Friends with Benefits: Analyzing the Implications of United States v. Newman for the Future of Insider Trading

Abstract

In the 2014 case United States v. Newman, a federal appeals court vacated convictions of insider trading and dismissed the indictments against two former hedge fund traders, Todd Newman and Anthony Chiasson. In overturning their convictions, the United States Court of Appeals for the Second Circuit ("Court") held that the U.S. Attorney's Office for the Southern District of New York ("Government') failed to prove that the corporate insiders received a significant benefit for tipping downstream tippees, who were several levels removed from the corporate insiders. The Court also held that the Government failed to show that the defendants had any knowledge of the alleged benefits that the insiders supposedly received. The Court reasoned that the benefit conferred to the tippees must be "of some consequence " so that it is no longer sufficient to show just friendship as a form of benefit. After the ruling, the Government sought a rehearing en banc and argued that the ruling departs from United States Supreme Court and Second Circuit precedent and that it threatens the effective enforcement of securities law, specifically in cases involving remote tippees and tippers. Following the denial for a rehearing by the Second Circuit, the Government filed a petition for writ of certiorari to the Supreme Court which was also denied on October 5, 2015. This Comment argues that the Court's decision in Newman, requiring a tangible personal benefit, is proper because the decision clarified the requirements necessary to sustain a conviction for remote tippee liability in insider trading cases. The Court's decision correctly curbed the government's ability to bring insider trading cases by limiting the Securities and Exchange Commission's ("SEC") broad interpretation of existing securities law. The SEC's broad interpretation has damaged the overall efficiency of the market by limiting the incentives of market participants to obtain information and make informed trading decisions. Furthermore, this Comment will recommend the need for Congress to enact create laws directly criminalizing insider trading behavior.

Keywords: SEC, Securities and Exchange Commission, Commission, tippees, traders, Newman, Todd Newman, Anthony Chiasson, enforcement, securities law, insider trading