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A U.S. Court Practically Declared Insider Trading Legal

Wednesday, December 10, 2014, was a big day for insider trading.

A three-judge panel of the U.S. Second Circuit Court of Appeals overturned insider trading convictions of former hedge fund managers Todd Newman and Anthony Chiasson.

Not only did the appeals court reverse the much-publicized guilty verdicts against the two traders, its 28-page decision effectively rewrites the meaning of insider trading.

The immediate outcome of the decision not only affects the two hedge fund executives, other traders convicted of insider trading, and charged individuals who pled guilty, it will also change how traders use inside information to their benefit in the future.

The court decision is as surprising as it is profound…

This Changes Trading Forever

Because the surprise unanimous appeals court decision immediately vacated the May 2013 judgments of conviction against Newman and Chiasson on charges of conspiracy to commit insider trading and insider trading in violation of 18 U.S.C. § 371, sections 10(b) and 32 of the Securities Exchange Act of 1934, SEC Rules 10b‐5 and 10b5‐2, and 18 U.S.C. § 2.

Adding insult to injury for Preet Bharara, the Manhattan U.S. Attorney who oversaw the six-week jury trial, which was heard in the U.S. District Court for the Southern District and presided over by Judge Richard J. Sullivan, the appeals court dismissed the entire suit with prejudice.

According to, "In the formal legal world a court case that is dismissed with prejudice means that it is dismissed permanently. A case dismissed with prejudice is over and done with, once and for all, and can't be brought back to court."

Now, not only won't there be any re-trial based on the appeals court decision, the only way similarly derived convictions will stand up on appeal will be if the matter makes it to the Supreme Court.

What happened – and how it happened – matters.

An Impossibly High Bar Is Set

The bottom line: As far as the appeals court's ruling, Judge Richard Sullivan gave the jurors hearing the case against both traders erroneous instructions. The appeals court said that he set the bar too low, which made it easy for jurors who deliberated for two days to reach a guilty verdict.

But the real bombshell in the Appeals Court decision is what it says is required to prove insider trading.

Insiders at Dell Inc. (formerly Nasdaq: DELL) and Nvidia Corp. (Nasdaq: NVDA) passed along information about what was going on in their companies to some contacts, which made its way through some fuzzy Wall Street "intelligence networks" (in reality, glorified gossip channels papered over with research notes) to analysts, who transmitted the information to analysts who worked for Newman and Chiasson. They traded on the information and made about $72 million.

While Judge Sullivan told jurors it was enough to show the traders knew the information they traded on resulted from a breach of fiduciary duty on the part of the tipsters at Dell and Nvidia, it didn't matter if the tipsters received benefits as a result of their tips. The appeals court wholeheartedly disagreed.

The new interpretation of what constitutes insider trading effectively says, a prosecutor must prove that the "tip-ee" knew that the "tipster" committed a breach of their fiduciary duty in disclosing inside information, and that the "tip-ee" knew that the "tipster" would gain a tangible reward of "some consequence."

Only one of the tipsters in the case received any gain. And that was merely "career advice." As such, the appeals court determined that there was no gain of any consequence, and further, that the traders didn't get the information first-hand.

Experts Despair of Ever Fixing the Problem

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. James Roth | December 15, 2014

    I am a retired lawyer. Securities law was not one my areas of practice so I don't claim any special expertise on the laws regarding insider trading. My knowledge in this area is dated and limited. I did handle many trials and appeals. I assume the District Attorney will seek review by the U.S. Supreme Court. If so, the opinion by the Second Circuit Court of Appeals may or may not be the last word on this case. In addition, the Second Circuit decision is only a binding precedent in that Circuit. District Courts outside that Circuit and other Circuits are not bound by this precedent. Although I assume many if not most insider trading cases are brought within that Circuit, insider trading cases are also brought outside that Circuit. In other words most areas of the country are not bound by this ruling. It can be cited as a precedent in courts outside the Second Circuit but it is not binding.

  2. Kevin Alexanderman | December 15, 2014

    Laws against insider trading are without question unconstitutional: they are a restriction on freedom of speech.

    These laws were created out of envy only, and are intended to limit freedom of speech of all those who lead commercial enterprises.

    • Chris | December 17, 2014

      Unconstitutional ? How would it appear to you if a high ranking U.S. intelligent agent was found out to be guilty of spying…then being tried for treason, used the same argument of free speech ? A generation of military men have died fighting to protect rights inherent in the Constitution- they did not give their lives so that certain skeevy, greedy, and unethical financial dealings could prosper. If you wish to champion Wall Street, that is your right to argue, but do not dishonor the Constitution by confusing skewed capitalism for democratic principles. Financial industry ‘manipulation’ (thieving) for the priviledged is anything but democratic.

      • Kevin Alexanderman | December 23, 2014

        "Insider Trading" or "stock tips" are as old as stock markets, and if you read on investing by the greats, they generally always see stock tips as a sucker move.
        Is there any theft involved? A company executive buys more shares in his company because he thinks they'll win the race in a free market.
        If he tells someone, they buy shares, driving the price up.
        Who loses? Who is robbed? No one. All the shareholders benefit.
        Now take the alternative, an executive sees his company screwing up, or threatened by a competitor, so he sells his shares. If he/she tells a friend, then shares can start to decline. Is the executive's judgement right? Maybe, maybe not, but those who substitute his for their own will generally get burned, as any successful investor knows.
        It would not be in an investor's or an executive's interest to tell people that they expect their company to fail, if they hold shares. If they have taken a short position, then they might benefit, as share price declined, but if they are betting against themselves, how much can they be trusted?
        When the government regulates whether a business can do business, such as an FDA approval, then there it is the government that is setting up insider trading opportunities. Most of the cases, (and the Hollywood movies about trading), use instances of government market involvement as their foundation. Take away government attempts at market involvement (such as their monopolization of the secondary mortgage market prior to the Great Recession), and you eliminate "sure thing" stock tips.

        Bottom line, insider trading laws are not "equal rights under the law", because they limit freedom of speech and economic rights one group of people unequally to the rest.

  3. DDearborn | December 15, 2014


    Insider trading now essentially legal not because it is fair, just or morally and ethically right, but because the really rich make a really lot of money with insider trading. And by definition, it is the really rich that are privy to this kind of information.

    The court also ruled to overturn because……….the convicted felons are……….really really rich. And as we all now know; the really really rich NEVER go to jail. Instead the government either finds or creates a loophole, changes the law, or just ignores it as in this case. The really rich are intentionally destroying the Republic in order to cover up their crimes against humanity. And make no mistake, the sheer size and scope of the theft that has taken place (Literally trillions of dollars stolen) has already taken down a path from which there is no return. In the overall context of current events this ruling was not so much an attack on the Justice system as it was an act of Treason.

  4. PHIL@STEINSCHNEIDER.COM | December 15, 2014

    If we assume people are fundamentally good, and should be free, then insider trading shouldn't even exist. On the other hand, if people are fundamentally bad, then free markets shouldn't exist, and everyone should be monitored constantly.

    In a free market, when valuable free speech is restricted, it'll become that much more marketable and move to a black market of the privileged few. On the other hand, if there were no restrictions on this stuff, it would much more likely leak out to everyone and be that much less useful.

    Government rules and regulations that restrict the free market and freedom of expression only make it that much more lucrative for those who are connected to government and the businesses it regulates. This isn't the free market. It's the next step down from socialism — fascism.

    Consequently, the judge in this case ruled correctly. In fact, the restrictions on insider trading should be eliminated completely. Otherwise, the semblance of fairness because of perceived "policeability" of the "unpolicable" will continue to give the average investor the false impression that they're being protected by the government, when nothing could be further from the truth.

    A cynical investor is always a better investor than a naïve one.

  5. Fabian | December 15, 2014

    I'm not really a fan of insider trading but the fact that for once a court of law decided to raise the burden of proof in favor of the public against the State is nothing to cry about.
    Because after Spitzer, I have some reservations about DA is good guy and trader is bad guy.

  6. john MS | December 15, 2014

    Insider trading legal. the rich get richer and the poor ( so they can buy votes), minorities get poorer. The gap between the richest & poorest gets bigger. Civil unrest will rise. Racial unrest will be the norm

    I note that JP morgan have now added a new clause to legislation enabling them to gamble at US taxpayers expense.

    How the founding fathers who left to escape tyranny would grimace. Financial tyranny is just as bad.

    And why complain about Russian Kleptomaniacs when American Robber Barons with their long history are still very much around. I am not sure that's what I call democracy seems more like Anarcho-capitalism.


  7. H. Craig Bradley | December 16, 2014


    Does this recent Court Decision mean that "insider trading" can only be proved in court IF those who initiated a release of said inside information in fact knew it was private and confidential and not intended for public use or release? Can insiders in a company be guilty of knowing their unauthorized release of "inside information" ( not available to the general public) are illegal if all key corporate insiders are required to sign an agreement outlining what kind of information is public domain and what is automatically considered " insider information" from a regulatory point-of-view?

  8. R.D. | December 17, 2014

    Many, many years ago I watched a movie called the Karate Kid. The old Sensei (Pat Morierity) stated, "best defense, no be there". If the stock market is that corrupt and all the little guys left, there would be no money for the big guys to feed off of. If the lure of big, instant money keeps you in the game then it would be wise to learn how to be an insider.
    Yesteryear we left the cave with a club, today we leave the driveway with a credit card; same deal.

  9. Wendell | December 29, 2015

    Excellent info many thanks for sharing.

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