Some of U.S. Attorney Preet Bharara’s biggest catches in a seven-year insider-trading sweep are clinging to one more hope of clearing their names.
The U.S. Supreme Court is set to define more clearly what constitutes insider trading after agreeing to hear a California case and ending a judicial split between appeals courts in San Francisco and New York. In a case called Salman, the San Francisco court said people could be convicted of insider trading if information was passed to a trading relative or a friend as a gift.
The New York appeals court, in a case called Newman, set the bar higher, requiring the person passing on inside information to at least potentially get some concrete benefit, such as money or something of value.
The Supreme Court’s decision to hear the appeal of the San Francisco case emboldened former Goldman Sachs Group Inc. director Rajat Gupta, hedge fund manager Doug Whitman and at least three others in their requests for reviews of their convictions. Whitman is set to ask a federal appeals court Feb. 2 to release him early from a two-year prison term while he challenges his guilty finding.
“Given that the Supreme Court declined to review the Newman decision, there is good reason to believe that the high court will overrule the Salman decision and deem Newman’s reading of the ‘personal benefit’ element as novel and correct,” Whitman’s lawyers wrote in a Jan. 22 filing with the appeals court.
The top court might have taken the case to draw a clear line between the general understanding of insider trading and the particular details of Newman, said Jill Fisch, a professor at the University of Pennsylvania’s School of Law.
“It could be the case that they want to clarify the fact that Newman doesn’t apply here,” she said.
Currently, there is no statutory law specifically on insider trading. Instead, prosecutors have relied on a series of court rulings that define the crime. Bharara won all but one of 78 prosecutions relying on those rulings before the New York appeals court ground his streak to a halt in December 2014. The panel overturned the convictions of Anthony Chiasson, the co- founder of Level Global Investors, and a former portfolio manager at Diamondback Capital Management, Todd Newman.
That decision reverberated further, upending the convictions of 14 people, with others like Gupta and Whitman seeking to add themselves to the list. Gupta was released from prison earlier this month after serving 19 months of his 30-month sentence for giving tips to his friend, billionaire fund manager Raj Rajaratnam.
Rajaratnam, who is serving an 11-year sentence, has also asked a federal judge to reconsider his case. The higher standard of proof mandated by Newman should be applied to him retroactively, he said in a request that’s pending. Christine Chung, his lawyer, declined to comment on the case.
Gupta and Whitman both “argued they were likely convicted for conduct that is not criminal in light of Newman,” Gupta’s lawyer Gary Naftalis said in a Jan. 11 letter to the federal appeals court. “The prejudice caused to Mr. Gupta by the now invalid pure relationship theory was devastating.”