In a highly anticipated decision, a divided Second Circuit panel (Katzmann, Pooler (dissenting), Chin) yesterday upheld the insider trading conviction of former SAC Capital portfolio manager Mathew Martoma, ruling that the “meaningfully close personal relationship” requirement set out by the Court in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), does not survive the Supreme Court’s decision in Salman v. United States, 137 S. Ct. 420 (2016). See United States v. Martoma, 14-3599 (2d Cir. Aug. 23, 2017).

The Court swiftly rejected the argument that insufficient evidence supported Martoma’s conviction and spent most of its majority opinion discussing whether the jury instruction (to which Martoma did not object and which was delivered prior to Newman) was plainly erroneous. Following Dirks v. S.E.C., 463 U.S. 646 (1983), and Salman, the Court held that a tippee assumes a fiduciary duty not to trade on material nonpublic information when the tipper has breached his fiduciary duty by disclosing the information and the tippee knows or should have known that there was a breach. Whether the disclosure is a breach of duty depends on the purpose of the disclosure, in particular, whether the tipper will personally benefit from making the disclosure. The Court concluded that there is personal benefit whenever the information is disclosed with the expectation that the tippee will trade on it and where the disclosure resembles trading by the tipper followed by a gift of the profits to the recipient. The Newman requirement—that there be a “meaningfully close personal relationship” between the tipper and tippee—no longer applies. However, the Court noted that juries will consider the nature of the relationship between the tipper and tippee in the course of determining whether there was a personal benefit.

With this legal analysis, the Court held that there was no plain error in the jury instruction—the challenged aspect of the instruction was not “obvious” error, nor did it impair Martoma’s substantial rights given the evidence that Martoma engaged the tipper for 43 paid consultation sessions over an 18-month period, leading up to the fateful disclosure of inside information that allowed the hedge fund at which Martoma worked to avoid considerable losses and also receive profits on a particular investment.

Judge Pooler’s dissent was longer than the majority opinion. Her core concern was that the opinion will open the floodgates to any situation in which a person shares inside information with another person who then trades on the information. She viewed the majority decision as inconsistent not only with Newman, but with Dirks and Salman.

We’ll be providing in-depth coverage and commentary about the Court’s opinions soon.