The U.S. Securities and Exchange Commission (SEC) was awarded a ruling on Feb. 18 that may allow the organization to collect illegal proceeds from money managers who engage in insider trading. This decision has the potential to affect future insider trading cases and provides the government to hold money managers accountable for profits generated from firms.

According to a recent Bloomberg report, the ruling came in an appeal by Whitman Capital LLC hedge fund founder Doug Whitman. The U.S. Court of Appeals in New York yesterday rejected his argument that the judge improperly instructed the jury on how to consider the issue of willful blindness at his insider trading trial.

Whitman was sentenced to two years in prison for trading on illicit tips about Polycom Inc., Google Inc. and Marvell Technology Group Ltd. He said he'd received the information from his neighbor, former Intel Corp. executive Roomy Khan. The U.S. said he made $935,000 on the trades based on her tips, and those of Karl Motey, a consultant Whitman hired.

“Here Whitman's own words were far more damning and provided ample factual basis for the conclusion that he could avoid positive knowledge that Khan and Motey used illegal channels to get confidential information only by deliberately closing his eyes to facts well known to him,” the court said.

According to Benjamin Fischer, a partner at Morvillo Abramowitz Grand Iason & Anello PC, the concept of conscious avoidance gives prosecutors an advantage at a time when public opinion has been against white-collar defendants and Wall Street traders. It gives the government the ability to argue that a busy trader making thousands of decisions a day didn't do enough to determine the source of the information he was receiving, Fischer said.

“Professionals need to be aware of the fact that this endorsement of the conscious avoidance doctrine means the government will prosecute cases on the theory that they turned a blind eye to the wrongful conduct,” Fischer said.

For related reports on insider trading , read these recent articles on Inside Counsel: