By Christopher M. Matthews
Federal prosecutors examining insider trading on Wall Street
might have been wise to quit while they were ahead.
That is the view of some legal specialists in light of
Wednesday's ruling, in which a federal appeals court overturned two
insider convictions, put a third in jeopardy and said prosecutors
SHYoverreached.
The office of Manhattan U.S. attorney Preet Bharara had racked
up 89 wins in a five-year investigation, work that rattled Wall
Street and landed him on the cover of Time magazine.
But the Second U.S. Circuit Court of Appeals vacated the
December 2012 convictions of former hedge-fund traders Todd Newman
and Anthony Chiasson, criticized prosecutors for the "doctrinal
novelty" of recent insider-trading cases and suggested they had
strayed too far from going after the real villains.
Prosecutors continued to press ahead with cases that weren't as
clear-cut, involving tippees further removed from the sources of
information, and without the benefit of wiretaps that had bolstered
the earlier string of convictions and guilty pleas.
As the number of insider-trading cases in the pipeline dwindled,
prosecutors were left with the tough ones. Over the summer, for
instance, Rengan Rajaratnam, the younger brother of Galleon Group
founder Raj, was acquitted of insider-trading charges by a
jury.
In the wake of Wednesday's ruling, parties on both sides of the
issue were sifting through the fallout and advocating their
positions.
Defense lawyers smarting from five years' worth of defeats were
seizing on the ruling as the final verdict of prosecutorial
overreach. Lawyer Ross Albert of Morris Manning & Martin, who
has worked at the Securities and Exchange Commission, said the
ruling brings back "some needed balance to insider-trading
law."
On the other side are alumni of the Manhattan U.S. attorney's
office who said some of the judges' admonishments weren't fair. The
hardest cases were saved for last, and there was always a chance of
defeat. That prospect, however, wasn't reason to avoid going to
trial, they said.
"When you get to the end of a series of prosecutions like these,
the ones at the end are not as core and easy as the ones at the
beginning," said Jonathan Streeter, who prosecuted Raj Rajaratnam
and is now a partner at Dechert LLP.
Both sides agree the ruling will make insider-trading
prosecutions tougher going forward. The court said prosecutors must
prove traders knew that the person who provided an inside tip
gained some sort of tangible reward for doing so.
The ruling is already reverberating through the downtown
Manhattan federal court. Thursday, a judge set a hearing date for
later this month to discuss whether the ruling would affect the
guilty pleas of four men who admitted they conspired to trade using
inside information about a company's merger with IBM Corp.
After Wednesday's ruling, the marquee conviction of former SAC
Capital portfolio manager Michael Steinberg may also be under
threat, legal experts say. The confidant of SAC founder Steven A.
Cohen was convicted last December and was layers removed from the
source of the confidential information, similar to Messrs. Newman
and Chiasson. He plans to appeal on similar grounds.
Legal experts have also questioned whether the ruling will
weaken the SEC's suit against SAC's Mr. Cohen for allegedly failing
to supervise traders at his firm, including Mr. Steinberg. A
spokesman for SAC Capital, now known as Point72 Asset Management,
declined to comment. The SEC chairman, Mary Jo White, said Thursday
that the agency was reviewing the ruling. Mr. Bharara's office said
it is considering its legal options.
Judge Richard Holwell, who presided over Raj Rajaratnam's 2011
trial, said prosecutors may have made different choices in
hindsight, but the record shows that they "won a lot of cases, and
they put a lot of people on notice that government wasn't going to
tolerate insider SHYtrading."
The judge, who resigned the bench to start a litigation firm,
added: "In the fullness of time, it probably doesn't detract from
the legacy."
Write to Christopher M. Matthews at
christopher.matthews@wsj.com
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