Speaking at a conference in Washington, D.C., Scott Friestad, an associate director of the enforcement division, said the landmark ruling from last December has forced investigators to redirect their attention to meet the evidentiary standards the federal appeals court laid out when it overturned the convictions of former hedge fund managers Todd Newman and Anthony Chiasson.
Prior to Newman, “people maybe got into the mindset of thinking that if you can prove information got passed to [a trader], then your job was done and you had a case,” Friestad said at the annual Securities Enforcement Forum. The Newman decision, however, is a “stark reminder that, no, throughout the investigative stage, you have to be focused not only on the information passed to the trader, but those other elements that are equally significant.”
Those other elements are the personal benefits bestowed upon tippers of inside information, and the knowledge that tippees have of this exchange. The Second Circuit ruled that prosecutors failed to show that Newman and Chiasson, as downstream recipients of inside information, knew anything about the ultimate sources of their information, including any benefits these insiders received.
Friestad said cases involving tippees who are so far removed from the original source of information are fairly rare. But what he said gave him pause was the fact that the Second Circuit also found that the government case failed because it hadn't shown that the corporate insiders at the heart of it received a significant benefit from the very people they allegedly tipped off.
“That’s what’s more concerning to me. That’s the more mainstream case that we would pursue,” he said, referring to cases involving a single layer of tippers and tippees. “What we have to think about is how we overcome it.”
The Newman decision has had tremendous effect on other prosecutions, leading to the Manhattan U.S. attorney’s office dismissing criminal charges against a dozen people besides Newman and Chiasson — 10 of whom had already pled guilty to insider trading. The decision also helped tank an SEC administrative proceeding against former Wells Fargo trader Joseph Ruggieri, after an in-house judge found the enforcement division did not prove Ruggieri’s alleged tipper received a significant personal benefit for his information.
The question of what counts as a personal benefit after the Newman decision is a thorny one, attorneys said. But Friestad said one thing the Newman and Ruggieri decisions made clear is that career mentoring and helping someone get a promotion don’t meet the standard.
The enforcement division has asked the commission to review the Ruggieri decision, while Ruggieri has asked the agency to uphold the in-house judge’s dismissal. The commission has yet to act on the request, but Daniel Hawke, the former head of the SEC’s market abuse enforcement unit, said he expects the commission will hear the division’s appeal. Doing so would give it a chance to opine on matters like the personal benefit standard.
But, he added, the body will likely take a cautious route in rendering its opinion, in part, for fear of getting reversed on appeal.
“I would not expect an earth-shaking decision,” said Hawke, who's now at Arnold & Porter LLP.
While the Newman decision was effectively made the law of the land after the U.S. Supreme Court refused to hear the government’s appeal of it, Friestad noted that many courts have narrowly interpreted the Second Circuit’s holdings over the past year.
He also said that, regardless of Newman, he’d expect the SEC will continue to bring insider trading cases at the pace it always has. He pointed to an action announced Monday, accusing a former Wells Fargo analyst of passing insider tips about a $398 million private equity deal to her then-boyfriend, who then traded off it.
“We won’t hesitate to bring those cases,” he said.
--Editing by Jeremy Barker.
