US v. Newman

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A federal judge in the Southern District of New York recently sustained the SEC’s insider-trading complaint against two alleged tippees, holding that, under the pleading standard applicable to a motion to dismiss, the SEC need not plead specific facts showing that the tip was exchanged as part of a quid pro quo relationship and that the tippees knew of such an exchange if the SEC (i) does not know the identity of the tipper or how the tip was relayed and (ii) pleads belief about the nature of the tip and the tippees’ knowledge, “coupled with particular facts supporting that belief.” The court also upheld its prior asset-freeze order, ruling that the standard for an asset freeze “requires only ‘a basis to infer liability,’ and thus may be lower than the standard on a motion to dismiss.”

In SEC v. Jafar (S.D.N.Y. June 8, 2015), the tippee defendants argued that the Second Circuit’s 2014 decision in United States v. Newman increased the Government’s burden in insider-trading cases and therefore required reconsideration of the court’s earlier denial of their motion to dismiss. (We previously wrote about the Newman decision at here, here, here, here, here and here.) Southern District Judge J. Paul Oetken denied the motion.

insider tradingAnother insider-trading case has survived a motion to dismiss under the more stringent standards that the Second Circuit adopted last year in United States v. Newman.  On May 12, 2015, a federal District Court in Massachusetts declined to dismiss the indictments in United States v. McPhail and held that the Government had alleged sufficient facts showing that the initial wrongdoer-tipper had received a personal benefit and that the tippee had known of that benefit.

U.S. District Judge Jed Rakoff issued a decision in SEC v. Payton (S.D.N.Y. Apr. 6, 2015) denying the defendants’ motion to dismiss a civil insider-trading suit filed by the SEC.  The court held that the SEC’s complaint had adequately alleged that the tipper of material nonpublic information had received a personal benefit for the disclosure and that the remote tippees had had sufficient knowledge of that benefit under the “recklessness” standard applicable to civil cases.  In so ruling, however, Judge Rakoff observed that the Second Circuit’s restrictive reading of the personal-benefit requirement in United States v. Newman “may not be obvious” in light of the Supreme Court’s controlling decision in Dirks v. SEC.

The Payton case involved allegedly material nonpublic information about a potential corporate acquisition.  The information came from one of the bidder’s outside attorneys, who allegedly told a friend named Martin (the initial tipper) in circumstances where the two allegedly shared a duty of trust and confidence.  Martin allegedly tipped his roommate, Conradt, who “shared a close, mutually-dependent financial relationship, and had a history of personal favors” with Martin.  Conradt allegedly told another registered representative, who allegedly tipped the two defendants.  Conradt also allegedly spoke to the two defendants about the information.  The SEC brought these civil proceedings against the two defendants for their trading.

The Second Circuit today denied the request by the U.S. Attorney’s office for the Southern District of New York for panel or en banc rehearing of the landmark U.S. v. Newman decision, which overturned insider-trading convictions of two remote tippees by (i) holding that a tippee must know…

insider tradingOn March 25, 2015, U.S. Representative Jim Himes introduced the Insider Trading Prohibition Act.  The bill is the latest in a series of efforts to define insider trading following the Second Circuit’s decision last year in United States v. Newman.  We have blogged previously about similar legislation introduced by U.S. Senators Jack Reed and Bob Menendez and U.S. Representative Stephen F. Lynch.

The Himes bill would create a new Section 16A of the Securities Exchange Act.  The new section would make it illegal for a person to trade securities on the basis of material, non-public information that the person knows (or recklessly disregards) was wrongfully obtained.  The bill would also make it illegal for a person whose own trading would be illegal to wrongfully communicate material, non-public information to another person when it is reasonably foreseeable that the other person is likely to trade on it or pass it on to others.

Ever since the U.S. Court of Appeals for the Second Circuit issued its landmark decision in United States v. Newman, debate has raged about whether the court has sanctioned insider trading or has appropriately restrained the Government’s efforts to prosecute innocent market conduct – and whether the judiciary, rather than Congress, should be defining and outlawing insider trading in the first place. Some members of Congress have now stepped into the act.

Last week, U.S. Senators Jack Reed and Bob Menendez introduced the Stop Illegal Insider Trading Act (S.702). The Reed-Menendez bill would make it illegal to (1) trade securities on the basis of material information that a person knows or has reason to know is not publicly available or (2) knowingly or recklessly communicate material information that a person knows or has reason to know is not publicly available when it is reasonably foreseeable that such communication is likely to result in the unlawful purchase or sale of securities.

On Thursday, February 5, 2015, Ralph C . Ferrara, Robert J. Cleary and Jonathan E. Richman were invited to Proskauer’s Hedge Fund Breakfast Seminar to speak about the Second Circuit’s insider-trading ruling in Newman/Chaisson.  The litigators provided the group of hedge fund professionals with a helpful overview of…