This week, in United States v. Martoma, the Circuit held that a “meaningfully close personal relationship” does not need to exist between an insider and a tippee in order to establish an insider trading violation under a “gift theory” of liability. The Circuit reached this conclusion on the ground that the Supreme Court abrogated the holding of United States v. Newman, 773 F.3d 438 (2d Cir. 2014), and thereby relaxed the “personal benefit” requirement necessary to support an insider trading conviction. You can access the Martoma opinion here.
Martoma was convicted of insider trading in violation of 15 U.S.C. §§ 78(b) & 78ff for trading on material, nonpublic information that he received from a neurologist concerning the results of a clinical drug trial. To establish an insider trading violation in this context, the government must prove that the insider stood to personally benefit, “directly or indirectly, from his disclosure to the tippee.” Dirks v. S.E.C., 463 U.S. 646, 662 (1983). Such a personal benefit exists where there is a quid pro quo exchange or, in some cases, where the insider makes a gift to the tippee. See id. at 664. The jury instruction in Martoma allowed the jury to find liability under the latter “gift theory” if it concluded that the neurologist divulged inside information for the purpose of “developing or maintaining a business contact or a friendship.” Martoma, slip op. at 12. To review this jury instruction, the panel had to determine what sort of relationship must exist between an insider and a tippee in order to satisfy the personal benefit requirement when inside information is offered as a gift. This required the panel to consider the extent to which the Supreme Court’s decision in Salman v. United States, 137 S. Ct. 420 (2016), undermined the Circuit’s analysis of the personal benefit requirement in Newman, 773 F.3d 438.
The standard adopted in Martoma allows the government to satisfy the personal benefit requirement simply by showing that (1) the insider disclosed material, nonpublic information “‘with the expectation that the [the recipient] would trade on it'” and (2) “‘the disclosure resemble[s] trading by the insider followed by a gift of the profits to the recipient.'” Slip op. at 27-28 (quoting Salman v. United States, 137 S. Ct. 420, 427-48 (2016)). Under Newman, the government was also required to prove the existence of a “meaningfully close personal relationship” between the tipper and tippee that “generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” 773 F.3d at 452. The Supreme Court expressly overruled Newman “[t]o the extent that the Second Circuit held that the tipper must . . . receive something of a pecuniary or similarly valuable nature in exchange for a gift to family or friends.” Salmon, 137 S. Ct. at 428 (quotation marks omitted). In Martoma, the panel held that Salmon also implicitly abrogated the “meaningfully close personal relationship” requirement. Accordingly, the panel upheld the district court’s jury instruction notwithstanding that it permitted the jury to find guilt if the insider traded information for the purpose of “developing” a friendship that was not meaningfully close at the time of the disclosure. Martoma, slip op. at 12 (emphasis added).
Judge Pooler wrote a lengthy dissent casting doubt on the majority’s reading of Salmon.