On June 25, 2018, the Second Circuit Court of Appeals issued a revised opinion in United States v. Martoma, No. 14-3599, Dkt No. 226. (2d Cir. Jun. 25, 2018) (“Martoma”). While the outcome for Matthew Martoma does not change—his conviction for insider trading still stands—other defendants facing insider trading charges may once again, at least for the present, avail themselves of the Second Circuit’s more stringent personal benefit test under United States v. Newman, 773 F.3d 438 (2d Cir. 2014) (“Newman”).
The Court’s original opinion, issued in 2017, acknowledged that Salman v. United States, 137 S. Ct. 420 (2016) (“Salman”) “fundamentally altered the analysis underlying Newman’s ‘meaningfully close personal relationship’ requirement such that the ‘meaningfully close personal relationship’ requirement is no longer good law.” United States v. Martoma, 869 F.3d 58, 69 (2d Cir. 2017) (“Martoma 2017”). In a surprise move, however, the revised opinion relies on Newman to find error in the district court’s jury instructions, not because they omitted the term “meaningfully close personal relationship,” but because they allowed the jury to find a personal benefit in the form of a “gift of confidential information to a trading relative or friend” without requiring the jury to find either that (1) the tipper and tippee shared a relationship suggesting a quid pro quo from the tippee or (2) the tipper gifted the confidential information with the intention to benefit the tippee.
Mathew Martoma was a portfolio manager at S.A.C. Capital Advisors, LLC (“SAC”). Martoma’s portfolio included two pharmaceutical companies, Elan Corporation, plc (“Elan”) and Wyeth Pharmaceuticals, Inc. (“Wyeth”), that were jointly developing an experimental drug to treat Alzheimer’s disease. Martoma engaged two doctors working on the experiment for multiple consultations, paying $1000 for each consult. Before Elan and Wyeth publicly disclosed negative results of a clinical trial, one of the doctors revealed the results to Martoma. The next day, SAC began to reduce its positions in Elan and Wyeth and entered into short‐sale and options trades before the results were made public. After the results were publicly disclosed, Elan and Wyeth’s share prices declined approximately 42% and 12%, respectively. SAC made approximately $80.3 million and averted losses of approximately $194.6 million.
The district court instructed the jurors that, in order to convict Martoma, they must decide whether the doctors received or anticipated receiving a “personal benefit” by disclosing the information. The jurors could infer a personal benefit if the doctors gave the information (1) with the intention of benefiting themselves in some manner, (2) with the intention of conferring a benefit on Martoma, or (3) as a gift with the goal of maintaining or developing a personal friendship or a useful networking contact. The jury returned a conviction on February 6, 2014.
Tippee liability, i.e., the liability of one receiving and trading on inside information provided by an insider “tipper,” is based on several layers of tests. The original framework of tests is set forth in Dirks v. S.E.C., 463 U.S. 646 (1983) (“Dirks”). Under Dirks, tippee liability depends on whether the tipper “has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach.” Dirks at 660. The test for whether the tipper breached his fiduciary duty “is whether the [tipper] personally will benefit, directly or indirectly, from his disclosure” to the tippee. Id. at 662. In other words, the preliminary test for tippee liability is whether the t...
