United States v. Chow
993 F.3d 125
2d Cir.2021Background
- Defendant Benjamin Chow, founder of Canyon Bridge, negotiated to acquire Lattice Semiconductor in 2016, signing two nondisclosure agreements (April and September NDAs) that expressly classified the fact of the negotiations as confidential.
- FINRA/FBI investigation identified unusual, concentrated purchases of Lattice stock in accounts controlled by Michael (Shaohua) Yin in the four months before Lattice's November 3, 2016 acquisition announcement; those accounts realized ≈$5 million profit on sales after the announcement.
- Extensive communications and meetings occurred between Chow and Yin in July–October 2016; large Yin purchases closely followed those communications (notably after meetings on July 5, Sept. 13, Sept. 21, Oct. 17), and Yin texted associates referencing Lattice by ticker and timing.
- Government evidence included the NDAs, phone records and texts, FINRA/FBI testimony about trading patterns and clearing in Manhattan (NASDAQ/DTCC/NSCC activity), and corporate testimony about confidentiality and exclusivity agreements with Canyon Bridge.
- A jury convicted Chow of conspiracy to commit securities fraud (18 U.S.C. §371), securities fraud, and six counts of insider trading; he was sentenced to three months’ imprisonment and two years’ supervised release. Chow appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether signing NDAs created a duty of trust/confidence for §10(b)/Rule 10b-5 liability | Government: NDAs created a duty as a matter of law under SEC Rule 10b5-2 and established temporary-insider status | Chow: NDAs were arm’s-length and insufficient to create insider-duty liability | Held: NDAs suffice; Rule 10b5-2 and controlling precedent create a duty when one agrees to keep information confidential |
| Whether evidence was sufficient to prove Chow intentionally disclosed material, nonpublic information and that Yin traded on it | Government: timing of communications, content (e.g., “making a deal,” “signing the contract soon”), and immediate large purchases support intentional tipping and materiality | Chow: Communications were general or about his own views; Yin may have traded on hypotheses, not tips | Held: Evidence sufficient; jury could infer intentional breach, materiality, and that Yin traded on tips |
| Whether Chow received/expected a personal benefit to satisfy Dirks tipper requirement | Government: Chow obtained introductions, analyst reports, business contacts, and received gifts; communications show intent to benefit Yin and reciprocal contacts | Chow: No tangible quid pro quo or personal benefit shown | Held: Personal benefit standard is low; evidence supported an indirect/relationship benefit and intent to benefit the tippee |
| Whether venue in the Southern District of New York was proper | Government: Trades were executed/cleared/recorded on NASDAQ/NSCC servers and involved Manhattan-based brokers, so acts in furtherance occurred in SDNY | Chow: Major events occurred outside SDNY; venue improper | Held: Venue proper; acts in furtherance (execution/clearing/settlement) occurred in SDNY and satisfy §78aa/§3237(a) |
Key Cases Cited
- United States v. O'Hagan, 521 U.S. 642 (adopts and explains the misappropriation theory; deception of principal supports §10(b) liability)
- Dirks v. SEC, 463 U.S. 646 (establishes personal-benefit test for tippers and describes when outsiders become fiduciaries)
- Chiarella v. United States, 445 U.S. 222 (classical theory: insiders owe duty of trust and confidence to shareholders)
- United States v. Martoma, 894 F.3d 64 (2d Cir.) (applies Dirks and clarifies personal-benefit inquiry in insider-trading prosecutions)
- United States v. Kosinski, 976 F.3d 135 (2d Cir.) (confidentiality agreements can establish temporary-insider fiduciary duties)
- United States v. Falcone, 257 F.3d 226 (2d Cir.) (tacit confidentiality arrangements can create duties supporting insider-trading liability)