United States v. Martoma
894 F.3d 64 (2017)
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Rule of Law:
An insider's personal benefit, required for tipper-tippee insider trading liability, can be established by evidence that the tipper intended to benefit the tippee by disclosing material non-public information, even without a quid pro quo or a meaningfully close personal relationship.
Facts:
- Mathew Martoma, a portfolio manager for the hedge fund S.A.C. Capital Advisors (SAC), managed a portfolio focused on pharmaceutical companies.
- Martoma arranged and paid for approximately 43 consultations with Dr. Sidney Gilman, the chair of a safety monitoring committee for a clinical trial of an Alzheimer's drug, bapineuzumab.
- Dr. Gilman was paid approximately $1,000 per hour for these consultations, totaling around $70,000, and was under a contractual duty to keep trial information confidential.
- During these consultations, Dr. Gilman repeatedly provided Martoma with confidential information and updates about the drug trial.
- In mid-July 2008, Dr. Gilman learned the final, negative efficacy results of the bapineuzumab trial.
- On July 17 and July 19, 2008, Dr. Gilman disclosed these final, negative results to Martoma in detail.
- Starting on July 21, 2008, after Martoma informed SAC's owner, SAC began selling its long positions and initiating short sales in the drug's developers, Elan and Wyeth.
- These trades resulted in approximately $275 million in gains and averted losses for SAC, and Martoma personally received a $9 million bonus based on this performance.
Procedural Posture:
- Mathew Martoma was charged with one count of conspiracy to commit securities fraud and two counts of securities fraud in the U.S. District Court for the Southern District of New York (the trial court).
- After a four-week trial, a jury found Martoma guilty on all counts.
- Martoma, as appellant, appealed his conviction to the U.S. Court of Appeals for the Second Circuit, arguing that the jury instructions were erroneous and that the evidence was insufficient to sustain his conviction.
- The United States was the appellee.
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Issue:
Does a corporate insider's disclosure of material non-public information with the intention of benefiting the recipient, without more, satisfy the 'personal benefit' element required to establish tipper-tippee liability for insider trading?
Opinions:
Majority - Katzmann, Chief Judge
Yes, an insider's intention to benefit a recipient is a standalone basis for satisfying the 'personal benefit' element of insider trading. The Supreme Court in Dirks v. S.E.C. established multiple ways to prove a personal benefit, including not only a pecuniary gain or quid pro quo relationship, but also the tipper's 'intention to benefit the particular recipient.' While the jury instructions were erroneous under the 'gift theory' as articulated in United States v. Newman (which requires a 'meaningfully close personal relationship'), the error was harmless. There was compelling evidence of a personal benefit under two other valid theories: first, the ongoing paid consultations established a quid pro quo relationship, and second, there was sufficient evidence that Dr. Gilman deliberately disclosed the valuable, confidential information with the specific intention of benefiting Martoma.
Dissenting - Pooler, Circuit Judge
No, an insider's subjective 'intention to benefit' a recipient is insufficient to satisfy the personal benefit element, which requires objective proof of gain to the tipper. The majority misinterprets Dirks, which requires evidence of 'a relationship...that suggests...an intention to benefit,' not a freestanding, subjective intent. By eliminating the need for objective evidence of a relationship, the majority's rule turns the personal benefit requirement into a 'mere formality' based on speculation into a tipper's motives. The instructional error was not harmless, as a reasonable jury could have doubted the existence of a quid pro quo, given that Dr. Gilman was not paid for the specific tips at issue, and the government itself argued against the existence of a close personal friendship.
Analysis:
This decision significantly reinterprets and limits the Second Circuit's own recent precedent in United States v. Newman, which had heightened the standard for proving personal benefit under a 'gift' theory. By establishing that a tipper's 'intention to benefit' the tippee is a standalone basis for liability, the court makes it easier for prosecutors to secure insider trading convictions without needing to prove a tangible quid pro quo or a 'meaningfully close personal relationship.' This ruling broadens the scope of what constitutes an illegal tip, reducing the evidentiary burden on the government in future insider trading cases involving tippers and tippees who are not close friends or relatives.
