Source: https://www.natlawreview.com/article/martoma-decision-second-circuit-tackles-insider-trading-post-salman
Timestamp: 2019-04-23 08:03:58+00:00

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The decision could alter the landscape of tipping liability.
The US Court of Appeals for the Second Circuit issued another landmark insider trading opinion on August 23. In United States v. Martoma, the Second Circuit loosened the standard required for the government to establish tipping liability, handing the government a significant victory in this key enforcement area. Martoma is the latest in a string of important decisions concerning this scope of insider trading liability.
The seeds of Martoma were planted in the Second Circuit’s 2014 decision in United States v. Newman, which threw a wrench in the government’s multiyear enforcement efforts in insider trading because of the decision’s heightened standard for tipping liability. Newman redefined the personal-benefit standard to require a “meaningfully close relationship” that presented “at least a potential gain of a pecuniary or similarly valuable nature.” But then, in December 2016, the Supreme Court issued its first insider trading decision in almost 20 years in United States v. Salman. As described below, the Supreme Court abrogated Newman’s personal benefit pecuniary requirement by finding—following Dirks—that an insider who gifts inside information to a trading relative or friend receives the requisite personal benefit.
A dispute, however, remained as to whether any gift sufficed or whether a close personal relationship in a gift-giving context was necessary to satisfy the personal-benefit requirement. Martoma resolves that issue, clarifying that so long as someone gifts the inside information with the expectation that the tippee will trade, the personal benefit test is met, even if the tipper and tippee are not even friends or relatives. This is a significant victory for the government.
In Salman, defendant Bassam Yacoub Salman, a remote tippee, received and traded on MNPI from his brother-in-law Michael Kara, who had obtained the information from his older brother Maher Kara, an investment banker at a large bank. Evidence showed that Salman was aware that the MNPI originated with Maher Kara, but there was no evidence that Maher received any pecuniary benefit for his tips. Salman was convicted at trial and his conviction was upheld by the US Court of Appeals for the Ninth Circuit. The US Supreme Court granted certiorari.
The Court also found that “[t]o the extent the Second Circuit [in Newman] held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends, Newman, 773 F.3d at 452, we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.” The Court held that Salman’s jury was properly instructed that a personal benefit includes the benefit one would obtain from simply making a gift of confidential information to a trading relative, and, accordingly, upheld the Ninth Circuit’s judgment.
Mathew Martoma worked as a portfolio manager at S.A.C. Capital Advisors, LLC (SAC), focusing on pharmaceutical and healthcare companies. In that role, Martoma caused SAC to acquire shares of two companies that were jointly developing an experimental drug called bapineuzumab used to treat Alzheimer’s disease. Martoma obtained information about bapineuzumab from Dr. Sidney Gilman, chair of the safety monitoring committee for the bapineuzumab clinical trial, in meetings arranged by an expert networking firm. Dr. Gilman participated in approximately 43 consultations with Martoma, for some of which he was paid $1,000 per hour. Despite his obligation to keep the results of the clinical trial confidential, Dr. Gilman disclosed test results and other confidential information to Martoma during the consultations. On July 17 and 19, 2008, in advance of a July 29, 2008 conference at which Dr. Gilman was due to present bapineuzumab test results, Dr. Gilman and Martoma met. Shortly thereafter, on July 21, 2008, SAC began to reduce its positions in the two companies at issue through short sales and options trades. On July 29, 2008, immediately following Dr. Gilman’s presentation, the share prices of the two companies at issue fell significantly. The trades that SAC had made in advance of the presentation resulted in approximately $80 million in gains and $195 million in averted losses.
Martoma was indicted for insider trading in the Southern District of New York, and on September 9, 2014, following a four-week trial at which Dr. Gilman testified, Martoma was convicted. While Martoma’s appeal was pending, the Second Circuit decided Newman and, after the Second Circuit heard oral argument in the Martoma appeal, the Supreme Court decided Salman. The Second Circuit requested additional briefing.
On appeal, Martoma argued that (i) the evidence presented at trial was insufficient to support his conviction and (ii) the district court did not properly instruct the jury in light of the Second Circuit’s decision in Newman. As to the sufficiency argument, Martoma argued that he and Dr. Gilman did not have a “meaningfully close personal relationship” and that Dr. Gilman had not received any pecuniary or similarly valuable gain in exchange for providing Martoma with confidential information. As to the second ground for appeal, Martoma argued that Newman’s personal benefit holding, requiring a “meaningfully close personal relationship” when a gift is made by an insider to a tippee, survived Salman, and the Martoma jury was not properly instructed on it.
As to Martoma’s sufficiency challenge, the majority found that even though Dr. Gilman did not bill Martoma for the two July 2008 meetings at which Dr. Gilman provided Martoma with the critical bapineuzumab testing information, Dr. Gilman and Martoma maintained a quid pro quo relationship that presented the opportunity to “yield future pecuniary gain.” As to that relationship, the court noted that “Martoma was a frequent and lucrative client for Dr. Gilman,” and “[a]t the same time, Dr. Gilman was regularly feeding Martoma confidential information about the safety results of clinical trials involving bapineuzumab.” The court held that in the context of Dr. Gilman’s ongoing quid pro quo relationship, where Dr. Gilman regularly disclosed confidential information in exchange for fees, a rational trier of fact could have found the essential elements of insider trading under a pecuniary quid pro quo theory.
Judge Rosemary S. Pooler issued a lengthy dissent criticizing various aspects of the majority opinion. Judge Pooler characterized the majority opinion as holding that “an insider receives a personal benefit when the insider gives inside information as a ‘gift’ to any person.” Judge Pooler reasoned that Newman included two holdings: (i) “when the government wishes to show a personal benefit based on a gift within a friendship, as permitted by Dirks, the friendship must be ‘a meaningfully close personal relationship,’” and (ii) “an insider’s gift to a friend only amounted to a personal benefit if the gift might yield money (or something similar) for the insider.” Judge Pooler opined that Salman overturned only the second of those holdings, and she further asserted that the majority’s requirement that a tipper must expect the tippee to trade on the information provided is not dispositive because that requirement always exists in tipping cases.
The Martoma decision is significant for several reasons. As the Second Circuit noted, “[t]his appeal is our first occasion to consider Newman in the aftermath of the Supreme Court’s recent decision in [Salman].” The Second Circuit found that Newman’s requirement of a close relationship between tipper and tippee does not stand in light of Salman. Indeed, the Second Circuit clarified that so long as someone gifts the inside information with the expectation that the tippee will trade, the nature of the relationship between the tipper and the tippee does not matter. Thus, absent a rehearing en banc or grant of certiorari, the Second Circuit has provided additional gloss on the “gift theory” articulated in Dirks, holding that any gift suffices and focusing the relevant inquiry on whether a tipper expects that a tippee will trade on the inside information provided. Unless the panel’s decision in Martoma is overturned, the ambiguity and limitations created by Newman’s personal benefit test are all but gone and Martoma will significantly aid the government’s insider trading enforcement efforts.
 United States v. Martoma, No. 14-3599, Dkt. No. 174-1 (2d Cir. Aug. 23, 2017).
 773 F.3d 438 (2d Cir. 2014).
 137 S. Ct. 420 (2016).
 137 S. Ct. 420, 427.
 Martoma, slip op. at 13.
 Martoma, slip op. at 19.
 Martoma, slip op. at 18 (quoting Newman, 773 F.3d at 452).
 Martoma, slip op. at 18.
 Martoma, slip op. at 18-19.
 Martoma, slip op. at 25 (internal quotations, citations, and alterations omitted).
 Martoma, slip op. at 25.
 Martoma, slip op. at 27-28 (internal quotations, citations, and alterations omitted).
 Martoma, slip op. at 35.
 United States v. Martoma, No. 14-3599, Dkt. No. 175 (2d Cir. Aug. 23, 2017) (Pooler, J., dissenting) (hereinafter, Dissent).
 Dissent at 20 (citing S.E.C. v. Obus, 693 F.3d 276, 286-87 (2d Cir. 2012); United States v. Gansman, 657 F.3d 85, 92 (2d Cir. 2011)).
 Martoma, slip op. at 22 n.6; Dissent at 15, 18.
 Martoma, slip op. at 3.
Kenneth I. Schacter is an experienced trial lawyer who handles a broad range of civil and white collar criminal matters. His practice emphasizes securities litigation; complex criminal, antitrust and civil RICO matters; SEC proceedings; intellectual property litigation; and other business litigation. Ken has trial experience before juries, judges and arbitration panels throughout the United States. He has tried more than 30 cases to verdict or award and has also argued dozens of appeals.
Grant R. MacQueen is part of a team of lawyers that represents clients in a wide range of areas, including business and corporate disputes, corporate investigations, criminal defense, and international arbitration. Additional matters involve issues relating to environmental, patent and trademark, securities, toxic tort, and product liability claims.

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