Prosecuting Wall Streeters for insider trading is about to get much harder
US Southern District Attorney Preet Bharara has racked up dozens of convictions of insider traders like Galleon Group CEO Raj Rajaratnam and former McKinsey managing director Raj Gupta.
But recent high-profile cases being overturned in appellate courtrooms could open the SEC to a flood of challenges and hamper its ability to prosecute existing cases in its pipeline, former prosecutors told Business Insider.
Bharara towered over Wall Street with an unblemished streak of convictions against white-collar crooks over an extended period.
Now, the successful appeal of the SEC's case against Diamondback Capital Management's Todd Newman and Level Global fund manager Anthony Chiasson and the US Supreme Court's refusal earlier this month to review that ruling backed Bharara into a corner, lawyers say.
This put the SEC in a position where it had no choice but to drop a case on Thursday against a former fund manager and abandon six more cases related to it.
Bharara said in a statement Thursday: "These prosecutions were all undertaken in good faith reliance on what this Office and others, including able defense counsel for all those who pled guilty, understood to be the well-settled law before Newman."
It's possible Bharara and the Department of Justice have endured the worst of the blowback stemming from the reversal of the Newman and Chiasson cases, a source said. Other sources said the SEC may see more of its closed or pending cases challenged, however.
What's a "benefit" among friends?
The cases of seven defendants were overturned because it could not be proven the each of the people participating in a chain of insider information actually enjoyed a "benefit" from doing so.
In other words, all parties participating in an insider trade have to make something off of it - and that wasn't the case in several recent insider trading cases. Now legal sources think convictions and plea deals on other cases Bharara has prosecuted will head back to court thanks to that key change.
He thinks prosecutors like Bharara have gotten away with legal ambiguities in the courtroom.
The SEC and DOJ declined to comment.