Defense attorneys handling securities fraud cases should pay close attention to an August 23 split decision by the United States Court of Appeals for the Second Circuit in New York regarding a high-profile insider trading case.
In rejecting a narrow interpretation of the tipper-tippee relationship, Chief Judge Robert A. Katzmann, joined by Judge Denny Chin, agreed with the prosecutors and upheld the conviction of Mathew Martoma, a former portfolio manager for SAC Capital Advisors LP. In doing so, they stated that the “logic of the case” required them to reject the classic insider trading requirement of a “meaningfully close personal relationship” between tipper and the recipient of the information.
In her dissenting opinion, Judge Rosemary S. Pooler argued that the appellate ruling – which aligns with the U.S. Supreme Court decision in Salman v. United States, (December 2016) – opens the door to prosecutors in virtually any type of insider trading case. Today, almost any insider tip can be considered a gift, even if there is only a tenuous personal relationship.
As a result, the 2nd COA’s 2014 ruling in United States v. Newman, which had imposed a significant burden on prosecutors seeking to prove unlawful tipping, will no longer provide support for defense arguments in insider trading cases. The Newman ruling had overturned the convictions of two hedge fund managers who did not have direct contact with the tipper who provided inside information.
The Court of Appeal’s tangled route to the split decision stems from trying to define the nature of the relationship between Martoma and Dr. Sidney Gilman, who provided a tip that led SAC to short its position on two pharmaceutical companies before their stock dropped, resulting in a $250 million gain for Martoma’s firm.
In the appeal of Martoma’s trial conviction for insider trading, his defense attorneys argued that the portfolio manager had only a professional networking relationship with Dr. Gilman. They argued that United States v. Newman imposed the requirement of a “meaningful personal relationship,” an issue that had not been raised at the time of Martoma’s original trial.
In Salman v. United States, the U.S. Supreme Court rejected a prosecutorial requirement that the tipper must receive a financial or other tangible benefit. But that decision did not mention anything about a “meaningfully close personal relationship” aspect when inside information was passed from tipper to tippee.
With the recent Court of Appeal ruling, it appears that Securities and Exchange Commission and the Department of Justice investigators will continue to have broad latitude in filing criminal charges in insider trading cases without having to address the nature of the tipper-tippee relationship.