Forbes – At their core, hedge funds are processors of information and the product they sell is their ability to utilize information to make profitable trading decisions. Analyzing a security from a pre-trade buying decision to the subsequent decision to sell requires a tremendous amount of information. While all data incoming to a hedge fund may not be used on any given day or in regard to any given position, the intake of information (particularly at equity trading firms) can be enormous.
It is this backdrop that makes the recent US Court of Appeals Second Circuit decision in the United States v. Newman case so important. The case was the appeal of the convictions of two “remote tippee” hedge fund managers (ie., tippees receiving material non-public information several persons removed from the original source of the information within the company). In throwing out their convictions, the Court clarified exactly what the government would have to prove in order to successfully prosecute a remote tippee. Hedge funds are required by Section 204A of the Advisers Act to maintain compliance programs to detect and prevent insider trading, and this latest decision will have implications for how those programs are run and their ultimate ability to be effective.
