Second Circuit Martoma Ruling, Affirming Tippee’s Conviction, Backtracks on Newman, and Adds Yet More Uncertainty to Ever-Evolving Insider Trading Law

by Carlton Fields

Carlton Fields

Last week's dueling Second Circuit opinions in United States v. Martoma – Chief Judge Katzman’s 37-page majority opinion and Judge Pooler vigorous 44-page dissent – once again transformed insider trading law. In the aftermath of last December's U.S. Supreme Court decision in Salman, Martoma modified, if not overruled, the circuit's prior decision in United States v. Newman

Legal Background

In its seminal 1983 Dirks v. SEC decision, the Supreme Court held that the “tippee” who receives material, non-public information from an insider and then trades on that information can only be liable for violation of the securities law if the insider/“tipper” received some form of a personal benefit for providing the information. In such cases, the Supreme Court explained, the tipper's duty to the corporation transfers to the tippee, who is obligated not to trade on information received from an insider who disclosed the information in breach of a fiduciary duty to that corporation. Under Dirks, therefore, whether the tipper breached a fiduciary duty depends on whether the tipper received some form of a “personal benefit” for providing the information. The Supreme Court, however, did not specify what exactly constitutes a personal benefit. While the Court defined “personal benefit” as including pecuniary and reputational gain, it also held that a “personal benefit” may be inferred “when an insider makes a gift of confidential information to a trading relative or friend.” 

The Dirks personal benefit language figured prominently in the personal benefit instruction to the jury in the trial leading to Martoma’s 2014 conviction in the Southern District of New York. However, later that year, while Martoma’s appeal was pending, the Second Circuit dramatically impacted insider trading prosecutions in Newman when it took a narrow reading of the Dirks personal benefit requirement. In the context of an insider’s gift of secret information to a trading relative or friend, Newman held that a personal benefit may only be inferred when there is a showing of both (1) a “meaningfully close personal relationship” and (2) “a potential gain of a pecuniary or similarly valuable nature” to the tipper. Based on that ruling, Martoma argued for reversal of his conviction, challenging the Dirks-based jury charge as legally erroneous.

But in December 2016, before Martoma’s appeal was decided, the Supreme Court again addressed the personal benefit rule in Salman v. United States, holding that a corporate insider who gifts information to a relative need not have received a pecuniary benefit in order to impute liability to the trading outsider. The Court relied on Dirks' reasoning that a tipper providing inside information to a trading relative is the equivalent of the tipper trading on such inside information himself and then gifting the proceeds to that relative, and thus benefitting from the gift itself. Salman thus, at the very least, undermined the Newman holding, although to what extent was unclear. And so the Second Circuit, which was still considering Martoma’s appeal, scheduled further oral argument to address Salman, leading to last week’s decision. 

The Decision

Martoma, a former manager for SAC Capital Advisors LP, was convicted in September 2014 and sentenced to nine years in prison on multiple counts of securities fraud violations for receiving and trading on insider information provided by doctors who worked on the drug trials of an experimental drug. Trading executed by Martoma and SAC in advance of the public announcement of the tipped information resulted, after the stock drop from public disclosure, in some $80 million in gains, $195 million in averted losses and a $9 million bonus to Martoma.

In last week’s decision, the Second Circuit held that under the Supreme Court’s reasoning in Salman, Newman’s meaningful relationship requirement can no longer be sustained.

[W]e 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” and the disclosure ”resemble[s] trading by the insider followed by a gift of the profits to the recipient.”

The court noted that although Salman involved a tip by a corporate insider to his brother and this case involved a more nuanced relationship between Martoma and the doctors, Salman did not distinguish between gifts to relatives or friends and gifts to others less close to the tipper. Therefore, the court concluded that under Salman, the same rule applied whether or not there was a “meaningfully close personal relationship” between the tipper and tippee.

The Dissent

In her 44-page dissenting opinion, Judge Pooler argued that Salman did not overrule Newman’s “meaningfully close personal relationship” requirement, nor did it change the personal benefit rule, as the majority does here, by holding that a person who gives insider information as a gift to anyone, whether or not a relative or friend, always receives a personal benefit. Thus, Judge Pooler argued the majority’s holding eradicates limits previously placed by the personal benefit requirement. Because the majority’s holding requires subjective rather than objective proof, she concluded, it allows for the prosecution of individuals with innocent motives. 


Martoma arguably makes insider trading prosecution easier because it eliminates the government’s need to show a meaningful relationship between tippers and tippees. In contrast, however, the decision is likely to lead to increased disputes and new defense theories over the tipper’s subjective expectations and whether the disclosure resembles trading by the insider followed by a cash gift.

In any event, the vitality of the Second Circuit’s holding remains uncertain. Given Judge Pooler’s lengthy dissent and because the panel arguably reversed circuit precedent if Salman is read as not itself having done so, a rehearing en banc in Martoma may well ensue. Regardless of whether further clarity may come from the Second Circuit or the Supreme Court, however, each of the dueling Martoma opinions provides detailed analyses of the evolution and current state of insider trading law that will serve as guidance for prosecutors and defense counsel alike in future cases.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Carlton Fields | Attorney Advertising

Written by:

Carlton Fields

Carlton Fields on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.