As this paper recently reported, an appeals court has overturned Anthony Chiasson’s 2012 insider trading conviction. Chiasson is a Portland native turned hedge fund manager who acted as a Cheverus high school trustee until his insider-trading arrest in 2012. Chiasson was co founder of Level Global Investors a hedge fund which had $4 billion under management until this case shut the fund down.
The prosecution alleged that, Chaisson and his codefendants traded on early information about the not yet released earnings reports of two technology companies. Chiasson was convicted after a six week trial, and then sentenced to 78 months in prison, a $5 million fine, and ordered to forfeit $1.3 million. He had remained free on bail pending appeal and last week, a three judge panel of the Second Circuit Court of Appeals vacated the conviction and ordered the charges against Chaisson and another codefendant dismissed.
Insider trading prohibitions are odd because they’re not clearly laid out in statute. They fall under a more general securities fraud law which refers to regulations prohibiting trading on material nonpublic information. But having inside information isn’t always a crime, the law requires that the person giving the tip had a duty to keep the information private and that they disclosed the information in exchange for a personal benefit. The trader must know this and trade on the information anyway.
A strange question arises then when the person trading on the information is several levels removed from the tipper. In this case, the evidence showed that Chaisson and his codefendant were at least three or four levels removed from the actual information leakers. The prosecution said that this was no problem since, as sophisticated investors, they should have known that the information must have been improperly obtained. The defense argued that was not enough and the Court of Appeals agreed:
We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.Accordingly, we reverse the convictions of Newman and Chiasson on all counts and remand with instructions to dismiss the indictment as it pertains to them with prejudice.
This decision breaks from some earlier cases in a subtle but important way by explicitly holding that, to be guilty, the defendant must have had knowledge both that the information was confidential, and that it was disclosed in exchange for a benefit. If Chiasson’s case stands, it undermines Manhattan US Attorney Preet Bharara’s years long campaign targeting hedge funds for insider trading prosecution. That investigation has led to over 80 convictions and other prosecutions that are still pending. This decision will likely freeze some pending cases and could leave some convictions vulnerable to appeal.
Of course, the case is not over, prosecutors will very likely petition for a rehearing before the full Circuit Court since this decision was rendered by a panel of only three judges. If they can’t get a rehearing or if they lose again, the government will likely appeal to the United States Supreme Court and if a rehearing overturns the panel decision, Chiasson will have no choice but to seek Supreme Court review.