United States: Newman Appears To Narrowly Survive The Second Circuit's Rehearing Of Martoma

On June 25, 2018, a divided panel of the United States Court of Appeals for the Second Circuit reaffirmed the insider trading conviction of a hedge fund portfolio manager in United States v. Martoma1 on different grounds from its previous decision.2 As the dissenting opinion pointed out, the majority's opinion has significant implications on insider trading prosecutions and may now jeopardize conduct that previously was not prohibited.

Relevant Background

As fully discussed in our previous article, Mathew Martoma appealed his insider trading conviction arguing the jury instructions were flawed and the evidence against him was insufficient. During the pendency of his appeal, the Second Circuit decided United States v. Newman holding that a personal benefit in the form of confidential information given to a trading friend or relative requires a showing that a tipper and tippee have a "meaningfully close personal relationship."3 Also during this time, the Supreme Court decided Salman v. United States holding that a personal benefit exists when a tipper "makes a gift of confidential information to a trading relative or friend."4 Given these two intervening decisions, the appeal was closely watched to see if Salman abrogated Newman's "meaningfully close personal relationship" requirement.

In a divided decision, a majority of the Second Circuit panel initially affirmed Martoma's conviction holding that it was not necessary to find a "meaningfully close personal relationship" to support a personal benefit. While not fully abrogating Newman, the majority held that "the straightforward logic of the gift-giving analysis in Dirks, affirmed by Salman, is that a corporate insider personally benefits whenever he 'disclos[es] inside information as a gift . . . with the expectation that [the recipient] would trade' on the basis of such information or otherwise exploit it for pecuniary gain." Notably, the dissent disagreed with the "vagueness and subjectivity" of the majority's formulation of the personal benefit test, warning that "[t]he result will be liability in many cases where it could not previously lie."

The Majority Opinion

Nearly a year later, the same Second Circuit panel of three judges reheard Martoma's appeal and reaffirmed his conviction in a divided decision. In reaffirming Martoma's conviction, the majority relied on the unique facts of the case—specifically the $70,000 in "consulting fees" that Martoma paid to the tipper (which we previously pointed out was likely a basis for the first decision)—and punted on "whether Newman's gloss on the gift theory is inconsistent with Salman."5 In particular, the majority found that the jury instructions were flawed because they "allowed the jury to find a personal benefit in the form of a 'gift of confidential information to a trading relative or friend' without requiring the jury to find either that tipper and tippee shared a relationship suggesting a quid pro quo or that the tipper gifted confidential information with the intention to benefit the tippee."6 Yet the majority reasoned that this flawed instruction was immaterial because the consulting fees were compelling evidence of a quid pro quo relationship or "simply advance payments for the tips."7 The majority also reasoned that this flaw did not prejudice Martoma because the tipper "received a personal benefit by disclosing insider information with the intention to benefit Martoma."8

The majority recognized that the "key sentence of Dirks is admittedly ambiguous" but held that a personal benefit may be supported by evidence of a quid pro quo relationship or an intention to benefit the tippee.9 According to the majority, evidence of a relationship is not necessary to prove that intention.10

The Dissenting Opinion

The dissent noted that "Newman remains good law," but once again warned of the majority's formulation of the personal benefit test, arguing that it could "render[] Newman a relic" by "attempt[ing] to redefine 'meaningfully close personal relationship' in subjective rather than objective terms."11 The dissent emphasized that, when the personal benefit is not pecuniary, "objective evidence about the nature of the relationship between the tipper and tippee takes on more importance in identifying the benefit."12 The dissent explained that "an intention to benefit is not itself an 'objective fact or circumstance,' as Dirks requires, but rather an inference drawn from objective facts or circumstances."13


As we indicated in our takeaways to our previous article,14 relationships will remain at the forefront of parties' arguments and defenses. This remains true today because, as the dissent stated and the majority acquiesced, "Newman remains good law." Yet whether such analysis will be undercut by the majority opinion in Martoma likely depends on whether this decision is reviewed by an en banc Second Circuit panel or the Supreme Court. After all, the dissent continues to make important arguments for following Newman and requiring the government to provide objective evidence to support an insider trading conviction.


1 Slip Op., No. 14-3599 (2d Cir. June 25, 2018).

2 United States v. Martoma, 869 F.3d 58 (2d Cir. 2017).

3 773 F.3d 438 (2d Cir. 2014).

4 137 S.Ct. 420 (2016).

5 Majority Opinion at 14, United States v. Martoma, Slip Op., No. 14-3599 (2d Cir. June 25, 2018).

6 Id. at 2.

7 Id. at 14.

8 Id. at 14-15.

9 Id. at 22.

10 Id. at 26.

11 Dissenting Opinion at 2, 18, United States v. Martoma, Slip Op., No. 14-3599 (2d Cir. June 25, 2018).

12 Id. at 6 (emphasis in original).

13 Id. at 14 (emphasis in original).

14 Marc D. Powers, Jonathan A. Forman, & Jonathan D. Blattmachr, Second Circuit Majority in U.S. v. Martoma Eliminates Proof of Financial or Other Personal Benefits to Tipper in Conviction, Securities Regulation Daily (Sept. 14, 2017).

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