New Ruling Makes It Easier for Feds to Win Insider Trading Cases


Recently, the United States Court of Appeals for the Second Circuit upheld the insider trading conviction of a former SAC Capital portfolio manager, deciding that the criteria they had established in the Newman case was no longer valid given the Supreme Court’s Salman decision.  Some argue this makes insider trading cases much easier to win.

Mathew Martoma’s Appeal

In 2014, Mathew Martoma, a former portfolio manager of Stephen Cohen’s SAC Capital Management, was found guilty of insider trading for using confidential information received from an expert involved in a clinical Alzheimer’s drug trial that generated $275 million in profit.  Martoma was given a nine-year sentence.

In Martoma’s appeal before the Second Circuit Court, his lawyers argued that the jury in the trial had not been properly instructed and that the government had not proved there was a meaningful close relationship between Martoma and Dr. Sid Gilman – the tipper in his case.  In the Second Circuit court’s 2014 United States v. Newman case, the appeals court ruled that the government must prove 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.”

However, in a 2-1 decision the Second Circuit court decided that the Supreme Court’s 2016 decision in the Salman insider trading case had eliminated the need to prove this.  In the majority opinion, the court wrote, ”We respectfully conclude that Salman fundamentally altered the analysis underlying Newman’s ‘meaningfully close personal relationship’ requirement such that the ‘meaningfully close personal relationship’ requirement is no longer good law.”

In addition, the court decided that the benefit to Dr. Gilman, the tipper in this case, was clear as Martoma had paid him $1,000 a meeting for his information and advice.  In fact, the court concluded that Martoma and Gilman had developed an ongoing “quid pro quo” relationship where Dr. Gilman regularly disclosed confidential information in exchange for fees.

Our Take

Unfortunately, the Second Circuit Court of Appeals latest ruling proved to be bad news for both Mathew Martoma as well as future defendants facing insider trading charges.  Essentially, the ruling in Martoma’s appeal eliminates much of the legal foundation of the Newman ruling.

In fact, in her minority opinion, Judge Rosemary Pooler highlighted what she saw is the problem with this new ruling:

“Today, the majority holds that an insider receives a personal benefit when the insider gives inside information as a “gift” to any person. In holding that someone who gives a gift always receives a personal benefit from doing so, the majority strips the long‐standing personal benefit rule of its limiting power. What counts as a “gift” is vague and subjective. Juries, and, more dangerously, prosecutors, can now seize on this vagueness and subjectivity. The result will be liability in many cases where it could not previously lie.”

Some legal experts agree with Judge Pooler claiming that the new ruling is a substantial broadening of insider trading laws.  If you give material nonpublic information in exchange for a benefit, then you satisfy the personal-benefit test which is obviously illegal.  However, if you give material nonpublic information in exchange for nothing, you now satisfy the “gift” test which could also be considered illegal.

Consequently, providing confidential information in all cases could now be considered insider trading.  It will now be left up to a jury to decide whether someone providing material nonpublic information who receives no specific benefit is providing an illegal “gift” or not.  In our minds, this is leaving the door open for the government to bring a slew of confusing insider trading cases.



About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email:

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