Publications

On August 23, 2017 the U.S. Court of Appeals for the Second Circuit upheld the conviction of Mathew Martoma, who was sentenced to nine years’ imprisonment for insider trading. Martoma, a former portfolio manager at S.A.C. Capital, appealed his conviction based upon an earlier Second Circuit decision, U.S. v. Newman. In Newman, the Second Circuit overturned two insider trading convictions because, among other reasons, the tipper of the inside information received no tangible benefit and there was not a sufficiently close personal relationship between the tipper and tippee to permit the inference that the tip was intended as a gift. The court held that “such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” Martoma claimed that, in his case, the government failed to present evidence sufficient to demonstrate either (a) that a tangible benefit was received by the person who tipped him, or (b) that Martoma had a “sufficiently close personal benefit” with the tipper to support the inference of a gift of the profits from the tip.

Subsequent to the Newman decision, the U.S. Supreme Court issued a ruling in another insider trading case, Salman v. U.S. in which it confirmed that the “personal benefit” requirement for insider trading liability may be satisfied when the tipper “makes a gift of confidential information to a trading relative or friend,” relying on the earlier Supreme Court decision in Dirks v. S.E.C. The Court held that this test was met in Salman because the tipper and tippee were brothers. The Supreme Court also held that when the intention to make a gift is demonstrated, there is no need to show that the tipper has an expectation of “a potential gain of a pecuniary or similary valuable nature.”

Relying onNewman and Salman, Martoma argued in his appeal that in order to satisfy the “personal benefit” requirement via a gift by the tipper to the tippee, the inside information must be shared between close family members or friends. In Martoma’s case, the tipper was a consultant who provided inside information to Martoma. Martoma contended that the consultant did not receive a tangible benefit because he was not paid a fee for the two meetings in which the inside information was allegedly conveyed. He further contended that the government failed to establish the tip was intended as a gift because he did not have a close personal relationship with the tipper. The Second Circuit focused primarily on the second argument and stated that, in light of the Salman decision, “the ‘meaningfully close personal relationship requirement’ is no longer good law.” It stated that liability will attach if “the insider [] discloses inside information to someone he expects will trade on the information.”

As one commentator put it, the ruling on Martoma “means just about any connection can suffice as long as the information is given with the intention that it be used for profitable trading as if the tipper gave the money directly . . . .” ^[1] In reaching this conclusion, the Second Circuit overruled the holding by a sister panel in the same Circuit Court (in the Newman decision) and also appeared to reject the U.S. Supreme Court’s holding in Dirks. It is not surprising, therefore, that the ruling was accompanied by a vigorous dissenting opinion which exceeded the length of the majority opinion. If the majority’s ground-breaking decision is allowed to stand, it likely will be the final death knell for the “personal benefit” requirement which has continuously dogged prosecutors in their effort to police insider trading in recent years.