Mathew Martoma exits the Southern District courthouse in 2014.
Mathew Martoma exits the Southern District courthouse in 2014. (Reuters/Brendan McDermid)

The U.S. Court of Appeals for the Second Circuit heard oral arguments earlier this month in a major insider-trading case following the U.S. Supreme Court’s ruling in Salman v. United States last year.

The appeal, United States v. Martoma, 14-3599, provides the circuit the opportunity to address its ruling in United States v. Newman in the light of Salman. Since the high court’s ruling, there’s been uncertainty over how much of Newman—which the Supreme Court declined to hear after the circuit reversed the convictions—remains after Salman. The panel of Judges Rosemary Pooler and Denny Chin and Chief Judge Robert A. Katzmann now has a chance to speak to the issue of the relationship between tipper and tippee, which Newman found must show “proof of a meaningfully close relationship that generates an exchange that is objective, consequential, and that represents at least a potential gain of a pecuniary or similarly valuable nature.”

In Salman, “trading relative or friend” is enough to establish the kind of prohibited gift-giving of information. But, said Stephen Fishbein, a partner in Shearman & Sterling’s litigation group, the facts in Salman are so different than Newman to almost make concerns over its impact on the Martoma case nonexistent.

Newman has been over-read in some corners,” he said. “There isn’t a conflict between Salman and Newman. Newman, rather, was specifically in the context of the more arm’s-length relationship on Wall Street” where information flows freely between parties arrayed in nonpersonal relationships, Fishbein said.

In this sense, the circuit, if it chooses, has the opportunity in Martoma to further clarify the quality of the relationship that isn’t of the more clear-cut Salman variety.

“It leaves open this really interesting question: Well, what do you mean by friend?” said Chip Loewenson, a partner in Morrison & Foerster’s white-collar defense group. “It’s easy enough to state the rule but it can be real difficult in application.”

The case before the circuit was born out of the many-tendriled investigation by former U.S. Attorney Preet Bharara into the SAC Capital Advisors hedge fund and its owner, Steven Cohen. In 2013, Mathew Martoma, a portfolio manager at SAC, was indicted on securities fraud violations in connection with insider information received from doctors connected to a drug trial.

In February 2014, Martoma was convicted on all counts, and later sentenced to a nine-year prison term and a forfeiture of $9.4 million. Since that trial and conviction, the circuit decided Newman. The Supreme Court rejected hearing that case but took and decided the Ninth Circuit’s Salman case. Both Newman and Salman dealt with down-stream tippees who benefited from breaches of fiduciary duty occurring between close friends or family members.

That aspect of the relationship concern doesn’t apply in Martoma. On appeal, Martoma argues that the government failed to nail the pecuniary test in Newman in its presentation, relying instead on the relationship between Martoma and Dr. Sid Gilman (the relationship between the other doctor, Joel Ross, is absent in the discussion), which fails to meet the other test of a meaningfully close relationship.

“That’s precisely what you can no longer do in a post-Newman world,” argued Kirkland & Ellis partner Paul Clement before the panel. He believed that the threshold for the relationship test is whether it was the kind in which gifts are, in fact, exchanged—a relationship that would resemble the kind of closeness and meaningfulness that was absent between Martoma and Gilman, according to Clement.

“In the light of Salman, you kind of need the Newman test now more than ever,” he said.

For the defense, the uncertainty over whether the jury was convicting in whole or in part on the quid pro quo pecuniary question, thanks to pre-Newman instructions, meant that the issue is largely by the wayside.

On the core relationship issue, Assistant U.S. Attorney Robert Allen argued that the defense was working hard to make a “conjunctive” case in Newman, when Salman largely dispensed with the relationship proximity issue by not engaging with the meaningfully close relationship of Newman.

Martoma essentially gets his conviction upheld on two levels, Allen said. Even if the circuit holds that Newman‘s meaningfully close relationship test is still alive under Salman, this is clearly the kind of situation that should fall into that category—even if it was a one-way friendship, as some of the judges suggested.

Even if Martoma was engaging in a fraudulent relationship, Allen argued that only the tipper must want to get something out of the tip for it to matter.

The circuit will likely have to resolve some issues over which piece to tackle, according to Dechert LLP’s Jonathan Streeter, who had prosecuted another separate SAC-related case, United States v. Rajaratnam, during his time with the Southern District U.S. Attorney’s Office. First, they’ll have to decide if the quid pro quo issue is really just a classic quid pro quo situation, and therefore requires little discussion of Newman or Salman.

However, if the judges decide it’s unclear what drove the jury’s decision, it would necessarily lead to a discussion of the relationship issues.

“If they decide that it’s not clear that that’s what the jury decided then, they will need to look into defining a little bit better what kind of a relationship Salman requires to assume a benefit” outside of a family or close-friend relation, he said.

Then, according to Shearman & Sterling’s Fishbein, the issue of whether the government proved in a pre-Newman world enough of that post-Newman relationship sufficiently. It’s these non-Salman relationships that the circuit will be trying to likely define, he said.

“You don’t want to unnecessarily chill conversations and communications between analysts and companies,” Fishbein said. “You want to encourage a free flow of information, and for analysts to do their job of exposing the true facts behind a company.”

|@ B. Colby Hamilton is a New York-based financial and white-collar litigation reporter for the New York Law Journal and Contact Colby at On Twitter: @bcolbyhamilton