The Supreme Court’s decision in Salman v. United States, 137 S.Ct. 420 (2016) is already having an effect on the appeals arising out of the insider trading convictions in the Southern District of New York. Shortly after Salman, the Second Circuit asked the parties in the insider trading case of United States v. Martoma to submit supplemental briefing discussing the decision’s impact. Salman rejected the defendant’s argument that he could not be convicted of insider trading where his brother-in-law did not receive a pecuniary benefit for passing information to him, holding that the relative’s tip satisfied the standard for a “gift of confidential information to trading relatives.” The decision partially overturned United States v. Newman, 773 F.3d 428 (2d Cir. 2014), which had required “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.” Our prior coverage of Newman can be found here and here, and our prior coverage of Salman can be found here.
Martoma had been convicted of insider trading after a jury found that he had profited off tips he had received from a doctor about confidential market information on pharmaceutical companies. On his appeal before Salman was decided, Martoma argued that he and the doctor were only casual acquaintances and that he never paid the doctor for the tips at issue, such that his conviction failed to satisfy the test under Newman.
In his supplemental briefing, Martoma argues that Salman did not overrule the portion of Newman holding that if the government relies on the relationship between the tipper and the tippee to establish a personal benefit, it must prove that the two had a “meaningfully close personal relationship.” Martoma argues that his relationship with the doctor is “woefully insufficient” under this standard, as it only “consisted of some pleasantries over e-mail and a single cup of coffee.” To allow otherwise would create a personal benefit test that is unconstitutionally vague and arbitrary. Thus, Martoma concludes, the government and the lower court’s jury instructions were reversible error, as they directed the jury to find a personal benefit based on that relationship alone. He also argues that the record fails to support the government’s alternative theory—that the doctor received a financial benefit in exchange for providing inside information—because the doctor was not paid for the two consulting meetings where he delivered the tips.
The government, however, argues that Salman supports Martoma’s conviction. In its supplemental briefing, the government construes Salman as rejecting the Newman personal benefit standard to hold that a gift of confidential information to a trading friend or relative—such as that found here—is enough to satisfy the personal benefit requirement, even if there is no tangible, pecuniary exchange. The government relies on the record to portray Martoma’s relationship with the doctor as both a close friendship and one based on money, emphasizing testimony about the perceived closeness of their relationship and evidence of the consulting arrangements between the parties, whereby the doctor received thousands of dollars to “leak confidential information to Martoma that Martoma then used to evaluate investments and trade stocks.” Thus, it was proper for the lower court to instruct, and the jury to infer, that Martoma and the doctor were sufficiently close such that he meant to gift Martoma information by tipping him, in return expecting future consulting business. Any jury instruction error was harmless, as the instruction provided is substantively the same as the one upheld in Salman.
We will continue to monitor the Martoma appeal to see whether the Second Circuit agrees with the government that Newman has been rejected, or whether the Court concludes that key aspects of Newman remain intact even after Salman.