“What looks like insider trading to one federal judge might not rise to the level of a crime to another. Or, in the case of two hedge fund managers fighting their convictions, to another three judges.”

“Level Global Investors LP co-founder Anthony Chiasson and ex-Diamondback Capital Management LLC portfolio manager Todd Newman claim they were wrongfully convicted because jurors at their trial were told they only had to find that the defendants knew tips they traded on weren’t public.”

“Today, the two men will make their case to the U.S. Court of Appeals in New York. If the panel of three judges agrees with them, it may make insider-trading prosecutions more difficult, while also calling into question one of the biggest victories won in the U.S. government’s seven-year crackdown on Wall Street.”

“Prosecutors have argued that all they need to prove is that traders were aware information they used wasn’t public and breached a fiduciary duty, as they did in winning the conviction of SAC Capital Advisors LP fund manager Michael Steinberg. U.S. District Judge Richard Sullivan took the same position in that case as in the trial of Chiasson and Newman.”

Additional Elements

“But lawyers for the two men said at least three judges have required an additional element: that the traders also know the original source of the inside information received a benefit for the tip.”

“Jurors were required to find all three elements by U.S. District Judge Jed Rakoff, in the case of Whitman Capital LLC hedge fund founder Doug Whitman; former U.S. District Judge Richard Holwell, in the case of Galleon Group LLC co-founder Raj Rajaratnam and U.S. District Judge Paul Gardephe, in the trial of SAC Capital portfolio manager Mathew Martoma.”

“The government’s zeal to combat insider trading went too far in this case,” Marc Pomerantz and Greg Morvillo, lawyers for Chiasson, said in a memo to the court. “He was a remote tippee, removed from the insiders by four degrees of separation.”

“A ruling by the federal appeals court in favor of Chiasson and Newman may imperil the Steinberg conviction, which along with the conviction of Martoma was among the biggest victories for Manhattan U.S. Attorney Preet Bharara in his prosecutions of Wall Street wrongdoing, and at SAC Capital in particular.”

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Read full Bloomberg article here.