Rappaport, Chianese Article on Impact of Newman, Payton Decisions Published by Hedge Fund Journal

Payton Begins to Clarify Newman Aftermath,” an article by Akin Gump litigation partner Douglas Rappaport and associate Christina Chianese, has been published by Hedge Fund Journal.

The article discusses the December 2014 decision issued by the 2nd Circuit in United States v. Newman, which, in the authors’ words, “attempted to provide further clarity and guidance” in determining “the exact line between permissible and impermissible training…particularly where information passes indirectly from tipper to tippee.” They note that the decision strove to “better delineate the boundaries of insider trading liability” in these scenarios.

After sketching out the specifics of Newman before the circuit court, they write that its decision dismissed charges against the two portfolio managers convicted of securities trading based on material non-public information. By doing so, the court “held that insider trading requires that: (1) the personal benefit provided to the tipper – which has long been recognized as a necessary precondition for tipper-tippee liability – must amount to a potential gain to the tipper of a pecuniary or similarly valuable nature and must resemble a quid pro quo; and (2) that a tippee defendant must know that the insider received a personal benefit.”

Rappaport and Chianese write that the Newman decision has been the subject of much commentary, even leading the government to abandon prosecution of some criminal cases. They then discuss the insider trading case SEC v. Payton, a post-Newman decision that they believe “sheds light on Newman’s application in the SEC civil enforcement context.” The judge in Payton, while recognizing the fundamental differences in the elements of the two cases, still held that Newman’s principles applied to both criminal Department of Justice prosecutions and civil SEC proceedings and denied defendants’ motion to dismiss the SEC’s civil complaint, pointing out the quid pro quo, personal benefit and bad intent aspects of the case.

The authors close by noting that the court’s ruling in Payton “may signal that Newman will have less of a limiting effect in the SEC civil enforcement context, where intent requirements are more relaxed, than in criminal cases,” adding that Newman’s impact “will continue to turn heavily on the admissible evidence of a sufficient personal benefit and the downstream tippees’ knowledge of the benefit.” They advise that, from a compliance perspective, “the best course remains to thoroughly evaluate any trading scenario presenting even a colourable risk of insider trading liability and err on the side of caution.”

To read the full article, please click here.