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Government rebuffed on major insider trading case

One of the biggest insider-trading cases to hit Wall Street operatives came to an end in the Supreme Court on Monday, as the Justices — without a noted dissent — turned aside a plea by the Obama administration that its loss in that case in lower courts will seriously hamper its ability to monitor market manipulation.  The denial of review in United States v. Newman on the opening day of a new Term was the most significant development appearing on a massive list of orders turning aside hundreds of newly filed cases — among them, a new attempt to take away the antitrust exemption for major league baseball when it blocks a team’s movement to another city.

The Court also issued its first ruling of the Term, a summary decision in a murder case that spares lawyers from having to engage in possibly futile searches for obscure documents to help in defending clients at trial.   The decision, made without briefing and oral argument, came in Maryland v. Kulbicki, a case that provided the plot for a Hollywood movie,
The Victim in the Night.

In a series of orders, the Court asked the U.S. Solicitor General to offer the federal government’s views on four new cases, involving the scope of a 2005 federal law that protects the privacy of records about medical errors that cause patient injury or deaths, the legal right of the Federal National Mortgage Association (“Fannie Mae”) to transfer to federal court a state-law case against it, the reach of U.S. patent law to overseas business activity, and the right to sue foreign governments in U.S. courts over activity that occurred abroad.

The new insider-trading case that the Court declined to review marked a significant break in a string of scores of victories by prosecutors in Manhattan against those who buy or sell stock by relying on corporate data that was not yet known to the public, including other investors.  Prosecutors had won convictions of two hedge-fund portfolio managers, Todd Newman and Anthony Chiasson, who had made millions by trading in information that was passed along to them through a chain of contacts, traced back to corporate insiders for high-tech companies.

Newman, a portfolio manager at Diamondback Capital Management, made about $4 million in gains and Chiasson, a co-founder of Level Global Investors, gained about $38 million.  They were convicted of criminal trading on inside information; Newman was sentenced to fifty-four months in prison and Chiasson to seventy-eight months.   They were prosecuted on the basis of a “gift theory” — that is, they benefited in the market from transactions that were based on something that was handed to them indirectly.

The U.S. Court of Appeals for the Second Circuit overturned their convictions, declaring that prosecutors failed to prove that Newman and Chiasson, as “tippees,” knew when they made trades that an insider had disclosed confidential information and that the insider did so in exchange for a personal benefit.  That ruling, the government argued in seeking Supreme Court review, created a difficult new legal standard that will “impair the government’s ability to protect the fairness and integrity of the securities market.”

The Justices, as is their custom, made no comment as they denied review.  There were no notations that any individual Justice had dissented from the order.

The Court’s opening decision involved the conduct of a defense lawyer for a Baltimore police sergeant, James Allen Kulbicki, who had been convicted of murdering his girlfriend the weekend before a court hearing on a claim that he had failed to provide child support for their son.  Maryland’s highest court, the Maryland Court of Appeals, found that Kulbicki’s defense team was deficient in failing to locate, and use in his defense, a 1991 report that cast some doubt upon a scientific theory about the identity of bullets that had been produced in different batches.  One of the authors of that report testified against Kulbicki as an expert witness for the prosecution on the issue of bullet identification.

The Justices’ unsigned opinion noted that, at the time of Kulbicki’s trial, that theory was still widely accepted, even though it was discredited later on.  The Maryland Court of Appeals, the opinion noted, was only able to find the 1991 report by using Internet search technology that was not available at the time of the trial.  “The Court of Appeals,” the opinion said, “demanded something close to ‘perfect advocacy’ — far more than the ‘reasonable competence’ the right to counsel guarantees.”

The Court turned to the U.S. Solicitor General for a reaction on whether the Court should grant review of four cases that had reached the Justices during the summer recess.   When the Court finds a case that interests it, but is not sure enough to go ahead and grant review, it frequently will seek the help of the government’s top appeals lawyer.   Here are the cases sent to the Justice Department on Monday, with the issue summarized:

** Tibbs v. Bunnell. Whether a law passed by Congress in 2005 to encourage hospitals and doctors to share information about medical incidents, to help develop ways to protect patient safety, bars the disclosure in a medical malpractice lawsuit of an incident report.  The case involves a Kentucky woman who died during an operation on her spine at the University of Kentucky Hospital in Lexington.  Four surgeons involved in the procedure asked the Court to block the release of a report by a nurse in the operating room at the time.

** Lightfoot v. Cendant Mortgage.  Whether the federal charter for “Fannie Mae,” the government-created corporation that pools mortgages to draw more investor money into the housing finance market, gives it the right to move a mortgage foreclosure case from state to federal court.  The petition also asks the Justices to overturn a 1992 decision, American National Red Cross v. S.G., defining the scope of court jurisdiction for congressional chartered corporations.

** Life Technologies Corp. v. Promega Corp.  Whether U.S. patent law bars the overseas shipment of a part of a device or process that is to be assembled overseas, in a way that would copy a U.S.-patented invention.  The case involves patent protection claims of a company that makes genetic testing kits, used to create DNA profiles for clinic research and for criminal case investigations.  The Court has shown an active interest in recent years in curbing the overseas reach of U.S. laws.

** Odhiambo v. Republic of Kenya.  Whether a Kenyan national who now lives in the United States may sue his former government in a U.S. court, to try to collect payments that he contends he is owed for acting as a whistleblower to identify people who had evaded Kenyan taxes.   This is another in a series of cases testing the power of U.S. courts to decide cases involving foreign activity that has no direct link to the U.S..

The cases that the Justices acted upon Monday had been examined at their “Long Conference” — the first since their summer recess began in late June — last Monday.  On Thursday, the Court granted review of thirteen of those cases.  The release of a seventy-six-page order list on Monday morning showed, as usual, that the vast majority of new cases did not get past the first hurdle, and were denied.

Once again, the Justices showed no interest in the ninety-three-year-old question whether the owners of major league baseball teams should be subject to a damages lawsuit when they take steps that are claimed to cause harm to commercial competition among its teams.  The Court itself created that exemption in 1922, and has since refused repeatedly to reconsider it, saying that it is up to Congress, if it wishes, to apply antitrust law to the league.  The Court has not granted a similar exemption for any of the other pro sports combines.

In the latest case, the city of San Jose asked the Justices to reopen the issue, to hear its claim that the baseball league has intervened to stop the Athletics baseball team’s move from Oakland, where its fan base and financial support have been declining, to the supposedly richer market of San Jose.  The Athletics apparently have suffered from the opening of a new stadium for the Giants in the San Francisco Bay area.  San Jose argued that the Athletics have been barred from relocating to that city to shield the Giants from competition.  The Court said nothing as it turned aside San Jose v. Office of Baseball Commissioner, seeking withdrawal of antitrust immunity at least for team relocation cases.

Here are some significant cases that the Court also rejected, with a summary of the legal questions at stake:

** Bolden v. Doe.  Whether Utah (and six other states with similar laws) acted unconstitutionally in requiring unwed fathers to prove their ability to care for their child, when no similar proof is required from the child’s unwed mother.

** Allaithi v. Rumsfeld.  Whether former detainees at the U.S. military prison at Guantanamo Bay, Cuba, have any legal protection under federal law against discrimination based on their Muslim faith.  The appeal by six foreign nationals formerly held as prisoners also sought to sue former Defense Secretary Donald Rumsfeld and a group of military officers whom the detainees claim were responsible for physical and religious abuse at Guantanamo. The Justices denied review of similar claims by other detainees in 2009.

** Corr v. Metropolitan Washington Airports Authority.  Whether Congress violated the separation-of-powers doctrine under the Constitution when it modified the federal government’s authority over two airports in the Washington, D.C., area, resulting in allegedly higher toll fees for commuters using a limited access highway to Washington’s Dulles International Airport.

** Anderson v. United States.  Whether a person suspected of a crime has any right to challenge the constitutionality of abusive and physically invasive search of that person’s spouse, in an effort to gain evidence of a crime.  The case involved a search without a warrant of a Vermont woman’s vagina for drugs that the police believed she was carrying there, as part of her husband’s trafficking.

** Li-Shou v. United States.  Whether the U.S. Navy may be sued for killing a civilian hostage who was held by pirates in the Indian Ocean in 2011, and for sinking that hostage’s vessel after he was killed in the operation.  The widow of a Taiwanese fishing boat captain was barred from pursuing her legal claims.   The federal government, however, has paid an undisclosed amount to her family.

** Ohio v. White.  Whether the Court would clarify the legal test to be used in judging whether a police officer acted illegally by shooting a suspect during an arrest.  The case grew out of a police shooting during an arrest in 2003 in the small Ohio town of Ottawa Hills, northwest of Toledo.  The fatal wounding was of a motorcyclist whom a local officer had been following, and who did not put up his hands when told to do so, according to the officer.









Recommended Citation: Lyle Denniston, Government rebuffed on major insider trading case, SCOTUSblog (Oct. 5, 2015, 12:53 PM),