Mathew Martoma, a former portfolio manager for Steven Cohen’s SAC Capital, is asking the U.S. Court of Appeals for the Second Circuit for a rehearing en banc of his 2014 insider trading conviction at the hands of the U.S. Attorney’s Office for the Southern District of New York.
The petition comes after a split appellate panel that included Chief Judge Robert Katzmann issued an affirmative amended order that the minority opinion said still fundamentally muddied the already complicated circuit law on the securities violation.
The muddied law in the circuit is exactly why Martoma argues the entire circuit should sit to rehear his appeal.
Martoma’s legal team, led by Kirkland & Ellis partner Paul Clement, points to the now-familiar lineage of decisions, both in the circuit and from the U.S. Supreme Court, that leads to the knot tangling up the former hedge fund manager’s insider trading case.
Four years ago, the Second Circuit ruled in a unanimous panel decision in United States v. Newman, that the government must prove a “meaningfully close personal relationship” requirement between the tipper and tippee to hold the latter liable for insider trading. More recently, the Supreme Court, which declined to hear Newman, ruled in Salman v. United States that a gift of the information to a trading relative, not just something of pecuniary value, qualified as a personal benefit to satisfy the requirement.
The initial panel decision on Martoma’s appeal saw a divide between the Second Circuit’s requirements in Newman and what the Supreme Court laid out in Salman. The “meaningfully close personal relationship” required by Newman was suspect under Salman, the majority of Katzmann and Circuit Judge Denny Chin said, even while acknowledging the Supreme Court did not specifically nullify the test. The Supreme Court had “fundamentally altered the analysis underlying Newman,” however, rendering it “no longer good law,” according to the majority.
According to Martoma, the ruling effectively did away with the test, which he argued was not satisfied by the kind of relationship he had with the tipper. With Newman’s requirement now nixed in favor of any kind of relationship as long as the expectation was the tippee would be trading on the information, Martoma’s appeal appeared even easier to deny, and his conviction upheld.
Circuit Judge Rosemary Pooler strongly disagreed with the majority’s findings, arguing that nothing in Salman broke new ground on the precedent set down in the Supreme Court’s 1983 decision in Dirks v. SEC. The majority, then, was jettisoning circuit law, without the required hearing en banc. She went on to blast the majority’s logic, and stated that it left insider trading law “for the worse.”
The majority’s amended opinion, issued in August 2017, dialed back the scope of Salman’s impact on Newman, while reaching the same ultimate conclusion for Martoma. This time, as Martoma’s counsel notes, Newman was overruled implicitly, rather than explicitly. As long as the tipper intended to benefit the tippee, the relationship requirement was satisfied, regardless if the tipper receives a benefit, other than a warm glow.
While the jury instructions in Martoma’s case were erroneous because the gift theory presented wasn’t complete, it was ruled harmless because enough evidence at trial of a quid pro quo relationship was presented.
Pooler again dissented, calling the majority’s new opinion “semantic rather than substantial.” Again, she argued it was an upheaval of the kind of requirement the circuit has relied on since Dirks.
Pooler’s arguments unsurprisingly make up the heft of Martoma’s request for an en banc hearing. The amended opinion effectively eliminates the personal benefit requirement, which Martoma argues the circuit does at the risk of undermining binding Supreme Court precedent.
“If a mere ‘intention to benefit’ the tippee is enough, there is no reason for the government ever to invoke the gift theory Newman so carefully cabined,” Martoma argued. “And Dirks does not leave open some alternative to the gift theory under which the government can show a breach of fiduciary duty just by showing an intent to benefit the outsider/tippee.”
A spokesman for the U.S. Attorney’s Office declined to comment on the petition.
Kirkland’s Clement did not respond to a request for comment.