United States: The Second Circuit Loosens The Reins On Insider Trading Prosecutions

After an intervening decision by the United States Supreme Court last year and a rare rehearing of oral argument in March, the Second Circuit has affirmed the conviction of Matthew Martoma, a former portfolio manager at S.A.C. Capital Advisors. In doing so, the Second Circuit has signaled a substantial shift in insider trading law by reversing course from its 2015 decision, which made prosecuting insider trading cases more difficult.

Following a four-week trial in 2014, Matthew Martoma was convicted on several securities fraud charges in connection with an insider trading scheme involving the securities of two pharmaceutical companies. The government had alleged that Martoma traded on materially nonpublic information regarding the trial-phase performance of an experimental drug designed to treat Alzheimer's disease. When Martoma learned that the clinical trials of the drug yielded major setbacks, he entered into short-sale and options trades, which resulted in approximately $80.3 million in gains and $194.6 million in averted losses.

Martoma appealed his conviction but, while his appeal was pending, the Second Circuit issued a decision in 2015 expanding on an earlier decision of the Supreme Court concerning the "personal benefit" derived from giving a "gift" of insider information. Earlier, in Dirks v. S.E.C., 463 U.S. 646 (1983), the Supreme Court held that the personal benefit necessary to establish insider trading liability in a tipping case could be inferred from a gift of inside information "to a trading relative or friend." Thereafter, in United States v. Newman, 773 F.3d 438 (2d Cir. 2015), the Second Circuit expanded on the holding in Dirks by concluding that this inference was "impermissible in the absence of proof of a meaningfully close personal relationship" and in the absence of some pecuniary gain for the tipper. At the time, observers considered the holding in Newman to be a major obstacle in prosecuting insider trading cases. After all, the term – "a meaningfully close personal relationship" – was left undefined by Newman, but it apparently did not reach two people who "had known each other for years, having both attended business school and worked together."

In light of the holding in Newman, Martoma argued in his appeal that the jury was not properly instructed on the relationship between himself and the doctors he consulted with who sat on the monitoring committee of the clinical trials. Martoma argued that the evidence offered at trial did not establish the "meaningfully close personal relationship" required by Newman nor did the evidence reveal that the doctors received any "objective, consequential ... gain of pecuniary or similarly valuable nature" in exchange for providing the confidential information.

Yet again, while Martoma's appeal was pending, the law continued to evolve as the United States Supreme Court issued an intervening decision, which, in part, scaled back the restrictive holding in Newman. In Salman v. United States, 136 S. Ct. 899 (2016), the defendant urged the Supreme Court to adopt a standard similar to the ruling in Newman by holding that a gift of insider information to a trading relative or friend was insufficient to establish insider trading liability "unless the tipper's goal in disclosing the information [wa]s to obtain money, property, or something of tangible value." The Supreme Court, however, declined to do so. Indeed, the Court specifically mentioned the Newman ruling and concluded that "to 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, ... this requirement is inconsistent with Dirks."

The Supreme Court in Salman, however, did not reach the Newman court's additional requirement of a "meaningfully close personal relationship." Nevertheless, the majority in Martoma concluded that the Salman decision "fundamentally altered the analysis underlying Newman's 'meaningfully close personal relationship.'" As Chief Judge Katzmann explained, the logic of the "gift-giving analysis in Dirks," as reaffirmed in Salman, does not support a distinction between gifts to people with whom a tipper shares a "meaningfully close personal relationship" and gifts to those with whom a tipper does not share such a relationship. In either case, an insider personally benefits whenever he discloses inside information as a gift with the expectation that the recipient will trade on the basis of such information because, as Chief Judge Katzmann concluded, such a disclosure is "the functional equivalent of trading on the information himself and giving a cash gift to the recipient."

Judge Pooler issued a lengthy dissent, which essentially criticized the majority holding for going too far by abandoning Newman entirely even though the Salman holding did not compel such a result. Judge Pooler acknowledged the unmistakable rejection in Salman of "Newman's second holding, which required a showing that a tipper would receive something of 'pecuniary or similarly valuable nature.'" The Supreme Court, however, as Judge Pooler noted, left Newman's qualification of a "meaningfully close personal relationship" untouched, which signaled to her the Supreme Court's unwillingness to broaden the gift-giving doctrine in Dirks. As Judge Pooler warned, by overturning Newman entirely, the majority would permit insider trading liability to exist whenever an insider gives a gift of confidential information to any person. That the majority emphasized its holding would only apply to instances in which a tipper expects someone to trade on the information was unavailing for Judge Pooler. As Judge Pooler wrote, the expectation that someone will trade on the information is a separate requirement in insider trading cases and does not serve as a limitation on liability under the personal benefit rule.

Ultimately, the Martoma decision reveals a serious disagreement within the Second Circuit regarding the incompatibility of the holdings in Salman and Newman. An en banc hearing is possible, especially given the opening remarks in Judge Pooler's dissent, where she expresses her concern with the majority's summary rejection of Newman "without convening [the] Court en banc." Until then, the Martoma decision must be considered to represent a significant about-face for the Second Circuit with respect to easing the burden on prosecuting insider trading cases.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.