Lessons for Hedge Fund Managers From the Government’s Failed Prosecution of Alleged Insider Trading Under Wire and Securities Fraud Laws

The Supreme Court stated clearly in Chiarella v. United States that the mere fact that a person receives material nonpublic information and executes a trade based on that information does not constitute a crime. But judicial intervention has not stopped the government from trying to come up with novel theories by which to prosecute so-called “remote tippees” – recipients of information several steps removed from the corporate insiders at the beginning of the chain – for insider trading. This is exactly what happened in the recent prosecution of Steven E. Slawson, co-founder of the hedge fund Titan Capital Management. In a guest article, Todd R. Harrison, lead trial counsel for Slawson and a partner at McDermott Will & Emery, discusses the government’s unsuccessful prosecution of Slawson and the wire and securities fraud statutes upon which it was based, analyzing the ramifications of the case for hedge fund managers. For additional insight from McDermott partners, see “SEC’s Hedge Fund Focus to Include Review of Funds That Outperform the Market” (Apr. 29, 2011). For recent coverage of insider trading issues, see “SEC Continues to Focus on Insider Trading and Fund Valuation” (Jun. 30, 2016); “Hedge Fund Managers Must Ensure That Insider Trading Compliance Policies and Procedures Cover Third-Party Consultants” (Jun. 9, 2016); and “SEC to Return Insider Trading Settlement Payment to Level Global” (Feb. 4, 2016).

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