Recent Cases Reduce the Impact of Newman on Insider Trading Enforcement

The U.S. Court of Appeals for the Second Circuit, with its high-profile decision in U.S. v. Newman, has not enabled investment fund managers and their ilk to commit insider trading with impunity, free from consequence.  Although some commentators have taken a contrary view, that perspective is mistaken, as evidenced by a recent district court decision, and may lead some market participants to adopt risky behavior if not corrected.  For more on Newman, see “The Newman/Chiasson Decision Continues to Have Implications for Insider Trading Compliance,” Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015).  In April 2015, the Securities and Exchange Commission scored a significant victory in SEC v. Payton, obtaining the approval of the Honorable Jed S. Rakoff to pursue a civil enforcement action in the U.S. District Court for the Southern District of New York against two defendants accused of insider trading, notwithstanding the recent Newman decision.  While some commentators have questioned whether the Payton decision marks the beginning of an “erosion” of the insider trading framework recently overhauled in Newman and hailed in many corners of Wall Street, this belief is based upon multiple incorrect assumptions about Newman and its import, and both decisions’ impact on the hedge fund industry.  In a guest article, Marc R. Rosen, chair of the Litigation and Risk Management Department at Kleinberg, Kaplan, Wolff & Cohen, examines the recent insider trading landscape, discusses the Payton decision and explores its impact on the hedge fund community.  For more insight from Kleinberg, Kaplan, Wolff & Cohen, see “Insurance Dedicated Funds Offer Hedge Fund Exposure Plus Tax, Underwriting and Asset Protection Advantages for Investors,” Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013); and “How Do New Commodities Regulations Impact Hedge Fund Managers with Respect to Registration, Marketing, Trading, Audits and Drafting of Governing Documents?,” Hedge Fund Law Report, Vol. 5, No. 18 (May 3, 2012).

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