On June 25, 2018, a divided three-judge panel of the Second Circuit amended its decision in United States v. Martoma. We previously reported on the facts of Martoma and the panel’s original decision, which held that the Supreme Court abrogated the “meaningfully close personal relationship” test articulated in United States v. Newman. See Shearman & Sterling LLP: Government/Regulatory Enforcement, Divided Second Circuit Panel Abandons Relationship Test From Landmark Newman Decision in Upholding Insider Trading Conviction (Aug. 29, 2017). The panel’s amended opinion, in contrast, holds that Newman’s “meaningfully close personal relationship” test is still valid for determining whether an insider tipper received a personal benefit (and thus breached a fiduciary duty), but also holds that the test will be satisfied upon a showing that (1) the “tipper and tippee shared a relationship suggesting a quid pro quo” or (2) “the tipper gifted confidential information with the intention to benefit the tippee.” United States v. Martoma, No. 14-3599, Dkt. No. 226 (2d Cir. June 25, 2018), at 5-6.

As background, Martoma was convicted in 2014 on various insider trading charges. According to the government, in July 2008, Martoma learned from doctors who worked on a clinical trial of an experimental Alzheimer’s drug that tests had gone poorly. At the time, Martoma was employed as a portfolio manager at SAC Capital Advisors LP (“SAC”), and had arranged for paid consultations with the doctors, sometimes at a rate of $1,000 per hour, which he used to learn inside information. According to the government, Martoma used this information to cause SAC to enter into short sales and other trading shortly before results of clinical trials became public, netting large gains and avoiding losses. Martoma appealed his conviction, contending that the jury instructions were improper and that there was insufficient evidence to convict him.

Under the Supreme Court’s decision in Dirks v. United States, tippers can be liable for insider trading only when they receive some form of personal benefit from their tips. Dirks v. U.S., 463 U.S. 646 (1983). Tippee liability derives from tipper liability, and also requires a finding of a “personal benefit” for the tipper. In Newman, the Second Circuit held that the requisite personal benefit could not be inferred from friendship alone absent “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 (2d Cir. 2014). Shortly thereafter, the Supreme Court decided Salman v. United States, which called Newman’s emphasis on pecuniary gain into question. Under the facts of Salman, where there was unquestionably such a meaningfully close relationship between the tipper and tippee, the Court held that a tipper who gives inside information to a relative or friend receives a personal benefit because “giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.”

As we previously reported, in its original opinion, the Martoma panel went further than the Supreme Court. That is, it held not only that Newman’s emphasis on pecuniary gain was inconsistent with Salman, but that the “reasonably close personal relationship” test also did not survive. Numerous commentators questioned the decision, contending that it had seemingly overturned a portion of the Newman decision without an en banc hearing or explicit support in the Salman decision, and Martoma filed a petition for rehearing.

In its amended opinion, the panel revised its original decision in a way that makes clear it no longer challenges Newman directly. Instead, the panel wrote that it “need not decide” whether Newman’s interpretation of the gift theory of tippee liability survives Salman, because in any event the “meaningfully close personal relationship” test can be satisfied where the tipper and tippee share a relationship suggesting a quid pro quo, or the tipper gifted the inside information with the intent to benefit the tippee. Indeed, the panel noted that it agreed with Martoma that the jury instructions were inconsistent with Newman and therefore incorrect. The panel, however, also found that the incorrect instructions did not constitute an obvious error, and in any event did not impair Martoma’s substantial rights because there was “compelling evidence” that at least one tipper received the benefit of $70,000 in consulting fees—which would suggest a quid pro quo and thus a meaningfully close relationship. Thus, it affirmed Martoma’s convictions.

A significant aspect of the Panel’s amended decision is its holding that, although Newman’s “meaningfully close personal relationship” test survives, evidence of the intent to benefit a tippee alone can be enough to satisfy that test. In dissent, Judge Rosemary Pooler criticized the majority for this approach, pointing out that this means a sufficient personal relationship can be proven without any objective evidence at all on the relationship between tipper and tippee. This may give prosecutors another option for satisfying Newman’s requirements, without the necessity of proving the tippee’s relationship with the tipper. But more likely, this will remain a highly contested and fact-dependent area of insider trading law.

Perhaps more important, neither the original panel decision in Martoma nor the amended panel decision do anything to call into question what was likely the more significant holding in Newman—that a remote tippee cannot be convicted in the absence of proof that he or she knew of the personal benefit received by the tipper. That holding remains unquestioned and stands as a powerful limitation on the government’s ability to prosecute alleged remote tippees.