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1355When Is Information Nonpublic?

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  • Baker, John
    Aug 19, 2012
      The U.S. Court of Appeals for the Second Circuit has approved a jury instruction defining when information is "nonpublic" and thus subject to strictures on insider trading. United States v. Contorinis, No. 11-3-cr (2d Cir. Aug. 17, 2012). The appellant was a hedge fund portfolio manager who placed hedge fund trades based on information received from an investment banker, and was criminally convicted of conspiracy to commit securities fraud and insider trading. The Second Circuit approved the following jury instruction defining nonpublic information:

      Information is nonpublic if it was not
      available to the public through such sources
      as press releases, Securities and Exchange
      Commission filings, trade publications,
      analysts' reports, newspapers, magazines,
      rumors, word of mouth or other sources. In
      assessing whether information is nonpublic,
      the keyword is "available." If information
      is available in the public media or in SEC
      filings, it is public. However, the fact
      that information has not appeared in a
      newspaper or other widely available public
      medium does not alone determine whether the
      information is nonpublic. Sometimes a
      corporation is willing to make information
      available to securities analysts, prospective
      investors, or members of the press who ask
      for it even though it may never have appeared
      in any newspaper publication or other
      publication. Such information would be
      public. Accordingly, information is not
      necessarily nonpublic simply because there
      has been no formal announcement or because
      only a few people have been made aware of it.
      For example, if UBS policy was to give out
      certain information to people who ask for it,
      that information is public information.
      Whether information is nonpublic is an issue
      of fact for you to decide.

      On the other hand, the confirmation by
      an insider of unconfirmed facts or rumors --
      even if reported in a newspaper -- may itself
      be inside information. A tip from a
      corporate insider that is more reliable or
      specific than public rumors is nonpublic
      information despite the existence of such
      rumors in the media or investment community.
      Whether or not the confirmation of a rumor by
      an insider qualifies as material nonpublic
      information is an issue of fact for you to

      The appellant argued that the instructions wrongly failed to indicate that general confirmation of an event that is "fairly obvious" to knowledgeable investors is not material, nonpublic information, and he also objected to the instruction that "[t]he confirmation by an insider of unconfirmed facts or rumors -- even if reported in a newspaper -- may itself be inside information." The Second Circuit rejected these objections, saying that a trier of fact may find that information obtained from a particular insider, even if it mirrors rumors or press reports, is sufficiently more reliable, and therefore is material and nonpublic, because the insider tip alters the information mix by confirming the rumor or reports.

      The opinion also addresses the district court's order that the appellant forfeit all $12.65 million of profits made and losses avoided by the hedge fund. The calculation of a forfeiture amount in criminal cases is usually based on the defendant's actual gain, and the court ruled that the portfolio manager could not be charged with the hedge fund's gain. On remand, the court suggested, the district court could decide to what extent the appellant's interest in salaries, bonuses, dividends, or enhanced value of equity in the hedge fund is subject to forfeiture.

      The Second Circuit's opinion is available online at


      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1250 Connecticut Avenue, NW, Suite 500
      Washington, DC 20036
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw