On Wednesday, December 10th 2014, in the case United States v. Newman and Chaisson, the United States Court of Appeals 2nd circuit made a controversial decision to reverse the convictions and indictments against Newman and Chaisson. The court document states:
“….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.”
Arguments on behalf of Mr. Chaisson
Mr. Chaisson’s attorney, Greg Morvillo argued there are two separate conditions that must be met in order to constitute insider trading:
1. Execution of a trade while in possession of material, non-public information
2. Breach of fiduciary duty
Moreover, Mr. Morvillo argued his client:
1. Was a “remote tippee” – receiving fourth-hand information from insiders within the company.
2. Did not know the insiders had disclosed the information in exchange for career advice, friendship, or other personal benefit.
At trial, the Government presented evidence that a group of financial analysts exchanged information they obtained from company insiders, both directly and more often indirectly. Specifically, the Government alleged that these analysts received information from insiders at Dell and NVIDIA disclosing those companies’ earnings numbers before they were publicly released in Dell’s May 2008 and August 2008 earnings announcements and NVIDIA’s May 2008 earnings announcement. These analysts then passed the inside information to their portfolio managers, including Newman and Chiasson, who, in turn, executed trades in Dell and NVIDIA stock, earning approximately $4 million and $68 million, respectively, in profits for their respective funds.
Mr. Newman and Mr. Chiasson were several steps removed from the corporate insiders and there was no evidence that either was aware of the source of the inside information. With respect to the Dell tipping chain, the evidence established that Rob Ray of Dell’s investor relations department tipped information regarding Dell’s consolidated earnings numbers to Sandy Goyal, an analyst at Neuberger Berman. Goyal in turn gave the information to Diamondback analyst Jesse Tortora. Tortora in turn relayed the6 Nos. 13‐1837‐cr; 13‐1917‐cr information to his manager Newman as well as to other analysts including Level Global analyst Spyridon “Sam” Adondakis. Adondakis then passed along the Dell information to Chiasson, making Newman and Chiasson three and four levels removed from the inside tipper, respectively.
Analysis: Ethical Considerations for Corporations, Analysts, and Investment Managers
Risk controls are rarely perfect. In most cases, they are a “best effort” to keep up with a increasingly complex ecosystem that extends beyond the control of initial disclosing party (in this case, Investor Relations). The slightest of mistakes, malicious or accidental, can create dire and unforeseen downstream consequences.
Corporations and the legal system need improvements to:
1. Thoroughly govern Investor Relations disclosures
2. Reduce ambiguity in the definitions of non-public, material information; and associated regulations
Improvement # 1 is an opportunity for control system innovation – regardless if it is technological or process oriented. Improvement # 2 is the legal clarity bring to achieve better cooperation and outcomes for the Corporations, Analysts, Investment Managers, SEC, and DOJ.
Think of it in these simple terms: If all the parties involved have a clear understanding of right and wrong for themselves and each other, the system as a whole will make great strides to protect investors, fairly regulate all parties, and restore faith in the underpinnings of the American economy.
Remarks from Mary Jo White @ 2014 Dealbook Conference
This information is provided for the sole purpose of commentary and analysis of ethics; and does not constitute legal advice and should not be interpreted as legal advice.
(1) Docket # 13-1837-cr (L) United States v. Newman and Chaisson Decision (Reversal of Convictions and Indicatments): http://www.ca2.uscourts.gov/decisions/isysquery/7e5c454f-c042-404e-b92d-364c330fc3ca/1/doc/13-1837_opn.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/7e5c454f-c042-404e-b92d-364c330fc3ca/1/hilite/
(2) Chaisson Hearing Documents provided by Mr. Chaisson’s attorney, Gregory Morvillo: http://morvillolaw.com/Chiasson_appeal.htm