Split 2nd Circuit Affirms Martoma Conviction

August 23, 2017

In United States of America, Appellee, v. Mathew Martoma, Defendant/Appellant (Opinion, United States court of Appeals for the Second Circuit; 14-3599 / August 23, 2017), the Syllabus offers the following preliminary background:

Defendant‐appellant Mathew Martoma appeals from a judgment of conviction entered on September 9, 2014 in the United States District Court for the Southern District of New York (Gardephe, J.). Martoma was found guilty, after a jury trial, of one count of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and two counts of securities fraud in violation of 15 U.S.C. §§ 78j(b) & 78ff in connection with an insider trading scheme.  After Martoma was convicted, this Court issued a decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), which elaborated on the Supreme Court's ruling in Dirks v. S.E.C., 463 U.S. 646 (1983), concerning liability for a "tippee" who trades on confidential information obtained from an insider, or a "tipper." Newman concluded that the "personal benefit" that a tipper must derive from providing inside information for a disclosure to trigger insider trading liability could not be inferred under the "gift theory" articulated in Dirks "in the absence of proof of a meaningfully close personal relationship [between the tipper and tippee] that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." Newman, 773 F.3d at 452

Martoma initially argued on appeal that the jury in his case had not been properly instructed and that the evidence presented at his trial was insufficient to convict him in light of Newman. While Martoma's appeal was pending, the Supreme Court issued a decision in Salman v. United States, 137 S. Ct. 420 (2016), which rejected certain aspects of Newman's holding. Id. at 428. In supplemental briefing, Martoma argues that his conviction should still be reversed under Newman because Salman did not overrule Newman's requirement that a tipper have a "meaningfully close personal relationship" with a tippee to justify the inference that a tipper received a personal benefit from his gift of inside information. Newman, 773 F.3d at 452.  We conclude that the logic of Salman abrogated Newman's "meaningfully close personal relationship" requirement and that the district court's jury instruction was not obviously erroneous.  Further, any instructional error would not have affected Martoma's substantial rights because the government presented overwhelming evidence that at least one tipper received a financial benefit from providing confidential information to Martoma. Accordingly, the judgment of the district court is AFFIRMED.

POOLER, Circuit Judge, dissents in a separate opinion

Newman and "Personal Benefit"

In 2014, the United States Court of Appeals for the Second Circuit ("2Cir") vacated the insider-trading convictions of two individuals on the ground that the Government had failed to present sufficient evidence that they knew the information they received had been disclosed in breach of a fiduciary duty. United States of America, Appellee, v. Todd Newman and Anthony Chiasson, Defendants-Appellants -- and --- Jon Horvath, Danny Kuo, Hyung G. Lim, Michael Steinberg, Defendants (Opinion, 2Cir, 13-CR-1837 and 12-CR-1917, December 10, 2014). As 2Cir held in Newman:

We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the  Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government's evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants' purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal  benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders' fiduciary duties Accordingly, we reverse the convictions of Newman and Chiasson on all counts and remand with instructions to dismiss the indictment as it pertains to them with prejudice.

Page 4 of the 2Cir Newman Opinion

It's All Relative -- In a Friendly Sort of Way

Last year, the United States Supreme Court issued a dramatic insider trading ruling in United States of America v. Bassam Yacoub Salman (Opinion, Supreme Court, 15-628 / December 6, 2016).  As set forth in the Court's Syllabus:

Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's Rule 10b-5 prohibit undisclosed trading on inside corporate information by persons bound by a duty of trust and confidence not to exploit that information for their personal advantage. These persons are also forbidden from tipping inside information to others for trading. A tippee who receives such information with the knowledge that its disclosure breached the tipper's duty acquires that duty and may be liable for securities fraud for any undisclosed trading on the information. In Dirks v. SEC, 463 U. S. 646, this Court explained that tippee liability hinges on whether the tipper's disclosure breaches a fiduciary duty, which occurs when the tipper discloses the information for a personal benefit. The Court also held that a personal benefit may be inferred where the tipper receives something of value in exchange for the tip or "makes a gift of confidential information to a trading relative or friend." Id., at 664. 

Petitioner Salman was indicted for federal securities-fraud crimes for trading on inside information he received from a friend and relative-by-marriage, Michael Kara, who, in turn, received the information from his brother, Maher Kara, a former investment banker at Citigroup. Maher testified at Salman's trial that he shared inside information with his brother Michael to benefit him and expected him to trade on it, and Michael testified to sharing that information with Salman, who knew that it was from Maher. Salman was convicted. 

While Salman's appeal to the Ninth Circuit was pending, the Second Circuit decided that Dirks does not permit a fact-finder to infer a personal benefit to the tipper from a gift of confidential information to a trading relative or friend, unless there is "proof of a meaningfully close personal relationship" between tipper and tippee "that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature," United States v. Newman, 773 F. 3d 438, 452, cert. denied, 577 U. S. ___. The Ninth Circuit declined to follow Newman so far, holding that Dirks allowed Salman's jury to infer that the tipper breached a duty because he made " 'a gift of confidential information to a trading relative.' " 792 F. 3d 1087, 1092 (quoting Dirks, 463 U. S., at 664). 

Held: The Ninth Circuit properly applied Dirks to affirm Salman's conviction. Under Dirks, the jury could infer that the tipper here personally benefited from making a gift of confidential information to a trading relative. Pp. 6-12. 

(a) Salman contends that a gift of confidential information to a friend or family member alone is insufficient to establish the personal benefit required for tippee liability, claiming that a tipper does not personally benefit unless the tipper's goal in disclosing information is to obtain money, property, or something of tangible value. The Government counters that a gift of confidential information to anyone, not just a "trading relative or friend," is enough to prove securities fraud because a tipper personally benefits through any disclosure of confidential trading information for a personal (non-corporate) purpose. The Government argues that any concerns raised by permitting such an inference are significantly alleviated by other statutory elements prosecutors must satisfy. Pp. 6-8. 

(b) This Court adheres to the holding in Dirks, which easily resolves the case at hand: "when an insider makes a gift of confidential information to a trading relative or friend . . . [t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient," 463 U. S., at 664. In these situations, the tipper personally benefits because giving a gift of trading information to a trading relative is the same thing as trading by the tipper followed by a gift of the proceeds. Here, by disclosing confidential information as a gift to his brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to Citigroup and its clients-a duty acquired and breached by Salman when he traded on the information with full knowledge that it had been improperly disclosed. To the extent that the Second Circuit in Newman held that the tipper must also receive something of a "pecuniary or similarly valuable nature" in exchange for a gift to a trading relative, that rule is inconsistent with Dirks. Pp. 8-10. 

(c) Salman's arguments to the contrary are rejected. Salman has cited nothing in this Court's precedents that undermines the gift-giving principle this Court announced in Dirks. Nor has he demonstrated that either §10(b) itself or Dirks's gift-giving standard "leav[e] grave uncertainty about how to estimate the risk posed by a crime" or are plagued by "hopeless indeterminacy." Johnson v. United States, 576 U. S. ___, ___, ___. Salman also has shown "no grievous ambiguity or uncertainty that would trigger" the rule of lenity. Barber v. Thomas, 560 U. S. 474, 492 (internal quotation marks omitted). To the contrary, his conduct is in the heartland of Dirks's rule concerning gifts of confidential information to trading relatives. Pp. 10-12. 

Unfortunately, 2Cir's Newman and the Supreme Court's Salman Opinions didn't fully match up and legal pundits warned that there were some unresolved issues that would likely unsettle insider trading law both in terms of redressing prior determinations and in impacting ongoing or contemplated cases.

READ:
The ripples from both Newman and Salman continue to spread.

Benefits Package

In Martoma's case, the trial court issued the following jury instructions: 

If you find that Dr. Gilman or Dr. Ross disclosed material, non‐public information to Mr. Martoma, you must then determine whether the government proved beyond a reasonable doubt that Dr. Gilman and Dr. Ross received or anticipated receiving some personal benefit, direct or indirect, from disclosing the material, non‐public information at issue.   

The benefit may, but need not be, financial or tangible in nature; it could include obtaining some future advantage, developing or maintaining a business contact or a friendship, or enhancing the tipper's reputation. 

A finding as to benefit should be based on all the objective facts and inferences presented in the case. You may find that Dr. Gilman or Dr. Ross received a direct or indirect personal benefit from providing inside information to Mr. Martoma if you find that Dr. Gilman or Dr. Ross gave the information to Mr. Martoma with the intention of benefit[t]ing themselves in some manner, or with the intention of conferring a benefit on Mr. Martoma, or as a gift with the goal of maintaining or developing a personal friendship or a useful networking contact.  

Pages 11 - 12 of 2Cir Opinion

Not Even Close

Following Newman, Martoma challenged both the sufficiency of trial evidence and the jury instructions. Pointedly, Martoma disputed that there was a "meaningfully close personal relationship" between him and Dr. Gilman. Similarly, Martoma argued that Dr. Gilman did not receive any gain of a pecuniary or other valuable nature pursuant to providing allegedly confidential information to Martoma. Finally, Martoma underscored that the jury instructions did not properly inform the jurors about the "personal benefit" standard enunciated in Newman.

In considering Martoma's arguments and certain inconsistencies between Newman and Salmanthe Majority Opinion by Chief Judge Katzmann and Judge Chin 2Cir states:

[I]n other words, the defendant in Salman urged the Supreme Court to adopt a standard similar to the ruling in Newman. The Supreme Court declined to do so and instead "adhere[d] to Dirks," which contained a "discussion of gift giving [that] resolve[d] the case." Id. at 427. According to the Salman Court:   

Dirks specifies that when a tipper gives inside information to "a trading relative or friend," the jury can infer that the tipper meant to provide the equivalent of a cash gift. In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds. Here, by disclosing confidential information as a gift to his brother with the expectation that he would trade on it, [the tipper] breached his duty of trust and confidence to [his employer] and its clients-a duty [the defendant] acquired, and breached himself, by trading on the information with full knowledge that it had been improperly disclosed.

Page 14 of the 2Cir Opinion

Thus, we hold 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.8 The dissent criticizes us for "holding that someone who gives a gift always receives a personal benefit from doing so" and that "an insider receives a personal benefit when the insider gives inside information as a 'gift' to any person." Dissent Slip Op. at 2. But our holding reaches only the insider who discloses inside information to someone he expects will trade on the information. This holding is no broader than the logic underpinning the Supreme Court's conclusion in Salman. Indeed, as noted above, the Supreme Court has found it "obvious" that an insider would personally benefit from "trad[ing] on [inside] information . . . himself and then giv[ing] the proceeds as a gift to his brother." Salman, 137 S. Ct. at 427-28. Our holding comports with Salman's observation that personal benefit to the insider is equally obvious when an insider "effectively achieve[s] the same result by disclosing the information to [the tippee]" for the purpose of "allowing [the tippee] to trade on it." Id. at 428.   

Pages 27 -29 of the 2Cir Opinion

 
Having concluded that the evidence was sufficient to support Martoma's conviction and that Newman's "meaningfully close personal relationship" requirement is no longer good law, the remaining question is whether the district court's jury instruction, which Martoma challenges for its failure to include Newman's "meaningfully close personal relationship" requirement, accurately conveyed the elements of insider trading. The jury instruction given at Martoma's trial stated that a "gift [given] with the goal of maintaining or developing a personal friendship or a useful networking contact" constitutes a personal benefit. Tr. 3191. Martoma focuses on the language about developing friendships, arguing that gifts given to develop future friendships do not give rise to the personal benefit needed to trigger insider trading liability. Salman reiterated that when confidential information is given as a gift, it is "the same thing as trading by the tipper followed by a gift of the proceeds" and is thus the functional equivalent of a cash gift. Salman, 137 S. Ct. at 428. Whether the recipient of the gift is an existing friend or a potential future friend whom a gift is intended to entice, the logic-that a tipper personally benefits by giving inside information in lieu of a cash gift-operates in a similar manner. For this reason, the aspect of the district court's instruction on gifts with the goal of developing friendships, which is at most "subject to reasonable dispute," did not constitute "obvious" error. Marcus, 560 U.S. at 262 (internal quotation marks omitted).  

Pages 34 - 35 of the 2Cir Opinion

The Dissent

Judge Pooler's opening paragraph in the Dissent notes the line of demarcation that it seems to have been crossed by the Majority:

Because the majority rejects limitations the Supreme Court set forth in Dirks v. S.E.C., 463 U.S. 646 (1983), and Salman v. United States, 137 S. Ct. 420 (2016), and overrules our holding in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), without convening this Court en banc, I cannot join the opinion. And, because those precedents show that Martoma's jury instructions were erroneous in a way that affected his rights at trial, I respectfully dissent.

Page 1 of the Dissent

A Vague Gift

Today, the majority holds that an insider receives a personal benefit when the insider gives inside information as a "gift" to any person. In holding that someone who gives a gift always receives a personal benefit from doing so, the majority strips the long‐standing personal benefit rule of its limiting power. What counts as a "gift" is vague and subjective. Juries, and, more dangerously, prosecutors, can now seize on this vagueness and subjectivity. The result will be liability in many cases where it could not previously lie.

Page 2 of the Dissent

A Matter of Inferences

To summarize, Dirks held that a gift of information to an insider's relatives or friends could permit an inference of a personal benefit. In Newman, we held that such an inference could only be made when (1) the gift was exchanged within a "meaningfully close personal relationship," and (2) a gift created the potential for an insider to receive a pecuniary or similar benefit. Salman reversed the second holding of Newman, requiring the potential of pecuniary gain, but left untouched the first holding that, in order to allow inference of a personal benefit, gifts must be exchanged within a "meaningfully close personal relationship."

Page 18 of the Dissent

Half-Baked Salman?

I note, also, that the majority's opinion exactly mirrors the government's view pressed in Salman: that "a gift of confidential information to anyone, not just a 'trading relative or friend,' is enough to prove securities fraud." Salman, 137 S. Ct. at 426. The Supreme Court, however, did not adopt that view. Id. at 427. It is curious indeed that the majority would understand Salman to require us to take a position that the Supreme Court explicitly considered but did not adopt.

Accordingly, I would hold (1) that Salman does not overrule Newman's "meaningfully close personal relationship" requirement, and (2) that Salman does not overrule the limitation described in both Dirks and in Salman itself-that an inference of personal benefit may be based on an insider's gift to relatives or friends, but not a gift to someone else.

Pages 31 - 32 of the Dissent

Severely Damaging

Adhering to the Supreme Court's precedent may challenge us when it leaves unethical conduct unpunished. But there is great wisdom in the Supreme Court's limitations on broad rules, particularly when those rules might otherwise allow punishment of the absentminded in addition to persons with corrupt intentions. Today, however, the majority severely damages the limitation provided by the personal benefit rule, and casts aside Circuit precedent and Supreme Court rulings to do so.

Page 44 of the Dissent