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.
For more information on the topic discussed, contact Ralph A. Siciliano at
siciliano@thsh.com or 212.508.6718
*Special thank you to Daniel Altabef for his contribution to the article.
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