U.S. District Judge Jed Rakoff. U.S. District Judge Jed Rakoff. Photo Credit: Rick Kopstein/ALM

It was years in the making, but in declining to dismiss an insider trading indictment Thursday, U.S. District Judge Jed Rakoff of the Southern District of New York brought a coda to his bicoastal efforts confronting the U.S. Court of Appeals for the Second Circuit’s contorted insider trading case law of recent years.

The motion to dismiss was just one of a number of actions by the defendants in United States v. Pinto-Thomaz, 18-cr-00579. Sebastian Pinto-Thomaz, according to an indictment, allegedly provided insider information about paint manufacturer Sherwin-Williams’ intent to acquire a rival company, Valspar, to two acquaintances, neither of whom had previously traded in either of the companies’ stocks.

The defendants challenged the government’s superseding indictment. As Rakoff noted, the motion was based on the Second Circuit’s critical 2014 ruling in United States v. Newman. The decision established a requirement that there be a meaningful close personal relationship between tipper and tippee.

In the years since, the Newman decision has produced more than a few judicial entanglements, some of which have involved Rakoff himself. The Manhattan federal judge was given the rare opportunity to express his contradictory views on the Second Circuit’s holding in Newman when he sat by designation in the U.S. Court of Appeals for the Ninth Circuit. There, he wrote the opinion in that court’s own critical insider trading case, United States v. Salman. Pinto-Thomaz is his first insider trading case since he wrote Salman.

The decision rebuked much of the Manhattan appellate court’s logic in Newman, which was written by Circuit Judge Barrington Parker, one of the Second Circuit’s most influential members. But it was ultimately Salman, not Newman, that made it to the U.S. Supreme Court. The high court’s ruling provided clarity, in accordance with its previous landmark in 1983’s Dirks v. SEC, with the personal benefit requirement.

As Rakoff noted, the high court’s language here seemed simple enough, as a way to understand what should be an easy-to-understand concept of insider trading: information is a company’s property. Should it be embezzled and used for gain by the inside person who took it, or someone they gave it to who knew it was “stolen goods,” then that’s a crime.

“It is just that simple —or, conceptually, should be,” Rakoff write. “But … some judicial decisions appear to have added complications.”

The Second Circuit’s handling of insider trading cases in the wake of the Salman decision appeared to be a clear target of Rakoff’s complications concern.

What the Supreme Court was trying to do in proscribing a personal benefit requirement, according to Rakoff, was make a clear distinction between “a lawfully-acting fiduciary” who may reveal insider information under certain circumstances and “someone who embezzles for personal advantage.”

“None of this suggested that ‘personal benefit’ consisted of any particular kind of benefit, but only that it was a benefit grounded in using company information for personal advantage, as opposed to a corporate or otherwise permissible purpose (such as whistleblowing),” Rakoff said.

Dirks purposefully laid out a concept of personal benefit that was quite broad, the judge continued, giving examples that provided a nonexhaustive set of ways that benefit could be taken. Most lower courts grasped this going forward, recognizing a variety of arrangements that could qualify as a personal benefit.

“But then along came the Second Circuit’s decision” in Newman, Rakoff wrote.

While the Supreme Court’s ruling in Salman ultimately undid some of what Rakoff saw as arguable departures from Dirks in narrowing the scope of the kinds of benefits a tipper could receive, because Salman never addressed the Newman finding of a meaningful close relationship requirement, it arguably stood as circuit law.

Then came the Second Circuit’s decisions in United States v. Martoma, which attempted a kind of course correction. Initially, the panel’s ruling appeared to negate the remaining Newman requirement. After being lambasted by Circuit Judge Rosemary Pooler’s dissent for having no power to overrule the prior panel in Newman, Chief Judge Robert Katzmann and Circuit Judge Denny Chin returned with an amended opinion in the case.

The panel narrowed the application of the Newman requirement to situations where a fact finder is asked to infer an adequate benefit simply from the relationship between the tipper and tippee, as Rakoff noted. Otherwise, Newman did not, and “indeed had no power to,” alter the general breadth of personal benefit under Dirks.

“What remains of Newman therefore applies in only the rarest of cases,” Rakoff wrote.

The facts in the Pinto-Thomaz case did not qualify as such a case, according to the judge. The requirement was irrelevant as the indictment alleged Pinto-Thomaz had an intention to benefit those he tipped off. The government alleges that Pinto-Thomaz’s tip to one of the defendants, Jeremy Millul, resulted in a profit of more than $106,000.

A spokesman for the office of U.S. Attorney Geoffrey Berman of the Southern District of New York did not return a request for comment.

Millul is represented by Arent Fox partner Glenn Colton. In a statement, Colton said he and his client were disappointed in Rakoff’s decision and remained “steadfast” in their belief in the constitutional principles underlying their arguments. Colton went on to express gratitude that additional hearings on substantive aspects of their motion will be heard.

Pinto-Thomaz’s legal team is led by Meister Seelig & Fein partner Henry Mazurek. Neither the firm or Mazurek immediately provided a comment.


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