Second Circuit Amends Martoma Insider Trading Decision

June 2018 Securities Alert

On June 25, 2018 the United States Court of Appeals for the Second Circuit issued an amended decision in United States v. Martoma[1] in order to resolve a conflict with a 2014 Second Circuit decision, United States v. Newman. This latest 2-1 amended decision (“Martoma II”), which was highly unusual, reaffirmed the insider trading conviction of SAC Capital Advisor LP portfolio manager Matthew Martoma, but withdrew its prior controversial holding that the jury instructions were “not obviously erroneous” because Newman was no longer good law.

Although Martoma II walked back some of the more divisive holdings of the panel’s original decision, the decision still gives the government the opportunity to argue that the bar for insider trading prosecutions within the Second Circuit has been lowered. 

A Recap of Martoma I

As explained in our prior Securities Alert, on August 23, 2017, the Second Circuit issued a decision affirming Martoma’s conviction.[2] Martoma I addressed both Newman and the U.S. Supreme Court’s 2016 Salman v. United States decision.

Through Newman, the Second Circuit had refined the “personal benefit” rule established in the Supreme Court’s 1983 Dirks v. SEC[3] decision by requiring that the government prove a “meaningfully close personal relationship” between tippers and tippees who exchange confidential information.[4] Two years later, in Salman, the Supreme Court found that to the extent Newman “held that the tipper must also receive something of a ‘pecuniary or similarly value nature’ in exchange for a gift to family or friends, . . . that this requirement is inconsistent with Dirks.”[5]

In Martoma I, the Second Circuit panel went a step further and held that “the logic of Salman abrogated Newman’s ‘meaningfully close personal relationship’” requirement. This controversial holding had the potential to expose many more individuals to insider trading prosecutions.

Martoma II

The panel’s amended decision affirms Martoma’s conviction and reaches the same ultimate conclusion as Martoma I, but does so without challenging Newman

The amended decision explicitly declined to address whether, in light of Salman, Newman is still good law: “because there are many ways to establish a personal benefit, we conclude that we need not decide whether Newman’s gloss on the gift theory is inconsistent with Salman.”[6] Rather, the Court concluded that Newman’s “meaningfully close personal relationship” standard, which “requires evidence of ‘a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter],’” did no more than “cabin[] the gift theory using two other freestanding personal benefits that have long been recognized by our case law.”[7]

Unlike Martoma I, which found that Martoma’s jury received proper instructions because Newman was no longer good law, Martoma II instead concluded that the jury instructions were erroneous under the Newman standard. Although the panel rejected Martoma’s claim that the instructions improperly “omitted the term ‘meaningfully close relationship,’” the panel found the instructions improper “because they allowed the jury to convict based solely on evidence of friendship without also requiring either that the tipper and tippee shared a quid pro quo-like relationship or that the tipper intended to benefit the tippee.”[8] 

Ultimately, however, the panel held that Martoma’s substantial rights were not affected by the jury instruction error, as the government had presented compelling evidence that at least one tipper shared a relationship suggesting a quid pro quo with Martoma (in the form of $70,000 in consulting fees).[9] 

As in Martoma I, the panel quickly rejected Martoma’s claim that there was insufficient evidence to sustain his conviction, citing the same “compelling evidence” of a relationship suggesting a quid pro quo, or alternatively, that a rational jury could find the tipper “personally benefited by disclosing inside information with the ‘intention to benefit’ Martoma.”[10] Indeed, the panel noted that “[w]e think a jury can often infer that a corporate insider receives a personal benefit (i.e., breaches his fiduciary duty) from deliberately disclosing valuable, confidential information without a corporate purpose and with the expectation that the tippee will trade on it.”[11]

Judge Pooler, as she did in Martoma I, issued a dissenting opinion, arguing that Martoma II’s “apparent concessions” in deference to Newman “are semantic rather than substantial,” and that the amended majority opinion simply attempts to rewrite the personal benefit rule “more subtly.”[12]

Ramifications of Martoma II

The Second Circuit may still decide on an en banc hearing to resolve the apparent tension between Newman and Martoma II. But as it stands, Martoma II gives prosecutors continued ammunition in insider trading prosecutions within the Second Circuit.

As suggested in Judge Pooler’s dissent, prosecutors may, under the Martoma II framework, seek to bring cases that only prove the objective fact of the communication of material, non-public information, and ask that the jury decide whether the requisite intent exists based on “pile[d] up insinuations about the tipper’s subjective understanding of the purpose of the tip.”[13]
 

[1] No. 14-3599, 2017 WL 9620394, at *2 (2d Cir. Jun. 25, 2018).

[2] 869 F.3d 58 (2d Cir. 2017).

[3] 463 U.S. 646 (1983).

[4] 773 F.3d 438 (2d Cir. 2014).

[5] 137 S.Ct. 420, 428 (2016) (citation omitted).

[6] 2017 WL 9620394, at *4.

[7] Id. at *9 (referring to Dirks and Second Circuit cases applying Dirks).

[8] Id. at *2.

[9] Id. at *10.

[10] Id.

[11] Id.

[12] Id. at *11, *14.

[13] Id. at *14.


For more information on the issues in this alert, please contact:

Arthur G. Jakoby at +1 212 592 1438 or [email protected]
Howard R. Elisofon at +1 212 592 1437 or [email protected]
Meaghan Millan at +1 212 592 1632 or [email protected]

© 2018 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.