DOJ: Appeals Court Got It Wrong In Insider Trading Reversal


In a December 10th ruling, a federal appeals court reversed two key insider trading convictions.  However, in a new criminal insider trading case against 5 stockbrokers who traded on inside information, the DOJ argues that the appeals court was “dramatically wrong” in its ruling, suggesting that it is considering appealing the landmark ruling.

IBM Insider Trading Case

The Justice Department’s comments came in an insider trading case against four stockbrokers – Trent Martin, Thomas Conradt, David Weishaus and Daryl Payton – who admitted to trading on tips about IBM Corp.’s $1.2 billion purchase of software company SPSS Inc.   The fifth man, Benjamin Durant, pleaded not guilty.

The inside information purportedly came from a lawyer working on the deal who told his friend, Trent Martin, about it not expecting that Martin would pass the tip on to others or would trade on it himself.  Martin told his roommate, Conradt, who in turn shared it with stockbrokers Payton, Durant and Weishaus. The government charges that the five accused parties made more than $1 million from the tip.  The lawyer wasn’t charged with wrongdoing.

The judge presiding over the IBM case, U.S. District Judge Andrew Carter, told the defendants that he might throw out their guilty pleas because of the appeals court’s December 10th reversal.  The judge also delayed the start of a trial for Durant, who pleaded not guilty, until February 23rd.

In addition, the judge gave federal prosecutors until Jan. 23 to convince him that, given the appeals court ruling, he should not throw out their guilty pleas, noting he was “doubtful it’s going to succeed.”

The case is the U.S. versus Conradt, 12-cr-00887, U.S. District Court, Southern District of New York (Manhattan).

DOJ Response

In a court filing, government prosecutors explained that the appeals court decision shouldn’t affect the IBM case because the four men admitted to “misappropriating” or stealing the information. They also contend that the government shouldn’t also have to show that any personal benefit was provided for the inside information.

In commenting about the appeals court’s decision, assistant U.S. attorneys Jessica Masella and Andrew Bauer wrote that it “wrongly narrows” who can be prosecuted for obtaining nonpublic information from a company insider.

They added that the ruling “dramatically (and in our view, wrongly) departs from 30 years of controlling Supreme Court authority and, in so doing, legalizes manipulative and deceptive conduct that no court has ever sanctioned,” prosecutors said in a court filing Monday.

Assistant U.S. Attorney Masella told Judge Carter that her office was consulting with Justice Department officials on whether to challenge the appeals court’s decision. Prosecutors are considering asking for a rehearing of the case before a full panel of Manhattan judges.  If the government’s attempt at the full U.S. Court of Appeals fails, it might seek a review by the U.S. Supreme Court.

Appeals Court Ruling

The entire IBM insider trading case against the 5 defendants turns on a recent appeals court ruling.  Read here for more details.

On December 10th, 2014 the United States Court of Appeals for the Second Circuit in Manhattan overturned two of the government’s insider trading convictions achieved in the past few years, against hedge fund managers Todd Newman and Anthony Chiasson.

The court of appeals agreed with the defendants that they could not be found guilty of insider trading given the government’s lack of evidence that the corporate insiders at Dell and Nvidia provided inside information in exchange for a personal benefit.  Furthermore, the court concluded that even if the tippers had received a personal benefit, there was no evidence Newman or Chiasson knew about such benefit to prove they were participants in the tippers’ fraudulent breaches of fiduciary duties.

Some suggest that the appeals court ruling could be extremely good news for other insider trading cases awaiting appeal.  Michael Steinberg, of SAC Capital Advisors was also convicted of insider trading last year, and the judge who provided “erroneous instructions” to the jurors in  Newman’s and Chiasson’s trial was the same who presided over Steinberg’s case — Judge Richard J. Sullivan.

Integrity’s Take

Judge Carter’s instructions in the IBM / SPSS insider trading case make it clear that last month’s decision by the Second Circuit Court of Appeals to overturn the Chiasson and Newman convictions will make it considerably more difficult for the U.S. Government to successfully win insider trading cases in the future.

The real question now is whether the Department of Justice feels strongly enough to appeal this decision.  We think this is very likely as allowing the appeals court decision to stand could undo many of the gains that the DOJ has won over the past few years against hedge funds and other white collar criminals.


About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email:

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