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13‐1837‐cr (L)
United States v. Newman and Chiasson
In the
United States Court of Appeals
For the Second Circuit
________
August Term, 2013
Nos. 13‐1837‐cr (L), 13‐1917‐cr (con)
UNITED STATES OF AMERICA,
Appellee,
v.
TODD NEWMAN, ANTHONY CHIASSON,
Defendants‐Appellants,
JON HORVATH, DANNY KUO, HYUNG G. LIM, MICHAEL STEINBERG,
Defendants.1
________
Appeal from the United States District Court
for the Southern District of New York.
No. 12 CR 121(RJS) ― Richard J. Sullivan, Judge.
________
Argued: April 22, 2014
Decided: December 10, 2014
________
1 The Clerk of Court is directed to amend the caption as set forth above.
2 Nos. 13‐1837‐cr; 13‐1917‐cr
Before: WINTER, PARKER, and HALL, Circuit Judges.
________
Defendants‐appellants Todd Newman and Anthony Chiasson
appeal from judgments of conviction entered on May 9, 2013, and
May 14, 2013, respectively, in the United States District Court for the
Southern District of New York (Richard J. Sullivan, J.) following a
six‐week jury trial on charges of conspiracy to commit insider
trading and insider trading in violation of 18 U.S.C. § 371, sections
10(b) and 32 of the Securities Exchange Act of 1934, SEC Rules 10b‐5
and 10b5‐2, and 18 U.S.C. § 2. Because the Government failed to
present sufficient evidence that the defendants willfully engaged in
substantive insider trading or a conspiracy to commit insider trading
in violation of the federal securities laws, we reverse Newman and
Chiasson’s convictions and remand with instructions to dismiss the
indictment as it pertains to them with prejudice.
________
STEPHEN FISHBEIN (John A. Nathanson, Jason M.
Swergold, on the brief), Shearman & Sterling LLP,
New York, NY, for Defendant‐Appellant Todd
Newman.
MARK F. POMERANTZ (Matthew J. Carhart;
Alexandra A.E. Shapiro, Daniel J. O’Neill, Jeremy
Licht, Shapiro, Arato & Isserles LLP, New York,
NY; Gregory R. Morvillo, Morvillo LLP, New
York, NY on the brief), Paul, Weiss, Rifkind,
Wharton & Garrison LLP, New York, NY, for
Defendant‐Appellant Anthony Chiasson.
ANTONIA M. APPS (Richard C. Tarlowe, Micah
W.J. Smith, Brent S. Wible, on the brief), Assistant
3 Nos. 13‐1837‐cr; 13‐1917‐cr
United States Attorneys for Preet Bharara, United
States Attorney, Southern District of New York,
New York, NY, for Appellee.
Ira M. Feinberg, Jordan L. Estes, Hagan Scotten,
Hogan Lovells US LLP, New York, NY; Joshua L.
Dratel, Law Offices of Joshua L. Dratel, P.C., New
York, NY, for Amicus Curiae National Association of
Criminal Defense Lawyers.
________
BARRINGTON D. PARKER, Circuit Judge:
Defendants‐appellants Todd Newman and Anthony Chiasson
appeal from judgments of conviction entered on May 9, 2013, and
May 14, 2013, respectively in the United States District Court for the
Southern District of New York (Richard J. Sullivan, J.) following a
six‐week jury trial on charges of securities fraud in violation of
sections 10(b) and 32 of the Securities Exchange Act of 1934 (the
“1934 Act”), 48 Stat. 891, 904 (codified as amended at 15 U.S.C. §§
78j(b), 78ff), Securities and Exchange Commission (SEC) Rules 10b‐5
and 10b5‐2 (codified at 17 C.F.R. §§ 240.10b‐5, 240.10b5‐2), and 18
U.S.C. § 2, and conspiracy to commit securities fraud in violation of
18 U.S.C. § 371.
The Government alleged that a cohort of analysts at various
hedge funds and investment firms obtained material, nonpublic
information from employees of publicly traded technology
companies, shared it amongst each other, and subsequently passed
this information to the portfolio managers at their respective
companies. The Government charged Newman, a portfolio
manager at Diamondback Capital Management, LLC
(“Diamondback”), and Chiasson, a portfolio manager at Level
4 Nos. 13‐1837‐cr; 13‐1917‐cr
Global Investors, L.P. (“Level Global”), with willfully participating
in this insider trading scheme by trading in securities based on the
inside information illicitly obtained by this group of analysts. On
appeal, Newman and Chiasson challenge the sufficiency of the
evidence as to several elements of the offense, and further argue that
the district court erred in failing to instruct the jury that it must find
that a tippee knew that the insider disclosed confidential
information in exchange for a personal benefit.
We agree that the jury instruction was erroneous because we
conclude that, in order to sustain a conviction for insider trading, the
Government must prove beyond a reasonable doubt that the tippee
knew that an insider disclosed confidential information and that he
did so in exchange for a personal benefit. Moreover, we hold that
the evidence was insufficient to sustain a guilty verdict against
Newman and Chiasson for two reasons. First, the Government’s
evidence of any personal benefit received by the alleged insiders
was insufficient to establish the tipper liability from which
defendants’ purported tippee liability would derive. Second, even
assuming that the scant evidence offered on the issue of personal
benefit was sufficient, which we conclude it was not, the
Government presented no evidence that Newman and Chiasson
knew that they were trading on information obtained from insiders
in violation of those insiders’ fiduciary duties.
Accordingly, we reverse the convictions of Newman and
Chiasson on all counts and remand with instructions to dismiss the
indictment as it pertains to them with prejudice.
BACKGROUND
This case arises from the Government’s ongoing investigation
into suspected insider trading activity at hedge funds. On January
18, 2012, the Government unsealed charges against Newman,
5 Nos. 13‐1837‐cr; 13‐1917‐cr
Chiasson, and several other investment professionals. On February
7, 2012, a grand jury returned an indictment. On August 28, 2012, a
twelve‐count Superseding Indictment S2 12 Cr. 121 (RJS) (the
“Indictment”) was filed. Count One of the Indictment charged
Newman, Chiasson, and a co‐defendant with conspiracy to commit
securities fraud, in violation of 18 U.S.C. § 371. Each of Counts Two
through Five charged Newman and each of Counts Six through Ten
charged Chiasson with securities fraud, in violation of sections 10(b)
and 32 of the 1934 Act, SEC Rules 10b‐5 and 105b‐2, and 18 U.S.C. §
2. A co‐defendant was charged with securities fraud in Counts
Eleven and Twelve.
At trial, the Government presented evidence that a group of
financial analysts exchanged information they obtained from
company insiders, both directly and more often indirectly.
Specifically, the Government alleged that these analysts received
information from insiders at Dell and NVIDIA disclosing those
companies’ earnings numbers before they were publicly released in
Dell’s May 2008 and August 2008 earnings announcements and
NVIDIA’s May 2008 earnings announcement. These analysts then
passed the inside information to their portfolio managers, including
Newman and Chiasson, who, in turn, executed trades in Dell and
NVIDIA stock, earning approximately $4 million and $68 million,
respectively, in profits for their respective funds.
Newman and Chiasson were several steps removed from the
corporate insiders and there was no evidence that either was aware
of the source of the inside information. With respect to the Dell
tipping chain, the evidence established that Rob Ray of Dell’s
investor relations department tipped information regarding Dell’s
consolidated earnings numbers to Sandy Goyal, an analyst at
Neuberger Berman. Goyal in turn gave the information to
Diamondback analyst Jesse Tortora. Tortora in turn relayed the
6 Nos. 13‐1837‐cr; 13‐1917‐cr
information to his manager Newman as well as to other analysts
including Level Global analyst Spyridon “Sam” Adondakis.
Adondakis then passed along the Dell information to Chiasson,
making Newman and Chiasson three and four levels removed from
the inside tipper, respectively.
With respect to the NVIDIA tipping chain, the evidence
established that Chris Choi of NVIDIA’s finance unit tipped inside
information to Hyung Lim, a former executive at technology
companies Broadcom Corp. and Altera Corp., whom Choi knew
from church. Lim passed the information to co‐defendant Danny
Kuo, an analyst at Whittier Trust. Kuo circulated the information to
the group of analyst friends, including Tortora and Adondakis, who
in turn gave the information to Newman and Chiasson, making
Newman and Chiasson four levels removed from the inside tippers.
Although Ray and Choi have yet to be charged
administratively, civilly, or criminally for insider trading or any
other wrongdoing, the Government charged that Newman and
Chiasson were criminally liable for insider trading because, as
sophisticated traders, they must have known that information was
disclosed by insiders in breach of a fiduciary duty, and not for any
legitimate corporate purpose.
At the close of evidence, Newman and Chiasson moved for a
judgment of acquittal pursuant to Federal Rule of Criminal
Procedure 29. They argued that there was no evidence that the
corporate insiders provided inside information in exchange for a
personal benefit which is required to establish tipper liability under
Dirks v. S.E.C., 463 U.S. 646 (1983). Because a tippee’s liability
derives from the liability of the tipper, Newman and Chiasson
argued that they could not be found guilty of insider trading.
Newman and Chiasson also argued that, even if the corporate
7 Nos. 13‐1837‐cr; 13‐1917‐cr
insiders had received a personal benefit in exchange for the inside
information, there was no evidence that they knew about any such
benefit. Absent such knowledge, appellants argued, they were not
aware of, or participants in, the tippers’ fraudulent breaches of
fiduciary duties to Dell or NVIDIA, and could not be convicted of
insider trading under Dirks. In the alternative, appellants requested
that the court instruct the jury that it must find that Newman and
Chiasson knew that the corporate insiders had disclosed confidential
information for personal benefit in order to find them guilty.
The district court reserved decision on the Rule 29 motions.
With respect to the appellants’ requested jury charge, while the
district court acknowledged that their position was “supportable
certainly by the language of Dirks,” Tr. 3595:10‐12, it ultimately
found that it was constrained by this Court’s decision in S.E.C. v.
Obus, 693 F.3d 276 (2d Cir. 2012), which listed the elements of tippee
liability without enumerating knowledge of a personal benefit
received by the insider as a separate element. Tr. 3604:3‐3605:5.
Accordingly, the district court did not give Newman and Chiasson’s
proposed jury instruction. Instead, the district court gave the
following instructions on the tippers’ intent and the personal benefit
requirement:
Now, if you find that Mr. Ray and/or Mr. Choi had a fiduciary
or other relationship of trust and confidence with their
employers, then you must next consider whether the
[G]overnment has proven beyond a reasonable doubt that
they intentionally breached that duty of trust and confidence
by disclosing material[,] nonpublic information for their own
benefit.
Tr. 4030.
8 Nos. 13‐1837‐cr; 13‐1917‐cr
On the issue of the appellants’ knowledge, the district court
instructed the jury:
To meet its burden, the [G]overnment must also prove beyond
a reasonable doubt that the defendant you are considering
knew that the material, nonpublic information had been
disclosed by the insider in breach of a duty of trust and
confidence. The mere receipt of material, nonpublic
information by a defendant, and even trading on that
information, is not sufficient; he must have known that it was
originally disclosed by the insider in violation of a duty of
confidentiality.
Tr. 4033:14‐22.
On December 17, 2012, the jury returned a verdict of guilty on
all counts. The district court subsequently denied the appellants’
Rule 29 motions.
On May 2, 2013, the district court sentenced Newman to an
aggregate term of 54 months’ imprisonment, to be followed by one
year of supervised release, imposed a $500 mandatory special
assessment, and ordered Newman to pay a $1 million fine and to
forfeit $737,724. On May 13, 2013, the district court sentenced
Chiasson to an aggregate term of 78 months’ imprisonment, to be
followed by one year of supervised release, imposed a $600
mandatory special assessment, and ordered him to pay a $5 million
fine and forfeiture in an amount not to exceed $2 million.2 This
appeal followed.
2 The district court subsequently set the forfeiture amount at $1,382,217.
9 Nos. 13‐1837‐cr; 13‐1917‐cr
DISCUSSION
Newman and Chiasson raise a number of arguments on
appeal. Because we conclude that the jury instructions were
erroneous and that there was insufficient evidence to support the
convictions, we address only the arguments relevant to these issues.
We review jury instructions de novo with regard to whether the jury
was misled or inadequately informed about the applicable law. See
United States v. Moran‐Toala, 726 F.3d 334, 344 (2d Cir. 2013).
I. The Law of Insider Trading
Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), prohibits the
use “in connection with the purchase or sale of any security . . . [of]
any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission may
prescribe . . . .” Although Section 10(b) was designed as a catch‐all
clause to prevent fraudulent practices, Ernst & Ernst v. Hochfelder,
425 U.S. 185, 202‐06 (1976), neither the statute nor the regulations
issued pursuant to it, including Rule 10b‐5, expressly prohibit
insider trading. Rather, the unlawfulness of insider trading is
predicated on the notion that insider trading is a type of securities
fraud proscribed by Section 10(b) and Rule 10b‐5. See Chiarella v.
United States, 445 U.S. 222, 226‐30 (1980).
A. The “Classical” and “Misappropriation” Theories of
Insider Trading
The classical theory holds that a corporate insider (such as an
officer or director) violates Section 10(b) and Rule 10b‐5 by trading
in the corporation’s securities on the basis of material, nonpublic
information about the corporation. Id. at 230. Under this theory,
there is a special “relationship of trust and confidence between the
shareholders of a corporation and those insiders who have obtained
confidential information by reason of their position within that
10 Nos. 13‐1837‐cr; 13‐1917‐cr
corporation.” Id. at 228. As a result of this relationship, corporate
insiders that possess material, nonpublic information have “a duty
to disclose [or to abstain from trading] because of the ‘necessity of
preventing a corporate insider from . . . tak[ing] unfair advantage of
. . . uninformed . . . stockholders.’” Id. at 228‐29 (citation omitted).
In accepting this theory of insider trading, the Supreme Court
explicitly rejected the notion of “a general duty between all
participants in market transactions to forgo actions based on
material, nonpublic information.” Id. at 233. Instead, the Court
limited the scope of insider trading liability to situations where the
insider had “a duty to disclose arising from a relationship of trust
and confidence between parties to a transaction,” such as that
between corporate officers and shareholders. Id. at 230.
An alternative, but overlapping, theory of insider trading
liability, commonly called the “misappropriation” theory, expands
the scope of insider trading liability to certain other “outsiders,”
who do not have any fiduciary or other relationship to a corporation
or its shareholders. Liability may attach where an “outsider”
possesses material non‐public information about a corporation and
another person uses that information to trade in breach of a duty
owed to the owner. United States v. O’Hagan, 521 U.S. 642, 652‐53
(1997); United States v. Libera, 989 F.2d 596, 599‐600 (2d Cir. 1993). In
other words, such conduct violates Section 10(b) because the
misappropriator engages in deception by pretending “loyalty to the
principal while secretly converting the principal’s information for
personal gain.” Obus, 693 F.3d at 285 (citations omitted).
B. Tipping Liability
The insider trading case law, however, is not confined to
insiders or misappropriators who trade for their own accounts. Id.
at 285. Courts have expanded insider trading liability to reach
situations where the insider or misappropriator in possession of
11 Nos. 13‐1837‐cr; 13‐1917‐cr
material nonpublic information (the “tipper”) does not himself trade
but discloses the information to an outsider (a “tippee”) who then
trades on the basis of the information before it is publicly disclosed.
See Dirks, 463 U.S. at 659. The elements of tipping liability are the
same, regardless of whether the tipper’s duty arises under the
“classical” or the “misappropriation” theory. Obus, 693 F.3d at 285‐
86.
In Dirks, the Supreme Court addressed the liability of a tippee
analyst who received material, nonpublic information about possible
fraud at an insurance company from one of the insurance company’s
former officers. Dirks, 463 U.S. at 648‐49. The analyst relayed the
information to some of his clients who were investors in the
insurance company, and some of them, in turn, sold their shares
based on the analyst’s tip. Id. The SEC charged the analyst Dirks
with aiding and abetting securities fraud by relaying confidential
and material inside information to people who traded the stock.
In reviewing the appeal, the Court articulated the general
principle of tipping liability: “Not only are insiders forbidden by
their fiduciary relationship from personally using undisclosed
corporate information to their advantage, but they may not give
such information to an outsider for the same improper purpose of
exploiting the information for their personal gain.” Id. at 659
(citation omitted). The test for determining whether the corporate
insider has breached his fiduciary duty “is whether the insider
personally will benefit, directly or indirectly, from his disclosure.
Absent some personal gain, there has been no breach of duty . . . .” Id. at
662 (emphasis added).
The Supreme Court rejected the SEC’s theory that a recipient
of confidential information (i.e. the “tippee”) must refrain from
trading “whenever he receives inside information from an insider.”
Id. at 655. Instead, the Court held that “[t]he tippee’s duty to
12 Nos. 13‐1837‐cr; 13‐1917‐cr
disclose or abstain is derivative from that of the insider’s duty.” Id.
at 659. Because the tipper’s breach of fiduciary duty requires that he
“personally will benefit, directly or indirectly, from his disclosure,”
id. at 662, a tippee may not be held liable in the absence of such
benefit. Moreover, the Supreme Court held that a tippee may be
found liable “only when the insider has breached his fiduciary duty .
. . and the tippee knows or should know that there has been a
breach.” Id. at 660 (emphasis added). In Dirks, the corporate insider
provided the confidential information in order to expose a fraud in
the company and not for any personal benefit, and thus, the Court
found that the insider had not breached his duty to the company’s
shareholders and that Dirks could not be held liable as tippee.
E. Mens Rea
Liability for securities fraud also requires proof that the
defendant acted with scienter, which is defined as “a mental state
embracing intent to deceive, manipulate or defraud.” Hochfelder, 425
U.S. at 193 n.12. In order to establish a criminal violation of the
securities laws, the Government must show that the defendant acted
“willfully.” 15 U.S.C. § 78ff(a). We have defined willfulness in this
context “as a realization on the defendant’s part that he was doing a
wrongful act under the securities laws.” United States v. Cassese, 428
F.3d 92, 98 (2d Cir. 2005) (internal quotation marks and citations
omitted); see also United States v. Dixon, 536 F.2d 1388, 1395 (2d Cir.
1976) (holding that to establish willfulness, the Government must
“establish a realization on the defendant’s part that he was doing a
wrongful act . . . under the securities laws” and that such an act
“involve[d] a significant risk of effecting the violation that
occurred.”) (quotation omitted).
II. The Requirements of Tippee Liability
The Government concedes that tippee liability requires proof
of a personal benefit to the insider. Gov’t Br. 56. However, the
13 Nos. 13‐1837‐cr; 13‐1917‐cr
Government argues that it was not required to prove that Newman
and Chiasson knew that the insiders at Dell and NVIDIA received a
personal benefit in order to be found guilty of insider trading.
Instead, the Government contends, consistent with the district
court’s instruction, that it merely needed to prove that the
“defendants traded on material, nonpublic information they knew
insiders had disclosed in breach of a duty of confidentiality . . . .”
Gov’t Br. 58.
In support of this position, the Government cites Dirks for the
proposition that the Supreme Court only required that the “tippee
know that the tipper disclosed information in breach of a duty.” Id. at
40 (citing Dirks, 463 U.S. at 660) (emphasis added). In addition, the
Government relies on dicta in a number of our decisions post‐Dirks,
in which we have described the elements of tippee liability without
specifically stating that the Government must prove that the tippee
knew that the corporate insider who disclosed confidential
information did so for his own personal benefit. Id. at 41‐44 (citing,
inter alia, United States v. Jiau, 734 F.3d 147, 152‐53 (2d Cir. 2013);
Obus, 693 F.3d at 289; S.E.C. v. Warde, 151 F.3d 42, 48‐49 (2d Cir.
1998)). By selectively parsing this dictum, the Government seeks to
revive the absolute bar on tippee trading that the Supreme Court
explicitly rejected in Dirks.
Although this Court has been accused of being “somewhat
Delphic” in our discussion of what is required to demonstrate tippee
liability, United States v. Whitman, 904 F. Supp. 2d 363, 371 n.6
(S.D.N.Y. 2012), the Supreme Court was quite clear in Dirks. First,
the tippee’s liability derives only from the tipper’s breach of a
fiduciary duty, not from trading on material, non‐public
information. See Chiarella, 445 U.S. at 233 (noting that there is no
“general duty between all participants in market transactions to
forgo actions based on material, nonpublic information”). Second,
the corporate insider has committed no breach of fiduciary duty
14 Nos. 13‐1837‐cr; 13‐1917‐cr
unless he receives a personal benefit in exchange for the disclosure.
Third, even in the presence of a tipper’s breach, a tippee is liable only
if he knows or should have known of the breach.
While we have not yet been presented with the question of
whether the tippee’s knowledge of a tipper’s breach requires
knowledge of the tipper’s personal benefit, the answer follows
naturally from Dirks. Dirks counsels us that the exchange of
confidential information for personal benefit is not separate from an
insider’s fiduciary breach; it is the fiduciary breach that triggers
liability for securities fraud under Rule 10b‐5. For purposes of
insider trading liability, the insider’s disclosure of confidential
information, standing alone, is not a breach. Thus, without
establishing that the tippee knows of the personal benefit received
by the insider in exchange for the disclosure, the Government
cannot meet its burden of showing that the tippee knew of a breach.
The Government’s overreliance on our prior dicta merely
highlights the doctrinal novelty of its recent insider trading
prosecutions, which are increasingly targeted at remote tippees
many levels removed from corporate insiders. By contrast, our prior
cases generally involved tippees who directly participated in the
tipper’s breach (and therefore had knowledge of the tipper’s
disclosure for personal benefit) or tippees who were explicitly
apprised of the tipper’s gain by an intermediary tippee. See, e.g.,
Jiau, 734 F.3d at 150 (“To provide an incentive, Jiau promised the
tippers insider information for their own private trading.”); United
States v. Falcone, 257 F.3d 226, 235 (2d Cir. 2001) (affirming
conviction of remote tipper where intermediary tippee paid the
inside tipper and had told remote tippee “the details of the
scheme”); Warde, 151 F.3d at 49 (tipper and tippee engaged in
parallel trading of the inside information and “discussed not only
the inside information, but also the best way to profit from it”);
United States v. Mylett, 97 F.3d 663 (2d Cir. 1996) (tippee acquired
15 Nos. 13‐1837‐cr; 13‐1917‐cr
inside information directly from his insider friend). We note that the
Government has not cited, nor have we found, a single case in which
tippees as remote as Newman and Chiasson have been held
criminally liable for insider trading.
Jiau illustrates the importance of this distinction quite clearly.
In Jiau, the panel was presented with the question of whether the
evidence at trial was sufficient to prove that the tippers personally
benefitted from their disclosure of insider information. In that
context, we summarized the elements of criminal liability as follows:
(1) the insider‐tippers . . . were entrusted the duty to protect
confidential information, which (2) they breached by
disclosing [the information] to their tippee . . . , who (3) knew
of [the tippers’] duty and (4) still used the information to trade
a security or further tip the information for [the tippee’s]
benefit, and finally (5) the insider‐tippers benefited in some
way from their disclosure.
Jiau, 734 F.3d at 152‐53 (citing Dirks, 463 U.S. at 659‐64; Obus, 693 F.
3d at 289). The Government relies on this language to argue that
Jiau is merely the most recent in a string of cases in which this Court
has found that a tippee, in order to be criminally liable for insider
trading, need know only that an insider‐tipper disclosed
information in breach of a duty of confidentiality. Gov’t Br. 43.
However, we reject the Government’s position that our cursory
recitation of the elements in Jiau suggests that criminal liability may
be imposed on a defendant based only on knowledge of a breach of
a duty of confidentiality. In Jiau, the defendant knew about the
benefit because she provided it. For that reason, we had no need to
reach the question of whether knowledge of a breach requires that a
tippee know that a personal benefit was provided to the tipper.
In light of Dirks, we find no support for the Government’s
contention that knowledge of a breach of the duty of confidentiality
16 Nos. 13‐1837‐cr; 13‐1917‐cr
without knowledge of the personal benefit is sufficient to impose
criminal liability. Although the Government might like the law to
be different, nothing in the law requires a symmetry of information
in the nation’s securities markets. The Supreme Court explicitly
repudiated this premise not only in Dirks, but in a predecessor case,
Chiarella v. United States. In Chiarella, the Supreme Court rejected
this Circuit’s conclusion that “the federal securities laws have
created a system providing equal access to information necessary for
reasoned and intelligent investment decisions . . . . because [material
non‐public] information gives certain buyers or sellers an unfair
advantage over less informed buyers and sellers.” 445 U.S. at 232.
The Supreme Court emphasized that “[t]his reasoning suffers from
[a] defect. . . . [because] not every instance of financial unfairness
constitutes fraudulent activity under § 10(b).” Id. See also United
States v. Chestman, 947 F.2d 551, 578 (2d Cir. 1991) (Winter, J.,
concurring) (“[The policy rationale [for prohibiting insider trading]
stops well short of prohibiting all trading on material nonpublic
information. Efficient capital markets depend on the protection of
property rights in information. However, they also require that
persons who acquire and act on information about companies be
able to profit from the information they generate . . . .”). Thus, in
both Chiarella and Dirks, the Supreme Court affirmatively
established that insider trading liability is based on breaches of
fiduciary duty, not on informational asymmetries. This is a critical
limitation on insider trading liability that protects a corporation’s
interests in confidentiality while promoting efficiency in the nation’s
securities markets.
As noted above, Dirks clearly defines a breach of fiduciary
duty as a breach of the duty of confidentiality in exchange for a
personal benefit. See Dirks, 463 U.S. at 662. Accordingly, we
conclude that a tippee’s knowledge of the insider’s breach
necessarily requires knowledge that the insider disclosed
17 Nos. 13‐1837‐cr; 13‐1917‐cr
confidential information in exchange for personal benefit. In
reaching this conclusion, we join every other district court to our
knowledge – apart from Judge Sullivan3 – that has confronted this
question. Compare United States v. Rengan Rajaratnam, No. 13‐211
(S.D.N.Y. July 1, 2014) (Buchwald, J.); United States v. Martoma, No.
12‐973 (S.D.N.Y. Feb. 4, 2014) (Gardephe, J.); United States v.
Whitman, 904 F. Supp. 2d 363, 371 (S.D.N.Y. 2012) (Rakoff, J.); United
States v. Raj Rajaratnam, 802 F. Supp. 2d 491, 499 (S.D.N.Y. 2011)
(Holwell, J.); State Teachers Retirement Bd. v. Fluor Corp., 592 F. Supp.
592, 594 (S.D.N.Y. 1984) (Sweet, J.),4 with United States v. Steinberg,
No. 12‐121, 2014 WL 2011685 at *5 (S.D.N.Y. May 15, 2014) (Sullivan,
J.), and United States v. Newman, No. 12‐121 (S.D.N.Y. Dec. 6, 2012)
(Sullivan, J.).5
3 Although the Government argues that district court decisions in S.E.C. v. Thrasher, 152
F. Supp. 2d 291 (S.D.N.Y. 2001) and S.E.C. v. Musella, 678 F. Supp. 1060 (S.D.N.Y. 1988)
support their position, these cases merely stand for the unremarkable proposition that a
tippee does not need to know the details of the insider’s disclosure of information. The
district courts determined that the tippee did not have to know for certain how
information was disclosed, Thrasher, 152 F. Supp. 2d at 304‐05, nor the identity of the
insiders, Musella, 678 F. Supp. at 1062‐63. This is not inconsistent with a requirement that
a defendant tippee understands that some benefit is being provided in return for the
information.
4 See also United States v. Santoro, 647 F. Supp. 153, 170‐71 (E.D.N.Y. 1986) (“An allegation
that the tippee knew of the tipper’s breach necessarily charges that the tippee knew that
the tipper was acting for personal gain.”) rev’d on other grounds sub nom. United States v.
Davidoff, 845 F.2d 1151 (2d Cir. 1988); Hernandez v. United States, 450 F. Supp. 2d 1112,
1118 (C.D. Cal. 2006) (“[U]nder the standard set forth in Dirks” a tippee can be liable
under Section 10(b) and Rule 10(b)‐5 “if the tippee had knowledge of the insider‐tipper’s
personal gain.”).
5 We note that Judge Sullivan had an opportunity to address the issue in Steinberg only
because the Government chose to charge Matthew Steinberg in the same criminal case as
Newman and Chiasson by filing a superseding indictment. Notably, the Government
superseded to add Steinberg on March 29, 2013, after the conclusion of the Newman trial,
after Judge Sullivan refused to give the defendants’ requested charge on scienter now at
issue on this appeal, and at a time when there was no possibility of a joint trial with the
Newman defendants.
18 Nos. 13‐1837‐cr; 13‐1917‐cr
Our conclusion also comports with well‐settled principles of
substantive criminal law. As the Supreme Court explained in Staples
v. United States, 511 U.S. 600, 605 (1994), under the common law,
mens rea, which requires that the defendant know the facts that make
his conduct illegal, is a necessary element in every crime. Such a
requirement is particularly appropriate in insider trading cases
where we have acknowledged “it is easy to imagine a . . . trader who
receives a tip and is unaware that his conduct was illegal and
therefore wrongful.” United States v. Kaiser, 609 F.3d 556, 569 (2d Cir.
2010). This is also a statutory requirement, because only “willful”
violations are subject to criminal provision. See United States v.
Temple, 447 F.3d 130, 137 (2d Cir. 2006) (“‘Willful’ repeatedly has
been defined in the criminal context as intentional, purposeful, and
voluntary, as distinguished from accidental or negligent”).
In sum, we hold that to sustain an insider trading conviction
against a tippee, the Government must prove each of the following
elements beyond a reasonable doubt: that (1) the corporate insider
was entrusted with a fiduciary duty; (2) the corporate insider
breached his fiduciary duty by (a) disclosing confidential
information to a tippee (b) in exchange for a personal benefit; (3) the
tippee knew of the tipper’s breach, that is, he knew the information
was confidential and divulged for personal benefit; and (4) the
tippee still used that information to trade in a security or tip another
individual for personal benefit. See Jiau, 734 F.3d at 152‐53; Dirks,
463 U.S. at 659‐64.
In view of this conclusion, we find, reviewing the charge as a
whole, United States v. Mitchell, 328 F.3d 77, 82 (2d Cir. 2003), that the
district court’s instruction failed to accurately advise the jury of the
law. The district court charged the jury that the Government had to
prove: (1) that the insiders had a “fiduciary or other relationship of
trust and confidence” with their corporations; (2) that they
“breached that duty of trust and confidence by disclosing material,
19 Nos. 13‐1837‐cr; 13‐1917‐cr
nonpublic information”; (3) that they “personally benefited in some
way” from the disclosure; (4) “that the defendant . . . knew the
information he obtained had been disclosed in breach of a duty”;
and (5) that the defendant used the information to purchase a
security. Under these instructions, a reasonable juror might have
concluded that a defendant could be criminally liable for insider
trading merely if such defendant knew that an insider had divulged
information that was required to be kept confidential. But a breach
of the duty of confidentiality is not fraudulent unless the tipper acts
for personal benefit, that is to say, there is no breach unless the
tipper “is in effect selling the information to its recipient for cash,
reciprocal information, or other things of value for himself. . . .”
Dirks, 463 U.S. at 664 (quotation omitted). Thus, the district court
was required to instruct the jury that the Government had to prove
beyond a reasonable doubt that Newman and Chiasson knew that
the tippers received a personal benefit for their disclosure.
The Government argues that any possible instructional error
was harmless because the jury could have found that Newman and
Chiasson inferred from the circumstances that some benefit was
provided to (or anticipated by) the insiders. Gov’t Br. 60. We
disagree.
An instructional error is harmless only if the Government
demonstrates that it is “clear beyond a reasonable doubt that a
rational jury would have found the defendant guilty absent the
error[.]” Neder v. United States, 527 U.S. 1, 17‐18 (1999); accord Moran‐
Toala, 726 F.3d at 345; United States v. Quattrone, 441 F.3d 153, 180 (2d
Cir. 2006). The harmless error inquiry requires us to view whether
the evidence introduced was “uncontested and supported by
overwhelming evidence” such that it is “clear beyond a reasonable
doubt that a rational jury would have found the defendant guilty
absent the error.” Neder, 527 U.S. at 18. Here both Chiasson and
Newman contested their knowledge of any benefit received by the
20 Nos. 13‐1837‐cr; 13‐1917‐cr
tippers and, in fact, elicited evidence sufficient to support a contrary
finding. Moreover, we conclude that the Government’s evidence of
any personal benefit received by the insiders was insufficient to
establish tipper liability from which Chiasson and Newman’s
purported tippee liability would derive.
III. Insufficiency of the Evidence
As a general matter, a defendant challenging the sufficiency of
the evidence bears a heavy burden, as the standard of review is
exceedingly deferential. United States v. Coplan, 703 F.3d 46, 62 (2d
Cir. 2012). Specifically, we “must view the evidence in the light
most favorable to the Government, crediting every inference that
could have been drawn in the Government’s favor, and deferring to
the jury’s assessment of witness credibility and its assessment of the
weight of the evidence.” Id. (citing United States v. Chavez, 549 F.3d
119, 124 (2d Cir. 2008)). Although sufficiency review is de novo, we
will uphold the judgments of conviction if “any rational trier of fact
could have found the essential elements of the crime beyond a
reasonable doubt.” Id. (citing United States v. Yannotti, 541 F.3d 112,
120 (2d Cir. 2008) (emphasis omitted); Jackson v. Virginia, 443 U.S.
307, 319 (1979)). This standard of review draws no distinction
between direct and circumstantial evidence. The Government is
entitled to prove its case solely through circumstantial evidence,
provided, of course, that the Government still demonstrates each
element of the charged offense beyond a reasonable doubt. United
States v. Lorenzo, 534 F.3d 153, 159 (2d Cir. 2008).
However, if the evidence “is nonexistent or so meager,” United
States v. Guadagna, 183 F.3d 122, 130 (2d Cir. 1999), such that it “gives
equal or nearly equal circumstantial support to a theory of guilt and
a theory of innocence, then a reasonable jury must necessarily
entertain a reasonable doubt,” Cassese, 428 F.3d at 99. Because few
events in the life of an individual are more important than a criminal
21 Nos. 13‐1837‐cr; 13‐1917‐cr
conviction, we continue to consider the “beyond a reasonable
doubt” requirement with utmost seriousness. Cassese, 428 F.3d at
102. Here, we find that the Government’s evidence failed to reach
that threshold, even when viewed in the light most favorable to it.
The circumstantial evidence in this case was simply too thin to
warrant the inference that the corporate insiders received any
personal benefit in exchange for their tips. As to the Dell tips, the
Government established that Goyal and Ray were not “close”
friends, but had known each other for years, having both attended
business school and worked at Dell together. Further, Ray, who
wanted to become a Wall Street analyst like Goyal, sought career
advice and assistance from Goyal. The evidence further showed
that Goyal advised Ray on a range of topics, from discussing the
qualifying examination in order to become a financial analyst to
editing Ray’s résumé and sending it to a Wall Street recruiter, and
that some of this assistance began before Ray began to provide tips
about Dell’s earnings. The evidence also established that Lim and
Choi were “family friends” that had met through church and
occasionally socialized together. The Government argues that these
facts were sufficient to prove that the tippers derived some benefit
from the tip. We disagree. If this was a “benefit,” practically
anything would qualify.
We have observed that “[p]ersonal benefit is broadly defined
to include not only pecuniary gain, but also, inter alia, any
reputational benefit that will translate into future earnings and the
benefit one would obtain from simply making a gift of confidential
information to a trading relative or friend.” Jiau, 734 F. 3d at 153
(internal citations, alterations, and quotation marks deleted). This
standard, although permissive, does not suggest that the
Government may prove the receipt of a personal benefit by the mere
fact of a friendship, particularly of a casual or social nature. If that
were true, and the Government was allowed to meet its burden by
22 Nos. 13‐1837‐cr; 13‐1917‐cr
proving that two individuals were alumni of the same school or
attended the same church, the personal benefit requirement would
be a nullity. To the extent Dirks suggests that a personal benefit may
be inferred from a personal relationship between the tipper and
tippee, where the tippee’s trades “resemble trading by the insider
himself followed by a gift of the profits to the recipient,” see 643 U.S.
at 664, we hold that such an inference is impermissible in the
absence of proof of a meaningfully close personal relationship that
generates an exchange that is objective, consequential, and
represents at least a potential gain of a pecuniary or similarly
valuable nature. In other words, as Judge Walker noted in Jiau, this
requires evidence of “a relationship between the insider and the
recipient that suggests a quid pro quo from the latter, or an intention
to benefit the [latter].” Jiau, 734 F. 3d at 153.
While our case law at times emphasizes language from Dirks
indicating that the tipper’s gain need not be immediately pecuniary, it
does not erode the fundamental insight that, in order to form the
basis for a fraudulent breach, the personal benefit received in
exchange for confidential information must be of some consequence.
For example, in Jiau, we noted that at least one of the corporate
insiders received something more than the ephemeral benefit of the
“value[] [of] [Jiau’s] friendship” because he also obtained access to
an investment club where stock tips and insight were routinely
discussed. Id. Thus, by joining the investment club, the tipper
entered into a relationship of quid quo pro with Jiau, and therefore
had the opportunity to access information that could yield future
pecuniary gain. Id; see also SEC v. Yun, 327 F.3d 1263, 1280 (11th Cir.
2003) (finding evidence of personal benefit where tipper and tippee
worked closely together in real estate deals and commonly split
commissions on various real estate transactions); SEC v. Sargent, 229
F.3d 68, 77 (1st Cir. 2000) (finding evidence of personal benefit when
23 Nos. 13‐1837‐cr; 13‐1917‐cr
the tipper passed information to a friend who referred others to the
tipper for dental work).
Here the “career advice” that Goyal gave Ray, the Dell tipper,
was little more than the encouragement one would generally expect
of a fellow alumnus or casual acquaintance. See, e.g., J. A. 2080
(offering “minor suggestions” on a resume), J.A. 2082 (offering
advice prior to an informational interview). Crucially, Goyal
testified that he would have given Ray advice without receiving
information because he routinely did so for industry colleagues.
Although the Government argues that the jury could have
reasonably inferred from the evidence that Ray and Goyal swapped
career advice for inside information, Ray himself disavowed that
any such quid pro quo existed. Further, the evidence showed Goyal
began giving Ray “career advice” over a year before Ray began
providing any insider information. Tr. 1514. Thus, it would not be
possible under the circumstances for a jury in a criminal trial to find
beyond a reasonable doubt that Ray received a personal benefit in
exchange for the disclosure of confidential information. See, e.g.,
United States v. D’Amato, 39 F.3d 1249, 1256 (2d Cir. 1994) (evidence
must be sufficient to “reasonably infer” guilt).
The evidence of personal benefit was even more scant in the
NVIDIA chain. Choi and Lim were merely casual acquaintances.
The evidence did not establish a history of loans or personal favors
between the two. During cross examination, Lim testified that he
did not provide anything of value to Choi in exchange for the
information. Tr. 3067‐68. Lim further testified that Choi did not
know that Lim was trading NVIDIA stock (and in fact for the
relevant period Lim did not trade stock), thus undermining any
inference that Choi intended to make a “gift” of the profits earned
on any transaction based on confidential information.
24 Nos. 13‐1837‐cr; 13‐1917‐cr
Even assuming that the scant evidence described above was
sufficient to permit the inference of a personal benefit, which we
conclude it was not, the Government presented absolutely no
testimony or any other evidence that Newman and Chiasson knew
that they were trading on information obtained from insiders, or
that those insiders received any benefit in exchange for such
disclosures, or even that Newman and Chiasson consciously
avoided learning of these facts. As discussed above, the
Government is required to prove beyond a reasonable doubt that
Newman and Chiasson knew that the insiders received a personal
benefit in exchange for disclosing confidential information.
It is largely uncontroverted that Chiasson and Newman, and
even their analysts, who testified as cooperating witnesses for the
Government, knew next to nothing about the insiders and nothing
about what, if any, personal benefit had been provided to them.
Adondakis said that he did not know what the relationship between
the insider and the first‐level tippee was, nor was he aware of any
personal benefits exchanged for the information, nor did he
communicate any such information to Chiasson. Adondakis
testified that he merely told Chiasson that Goyal “was talking to
someone within Dell,” and that a friend of a friend of Tortora’s
would be getting NVIDIA information. Tr. 1708, 1878. Adondakis
further testified that he did not specifically tell Chiasson that the
source of the NVIDIA information worked at NVIDIA. Similarly,
Tortora testified that, while he was aware Goyal received
information from someone at Dell who had access to “overall”
financial numbers, he was not aware of the insider’s name, or
position, or the circumstances of how Goyal obtained the
information. Tortora further testified that he did not know whether
Choi received a personal benefit for disclosing inside information
regarding NVIDIA.
25 Nos. 13‐1837‐cr; 13‐1917‐cr
The Government now invites us to conclude that the jury
could have found that the appellants knew the insiders disclosed the
information “for some personal reason rather than for no reason at
all.” Gov’t Br. 65. But the Supreme Court affirmatively rejected the
premise that a tipper who discloses confidential information
necessarily does so to receive a personal benefit. See Dirks, 463 U.S.
at 661‐62 (“All disclosures of confidential corporate information are
not inconsistent with the duty insiders owe to shareholders”).
Moreover, it is inconceivable that a jury could conclude, beyond a
reasonable doubt, that Newman and Chiasson were aware of a
personal benefit, when Adondakis and Tortora, who were more
intimately involved in the insider trading scheme as part of the
“corrupt” analyst group, disavowed any such knowledge.
Alternatively, the Government contends that the specificity,
timing, and frequency of the updates provided to Newman and
Chiasson about Dell and NVIDIA were so “overwhelmingly
suspicious” that they warranted various material inferences that
could support a guilty verdict. Gov’t Br. 65. Newman and Chiasson
received four updates on Dell’s earnings numbers in the weeks
leading up to its August 2008 earnings announcement. Similarly,
Newman and Chiasson received multiple updates on NVIDIA’s
earnings numbers between the close of the quarter and the
company’s earnings announcement. The Government argues that
given the detailed nature and accuracy of these updates, Newman
and Chiasson must have known, or deliberately avoided knowing,
that the information originated with corporate insiders, and that
those insiders disclosed the information in exchange for a personal
benefit. We disagree.
Even viewed in the light most favorable to the Government,
the evidence presented at trial undermined the inference of
knowledge in several ways. The evidence established that analysts
at hedge funds routinely estimate metrics such as revenue, gross
26 Nos. 13‐1837‐cr; 13‐1917‐cr
margin, operating margin, and earnings per share through
legitimate financial modeling using publicly available information
and educated assumptions about industry and company trends. For
example, on cross‐examination, cooperating witness Goyal testified
that under his financial model on Dell, when he ran the model in
January 2008 without any inside information, he calculated May
2008 quarter results of $16.071 billion revenue, 18.5% gross margin,
and $0.38 earnings per share. Tr. 1566. These estimates came very
close to Dell’s reported earnings of $16.077 billion revenue; 18.4%
gross margin, and $0.38 earnings per share. Appellants also elicited
testimony from the cooperating witnesses and investor relations
associates that analysts routinely solicited information from
companies in order to check assumptions in their models in advance
of earnings announcements. Goyal testified that he frequently spoke
to internal relations departments to run his model by them and ask
whether his assumptions were “too high or too low” or in the “ball
park,” which suggests analysts routinely updated numbers in
advance of the earnings announcements. Tr. 1511. Ray’s supervisor
confirmed that investor relations departments routinely assisted
analysts with developing their models
Moreover, the evidence established that NVIDIA and Dell’s
investor relations personnel routinely “leaked” earnings data in
advance of quarterly earnings. Appellants introduced examples in
which Dell insiders, including the head of Investor Relations, Lynn
Tyson, selectively disclosed confidential quarterly financial
information arguably similar to the inside information disclosed by
Ray and Choi to establish relationships with financial firms who
might be in a position to buy Dell’s stock. For example, appellants
introduced an email Tortora sent Newman summarizing a
conversation he had with Tyson in which she suggested “low 12%
opex [was] reasonable” for Dell’s upcoming quarter and that she
27 Nos. 13‐1837‐cr; 13‐1917‐cr
was “fairly confident on [operating margin] and [gross margin].”
Tr. 568:18‐581:23.
No reasonable jury could have found beyond a reasonable
doubt that Newman and Chiasson knew, or deliberately avoided
knowing, that the information originated with corporate insiders. In
general, information about a firm’s finances could certainly be
sufficiently detailed and proprietary to permit the inference that the
tippee knew that the information came from an inside source. But in
this case, where the financial information is of a nature regularly and
accurately predicted by analyst modeling, and the tippees are
several levels removed from the source, the inference that
defendants knew, or should have known, that the information
originated with a corporate insider is unwarranted.
Moreover, even if detail and specificity could support an
inference as to the nature of the source, it cannot, without more,
permit an inference as to that source’s improper motive for
disclosure. That is especially true here, where the evidence showed
that corporate insiders at Dell and NVIDIA regularly engaged with
analysts and routinely selectively disclosed the same type of
information. Thus, in light of the testimony (much of which was
adduced from the Government’s own witnesses) about the accuracy
of the analysts’ estimates and the selective disclosures by the
companies themselves, no rational jury would find that the tips were
so overwhelmingly suspicious that Newman and Chiasson either
knew or consciously avoided knowing that the information came
from corporate insiders or that those insiders received any personal
benefit in exchange for the disclosure.
In short, the bare facts in support of the Government’s theory
of the case are as consistent with an inference of innocence as one of
guilt. Where the evidence viewed in the light most favorable to the
prosecution gives equal or nearly equal circumstantial support to a
28 Nos. 13‐1837‐cr; 13‐1917‐cr
theory of innocence as a theory of guilt, that evidence necessarily
fails to establish guilt beyond a reasonable doubt. See United States
v. Glenn, 312 F.3d 58, 70 (2d Cir. 2002). Because the Government
failed to demonstrate that Newman and Chiasson had the intent to
commit insider trading, it cannot sustain the convictions on either
the substantive insider trading counts or the conspiracy count.
United States v. Gaviria, 740 F.2d 174, 183 (2d Cir. 1984) (“[W]here the
crime charged is conspiracy, a conviction cannot be sustained unless
the Government establishes beyond a reasonable doubt that the
defendant had the specific intent to violate the substantive statute.”)
(internal quotation marks omitted). Consequently, we reverse
Newman and Chiasson’s convictions and remand with instructions
to dismiss the indictment as it pertains to them.
CONCLUSION
For the foregoing reasons, we vacate the convictions and
remand for the district court to dismiss the indictment with
prejudice as it pertains to Newman and Chiasson.