Since the Second Circuit came out with its decision in United States v. Martoma I have been asked many questions about it. I am sorry to say that the answer to pretty much all of them is: “I don’t know.” I hate that answer, by the way, but it is what it is.
People have asked: Why did the Second Circuit do this? Did the panel mean to go as far as it seems they went? Does this mean there is no such thing as personal benefit? Was Newman really just a personal shot at the over reach of former US Attorney Preet Bharara? Will the Second Circuit take this en banc? Will SCOTUS hear another insider trading case so soon after United States v. Salman? Answer: I don’t know.
One more popular one: Does this mean that Chiasson and Newman would be found guilty today? Answer: No!! This one I know definitively because the main holding of United States v. Newman was that the tippee’s needed to have a knowledge of the personal benefit exchanged between tipper and tippee, and no evidence existed that Chiasson and Newman had any knowledge of any benefit.
So, I least I know that. Before we can begin to hope to answer some of these questions above, we need to know what in the Wide, Wide World of Sports the Second Circuit did in Martoma.
To recap the facts, Martoma worked for SAC as a portfolio manager. He hired a consultant, Gilman, who provided Martoma with information about a drug trial. The government alleged and proved at trial that Gilman gave Martoma material nonpublic information about the drug trial, in breach of a fiduciary duty (which means in exchange for a personal benefit) and that Martoma traded on it. The appeal centered on Newman-like issues; it questioned both the sufficiency of the evidence and the jury charge.
Last week, in upholding Martoma’s conviction, in a stunning opinion, the Second Circuit reversed Newman. More accurately, it reversed the Newman holding that stated: “To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee, where the tippee’s trades ‘resemble trading by the insider himself followed by a gift of the profits to the recipient,’ we hold that such an 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.” The Circuit stated: “the logic of Salman abrogated Newman’s ‘meaningfully close personal relationship’ requirement”.
The majority opinion took its lead from one sentence in Salman. The Supreme Court noted 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, Newman, 773 F.3d at 452, . . . this requirement is inconsistent with Dirks.” From here the majority concluded that the High Court intended to wipe out the entirety of Newman’s “meaningfully close personal benefit” requirement. In so doing, the majority opinion held: “that an insider or tipper personally benefits from a disclosure of inside information whenever the information was disclosed ‘with the expectation that [the recipient] would trade on it,’ Salman, 137 S. Ct. at 428, and the disclosure ‘resemble[s] trading by the insider followed by a gift of the profits to the recipient,’ id. at 427 (quoting Dirks, 463 U.S. at 664), whether or not there was a ‘meaningfully close personal relationship’ between the tipper and tippee.”
While the true impact of this statement may not be felt for some time, a fair interpretation (and one being kicked around the legal community) is that the Second Circuit effectively eliminated personal benefit and replaced it with a standard that boils down to a tipper’s intentional act of providing material nonpublic information to another and the tipper’s expectation that the tippee is going to trade on that information. After all, a gift is merely providing an item to another person without necessarily receiving something tangible in return. Virtually anything that is passed from one person to the next without a quid pro quo can be considered a gift by someone. So, it feels like a very broad and expansive ruling and a vast departure from how Newman positioned personal benefit. Thus, unless and until it gets sorted out, Martoma is about as far from Newman as Kansas is from the Land of Oz.
Unlike Newman, Martoma was not a unanimous panel. Judge Rosemary Pooler dissented … some would say vehemently dissented. The dissent points out that the majority went too far in its analysis of Salman’s criticism of Newman. Salman stated “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, Newman, 773 F.3d at 452, . . . this requirement is inconsistent with Dirks.” The dissent opined that the Supreme Court only questioned the added requirement of “pecuniary or similarly valuable nature” and not the requirement of demonstrating a “meaningfully close personal relationship.” It noted that Salman did a Newman-like analysis of the closeness of the tipper/tippee relationship, therefore logics dictates that the Supreme Court embraced, at least part of the Newman requirement. The dissent essentially argues that the Supremes are a pretty smart bunch of folks and had they wished to overturn the requirement of a “meaningfully close personal relationship” they would have used those specific words, rather than discussing only pecuniary gain.
Personally, I don’t think that Salman intended to go as far as Martoma’s majority opinion took it. For me, the answer can be found in a small but crucial word in the above referenced sentence: “also”. Salman’s use of the word “also” in relation to the pecuniary language suggests that it did not question the “meaningfully close personal relationship” requirement. Let’s put it this way, knowing that the Supreme Court went to great lengths to discuss the closeness of the tipper/tippee relationships in Salman, which interpretation is more likely, that: (1) Newman requires a meaningfully close personal relationship but the Supreme Court disagreed with any additional requirement that gift to relative/friend must contemplate something of pecuniary or similarly value nature” OR, (2) because Newman required a pecuniary or similarly valuable gain to the tipper, the Supreme Court deemed the entire sentence faulty and disagreed that gift between a trading relative or friend must contemplate a close personal relationship?
I think you know where I come out on that one (hint, it is (1) and not (2)). But, as to where the District Courts, Second Circuit, other Courts of Appeal and even the Supreme Court will ultimately come out … I’m sorry to say again … I don’t know. What I do know, is that a fight I thought was over, is about to begin all over again.
Gregory Morvillo is a partner at Morvillo LLP
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