On October 5, 2015, the Supreme Court dealt the Department of Justice a rare defeat in its prosecution of insider trading cases by denying certiorari of the Second Circuit’s opinion in United States v. Newman. The DOJ, and in particular the U.S. Attorney’s Office in the Southern District of New York, have recently been on a winning streak in insider trading cases. But that tide may turn with the Court’s decision. Many of us know the Newman case, but this post discusses the additional implications that may become more important now that the Supreme Court has essentially backed Newman’s reasoning.

The DOJ has recently prosecuted insider trading violations against individuals far removed from the initial tip, but Newman’s greatest impact will be shortening the chain of these insider trading violations. In Newman, the government alleged that various analysts received information from company insiders disclosing company earnings before they were publicly released. Newman and Chiasson, however, were three or four levels removed from the inside tipper.

Newman and Chiasson argued that there was no evidence the corporate insiders provided inside information in exchange for personal benefit required under the Supreme Court’s decision in Dirks v. S.E.C., 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). Newman and Chiasson argued that, even if the corporate insiders had received a personal benefit in exchange for inside information, there was no evidence that they knew about any such benefit. The Second Circuit agreed, and held that in order to sustain a conviction for insider trading, the government must prove that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.

The court went on to question the sufficiency of the government’s allegations of a personal benefit. While the Supreme Court in Dirks suggested that a personal benefit may be inferred from personal relationships that resemble trading by the insider followed by a gift from the recipient, the Second Circuit held that such an inference is impermissible in the absence of a meaningfully close personal relationship that generates an exchange that is objective and consequential and represents at least a potential gain of a pecuniary or similarly valuable nature. In other words, the personal benefit must be “of some consequence.”

We expect the decision to make the prosecution of insider trading cases more difficult, especially in the Second Circuit. In fact, the U.S. Attorney for the Southern District of New York, Preet Bharara, noted his office would think long and hard before pursuing some insider trading cases and said the ruling provides a “category of conduct that arguably will go unpunished going forward.” Much has been written about this decision, but below are finer points in the decision that provide more tools for defendants fighting insider trading convictions.

• Mere information asymmetry insufficient: The Second Circuit emphasized that mere “informational asymmetries” are not unlawful. Now, traders can use nonpublic information with more confidence and without worry that the information was initially received unlawfully. If they do not know of any personal benefit given in exchange for the information, at least under Newman they cannot be prosecuted. We expect this to drastically shorten the chain of liability for insider trading.

• Rebutting personal benefits of consequence: The Second Circuit also heightened the standard for personal benefits. Mere friendship is insufficient. We expect defendants to offer, like Newman and Chiasson, evidence that the personal benefit would have been given without the tip or had been given before the tip was provided. Both factors were used in Newman to challenge the government’s tenuous personal benefit based on the friendship between the corporate insiders and the initial tippees.

• Demonstrating inside information was not suspicious: The government in Newman also argued that, even if Newman and Chiasson did not know of the personal benefit, the information was overwhelmingly suspicious. However, the government’s own witnesses testified that analysts often provide factual models that are close estimates of earnings. Insiders will also often leak this information in advance of the earnings. Because it was reasonable for Newman and Chiasson to believe this information came from either analyst estimates or lawful disclosures, the Court rejected the government’s allegation the information was overwhelmingly suspicious. We expect defendants to offer similar evidence to negate arguments the information received was suspicious.