United States of America v. Martoma
Filing
OPINION, affirming the judgment of the district court, by RAK, RSP, DC, FILED.[2108040] [14-3599]
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page1 of 37
14‐3599
United States v. Martoma
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
_______________
August Term, 2016
(Argued: October 28, 2015 and May 9, 2017 Decided: August 23, 2017)
Docket No. 14‐3599
_______________
UNITED STATES OF AMERICA,
Appellee,
– v. –
MATHEW MARTOMA
Defendant‐Appellant.
_______________
B e f o r e:
KATZMANN, Chief Judge, POOLER and CHIN, Circuit Judges.
______________
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page2 of 37
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.
2
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page3 of 37
_______________
ROBERT ALLEN and ARLO DEVLIN‐BROWN, Assistant United States
Attorneys, (Megan Gaffney, Michael A. Levy, and Margaret
Garnett, Assistant United States Attorneys, on the brief), for
Joon H. Kim, Acting United States Attorney for the Southern
District of New York, New York, NY, for Appellee.
PAUL D. CLEMENT (Erin E. Murphy, Harker Rhodes, and Edmund G.
LaCour, Jr., on the brief), Kirkland & Ellis LLP, Washington,
DC; Alexandra A.E. Shapiro, Eric S. Olney, and Jeremy Licht,
Shapiro Arato LLP, New York, NY; Charles J. Ogletree, Jr.,
Cambridge, MA, for Defendant‐Appellant.
_______________
KATZMANN, Chief Judge:
Defendant‐appellant Mathew Martoma was convicted, following a four‐
week 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. Martoma argues
primarily that the evidence presented at trial was insufficient to support his
conviction and that the district court did not properly instruct the jury in light of
the Second Circuit’s decision in United States v. Newman, 773 F.3d 438 (2d Cir.
2014), issued after Martoma was convicted. This appeal is our first occasion to
consider Newman in the aftermath of the Supreme Court’s recent decision in
Salman v. United States, 137 S. Ct. 420 (2016). We hold that the logic of Salman
3
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page4 of 37
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. As a result, we AFFIRM the judgment of the district court.
BACKGROUND
I.
Martoma’s convictions stem from an insider trading scheme involving
securities of two pharmaceutical companies, Elan Corporation, plc (“Elan”) and
Wyeth, that were jointly developing an experimental drug called bapineuzumab
to treat Alzheimer’s disease. Martoma worked as a portfolio manager at S.A.C.
Capital Advisors, LLC (“SAC”), a hedge fund owned and managed by Steven A.
Cohen. In that capacity, Martoma managed an investment portfolio with buying
power of between $400 and $500 million that was focused on pharmaceutical and
healthcare companies. He also recommended investments to Cohen, who
managed SAC’s largest portfolio. While at SAC, Martoma began to acquire
4
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page5 of 37
shares in Elan and Wyeth in his portfolio and recommended that Cohen acquire
shares in the companies as well.
In order to obtain information about bapineuzumab, Martoma contacted
expert networking firms and arranged paid consultations with doctors
knowledgeable about Alzheimer’s disease, including two who were working on
the bapineuzumab clinical trial. Dr. Sidney Gilman, chair of the safety
monitoring committee for the bapineuzumab clinical trial, participated in
approximately 43 consultations with Martoma at the rate of around $1,000 per
hour.1 As a member of the safety monitoring committee, Dr. Gilman had an
obligation to keep the results of the clinical trial confidential. His consulting
contract reiterated that he was not to disclose any confidential information in a
consultation. He nevertheless provided Martoma, whom he knew was an
investment manager, with confidential updates on the drug’s safety that he
received during meetings of the safety monitoring committee. Dr. Gilman also
shared with Martoma the dates of upcoming safety monitoring committee
Martoma did not pay Dr. Gilman or any other consultant directly. Instead, SAC
would pay the expert networking firm, and the expert networking firm would in turn
pay Dr. Gilman and the other consultants.
1
5
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page6 of 37
meetings, which allowed Martoma to schedule consultations with Dr. Gilman
shortly after each one. Another consultant, Dr. Joel Ross, one of the principal
investigators on the clinical trial, met with Martoma on many occasions between
2006 and July 2008 and charged approximately $1,500 per hour. Like Dr. Gilman,
Dr. Ross had an obligation to maintain the confidentiality of information about
the bapineuzumab clinical trial. Nevertheless, during their consultations, Dr.
Ross provided Martoma with information about the clinical trial, including
information about his patients’ responses to the drug and the total number of
participants in the study, that Dr. Ross recognized was not public.
On June 17, 2008, Elan and Wyeth issued a press release regarding the
results of “Phase II” of the bapineuzumab clinical trial. The press release
described the preliminary results as “encouraging,” with “clinically meaningful
benefits in important subgroups” of Alzheimer’s patients with certain genetic
characteristics, but indicated that the drug had not proven effective in the
general population of Alzheimer’s patients. J.A. 547. The press release further
stated that the results of the trials would be presented in greater detail at the
International Conference on Alzehimer’s Disease to be held on July 29, 2008.
Elan’s share price increased following the press release.
6
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page7 of 37
In mid‐July of 2008, the sponsors of the bapineuzumab trial selected Dr.
Gilman to present the results at the July 29 conference. It was only at this point
that Dr. Gilman was unblinded as to the final efficacy results of the trial. Dr.
Gilman was “initially euphoric” about the results, but identified “two major
weaknesses in the data” that called into question the efficacy of the drug as
compared to the placebo. Tr. 1419–20. On July 17, 2008, the day after being
unblinded to the results, Dr. Gilman spoke with Martoma for about 90 minutes
by telephone about what he had learned. That same day, Martoma purchased a
plane ticket to see Dr. Gilman in person at his office in Ann Arbor, Michigan.
That meeting occurred two days later, on July 19, 2008. At that meeting, Dr.
Gilman showed Martoma a PowerPoint presentation containing the efficacy
results and discussed the data with him in detail.
The next morning, Sunday, July 20, Martoma sent Cohen, the owner of
SAC, an email with “It’s important” in the subject line and asked to speak with
him by telephone. The two had a telephone conversation lasting about twenty
minutes, after which Martoma emailed Cohen a summary of SAC’s Elan and
Wyeth holdings. The day after Martoma spoke to Cohen, on July 21, 2008, SAC
7
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page8 of 37
began to reduce its position in Elan and Wyeth securities by entering into short‐
sale and options trades that would be profitable if Elan’s and Wyeth’s stock fell.
Dr. Gilman publicly presented the final results from the bapineuzumab
trial at the International Conference on Alzehimer’s Disease in the afternoon of
July 29, 2008. Elan’s share price began to decline during Dr. Gilman’s
presentation and at the close of trading the next day, the share prices of Elan’s
and Wyeth had declined by about 42% and 12%, respectively. The trades that
Martoma and Cohen made in advance of the announcement resulted in
approximately $80.3 million in gains and $194.6 million in averted losses for
SAC. Martoma personally received a $9 million bonus based in large part on his
trading activity in Elan and Wyeth.
II.
The procedural history of this case is inextricably intertwined with recent
developments in insider trading law. Insider trading is a violation of § 10(b) of
the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78j(b), and Rule 10b‐5,
promulgated by the Securities and Exchange Commission (“SEC”) and codified
at 17 C.F.R. § 240.10b‐5. The Supreme Court has long held that there is no
“general duty between all participants in market transactions to forgo actions
8
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page9 of 37
based on material, nonpublic information.” Chiarella v. United States, 445 U.S. 222,
233 (1980). However, the “traditional” or “classical theory” of insider trading
provides that a corporate insider violates § 10(b) and Rule 10b‐5 when he “trades
in the securities of his corporation on the basis of material, non‐public
information” because “a relationship of trust and confidence [exists] between the
shareholders of a corporation and those insiders who have obtained confidential
information by reason of their position with that corporation.” United States v.
O’Hagan, 521 U.S. 642, 651‐52 (1997) (alteration in original) (quoting Chiarella, 445
U.S. at 228). Similarly, the “misappropriation theory” of insider trading provides
“that a person . . . violates § 10(b) and Rule 10b‐5[] when he misappropriates
confidential information for securities trading purposes, in breach of a duty
owed to the source of the information.” Id. at 652. It is thus the breach of a
fiduciary duty or other “duty of loyalty and confidentiality” that is a necessary
predicate to insider trading liability. See id.
In Dirks v. S.E.C., 463 U.S. 646 (1983), the Supreme Court held that a
“tippee”—someone who is not a corporate insider but who nevertheless receives
material nonpublic information from a corporate insider, or “tipper,” and then
trades on the information—can also be held liable under § 10(b) and Rule 10b‐5,
9
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page10 of 37
but “only when the insider has breached his fiduciary duty to the shareholders
by disclosing the information to the tippee and the tippee knows or should know
that there has been a breach.” Id. at 660.2 “[T]he test” for whether there has been a
breach of a fiduciary duty or other duty of loyalty and confidentiality “is
whether the [tipper] personally will benefit, directly or indirectly, from his
disclosure” to the tippee. Dirks, 463 U.S. at 662. As examples of “direct or indirect
personal benefit[s] from the disclosure,” the Supreme Court cited “pecuniary
gain or a reputational benefit that will translate into future earnings.” Id. at 663.
The Supreme Court went on to list “objective facts and circumstances that often
justify” an inference of personal benefit:
For example, there may be a relationship between the
insider and the recipient that suggests a quid pro quo
from the latter, or an intention to benefit the particular
recipient. The elements of fiduciary duty and
exploitation of nonpublic information also exist when
an insider makes a gift of confidential information to a
trading relative or friend. The tip and trade resemble
trading by the insider himself followed by a gift of the
profits to the recipient.
Although many of the cases refer to “insiders” and “fiduciary” duties because
those cases involve the “classical theory” of insider trading, the Dirks articulation of
tipper and tippee liability also applies under the misappropriation theory, where the
misappropriator violates some duty owed to the source of the information. See S.E.C. v.
Obus, 693 F.3d 276, 286–88 (2d Cir. 2012); see also Newman, 773 F.3d at 445–46.
2
10
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page11 of 37
Id. at 664. Building on this language, we have observed that “[p]ersonal benefit is
broadly defined to include not only pecuniary gain, but also, inter alia, any
reputational benefit that will translate into future earnings and the benefit one
would obtain from simply making a gift of confidential information to a trading
relative or friend.” United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013)
(alterations, citations, and internal quotation marks omitted).
Accordingly, the district court instructed the jury in Martoma’s trial that:
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
11
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page12 of 37
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.
Tr. 3191.
After Martoma was convicted and while his appeal was pending, we
considered one of the situations described in Dirks—giving a “gift” of inside
information to “a trading relative or friend”—in greater detail in United States v.
Newman, 773 F.3d 438 (2d Cir. 2015). The Court noted “that [p]ersonal benefit is
broadly defined.” Id. at 452 (quoting Jiau, 734 F.3d at 153) (internal quotation
marks omitted). The Court went on, however, to state:
This standard, although permissive, does not suggest
that the Government may prove the receipt of a
personal benefit by the mere fact of a friendship,
particularly of a casual or social nature. If that were
true, and the Government was allowed to meet its
burden by proving that two individuals were alumni of
the same school or attended the same church, the
personal benefit requirement would be a nullity. 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
12
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page13 of 37
potential gain of a pecuniary or similarly valuable
nature.
Id. at 452 (citation omitted).
Based on this language from Newman, Martoma challenged on appeal both
the sufficiency of the evidence presented at his trial and the adequacy of the
instructions given to the jury. Martoma argued that he and Dr. Gilman did not
have a “meaningfully close personal relationship” and that Dr. Gilman had not
received any “objective, consequential . . . gain of a pecuniary or similarly
valuable nature” in exchange for providing Martoma with confidential
information.3 Further, according to Martoma, even if the evidence was sufficient
to support his conviction, the district court’s jury instructions were inadequate in
light of Newman because they did not inform the jury about the limitations on
“personal benefit” developed in Newman. This inadequate instruction, Martoma
argued, warranted a retrial. The initial round of briefing and oral argument
focused in large part on whether Martoma’s conviction could stand in light of
Newman.
The parties focus primarily on Dr. Gilman because it was Dr. Gilman, not Dr.
Ross, who gave Martoma the final efficacy data that led Martoma to reduce SAC’s
position in Elan and Wyeth.
3
13
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page14 of 37
Shortly after we held oral argument, however, the Supreme Court granted
certiorari in Salman v. United States, see 136 S. Ct. 899 (2016), and issued a decision
in the case on December 6, 2016. See 137 S. Ct. 420 (2016). The defendant in
Salman argued that a “gift of confidential information to a trading relative or
friend,” id. at 426 (quoting Dirks, 463 U.S. at 664), was insufficient to establish
insider trading liability “unless the tipper’s goal in disclosing inside information
[wa]s to obtain money, property, or something of tangible value.” Id. In 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.
14
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page15 of 37
Id. at 428. The Supreme Court also mentioned the Newman decision, observing
that “[t]o 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, . . . this requirement is inconsistent with Dirks.” Id. (quoting
Newman, 773 F.3d at 452).
In light of Salman, we requested additional briefing from the parties and
scheduled a second round of oral argument to address how Salman affects this
case.
DISCUSSION
As noted above, Martoma challenges both the sufficiency of the evidence
presented at trial and the adequacy of the district court’s jury instruction. A
defendant challenging the sufficiency of the evidence “bears a heavy burden,”
and “the standard of review is exceedingly deferential.” United States v. Coplan,
703 F.3d 46, 62 (2d Cir. 2012) (citations and internal quotation marks omitted).
“In evaluating a sufficiency challenge, we ‘must view the evidence in the light
most favorable to the government, crediting every inference that could have been
drawn in the government’s favor, and deferring to the jury’s assessment of
witness credibility and its assessment of the weight of the evidence.’” Id.
15
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page16 of 37
(quoting United States v. Chavez, 549 F.3d 119, 124 (2d Cir. 2008)). “Although
sufficiency review is de novo, we will uphold the judgment[] of conviction if any
rational trier of fact could have found the essential elements of the crime beyond
a reasonable doubt.” Id. (quoting Jackson v. Virginia, 443 U.S. 307, 319 (1979))
(citation omitted). “A judgment of acquittal is warranted only if the evidence that
the defendant committed the crime alleged is nonexistent or so meager that no
reasonable jury could find guilt beyond a reasonable doubt.” United States v. Jiau,
734 F.3d 147, 152 (2d Cir. 2013) (alterations and internal quotation marks
omitted).
With respect to Martoma’s challenge to the district court’s jury instruction,
“[w]e review a jury charge in its entirety and not on the basis of excerpts taken
out of context.” United States v. Mitchell, 328 F.3d 77, 82 (2d Cir. 2003) (quoting
United States v. Zvi, 168 F.3d 49, 58 (2d Cir. 1998)). “A conviction based on a
general verdict is subject to challenge if the jury was instructed on alternative
theories of guilt and may have relied on an invalid one.” Hedgpeth v. Pulido, 555
U.S. 57, 58 (2008). Such a challenge, however, is subject to harmless error review.
See id. at 58, 61–62. And because Martoma raises his challenge to the jury
instruction for the first time on appeal, we review only for plain error. United
16
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page17 of 37
States v. Vilar, 729 F.3d 62, 70 (2d Cir. 2013). Under the plain error standard, an
appellant must demonstrate that “(1) there is an error; (2) the error is clear or
obvious, rather than subject to reasonable dispute; (3) the error affected the
appellant’s substantial rights . . . ; and (4) the error seriously affects the fairness,
integrity or public reputation of judicial proceedings.”4 United States v. Marcus,
560 U.S. 258, 262 (2010) (internal quotation marks and alteration omitted). “[W]e
look not to the law at the time of the trial court’s decision to assess whether the
error was plain, but rather, to the law as it exists at the time of review.” Vilar, 729
F.3d at 71. Even with respect to an instructional error that “incorrectly omitted an
element of the offense,” we will not overturn a conviction “if we find that the
jury would have returned the same verdict beyond a reasonable doubt,” and
thus that “the error did not affect [the defendant’s] substantial rights.” United
In the past, we have stated that “[w]here . . . the source of an alleged jury
instruction error is a supervening decision, we employ a ‘modified plain‐error rule,
under which the government, not the defendant, bears the burden to demonstrate that
the error . . . was harmless.’” United States v. Mahaffy, 693 F.3d 113, 136 (2d Cir. 2012).
We have “on at least twenty‐two occasions,” Vilar, 729 F.3d at 71 n.5, observed that the
Supreme Court’s decision in Johnson v. United States, 520 U.S. 461 (1997) “called into
question the modified plain error standard of review.” United States v. Botti, 711 F.3d
299, 308 (2d Cir. 2013). Here, as in the past, “[b]ecause we would reach the same
conclusion under either standard, we need not resolve that question.” United States v.
Nouri, 711 F.3d 129, 138 n.2 (2d Cir. 2013).
4
17
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page18 of 37
States v. Nouri, 711 F.3d 129, 139–140 (2d Cir. 2013) (internal quotation marks
omitted).
I.
We first evaluate Martoma’s sufficiency challenge. In Newman, the Court
noted that “the tipper’s gain need not be immediately pecuniary,” and, invoking
United States v. Jiau, 734 F.3d 147 (2d Cir. 2013), explained that “enter[ing] into a
relationship of quid quo pro with [a tippee], and therefore ha[ving] the
opportunity to . . . yield future pecuniary gain,” constituted a personal benefit
giving rise to insider trading liability. Newman, 773 F.3d at 452. That is exactly
what happened in this case. Martoma was a frequent and lucrative client for Dr.
Gilman, who was paid $1,000 per hour for approximately 43 consultation
sessions. At the same time, Dr. Gilman was regularly feeding Martoma
confidential information about the safety results of clinical trials involving
bapineuzumab. And when Dr. Gilman gained access to the final clinical study
efficacy data in July 2008, he immediately passed it along to Martoma. It is true
that Dr. Gilman did not bill Martoma specifically for the July 17 and 19, 2008
meetings at which Dr. Gilman provided Martoma with the efficacy data—
because, as he admitted at trial, doing so “would [have been] tantamount to
18
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page19 of 37
confessing that [he] was . . . giving [Martoma] inside information.” Tr. 1918. But
in the context of their ongoing “relationship of quid pro quo,” Newman, 773 F.3d at
452, where Dr. Gilman regularly disclosed confidential information in exchange
for fees, “a rational trier of fact could have found the essential elements of the
crime [of insider trading] beyond a reasonable doubt” under a pecuniary quid pro
quo theory. Coplan, 703 F.3d at 62 (quoting Jackson, 443 U.S. at 319).
II.
Because the evidence presented at trial was sufficient to sustain Martoma’s
conviction, we turn next to his challenge to the district court’s jury instruction.
His argument on this front focuses on the theory, originating in Dirks, that the
personal benefit necessary to establish insider trading liability in a tipping case
can be inferred from a gift of inside information “to a trading relative or friend.”
See Dirks, 463 U.S. at 663–64; Salman, 137 S. Ct. at 428. As noted above, Newman
held that this inference was “impermissible in the absence of proof of a
meaningfully close personal relationship.” 773 F.3d at 452. Martoma argues that
this requirement survives the Supreme Court’s decision in Salman and that the
jury was not properly instructed on it. Following the logic of the Supreme
Court’s reasoning in Salman, interpreting Dirks, we think that Newman’s
19
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page20 of 37
“meaningfully close personal relationship” requirement can no longer be
sustained.
A.
The Supreme Court explained in Dirks that a tippee who knowingly trades
on material nonpublic information obtained from an insider does not necessarily
violate insider trading law. See 463 U.S. at 658–59. But “[t]he conclusion that
recipients of inside information do not invariably acquire a duty to disclose or
abstain does not mean that such tippees always are free to trade on the
information.” Id. at 659. Instead, “the tippee’s duty to disclose or abstain is
derivative from that of the insider’s duty.” Id. at 659. “Thus, some tippees must
assume an insider’s duty to the shareholders not because they receive inside
information, but rather because it has been made available to them improperly.”
Id. at 660 (emphasis in original). As a result, “a tippee assumes a fiduciary duty
. . . not to trade on material nonpublic information only when the insider has
breached his fiduciary duty . . . by disclosing the information to the tippee and
the tippee knows or should know that there has been a breach.” Id. at 660.
Dirks further observed that “[w]hether disclosure is a breach of duty . . .
depends in large part on the purpose of the disclosure,” namely “whether the
20
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page21 of 37
insider personally will benefit, directly or indirectly, from his disclosure,”
because “[a]bsent some personal gain, there has been no breach of duty to
stockholders.” 463 U.S. at 662; see also id. at 659 (“[Tippers] may not give [inside]
information to an outsider for the . . . improper purpose of exploiting the
information for their personal gain.”). In the context of this discussion, Dirks gave
several examples of situations in which an insider would personally benefit from
disclosing inside information: disclosing inside information in a quid pro quo
relationship, disclosing inside information with “an intention to benefit the
particular recipient,” and disclosing inside information as “a gift . . . to a trading
relative or friend.” Id. at 664. Contrary to the dissent’s claim, see Dissent Slip Op.
at 23, this discussion did not purport to limit to these examples the situations in
which a personal benefit can be inferred; the broader inquiry underlying the
examples remained “whether the insider personally will benefit, directly or
indirectly, from his disclosure.” Id. at 662.5
The fact that Dirks held that the tipper’s intent to give a benefit to the tippee was
an example of a personal benefit to the tipper illustrates just how broadly the Court
defined the concept of personal benefit to the tipper.
5
21
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page22 of 37
Newman, however, did view these examples as limiting the situations in
which a personal benefit could be inferred. As relevant to this case, Newman held
that the jury was never permitted to infer that a tipper had personally benefitted
from disclosing inside information as a gift unless that gift was made to someone
with whom the tipper had “a meaningfully close personal relationship,” 773 F.3d
at 452, seeking to give definition to the “friend” language from Dirks.6 But in
evaluating this gloss on Dirks, it is critical to keep in mind that the ultimate
inquiry under Dirks is whether a tipper has personally benefitted from a
disclosure of inside information such that he has violated his fiduciary duty, and
it is not apparent that the examples in Dirks support a categorical rule that an
insider can never benefit personally from gifting inside information to people
other than “meaningfully close” friends or family members—especially because
the justification for construing gifts as involving a personal benefit is that “[t]he
tip and trade resemble trading by the insider himself followed by a gift of the
The “meaningfully close personal relationship” requirement was paired,
moreover, with the additional requirement that the relationship “generate[] an
exchange that is objective, consequential, and represents at least a potential gain of a
pecuniary or similarly valuable nature.” 773 F.3d at 452. The dissent concedes that
Salman expressly rejected the latter part of this pairing, See Dissent Slip Op. at 18.
6
22
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page23 of 37
profits to the recipient,” Dirks, 463 U.S. at 664, an observation that holds true
even if the tipper and tippee were, for example, business school classmates who
“had known each other for years” rather than “close friends.” See Newman, 773
F.3d at 452 (internal quotation marks omitted).
B.
Despite some tension between Newman and Dirks, “it would ordinarily be
neither appropriate nor possible for [a panel] to reverse an existing Circuit
precedent.” Shipping Corp. of India v. Jaldhi Overseas Pte Ltd., 585 F.3d 58, 67 (2d
Cir. 2009). However, “a three‐judge panel may issue an opinion that overrules
Circuit precedent . . . where an intervening Supreme Court decision casts doubt
on the prior ruling.” Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372, 378 (2d Cir.
2016) (internal quotation marks omitted). The Supreme Court’s decision in
Salman explicitly rejected certain aspects of Newman. See 137 S. Ct. at 428. While
the Supreme Court did not have occasion to expressly overrule Newman’s
requirement that the 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—because that aspect of Newman was not at
issue in Salman—“[e]ven if the effect of a Supreme Court decision is ‘subtle,’ it
23
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page24 of 37
may nonetheless alter the relevant analysis fundamentally enough to require
overruling prior, ‘inconsistent’ precedent.” Doscher, 832 F.3d at 378 (quoting
Wojchowski v. Daines, 498 F.3d 99, 108 (2d Cir. 2007)).
We respectfully conclude that Salman fundamentally altered the analysis
underlying Newman’s “meaningfully close personal relationship” requirement
such that the “meaningfully close personal relationship” requirement is no
longer good law. In a case involving a tipper and tippee who were brothers,
Salman 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.” 137 S. Ct. at 427–28. And Salman observed that an insider
“effectively achieve[s] the same result by disclosing the information to [the
tippee], and allowing him to trade on it,” because “giving a gift of [inside]
information is the same thing as trading by the tipper followed by a gift of the
proceeds.” Id. at 428; see also id. (“Making a gift of inside information to a relative
. . . is little different from trading on the information, obtaining the profits, and
doling them out . . . .”). For this reason, Salman cited Dirks’s observation that
“‘insiders [are] forbidden’ both ‘from personally using undisclosed corporate
information to their advantage’ and from ‘giv[ing] such information to an
24
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page25 of 37
outsider for the same improper purpose of exploiting the information for their
personal gain.’” Id. (quoting Dirks, 463 U.S. at 659) (alterations in original).
It is true that Dirks and Salman largely confine their discussion of gifts to
“trading relative[s] and friend[s],” and, as indicated earlier, Salman did not
specifically hold that gifts to anyone, not just relatives and friends, give rise to
the personal benefit needed to establish insider trading liability (presumably
because Salman involved tips between brothers, comfortably within the “trading
relative” language of Dirks). However, the straightforward logic of the gift‐giving
analysis in Dirks, strongly reaffirmed in 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 his pecuniary gain. Salman, 137 S. Ct. at 428. That is
because such a disclosure is the functional equivalent of trading on the
information himself and giving a cash gift to the recipient. Nothing in Salman’s
reaffirmation of this logic supports a distinction between gifts to people with
whom a tipper shares a “meaningfully close personal relationship”—a term left
undefined in Newman, but which apparently did not reach two people who “had
known each other for years, having both attended business school and worked
25
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page26 of 37
. . . together,” 773 F.3d at 452—and gifts to those with whom a tipper does not
share such a relationship. If the insider discloses inside information “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), he personally benefits
for the reasons described in Dirks and Salman.7 Indeed, Dirks seems to have at
least implicitly shared this understanding: Although the tippee in Dirks did not
have a personal relationship of any kind, let alone a friendship, with the tippers
who gave him inside information, the Supreme Court applied the gift theory to
his case. See Dirks, 463 U.S. at 648–49, 667 (“[N]or was [the tippers’] purpose to
make a gift of valuable information to Dirks.”); see also Salman, 137 S. Ct. at 427
The dissent posits that some benefits from gift‐giving might be unique to close
friendships and family relationships. See Dissent Slip Op. at 28–29. Notably, none of
these benefits bear any relation to the Supreme Court’s articulation of why giving a gift
to a “trading relative or friend” involves a personal benefit to the gift‐giver. The
Supreme Court did not, for example, say that an insider benefits personally from
making friends and family members happy, or from improving relationships, or from
the potential of using the gift in the future. Instead, the Supreme Court observed that
giving a gift of inside information personally benefits the insider because the gift is the
equivalent of trading on the tip oneself—an obvious pecuniary benefit—and giving a
gift of the proceeds. In light of this articulated logic, the dissent’s claim that “[i]t is not
entirely straightforward that giving a gift provides the gift‐giver with a benefit,” see
Dissent Slip Op. at 11, is not persuasive.
7
26
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page27 of 37
(“We then applied this gift‐giving principle to resolve Dirks itself . . . .”). This
approach makes sense in light of the Supreme Court’s observation that “’insiders
[are] forbidden’ both ‘from personally using undisclosed corporate information
to their advantage’ and from ‘giv[ing] such information to an outsider for the
same improper purpose of exploiting the information for their personal gain’”—
a statement not limited by the relationships of the parties. See Salman, 137 S. Ct. at
428 (quoting Dirks, 463 U.S. at 659) (alterations in original).
An example illustrates the point. Imagine that a corporate insider, instead
of giving a cash end‐of‐year gift to his doorman, gives a tip of inside information
with instructions to trade on the information and consider the proceeds of the
trade to be his end‐of‐year gift. In this example, there may not be a
“meaningfully close personal relationship” between the tipper and tippee, yet
this clearly is an illustration of prohibited insider trading, as the insider has given
a tip of valuable inside information in lieu of a cash gift and has thus personally
benefitted from the disclosure.
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,
27
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page28 of 37
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
Although we hold that Newman’s “meaningfully close personal relationship”
requirement is no longer good law, we do not hold that the relationship between the
tipper and tippee cannot be relevant to the jury in assessing competing narratives as to
whether information was disclosed “with the expectation that [the recipient] would
trade on it,” Salman, 137 S. Ct. at 428, and whether the disclosure “resemble[d] trading
by the insider followed by a gift of the profits to the recipient,” id. at 427 (quoting Dirks,
463 U.S. at 664). In the dissent’s example of a disclosure of inside information to a
reporter, for example, see Dissent Slip Op. at 5, a pre‐existing personal relationship
between the insider and the reporter might tend to show that the information was not
disclosed for altruistic reasons but was instead disclosed “with the expectation that [the
recipient] would trade on it.” Salman, 137 S. Ct. at 428. A pre‐existing personal
relationship might also tend to show, however, that the insider trusted the reporter to
scrupulously reveal a corporate fraud to the relevant authorities or the investing public.
It is for the jury to decide, based on all of the facts and circumstances in a particular
case, what to infer about the tipper’s purpose from his relationship with the tippee.
8
28
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page29 of 37
“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.
Contrary to the dissent’s suggestion, not all disclosures of inside
information will meet this test. For example, disclosures for whistleblowing
purposes to reveal a fraud, see Dirks, 463 U.S. at 649–50, 667, and inadvertent
disclosures, see id. at 663 & n.23, are not disclosures made “with the expectation
that [the recipient] would trade on” them and thus involve no personal benefit to
the insider. Salman, 137 S. Ct. at 428. There may also be other situations in which
the facts do not justify the inference that information was disclosed “with the
expectation that [the recipient] would trade on it,” Salman, 137 S. Ct. at 428, and
that 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). As a result, our
holding does not eliminate or vitiate the personal benefit rule; it merely
acknowledges that it is possible to personally benefit from a disclosure of inside
29
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page30 of 37
information as a gift to someone with whom one does not share a “meaningfully
close personal relationship.” Phrased another way, we reject, in light of Salman,
the categorical rule that an insider can never personally benefit from disclosing
inside information as a gift without a “meaningfully close personal relationship.”
C.
It is, of course, the province of the jury to evaluate competing narratives
and decide what actually motivated a tipper to disclose confidential information,
and consequently, whether there was a personal benefit to the insider on the facts
of a particular case. How can jurors, or this Court on appeal, know that inside
information was disclosed “with the expectation that [the recipient] would trade
on it,” Salman, 137 S. Ct. at 428, and that the disclosure “resemble[d] trading by
the insider followed by a gift of the profits to the recipient”? Id. at 427 (quoting
Dirks, 463 U.S. at 664). Arguably, Newman’s “meaningfully close personal
relationship” requirement could be construed as limited to the question of the
sufficiency of circumstantial evidence in an insider trading case. See 773 F.3d at
451–53. But Newman’s sufficiency analysis appeared to assume that the personal
benefit involved in giving a gift was “the ephemeral benefit of the . . . friendship”
of the recipient of the gift. Newman, 773 F.3d at 452 (quoting Jiau, 734 F.3d at 153);
30
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page31 of 37
see also id. (explaining that the government cannot “prove the receipt of a
personal benefit by the mere fact of a friendship”). Because the Court in Newman
was of the opinion that friendship itself, “particularly of a casual or social
nature,” did not constitute a personal benefit, it required more. 773 F.3d at 452.9
But as the Supreme Court explained in Dirks and reaffirmed again in Salman, the
personal benefit one receives from giving a gift of inside information is not the
friendship or loyalty or gratitude of the recipient of the gift; it is the imputed
pecuniary benefit of having effectively profited from the trade oneself and given
the proceeds as a cash gift. See Salman, 137 S. Ct. at 427–28; Dirks, 463 U.S. at 664.
If under Dirks and Salman it is not correct to characterize the personal benefit at
issue in gift‐giving as the receipt of friendship, then Newman’s discussion of the
In particular, as described above, Newman held that a personal benefit could not
be inferred from gift‐giving “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.” 773 F.3d at 452.
Under this standard, even a gift to one’s best friend or spouse was insufficient to convey
the requisite personal benefit without some kind of objective exchange involving
potential pecuniary value. While the latter requirement was explicitly rejected by the
Supreme Court, see Salman, 137 S. Ct. at 428, viewing the “meaningfully close personal
relationship” requirement in its original context further demonstrates that Newman
understood the personal benefit involved in gift‐giving to be the receipt of friendship
and concluded that this “ephemeral” benefit was simply not the kind of benefit that
should give rise to insider trading liability. See 773 F.3d at 452.
9
31
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page32 of 37
circumstances in which a jury can infer that a tipper personally benefitted from
disclosing inside information as a gift must now be considered inapposite.
The dissent argues that “[w]hat counts as a ‘gift’ is vague and subjective.”10
Dissent Slip Op. at 2. We reiterate the Supreme Court’s observation that
“[d]etermining whether an insider personally benefits from a particular
disclosure, a question of fact, will not always be easy for courts.” Salman, 137 S.
Ct. at 429 (quoting Dirks, 463 U.S. at 664) (alteration in original). As the dissent
points out, many cases may rely on circumstantial evidence of intent. See Dissent
Slip Op. at 20–21. Because we have concluded that the evidence presented at
Martoma’s trial was sufficient to convict under a straightforward pecuniary
benefit theory, we need not consider the outer boundaries of when a jury is
entitled to infer, relying on circumstantial evidence, that a particular disclosure
was made “with the expectation that [the recipient] would trade on it,” Salman,
137 S. Ct. at 428, and “resemble[d] trading by the insider followed by a gift of the
The same might be said of the “meaningfully close personal relationship” test.
When asked how “meaningfully close personal relationship” should be defined,
Martoma and the government both invoked the basics of Dirks and Salman, agreeing
that a “meaningfully close personal relationship” is the kind of relationship in which
gifts are exchanged.
10
32
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page33 of 37
profits to the recipient,” id. at 427 (quoting Dirks, 463 U.S. at 664). It is worth
noting, however, that not all insider trading cases rely on circumstantial
evidence. In some cases, the tipper may cooperate with the government and
testify against the tippee, providing information on the motivation for disclosing
inside information. In other cases, other witnesses might testify about
conversations with a tipper that shed light on the tipper’s intentions. Thus, while
concerns about the sufficiency of circumstantial evidence on the gift theory are
not wholly without basis, the response to those concerns lies in appellate review
of the sufficiency of the evidence of personal benefit, not in a definition of
personal benefit that categorically excludes situations where the requisite
personal benefit could be proven. In other words, the fact that some cases of
insider trading might be hard to prove beyond a reasonable doubt based on
circumstantial evidence (and might consequently be reversed on appeal as
supported by insufficient evidence) does not mean that other cases—the
doorman hypothetical discussed above, for example—should be outside the
bounds of insider trading liability even where the government has put forward
adequate proof of personal benefit.
33
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page34 of 37
As a final note on this point, the dissent is correct that the legality and
ethics of insider trading are not necessarily coextensive. See Dissent Slip Op. at
43. But the legality of insider trading is coextensive with a corporate insider’s
fiduciary duty of loyalty to the corporation. See Dirks, 463 U.S. at 654, 659–60.
The dissent would hold, in effect, that a corporate insider does not violate his or
her duty of loyalty by disclosing inside information to an outsider as a gift with
no legitimate corporate purpose so long as the gift is to someone with whom the
insider does not share a “meaningfully close personal relationship.” In our view,
for the reasons discussed above, Salman and Dirks compel a different result.
D.
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
34
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page35 of 37
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).
Even if the jury instruction was obviously erroneous—which we hold it
was not—that error did not impair Martoma’s substantial rights in light of the
compelling evidence that Dr. Gilman, the tipper, received substantial financial
benefit in exchange for providing confidential information to Martoma. As
discussed above, Dr. Gilman, over the course of approximately 18 months and 43
paid consultation sessions for which he billed $1,000 an hour, regularly and
35
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page36 of 37
intentionally provided Martoma with confidential information from the
bapineuzumab clinical trial. Martoma kept coming back, specifically scheduling
consultation sessions so that they would occur shortly after the safety monitoring
committee meetings, when Dr. Gilman would have new information to pass
along—and starting at least in August 2007, Dr. Gilman would reschedule his
conversations with Martoma if he had no new information to reveal at the time
they were scheduled to meet. Thus, the consulting relationship between Dr.
Gilman and Martoma at that point involved no “legitimate service,” see Dissent
Slip Op. at 43; as Dr. Gilman testified at trial, “the purpose of those consultations
was for [him] to disclose to [Martoma] confidential information about the results
. . . of the last Safety Monitoring Committee [meeting].” Tr. 1274:6–9. And
because Martoma continued to see Dr. Gilman to receive confidential
information, Dr. Gilman continued to receive consulting fees. The fact that Dr.
Gilman did not specifically bill for his July 17 and 19, 2008 conversations with
Martoma in which Dr. Gilman divulged the final drug efficacy data does not
alter the inescapable conclusion that in the context of this “relationship of quid
pro quo,” Newman, 773 F.3d at 452, Dr. Gilman’s disclosure of confidential
information was designed to “translate into future earnings.” United States v. Jiau,
36
Case 14-3599, Document 174-1, 08/23/2017, 2108040, Page37 of 37
734 F.3d 147, 153 (2d Cir. 2013) (quoting Dirks, 463 U.S. at 663). As a result, “it is
clear beyond a reasonable doubt that a rational jury would have found
[Martoma] guilty absent [any] error.” United States v. Mahaffy, 693 F.3d 113, 136
(2d Cir. 2012).
CONCLUSION
We have considered Martoma’s remaining arguments and find in them no
basis for reversal. Accordingly, we AFFIRM the judgment of the district court.
37
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?