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.\u00a0 Analyzing a security from\u00a0a pre-trade buying decision to the subsequent decision to sell requires a tremendous amount of information.\u00a0 While all data incoming to a\u00a0hedge fund\u00a0may not be used on any given day or in regard to any given position,\u00a0the intake of information (particularly at equity trading firms) can be\u00a0enormous.<\/p>\n
It is this backdrop that makes the recent US Court of Appeals Second Circuit decision in\u00a0the United States v. Newman<\/em> case so important. The case\u00a0was the appeal of the convictions of two \u201cremote tippee\u201d\u00a0hedge fund managers (ie., tippees receiving material non-public information several persons removed from the original source of the information within the company).\u00a0 In throwing out their\u00a0convictions, the\u00a0Court clarified exactly what the\u00a0government would have to prove in order to successfully prosecute a remote tippee.\u00a0\u00a0Hedge funds are required by\u00a0Section 204A of the Advisers Act to maintain compliance\u00a0programs to detect and\u00a0prevent insider trading, and this latest decision will have implications for how those programs are run and their ultimate ability to be effective.<\/p>\n