Preet Bharara, United States Attorney for the Southern District of New York, has petitioned the United States Court of Appeals for the Second Circuit for a rehearing en banc of last month’s landmark decision vacating multiple insider trading convictions, arguing that the decision creates a new “deeply confounding” standard that splits from precedent in this and other circuits, and threatens the effective enforcement of the securities laws.

As covered previously here, in United States v. Newman the Second Circuit held that to convict a tippee for insider trading under Section 10(b) of the Securities Act of 1934 the Government must prove beyond a reasonable doubt that the tippee had knowledge of the benefit received by the tipper, and not mere knowledge that the tipper had breached his or her duty of confidentiality. Finding that the Government had not proven that hedge fund managers Todd Newman and Anthony Chiasson—who had received tips from financial analysts, who themselves had allegedly received tips from insiders at Dell and NVIDIA—knew of the original tippers’ personal benefit from providing such information, the Second Circuit overturned their convictions for insider trading.

The Government has challenged this heightened standard as contrary to Dirks v. SEC, 463 U.S. 646 (1983) and other precedent. In particular, the Government contends that the Second Circuit “effectively nullified part of the Dirks benefit test” by “eliminating Dirks’s express recognition that an improper but uncompensated gift of information by an insider suffices.” The Government also claims that the new standard, which considers, among other things, a “meaningfully close personal relationship,” lacks any “familiar meaning in this or any analogous area of law.”

In its petition, the Government contends that Newman will severely hamper its ability to prosecute “some of the most common, culpable, and market-threatening forms of insider trading.” The Government warns that the “ambiguous and diluted notion” of a tipper’s personal benefit will allow hedge fund managers and other traders to “insulate themselves from tippee liability by knowingly placing themselves at the end of a chain of inside information” and turning a blind eye to the sources of inside information.

The SEC, which filed an amicus brief, has largely seconded the Government’s arguments.

United States v. Newman et al., Cases No. 13-1837(L), 1301917(CON) (2d Cir. 2015).