This month the United States Court of Appeals for the Second Circuit overturned insider trading convictions of hedge fund managers Todd Newman and Anthony Chiasson. The Second Circuit ruling marked the first appellate decision in years to limit the scope of insider trading laws by finding that Newman and Chiasson were too removed from the source of the confidential tip, the so-called tippee. The implications of this Second Circuit ruling have yet to be seen, but it may open doors for others charged with insider trading to have their cases dismissed as well.

The case involved confidential information that passed through a chain of sources, and Newman and Chiasson relied on the information from analysts at their firms. At issue was the question of how much knowledge the hedge fund managers had on the source of the tip. The Second Circuit ruling held Newman and Chiasson were too far removed from the insider source of the confidential information to be liable for insider trading. The Court overturned the insider trading convictions due to Judge Richard J. Sullivan’s erroneous jury instructions in the trial court. The Court further found that the government did not introduce enough evidence to convict the defendants, so Newman and Chiasson’s case cannot be retried.

Under the Supreme Court ruling in Dirks v. S.E.C., a tippee is liable for insider trading if he or she knew that the tipper breached a duty to keep the information confidential. The elements that the government needs to meet require showing that the tipper owed a duty to not reveal the confidential information and that the tippee provided a benefit to the tipper. In Newman and Chiasson’s case, Judge Sullivan only instructed the jury that they need to find that the defendants knew the tipper breached a duty, leaving out the received benefit requirement.

The Second Circuit held that in order to prove an act of insider trading, the government must prove “beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit,” and, under this standard, the evidence was not sufficient to show that Newman and Chiasson committed wrongful trading. Without demonstrating a personal benefit, the Court found that “the government cannot meet its burden of showing that the tippee knew of a breach.”

The Second Circuit’s decision could possibly lead to dismissal of others’ insider trading charges. Michael Steinberg, whose appeal was waiting on this decision, was convicted of insider trading by Judge Sullivan, who presided over Newman and Chiasson’s case, for trading on the same information the hedge fund managers received, and is hoping to have his case dismissed based on the Second Circuit’s ruling. Southern District of New York Judge Andrew Carter stated his inclination to toss out four insider trading guilty pleas due to the Second Circuit’s decision, as its definition of insider trading no longer applies to his case. Although the Second Circuit’s decision is significant in clarifying the standard for insider trading prosecution, the decision applies to cases involving remote tippees or confidential information that passes through a string of sources, so it may not have much effect, if any, on insider trading prosecutions overall.