NEW YORK — A federal appeals court dealt a blow to the government's success in insider trading prosecutions Wednesday by reversing two convictions with a decision that also jeopardizes a third — and attempts to further define how far prosecutors can push the law in their quest to clean up Wall Street.
The 2nd U.S. Circuit Court of Appeals overturned the convictions of Anthony Chiasson, of New York, and Todd Newman, of Needham, Massachusetts, finding they were too far removed from inside information to be held responsible for it.
In doing so, the three-judge panel made a sweeping observation about a blitz of Manhattan insider trading prosecutions that has resulted in more than 80 convictions since 2008.
The appeals court criticized the government, describing the "novelty of its recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders." The court said prior cases generally involved tippees directly participating in the passing of secrets.
"We note that the government has not cited, nor have we found, a single case in which tippees as remote as Newman and Chiasson have been held criminally liable for insider trading," it said in an opinion written by Circuit Judge Barrington D. Parker.
Chiasson co-founded Greenwich, Connecticut-based Level Global Investors. He was sentenced to 6½ years in prison and ordered to pay a $5 million fine and forfeit $1.38 million. Newman worked for Stamford, Connecticut-based Diamondback Capital Management. He received 4½ years and was ordered to pay a $1 million fine and to forfeit $737,724. The former portfolio managers were both convicted in December 2012.
The appeals court said the government failed to present sufficient evidence the men willfully engaged in insider trading or conspired to break the law. It instructed a lower court judge to dismiss the indictment against them.
The reversals could jeopardize the insider trading conviction of former SAC Capital portfolio manager Michael Steinberg, which is being challenged on the same principle.
The government said it would issue a statement later Wednesday.
Gregory Morvillo, an attorney for Chiasson, called the ruling "a resounding victory for the rule of law and for Anthony Chiasson personally."
"He is deeply gratified that the decision issued today unequivocally re-establishes his innocence under the law — consistent with what Anthony has steadfastly maintained for the duration of this ordeal," he said.
Stephen Fishbein and John Nathanson, lawyers for Newman, said in a statement that they were "relieved but not surprised by today's decision, which clearly establishes Todd Newman's innocence on all charges."
"This is not a mere technicality, but rather a considered judgment that Mr. Newman did not commit a crime," they added. "Unfortunately, this vindication comes after four years of unnecessary prosecution including a trial in which the Second Circuit held that the wrong legal standard was applied. We are gratified that, going forward, others will benefit from clearer rules in this area."
Barry Berke, Steinberg's attorney, said in a statement that the ruling "clearly means that Michael Steinberg is innocent of any crime and his conviction will be vacated as well. It sends a loud and clear message that the government will be rebuked when it tries to turn innocent conduct into a crime, as it did in the case of Mr. Steinberg."
Eugene Goldman, a former Securities and Exchange Commission enforcement lawyer, said the ruling "could stop multiple insider trading cases in their tracks."