On 23 August 2017, in a widely followed case (United States v. Martoma), a divided panel of the Second Circuit Court of Appeals (which hears appeals from district courts in Connecticut, New York and Vermont) upheld the insider trading conviction of portfolio manager Mathew Martoma of SAC Capital Advisors, LLC. The decision marked that court’s first occasion to consider its landmark decision in United States v. Newman (which we have written about in previous editions of this newsletter) in light of the United States Supreme Court’s subsequent decision in Salman v. United States. In Salman, the Court found that a jury could infer that a tipper personally benefited from making a gift of confidential information to a relative who traded on it.
Over a strong dissent, the majority found that the logic underpinning the Salman decision abrogated Newman‘s requirement that a “meaningfully close personal relationship” must exist between a tipper and tippee before allowing a jury to infer the personal benefit necessary to establish insider trading liability merely from a tip of inside information. The majority 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 and the disclosure resembles trading by the insider followed by a gift of the profits to the recipient, whether or not there was a meaningfully close relationship between the tipper and tippee”. In so ruling, the court shifted the focus from the relationship between a tipper and tippee to the tipper’s subjective intent in making the tip and seemingly did away with the limiting principle that Newman had established.
While clearly a win for prosecutors, this new standard will still require a highly fact-intensive inquiry into the purpose of any tip. As a result, it remains to be seen how much of a shift in law it portends. Furthermore, the requirement established in Newman—that a tippee must know about the personal benefit received by the insider – remains unchanged and will continue to limit prosecutions involving extended tipping chains.