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US prosecutors, already smart-
ing from a appeals court rul-
ing that weakens their ability
to crack down on future
insider trading, on Thursday
faced widening fallout from
the decision as some existing cases threatened
Lawyers for some defendants hinted they
might seek to withdraw guilty pleas, and a
Manhattan federal judge questioned if four
such pleas were affected.
The moves were the latest repercussions
from the 2nd US Circuit Court of Appeals
finding that prosecutors presented insufficient
evidence to convict Todd Newman, a former
portfolio manager at Diamondback Capital
Management, and Anthony Chiasson, co-
founder of Level Global Investors.
Speaking at a conference, US Securities and
Exchange Commission Chair Mary Jo White
said Thursday "there is no question it s a sig-
nificant decision," adding her agency was
reviewing the Wednesday ruling, which she
called "overly narrow."
Some defendants who cooperated and plead-
ed guilty in the prosecution of Newman and
Chiasson are now considering taking the
extraordinary step of withdrawing their pleas,
two lawyers said Thursday.
The three-judge panel not only found that
prosecutors needed to prove a trader knew
that the original source of non-public infor-
mation has received a benefit in exchange for
the tip, but also narrowed what actually con-
stituted such a benefit.
In several such cases, the defendants were
tipped based on information they received
third- or fourth-hand, rather than straight from the
source, which made it tougher to prove their awareness
that source had obtained something tangible in return.
The ruling threatens to challenge a broad insider
trading crackdown underway since 2009 under Man-
hattan US Attorney Preet Bharara, whose office during
his tenure has secured 82 other convictions.
While the pace of prosecutions had looked set to
gradually slow from the breakneck pace of recent years,
the appeals court s ruling could slam the brakes on
authorities efforts to pursue future cases.
Many on Wall Street say that despite Bharara s thrusts
against the practice, trading on privileged information
remains common amid the current M&A boom, with
Merck & Co s acquisition of Cubist Pharmaceuticals Inc
just the latest deal to have seen unusual options activity
before being announced.
Among those threatening to withdraw plea deals is
Danny Kuo, a former Whittier Trust Co analyst who
pleaded guilty in 2012 and turned cooperator. Roland
Riopelle, Kuo s lawyer, said in an interview he had calls
into the US Attorney s Office. While he had not made
a definite decision, the issue was "certainly worth study-
"If there s no crime there, that s a good reason to
withdraw your plea," he said.
Kuo was nearly sentenced to six months in prison in
July by US District Judge Richard Sullivan, whose ruling
in the Newman and Chiasson case was subject to the
But Sullivan delayed sentencing, saying if the 2nd
Circuit reversed him and required proof a tippee knew
an insider received something for non-public information,
he was "not sure, frankly, in the guilty plea there s a
sufficient basis to conclude that Mr. Kuo had that knowl-
The ruling may also benefit Michael Steinberg, a SAC
Capital portfolio manager convicted in 2013 and later
sentenced to 3-1/2 years in prison as part of the same
conspiracy. Steinberg had raised similar arguments on
appeal as Newman and Chiasson, and his lawyer, Barry
Berke, said Wednesday the ruling meant his conviction
would be vacated as well.
Separately, US District Judge Andrew Carter in Man-
hattan scheduled hearings for December 18 to address
whether the ruling affects the pleas of the four men,
who admitted to engaging in a scheme to buy options
and stock in software maker SPSS Inc prior to the
announcement that IBM Corp was acquiring it.
The defendants include former Euro Pacific Capital
Inc traders Daryl Payton, Thomas Conradt and David
Weishaus as well as Trent Martin, a former analyst at
Royal Bank of Scotland Group Plc.
The order came after prosecutors late Wednesday
asked Carter to suspend a pretrial schedule for a January
12 trial of the last remaining defendant in the case, saying
the appellate ruling raised "potential legal issues" that
could affect the trial.
Lawyers for the defendants in the IBM case did not
immediately respond to requests for comment.
Beyond pending cases, the ruling could also affect
pending investigations involving similar chains of tippees,
said Glen Kopp, a former prosecutor at Bracewell & Giu-
liani. That would especially be true, he said, if authorities
were sitting on cases following oral arguments in the
case in April, at which some judges voiced skepticism
of the prosecution s interpretation of the law.
"Could it impact more cases? Absolutely," Kopp said.
As hedge fund managers and their lawyers digested
Wednesday s news, many began speculation about how
the decision might impact their industry in the weeks
and months ahead, with one former prosecutor who
didn t want to be identified saying he thought it could
lead to firms seeking tips more aggressively. Reuters
US authorities face new fallout
from insider trading ruling
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