Todd Newman, with lawyers. Photographer: Victor J. Blue/Bloomberg
Todd Newman, with lawyers. Photographer: Victor J. Blue/Bloomberg

(Corrects prison sentences in third paragraph.)

Todd Newman and Anthony Chiasson's appeals of their insider trading convictions hinge on a fairly nit-picky legal point about jury instructions, although an important one that has an appeals court pretty riled up.1 But I don't really think that the appeal has gotten so much attention, or gotten judges so riled up, or raised concerns about "undercut[ting] one of [U.S. Attorney Preet Bharara's] greatest achievements," just because of an academic debate about jury instructions. The bigger problem seems to be that Newman and Chiasson appear to be innocent.

I mean! The story is long, and you've heard it by now; this DealBook article has a good summary. Basically Rob Ray, a Dell investor relations guy, and Chris Choi, an Nvidia finance employee, sometimes told Sandy Goyal and Hyung Lim stuff about their companies. Goyal and Lim, in turn, shared this information with Jesse Tortora and Sam Adondakis. Tortora and Adondakis, in further turn, shared that information with their bosses, who were Newman and Chiasson.

The question is, did Newman and Chiasson know that they were trading on illegal inside information, or did they just think that they were getting legitimate market information? It seems pretty clear to me that it's the latter. The Dell tips, for instance, came from an investor relations employee at Dell who has never been charged by the government; the Nvidia tips came from a finance employee at Nvidia who settled a civil case with the SEC today for a $30,000 fine. Newman and Chiasson were sentenced to four and a half and six and a half years in prison, respectively. The government thinks it should have been obvious to Newman and Chiasson that the guys who told the guys who told the guys who told them about Dell and Nvidia did so illegally. But the government itself, which has complete information, apparently didn't find it obvious enough to actually charge those guys with a crime.

Because it wasn't obvious at all. Newman and Chiasson were in the business of investing in stocks. Their analysts talked to other investors to get a sense of what those investors thought. They also talked to investor relations departments at the companies they covered. From Newman's reply brief on appeal:2

In sum, nothing in the government’s submission undermines the compelling evidence that Dell and NVIDIA personnel disclosed specific and accurate quarterly financial information prior to the official company announcements -- and that Tortora regularly reported such leaks to Newman. Nor does the government contend that the leaks were the product of self-dealing by insiders. From Newman’s perspective, detailed and accurate quarterly data could and did come from “checks” with insiders, who provided the data without any expectation of personal gain. Thus, the government’s presumption that Newman’s receipt of this type of information is consistent only with self-dealing is baseless.

Because that is how it works. Companies talk to investors, and if they tell those investors things in their "official" capacity -- even things that they don't tell anyone else, even material nonpublic information that they really shouldn't be telling investors without public disclosure3 -- then it's not a crime for the investors to trade on it.4

You can see how this state of affairs would be upsetting for the government, Dell and Nvidia to admit. People don't like to hear --- and companies don't like to admit -- that companies tell favored investors things that they don't disclose publicly. Nonetheless, it is true, at least some of the time, including apparently at Dell and Nvidia. So you can see why Newman and Chiasson would think that the information they were getting from their analysts came from legitimate, company-approved sources. This is especially true because it was fourth-hand, and because it was often vague or wrong.5 Newman and Chiasson had no reason to think they had a magical pipeline to get earnings information before it was announced, because they didn't. They had some data points, among many other data points, in a business of calling around and working sources and trying to build a picture of what was going on at Dell and Nvidia.

Anyway! I am convinced, but a jury wasn't. Juries rarely are, and you can speculate about why.6 "Wall Street greed" -- prosecutors' preferred term for "people getting paid a lot of money at their investing jobs" -- is probably a big part of it: Once you hear how much money Newman and Chiasson made, it's easier to think they were up to no good.

But appeals court judges, who sit around dispassionately reading briefs, might be easier to convince that Chiasson and Newman are innocent. This leaves a bit of a problem, since "we're innocent" is not a valid basis for an appeal. "Insufficiency of the evidence" to convict is a valid basis, and Chiasson and Newman argue it here, but it's a bit disfavored. Judges don't like to say that no rational jury could have come to the conclusion that an actual jury actually came to. It doesn't make the system look good.

Fortunately, there's an out here: One of the instructions that the judge in Newman's and Chiasson's trials gave the jury was wrong.7 That on its own seems like a bit of a silly reason to overturn their convictions; the prosecutors have argued that it's a "harmless error" and you can sort of see their point. (Simplistically, the point is: If this jury was going to convict Newman and Chiasson based on the pretty weak evidence it had, it was also going to convict them based on the same evidence and a few extra words in the jury instruction.8 "Wall Street greed" is "Wall Street greed.") And, if the court does overturn the convictions on a technicality, it's hard to see how that would be a huge setback in the Southern District's glorious insider-trading winning streak. They'd just go try these cases again, and probably win again.

But that's not what's really going on. If the appeals court overturns these convictions, it won't be because it's dissatisfied with a few words in a jury instruction. It will be because it has grave doubts about whether prosecutors are going after innocent people for insider trading. As Judge Barrington Parker said at yesterday's argument:

If I’m in the business 15 minutes versus 15 years there seems to be a different standard of criminal exposure. At the end of the day if you follow your position to its logical conclusion – the person likely to be guilty is the person the government decided to indict

So far, that's been entirely correct. Perhaps the Second Circuit will change things.

1 Excellent things to read about the riled-up appeals court include this DealBook article for the broad story, this Financial Times article for the scene at the appeals court, and this DealBook article about the legal question, or this characterization from Bess Levin.

The real brief version of the legal question: Some corporate insiders, Rob Ray at Dell and Chris Choi at Nvidia told some guys some stuff about their companies. Those guys told some other guys, who told Newman and Chiasson. The judge instructed the jury that, to convict Newman and Chiasson, it would have to find that Ray and Choi "had a fiduciary or other relationship of trust and confidence with their employers" and "intentionally breached that duty of trust and confidence by disclosing material, nonpublic information for their own benefit." He then went on to say that:

To meet its burden, the government must also prove beyond a reasonable doubt that the Defendant you are considering knew that the material nonpublic information had been disclosed by the insider in breach of a duty of trust and confidence. The mere receipt of material, nonpublic information by a Defendant, and even trading on that information, is not sufficient; he must have known that it was originally disclosed by the insider in violation of a duty of confidentiality.

The question is, in that second part, did he have to say "he must have known that it was originally disclosed by the insider in violation of a duty of confidentiality and for the insider's own benefit"? Every other District Court judge in New York does; the judge in Newman's and Chiasson's case, the extremely pro-prosecutor Richard Sullivan, does not.

Here are the briefs:

Newman and Chiasson, and every other district judge, seem to be right on the law here. The relevant Supreme Court case requires that "the tippee knows or should know that there has been a breach" of the insider's duty to keep information confidential, and that "Absent some personal gain, there has been no breach of duty to stockholders." That seems pretty clearly to mean that the tippee must know that there was a personal gain.

2 In general, if you want a good view of the facts in this case, pages 3-15 of that brief are a good place to start. Pages 5-27 of the government's brief gives an alternative view.

3 Because of Regulation FD, which prohibits companies from disclosing material nonpublic information to one investor without disclosing it broadly. I sometimes think simplistically that in any case of trading on material nonpublic information there's probably either a Reg FD violation or illegal insider trading, but there can't be both: If the company told you the information without a confidentiality agreement, then you can trade on it (but the company messed up); if someone snuck you the information, then you can't. This is not, though, legal advice. Obviously.

4 Unless, again, they've agreed not to trade on it.

5 Newman's reply brief again:

The government says that Rob Ray regularly provided precise, accurate information over eight consecutive financial quarters. Yet the government charged Newman with substantive insider trading in Dell stock for only two quarters. And Sandy Goyal – the only person to testify as to what Ray actually said – described receiving information in the form of ranges or directional information, not precise numbers. Even Jesse Tortora, the government’s star witness, said that Goyal’s information was accurate only 70% of the time. Tortora was so embarrassed by the inaccuracy of his Dell information that he told Newman “from now on [I’m] goign [sic] to tell you to [do the] opposite of what [I] think.”

6 I'm not aware of jury interviews in the Newman and Chiasson cases, but this report from the similar Michael Steinberg case is dispiriting:

One juror asked Demethress Gordon, the jury forewoman and one of the holdouts, to walk through a doorway. She complied, and the fellow juror said, “I told you to go through the door, but I didn’t tell you explicitly how to go through the door,” Ms. Gordon recalled in an interview.

“It’s like the elephant in the room — it’s obvious you know what to do,” she added.

The reasoning seems to be that, since Steinberg told his analysts "get me information about stocks," the analyst was supposed to know that that meant "get me that information illegally." Um, okay?

7 Arguably, probably, etc. See footnote 1.

8 That is: The jury had to conclude that Newman and Chiasson knew that Ray and Choi disclosed the information in violation of a duty of confidentiality. I think that's a tough thing to conclude, based on what Newman and Chiasson knew about Dell and Nvidia's disclosure practices and the accuracy of Ray's and Choi's information, and on what they didn't know about how the leaks actually happened. But if you conclude that, then I guess it's no harder to conclude that they also knew that Ray and Choi disclosed the information for some personal benefit.

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.