David Siegal in Law360: 2nd Circ. Could Curtail Insider Trading Prosecutions

04/22/2014


An impending Second Circuit ruling on whether the government should have to prove that recipients of insider trading tips knew their source stood to benefit from the disclosure could drastically limit prosecutors' ability to pursue charges against those further down the "daisy chain" from an illegal tip, experts say.

Hedge fund executives Anthony Chiasson and Todd Newman have argued they should not be prosecuted because they were unaware a Dell Inc. employee had his own enrichment in mind when he passed them nonpublic information. Should the defense prove successful, attorneys believe it could impose a massive new burden on the U.S. Securities and Exchange Commission and other regulators tasked with reining in the illegal transactions.

"The further away in the daisy chain from the original tip, the more difficult it will be for a prosecutor to prove that the downstream tippee knew that the original tipper was revealing the information for purposes of personal gain," said David Siegal, a partner at Haynes and Boone, LLP who co-chairs the firm's white collar criminal defense practice group.

In insider trading cases, the government routinely pursues not just the party who initially disclosed the nonpublic information, but also anyone believed to have used it to profit, even if it was passed through multiple parties after the original breach. For now, prosecutors are required to show only that a defendant relied on nonpublic information to make the trades in order to obtain a conviction.

Excerpted from Law360, April 22, 2014. To view full article, click here (subscription required).

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