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United States v. Martoma

United States Court of Appeals for the Second Circuit

October 28, 2015, Argued; May 9, 2017, Argued; August 23, 2017, Decided

Docket No. 14-3599

Opinion

 [*67]  Katzmann, Chief Judge:

Defendant-appellant Mathew Martoma was convicted, following a four-week jury trial, of one count of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and two counts of securities fraud in violation  [**3] of 15 U.S.C. §§ 78j(b) & 78ff in connection [**4]  with an insider trading scheme. On appeal, Martoma argues that the jury was improperly instructed and that there was insufficient evidence to sustain his conviction.

Martoma's contentions focus on the "personal benefit" element of insider trading law. In Dirks v. S.E.C., the Supreme Court held that ] a "tippee"—someone who receives confidential information from a corporate insider, or "tipper," and then trades on the information—can be held liable under the insider trading laws "only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach." 463 U.S. 646, 660, 103 S. Ct. 3255, 77 L. Ed. 2d 911 (1983). "[T]he test" for whether there has been a breach of the tipper's duty "is whether the [tipper]  [*68]  personally will benefit, directly or indirectly, from his disclosure" to the tippee. Id. at 662. Dirks set forth several personal benefits that could prove the tipper's breach, including, for example, "a relationship" between the tipper and tippee "that suggests a quid pro quo from the latter," the tipper's "intention to benefit" the tippee, and "a gift of confidential information to a trading relative or friend" where "[t]he tip and trade resemble [**5]  trading by the insider himself followed by a gift of the profits to the recipient." Id. at 664.

Martoma first argues that the jury in his case was not properly instructed in light of the Second Circuit's decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014). Martoma asserts that, under Newman, evidence that the tipper made a gift of inside information to a trading relative or friend establishes a "personal benefit" only if tipper and tippee share a "meaningfully close personal relationship." See Newman, 773 F.3d at 452. Martoma contends that the jury instructions were flawed because they did not qualify that evidence of a gift to a trading relative or friend establishes a personal benefit only where there is a "meaningfully close personal relationship." Second, Martoma argues that the evidence at trial was insufficient to sustain a conviction under any theory of personal benefit.

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894 F.3d 64 *; 2017 U.S. App. LEXIS 27880 **; Fed. Sec. L. Rep. (CCH) P100,213

UNITED STATES OF AMERICA, Appellee, - v. - MATHEW MARTOMA, Defendant-Appellant.

Subsequent History: Amended: June 25, 2018. As Corrected July 3, 2018.

Prior History: Defendant-appellant Mathew Martoma appeals from a judgment of conviction entered on September 9, 2014 in the United States District Court for the Southern District of New York (Gardephe, J.). Martoma was found guilty, after a jury trial, of one count of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and two counts of securities fraud in violation of 15 U.S.C. §§ 78j(b) & 78ff in connection with an insider trading scheme. After Martoma was convicted, this Court issued a decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), which elaborated on the Supreme Court's ruling in Dirks v. S.E.C., 463 U.S. 646, 103 S. Ct. 3255, 77 L. Ed. 2d 911 (1983), concerning liability for a "tippee" who trades on confidential information obtained from an insider, or a "tipper."

On appeal, Martoma argues that the jury in his case was not properly instructed and that the evidence presented at his trial was insufficient to sustain his conviction. Martoma contends that the jury instructions ran afoul of Newman by allowing the jury to find that a tipper receives a "personal benefit" from gifting inside information even where the tipper and tippee do not share a "meaningfully close personal relationship." He further argues that the evidence at trial was insufficient to sustain a conviction under any theory of personal benefit.

We conclude that the jury instructions are inconsistent with Newman. That decision held that a personal benefit in the form of "a gift of confidential information to a trading relative or friend" requires proof that the tipper and tippee share a "meaningfully close personal relationship." 773 F.3d at 452. Newman explained that this standard "requires evidence of 'a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].'" Id. Thus, Martoma's jury instructions were erroneous, not because they omitted the term "meaningfully close personal relationship," but because they allowed the jury to convict based solely on evidence of friendship without also requiring either that the tipper and tippee shared a quid pro quo-like relationship or that the tipper intended to benefit the tippee.

We nonetheless conclude that this instructional error did not affect Martoma's substantial rights. At trial, the government presented compelling evidence that at least one tipper shared a relationship suggesting a quid pro quo with Martoma. For the same reason, Martoma's challenge to the sufficiency of the personal-benefit evidence fails. The government also presented sufficient evidence for a rational trier of fact to conclude that at least one tipper received a personal benefit by disclosing inside information with the intention to benefit Martoma. Accordingly, the judgment of the district court is AFFIRMED.

United States v. Martoma, 869 F.3d 58, 2017 U.S. App. LEXIS 16084 (2d Cir. N.Y., Aug. 23, 2017)

CORE TERMS

tipper, personal benefit, tippee, insider, gift, trading, confidential information, inside information, personal relationship, quid pro quo, insider trading, meaningfully, recipient, benefits, tip, jury instructions, infer, objective evidence, disclosing, slip opinion, consultations, disclosure, suggests, objective fact, bapineuzumab, clinical trial, colleagues, friendship, convicted, pecuniary

Securities Law, Postoffering & Secondary Distributions, Securities Exchange Act of 1934 Actions, Insider Trading, Criminal Law & Procedure, Standards of Review, Harmless & Invited Error, Jury Instructions, Trials, Plain Error, Burdens of Proof, De Novo Review, Sufficiency of Evidence, Substantial Evidence, Insider Trading, Classical Theory, Misappropriation Theory, Duty to Abstain & Disclose, Tippee Duties, Elements of Proof, Scienter, Acts & Mental States, Mens Rea, General Intent, Evidence, Admissibility, Circumstantial & Direct Evidence, Evidence