(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Reynolds Holding
NEW YORK, May 15 (Reuters Breakingviews) - Are insider traders guilty if they don't know whether a source was paid? Is it securities fraud if a lie creates no personal gain? In New York, it all depends on the judge presiding. With the fates of SAC Capital hedgies, a former Citigroup (C.N) banker and others hanging in the balance, Wall Street could use some consistency from the courts.
As with so many hot-button legal issues, Judge Jed Rakoff is the man in the middle. During last year's insider trading trial of hedge fund manager Doug Whitman, for instance, he demanded proof that sources inside Google (GOOG.O) and elsewhere were compensated for indirectly tipping Whitman. Rakoff was following the lead of the judge in the trial of Galleon Group founder Raj Rajaratnam. Both cases ended with convictions.
In December, however, Judge Richard Sullivan veered from precedent and refused to require such proof in the insider-trading case against Todd Newman, a hedge fund manager at Diamondback Capital. Newman contends in the appeal of his conviction that Sullivan erred.
Rakoff and Sullivan are also at odds over Securities and Exchange lawsuits that allege another sort of fraud. Rakoff rejected former Citigroup banker Brian Stoker's claim last year that he couldn't be found liable for an allegedly misleading mortgage-bond deal unless he personally benefited from any deception. The judge said it was enough that the bank profited. Stoker was cleared anyhow.
Last March, though, Sullivan took the opposite view, bouncing a fraud claim against two former Freddie Mac FMCC.OB honchos because the SEC hadn't alleged a personal benefit. The case is still pending.
These courthouse clashes over legal nuance are causing frustration across Wall Street. Compensation for tipping confidential information is a big issue in the insider trading action against SAC Capital manager Michael Steinberg, and much to the chagrin of his lawyers, prosecutors got the case in front of Sullivan. The SEC's lawsuit against former Goldman Sachs (GS.N) banker Fabrice Tourre over the Abacus CDO also raises the personal benefit issue.
Insider trading and other financial frauds aren't necessarily well defined. Ideally, Congress would clarify matters. Partisan gridlock probably means the task will rest with judges. It would be nice if they could at least agree among themselves.
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- Former Diamondback Capital manager Todd Newman on May 10 requested release from prison during the appeal of his insider trading conviction last December. He argued that an errant jury instruction raises a substantial question of law, which is a condition for release. Newman claims the jury should have been told conviction requires proof that an insider trader knew that the original source of confidential information disclosed it for a personal benefit. U.S. district judges in New York have disagreed over whether such knowledge is required.
- Separately, former Freddie Mac executives Richard Syron and Patricia Cook on March 28 won their bid for dismissal of one Securities and Exchange Commission claim that they fraudulently misled investors about the housing agency's subprime mortgage portfolio. U.S. District Judge Richard Sullivan ruled that the SEC had failed to allege that the two officials received money or property in exchange for their alleged deceptions, even though their employer may have benefited. Other judges on the court have ruled differently, saying essentially that an employer's gain is enough to hold an employee liable for fraud.
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(Editing by Jeffrey Goldfarb and Martin Langfield)
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