NEW YORK, April 22 (Reuters) - A U.S. prosecutor faced tough questioning by a federal appeals court Tuesday over what must be proved to secure insider trading convictions, with one judge calling the government’s view of the law “amorphous.”
The 2nd U.S. Circuit Court of Appeals in New York heard arguments in the case of Todd Newman, a former portfolio manager at the hedge fund Diamondback Capital Management, and Anthony Chiasson, co-founder of the hedge fund Level Global Investors.
The three-judge panel weighed whether recipients of non-public information can be found guilty of insider trading without any requirement prosecutors prove they knew the source of the tip benefited from the disclosure.
Antonia Apps, a lawyer for the government, argued prosecutors only need to establish that the recipients of insider information knew the tipper breached a duty to keep it confidential.
“And here of course the defendants were told it came from the inside,” she said.
Her arguments were met by a round of sharp questioning by the panel, including U.S. Circuit Judge Barrington Parker, who said the government’s “amorphous theory” gave little guidance to Wall Street firms on how they can legally use non-public information.
“Your theory leaves all these institutions at the mercy of the government,” Parker said.
Newman, 49, and Chiasson, 40, were found guilty in 2012 for their roles in a scheme the government said reaped $72 million in illicit profits after trading on inside information about Dell Inc and Nvidia Corp.
Prosecutors said both men traded on tips they received from analysts working at their hedge funds who were members of a “corrupt circle” of investment firm analysts that traded non-public information obtained from employees at various companies.
At their trial, U.S. District Judge Richard Sullivan did not require proof Newman and Chiasson knew insiders at Dell and Nvidia received a benefit.
Lawyers for Newman and Chiasson argued the government is required to prove that tippees knew an insider received a personal benefit in exchange for non-public information.
Mark Pomerantz, a lawyer for Chiasson, said his client “didn’t know the insiders had disclosed the information in exchange for job advice, friendship or some other personal benefit.”
The defense lawyers say Sullivan’s ruling contradicted decisions by Manhattan judges in four other cases including that of Galleon Group hedge fund founder Raj Rajaratnam and SAC Capital portfolio manager Mathew Martoma.
Apps faced repeated critical questioning by Parker, who was among a panel of judges that last year allowed Newman and Chiasson out on bail pending appeal after they were sentenced to 4-1/2 years and 6-1/2 years in prison, respectively.
“I‘m concerned the government’s position on key points of the law seems to vary based depending on which judge you’re talking to,” Parker said.
A ruling in favor of Newman and Chiasson could impact other cases brought under Manhattan U.S. Attorney Preet Bharara, whose office has secured 80 insider trading convictions of individuals since October 2009.
Among those cases would be the one against Michael Steinberg, a SAC Capital portfolio manager convicted in December in a case that involved the same alleged “corrupt circle” of analysts.
Sullivan, who presided over his case, instructed the jury in Steinberg’s case in the same way he did in the trial of Newman and Chiasson.
“Can you allay my concern that what the government did was move the indictments around until it got before its preferred venue, Judge Sullivan?” Parker said.
Steinberg’s lawyer Barry Berke attended the arguments on Tuesday. He declined to comment.
The case is U.S. v. Newman, 2nd U.S. Circuit Court of Appeals, No. 13-1837. (Reporting by Nate Raymond in New York; editing by Andrew Hay)