A ruling that tossed out the insider trading convictions of two hedge fund managers may have opened the door for others charged with wrongful trading to get their cases or pleas dismissed.
A federal judge in Manhattan, Andrew L. Carter Jr., on Thursday ordered the lawyers for the defendants in an unrelated insider trading case to come to court on Dec. 18 to discuss the implications of the ruling. The day before, a panel of the United States Court of Appeals for the Second Circuit overturned the convictions of the hedge fund managers Anthony Chiasson and Todd Newman.
Judge Carter said in his brief order that he wanted to discuss whether the appellate ruling affects a guilty plea by at least one of five defendants. In the case he is overseeing, five friends have been accused of receiving a secondhand tip about IBM’s plans to acquire SPSS for $1.2 billion in October 2009.
The move by the judge is a sign that the impact of the appellate court’s decision may have ramifications well beyond Mr. Chiasson and Mr. Newman. The ruling was notable because the appellate court significantly reined in prosecutors when pursuing cases of insider trading, especially against individuals who are far removed from the original source of an illegal stock tip.
Under the appeals court ruling, the government must also show more than just friendship between people sharing in inside information in order to establish a benefit — one of the elements of proving insider trading. The court said the person passing on a tip must receive something “of some consequence.”
In legal circles it is seen as likely that the ruling will mean that Michael Steinberg, a former portfolio manager at SAC Capital Advisors, will have his conviction overturned because he traded on the same information that did not constitute an illegal tip for Mr. Chiasson and Mr. Newman. Several others who pleaded guilty and testified as cooperating witnesses in the trials of Mr. Chiasson, Mr. Newman and Mr. Steinberg may also seek to withdraw their pleas, since they implicitly pleaded guilty to something that was not a crime, according to the appellate court ruling. (Mr. Steinberg remains free pending an appeal.)
Roland Riopelle, the lawyer for Danny Kuo, a former analyst who pleaded guilty to insider trading and cooperated with the government in its investigation of Mr. Chiasson and Mr. Newman, said he has contacted prosecutors in the wake of the appellate ruling.
Preet Bharara, the United States attorney for Manhattan, has said his office is considering appealing the appellate court’s decision. But at the same time, Mr. Bharara, in a statement issued after the decision, said he did not expect many convictions to be affected by the appellate ruling.
Still, the hearing ordered by Judge Carter may be only the first of a number of attempts by people charged with insider trading to raise new challenges to those charges or pleas they have entered.
Michael Kimelman, a former lawyer and trader convicted of insider trading and who served 21 months in a federal prison, said he was discussing with several lawyers whether to file a motion to seek to reopen his conviction. Mr. Kimelman said that like Mr. Chiasson and Mr. Newman he was not aware that he was trading on inside information when he bought shares of 3Com in September 2007.
Mr. Kimelman says he believes the jury in his trial was improperly instructed on the law. He noted that the judge in his case — Richard J. Sullivan of the Federal District Court in Manhattan — was the same judge who presided over the trials of Mr. Chiasson, Mr. Newman and Mr. Steinberg. That said, Mr. Kimelman, 43, acknowledged that it would be difficult to reopen his conviction three years later.
The appeals court ruling may also provide a path for defense lawyers to challenge, or even unwind, regulatory cases. Indeed, some lawyers have approached the Securities and Exchange Commission on the possibility of reopening closed and settled insider trading cases.
A lawyer for Filip Szymik, who recently settled accusations that he tipped a friend about a hedge fund’s secret plan to attack Herbalife, said he contacted the S.E.C. this week to raise the prospect of revisiting the settlement. The lawyer, Paul Ryan, declined to comment further.
The S.E.C. argued that in leaking the information Mr. Szymik “received a personal benefit by gifting confidential information to his friend.”
Appeals Court Deals Setback to Crackdown on Insider Trading
The ruling in the case against two former hedge fund traders, Todd Newman and Anthony Chiasson, is a blow to prosecutors’ campaign to crack down on insider trading.