Securities regulation is based on the core idea that all investors should have equal access to the rewards of participation in securities transactions. Insider trading is the antithesis to this equal access theory.
Insider trading violations occur when an individual in possession of unpublished price sensitive information (UPSI) – a “tipper” – relays that information for personal gain (or in violation of a duty) to another person (a “tippee”), who trades on the basis of that information. One issue that frequently arises in such cases is proving that an individual who receives such a tip has the requisite scienter, or state of mind, to have committed a violation. A recent US court decision in United States v Newman has dealt a severe blow to the US government’s efforts to prosecute individuals who trade on inside information but have one or more “layers” between them and the insider who initially disclosed the tip.
The Newman case
The Newman decision followed a 2013 criminal insider trading trial in New York. Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, a former portfolio manager at Level Global Investors, were charged with receiving confidential information about Dell’s and NVIDIA’s quarterly earnings through a series of intermediaries, and trading on that information prior to its public disclosure. The two portfolio managers’ trades in Dell and NVIDIA stock resulted in a combined US$72 million in profits for their respective funds.
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Suhail Nathani is a partner, Yogesh Chande is an associate partner and Malek-ul-Ashtar Shipchandler is a trainee at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice
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