A loop has been closed in a long-running insider-trading investigation by the government. Chris Choi, a former employee at Nvidia Corp. whose tips to a friend set in motion a flurry of trading at several hedge funds, has agreed to settle fraud claims by the Securities and Exchange Commission.
Unlike some leak recipients who were convicted of felonies, Choi hasn't been charged criminally. And it seems doubtful that he will be. The SEC said he agreed to pay $30,000, without admitting or denying the agency's allegations, which looks like a good deal for him. As the commission explained in its news release:
The SEC alleges that Chris Choi of San Jose, Calif., tipped his friend Hyung Lim with nonpublic information about Nvidia’s financial performance in advance of the technology company’s quarterly earnings announcements in 2009 and 2010. Lim relayed Choi’s information to a fellow poker player Danny Kuo, who was a hedge fund manager at Whittier Trust Company. Kuo illegally traded on the inside information for his firm and passed it along to analysts at such other firms as Diamondback Capital Management, Level Global Investors LP, and Sigma Capital Management, which is an affiliate of S.A.C. Capital Advisors LP. The analysts relayed Choi’s information to their portfolio managers who caused funds to conduct insider trading in Nvidia securities.
The absence of charges against Choi had been a recurring criticism of the government's insider-trading crackdown: If the downstream tippees who traded on Choi's leaks, such as Michael Steinberg of SAC Capital, are going to prison, why isn't the original tipper being punished?
Likewise, another key tipper in the same investigation was Rob Ray, who was an employee in the investor-relations department at Dell Inc. Steinberg and others were convicted of trading based on information that Ray provided to a former colleague, who then told two friends (and so on). However, Ray hasn't been accused by the government of wrongdoing, civilly or criminally.
Here's one line from the SEC's complaint against Choi that caught my attention, particularly the last part: "Choi provided the material nonpublic information to Lim in breach of the fiduciary duty that Choi, an employee of Nvidia, owed to Nvidia, and did so with the expectation of receiving a benefit and/or to confer a financial benefit on Lim."
That overlaps with one of the crucial issues raised this week at the U.S. Court of Appeals in Manhattan, which heard oral arguments in the insider-trading case against Todd Newman of Diamondback and Anthony Chiasson of Level Global, who were part of the same trading circle. Defense attorneys argued at the hearing that their convictions should be overturned because the judge at their trial, Richard Sullivan, didn't instruct the jury that, in order to convict the two men, they had to have known that the source of their illegal tip received a benefit. The argument seemed to resonate with the appeals court judges, who expressed doubts about the government's case, according to news accounts of the hearing. (See my colleague Matt Levine's take on the prosecutions of Newman and Chiasson here.)
The government said jurors needed only to find that the defendants knew the tipper's information was material and nonpublic, and that the tipper had breached a fiduciary duty by revealing it. Judge Sullivan gave a similar instruction to the jury in Steinberg's case.
Now at least a government agency has gone on record in a settled court complaint saying that one of the tippers, Choi, may have expected to receive a benefit in exchange for his illicit tip. That's not the same as proving it. And it's too late to change the jury instructions now, of course. If any of the convictions get overturned, a lot of people will be wondering why the government didn't assert this sooner, when it counted most.
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