Case 1:12-cr-00121-RJS Document 258 Filed 05/07/13 Page 1 of 4

USDS SDNY
DOCUMENT
U1\lITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK ELECTRONICALLY FILED
DOC#:
-----------------
DATE FILED: ~- 7-13
UNITED STATES OF AMERICA,

-v-
No. 12 Cr. 121 (RJS)
TODD NEWMAN , ORDER

Defendant.

RICHARD J. SULLIVAN, District Judge:

At Defendant's sentencing on May 2, 2013, the Court reserved decision on Defendant's

request for bail pending appeal of his conviction. For the reasons set forth below, the Court now

denies Defendant's request.

Under 18 U.s.c. 3143(b), a court shall grant a convicted defendant bail pending appeal

if, inter alia, (i) the defendant can show by clear and convincing evidence that he is not likely to

flee or pose a danger to others, and (ii) the court finds that "the appeal raises a substantial

question of law or fact likely to result in a reversal , a new trial , or a sentence that will be less

than the total time already served prior to and during the pendency of the appeaJ." United States

v. Aleynikov, No. 10 Cr. 096 (DLC), 2011 WL 1334850, at *1 (S .D .N.Y. Mar. 28, 2011) (citing

18 U.S.C . 3143(b. Here, the government does not dispute that Defendant is neither a flight

risk nor a danger to the community. Thus, the sole issue before the Court is whether Defendant's

appeal "raises a substantial question of law or fact. "

A substantial question is '" a "close" question or one that very well could be decided the

other way .'" United States v. Randell, 761 F.2d 122, 125 (2d Cir. 1985) (quoting United States

v. Giancola, 754 F.2d 898, 901 (11 th Cir. 1985. "If a court does find that a question raised on

appeal is 'substantial,' it must then consider whether that question is ' so integral to the merits of
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the conviction on which defendant is to be imprisoned that a contrary appellate holding is likely

to require reversal of the conviction or a new trial.'" Jd. (quoting United States v. Miller, 753

F.2d 19,23 (3d Cir. 1985). At each of these steps, the defendant bears the burden of persuasion.

Jd.

In this case, Defendant's appeal challenges the Court's jury instruction regarding the

elements of insider trading. Specifically, Defendant argues that the Court erroneously refused to

instruct the jury that to convict Defendant of insider trading, it must find that Defendant knew

that the information he received originated with a corporate insider who disclosed it in breach of

a fiduciary duty and for a personal benefit. (Doc. No . 238 ("Sentencing Mem.") at 52 .)

Defendant further argues that this question is substantial because 0) the Court incorrectly relied

on SEC v. Obus, 693 F.3d 276 (2d Cir. 2012), in deciding that insider trading liability does not

require that a tippee knew that the insider received a personal benefit, and (ii) three other courts

in this district have reached the contrary conclusion. (See Sentencing Mem. at 52-55.)

In Obus, the Second Circuit extensively analyzed the elements of both tipper and tippee

liability under Supreme Court precedents and held that:

tipper liability requires that (I) the tipper had a duty to keep material non-public
information confidential ; (2) the tipper breached that duty by intentionally or
recklessly relaying the infonnation to a tippee who could use the information in
connection with securities trading; and (3) the tipper received a personal benefit
from the tip. Tippee liability requires that (1) the tipper breached a duty by
tipping confidential information ; (2) the tippee knew or had reason to know that
the tippee improperly obtained the information (i. e., that the information was
obtained through the tipper's breach) ; and (3) the tippee, while in knowing
possession of the material non-public information, used the information by
trading or by tipping for his own benefit.

693 F.3d at 289. Obus thus makes clear that the tipper's breach of fiduciary duty and receipt of a

personal benefit are separate elements and that the tippee need know only of the former. The

Court's jury instruction tracked Obus's guidance.

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Defendant nevertheless argues that Obus does not control this case because it is (i) a civil

case (ii) involving the misappropriation theory of insider trading (iii) in which the issue of a

remote tippee's knowledge of personal benefit was not decided by the Second Circuit.

(Sentencing Mem. at 53.) As the government notes, there is some irony to Defendant's objection

to the Court's reliance on Obus given Defendant's reliance on SEC v. Dirks, 463 U.S. 646

(1983), another civil case, for his position. (See Sentencing Mem. at 52.) That irony reflects the

deeper reality that the criminal law of insider trading has developed in large part through civil

cases such as Dirks and Obus. To be sure, adapting such civil cases to the criminal context has

required adjusting the level of scienter necessary for liability, but what Defendant suggests is not

an adjustment so much as an addition of a totally new element to those Obus requires for civil

insider trading liability. The Court sees no basis for doing so.

Defendant's remaining arguments are equally unconvincing. Obus strongly suggests that,

at least with respect to tippee scienter, the difference between misappropriation and classical

insider trading cases is immaterial. See Obus , 693 F.3d at 288 (applying Dirks' scienter

requirement equally in both misappropriation and classical insider trading contexts). And while

the question of a tippee's knowledge of personal benefit may not have been directly presented in

Obus, it was directly decided by that case, which clearly enumerates the elements of tippee

liability in the form of a holding. See id. at 289. Thus, Defendant fails to raise substantial

questions as to whether Obus controls this case and, if so, as to what Obus requires. As the

Court held at trial, Obus clearly applies and does not require that Defendant had knowledge that

the insider obtained a personal benefit.

Two of the three cases in this district that reached the contrary conclusion did so before

the Second Circuit decided Obus and thus shed no light on Obus's application here. The third

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case, United States v. Whitman, No. 12 Cr. 125 (JSR), 2012 WL 5505080 (S.D.N.Y. Nov. 14,

2012), post-dates Obus but ignores it almost entirely in concluding that insider trading liability

requires tippee knowledge of a personal benefit to the tipper. See id. at *5-6. Cleverly,

Defendant argues that Whitman's disregard of Obus supports his claim that Obus is not

controlling here. (See Sentencing Mem. at 55.) However, while such silence may indeed

indicate that Obus did not affect Whitman ' s analysis, it is hardly persuasive precedent for the

broader proposition that Obus does not apply to criminal insider trading. Indeed, if it were, then

simply wishing a Second Circuit precedent away would make it so - a proposition that clearly is

untenable. Accordingly, the Court does not find that the question of whether a tippee must know

that a tipper received a personal benefit is substantial merely because Whitman decided that

question differently from the Court.

Because Defendant has failed to demonstrate that his appeal presents a substantial

question of law or fact, the Court need not consider whether the issue Defendant raises on appeal

is likely to result in a reversal of his conviction or a new trial. Accordingly, Defendant's

application for bail pending appeal is HEREBY DENIED, and Defendant is instructed to

surrender at the correctional facility to which he is designated on July 8, 2013.

SO ORDERED.

Dated: May 7, 2013

New York , New York

ARD J. SULLIV AN
ITED STATES DISTRICT JUDGE