The September 1, 2016 issue of Fortune has a terrific article by William D. Cohan about former hedge fund manager Todd Newman entitled, "Overturned: The Hedge Fund Trader Who Beat the Feds." Newman, you may recall, was the defendant in a hugely important insider trading decision -- U.S. v. Newman -- that has had a major impact on how prosecutors and the SEC pursue insider trading cases.

The Second Circuit's decision in Newman, which the U.S. Supreme Court declined to review in October 2015, requires prosecutors to establish “proof of a meaningfully close personal relationship [between the tipper and tippee] that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” This requirement that the tipper must have personally benefited from providing the tip has forced prosecutors to not pursue many insider trading cases that they previously would have brought.

The Newman decision has had a major impact on insider trading jurisprudence, but it has obviously had a direct and much greater impact on Todd Newman. In the Fortune article, Cohan walks the reader through the case against Newman from the initial telephone call he received in November 2010 from former FBI agent David Makol (who was himself featured in another must-read WSJ article: "The FBI Agent Who Flips Insider-Trading Witnesses"). Makol told Newman that "we have some stuff going on later today that’s going to affect your job, your family. We’ve got to get stuff done. This is urgent.” He asked Newman to meet FBI agents at a nearby McDonald’s to talk, but Newman instead hung up and visited the general counsel at his firm, Diamondback Capital Management.

That phone call began a five-year legal battle that included the loss of his job in January 2011, his arrest in January 2012, a December 2012 trial in which he was convicted and sentenced to 54 months in prison, the December 2014 opinion of the Second Circuit overturning his conviction, and the October 2015 decision of the U.S. Supreme Court not to review the Second Circuit's opinion. Cohan's article provides many interesting details about Newman's saga, including, for example, the circumstances of his 2012 arrest that occurred at 6 a.m. at his home. The FBI brought eight 8 agents and a total of 12 cars, but used no sirens. “They wanted to surprise me,” he says. “They take great joy in that.”  

Although his conviction was overturned, Newman says that there is little or no chance that he will be able to get hired at a hedge fund again. Instead, he is planning to start a business that will "help others make it through experiences similar to his own."

 

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