On January 11, the Second Circuit Court of Appeals denied the appeal of Rajat Gupta, who was seeking to undo his insider trading conviction. Relying on the Second Circuit’s decision in United States v. Newman, Gupta argued that—to satisfy the requirement that Gupta personally benefit from tipping inside information—the Government must show “a quid pro quo – in which [Gupta] receive[d] an ‘objective, consequential . . . gain of a pecuniary or similarly valuable nature.’”[1] In other words—intangible benefits should not, standing alone, constitute a personal benefit sufficient to uphold a criminal conviction. The Second Circuit rejected this argument, finding that the Supreme Court’s decisions in Dirks v. SEC and Salman v. United States foreclosed such a narrow definition of “benefit,” opting instead for a test that looked at “varying sets of circumstances”—including those that involve indirect, intangible, and nonquantifiable gains, such as an anticipated quid quo pro that can be inferred from an ongoing, business relationship—to satisfy the “personal benefit” test.[2] This case is the latest in a line of decisions—in the Supreme Court, as well as the Second and Ninth Circuits—to reject defendants’ arguments for a narrow definition of the “personal benefit” element of insider trading law based on Newman.
Background
In 2012, a jury convicted Gupta of insider trading after he shared inside information, which he learned as a member of Goldman Sachs’ board of directors, with Raj Rajaratnam, founder of the Galleon Group, as well as business associate and friend of Gupta.[3] After unsuccessfully appealing his conviction, Gupta returned to the Southern District of New York in 2015 and filed a habeas petition to vacate his conviction, arguing that the lower court’s jury instruction—that Gupta could be guilty if he received a benefit that did not need to be financial or tangible in nature, such as maintaining a good relationship with a frequent business partner—was legally invalid following the Second Circuit’s decision in Newman.[4]Newman had held that the personal benefit inferred from a “gift of confidential information to a trading relative or friend,” then well-established under Dirks, required “proof of a meaningfully close personal relationship that generates an exchange that . . . represents at least a potential gain of a pecuniary or similarly valuable nature.”[5] On July 2, 2015, the District Court rejected Gupta’s habeas petition, holding that Gupta could not overcome the procedural forfeit of his claim as he could not show cause or actual innocence.[6] Gupta filed an appeal with the Second Circuit.
In 2016, Gupta’s pending attempt to vacate his conviction suffered another blow when, in Salman, the Supreme Court rejected the Newman pecuniary formulation in favor of the original test from Dirks.[7]Gupta v. U.S. (2019)
In his appeal, Gupta, as others did before him,[8] focused on the limiting language in Newman as the basis for his habeas petition. Specifically, Gupta argued that the jury instruction at his criminal trial was legally invalid because the instruction did not require a quid pro quo from which Gupta received at least the potential for a pecuniary gain.[9] He further argued that Salman was not dispositive because its holding applied only to the gift theory, which Gupta never invoked.[10]
The Second Circuit affirmed the District Court, finding the jury instruction consistent with Dirks and, restating Salman, clarified that personal benefits “need not be pecuniary at all.”[11] “Where the recipient of the tip is the tipper’s ‘frequent’ ‘business’ partner, the tipper’s anticipation of a quid pro quo is easily inferable.”[12] The Court found that ample evidence was presented at trial to show that Rajaratnam and Gupta were frequent business associates and at least good friends, and that Gupta intended to benefit from sharing the inside information with Rajaratnam.[13] The Court further noted that Dirks set out a broad, non-exclusive description of “personal benefit,” stating that the examples listed by the Supreme Court in Dirks were just that: a...
