A federal appeals court has vacated the insider trading convictions of two prominent hedge fund managers, Todd Newman and Anthony Chiasson, in what many observers think will become a seminal legal ruling. Essentially, the court ruled that the jury was given improper instructions. The court asserted that Newman and Chiasson were unaware of the sources of the insider trading information and that it was not apparent that these sources revealed the sensitive information for personal gain.
The ruling, issued by the Second U.S. Circuit Court of Appeals, said that for people to be convicted of trading on inside information, they must know not only that the providers of the information gave it illegally but that they received it in exchange for some benefit — and not just that it was disclosed in breach of fiduciary duty, as the appeals panel says the jurors were erroneously informed.
“[T]he government presented absolutely no testimony or any other evidence that Newman and Chiasson knew that they were trading on information obtained from insiders, or that those insiders received any benefit in exchange for such disclosures, or even that Newman and Chiasson consciously avoided learning of these facts,” said Judge Barrington Parker, who wrote the opinion, according to the Wall Street Journal. “The government is required to prove beyond a reasonable doubt that Newman and Chiasson knew that the insiders received a personal benefit in exchange for disclosing confidential information.”
Several legal experts, however, expressed concern about the ruling’s implications. “This ruling looks like a free pass for those trading on inside information,” Peter Henning, a law professor at Wayne State University and former Securities and Exchange attorney, told Bloomberg. “It’s going to make prosecutors’ jobs more difficult.”
Newman, a former Diamondback Capital Management portfolio manager, was sentenced to 54 months in prison after being convicted of one count of conspiracy to commit securities fraud and four counts of securities fraud. Chiasson, co-founder of Level Global Investors, was sentenced to six and a half years in prison after he was convicted of one count of conspiracy to commit securities fraud and five counts of securities fraud.
The court ruling is a huge setback for U.S. Attorney Preet Bharara, whose reputation was built on the more than 80 convictions in the government’s long-running crackdown on insider trading. “Today’s decision is a resounding victory for the rule of law and for Anthony Chiasson personally,” said a statement issued on behalf of Chiasson. The statement added that he “has always conducted himself according to the highest ethical and professional standards in service to many of the world’s leading hedge fund investors who were his clients for years.”
The court ruling also raises speculation whether an appeals court will eventually throw out the conviction of Michael Steinberg, the one-time lieutenant of SAC Capital Advisors’ Steven Cohen, and perhaps others. In a statement, Bharara said the appeals court ruling “interprets the securities laws in a way that will limit the ability to prosecute people who trade on leaked inside information,” adding, “we are still assessing the Court’s decision, which appears in our view to narrow what has constituted illegal insider trading, and are considering our options for further appellate review.”
Speaking of Cohen, the SAC founder, who now runs a family office called Point72 Asset Management after the government forced him to return all outside client money, contributed $1.5 million to organizations that sought to help Republicans win state gubernatorial races in the most recent election, according to a Wall Street Journal report. Cohen made the political donation to the American Comeback Committee, an organization that is related to the Republican Governors Association, according to the report. Other major hedge fund donors included Paul Singer’s Elliott Management Corp., which donated $2.5 million. Several hedge funds continue to give money to the Republican governor group, including Chicago-based Citadel, $1.5 million; New York-based Third Point, $750,000; and Bruce Kovner’s New York-based family office Caxton Alternative Management, $750,000.
Jeffrey Smith’s Starboard Value raised its stake in MeadWestvaco to 10 million shares, or 6.1 percent of the total outstanding. At the end of the third quarter, it held 9.35 million shares of the packaging company. Smith earlier said in several forums — including the Institutional Investor-CNBC Delivering Alpha conference — that he thinks the combined value of MeadWestvaco’s assets far exceeds its current share price and that this value is undermined by excessive corporate overhead and its conglomerate structure. Among the tactics Smith proposes are some typical items in an activist’s arsenal: selling non-core assets, cutting costs and buying back a hefty chunk of stock, in this case $500 million. He also believes there is value to be extracted from the company’s overfunded pension plan.
Shares of Land’s End plummeted more than 7 percent after the retailer reported a decline in revenues and same-store sales as well as a reduced number of stores. The stock, which was down more than 15 percent at one point on Wednesday, is the third largest holding of Edward Lampert’s ESL Partners after Sears spun off the apparel brand in April.