Second Circuit Accepts Rajat Gupta’s Insider Trading Appeal

This week I spoke with Fox Business reporter Serena Elavia about the Second Circuit’s decision to grant a certificate of appealability in the Rajat Gupta insider trading prosecution.  Gupta is the high-profile former McKinsey & Co. Managing Director and Goldman Sachs board member who was prosecuted and convicted for providing insider information to former Galleon Group hedge fund manager Raj Rajaratnam.

Gupta, who was first convicted in 2012 and whose direct appeal was denied in 2014, received another bite at the apple earlier this month.  He now has an opportunity for the Second Circuit to determine whether his conviction should be vacated because the jury was erroneously instructed and whether any procedural default may be excused for cause and prejudice or actual innocence.  This opportunity flows directly from the Second Circuit’s United States v. Newman decision, which altered the proof needed for the “personal benefit” to the insider that is required under Dirks v. S.E.C., 463 U.S. 646 (1983).

Newman held that merely “maintaining a good relationship” is not enough to prove the required “personal benefit.”  Instead, the insider must be the beneficiary of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”  Yet, at the time that Gupta was convicted, the district court instructed the jury that the benefit received did “not need to be financial or to be tangible in nature.  It could include, for example, maintaining a good relationship with a frequent business partner, or obtaining future financial benefits.”  Gupta did not object at the time to the instruction (Newman had not been decided).  Gupta and others, including Bassam Salman, whose petition for certiorari the Supreme Court just granted, have argued that Newman did, in fact, change the personal benefit test and thus their convictions under the less stringent “relationship” test should be vacated.

For Gupta personally, the Second Circuit’s order agreeing to hear the appeal is a significant step, although, procedurally, the Second Circuit may have accepted the appeal to put it in a holding pattern.  The Supreme Court will have the final say on this issue as it addresses Salman’s petition on the question of whether the personal benefit:

requires proof of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” as the Second Circuit held in United States v. Newman, or whether it is enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case.

Salman’s Supreme Court brief is due in May.



Supreme Court Takes on Insider Trading “Personal Benefit” After All

Just when the Supreme Court appeared to be turning its collective attention away from the standard for insider trading convictions by denying the writ for certiorari in United States v. Newman, the Court today granted cert. in Salman v. United States, which addresses the “personal benefit” that a tipper must receive in an insider trading case.  (And speaking of recent cert. grants:  kudos to my colleague, Charles Casper, who, along with others, obtained a grant of certiorari in Microsoft Corporation v. Baker, No. 15-457, on behalf of Microsoft, in a case raising a class action jurisdictional challenge).

Back to insider trading.  The Court will now take up the following question, as posed by the petitioner in Salman:

Does the personal benefit to the insider that is necessary to establish insider trading under Dirks v. SEC, 463 U.S. 636 (1983), require proof of an “exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” as the Second Circuit held in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), cert. denied, No. 15-137 (U.S. Oct. 5, 2015), or is it enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case?

In Salman, the remote-tippee defendant (Salman) received and traded on information received from the brother (Michael) of a Citigroup investment banker-insider (Maher).  Maher testified that he provided the information to his brother Michael to “get him off his back.”  Michael then provided the information to Salman.  The petitioner argued that, under the standard set by Newman, Maher, the insider, gained “nothing” – or at the very least nothing that was “objective” or “consequential” or that represented “a potential gain of a pecuniary or similarly valuable nature.”  Maher, it seems, was – like Spaulding Smails in Caddyshack – that family member whose relative was content to declare:  “you’ll get nothing and like it!”

The Ninth Circuit, however, explicitly rejected the approach in Newman and determined that it was sufficient that the government proved that the insider “made a gift of confidential information to a trading relative or friend.”  Because the government had established that link, the Ninth Circuit (Southern District of New York Judge Jed Rakoff, sitting by designation) concluded that the government satisfied its “personal benefit” burden.

But why did the Supreme Court pick Salman rather than weigh in on Newman?  While it is, of course, reading tea leaves, it nonetheless appears that the Court was persuaded by the petitioners’ argument (adopting the Justice Department’s arguments from the Newman petition) that the conflict generated by Newman and widened by Salman creates “uneven enforcement” of the securities laws and that Supreme Court review is necessary to “restore certainty and order” to the law of insider trading.

Moreover, petitioner argued that, unlike in Newman, where the Second Circuit based its decision on a second ground (the defendant’s lack of knowledge of any personal benefit), the “personal benefit” test here was outcome-determinative:  apply Newman, judgment reversed; require merely a gift to a family member, judgment affirmed.

As we argued previously in the context of Newman, we think that Newman got it right (or, at least, put us on the right path) by providing clarity as to the level of personal benefit required of a tipper in an insider trading prosecution.  What the Court does with Newman and Salman will surely be debated going forward, but in the meantime, there appears to be at least a final word on the subject coming shortly from One First Street.

Bharara’s Insider Trading Inferno Engulfs Its Next Victim: Former SAC Portfolio Manager Steinberg Convicted

Yesterday – seemingly before the ink even dried on SAC Capital Advisor’s unprecedented billion dollar plea agreement – U.S. Attorney Preet Bharara’s office secured the conviction of former SAC portfolio manager Michael Steinberg.

As recently reported by White Collar Alert editor Carrie Sarhangi, Steinberg was indicted for insider trading in March, and the government contended that he traded on financial figures he obtained from professionals with ties to computer mogul Dell and technology company Nvidia. “He allegedly made about $1.4 million in trades [executed] ahead of some of the companies’ quarterly earnings reports in 2008 and 2009.”  Richard Vanderford, SAC’s Steinberg Guilty of Insider Trading, Law360 (Dec. 18, 2013).

During the month-long trial, which began on November 18th, prosecutors did not present the incontrovertible evidence that we have become accustomed to seeing in insider trading cases brought by Bharara’s office.  As noted this morning by The New York Times, “Prosecutors lacked the incriminating wiretaps …. The emails pointed to no smoking gun.  And the government’s star witness, a felon who testified to avoid prison time, fumbled his way through five days of cross-examination.”  Ben Protess, Matthew Goldstein and Alexandra Stevenson, Former SAC Trader Is Convicted of Insider Trading, The New York Time’s DealB%k (Dec. 18, 2013).  Indeed, the government had previously conceded “that the case was not a slam dunk,” as Steinberg “was at the end of a five-person chain of information that started with an insider … and wound its way to … [him].”  Id.

Yet, after two days of deliberations, the federal jury completed its “fact-finding,” id., and delivered the guilty verdict.  In a press release issued yesterday, Bharara stated:

The jury has found what the Government contended from the outset; in search of an edge, Michael Steinberg crossed the line into criminal insider trading.  Like many other traders before him who, blinded by profits, lost their sense of right and wrong, Steinberg now stands convicted of federal crimes and faces the prospect of losing his liberty.

Statement of Manhattan U.S. Attorney Preet Bharara On The Conviction of Michael Steinberg (Dec. 18, 2013).  Indeed, while Steinberg is free on bail until his April 25th sentencing, he faces up to 85 years in prison.

The conviction of Mr. Steinberg is just the latest victory by the United States Attorney’s Office in Manhattan in its campaign to root out illegal conduct on Wall Street.  Over the past four years, more than 80 individuals and entities have been charged with insider trading in the Southern District of New York.  The office has secured 76 convictions without losing a single trial.  And just last week, Richard Zabel, Bharara’s Deputy U.S. Attorney, noted at a conference that insider trading remains one his office’s focuses.

According to one recent survey, financial services professionals feel that there may be plenty of Wall Streeters for Bharara’s office to target.  This survey, entitled “Wall Street in Crisis:  A Perfect Storm Looming,” revealed the following:

  • 52% of financial services professionals felt it was likely that their competitors have engaged in unethical or illegal activity to engage in the market;
  • 24% felt employees at their own company have likely engaged in misconduct to get ahead;
  • 23% of respondents indicated that they have observed or had firsthand knowledge of wrongdoing;
  • 24% of financial service professionals likely would engaged in insider trading to make $10 million if they could get away with it; and
  • 29% of those surveyed believed that the rules may have to be broken in order to be successful.

Yet the question still remains whether SAC’s founder, Steven A. Cohen, falls into one of these categories of professionals prone to illegal activity, and/or whether he will be the next victim of Bharara insider trading inferno.

The Blame Game: Who Should be Indicted – the Company or the Individual?

Just how wide is the net being cast upon SAC by federal authorities?  Last week, I posted about the unprecedented plea agreement worked out between prosecutors and SAC Capital Advisors, L.P. in what could be described as the most rampant insider trading scheme ever charged.

Last Friday, SAC’s general counsel, Peter Nussbaum, appeared in federal court to plead guilty to all five charges filed against SAC on the behalf of the company.  The presiding criminal judge, U.S. District Judge Laura Taylor Swain, was emphatic that she would not approve the agreement without an exhaustive review of its terms, including the “no immunity clause” which provides “no immunity from prosecution for any individual and does not restrict the government from charging any individual for any criminal offense,” a clause that allows the government to potentially charge SAC’s founder, Steven A. Cohen.  And while national headlines are abuzz about SAC – the company – reporters have been remiss to discuss the implications of alleged insider trading upon SAC’s individuals – alumni, traders, and advisors.

Here is the scoop on some of the primary individuals indicted in connection with SAC:

  • Richard Lee, former SAC trader, pled guilty to insider trading and is cooperating with prosecutors.  Lee was allegedly responsible for giving the government information about SAC’s so-called expert networks that connect traders with corporate insiders and the company’s questionable hiring procedures and protocol, including the fact that he was hired by SAC after being terminated by a prior hedge fund on his first day of employment for accessing the hedge fund’s accounting system and misstating the value of his holdings.
  • Donald Longueuil and Noah Freeman, both former portfolio managers, were charged with insider trading relative to publicly traded technology companies, including chip maker Marvell Technology.  Freeman received insider information about Marvell, which he passed along to Longueuil, who turned the tip into a $1 million profit.  Reportedly, Longueuil was taken down in part of a larger effort by authorities to crack down on SAC’s so-called expert networks.  He pled guilty in 2011 and is currently serving a two and a half year sentence.  Freeman pled guilty in 2011 but because he is cooperating with prosecutors, he has yet to be sentenced.
  • Jon Horvath, a former technology industry analyst pleaded guilty in September 2013, for his role in the insider trading conspiracy involving Dell computer and the chip maker Nvidia.  The conspiracy allegedly earned $62 million in illegal gains and included Horvath’s former boss, Michael Steinberg.
  • Anthony Chiasson, co-founder of Level Global Investors, was convicted by a federal jury of illegally trading the technology stocks Dell and Nvidia as part of the conspiracy discussed, supra.  On appeal, Chiasson’s attorneys are arguing that Chiasson lacked knowledge that the insider information was, in fact, given by tippers with the intent to benefit themselves.
  • Michael Steinberg, former SAC portfolio manager, has been indicted for insider trading and the government contends that he utilized secret tips about quarterly earnings results from computer mogul Dell and technology company Nvidia.  He is scheduled for trial on Monday, November 18.  With SAC’s increased notoriety and significant media attention in the past few weeks, Steinberg’s lawyers have already raised concerns that he may not be able to obtain a fair and impartial jury.
  • Mathew Martoma, an ex-SAC trader and pharmaceutical-industry analyst, is charged with conspiring to profit from insider knowledge pertaining to an Alzheimer’s drug and is scheduled for trial in January 2014.  Prosecutors allege that Martoma received insider information about a drug trial from Sidney Gilman, a neurology professor at Michigan and leading expert in Alzheimer’s disease.  Based on Gilman’s tip, Martoma bought and sold large blocks of Elan and Wyeth shares and was allegedly able to avoid losses and make profits for SAC amounting to $276 million, the biggest insider-trading case in history.

Questions remain: how will these prosecutions affect company founder Cohen?  Specifically, will information obtained through cooperating defendants and/or outstanding trials result in the government turning its attention from the company to Cohen, the individual on top?