A decision last week from the U.S. District Court for the Southern District of New York illustrates the broad reach of prosecutors and regulators in pursuing recipients of insider trading tips, despite the case-law requirement that the tipper have received a personal benefit from giving the tip.
This state of play marks a turnaround from four years ago, when it appeared that the personal benefit requirement stood to curtail substantially the government’s ability to bring insider trading charges against tippees unless the government could show a “meaningfully close personal relationship” between tipper and tippee.
Then, in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), the U.S. Court of Appeals for the Second Circuit held that to establish liability the government must show a “meaningfully close personal relationship” as well as an exchange of pecuniary value between tipper and tippee. While it was not entirely clear what the Second Circuit’s words meant, it was clear that the U.S. Attorney’s Office and Securities and Exchange Commission understood Newman to be a significant obstacle to their insider trading actions.
But then came a U.S. Supreme Court decision rejecting Newman at least in part, and then a Second Circuit opinion further restricting it.
And last week, U.S. District Judge Jed Rakoff stated in a decision denying a motion to dismiss an insider trading case that “[w]hat remains of Newman therefore applies in only the rarest of cases.” United States v. Pinto-Thomaz (S.D.N.Y. Dec. 6, 2018).
The driving force behind the decline of the Newman approach was the Supreme Court’s decision in Salman v. United States, 137 S. Ct. 420 (2016). That case involved a tip from brother to brother, where the tipper had received no money or thing of similar value in return. The Court relied on its language in Dirks v. S.E.C., 463 U.S. 646 (1983), where it viewed a tipper’s gift of confidential information to a trading relative or friend as satisfying the personal benefit requirement.
The defendant in Salman attempted to rely on the Second Circuit’s Newman decision, but the Supreme Court rejected that argument, and stated: “To the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family and friends, . . . this requirement is inconsistent with Dirks.”
After the Salman case, the personal benefit issue came before the Second Circuit in United States v. Martoma. There, in August 2017, the appeals court not only noted that the Supreme Court had explicitly rejected (i) the pecuniary-value requirement of Newman, but also concluded that Salman had implicitly abrogated (ii) the “meaningfully close personal relationship” aspect of Newman. United States v. Martoma, 869 F.3d 58 (2d Cir. 2017) (“Martoma I”). The opinion was written by Judge Robert Katzmann and joined by Judge Denny Chin; the third panel member, Judge Rosemary Pooler, dissented. (A third holding of Newman, that the tippee had to be aware of the tipper’s personal benefit, was unaffected by Salman and remains as an important limitation on the government’s pursuit of insider trading cases).
In June 2018, the panel issued an amended opinion, with Judge Pooler once against dissenting. 894 F.3d 64 (2d Cir. 2017) (“Martoma II”). The court reached the same result as before and affirmed the conviction in the case before it. But it modified its holding that Salman...
