WASHINGTON (AP) — The Supreme Court said Monday it won't hear the Obama administration's appeal of a lower court ruling that made it tougher to prosecute people for trading on leaked inside information.
The justices let stand a decision by the federal appeals court in New York last year that threw out insider trading convictions of two high-profile hedge fund managers.
The 2nd U.S. Circuit Court of Appeals overturned the convictions of Anthony Chiasson, of Manhattan, and Todd Newman, of Needham, Massachusetts, after finding they were too far removed from inside information to be prosecuted.
Prosecutors warned the ruling could hinder the government's campaign to curb insider trading on Wall Street, a crackdown that has resulted in more than 80 arrests and 70 convictions over several years.
Chiasson, who co-founded Level Global Investors based in Greenwich, Conn., and Newman, who had worked for Diamondback Capital Management based in Stamford, Conn., traded on tips from insiders on stock in technology companies Dell Inc. and Nvidia Corp. that generated $72 million in profits. The former portfolio managers were both convicted in December 2012.
The appeals court said prosecutors failed to present enough evidence the men willfully engaged in insider trading or conspired to break the law. It ruled that the government must show a person receiving a tip knew that an insider disclosed confidential information and that the tipster passed the information expecting a personal benefit.
In legal briefs filed with the court, Solicitor General Donald Verrilli said leaving the appeals court ruling in place would "hurt market participants, disadvantage scrupulous market analysts and impair the government's ability to protect the fairness and integrity of the securities markets."
Both men have denied insider trading. Their lawyers argued that they believed they were making trades based on legitimate research.
U.S. Attorney Preet Bharara in Manhattan told reporters on a conference call Monday that the Supreme Court's decision means "that there's a category of conduct that arguably will go unpunished going forward."
"If you have a CEO who has access to material, non-published information about earnings or anything else of a very sensitive nature and decides he wants to tip a relative or a buddy or a crony, knowing that person is going to trade on it to the tune and profit of millions of dollars, we would have to think long and hard, given Newman, whether to prosecute a person like that," Bharara said.
He said new laws or regulations could give the government, insiders and the public more clarity on the issue.
The U.S. Justice Department issued a statement Monday evening saying, "Despite the Supreme Court's decision not to review the convictions in these cases, the Justice Department will continue to vigorously enforce the laws against insider trading."
In a statement, Chiasson's attorney Gregory Morvillo said his client is "deeply gratified by this complete vindication." But Morvillo added that dozens of Chiasson's colleagues lost their jobs "at his thriving fund which became the collateral damage of this ill-conceived prosecution."
Nearly $62 million of the profits came as a result of tips from a Dell employee to a former Dell worker who spread the information among friends, some of whom worked at five investment houses, including three hedge funds.
When the men were arrested in 2012, prosecutors said the Dell trades represented the largest insider trading transaction ever prosecuted in Manhattan.
The case is United States v. Newman, 15-137.
Associated Press writer Larry Neumeister contributed to this report.