Appeal judges hint at doubts in insider case

New York: Preet Bharara's perfect record, 80 insider trading convictions without a single defeat, is in jeopardy.

The U.S. Court of Appeals in Manhattan on Tuesday picked apart the government's case against two former hedge fund traders, Todd Newman and Anthony Chiasson, questioning whether the judge in the trial erred when instructing jurors. In an hourlong hearing, a three-judge panel hinted that it might overturn the convictions, the first real threat to Bharara's sweeping campaign as a U.S. attorney to root out insider trading on Wall Street.

The prosecutor arguing the appeal for Bharara was on the defensive from the start. Before Antonia M. Apps even finished a sentence of her presentation, the appellate panel implied that Bharara's office had steered some insider trading trials to Judge Richard J. Sullivan, a lower-court judge in Manhattan.

Judge Barrington D. Parker of the appeals court, interrupting Apps, referred to Sullivan as the government's apparent "preferred venue" for insider trading cases. While Apps argued that consolidating the cases created "judicial efficiencies," Judge Ralph K. Winter noted the "sheer coincidence that the judge who bought into the government's theory" oversaw the recent trials.

It is not every day that Bharara's office is challenged over its Wall Street crackdown. Bharara, a 45-year-old former aide to Sen. Charles E. Schumer, D-N.Y., has seen his celebrity status rise with every case against a big bank or hedge fund. As his profile grew, Bharara appeared on the cover of Time magazine and fielded speculation about a run for public office. Even Bruce Springsteen - Bharara is a big fan - name-checked him at a concert.

A judicial chiding here or there will not slow his momentum, and legal experts said the appellate court could very well uphold the insider trading convictions. A reversal, however, might undercut one of his greatest achievements.

The appeal by Chiasson and Newman, which could take months to decide, has captivated the white-collar bar. A victory for Chiasson and Newman would offer a blueprint for traders to defend future insider trading cases and would imperil at least one other milestone conviction: Michael Steinberg, of SAC Capital Advisors, the once-giant hedge fund that Bharara indicted last year. When Sullivan presided over Steinberg's trial late last year, he provided a jury instruction similar to the one for the trial involving Chiasson and Newman.

Unlike other judges, Sullivan did not require jurors to conclude that Newman and Chiasson had known a critical detail when trading: that insiders were improperly leaking confidential information in exchange for some "personal benefit." Sullivan's instructions, the defense lawyers contended, ran afoul of a 30-year-old U.S. Supreme Court ruling that helped define insider trading.

"Judge Sullivan left a piece out of the equation," Mark F. Pomerantz, a lawyer at Paul, Weiss, Rifkind, Wharton & Garrison who argued the appeal for Chiasson, told the panel. Pomerantz, who is working alongside Alexandra Shapiro and Chaisson's trial lawyer, Gregory Morvillo, likened the case to the government claiming that there was an egg salad sandwich without proving that there were any eggs.

The argument appeared to strike a chord with the judges, whose persistent questioning of Apps contrasted with their scant interruptions of Chiasson's and Newman's lawyers. When the hearing ended, lawyers filed out of the courtroom buzzing about the prospect of the panel overturning the convictions.

But the appeal before the panel, which also included Judge Peter W. Hall, is hardly a foregone conclusion. It is unclear whether the U.S. Court of Appeals for the 2nd Circuit, a court known for siding with the government, will take the rare step of narrowing what constitutes insider trading. A panel's questioning in oral arguments does not always foreshadow the ruling.

To sow some doubt about the appeal, Apps pointed in the oral arguments to other cases that support Sullivan's jury instruction. And even if the appellate court takes issue with the technicalities of the instruction, Apps said, the error was "harmless," given the overwhelming weight of evidence presented at trial that Chiasson and Newman knowingly traded on confidential information.

After a five-week trial in late 2012, a jury convicted Newman and Chiasson of participating in what prosecutors called a "circle of greed" that generated roughly $70 million in illicit gains. Sullivan sentenced Newman, 49, to 4 1/2 half years in prison, while Chiasson, 40, received a 6 1/2 year sentence. The appellate court allowed both defendants to remain free on bail while awaiting the outcome of their appeal.

Like Steinberg at SAC Capital, Newman and Chiasson were far removed from insider leaks at two technology companies, Dell and Nvidia. Prosecutors placed them at the end of a four- or five-person chain of information that started with insiders at Dell and Nvidia and wound its way through a network of traders.

At Dell, the leaks came from Rob Ray, an employee in the computer maker's investor relations department. Ray shared advance earnings information with a former colleague, Sandeep Goyal, who in turn passed the tips on to two analysts who worked with Chiasson and Newman at their respective hedge funds, Level Global Investors and Diamondback Capital Management. Goyal and the analysts - who socialized in Manhattan and the Hamptons - later pleaded guilty and cooperated with the government.

Prosecutors never charged Ray, although insider trading cases require proof that someone like him wrongfully disclosed secret information in a breach of a duty to his company. Stephen Fishbein, a partner at Shearman & Sterling who is representing Newman, theorized that Ray was not charged "because there is not sufficient evidence of a breach or a benefit."

The appeal also hinges on what the Supreme Court intended in a 1983 ruling, Dirks v. Securities and Exchange Commission, that said a person could be guilty of insider trading only if he knew that the corporate insider leaking the information was breaching a duty to the company. When defining a breach, the court explained that "the test is whether the insider personally will benefit," adding, "Absent some personal gain, there has been no breach of duty."

For Ray, the gain was subtle: career advice from Goyal.

At the hearing, defense lawyers argued that Sullivan's instructions had tainted the verdict because he permitted the jurors to convict Chiasson and Newman without finding that the men knew of any quid pro quo. Newman and Chiasson were unaware that Ray received career advice from Goyal.

The argument gained traction among defense lawyers. Before the hearing on Tuesday, the National Association of Criminal Defense Lawyers filed a supporting legal brief warning that the convictions would have a chilling effect on Wall Street analysts gathering information.

The appellate judges seized on the vague nature of what constituted a personal benefit. Parker questioned the "amorphous theory" underpinning some of the government's case, noting that an air of uncertainty hung over Wall Street without a "bright line" to clarify what constituted illegal trading.

Parker also wondered how career advice could amount to a personal benefit. To illustrate his point, Parker questioned whether Apps would consider a hypothetical suggestion that she stand closer to the courtroom microphone to be a beneficial piece of advice.

Unfazed, Apps quipped in reply: "I'm not sure that's good career advice," prompting an uproar of laughter in the courtroom.

Despite the apparent skepticism of the panel, some legal experts said that the prosecution still had a good case. Alafair S. Burke, a professor of criminal law at Hofstra University School of Law, said that the defense lawyers had misinterpreted the ruling in Dirks v. SEC and that a tougher jury instruction would place "too high a burden on the government."

Underscoring the importance of the appeal, Bharara's top lieutenants attended the hearing: Richard B. Zabel, Lorin L. Reisner and Joon Kim grabbed seats in an overflow room next to the courtroom. Nearby was David Chaves, an FBI agent who supervised the investigations.

With their freedom at stake, Newman and Chiasson both attended the hearing. Chiasson sat next to his wife.

When Apps exited the courtroom, she flashed a smile. Despite the interrogation, two of the judges applauded her performance, saying she had done just "fine" under pressure.