An Insider Trading Case That Puts 2 Defendants at Odds

The New York Times on October 22, 2012 released the following:


The insider trading charges against Anthony Chiasson, a co-founder of Level Global Investors, and Todd Newman, a former portfolio manager at Diamondback Capital Management, has put the two defendants at odds and may end up with one implicating the other as part of a defense strategy.

The government has accused the two men of receiving inside information through a “circle of friends” who exchanged information about technology companies. Mr. Chiasson is charged with reaping the largest profits for his hedge fund — about $57 million — by shorting Dell shares before a negative earnings announcement in August 2008. Mr. Newman is also accused of trading in Dell at the same time, but in much smaller amounts.

The information was passed around among a group of analysts who have pleaded guilty and agreed to cooperate in the case. Unlike other recent insider trading cases, however, the government does not have wiretaps or other consensual recordings to show how the tips made their way to Mr. Chiasson and Mr. Newman. Thus, the case will ride on whether analysts who worked for the two defendants are believable witnesses for the prosecution.

One quirk in the case is that there is no direct connection between Mr. Chiasson and Mr. Newman, although they are charged with being members of the same conspiracy. They worked at different firms, and the information reached them by different paths. Neither has much incentive to cooperate by putting up a united front.

For the case against Mr. Chiasson, the indictment accuses him of receiving the inside information from Spyridon Adondakis, an analyst at Level Global who pleaded guilty to passing inside information.

According to recent filings in the case, one way Mr. Chiasson’s lawyers plan to attack Mr. Adondakis’s credibility is by showing that he rarely shared confidential information with Mr. Chiasson. To that end, the defense plans to introduce nearly 1,000 e-mails sent by the analysts containing corporate information in which Mr. Chiasson was rarely listed as a recipient on the chain of messages.

Defense lawyers are likely to argue that Mr. Adondakis is someone who is an admitted criminal who never shared inside information with his boss. It was only after being caught did he offer up a prominent hedge fund manager in the hope of getting a significant reduction in his sentence.

The problem for Mr. Newman is that a few hundred of those e-mails included him as a recipient. Many were sent by an analyst at Diamondback who has also pleaded guilty to being Mr. Newman’s source of inside information.

To the extent the e-mails show Mr. Adondakis and others engaged in wrongdoing, they implicate Mr. Newman in the same criminal conduct. He could suffer some rather significant collateral damage if Mr. Chiasson argues that the e-mails are evidence of violations of the federal securities laws by Mr. Adondakis and his cohorts. The e-mails might hurt Mr. Newman’s case, but that is of little concern to Mr. Chiasson because it has become a situation of “every man for himself.”

To avoid this problem, Mr. Newman has asked a United States District Court judge, Richard J. Sullivan, to sever his case so that he is tried separately from Mr. Chiasson, or to bar his co-defendant from using the e-mails as part of his defense. Mr. Newman argues that the e-mails would not be admitted as evidence if he had a separate trial, and that they are potentially prejudicial to his case if the jury misuses them despite any instruction the judge might give to consider them only with regard to the charges against Mr. Chiasson.

Mr. Chiasson naturally opposes the proposal to preclude his lawyers from introducing the e-mails because they can support his position that Mr. Adondakis did not tip him by keeping secret any inside information he received.

Federal prosecutors have told the court they are sitting this one out by not taking a position in support of either defendant.

This is not the first time the defendants sought separate trials. In the summer, they asked Judge Sullivan to sever their cases because they were not part of a single conspiracy as alleged in the indictment but instead there were multiple agreements, sometimes called “hub and spoke” conspiracies. If they were not part of the same agreement, then it would be improper to try them together.

Judge Sullivan denied their motions without explanation, although the likely reason is that there is enough overlap in the evidence that a jury could find a single conspiracy and therefore it would be more efficient to conduct a joint trial.

With the trial scheduled to begin on Oct. 29, this latest motion presents a significant challenge. At this late date, ordering separate trials could mean substantial inconvenience for the government because prosecutors will have to reorganize their case to concentrate on only one defendant after preparing for a joint trial.

The court would face the prospect of two trials about the same basic set of facts, with some of the cooperating witnesses testifying twice about the same inside information. Any inconsistencies in their testimony will be fodder for cross-examination in the second case, potentially giving the defendant who is tried later an unfair advantage.

Keeping the defendants together for trial, however, means Judge Sullivan will have to figure out whether to admit the e-mail evidence that goes to the heart of Mr. Chiasson’s defense that he did not trade on inside information, or to keep it out to prevent the evidence from harming Mr. Newman’s case. If he does not grant Mr. Newman’s severance motion and the defendants are convicted, then one will have a significant issue to argue in an appeal.”


Douglas McNabb – McNabb Associates, P.C.’s
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The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at or at one of the offices listed above.

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