United States v. Martoma

869 F.3d 58

UNITED STATES of America, Appellee,

v.Mathew MARTOMA, Defendant-Appellant.

Docket No. 14-3599

August Term, 2016

United States Court of Appeals, Second Circuit.

Argued: October 28, 2015

May 9, 2017

Decided: August 23, 2017

Robert Allen and Arlo Devlin-Brown , Assistant United States Attorneys, (Megan Gaffney, Michael A. Levy, and Margaret Garnett, Assistant United States Attorneys, on the brief), for Joon H. Kim, Acting United States Attorney for the Southern District of New York, New York, NY, for Appellee.

Paul D. Clement (Erin E. Murphy, Harker Rhodes, and Edmund G. LaCour, Jr., on the brief), Kirkland & Ellis LLP, Washington, DC; Alexandra A.E. Shapiro, Eric S. Olney, and Jeremy Licht, Shapiro Arato LLP, New York, NY; Charles J. Ogletree, Jr., Cambridge, MA, for Defendant-Appellant.

Before: Katzmann, Chief Judge, Pooler and Chin, Circuit Judges.

Katzmann, Chief Judge:

Defendant-appellant Mathew Martoma was convicted, following a four-week jury trial, of one count of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and two counts of securities fraud in violation of 15 U.S.C. §§ 78j(b) & 78ff in connection with an insider trading scheme. Martoma argues primarily that the evidence presented at trial was insufficient to support his conviction and that the district court did not properly instruct the jury in light of the Second Circuit's decision in United States v. Newman , 773 F.3d 438 (2d Cir. 2014), issued after Martoma was convicted. This appeal is our first occasion to consider Newman in the aftermath of the Supreme Court's recent decision in Salman v. United States , ––– U.S. ––––, 137 S.Ct. 420, 196 L.Ed.2d 351 (2016). We hold that the logic of Salman abrogated Newman 's"meaningfully close personal relationship" requirement and that the district court's jury instruction was not obviously erroneous. Further, any instructional error would not have affected Martoma's substantial rights because the government presented overwhelming evidence that at least one tipper received a financial benefit from providing confidential information to Martoma. As a result, we AFFIRM the judgment of the district court.

BACKGROUND

I.

Martoma's convictions stem from an insider trading scheme involving securities of two pharmaceutical companies, Elan Corporation, plc ("Elan") and Wyeth, that were jointly developing an experimental drug called bapineuzumab to treat Alzheimer's disease. Martoma worked as a portfolio manager at S.A.C. Capital Advisors, LLC ("SAC"), a hedge fund owned and managed by Steven A. Cohen. In that capacity, Martoma managed an investment portfolio with buying power of between $400 and $500 million that was focused on pharmaceutical and healthcare companies. He also recommended investments to Cohen, who managed SAC's largest portfolio. While at SAC, Martoma began to acquire shares in Elan and Wyeth in his portfolio and recommended that Cohen acquire shares in the companies as well.

In order to obtain information about bapineuzumab, Martoma contacted expert networking firms and arranged paid consultations with doctors knowledgeable about Alzheimer's disease, including two who were working on the bapineuzumab clinical trial. Dr. Sidney Gilman, chair of the safety monitoring committee for the bapineuzumab clinical trial, participated in approximately 43 consultations with Martoma at the rate of around $1,000 per hour.¹ As a member of the safety monitoring committee, Dr. Gilman had an obligation to keep the results of the clinical trial confidential. His consulting contract reiterated that he was not to disclose any confidential information in a consultation. He nevertheless provided Martoma, whom he knew was an investment manager, with confidential updates on the drug's safety that he received during meetings of the safety monitoring committee. Dr. Gilman also shared with Martoma the dates of upcoming safety monitoring committee meetings, which allowed Martoma to schedule consultations with Dr. Gilman shortly after each one. Another consultant, Dr. Joel Ross, one of the principal investigators on the clinical trial, met with Martoma on many occasions between 2006 and July 2008 and charged approximately $1,500 per hour. Like Dr. Gilman, Dr. Ross had an obligation to maintain the confidentiality of information about the bapineuzumab clinical trial. Nevertheless, during their consultations, Dr. Ross provided Martoma with information about the clinical trial, including information about his patients' responses to the drug and the total number of participants in the study, that Dr. Ross recognized was not public.

On June 17, 2008, Elan and Wyeth issued a press release regarding the results of "Phase II" of the bapineuzumab clinical trial. The press release described the preliminary results as "encouraging," with "clinically meaningful benefits in important subgroups" of Alzheimer's patients with certain genetic characteristics, but indicated that the drug had not proven effective in the general population of Alzheimer's patients. J.A. 547. The press release further stated that the results of the trials would be presented in greater detail at the International Conference on Alzehimer's Disease to be held on July 29, 2008. Elan's share price increased following the press release.

In mid-July of 2008, the sponsors of the bapineuzumab trial selected Dr. Gilman to present the results at the July 29 conference. It was only at this point that Dr. Gilman was unblinded as to the final efficacy results of the trial. Dr. Gilman was "initially euphoric" about the results, but identified "two major weaknesses in the data" that called into question the efficacy of the drug as compared to the placebo. Tr. 1419–20. On July 17, 2008, the day after being unblinded to the results, Dr. Gilman spoke with Martoma for about 90 minutes by telephone about what he had learned. That same day, Martoma purchased a plane ticket to see Dr. Gilman in person at his office in Ann Arbor, Michigan. That meeting occurred two days later, on July 19, 2008. At that meeting, Dr. Gilman showed Martoma a PowerPoint presentation containing the efficacy results and discussed the data with him in detail.

The next morning, Sunday, July 20, Martoma sent Cohen, the owner of SAC, an email with "It's important" in the subject line and asked to speak with him by telephone. The two had a telephone conversation lasting about twenty minutes, after which Martoma emailed Cohen a summary of SAC's Elan and Wyeth holdings. The day after Martoma spoke to Cohen, on July 21, 2008, SAC began to reduce its position in Elan and Wyeth securities by entering into short-sale and options trades that would be profitable if Elan's and Wyeth's stock fell.

Dr. Gilman publicly presented the final results from the bapineuzumab trial at the International Conference on Alzehimer's Disease in the afternoon of July 29, 2008. Elan's share price began to decline during Dr. Gilman's presentation and at the close of trading the next day, the share prices of Elan's and Wyeth had declined by about 42% and 12%, respectively. The trades that Martoma and Cohen made in advance of the announcement resulted in approximately $80.3 million in gains and $194.6 million in averted losses for SAC. Martoma personally received a $9 million bonus based in large part on his trading activity in Elan and Wyeth.

II.

The procedural history of this case is inextricably intertwined with recent developments in insider trading law. Insider trading is a violation of § 10(b) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78j(b), and Rule 10b-5, promulgated by the Securities and Exchange Commission ("SEC") and codified at 17 C.F.R. § 240.10b-5. The Supreme Court has long held that there is no "general duty between all participants in market transactions to forgo actions based on material, nonpublic information." Chiarella v. United States , 445 U.S. 222, 233, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980). However, the "traditional" or "classical theory" of insider trading provides that a corporate insider violates § 10(b) and Rule 10b-5 when he "trades in the securities of his corporation on the basis of material, non-public information" because "a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation." United States v. O'Hagan , 521 U.S. 642, 651-52, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997) (alteration in original) (quoting Chiarella , 445 U.S. at 228, 100 S.Ct. 1108 ). Similarly, the "misappropriation theory" of insider trading provides "that a person ... violates § 10(b) and Rule 10b-5[ ] when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information." Id . at 652, 117 S.Ct. 2199. It is thus the breach of a fiduciary duty or other "duty of loyalty and confidentiality" that is a necessary predicate to insider trading liability. See id .

In Dirks v. S.E.C. , 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), the Supreme Court held that a "tippee"—someone who is not a corporate insider but who nevertheless receives material nonpublic information from a corporate insider, or "tipper," and then trades on the information—can also be held liable under § 10(b) and Rule 10b-5, but "only when the insider 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." Id. at 660, 103 S.Ct. 3255.² "[T]he test" for whether there has been a breach of a fiduciary duty or other duty of loyalty and confidentiality "is whether the [tipper] personally will benefit, directly or indirectly, from his disclosure" to the tippee. Dirks , 463 U.S. at 662, 103 S.Ct. 3255. As examples of "direct or indirect personal benefit[s] from the disclosure," the Supreme Court cited "pecuniary gain or a...