman doesn’t apply here,” she said.

No law

Currently, there is no statutory law specifically on insider trading. Instead, prosecutors have relied on a series of court rulings that define the crime. Bharara won all but one of 78 prosecutions before the New York appeals court ground his streak to a halt in December 2014. The panel overturned the convictions of Anthony Chiasson, the co-founder of Level Global Investors, and a former portfolio manager at Diamondback Capital Management, Todd Newman.

That decision reverberated further, upending the convictions of another 12 people, with others like Gupta and Whitman seeking to add themselves to the list. Gupta was released from prison earlier this month after serving 19 months of his 30-month sentence for giving tips to his friend, billionaire fund manager Raj Rajaratnam.

Rajaratnam, who is serving an 11-year sentence, has also asked a federal judge to reconsider his case. The higher standard of proof mandated by Newman should be applied to him retroactively, he said in a request that’s pending. Christine Chung, his lawyer, declined to comment on the case.

Prejudice devastating

Gupta and Whitman both “argued they were likely convicted for conduct that is not criminal in light of Newman,” Gupta’s lawyer Gary Naftalis said in a Jan. 11 letter to the federal appeals court. “The prejudice caused to Mr. Gupta by the now invalid pure relationship theory was devastating.”

The Supreme Court refused to consider the government’s appeal of the Newman decision, but agreed to look at the case of Bassam Yacoub Salman, an Illinois man who was convicted of insider trading on merger tips he got from a relative. Salman’s conviction was upheld by the Court of Appeals in San Francisco.

Decision’s author

The author of that decision was U.S. District Judge Jed Rakoff, who was sitting as a visiting jurist on the San Francisco appellate panel after handling a number of the insider-trading cases as a trial judge in New York. Rakoff wrote in the Salman case that he wouldn’t follow the Newman reasoning and that it was enough that information was intended as a gift.

Congress is likely to pass a statute defining insider trading if the Supreme Court overturns Salman and agrees with Newman, said Samuel Buell of Duke University’s School of Law.

“The perception of fairness is harmed if people believe that the legal rule is easy to get around,” he said.

No date set

The Supreme Court hasn’t yet said whether it will hear arguments in its current term, which runs through the end of June, or wait until the nine-month term that starts in October.

Bharara, who declined to comment for this story, has called the Newman decision a “bonanza” for executives and fund managers leaking inside information, providing an “obvious map for unscrupulous investors.”

Michael Kimelman and his co-defendant, former Galleon Group LLC trader Zvi Goffer, are both challenging their insider-trading convictions, noting the judge in their case is the same one who was reversed in the Newman decision. Tai Nguyen, who was convicted of passing tips to a former SAC Capital Advisors fund manager, has also asked for a review of his case.

“The more clarity there can be the better off defendants will be and people hoping never to be defendants will be,” said Greg Morvillo, Chiasson’s lawyer. “People on Wall Street deserve a bright line to know if they’re crossing it.”


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