United States v. Newman and Chiasson
2014 U.S. App. LEXIS 23190
2d Cir.2014Background
- Newman and Chiasson, portfolio managers at hedge funds, were convicted after a jury trial for insider trading and conspiracy based on receiving and trading on material nonpublic earnings information about Dell and NVIDIA passed through a chain of analysts from corporate insiders.
- The Government alleged analysts received inside tips from Dell and NVIDIA employees (tippers) who then passed information through intermediaries to the defendants, yielding significant trading profits for their funds.
- Defendants were several steps removed from the alleged tippers and presented evidence they did not know the identity of the insiders nor that any personal benefit was exchanged for the information.
- At trial defendants requested a jury instruction requiring proof that a tippee knew the insider disclosed information in exchange for a personal benefit; the district court declined and instead instructed the jury that the Government need only prove the defendants knew the information was disclosed in breach of a duty.
- The jury convicted; on appeal the Second Circuit reviewed the sufficiency of evidence and the jury instructions, focusing on whether tippee liability requires proof that the tippee knew of the insider’s personal benefit in exchange for the disclosure.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether tippee must know insider received personal benefit for disclosure | Gov't: tippee need only know insider disclosed confidential info in breach of duty | Defs: must know insider disclosed for personal benefit; Dirks requires proof of tipper benefit and tippee knowledge of it | Held: Tippee conviction requires proof the tippee knew the insider disclosed confidential info in exchange for a personal benefit |
| Whether district court erred by omitting instruction that tippee must know of tipper’s personal benefit | Gov't: prior dicta show no separate knowledge element for benefit; instruction sufficient | Defs: omission left jury uninformed of essential element | Held: Failure to instruct on tippee knowledge of tipper’s personal benefit was erroneous and not harmless |
| Whether evidence proved tippers received a personal benefit | Gov't: friendships, career help, social ties supported inference of benefit | Defs: relationships were casual; no quid pro quo or objective exchange shown | Held: Evidence was too meager; friendships/casual advice insufficient to establish personal benefit beyond reasonable doubt |
| Whether evidence proved defendants knew of tipper breach/benefit | Gov't: specificity/timing of updates made origin and motive inferable | Defs: analysts often model and obtain similar info legitimately; defendants were remote and lacked knowledge | Held: No evidence that defendants knew insiders provided info for personal benefit; convictions unsupported and reversed |
Key Cases Cited
- Dirks v. S.E.C., 463 U.S. 646 (1983) (tippee liability derives from tipper breach; tipper must personally benefit for breach)
- Chiarella v. United States, 445 U.S. 222 (1980) (insider trading liability grounded in fiduciary duty, not general information asymmetry)
- United States v. O’Hagan, 521 U.S. 642 (1997) (misappropriation theory of insider trading)
- Jiau v. United States, 734 F.3d 147 (2d Cir. 2013) (elements of tippee liability summarized; facts showed tippee provided the benefit)
- S.E.C. v. Obus, 693 F.3d 276 (2d Cir. 2012) (discussion of tipping and misappropriation theories)
- Staples v. United States, 511 U.S. 600 (1994) (mens rea requires knowledge of facts that make conduct illegal)
- Neder v. United States, 527 U.S. 1 (1999) (harmless-error standard for jury instruction errors)
- Jackson v. Virginia, 443 U.S. 307 (1979) (standard for sufficiency of evidence review)
- United States v. Cassese, 428 F.3d 92 (2d Cir. 2005) (definition of willfulness in securities context)