Insider Trading Ruling Muddies Question of Tipster Benefits

Stay up-to-date with the latest developments in securities law through access to both news and all statutes and regulations. Find relevant corporate filings through a searchable EDGAR database. And...

By Antoinette Gartrell

A federal appeals court decision upholding former SAC Capital Advisors executive Mathew Martoma’s insider trading conviction generated new uncertainty about what’s required for liability, securities lawyers said ( United States v. Martoma , 2017 BL 295177, 2d Cir., No. 14-3599, 8/23/17 ).

The Aug. 23 decision by the U.S. Court of Appeals for the Second Circuit creates confusion about what kind of benefit an insider has to get to hold a tippee liable for insider trading, former SEC enforcement lawyer Stephen Crimmins of Murphy & McGonigle, New York and Washington, told Bloomberg BNA. Further review by the full court is needed, he said, since the issue goes to the core of the violation and could affect attorneys’ litigation strategies. “The Second Circuit has the highest volume of securities cases, so it’s critically important that it gets this right.”

Martoma was convicted in September 2014 of using inside information to make $275 million on trades in Wyeth LLC and Elan Corp. securities. On appeal, he told the Second Circuit that the doctor who tipped him about the clinical trial of an experimental drug to treat Alzheimer’s disease didn’t receive a personal benefit for sharing the information, as required by the court’s 2014 Newman decision. Martoma argued he didn’t have a “meaningfully close personal relationship” with the doctor such that a personal benefit could be inferred.

The appeals court, in a sharply divided opinion, said the U.S. Supreme Court’s decision in Salman v. United States did away with Newman’s close personal relationship requirement. Rather, Chief Judge Robert Katzmann said, an insider personally benefits by giving a gift of inside information to a recipient expecting that the tippee will trade on the information.

Ground Zero

A personal benefit to the tipper is “ground zero in an insider trading case,” Crimmins said. “If in Martoma, after Salman, there doesn’t have to be a meaningfully close relationship, then you have no test because any casual acquaintance is enough. Any time anyone tips someone, there will always be a personal benefit and liability,” he said.

The ruling is “confusing and feels like a drastic change” from what previously was required, New York lawyer Gregory Morvillo, Morvillo LLP, said. “Saying that Salman abrogated Newman goes too far,” he said. Morvillo represented one of the two hedge fund executives whose insider convictions were overturned in Newman.

New York securities lawyer Jacob Zamansky had a different take on the decision. “ Martoma really was not a close case,” he told Bloomberg BNA. “There was tremendous evidence that he had a source close to the company when he made his trades and that a clear benefit was conferred. There was a meaningful relationship in this case that was established at trial and that’s the standard for Newman,” Zamansky said. The opinion sends the message that “insider trading is still a crime and will hopefully deter hedge funds from illegally profiting from inside information.”

Both Zamansky and Washington lawyer Thomas Gorman of Dorsey & Whitney LLP predicted that Martoma will seek high court review. But, Gorman said, it will be difficult to persuade the justices to hear the case. Salman, which left open the question of what constitutes a gift, was just decided last term and “this decision is not flatly contradicting that opinion,” Gorman said.

The ruling could also make future convictions easier—and catch some innocent people along the way, Morvillo said.

Now, “when attorneys are advising clients who may have access to nonpublic info, they will need to be extremely cautious because the metes and bounds of insider trading liability are so fuzzy,” Crimmins said. Defense lawyers will want to rely on Judge Rosemary Pooler’s well-articulated arguments in the dissent that you still need a meaningful relationship to satisfy the personal benefit requirements for tippee liability, he said.

To contact the reporter on this story: Antoinette Gartrell in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Securities & Capital Markets on Bloomberg Law