It all started innocently enough. In a case I wrote about in September 2013, then RBS analyst Trent Martin was listening to his good friend, a lawyer [not named by prosecutors], whose firm [not named by prosecutors] was working on
Conradt passed the information on to his buddies at his office and from there the gains were much larger as options were purchased, accounts leveraged and those actions caught the eye of the SEC. Fast forward, 4 people who traded on the IBM/SPSS information pleaded guilty and one, Benjamin Durant, decided to take his case to court which is scheduled to begin in February. Then, on December 10, the 2nd Circuit overturned the insider trading convictions of Todd Newman and Anthony Chiasson ... suddenly insider trading was legal ... or was it still illegal ... or what was insider trading anyway? Government prosecutors in the Southern District of New York do not appear to know either despite the recent ruling.
The cases of Newman/Chiasson and the IBM/SPSS traders could not be more different but the two cases have collided as the law of insider trading has become more defined. Newman and Chiasson were both successful hedge fund traders who made trades based on information that their analysts relayed to them. Expecting their analysts were operating within the law, Newman/Chiasson made trades but some of the information that supported those trade decisions had been gained by their analysts through corporate insiders at publicly traded companies. Those analysts admitted their guilt and testified against Newman/Chiasson stating that the traders also knew the information was obtained illegally from insiders. A jury agreed and found the two gentlemen guilty. They appealed, and on December 10, 2014 their convictions were tossed by the 2nd Circuit. The decision to overturn their convictions was based on whether the government had proven that Newman/Chiasson knew of a benefit, like a payment, to the person who tipped (owed a fiduciary duty to the publicly traded company he worked for). The appeals court said that the government had not given any evidence to that affect and now the IBM/SPSS traders wanted to use the same ruling to their benefit.
In the case of Trent Martin and the subsequent passing of information, there was no benefit given to the tipper, the lawyer who passed on the facts of the SPSS acquisition. In fact, the lawyer was not even charged because his disclosure to Martin was viewed by prosecutors as being more poor judgement than criminal. So if prosecutors gave this lawyer a break, and prosecutors love nailing lawyers, then there was clearly no benefit to the tipper as clarified in Newman/Chiasson.
The benefit, the government argued, was the indirect "gift of confidential information," that Martin started with the IBM/SPSS tip. A stretch. The four who pleaded guilty, Martin included, all wanted to withdraw their guilty pleas based on the Newman/Chiasson ruling. On Thursday, U.S. District Judge Andrew Carter, Jr. agreed with the defendants and tossed their plea agreements. The men are still charged and could face trial, but that is looking highly unlikely, as is the trial of the fifth trader Benjamin Durant.
On Tuesday, Durant's attorneys (Federal Defenders Peggy Cross-Goldenberg, Sarah Baumgartel and Clay Kaminsky) filed a motion to Judge Carter to have his case dismissed. The motion stated that government prosecutors' position was that this case is different from Newman/Chiasson because it, "... unlike Newman, is brought under the misappropriation theory of liability." Misappropriation, meaning that this white-collar gang of traders in the IBM/SPSS trades had received their information through means not appropriate ... versus a classical theory of insider trading meaning that the inside information was obtained through, well insiders who had legitimate access but wrongly shared it (Newman/Chiasson). The problem with this is that it is the exact opposite of what the government stated in its argument to uphold the Newman/Chiasson conviction where they said, "...there is NO material difference between a classical insider trading case and a misappropriation case." You cannot have it both ways.
The Newman/Chiasson decision should be welcomed as a clear line of determining what does and does not constitute insider trading. A line drawn by a judge, and not a prosecutor, could mean freedom for the IBM/SPSS Five and a quiet end to Operation Perfect Hedge.
