We now have the first official judicial reaction to the Second Circuit’s recent opinion in United States v. Newman and Chiasson. On January 22, 2015, District Judge Andrew Carter of the Southern District of New York vacated previously-accepted guilty pleas in United States v. Conradt, 12 Cr. 887 (ALC) (S.D.N.Y.).
Conradt is an insider trading prosecution based on securities trades by alleged tippees who learned and traded on the basis of nonpublic information about an impending IBM acquisition of a software firm. Briefly, the facts are as follows. A law firm employee learned about the impending IBM acquisition of SPSS and improperly communicated that information to a friend, Trent Martin. There apparently is no evidence that the lawyer who leaked the information in the first place received any proceeds or benefits from doing so. Martin was a roommate and friend of defendant Thomas Conradt, and told Conradt about the SPSS deal. Conradt told other defendants about the deal. The defendants bought SPSS options and profited on them when the transaction was announced. Four defendants pleaded guilty to insider trading charges before Newman was decided. The fifth, Benjamin Durant, pleaded not guilty and is scheduled for trial on February 23. The four pleading defendants admitted in their plea allocutions that they committed insider trading and knew what they did was illegal.
We previously wrote a post about the Department of Justice’s brief arguing against dismissal of the Durant indictment, explaining that the DOJ’s grounds for distinguishing U.S. v. Newman – that Newman involved the “classical” theory of insider trading and the Durant prosecution was based on the “misappropriation” theory – were specious and should be rejected by the court. You can review that discussion here: U.S. v. Durant: DOJ Argument that Newman Reasoning Does Not Apply to Misappropriation Theory Misses the Mark.
Having reviewed the DOJ position, Judge Carter rejected it in the context of considering the four previously-accepted guilty pleas. His decision is brief and decisive. It can be read here: United States v. Conradt, but this is the core of what he says:
[T]his Court finds that, as indicated in Newman, the controlling rule of law in the Second Circuit is that “the elements of tipping liability are the same, regardless of whether the tipper’s duty arises under the ‘classical’ or the ‘misappropriation’ theory.”. . . Additionally, even if Newman did not specifically resolve the issue, the Court is swayed by the fact that Newman’s unequivocal statement on the point is part of a meticulous and conscientious effort by the Second Circuit to clarify the state of insider-trading law in this Circuit. Accordingly, even assuming arguendo that the Government is correct that the cited language in Newman is dicta, it is not just any dicta, but emphatic dicta which must be given the utmost consideration. . . . Finally, the Court notes that it agrees with Newman’s articulation of the requirements of tipping liability and its statement that such analysis applies equally in misappropriation cases.
Conradt, slip op. at 2-3. The court also rejected the DOJ argument that previous Second Circuit cases held that a personal benefit to the tipper is not required in misappropriation cases, noting that “Newman construes each one of the authorities the Government cites in this regard to be consonant with its holding.” Id. at 3 n.1.
In other news, today (January 23) the DOJ announced that it would seek en banc review from the Second Circuit of the Newman decision. See Bharara To Appeal 2nd Circ.’s Landmark Newman Decision.
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