On April 22, 2014, the Second Circuit Court of Appeals heard oral arguments in an appeal by two former hedge fund traders, Todd Newman and Anthony Chiasson, of their convictions for insider trading. On appeal, counsel for Newman and Chiasson argued that the trial court erred by failing to instruct jurors that the government was required to prove that the defendants (who were downstream tippees) knew that the insider who leaked the information at issue received a “personal benefit” for doing so. The district court declined to give such an instruction and concluded that the law did not require that a defendant have knowledge that the insider obtained a personal benefit, but only knowledge that the insider breached a fiduciary duty.

The appeal is one of the most important in the area of insider trading in the last decade and raises fundamental questions about the legal standard required to impose insider trading liability on downstream tippees. A key legal issue to be considered by the Second Circuit in deciding the appeal is whether the trial court’s interpretation of the law is too similar to the parity-of-information standard explicitly rejected by the Supreme Court in Dirks v. SEC (1983) (Dirks). In Dirks, Justice Powell, delivering the opinion of the Court, reasoned that “imposing a duty to disclose or abstain solely because a person knowingly receives material nonpublic information from an insider and trades on it could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market.” Id. at 658.

Echoing doubts expressed by some commentators, including Robert Hotz of Akin Gump Strauss Hauer & Feld LLP, two of the three judges on the Second Circuit panel frequently interrupted Assistant U.S. Attorney Antonia Apps with questions suggesting that the prosecutors’ interpretation of the applicable case law is too vague. "We sit in the financial capital of the world, and the amorphous theory you have gives precious little guidance to all these financial institutions and all these hedge funds out there about a bright-line theory as to what they can and cannot do," Judge Barrington D. Parker said.