There is no statutory law specifically on insider trading.

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.

Clear Line

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.

Convictions Upended

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.”

The Supreme Court refused to consider the government’s appeal of the Newman decision, but agreed to look at the case of Bassam Yacoub Salman, an Illinois man who was convicted of insider trading on merger tips he got from a relative. Salman’s conviction was upheld by the Court of Appeals in San Francisco. Decision’s Author

The author of that decision was U.S. District Judge Jed Rakoff, who was sitting as a visiting jurist on the San Francisco appellate panel after handling a number of the insider-trading cases as a trial judge in New York. Rakoff wrote in the Salman case that he wouldn’t follow the Newman reasoning and that it was enough that information was intended as a gift.

Rakoff’s disagreement with Newman “colored his handling” of Whitman’s request to set aside his conviction and grant his release on bail, the fund manager said in a Jan. 22 court filing to the appeals panel.

Congress is likely to pass a statute defining insider trading if the Supreme Court overturns Salman and agrees with Newman, said Samuel Buell of Duke University’s School of Law.

“The perception of fairness is harmed if people believe that the legal rule is easy to get around,” he said.

No Date Set

The Supreme Court hasn’t yet said whether it will hear arguments in its current term, which runs through the end of June, or wait until the nine-month term that starts in October.

Bharara, who declined to comment for this story, has called the Newman decision a “bonanza” for executives and fund managers leaking inside information, providing an “obvious map for unscrupulous investors.”

Michael Kimelman and his co-defendant, former Galleon Group LLC trader Zvi Goffer, are both challenging their insider- trading convictions, noting the judge in their case is the same one who was reversed in the Newman decision. Tai Nguyen, who was convicted of passing tips to a former SAC Capital Advisors fund manager, has also asked for a review of his case.

“The more clarity there can be the better off defendants will be and people hoping never to be defendants will be,” said Greg Morvillo, Chiasson’s lawyer. “People on Wall Street deserve a bright line to know if they’re crossing it.”

— With assistance from Greg Stohr and Matt Robinson.

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