After an intervening decision by the United States Supreme Court last year and a rare rehearing of oral argument in March, the Second Circuit has affirmed the conviction of Matthew Martoma, a former portfolio manager at S.A.C. Capital Advisors. In doing so, the Second Circuit has signaled a substantial shift in insider trading law by reversing course from its 2015 decision, which made prosecuting insider trading cases more difficult.

Following a four-week trial in 2014, Matthew Martoma was convicted on several securities fraud charges in connection with an insider trading scheme involving the securities of two pharmaceutical companies. The government had alleged that Martoma traded on materially nonpublic information regarding the trial-phase performance of an experimental drug designed to treat Alzheimer’s disease. When Martoma learned that the clinical trials of the drug yielded major setbacks, he entered into short-sale and options trades, which resulted in approximately $80.3 million in gains and $194.6 million in averted losses.

Martoma appealed his conviction but, while his appeal was pending, the Second Circuit issued a decision in 2015 expanding on an earlier decision of the Supreme Court concerning the “personal benefit” derived from giving a “gift” of insider information. Earlier, in Dirks v. S.E.C., 463 U.S. 646 (1983), the Supreme Court held that the personal benefit necessary to establish insider trading liability in a tipping case could be inferred from a gift of inside information “to a trading relative or friend.” Thereafter, in United States v. Newman, 773 F.3d 438 (2d Cir. 2015), the Second Circuit expanded on the holding in Dirks by concluding that this inference was “impermissible in the absence of proof of a meaningfully close personal relationship” and in the absence of some pecuniary gain for the tipper. At the time, observers considered the holding in Newman to be a major obstacle in prosecuting insider trading cases. After all, the term – “a meaningfully close personal relationship” – was left undefined by Newman, but it apparently did not reach two people who “had known each other for years, having both attended business school and worked together.”

In light of the holding in Newman, Martoma argued in his appeal that the jury was not properly instructed on the relationship between himself and the doctors he consulted with who sat on the monitoring committee of the clinical trials. Martoma argued that the evidence offered at trial did not establish the “meaningfully close personal relationship” required by Newman nor did the evidence reveal that the doctors received any “objective, consequential … gain of pecuniary or similarly valuable nature” in exchange for providing the confidential information.

Yet again, while Martoma’s appeal was pending, the law continued to evolve as the United States Supreme Court issued an intervening decision, which, in part, scaled back the restrictive holding in Newman. In Salman v. United States, 136 S. Ct. 899 (2016), the defendant urged the Supreme Court to adopt a standard similar to the ruling in Newman by holding that a gift of insider information to a trading relative or friend was insufficient to establish insider trading liability “unless the tipper’s goal in disclosing the information [wa]s to obtain money, property, or something of tangible value.” The Supreme Court, however, declined to do so. Indeed, the Court specifically mentioned the Newman ruling and concluded that “to 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.”

The Supreme Court in Salman, however, did not reach the Newman court’s additional requirement of a “meaningfully close personal relationship.” Nevertheless, the majority in Martoma concluded that the Salman decision “fundamentally altered the analysis underlying Newman’s ‘meaningfully close personal relationship.’” As Chief Judge Katzmann explained, the logic of the “gift-giving analysis in Dirks,” as reaffirmed in Salman, does not support a distinction between gifts to people with whom a tipper shares a “meaningfully close personal relationship” and gifts to those with whom a tipper does not share such a relationship. In either case, an insider personally benefits whenever he discloses inside information as a gift with the expectation that the recipient will trade on the basis of such information because, as Chief Judge Katzmann concluded, such a disclosure is “the functional equivalent of trading on the information himself and giving a cash gift to the recipient.”

Judge Pooler issued a lengthy dissent, which essentially criticized the majority holding for going too far by abandoning Newman entirely even though the Salman holding did not compel such a result. Judge Pooler acknowledged the unmistakable rejection in Salman of “Newman’s second holding, which required a showing that a tipper would receive something of ‘pecuniary or similarly valuable nature.’” The Supreme Court, however, as Judge Pooler noted, left Newman’s qualification of a “meaningfully close personal relationship” untouched, which signaled to her the Supreme Court’s unwillingness to broaden the gift-giving doctrine in Dirks. As Judge Pooler warned, by overturning Newman entirely, the majority would permit insider trading liability to exist whenever an insider gives a gift of confidential information to any person. That the majority emphasized its holding would only apply to instances in which a tipper expects someone to trade on the information was unavailing for Judge Pooler. As Judge Pooler wrote, the expectation that someone will trade on the information is a separate requirement in insider trading cases and does not serve as a limitation on liability under the personal benefit rule.

Ultimately, the Martoma decision reveals a serious disagreement within the Second Circuit regarding the incompatibility of the holdings in Salman and Newman. An en banc hearing is possible, especially given the opening remarks in Judge Pooler’s dissent, where she expresses her concern with the majority’s summary rejection of Newman “without convening [the] Court en banc.” Until then, the Martoma decision must be considered to represent a significant about-face for the Second Circuit with respect to easing the burden on prosecuting insider trading cases.