by Antonia M. Apps

Less than three years after the U.S. Court of Appeals for the Second Circuit instituted a new test for the personal benefit element of insider trading violations in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), the Court of Appeals in United States v. Martoma , No. 14-3599 (2d Cir. Aug. 23, 2017), expressly overruled the remaining vestiges of that test, which had already been narrowed by the Supreme Court in Salman v. United States, 137 S. Ct. 420 (2016).  The recent cases all addressed the Supreme Court’s seminal decision in Dirks v. SEC, 463 U.S. 646 (1983), which held that liability for insider trading under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder requires the insider disclosing material nonpublic information to have received or expected a personal benefit in exchange for disclosing the information.  Dirks provided a broad definition of personal benefit, holding that it could be satisfied by (among other things) “a gift of confidential information to a trading relative or friend.”  463 U.S. at 664.  In a 2-to-1 decision, the Court of Appeals in Martoma held that Newman’s gloss of a “meaningfully close personal relationship” as part of the personal benefit test was “no longer good law.”  Slip Op. at 24.  Instead, the majority ruled, liability requires the government to prove that the tipper expected the tippee would trade on the information and the tip “resembled trading by the insider followed by a gift of the profits” to the tippee.  Id. at 26. Continue reading →