Is “Operation Perfect Hedge” Unraveling?


Last week, U.S. prosecutors agreed to drop all charges against five men accused of insider trading ahead of IBM’s acquisition of SPSS due to a recent appeals court ruling which overturned two previous high profile insider trading convictions.  However, some experts believe that the new higher legal standard could lead to the unraveling of the government’s war on insider trading called “operation perfect hedge”.

Charges Dropped

On Thursday, U.S. prosecutors said they would drop charges against the five men accused of insider trading ahead of IBM Corp’s planned $1.2 bln acquisition of SPSS, Inc. (click here for more on this case).  This unusual decision was made as a result of a ruling made in December when a three judge panel at the 2nd U.S. Circuit Court of Appeals reversed the insider trading convictions of hedge fund managers Todd Newman and Anthony Chiasson.

Prosecutor, Andrew Bauer said that as a result of the heightened legal standard established by the appeals court ruling, “we do not have the requisite evidence to establish one of the elements of the crime.”

This decision follows U.S. District Court Judge Andrew Carter’s recent move to toss out the guilty pleas of Trent Martin, Thomas Conradt, David Weishaus and Daryl Payton — citing the 2nd Circuit Court of Appeals’ ruling.  The fifth defendant in the case, Benjamin Durant originally pleaded not guilty and intended to go to trial.  Durant recently filed a motion requesting that Judge Carter dismiss the indictment against him after the Judge allowed the other four defendants to pull their pleas.

Government’s Response

However, the move by US prosecutors shouldn’t be seen as a surrender on this issue.  Federal prosecutors have asked for an “en banc” hearing, in which the entire 2nd Circuit Court of Appeals (and not just a 3 judge panel) would reconsider its December opinion.  If it doesn’t prevail with the appeals court, the DOJ could also appeal its case to the U.S. Supreme Court.

At the heart of the problem for federal prosecutors is that the appellate court found that prosecutors must prove that someone accused of insider trading needs to know that the source of their tip received an actual benefit in exchange for the information.  The appeals court also narrowed what constitutes a benefit, saying that it cannot only be friendship.

US prosecutors are hoping that they can convince the appeals court to change or narrow its original opinion, or barring that can prevail before the Supreme Court.  If prosecutors are able to achieve either of these outcomes, they reserve the right to refile charges later against the IBM five.

Impact of this Decision

The IBM case marks the first time U.S. prosecutors have dropped insider trading charges in the wake of the Second Circuit Court of Appeals’ decision.  However, more importantly, the legal strategy used by the defendants to get their charges dropped could provide a road map for others challenging the government.

Apparently, a number of defendants who have either pleaded guilty to insider trading over the past five years, or who have been found guilty during trial have asked whether their cases might also be reversed.  Legal experts say the precedent established by the appeals court’s ruling threatens to overturn a number of other convictions, including the high profile conviction of former SAC Capital portfolio manager Michael Steinberg.

Clearly, this most recent IBM insider trading case is important to U.S. prosecutors as it could be evidence that the tide has finally turned against the government in its “war on insider trading” and that its “Operation Perfect Hedge” is beginning to unravel.



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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