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Inside out

5 Oct 2015 By Reynolds Holding

The U.S. Supreme Court has given prosecutors a solid insider trading tip. Justices won’t let them take another shot at two hedge fund managers, signaling that cases against improper dealings have gone too far. The outcome saves them from further excesses that could hurt their credibility on Wall Street.

A federal appeals court in New York spared Anthony Chiasson and Todd Newman from prison last year for trading on Dell and Nvidia secrets. The two got the information through intermediaries, but denied knowing whether those insiders were compensated for their tips. The appellate judges agreed that such knowledge was an essential element of the crime – and that the compensation had to be worth more than just a favor between friends. Their convictions were reversed.

The Supreme Court on Monday denied a request from prosecutors to review the case, preserving the controversial ruling. The government said it “insulates from liability deceptive acts” that have long been criminal. It’s clear, though, that a 1983 Supreme Court precedent puts the appellate judges on firm legal ground.

In any event, prosecutors protest too much. Judges have continued to find plenty of people liable for passing inside information to their friends or relatives. Those cases, though, have included evidence that the tipper gained something – subsequent help with tuition, for example – in exchange for the information. Absent such evidence, cases have been tossed.

If the top tribunal had accepted the appeal, prosecutors might have wound up worse off. Justice Antonin Scalia, for one, has advocated narrowing the definition of insider trading. Even a ruling that simply vindicated Chiasson and Newman would have created a national precedent immune from challenge.

Preet Bharara, the U.S. attorney in Manhattan, is already under fire for focusing on insider traders like Galleon Fund founder Raj Rajaratnam rather than executives who may have contributed to the 2008 financial crisis. Even his office’s impressive record against such dodgy dealings has suffered recent reversals. One fund manager is now suing Bharara over allegedly improper tactics.

Federal enforcers have portrayed the rejection of their appeal as a loss. They’re missing the point. The top court has just alerted them to be careful what they wish for.


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