Court sets tougher standard on insider trading cases

Insider trading cases may get much tougher to prosecute after a U.S. appeals court overturned the convictions of two former hedge fund managers, challenging Manhattan U.S. Attorney Preet Bharara's Wall Street crackdown.

The Second U.S. Circuit Court of Appeals in Manhattan said Wednesday that prosecutors presented insufficient evidence to convict Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.

The court held that a trader or investor can only be convicted if he or she knows the original source of nonpublic information has received financial or other personal benefits of "some consequence" in exchange for the tip.

That ruling establishes a tougher standard that could make future insider trading cases substantially harder to prove and pave the way for one of Bharara's highest-profile convictions, involving Michael Steinberg, a former manager at SAC Capital, to be tossed out.

The ruling raises the bar for prosecuting people who are one or more layers removed from sources of confidential information, said Marc Powers, a securities lawyer with BakerHostetler.

Newman and Chiasson had been sentenced to 4 1/2 years and 6 1/2 years in prison, respectively, and had been out on bail pending appeal.

Bharara's office, in a five-year insider trading crackdown, had secured convictions of 82 other people, with one acquittal but no previous appellate reversals.

Bharara, in a statement, said he was considering an appeal of the ruling, which "will limit the ability to prosecute people who trade on leaked inside information."