U.S. v Stewart: Newman’s first chink in the armor
Last week, ex-Perella Weinberg Partners LP banker, Sean Stewart, was convicted in the Southern District of New York with violations of the insider trading laws. The conviction comes in the wake of Newman, a case that seriously damaged the ability of the government to prove tipper-tippee insider trading, by requiring “a meaningfully close personal relationship that generates an exchange that … represents at least a potential gain of a pecuniary or similarly valuable nature,” for the tipper. U.S. v. Newman, 773 F.3d 438, 452 (2d Cir. 2014). Formerly, insider trading convictions required no such relationship, and the revelation of the holding led to multiple overturned convictions and ongoing litigation in several high profile cases. But as the Stewart case shows, the U.S. Attorney’s office is not backing away from insider trading cases, they are simply finding other ways to prosecute.
In Stewart, the government attacked the case from three angles to overcome the Newman hurdle by, 1) researching and alleging a “pecuniary gain,” 2) focusing on the close Father-Son relationship of the tipper-tippee in this case, and 3) charging under the “tender offer” standard. The tactics used by the government have overcome the first step in challenging the Newman paradigm. But, at what cost? It seems that the use of the very close familial relationship in this case explores an entirely new realm of prosecutorial discretion and legal substance. To prove insider trading, must the government now go after people who are discussing inside information within the context of a family relationship? In this case, they certainly used that as a focal point in proving a violation of the law.
In this case, unlike prior insider trading cases, heavy emphasis was put on finding and proving some pecuniary gain by Stewart. In this instance, the government was able to show that the Father used proceeds of insider trading to pay “expenses related to Sean Stewart’s wedding,” after pouring over Stewart’s Father’s bank accounts. Even if the idea that a pecuniary gain could be derived from a Father paying for expenses for his Son’s wedding is a violation of the law seems stretched, it was enough to overcome early challenges and resulted in a conviction. It is certain that if the government continues down this path there are any number of things that could be used within a familial relationship to prove pecuniary gain.
To prove a meaningfully close personal relationship the government focused on Stewart and his Father. Clearly, a family tie here distinguishes this case from the casual relationships between tippers-tippees in Newman. By focusing on the family relationship, the government strengthened the argument that the Court should rely on the close relationship and relax the pecuniary gain standard. In this case and others, it seems to be working. In fact, the Supreme Court has accepted Cert in a case from the Ninth Circuit, U.S. v. Salman. In that case, the tipper was the brother of one tippee and the brother-in-law of the other tippee. The Court did not require proof of a pecuniary quid pro quo, but relied on the close family relationship because gifting inside information to a close family member can be seen as a pecuniary gain for the tipper.
In the last prong of the government’s attack, they proceeded in an additional count under the tender offer rule. One of the five mergers that Stewart discussed with his Father involved a tender offer. Because the tender offer was not implicated in Newman, this is really just an additional charge in the Stewart case, not a direct attack on the rule laid down in Newman. Tender offer insider trading cases do not require tipping for a personal benefit in violation of a fiduciary or similar relationship. A tender offer prosecution only requires that the tipper have material information about a potential tender offer and “know, or have reason to know, the information (i) is nonpublic; and (ii) has been acquired from the tender offeror or the issuer of securities offered to be purchased.” So, even though the impact of this count does not directly apply, it points to the government recognizing that charging additional alternative crimes is in the game plan for future prosecutions.
In essence, the government has simply focused on closer relationships where they can show a specific pecuniary gain for the tipper. The tactics, though creative, do not overcome the obstacles laid down by Newman, they simply repackage the same types of insider trading claims while limiting the scope of the people they intend to prosecute. It seems that all that has happened is the government has focused on a more narrow set of individuals who have very close relationships, all familial thus far, and left the large scale arms length insider trading cases out of the equation. The slippery slope of enforcing insider trading against a small group of closely knit individuals seems short-sighted and does not address the policy issues related to insider trading on whole; The big fish get away while the government criminalizes family and close friends in small-ish trading scenarios. Instead of using criminal resources to closely examine a Father’s bank records for evidence that he provided some wedding expenses to his Son, resources would be better spent doing a deep dive into the relationships and bank records of this individuals who really deserve prosecution and leave the SEC to enforce the rest.
Despite the misgivings of the tactics and the true impact of these prosecutions on Newman, if any, the government has set its sights on moving ahead with insider trading prosecutions despite the circumstances. Despite the great strides gained by Newman, financial professionals are still at serious risk of prosecution. Only now they face serious inquiries into their personal lives and that of their families. The stakes are high and careful attention should be paid to all insider trading issues, especially in the context of family and close friends.