U.S. Attorney Preet Bharara’s dogged pursuit of insider trading cases over the past decade has been a boon for elite white collar litigators. But in the aftermath of a recent ruling significantly limiting liability, insider trading prosecutions are dropping like flies. Last week, the U.S. dismissed its case against former SAC Capital Advisors LP fund manager Michael Steinberg and abandoned charges against six cooperators who’d previously pled guilty.
Is it the end of an era?
“You can be certain this is not the end of prosecutions for insider trading,” says Charles Stillman of Ballard Spahr. “But prosecutors are going to have to sharpen their scalpel.”
In United States v. Newman the Second Circuit held that the tippee — the person trading on the inside information — must know that the tipper disclosed the non-public information in exchange for a “personal benefit,” and that such “benefit” must be of “consequence.”
Consequently, cases where information is passed game-of-telephone style may be a thing of the past. “The recent dismissals confirm that the prosecution of downstream tippees many levels removed from the original source has become significantly more difficult for the government following Newman,” says Jonathan Sack of Morvillo Abramowitz. “I would also expect to see increased litigation around ‘benefit,’” whose definition still remains open following Newman.
“You have to credit U.S. Attorney for seeing the major shift in the law,” says Stillman of Bharara dropping charges against Steinberg and others.
Though the government technically could have fought to uphold Steinberg’s conviction and held defendants to their guilty pleas, “the U.S. Attorneys Office did the right thing, in my view,” says Lee Richards of Richards Kibbe. While it’s rare for cases of those who’ve been convicted or pled guilty to be dismissed, “It’s not unprecedented,” says Richards.
In recent years, Bharara’s office brought cases against billionaire hedge fund manager Raj Rajaratnam and members of his far-reaching network, the alleged “criminal club” of Wall Street traders, including Anthony Chiasson and Todd Newman (whose convictions were overturned in Newman), as well as hedge fund giant SAC Capital Advisors and several of its former employees. The aggressive crack-down on alleged insider trading rings resulted in 87 convictions (14 of which have now been dismissed or overturned) and generated plenty of billable hours for the white collar bar.
The Newman decision knocked out some of Bharara’s marquee prosecutions, although its effect on white collar work may not be as dramatic as it looks.
“Generally, I’d expect Newman likely to lead to fewer insider trading cases in the near term,” says Sack. “But the number of such prosecutions was likely to go down in any event as recent cases were resolved, and compliance systems have responded to increased regulatory and prosecutorial scrutiny.”
Quinn Emanuel’s Marc Greenwald adds that after Newman he expects the “government to be less aggressive,” and “less likely to bring marginal cases.”
Since the insider trading laws apply equally to civil and criminal prosecutions, Newman is likely to also have a chilling effect on civil cases brought by the Securities and Exchange Commission, says John “Rusty” Wing of Lankler Siffert. Though “we can expect the SEC to test the limits of what counts as an intangible ‘benefit’ in insider trading cases, where the criminal authorities will be more conservative and very careful to articulate only intangible benefits which are a clear and substantialquid pro quofor tipping inside information,” says Richards.
Even if insider trading cases do slow down, we needn’t worry about white collar litigators. “The white collar bar will have plenty of cases with the FCPA [Foreign Corrupt Practices Act] on corruption and bribery,” says Greenwald. “And given human nature, that’s not likely to change.”
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