NEW YORK (Reuters) - A U.S. appeals court dealt federal prosecutors a blow in their crackdown on insider trading on Wall Street on Wednesday, overturning the convictions of two former hedge fund managers charged with making illegal trades in technology stocks.
The 2nd U.S. Circuit Court of Appeals in New York said prosecutors presented insufficient evidence to convict Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.
The court held that defendants can only be convicted of insider trading if the person trading on confidential information knew the original tipper disclosed it in exchange for a personal benefit.
“Although the government might like the law to be different, nothing in the law requires a symmetry of information in the nation’s securities markets,” U.S. Circuit Judge Barrington Parker wrote for the three-judge panel.
The ruling will offer hope to at least one other Wall Street figure convicted as part of Manhattan U.S. Attorney Preet Bharara five-year long crackdown on insider trading.
Newman and Chiasson had been sentenced to 4-1/2 years and 6-1/2 years in prison, respectively, and had been out on bail pending appeal.
The case had been closely watched among the white collar defense community for whether the court would impose a heightened standard for proof in insider trading cases.
It marked a blow for Bharara, who had secured convictions of 82 other people in insider trading cases since October 2009, with one trial acquittal but no previous appellate reversals.
A spokeswoman for Bharara had no immediate comment.
The ruling could also benefit Michael Steinberg, a SAC Capital portfolio manager convicted in December 2013 and later sentenced to 3-1/2 years in prison. He was indicted in the same conspiracy as Newman and Chiasson and has raised similar arguments on appeal.
“The 2nd Circuit’s decision clearly means that Michael Steinberg is innocent of any crime and his conviction will be vacated as well,” said Barry Berke, Steinberg’s lawyer.
Gregory Morvillo, Chiasson’s lawyer, called the decision “a resounding victory for the rule of law,” adding that his client was “deeply gratified that the decision issued today unequivocally re-establishes his innocence under the law.”
In a joint statement, Newman’s lawyers Stephen Fishbein and John Nathanson said they were “relieved but not surprised” by the ruling, which came after “four years of unnecessary prosecution.”
“We are gratified that, going forward, others will benefit from clearer rules in this area,” they said.
Newman, 50, and Chiasson, 41, 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 computer maker Dell Inc [DI.UL] and chipmaker 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 that Newman and Chiasson knew insiders at Dell and Nvidia received something in exchange for the information they provided. Parker on Wednesday called that instruction “erroneous.”
Jill Fisch, a professor at the University of Pennsylvania School of Law, said the ruling was a message the recent insider trading prosecutions had gone too far.
While traders should not be allowed to pay a corporate insider for non-public information, she said, Wall Street traders routinely “get a whole lot of information from people that you talk to all the time.”
“What basis could you possibly have for determining which information you can use and which you can‘t?” she said.
The ruling could also add pressure for the U.S. Securities and Exchange Commission to explain in greater detail which behaviors on Wall Street count as insider trading, said C. Evan Stewart, a partner at Cohen & Gresser in New York.
He said while the SEC does not write criminal laws, its rules provide the standard for which criminal fraud laws can be applied in insider trading cases.
U.S. officials have argued the rules are clear, but traders, including Steven A. Cohen, founder of the firm called SAC Capital until its recent rebranding, contend they are not.
“This is the 2nd Circuit saying there needs to be greater clarity about what the law is here,” Stewart said.
The case is U.S. v. Newman, 2nd U.S. Circuit Court of Appeals, No. 13-1837.
Reporting By Emily Flitter; Editing by Christian Plumb