The Second Circuit Upholds former SAC Capital Manager’s Conviction and Expands the Supreme Court’s Personal Benefit Rule

August 29, 2017

On August 23, 2017, the U.S. Court of Appeals for the Second Circuit affirmed the conviction of SAC Capital Advisers LP manager, Mathew Martoma. United States v. Martoma, Case No. 14-3599 (2d Cir.). Applying for the very first time the Supreme Court’s recent decision in Salman v. United States, No. 15-628, 137 S. Ct. 420 (Dec. 6, 2016), the Second Circuit overruled its own valuable personal benefit requirement and expanded the Supreme Court’s personal benefit rule addressing insider trading where a tipper gifts inside information in violation of securities laws.


On September 9, 2014, Martoma was found guilty of one count of conspiracy to commit securities fraud and two counts of securities fraud based on an insider trading scheme involving two pharmaceutical companies in the U.S. District Court for the Southern District of New York.

Within a few months of the Martoma verdict, the Second Circuit rendered its decision in United States v. Newman, 773 F.3d 438 (2d Cir. Dec. 10, 2014). In Newman, the Second Circuit narrowed the scope of insider trading prosecutions by applying a new, valuable personal benefit test which required that a tippee knew or should have known that the insider/tipper received a personal benefit for the tip and that to the extent that a personal benefit may be inferred from a personal relationship between the tipper and tippee, “the inference is impermissible in the absence of proof of a meaningfully close personal relationship 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.

Citing Newman, Martoma challenged his conviction on appeal to the Second Circuit by arguing insufficient evidence and inadequate jury instructions. Martoma, Slip Op. at 13. Oral argument was held in October 2015. A few months later, in January 2016, the Supreme Court accepted certiorari in Salman from the U.S. Court of Appeals for the Ninth Circuit which rejected Newman’s valuable personal benefit requirement.

As we set forth in a memorandum in December 2016,1 the Supreme Court agreed with the Ninth Circuit, explaining that Dirks v. SEC, 463 U.S. 646 (1983) “makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to ‘a trading relative.'” 137 S. Ct. at 427. Addressing Newman, the Supreme Court concluded that “[t]o the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends, we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.Id. at 428 (citation omitted). However, the Supreme Court declined to address Newman’s other holding that the government must prove that traders knew or should have known, that the information they received was from an insider receiving a personal benefit. Id. at 425 n.1.


Upon the Supreme Court’s decision in Salman, the Second Circuit requested additional briefing from the Martoma parties as to the effect of Salman. Thereafter, the Second Circuit affirmed Martoma’s conviction, concluding that there was overwhelming evidence supporting Martoma’s guilt and that the jury instructions were not obviously erroneous. Martoma, Slip Op. at 2.

In discussing Martoma’s challenge to the jury instruction on personal benefit, the Second Circuit also concluded that Newman’s requirement of a “meaningfully close personal relationship” that generated an exchange of something potentially valuable or pecuniary could “no longer be sustained” in light of Salman. Slip Op. 19-20, 22 n.6. While acknowledging that Salman and other Supreme Court precedent like Dirks v. SEC, 463 U.S. 646 (1983) confined “their discussion of gifts to ‘trading relative[s] and friend[s],'” the Second Circuit held that an insider/tipper “personally benefits from a disclosure of inside information” if “the information was disclosed ‘with the expectation that [the recipient] would trade on it,’ and the disclosure resemble[s] trading by the insider followed by a gift of the profits to the recipient, whether or not there was a ‘meaningfully close personal relationship’ between the tipper and tippee.” Slip Op. at 27-28 (quoting Salman). The Court argued that its conclusion was supported by Dirks, where “the tippee . . . did not have a personal relationship of any kind, let alone a friendship, with the tippers who gave him inside information” and the Supreme Court applied the gift theory anyway. Slip Op. at 26.

U.S. Circuit Judge Rosemary S. Pooler wrote a lengthy dissent to the opinion, concluding that the Second Circuit expanded the personal benefit rule beyond the circumstances set forth in Dirks and Salman, i.e, when a person gifts information to trading relatives or friends, and created a rule that could apply to a gift to any person. Dissent Slip Op. at 2. The Dirks/Salman personal benefit rule, Judge Pooler explained, made “it unlikely that persons with innocent intentions will violate the law” and provided “greater notice to persons hearing information that the information was shared improperly.” Dissent Slip Op. at 9. The result of the new Second Circuit personal benefit/gift rule would be that the government would be required to show “few objective facts” and the meaning of gift would be left open to vague and subjective interpretations. Id.


Martoma expands the Salman and Dirks personal benefit rule by facilitating the potential prosecution of any person who gifts inside information with expectation that the information will be traded upon. The decision represents a major win for prosecutors, and the Acting U.S. Attorney Joon H. Kim for the United States Attorney’s Office for the Southern District of New York indicated in a press release that he was “gratified.” Given its potentially broad application, the decision could have an extreme, chilling effect on communications between market participants who are otherwise unclear about what constitutes a gift or creates liability under securities laws. Because the decision overruled Newman, broadened the application of the personal benefit/gift rule, and resulted in a lengthy dissent from Judge Pooler, Martoma may not go unchallenged for long. The decision could, for example, result in a rare rehearing before the full Second Circuit or an appeal to the U.S. Supreme Court. Until then, legal experts will be watching federal district courts closely to see how they apply the Second Circuit’s new personal benefit/gift rule. We will continue to monitor this area of developing insider trading law.


1  U.S. Supreme Court Sides with Prosecutors and Partially Overrules Second Circuit Standard That Made It Harder to Prosecute Insider Trading, SEWARD & KISSEL LLP (Dec. 7, 2016)


If you have any questions regarding the matters covered in this memo, please contact Jack Yoskowitz or your primary attorney in Seward & Kissel’s Capital Markets, Investment Management, or Litigation Groups.