On August 17, 2016, jurors in a New York federal court convicted Sean Stewart on criminal charges of conspiracy, securities fraud, and tender offer fraud after more than five days of deliberation. Stewart, a former investment banker for JPMorgan and Perella Weinberg Partners, was charged with leaking confidential information about health care mergers to his father, Robert Stewart, on at least five occasions over the course of four years. The case provides a victory to Preet Bharara, the United States Attorney for the Southern District of New York, after a series of setbacks in the form of unfavorable decisions in the aftermath of the Second Circuit's decision in U.S. v. Newman, the repercussions of which have been covered extensively on this blog (see here, here). As the first conviction post-Newman, U.S. v. Stewart provides some insight into the kinds of facts that might support an insider trading charge in the Second Circuit going forward and is thus worthy of analysis.
Although Sean Stewart was charged for his role as a tipper rather than a tippee like the defendants in Newman, the holding there was still implicated because insider trading law under Dirks v. SEC requires a "personal benefit" to the insider. Under Newman, prosecutors in cases against remote tippees must show – in the absence of a "meaningfully close personal relationship" – that the trades were executed by someone who knew that the tipper would derive some "consequential" benefit from sharing the information. At trial, as with many post-Newman insider trading cases, the Stewart case turned in part on whether Sean Stewart expected to derive any benefit from providing the inside information to his father. Sean Stewart testified that he had talked openly and casually about deals with his family but he denied telling his father the dates of the mergers or the size of the deals. Robert Stewart worked with a trading partner, Richard Cunniffe, who received $1.1 million in associated gains and pleaded guilty to related charges. Robert Stewart received about $150,000. Prosecutors argued that Robert Stewart then used some of those allegedly ill-gotten gains to pay $10,000 to a photographer at his son's wedding, thereby providing a consequential benefit as required by Newman.
Prosecutors alleged that Sean Stewart continued to provide inside information to his father even after he was confronted by attorneys for JPMorgan about stock trades that his father made surrounding a merger his son helped arrange in 2011. Prosecutors alleged that the father made trades based on inside information about four additional mergers afterward. As in the SEC's original complaint, prosecutors also alleged that Robert and Sean Stewart disguised their conspiracy via code, appearing to communicate about golf reservations when in fact they were communicating about trade deals. Robert Stewart did not testify at trial, asserting his Fifth Amendment right against self-incrimination.
Sean Stewart's attorneys have indicated that they intend to appeal, citing issues around Robert Stewart's failure to testify. The repercussions associated with Newman are likely to continue to play a role, as jurors have indicated they struggled with the "benefit" that Sean Stewart received in exchange for his tips.
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