Supreme Court might hear insider trading case

A groundbreaking case that challenges the legal definition of insider trading is headed to the U.S. Supreme Court for possible review.

The Department of Justice, in a petition backed by the U.S. Solicitor General Donald Verrilli Jr., has asked the highest court in the land to take a look at a recent appeals court ruling that, left to stand, would dramatically narrow what counts as illegal insider trading.

Whether the Supreme Court will hear the case — prosecuted by Manhattan U.S. Attorney Preet Bharara — remains to be seen. But the outcome of this next phase could dramatically affect how insider trading is prosecuted across the nation.

In December, Bharara suffered a major setback in his insider trading crackdown when the U.S. 2nd Circuit Court of Appeals overturned the convictions of Level Global co-founder Anthony Chiasson and Diamondback portfolio manager Todd Newman.

The appeals court ruled that 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."

Under the ruling, a person must have direct knowledge of the insider doling out the tips, and know that he or she was breaking the law, to be convicted of insider trading. The court said the government must also prove that the tipper received some sort of benefit in exchange for the information provided.

In its filing Thursday, the Justice Department challenged this viewpoint, saying the appeals court relied on a "novel test" that has "created a conflict with circuits."

"The effect of the new rule will be to hurt market participants, disadvantage scrupulous market analysts, and impair the government’s ability to protect the fairness and integrity of the securities markets," the petition said.

The ruling threatens to undo a chunk of the DOJ's work on insider trading since its Wall Street crackdown kicked off in 2007. In particular, it threatens cases in which the alleged trader was not in direct contact with the tipster but instead dealing with someone one, two or even three steps removed from the original source of information.

Several people convicted in Bharara's widespread crackdown on insider trading have publicly declared that they, too, should be exempt under the appeals court decision.

In March, hedge fund manager Michael Kimelman, who has already served prison time under a 30-month sentence, filed a motion to vacate his conviction on the basis that the government provided no evidence that he knew the source of the tips that led to his conviction or that the information was wrongfully obtained.

Around the same time, David Ganek, Chiasson's partner at Level Global, has separately sued Bharara and several FBI agents for "prosecutorial misconduct."

“Mr. Chiasson remains confident that the carefully reasoned analysis of the Second Circuit is well grounded in the facts and the law and will withstand Supreme Court review,” said Chiasson's lawyer Gregg Morvillo of Morvillo LLP. Newman's lawyer declined to comment.