Source: https://www.scribd.com/document/273074006/Newman-Cert-Petition
Timestamp: 2017-02-20 18:22:08
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Newman Cert Petition | Insider Trading | Dell
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trading—including when he “makes a gift of confidential information to a trading relative or friend.” Id. at
664. “The tip and trade,” the Court explained, “resemble trading by the insider himself followed by a
gift of profits to the recipient.” Ibid.
appeals erroneously departed from this Court’s decision in Dirks by holding that liability under a gifting
theory requires “proof of a meaningfully close personal relationship that generates an exchange that is
G. Lim, and Michael Steinberg. Those individuals are not “parties
to the proceeding in the court whose judgment is sought to be reviewed” under Rule 12.6. They did not participate in that proceeding, and the caption makes clear that they were neither appellants
A. The Second Circuit’s decision conflicts with this
Court’s decision in Dirks v. SEC..................................... 15
B. The Second Circuit’s decision conflicts with
C. The Second Circuit’s erroneous redefinition of
Appendix A — Court of appeals opinion (Dec. 14, 2014)....... 1a
Appendix B — Court of appeals order .................................. 35a
Appendix C — Statutory and regulatory provisions ........... 37a
United States v. O’Hagan, 521 U.S. 642
15 U.S.C. 78j(b) (§ 10(b)) .............................................. 2, 15
and including Saturday, August 1, 2015. This Court’s
1. The evidence at trial, taken in the light most favorable to the jury’s guilty verdict, see Jackson v.
respondents—both of whom worked as hedge-fund
managers, see App., infra, 2a—were part of a scheme
recipients advance knowledge of “whether [the companies’] earnings were going to be materially better or
worse than market expectations[,]” thus “allowing for
trading on the stock.” Tr. 156. Respondents used the
Inc. and NVIDIA Corporation, thereby earning approximately $4 million for respondent Newman’s fund
and approximately $68 million for respondent Chiasson’s fund. See App., infra, 4a; see also Tr. 2662-2666
specific information on Dell’s quarterly earnings—
2008—after the close of the quarter but before the
earnings announcement—that gross margin was
“looking at 17.5%” versus market expectations of
When Goyal wanted to speak to Dell’s investorrelations department, he had authorized contacts
Cites to “Ex.” refer to the government’s trial exhibits.
Goyal obtained access to information that was otherwise shielded from outsiders’ view because he was
Goyal “had known each other for years,” having attended business school together and “worked at Dell
together.” App., infra, 24a-25a. Over the course of
their relationship, they met each other’s wives, had
he “desperately” wanted to make a similar move and
desired Goyal’s help in doing so. Ex. 708, at 2; see,
Goyal obliged him, “advis[ing] Ray on a range of
order to become a financial analyst to editing Ray’s
résumé and sending it to a Wall Street recruiter.”
tips about Dell’s performance were intended to encourage Goyal to continue that kind of assistance, see
have kept giving “some kind of advice” absent the tips,
not have had as “much detail,” “frequency,” or
“length” absent the inside information he received, Tr.
1515, and he put “special” effort into helping Ray
compared to others: the advice was “very, very detailed for [Ray] and I spent a lot of time, so—I haven’t
done that with anybody else.” Tr. 1515; see Tr. 1630.
1630, 1640 (Goyal was “paid for [the information]” by
322. The specific earnings-related numbers that Newman was obtaining—which sometimes differed markedly from “street” expectations, see, e.g., Ex. 214, and
228, 287—were distinct from anything that might have
including a “very large” short position in August 2008
Tr. 1197-1200 (referring to a tip, Newman asked “the
Dell from Sandy [Goyal]?” and on confirmation began
$175,000—an amount approximately equivalent to
Goyal’s yearly salary—while noting that Goyal
“helped us most.” Tr. 404-406; see Tr. 1263, 13531354, 1424-1426; see also, e.g., Tr. 1640; Exs. 750-754,
“someone within” the company. Tr. 1708; see Tr.
1757, 1778-1779, 2219. He knew that the “Dell insider” was giving “final roll-up[s] of numbers” that were
“unlikely to change” before the earnings announcement. Tr. 1792-1793. Chiasson demonstrated his
trades that did not reference “information about contacts.” Tr. 1783-1785, 1790; see p. 9, infra. And when
“checks on [gross margin]” for a particular quarter
Chiasson wrote back: “Not your concern. I just do.”
Choi, who worked in NVIDIA’s finance unit and had
access to the company’s quarterly earnings numbers
to speak with investors about the company’s earnings,
& Ex. 803 (NVIDIA’s investor-relations head kept
Nevertheless, for more than two years, Choi provided confidential, pre-announcement NVIDIA earnings information to Hyung Lim, a technology executive. See App., infra, 5a; Tr. 3033-3038. That information—given quarter after quarter—was highly
gross margins would be 29.4 percent; NVIDIA’s earn-
each other’s families (for instance, Lim once bought a
gift for Choi’s child), and spoke by phone. Tr. 30323033, 3068; see also App., infra, 5a, 25a; Tr. 3010.
told him so, and even asked Choi “whether he thinks
that I’m going to be able to sell [that stock] for profit.”
who paid Lim a total of $15,000 for “giving him nonpublic information” on NVIDIA and other companies.
casino to cover Lim’s gambling debt), 3054. Kuo then
Tortora passed the information to respondent Newman, and Adondakis passed it to respondent Chiasson—both of whom executed profitable trades as a
ample reason to believe—and took steps suggesting
they understood—that the NVIDIA information came
NVIDIA’s earnings-related numbers, sent by Kuo to
formation came from “an accounting manager at
NVDA” and that Kuo had received it “through a
friend.” Ex. 805; see Tr. 1870-1876. The tips contained the type of detailed information that only an
2611-2612; Exs. 803, 810. And Newman plainly believed the information was accurate—for instance,
advance of NVIDIA’s May 2009 earnings announcement, he shorted NVIDIA’s stock within minutes. See
Exs. 818 (Kuo “[n]ailed everything * * * last
q[uarter]”), 2501-DB; Tr. 499-507.
“a friend of [analyst] Jesse Tortora would be getting
he went to church with and that the contact was—it
would have an Nvidia contact, essentially.” Tr. 1878.
“Contact” was the way Chiasson and Adondakis referred to someone who worked at a particular company. See Tr. 1878-1879. Chiasson traded on the inside
2. Respondents’ trial on securities-fraud charges
insiders “had a fiduciary or other relationship of trust
and confidence with Dell and [NVIDIA], respectively”; the insiders “breached that duty of trust and
confidence by disclosing material, nonpublic information” that was subsequently disclosed to the relevant respondent; the insiders “personally benefited in
the allegedly inside information”; the respondent
“knew that the information he obtained had been
disclosed in breach of a duty” of trust and confidence;
the jury that “[t]he benefit does not need to be financial or tangible in nature.” Tr. 4032-4033. Rather, the
court charged, the benefit “could include obtaining
business contact, enhancing the tipper’s reputation, or
friend.” Tr. 4033; see also 12-cr-121 Docket entry No.
160, at 27-28 (S.D.N.Y. Oct. 18, 2012) (respondents’
the district court denied respondents’ motions for
3. On appeal, the Second Circuit reversed respondents’ convictions and remanded “with instructions to dismiss the indictment as it pertains to [respondents] with prejudice.” App., infra, 3a.
a. The court of appeals first addressed respondents’ argument that the district court erred in instructing the jury on the “knowledge” element of an
ruling that “in order to sustain a conviction for insider
did so in exchange for a personal benefit.” Id. at 3a.
court emphasized what it described as “the fundamental insight that, in order to form the basis for a
consequence.” App., infra, 26a. The court acknowledged that in Dirks v. SEC, 463 U.S. 646 (1983), this
Court stated that “personal benefit” includes reputational benefit and “the benefit one would obtain from
trading relative or friend.” App., infra, 25a (quoting
Ct. 311 (2014)). But the court held that, “[t]o the
tipper and tippee, where the tippee’s trades ‘resemble
profits to the recipient,’ * * * such an inference is
impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” App., infra, 26a; see ibid. (“In
other words, * * * this requires evidence of ‘a relationship between the insider and the recipient that
suggests a quid pro quo from the latter, or an intention to benefit the [latter].’ ”) (quoting Jiau, 734 F.3d
not “prove the receipt of a personal benefit by the
social nature.” Id. at 25a; see id. at 26a-27a (describing benefit of friendship as “ephemeral”).
27a-28a. The court concluded that “the ‘career advice’
that Goyal gave Ray, the Dell tipper,” did not suffice
because it “was little more than the encouragement
casual acquaintance” and because Goyal began supplying it before Ray “began providing any insider information” and would have continued to do so if Ray had
the fact that Ray did not testify, that “Ray himself
disavowed that any * * * quid pro quo existed”).
that the friendship between Choi and Lim (his immediate tippee) did not give rise to an inference of personal benefit because the two were only “casual acquaintances” and because Choi did not receive anything valuable from Lim or even know that Lim was
c. Finally, the court of appeals ruled that the government’s evidence of respondents’ knowledge was
infra, 28a (“[T]he Government presented absolutely
these facts.”), with id. at 33a (“[T]he bare facts in
support of the Government’s theory of the case are as
guilt.”). The court found it “inconceivable” that a jury
could conclude that respondents “were aware of a
personal benefit” to the insiders “when Adondakis and
disavowed any such knowledge.” Id. at 30a. And the
court rejected the argument that the “specificity,
timing, and frequency of the updates” provided to
respondents were “overwhelmingly suspicious.” Id. at
“inference of knowledge” was “undermined” by evidence that analysts estimate earnings and other metrics based on publicly available information; corporate
and Dell and NVIDIA leaked earnings data “arguably
similar to the inside information” at issue in this case
banc. After calling for responses and accepting amicus submissions—including an amicus brief filed by
the SEC arguing that the panel’s ruling on personal
benefit was “directly at odds with” Dirks and “could
negatively affect the SEC’s ability to bring insider
trading actions,” 13-1837 Docket entry No. 298, at 1-2
(2d Cir. Jan. 29, 2015)—the court of appeals denied
broke with this Court’s decision in Dirks v. SEC, 463
U.S. 646 (1983). The court reinterpreted this Court’s
“makes a gift of confidential information to a trading
relative or friend,” id. at 664, to require “proof of a
similarly valuable nature.” App., infra, 26a. That
require an “exchange” to find liability for a gift of
standards for the relationships that can support liability. The Second Circuit’s novel test has also created a
Dirks—both before and after the decision below. And
and impair the government’s ability to protect the
Those harmful consequences warrant this Court’s
review and reversal of the court of appeals’ effort to
rewrite this Court’s decision in Dirks.
Court’s Decision In Dirks v. SEC
17 C.F.R. 240.10b-5, by “trad[ing] in the securities of
information.” United States v. O’Hagan, 521 U.S. 642,
651-652 (1997). Such trading “qualifies as a ‘deceptive
device,’ ” within the meaning of Section 10(b), because
it violates the “relationship of trust and confidence”
that exists “between the shareholders of a corporation
information by reason of their position with that corporation.” Id. at 652 (citation and internal quotation
marks omitted). To avoid “tak[ing] unfair advantage”
of “uninformed * * * stockholders,” a corporate
publicly “disclose” it or “abstain from trading.” Ibid.
In addition, a “corporate ‘outsider’ ” violates the securities laws
by misappropriating nonpublic information for trading “in breach
information”—for instance, a law firm that has been entrusted
with corporate secrets. O’Hagan, 521 U.S. at 652-653.
In Dirks, this Court addressed the scope of “tipper-tippee” insider-trading liability—that is, liability
that arises from an insider’s disclosure of confidential
corporate information to others who “exploit[]” it for
their “personal gain.” 463 U.S. at 659. The defendant
the company’s assets were “vastly overstated as a
result of fraudulent corporate practices.” Id. at 649.
Having been urged to “verify the fraud and disclose it
publicly,” Dirks interviewed “corporation employees”
who “corroborated” the bad acts; he then “openly
number of clients and investors,” some of whom decided to sell their holdings in the corporation’s securities. Id. at 649-650. Although Dirks’s efforts ultimately resulted in public exposure of the fraud, the
of Rule 10b-5 “by repeating the [fraud] allegations” to
On review, this Court disapproved the theory “that
the antifraud provisions” always “require equal information among all traders.” 463 U.S. at 657. That
theory, the Court said, could “have an inhibiting influence on the role of market analysts, which * * * is
necessary to the preservation of a healthy market.”
Id. at 658-659. But the Court confirmed that “[t]he
need for a ban on some tippee trading is clear.” Id. at
659.3 The Court explained that a tippee’s duty is “de3
The Court noted that it is unlawful for an insider to do “indirectly,” through disclosing inside information to “ ‘any other person,’ ” what the insider cannot do directly. 463 U.S. at 659 (quoting
15 U.S.C. 78t(b), which provides that “[i]t shall be unlawful for any
rivative from * * * the insider’s duty”—that is, “a
breach.” Id. at 660.
Court held, is “whether the insider personally will
benefit, directly or indirectly, from his disclosure.”
“objective facts and circumstances” the existence of
such a benefit. Id. at 663-664. First, “there may be a
suggests a quid pro quo from the latter, or an intention to benefit the particular recipient.” Id. at 664; see
id. at 663 (noting that “pecuniary gain or a reputational benefit that will translate into future earnings”
hopes for some personal return—as, for instance,
when the insider shows an “intention to benefit” a
“particular” tippee, id. at 664, who is in a position to
“[t]he elements of fiduciary duty and exploitation of
relative or friend,” as “[t]he tip and trade resemble
profits to the recipient.” Ibid.; see Bateman Eichler,
any other person”).
Under that test, the Court concluded, “there was
no actionable violation by Dirks” because the insiders
665; see id. at 667. The “tippers were motivated by a
desire to expose the fraud”; they “received no monetary or personal benefit for revealing Equity Funding’s secrets, nor was their purpose to make a gift of
valuable information to Dirks.” Id. at 667.
2. The court of appeals’ decision is irreconcilable
with Dirks. In the guise of interpreting this Court’s
personal-benefit test, stating that “[t]o the extent
and tippee, where the tippee’s trades ‘resemble trading by the insider himself followed by a gift of the
profits to the recipient,’ * * * we hold that such an
similarly valuable nature.” App., infra, 26a.
That new “exchange” formulation erases a form of
Enforcement, and Prevention § 1:8, at 1-20 (2006); id.
§ 4:6, at 4-10 to 4-13. The Court applied both of those
tests in finding that the insiders’ exposure of a fraud
involved neither “monetary or personal benefit” nor
“a gift of valuable information to Dirks.” 463 U.S. at
but then rewrote the concept of a “gift” so as to eliminate it. The court held that an insider cannot be liable
recipient of information “that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” id. at 26a. But
such an “exchange” is, by definition, not the same
thing as a “gift”; rather, it is a quid pro quo, “something for something.” See Webster’s New International Dictionary 1056 (2d ed. 1958) (defining gift as
“anything voluntarily transferred * * * without compensation”); see also Dirks, 463 U.S. at 663-664. If the
unless an “exchange” takes place, then Dirks’s two
categories of personal benefit are collapsed into one—
and the entire “gift” discussion in Dirks becomes
*6 n.2 (S.D.N.Y. Apr. 6, 2015) (“[T]he Dirks decision
instances where an insider makes a ‘gift’ of confidential information to a relative or friend; whereas, the
that it is generally akin to quid pro quo.”).
To the extent that anything remains of the gift category of personal benefit in light of the “exchange”
insider’s relationship to the friend or relative is
“meaningfully close” (a phrase that the Second Circuit
contain any such requirement—no doubt recognizing
The Second Circuit’s stark departure from Dirks is
manifested in its refusal to accept the jury’s findings
the existence of personal benefit is “a question of fact”
that will turn on “objective facts and circumstances,”
legal standard of being “consequential” and “repre-
similarly valuable nature,” and concluded that the
friendships at issue were not “close” enough, nor the
career advice important enough, to support the jury’s
3. The Second Circuit’s departure from Dirks
insider’s fiduciary duties. See id. at 662 & n.22; see
expose corporate fraud for shareholders’ benefit).
Dirks nevertheless makes clear that when the insider acts for his own gain or makes a gift of the confidential information for trading, he breaches his fiduciary duty by treating the corporation’s confidential
trading in their corporation’s securities. Id. at 653
inferring the insider’s purpose “will not always be
easy,” it believed that the legal standard it announced
provided the “guiding principle” necessary to inform
novel and imprecise legal rules for the “guiding principle” that this Court carefully fashioned for factfinders in Dirks. It had no authority to do so.
The Second Circuit’s Decision Conflicts With Decisions Of Other Courts Of Appeals
The Second Circuit’s decision also conflicts with the
at Citigroup; he disclosed to his brother Michael material, nonpublic information about “upcoming mergers and acquisitions of and by Citigroup clients,” and
that “Maher and Michael Kara enjoyed a close and
mutually beneficial relationship” and that Maher
“gave Michael the inside information in order to ‘benefit him’ ”).
Defendant Salman relied on the Second Circuit’s
could not be upheld in the absence of “evidence that
Maher received * * * [a] tangible benefit” in exchange for his tips because “evidence of a friendship
standing alone, is insufficient.” 2015 WL 4068903, at
*6. The Ninth Circuit stated that “[t]o the extent [the
Second Circuit’s decision below] can be read to go so
‘insider makes a gift of confidential information to a
trading relative or friend.’ ” Ibid. (citation omitted).
In the Ninth Circuit’s view, “Maher’s disclosure of
he intended to trade on it, was precisely the ‘gift
* * * ’ that Dirks envisioned.” Id. at *4.4
Ninth Circuit did not, for example, condition Salman’s
liability—as the Second Circuit would have—on
whether Maher and Michael engaged in an “exchange
Other courts of appeals have similarly noted that Dirks envisioned liability for making a “gift” of information. See SEC v.
Rocklage, 470 F.3d 1, 7 n.4 (1st Cir. 2006) (“[T]he mere giving of a
gift to a relative or friend is a sufficient personal benefit.”); SEC v.
Dirks “a gift to a trading relative or friend” is sufficient “to create
a ‘benefit’ ” to the insider).
least a potential gain of a pecuniary or similarly valuable nature.” App., infra, 26a. Nor did the Ninth
exchange for the tips was “of some consequence.”
2. The Seventh Circuit’s decision in Maio, a civil
the disclosure by the insider “was an improper gift of
confidential corporate information” and rejected the
argument that the insider’s “disclosure was not improper because he did not receive any direct or indirect personal benefit as a result of his tip.” Id. at 632633. The inference of personal benefit, the court explained, was “unassailable” in the absence of “some
legitimate reason” for the disclosure: “After all, [the
tell Maio anything?” Id. at 633; see United States v.
Circuit has now layered on top of Dirks’s personalbenefit test. The Seventh Circuit did not suggest that
liability turned on whether Maio’s friendship with the
insider was “meaningfully close” or whether the insider’s disclosure was part of an “objective, consequen-
tial” exchange with a “potential gain of a pecuniary or
similarly valuable nature.” App., infra, 26a. And the
inference that Maio drew—that a personal benefit for
“legitimate reason” for a disclosure, see 51 F.3d at
632-633—would be unavailable under the Second Circuit’s analysis, which imposes additional artificial
individuals who are all participating in the same nationwide capital markets. See generally O’Hagan, 521
C. The Second Circuit’s Erroneous Redefinition Of Personal Benefit Will Harm The Fair And Efficient Operation Of The Securities Markets And Warrants Review
of certiorari “[i]n view of the importance” of the question presented by that case. 463 U.S. at 652. The
The Second Circuit’s personal-benefit analysis already has
been the subject of extensive commentary—much of it critical.
(Dec. 11, 2014) (“[T]he court rewrote the insider trading playbook,
imposing the greatest limits on prosecutors in a generation.”);
Second Circuit’s alteration of the Dirks standard
licenses trading by insiders’ favored tippees, thereby
activity. The Court should correct the Second Circuit’s erroneous redefinition of personal benefit. Delay in doing so will result in continuing and serious
1. “[E]liminat[ing] ‘use of inside information for
personal advantage,’ ” Dirks, 463 U.S. at 662 (citation
omitted), advances a “basic purpose” of the securities
laws: “to insure honest securities markets and thereby promote investor confidence.” Chadbourne &
(quoting O’Hagan, 521 U.S. at 658); see also O’Hagan,
“tak[es] unfair advantage of uninformed stockholders.” O’Hagan, 521 U.S. at 652 (brackets and ellipses
See id. at 658-659. While some “informational disparity is inevitable in the securities markets,” a rational
investor will “hesitate to venture * * * capital” in a
rigged game—one in which he faces a systematic
“informational disadvantage” vis-à-vis insiders and
their chosen beneficiaries that can never “be overcome with research or skill.” Ibid.; see Dirks, 463
(2008). By raising and altering the standard for personal benefit, the Second Circuit’s decision insulates
2. The Second Circuit’s decision also negatively affects the activities of legitimate market analysts. As
Dirks explained, analysts undertaking lawful functions play an important “role” in “the preservation of
a healthy market”: they “ferret out and analyze information” that allows them to make “judgments as to
the market worth of a corporation’s securities,” thereby enhancing “efficiency in pricing.” 463 U.S. at 658659 & n.17 (citation omitted). Dirks thus framed its
personal-benefit standard to avoid an “inhibiting influence” on analysts’ honest efforts. Id. at 658.
But precisely because analysts often obtain information “by meeting with and questioning corporate
officers and others who are insiders,” they are well
When analysts do gain illicit information by “contrivance,” O’Hagan, 521 U.S. at 658-659, they no longer
serve to keep the markets “healthy.” Dirks, 463 U.S.
of the markets—not only by hurting investors in the
value of a company’s stock is a labor-intensive process
that labor by siphoning secret information from insiders in breach of their duties, thereby arriving at “predictions” of corporate performance that no model can
“be sure when the line” between legal and illegal activity “is crossed,” and the Court’s description of the
proof required to establish the existence of an insider’s personal benefit therefore already incorporates
has upset the balance struck in Dirks, and the court’s
court’s misinterpretation of Dirks, it should remand
focused on whether the relationship between the insiders and their tippees was “meaningfully close,” and
whether the insiders received anything “objective,
gain of a pecuniary or similarly valuable nature.”
are not determinative. And applying Dirks, the evidence was sufficient to support a rational jury’s finding, taking the evidence in the light most favorable to
b. The Second Circuit also stated that “the Government presented absolutely no testimony or any
other evidence” that respondents knew, or consciously
avoided knowing, that they were trading on information in exchange for which the insiders “received
any benefit.” App., infra, 28a. But see id. at 33a
knowing) that an insider had a “meaningfully close
personal relationship” with the first-line tippee and
engaged in an “exchange” that is “consequential.”
information about corporate earnings cannot be legitimately obtained, quarter after quarter, without improper disclosure—and whose conduct reveals such
was “obtained from insiders.” App., infra, 28a. But
2013) (Chiasson brief stating that “the trial evidence
leaked by insiders at Dell and NVIDIA”); 13-1917
(Newman brief arguing that “indications that the
information came from insiders” was not sufficient to
recognized that Chiasson was informed that “Goyal
‘was talking to someone within Dell’ ” (App., infra,
29a)—refuting the suggestion that he did not know
Court should grant review to correct the Second Circuit’s mistaken interpretation of Dirks, then remand
that he “told Mr. Chiasson” that “Sandy [Goyal, a first-line tippee]
was talking to someone within Dell to get information” and that
Goyal was “willing to share information on Dell with me.” Tr.
1708. On the second cited page, Adondakis testified that he explained to Chiasson that “a friend of Jesse Tortora would be getting information from Nvidia through a friend of his who he went
to church with and that the contact was—it would have an Nvidia
contact, essentially.” Tr. 1878. And on the next page of the transcript, Adondakis explained that when he discussed a “contact” at
4. This Court’s intervention is warranted now. If
allowed to stand, the court of appeals’ novel personalbenefit standard will restrict enforcement of Section
10(b)’s ban on insider trading, create uncertainty in
government’s ability to restrain and punish tippers
friend or relative will not meet the Second Circuit’s
was “meaningfully close” and that the insider stood to
obtain money (or something of “similar” value) via an
“exchange.” App., infra, 26a. Such evidence will not
always exist. Accordingly, until the Second Circuit’s
as prohibited under Dirks will elude criminal prosecution—creating an obvious roadmap for unscrupulous
The Second Circuit’s redefinition of what constitutes a personal
Indeed, the court of appeals’ new standard has already resulted
in vacatur of the guilty pleas of a number of insider-trading defendants “in light of Newman’s clarification of the personal benefit
and tippee knowledge requirements.” United States v. Conradt,
increases the chances that such conduct will proliferate. Empirical evidence shows that “a significant
portion of the market movement associated with corporate events” already “occurs before the event is
announced.” James D. Cox, Giving Tippers a Pass:
The Second Circuit’s decision is likely to exacerbate
sophisticated market participants to engage in behavior hitherto restricted by Dirks. See ibid. (“[R]emote
tippees are likely * * * pervasive and truly are insidious. Newman pours gas onto this raging fire.”).
Finally, while the existing circuit split alone justifies this Court’s review to restore a uniform interpretation of Dirks, the Second Circuit’s innovation
development and enforcement of the securities laws—
that, despite its doubts about the Second Circuit’s
extraterritoriality rule, the D.C. Circuit “deferred” to
that court “because of its ‘preeminence in the field of
securities law’ ”) (citation omitted). That influence
heightens the need for this Court’s intervention:
court of appeals’ stark departure from Dirks, reaffirmation of this Court’s time-tested rule is warranted
No. 12 CR 121 (RJS)—Richard J. Sullivan, Judge
Defendants‐appellants Todd Newman and Anthony
of New York (Richard J. Sullivan, J.) following a six‐
week jury trial on charges of securities fraud in violation of sections 10(b) and 32 of the Securities Exchange Act of 1934 (the “1934 Act”), 48 Stat. 891, 904
(codified as amended at 15 U.S.C. §§ 78j(b), 78ff),
10b‐5 and 10b5‐2 (codified at 17 C.F.R. §§ 240.10b‐5,
240.10b5‐2), and 18 U.S.C. § 2, and conspiracy to commit securities fraud in violation of 18 U.S.C. § 371.
portfolio manager at Diamondback Capital Management, LLC (“Diamondback”), and Chiasson, a portfolio
manager at Level Global Investors, L.P. (“Level Global”), with willfully participating in this insider trading
two reasons. First, the Government’s evidence of any
defendants’ purported tippee liability would derive.
violation of those insiders’ fiduciary duties.
This case arises from the Government’s ongoing
2012, a grand jury returned an indictment. On August 28, 2012, a twelve‐count Superseding Indictment
S2 12 Cr. 121 (RJS) (the “Indictment”) was filed.
Count One of the Indictment charged Newman, Chiasson, and a co‐defendant with conspiracy to commit
securities fraud, in violation of 18 U.S.C. § 371. Each
the 1934 Act, SEC Rules 10b‐5 and 105b‐2, and 18
U.S.C. § 2. A co‐defendant was charged with securities fraud in Counts Eleven and Twelve.
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
evidence established that Rob Ray of Dell’s investor
Dell’s consolidated earnings numbers to Sandy Goyal,
manager Newman as well as to other analysts including Level Global analyst Spyridon “Sam” Adondakis.
evidence established that Chris Choi of NVIDIA’s
Lim passed the information to co‐defendant Danny
tippee’s liability derives from the liability of the tipper,
about any such benefit. Absent such knowledge, appellants argued, they were not aware of, or participants in, the tippers’ fraudulent breaches of fiduciary
motions. With respect to the appellants’ requested
their position was “supportable certainly by the lan-
guage of Dirks,” Tr. 3595:10‐12, it ultimately found
that it was constrained by this Court’s decision in
insider as a separate element. Tr. 3604:3‐3605:5.
and Chiasson’s proposed jury instruction. Instead,
tippers’ intent and the personal benefit requirement:
On the issue of the appellants’ knowledge, the district court instructed the jury:
Tr. 4033:14‐22.
of guilty on all counts. The district court subsequently denied the appellants’ Rule 29 motions.
On May 2, 2013, the district court sentenced Newman to an aggregate term of 54 months’ imprisonment,
$737,724. On May 13, 2013, the district court sentenced Chiasson to an aggregate term of 78 months’
the applicable law. See United States v. Moran‐
Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b),
prohibits the use “in connection with the purchase or
rules and regulations as the Commission may prescribe . . . .” Although Section 10(b) was designed as
a catch‐all clause to prevent fraudulent practices,
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 202‐06
pursuant to it, including Rule 10b‐5, expressly prohibit
and Rule 10b‐5. See Chiarella v. United States, 445
U.S. 222, 226‐30 (1980).
A. The “Classical” and “Misappropriation” Theories of Insider Trading
and Rule 10b‐5 by trading in the corporation’s securities on the basis of material, nonpublic information
about the corporation. Id. at 230. Under this theory, there is a special “relationship of trust and confidence between the shareholders of a corporation and
tion.” Id. at 228. As a result of this relationship,
information have “a duty to disclose [or to abstain from
trading] because of the ‘necessity of preventing a corporate insider from . . . tak[ing] unfair advantage of . . .
uninformed . . . stockholders.’ ” Id. at 228‐29 (citation
Supreme Court explicitly rejected the notion of “a general duty between all participants in market transactions to forgo actions based on material, nonpublic
information.” Id. at 233. Instead, the Court limited
where the insider had “a duty to disclose arising from
to a transaction,” such as that between corporate officers and shareholders. Id. at 230.
trading liability, commonly called the “misappropriation” theory, expands the scope of insider trading liability to certain other “outsiders,” who do not have any
shareholders. Liability may attach where an “outsider” possesses material non‐public information about a
United States v. O’Hagan, 521 U.S. 642, 652‐53 (1997);
United States v. Libera, 989 F.2d 596, 599‐600 (2d Cir.
tion by pretending “loyalty to the principal while secretly converting the principal’s information for personal gain.” Obus, 693 F.3d at 285 (citations omitted).
the insider or misappropriator in possession of material nonpublic information (the “tipper”) does not himself trade but discloses the information to an outsider
(a “tippee”) who then trades on the basis of the information before it is publicly disclosed. See Dirks, 463
same, regardless of whether the tipper’s duty arises
under the “classical” or the “misappropriation” theory.
Obus, 693 F.3d at 285‐86.
information about possible fraud at an insurance company from one of the insurance company’s former officers. Dirks, 463 U.S. at 648‐49. The analyst relayed
turn, sold their shares based on the analyst’s tip. Id.
general principle of tipping liability: “Not only are
exploiting the information for their personal gain.”
whether the corporate insider has breached his fiduciary duty “is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent
some personal gain, there has been no breach of duty . . . .” Id. at 662 (emphasis added).
The Supreme Court rejected the SEC’s theory that
a recipient of confidential information (i.e. the “tippee”) must refrain from trading “whenever he receives
inside information from an insider.”
Instead, the Court held that “[t]he tippee’s duty to
disclose or abstain is derivative from that of the insider’s duty.” Id. at 659. Because the tipper’s breach
of fiduciary duty requires that he “personally will
benefit, directly or indirectly, from his disclosure,” id.
a tippee may be found liable “only when the insider has
or should know that there has been a breach.” Id. at
had not breached his duty to the company’s shareholders and that Dirks could not be held liable as tippee.
that the defendant acted with scienter, which is defined as “a mental state embracing intent to deceive,
manipulate or defraud.” Hochfelder, 425 U.S. at 193
defendant acted “willfully.” 15 U.S.C. § 78ff(a). We
have defined willfulness in this context “as a realization on the defendant’s part that he was doing a
wrongful act under the securities laws.”
1976) (holding that to establish willfulness, the Government must “establish a realization on the defendant’s part that he was doing a wrongful act . . . under
the securities laws” and that such an act “involve[d] a
significant risk of effecting the violation that occurred.”) (quotation omitted).
Gov’t Br. 56. However, the Government argues that
consistent with the district court’s instruction, that it
merely needed to prove that the “defendants traded on
had disclosed in breach of a duty of confidentiality . . . .” Gov’t Br. 58.
required that the “tippee know that the tipper disclosed information in breach of a duty.” Id. at 40
of our decisions post‐Dirks, in which we have described the elements of tippee liability without specifically stating that the Government must prove that the
benefit. Id. at 41‐44 (citing, inter alia, United States
v. Jiau, 734 F.3d 147, 152‐53 (2d Cir. 2013); Obus, 693
F.3d at 289; S.E.C. v. Warde, 151 F.3d 42, 48‐49 (2d
“somewhat Delphic” in our discussion of what is required to demonstrate tippee liability, United States v.
First, the tippee’s liability derives only from the tipper’s breach of a fiduciary duty, not from trading on
material, non‐public information. See Chiarella, 445
U.S. at 233 (noting that there is no “general duty between all participants in market transactions to forgo
actions based on material, nonpublic information”).
presence of a tipper’s breach, a tippee is liable only if
question of whether the tippee’s knowledge of a tipper’s breach requires knowledge of the tipper’s personal benefit, the answer follows naturally from Dirks.
insider’s fiduciary breach; it is the fiduciary breach
10b‐5. For purposes of insider trading liability, the
insider’s disclosure of confidential information, standing alone, is not a breach. Thus, without establishing
The Government’s overreliance on our prior dicta
tipper’s breach (and therefore had knowledge of the
tipper’s disclosure for personal benefit) or tippees who
were explicitly apprised of the tipper’s gain by an
(“To provide an incentive, Jiau promised the tippers
insider information for their own private trading.”);
remote tippee “the details of the scheme”); Warde, 151
F.3d at 49 (tipper and tippee engaged in parallel trading of the inside information and “discussed not only
from it”); United States v. Mylett, 97 F.3d 663 (2d Cir.
(1) the insider‐tippers . . . were entrusted the duty
tippee . . . , who (3) knew of [the tippers’] duty and
further tip the information for [the tippee’s] benefit,
and finally (5) the insider‐tippers benefited in some
Jiau, 734 F.3d at 152‐53 (citing Dirks, 463 U.S. at 659‐
insider trading, need know only that an insider‐tipper
disclosed information in breach of a duty of confidentiality. Gov’t Br. 43. However, we reject the Government’s position that our cursory recitation of the elements in Jiau suggests that criminal liability may be
In light of Dirks, we find no support for the Government’s contention that knowledge of a breach of the
ferent, nothing in the law requires a symmetry of information in the nation’s securities markets. The
United States. In Chiarella, the Supreme Court rejected this Circuit’s conclusion that “the federal securities laws have created a system providing equal access to information necessary for reasoned and intelligent investment decisions . . . . because [material non‐
sellers.” 445 U.S. at 232. The Supreme Court emphasized that “[t]his reasoning suffers from [a] defect. . . . [because] not every instance of financial
§ 10(b).” Id. See also United States v. Chestman,
947 F.2d 551, 578 (2d Cir. 1991) (Winter, J., concurring) (“[The policy rationale [for prohibiting insider
be able to profit from the information they generate . . . .”). Thus, in both Chiarella and Dirks, the
corporation’s interests in confidentiality while promoting efficiency in the nation’s securities markets.
U.S. at 662. Accordingly, we conclude that a tippee’s
knowledge of the insider’s breach necessarily requires
our knowledge—apart from Judge Sullivan3—that has
Rengan Rajaratnam, No. 13‐211 (S.D.N.Y. July 1,
12‐973 (S.D.N.Y. Feb. 4, 2014) (Gardephe, J.); United
that a tippee does not need to know the details of the insider’s disclosure of information. The district courts determined that the
See also United States v. Santoro, 647 F. Supp. 153, 170‐71
(E.D.N.Y. 1986) (“An allegation that the tippee knew of the tipper’s
ted States v. Steinberg, No. 12‐121, 2014 WL 2011685
at *5 (S.D.N.Y. May 15, 2014) (Sullivan, J.), and United States v. Newman, No. 12‐121 (S.D.N.Y. Dec. 6,
Our conclusion also comports with well‐settled principles of substantive criminal law. As the Supreme
make his conduct illegal, is a necessary element in every crime. Such a requirement is particularly appropriate in insider trading cases where we have acknowledged “it is easy to imagine a . . . trader who receives
therefore wrongful.” United States v. Kaiser, 609
was acting for personal gain.”) rev’d on other grounds sub nom.
(“[U]nder the standard set forth in Dirks” a tippee can be liable
under Section 10(b) and Rule 10(b)‐5 “if the tippee had knowledge
of the insider‐tipper’s personal gain.”). 5
defendants’ requested charge on scienter now at issue on this appeal, and at a time when there was no possibility of a joint trial with
requirement, because only willful” violations are subject to criminal provision. See United States v. Temple, 447 F.3d 130, 137 (2d Cir. 2006) (“ ‘Willful’ repeatedly has been defined in the criminal context as
from accidental or negligent”).
breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper’s
734 F.3d at 152‐53; Dirks, 463 U.S. at 659‐64.
77, 82 (2d Cir. 2003), that the district court’s instruction failed to accurately advise the jury of the law.
The district court charged the jury that the Government had to prove: (1) that the insiders had a “fiduciary or other relationship of trust and confidence”
with their corporations; (2) that they “breached that
nonpublic information”; (3) that they “personally benefited in some way” from the disclosure; (4) “that the
been disclosed in breach of a duty”; and (5) that the
no breach unless the tipper “is in effect selling the
information to its recipient for cash, reciprocal information, or other things of value for himself. . . .”
anticipated by) the insiders. Gov’t Br. 60. We disagree.
An instructional error is harmless only if the Government demonstrates that it is “clear beyond a reasonable doubt that a rational jury would have found
the defendant guilty absent the error[.]” Neder v.
United States, 527 U.S. 1, 17‐18 (1999); accord Moran‐	Toala, 726 F.3d at 345; United States v. Quattrone, 441
F.3d 153, 180 (2d Cir. 2006). The harmless error inquiry requires us to view whether the evidence introduced was “uncontested and supported by overwhelming evidence” such that it is “clear beyond a reasonable
doubt that a rational jury would have found the defendant guilty absent the error.” Neder, 527 U.S. at
in fact, elicited evidence sufficient to support a contrary finding. Moreover, we conclude that the Government’s evidence of any personal benefit received by
from which Chiasson and Newman’s purported tippee
Specifically, we “must view the evidence in the light
most favorable to the Government, crediting every inference that could have been drawn in the Government’s favor, and deferring to the jury’s assessment of
the evidence.” Id. (citing United States v. Chavez,
conviction if “any rational trier of fact could have found
the essential elements of the crime beyond a reasonable doubt.” Id. (citing United States v. Yannotti, 541
However, if the evidence “is nonexistent or so meager,” United States v. Guadagna, 183 F.3d 122, 130 (2d
Cir. 1999), such that it “gives equal or nearly equal circumstantial support to a theory of guilt and a theory of
innocence, then a reasonable jury must necessarily entertain a reasonable doubt,” Cassese, 428 F.3d at 99.
consider the “beyond a reasonable doubt” requirement
Here, we find that the Government’s evidence failed to
their tips. As to the Dell tips, the Government established that Goyal and Ray were not “close” friends, but
analyst to editing Ray’s résumé and sending it to a
began before Ray began to provide tips about Dell’s
Choi were “family friends” that had met through
tip. We disagree. If this was a “benefit,” practically
We have observed that “[p]ersonal benefit is broadly defined to include not only pecuniary gain, but also,
to a trading relative or friend.” Jiau, 734 F. 3d at 153
inferred from a personal relationship between the tipper and tippee, where the tippee’s trades “resemble
profits to the recipient,” see 643 U.S. at 664, we hold
evidence of “a relationship between the insider and the
or an intention to benefit the [latter].” Jiau, 734 F.
from Dirks indicating that the tipper’s gain need not
more than the ephemeral benefit of the “value[] [of]
[Jiau’s] friendship” because he also obtained access to
Here the “career advice” that Goyal gave Ray, the
one would generally expect of a fellow alumnus or casual acquaintance. See, e.g., J.A. 2080 (offering “minor
suggestions” on a resume), J.A. 2082 (offering advice
showed Goyal began giving Ray “career advice” over a
D’Amato, 39 F.3d 1249, 1256 (2d Cir. 1994) (evidence
must be sufficient to “reasonably infer” guilt).
he did not provide anything of value to Choi in exchange for the information. Tr. 3067‐68. Lim further testified that Choi did not know that Lim was
inference that Choi intended to make a “gift” of the
Adondakis said that he did not know what the relationship between the insider and the first‐level tippee
any such information to Chiasson. Adondakis testified that he merely told Chiasson that Goyal “was
talking to someone within Dell,” and that a friend of a
friend of Tortora’s would be getting NVIDIA information. Tr. 1708, 1878. Adondakis further testified
had access to “overall” financial numbers, he was not
aware of the insider’s name, or position, or the circumstances of how Goyal obtained the information. Tortora further testified that he did not know whether
insiders disclosed the information “for some personal
reason rather than for no reason at all.” Gov’t Br. 65.
premise that a tipper who discloses confidential information necessarily does so to receive a personal benefit. See Dirks, 463 U.S. at 661‐62 (“All disclosures of
with the duty insiders owe to shareholders”). Moreover, it is inconceivable that a jury could conclude,
insider trading scheme as part of the “corrupt” analyst
NVIDIA were so “overwhelmingly suspicious” that
support a guilty verdict. Gov’t Br. 65. Newman and
Chiasson received four updates on Dell’s earnings
Chiasson received multiple updates on NVIDIA’s
the company’s earnings announcement. The Government argues that given the detailed nature and accuracy of these updates, Newman and Chiasson must
industry and company trends. For example, on cross‐
very close to Dell’s reported earnings of $16.077 billion
assumptions were “too high or too low” or in the “ball
park,” which suggests analysts routinely updated numbers in advance of the earnings announcements. Tr.
1511. Ray’s supervisor confirmed that investor relations departments routinely assisted analysts with developing their models
and Dell’s investor relations personnel routinely
“leaked” earnings data in advance of quarterly earnings. Appellants introduced examples in which Dell
a position to buy Dell’s stock. For example, appellants introduced an email Tortora sent Newman summarizing a conversation he had with Tyson in which
she suggested “low 12% opex [was] reasonable” for
Dell’s upcoming quarter and that she was “fairly confident on [operating margin] and [gross margin].” Tr.
568:18‐581:23.
No reasonable jury could have found beyond a reasonable doubt that Newman and Chiasson knew, or deliberately avoided knowing, that the information originated with corporate insiders. In general, information about a firm’s finances could certainly be sufficiently detailed and proprietary to permit the inference that the tippee knew that the information came
source’s improper motive for disclosure. That is especially true here, where the evidence showed that
testimony (much of which was adduced from the Government’s own witnesses) about the accuracy of the
analysts’ estimates and the selective disclosures by the
In short, the bare facts in support of the Government’s theory of the case are as consistent with an inference of innocence as one of guilt. Where the evidence viewed in the light most favorable to the prosecution gives equal or nearly equal circumstantial support to a theory of innocence as a theory of guilt, that
Gaviria, 740 F.2d 174, 183 (2d Cir. 1984) (“[W]here the
intent to violate the substantive statute.”) (internal
Newman and Chiasson’s convictions and remand with
/s/ CATHERINE O’HAGAN WOLFE
national securities exchange—
PRELIMINARY NOTE TO § 240.10b5-2: This section
which a person has a duty of trust or confidence for purposes of the “misappropriation” theory of insider trading
§240.10b-5 thereunder that is based on the purchase or
(b) Enumerated “duties of trust or confidence.” For
purposes of this section, a “duty of trust or confidence”
of the parties’ history, pattern, or practice of sharing and
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