What looks like insider trading to one federal judge might not rise to the level of a crime to another — or, in the case of two hedge fund managers fighting their convictions, to another three judges.
Level Global Investors co-founder Anthony Chiasson and ex-Diamondback Capital Management portfolio manager Todd Newman claim they were wrongfully convicted because jurors at their trial were told they had to find only that the defendants knew tips they traded on weren't public.
On Tuesday, the two men were scheduled to make their case to the 2nd U.S. Circuit Court of Appeals in New York. If the panel of three judges agrees with them, it might make insider-trading prosecutions more difficult, while also calling into question one of the biggest victories won in the U.S. government's seven-year crackdown on Wall Street.
Prosecutors have argued that all they need to prove is that traders were aware information they used wasn't public and breached a fiduciary duty, as they did in winning the conviction of SAC Capital Advisors fund manager Michael Steinberg. U.S. District Judge Richard Sullivan took the same position in that case as in the trial of Messrs. Chiasson and Newman.
But lawyers for the two men said at least three judges have required an additional element: that the traders also know the original source of the inside information received a benefit for the tip.
Jurors were required to find all three elements in the cases of Whitman Capital hedge fund founder Doug Whitman, Galleon Group co-founder Raj Rajaratnam and in the trial of SAC Capital portfolio manager Mathew Martoma.
“The government's zeal to combat insider trading went too far in this case,” Marc Pomerantz and Greg Morvillo, lawyers for Mr. Chiasson, said in a memo to the court. “He was a remote tippee, removed from the insiders by four degrees of separation.”