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If the Supreme Court won't help stop insider trading, who will?

The Supreme Court's decision not to review a recent insider trading case produces a cloudy precedent for white-collar prosecutions.

The U.S. Supreme Court recently decided that they would not hear the Justice Department's challenge of a major appeals court decision, United States v. Newman, which overturned two counts of insider trading in 2014. The case against former hedge fund managers Todd Newman, of Diamondback Capital Management, and Anthony Chiasson, of Level Global Investors, was initially brought by the U.S Attorney's Office for the Southern District of New York. The government alleged that Newman and Chiasson used a round-robin ring of insider trading tips to earn a combined total of $72 million for their funds.

After a six-week trial on securities-related charges in 2012, a federal district court jury found the defendants guilty on all counts. Newman was sentenced to 54 months in prison, and Chiasson received a sentence of 78 months. In 2014, a three-judge panel of the U.S. Court of Appeals for the Second Circuit overturned the convictions. The Justice Department filed a petition to the Supreme Court to review the case in July 2015.

A conviction for insider trading requires proof that the person who disclosed the information, the tipper, received a "personal benefit." Under some circumstances, a "personal benefit" may be proven if there is a "meaningfully close personal relationship" between the tipper and the tippee. The Second Circuit reversed the convictions based on a very narrow interpretation of the term "personal benefit." The court also found that the Justice Department had not established that there was a "meaningfully close personal relationship" between either Newman or Chiasson (the tippees), and the providers of the insider trading tips (the tippers). The Second Circuit interpreted the 1983 case Dirks v. SEC to mean that for insider trading to have occurred, the providers of the tips must have benefitted from sharing the tips, which, the appellate court wrote, could not be proven.

The jury heard a lot of evidence in six weeks, enough to convict on all counts for each defendant. The Dirks decision gave the fact-finder fair latitude regarding the "objective facts and circumstances" to determine culpability in the case. But the Second Circuit's interpretation will create problems for prosecutors in future cases, as the margin for that connection just shrank. It seems illogical to think that both the tippers and tippees did not see the potential for misuse of the confidential information repeatedly provided over the span in this case. These are not your average investors. These are really smart, sophisticated traders, who understand the nuances in securities law and now appear to have a more vague definition to use as a defense.

The Justice Department warned in their petition to the Supreme Court that the Second Circuit ruling will create "an obvious roadmap for unscrupulous insiders and tippees." Not only is that an accurate prediction, but the Supreme Court's refusal to hear the case puts pending insider trading cases in jeopardy.

The Justice Department has publically announced that it wants to make prosecuting white-collar crime a priority; but with an interpretation like this, that priority becomes increasingly frustrating to achieve. The issues at hand appear to be a very strict definition of what constitutes a "close personal relationship," as well as how tippers may benefit from giving their insider knowledge to traders.

Situations like this erode public confidence in the financial markets even more. By denying review in this case, the Supreme Court effectively passed the ball to Congress to legislatively attempt to define this issue for now. Perhaps Congress will step in and redefine the tipper-tippee relationship and give specific guidance. Who knows? Until then, "meaningfully close" is going to be a tough standard to define.

Bruce Dorris, J.D., CFE, CPA, CVA, is Vice President and Program Director at the ACFE. His email address is: