14‐3599
United States v. Martoma
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
_______________
August Term, 2016
(Argued: October 28, 2015 and May 9, 2017 Decided: August 23, 2017
Amended: June 25, 2018)
Docket No. 14‐3599
_______________
UNITED STATES OF AMERICA,
Appellee,
– v. –
MATHEW MARTOMA,
Defendant‐Appellant.
_______________
B e f o r e:
KATZMANN, Chief Judge, POOLER and CHIN, Circuit Judges.
______________
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 (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
2
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.
Judge Pooler dissents in a separate opinion.
_______________
ROBERT ALLEN and ARLO DEVLIN‐BROWN, Assistant United States
Attorneys, (Megan Gaffney, Michael A. Levy, and
Margaret Garnett, Assistant United States Attorneys, on the
brief), for Geoffrey S. Berman, United States Attorney for
the Southern District of New York, New York, NY, for
Appellee.
PAUL D. CLEMENT (Erin E. Murphy, Harker Rhodes, and Edmund
G. LaCour, Jr., on the brief), Kirkland & Ellis LLP,
Washington, DC; Alexandra A.E. Shapiro, Eric S. Olney,
and Jeremy Licht, Shapiro Arato LLP, New York, NY;
Charles J. Ogletree, Jr., Cambridge, MA, for Defendant‐
Appellant.
_______________
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 of
15 U.S.C. §§ 78j(b) & 78ff in connection with an insider trading scheme. On
3
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 (1983). “[T]he test” for whether there has been a breach of the tipper’s
duty “is whether the [tipper] 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 trading by the insider himself followed by a gift of the profits
to the recipient.” Id. at 664.
4
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.
We agree that the jury instructions are inconsistent with Newman,
though not for the reasons Martoma advances. Newman held that a personal
benefit in the form of “a gift of confidential information to a trading relative
or friend,” see Dirks, 463 U.S. at 664, requires proof that the tipper and tippee
shared what the decision called a “meaningfully close personal relationship,”
see Newman, 773 F.3d at 452. The Court explained that this standard “requires
evidence of ‘a relationship between the insider and the recipient that suggests
5
a quid pro quo from the latter, or an intention to benefit the [latter].’” Id.
(quoting United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013) (quoting Dirks,
463 U.S. at 664)). Thus, Martoma’s jury instructions were erroneous, not
because they omitted the term “meaningfully close personal relationship,” but
because they allowed the jury to find a personal benefit in the form of a “gift
of confidential information to a trading relative or friend” without requiring
the jury to find either that tipper and tippee shared a relationship suggesting
a quid pro quo or that the tipper gifted confidential information with the
intention 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 received a different type of personal benefit
from disclosing inside information: $70,000 in “consulting fees.” This
evidence establishes the existence of a relationship suggesting a quid pro quo
between the tipper and tippee. For this reason, Martoma’s challenge to the
sufficiency of the personal‐benefit evidence fails. Moreover, the government
presented sufficient evidence for a rational trier of fact to conclude that at
least one tipper received a personal benefit by disclosing inside information
6
with the intention to benefit Martoma. Accordingly, we AFFIRM the
judgment of the district court.
BACKGROUND
Martoma’s convictions stem from an insider trading scheme involving
securities of two pharmaceutical companies, Elan Corporation, plc (“Elan”)
and Wyeth, that were jointly developing an experimental drug called
bapineuzumab to treat Alzheimer’s disease. Martoma worked as a portfolio
manager at S.A.C. Capital Advisors (“SAC”), a hedge fund owned and
managed by Steven A. Cohen. In that capacity, Martoma managed an
investment portfolio with buying power of between $400 and $500 million
that was focused on pharmaceutical and healthcare companies. He also
recommended investments to Cohen, who managed SAC’s largest portfolio.
While at SAC, Martoma began to acquire shares in Elan and Wyeth in his
portfolio and recommended that Cohen acquire shares in the companies as
well.
In order to obtain information about bapineuzumab, Martoma
contacted expert networking firms and arranged paid consultations with
doctors knowledgeable about Alzheimer’s disease, including two who were
7
working on the bapineuzumab clinical trial. Dr. Sidney Gilman, chair of the
safety monitoring committee for the bapineuzumab clinical trial, participated
in approximately 43 consultations with Martoma at the rate of around $1,000
per hour.1 As a member of the safety monitoring committee, Dr. Gilman had
an obligation to keep the results of the clinical trial confidential. His
consulting contract reiterated that he was not to disclose any confidential
information in a consultation. He nevertheless provided Martoma, whom he
knew to be an investment manager seeking information to help make
securities trading decisions, with confidential updates on the drug’s safety
that he received during meetings of the safety monitoring committee. Dr.
Gilman also shared with Martoma the dates of upcoming safety monitoring
committee meetings, which allowed Martoma to schedule consultations with
Dr. Gilman shortly after each one. Another consultant, Dr. Joel Ross, one of
the principal investigators on the clinical trial, met with Martoma on many
occasions between 2006 and July 2008 and charged approximately $1,500 per
1 Martoma did not pay Dr. Gilman or any other consultant directly. Instead,
SAC would pay the expert networking firm, and the expert networking firm would
in turn pay Dr. Gilman and the other consultants.
8
hour. Like Dr. Gilman, Dr. Ross had an obligation to maintain the
confidentiality of information about the bapineuzumab clinical trial.
Nevertheless, during their consultations, Dr. Ross provided Martoma with
information about the clinical trial, including information about his patients’
responses to the drug and the total number of participants in the study, that
Dr. Ross recognized was not public.
On June 17, 2008, Elan and Wyeth issued a press release regarding the
results of “Phase II” of the bapineuzumab clinical trial. The press release
described the preliminary results as “encouraging,” with “clinically
meaningful benefits in important subgroups” of Alzheimer’s patients with
certain genetic characteristics, but indicated that the drug had not proven
effective in the general population of Alzheimer’s patients. J.A. 547. The press
release further stated that the results of the trials would be presented in
greater detail at the International Conference on Alzehimer’s Disease to be
held on July 29, 2008. Elan’s share price increased following the press release.
In mid‐July of 2008, the sponsors of the bapineuzumab trial selected Dr.
Gilman to present the results at the July 29 conference. It was only at this
point that Dr. Gilman was unblinded as to the final efficacy results of the trial.
9
Dr. Gilman was “initially euphoric” about the results, but identified “two
major weaknesses in the data” that called into question the efficacy of the
drug as compared to the placebo. Tr. 1419–20. On July 17, 2008, the day after
being unblinded to the results, Dr. Gilman spoke with Martoma for about 90
minutes by telephone about what he had learned. That same day, Martoma
purchased a plane ticket to see Dr. Gilman in person at his office in Ann
Arbor, Michigan. That meeting occurred two days later, on July 19, 2008. At
that meeting, Dr. Gilman showed Martoma a PowerPoint presentation
containing the efficacy results and discussed the data with him in detail.
The next morning, Sunday, July 20, Martoma sent Cohen, the owner of
SAC, an email with “It’s important” in the subject line and asked to speak
with him by telephone. The two had a telephone conversation lasting about
twenty minutes, after which Martoma emailed Cohen a summary of SAC’s
Elan and Wyeth holdings. The day after Martoma spoke to Cohen, on July 21,
2008, SAC began to reduce its position in Elan and Wyeth securities and
entered into short‐sale and options trades that would be profitable if Elan’s
and Wyeth’s stock fell.
10
Dr. Gilman publicly presented the final results from the bapineuzumab
trial at the International Conference on Alzehimer’s Disease in the afternoon
of July 29, 2008. Elan’s share price began to decline during Dr. Gilman’s
presentation and at the close of trading the next day, the share prices of Elan’s
and Wyeth had declined by about 42% and 12%, respectively. The trades that
Martoma and Cohen made in advance of the announcement resulted in
approximately $80.3 million in gains and $194.6 million in averted losses for
SAC. Martoma personally received a $9 million bonus based in large part on
his trading activity in Elan and Wyeth.
At Martoma’s trial, the district court instructed the jury on the personal
benefit element of insider trading law as follows:
If you find that Dr. Gilman or Dr. Ross disclosed
material, non‐public information to Mr. Martoma,
you must then determine whether the government
proved beyond a reasonable doubt that Dr. Gilman
and Dr. Ross received or anticipated receiving some
personal benefit, direct or indirect, from disclosing
the material, non‐public information at issue.
The benefit may, but need not be, financial or tangible
in nature; it could include obtaining some future
advantage, developing or maintaining a business
contact or a friendship, or enhancing the tipper’s
reputation.
11
A finding as to benefit should be based on all the
objective facts and inferences presented in the case.
You may find that Dr. Gilman or Dr. Ross received a
direct or indirect personal benefit from providing
inside information to Mr. Martoma if you find that Dr.
Gilman or Dr. Ross gave the information to Mr.
Martoma with the intention of benefiting themselves
in some manner, or with the intention of conferring a
benefit on Mr. Martoma, or as a gift with the goal of
maintaining or developing a personal friendship or a
useful networking contact.
Tr. 3191.
After Martoma was convicted and while his appeal was pending, this
Court decided United States v. Newman, 773 F.3d 438 (2d Cir. 2014), an insider
trading case that considered one of the personal benefits described in Dirks
and mentioned in Martoma’s jury instructions—making a “gift” of inside
information to “a trading relative or friend.”2 This Court stated:
To the extent Dirks suggests that a personal benefit
may be inferred from a personal relationship between
the tipper and tippee, where the tippee’s trades
‘resemble trading by the insider himself followed by
a gift of the profits to the recipient,’ see 463 U.S. at 664,
we hold that such an inference is impermissible in the
absence of proof of a meaningfully close personal
2 For convenience, we sometimes refer to this as the “gift theory” of personal
benefit.
12
relationship that generates an exchange that is
objective, consequential, and represents at least a
potential gain of a pecuniary or similarly valuable
nature.
773 F.3d at 452. An initial round of briefing focused in large part on whether
Martoma’s conviction could stand in light of this passage from Newman.
Shortly thereafter, the Supreme Court decided Salman v. United States,
137 S. Ct. 420 (2016), another case involving the gift theory. The defendant,
relying on Newman, urged the Supreme Court to hold that a “‘gift of
confidential information to a trading relative or friend’” is insufficient to
establish insider trading liability “unless the tipper’s goal in disclosing inside
information [wa]s to obtain money, property, or something of tangible value.”
Id. at 426 (quoting Dirks, 463 U.S. at 664). The Supreme Court rejected the
defendant’s argument and “adhere[d] to Dirks,” id. at 427, observing that “[t]o
the extent the Second Circuit held that the tipper must also receive something
of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or
friends, . . . this requirement is inconsistent with Dirks,” id. at 428 (quoting
Newman, 773 F.3d at 452); see also id. (“Here, by disclosing confidential
information as a gift to his brother with the expectation that he would trade
13
on it, Maher breached his duty of trust and confidence to Citigroup and its
clients . . . .”).
The government now takes the position that Salman fully abrogated
Newman’s interpretation of the personal benefit element, whereas Martoma
argues that Newman’s “meaningfully close personal relationship” standard
survived Salman. However, because there are many ways to establish a
personal benefit, we conclude that we need not decide whether Newman’s
gloss on the gift theory is inconsistent with Salman. At trial, the government
presented compelling evidence that Dr. Gilman received a different type of
personal benefit: $70,000 in consulting fees, which can be seen either as
evidence of a quid pro quo‐like relationship, or simply advance payments for
the tips of inside information that Dr. Gilman went on to supply.3 The
government also introduced sufficient evidence to prove Dr. Gilman received
a personal benefit by disclosing inside information with the intention to
The parties focus primarily on Dr. Gilman because it was Dr. Gilman, not
3
Dr. Ross, who gave Martoma the final efficacy data that led Martoma to reduce
SAC’s position in Elan and Wyeth.
14
benefit Martoma. We accordingly conclude that Martoma has provided no
basis for his judgment of conviction to be vacated or reversed.
DISCUSSION
As noted above, Martoma challenges both the adequacy of the district
court’s jury instructions and the sufficiency of the evidence presented at trial.
“We review a jury charge in its entirety and not on the basis of excerpts taken
out of context.” United States v. Mitchell, 328 F.3d 77, 82 (2d Cir. 2003) (quoting
United States v. Zvi, 168 F.3d 49, 58 (2d Cir. 1998)). “A conviction based on a
general verdict is subject to challenge if the jury was instructed on alternative
theories of guilt and may have relied on an invalid one.” Hedgpeth v. Pulido,
555 U.S. 57, 58 (2008). Such a challenge, however, is subject to harmless error
review. See id. at 58, 61–62. And because Martoma raises his challenge to the
jury instructions for the first time on appeal, we review only for plain error.
United States v. Vilar, 729 F.3d 62, 70 (2d Cir. 2013). Under the plain error
standard, an appellant must demonstrate that “(1) there is an error; (2) the
error is clear or obvious, rather than subject to reasonable dispute; (3) the
error affected the appellant’s substantial rights . . . ; and (4) the error seriously
15
affects the fairness, integrity or public reputation of judicial proceedings.”4
United States v. Marcus, 560 U.S. 258, 262 (2010) (internal quotation marks and
alteration omitted). “[W]e look not to the law at the time of the trial court’s
decision to assess whether the error was plain, but rather, to the law as it
exists at the time of review.” Vilar, 729 F.3d at 71. Even with respect to an
instructional error that “incorrectly omitted an element of the offense,” we
will not overturn a conviction “if we find that the jury would have returned
the same verdict beyond a reasonable doubt,” and thus that “the error did not
affect [the defendant’s] substantial rights.” Nouri, 711 F.3d at 139–40 (internal
quotation marks omitted).
4 In the past, we have stated that “[w]here . . . the source of an alleged jury
instruction error is a supervening decision, we employ a ‘modified plain‐error rule,
under which the government, not the defendant, bears the burden to demonstrate
that the error . . . was harmless.’” United States v. Mahaffy, 693 F.3d 113, 136 (2d Cir.
2012) (second alteration in original). We have “on at least twenty‐two occasions,”
Vilar, 729 F.3d at 71 n.5, observed that the Supreme Court’s decision in Johnson v.
United States, 520 U.S. 461 (1997), “called into question the modified plain error
standard of review,” United States v. Botti, 711 F.3d 299, 308 (2d Cir. 2013). Here, as in
the past, “[b]ecause we would reach the same conclusion under either standard, we
need not resolve that question.” United States v. Nouri, 711 F.3d 129, 138 n.2 (2d Cir.
2013).
16
With respect to Martoma’s second argument, a defendant challenging
the sufficiency of the evidence “bears a heavy burden,” and “the standard of
review is exceedingly deferential.” United States v. Coplan, 703 F.3d 46, 62 (2d
Cir. 2012) (internal quotation marks omitted). “In evaluating a sufficiency
challenge, we ‘must view the evidence in the light most favorable to the
government, crediting every inference that could have been drawn in the
government’s favor, and deferring to the jury’s assessment of witness
credibility and its assessment of the weight of the evidence.’” Id. (quoting
United States v. Chavez, 549 F.3d 119, 124 (2d Cir. 2008)). “Although sufficiency
review is de novo, we will uphold the judgment[] of conviction if ‘any rational
trier of fact could have found the essential elements of the crime beyond a
reasonable doubt.’” Id. (citation omitted) (quoting Jackson v. Virginia, 443 U.S.
307, 319 (1979)). “A judgment of acquittal is warranted only if the evidence
that the defendant committed the crime alleged is nonexistent or so meager
that no reasonable jury could find guilt beyond a reasonable doubt.” Jiau, 734
F.3d at 152 (alteration and internal quotation marks omitted).
17
I.
We first turn to Martoma’s challenge to the district court’s jury
instructions, which focuses on Dirks’ statement that the personal benefit
necessary to establish insider trading liability in a tipping case can be inferred
from a “gift of confidential information to a trading relative or friend.” Dirks,
463 U.S. at 663–64; see also Salman, 137 S. Ct. at 428. Martoma argues that the
district court’s jury instructions ran afoul of this Court’s decision in Newman
by permitting the jury to conclude that a gift of confidential information given
with the goal of “developing or maintaining . . . a friendship” qualifies as a
personal benefit. According to Martoma, the jury should have been instructed
that the tipper and tippee must share a “meaningfully close personal
relationship” in order to find a personal benefit based on a gift of inside
information to a friend.
A. The Personal Benefit Requirement
The Supreme Court long ago held that there is no “general duty
between all participants in market transactions to forgo actions based on
material, nonpublic information.” Chiarella v. United States, 445 U.S. 222, 233
(1980). However, the “traditional” or “classical theory” of insider trading
18
provides that a corporate insider violates § 10(b) of the Securities Exchange
Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b‐5, 17 C.F.R. § 240.10b‐5 (2017),
when he “trades in the securities of his corporation on the basis of material,
non‐public information” because “a relationship of trust and confidence
[exists] between the shareholders of a corporation and those insiders who
have obtained confidential information by reason of their position with that
corporation.” United States v. O’Hagan, 521 U.S. 642, 651–52 (1997) (alteration
in original) (quoting Chiarella, 445 U.S. at 228). Similarly, the
“misappropriation theory” of insider trading provides “that a person . . .
violates § 10(b) and Rule 10b‐5[] when he misappropriates confidential
information for securities trading purposes, in breach of a duty owed to the
source of the information.” Id. at 652. It is thus the breach of a fiduciary duty
or other “duty of loyalty and confidentiality” that is a necessary predicate to
insider trading liability. See id.5
5 Although many of the cases refer to “insiders” and “fiduciary” duties
because those cases involve the “classical theory” of insider trading, the Dirks
articulation of tipper and tippee liability also applies under the misappropriation
theory, where the misappropriator violates some duty owed to the source of the
information. See S.E.C. v. Obus, 693 F.3d 276, 286–88 (2d Cir. 2012); see also Newman,
773 F.3d at 445–46.
19
The personal benefit element has its origin in Dirks, where the Supreme
Court examined how a recipient of inside information who was not himself a
corporate insider—i.e., a tippee—can acquire a duty to disclose or abstain
from trading. The Supreme Court held that a tippee acquires the duty to
disclose or abstain only if the insider disclosed the confidential information in
breach of a fiduciary duty to the firm. Dirks, 463 U.S. at 660–61. “Whether
disclosure is a breach of duty,” the Supreme Court explained, “depends in
large part on the purpose of the disclosure.” Id. at 662. The personal benefit
requirement is designed to test the propriety of the tipper’s purpose. See id. at
661–63. This logic is sound. A firm’s confidential information belongs to the
firm itself, and an insider entrusted with it has a fiduciary duty to use it only
for firm purposes. The insider who personally benefits—i.e., whose purpose is
to help himself—from disclosing confidential information therefore breaches
that duty; the insider who discloses for a legitimate corporate purpose does
not. Identifying personal benefits is not, however, the central focus of insider
trading law, but simply how courts and juries analyze breaches of fiduciary
duty.
20
The Supreme Court defined personal benefit broadly. As noted above,
the test for a personal benefit is whether objective evidence shows that “the
insider personally will benefit, directly or indirectly, from his disclosure” of
confidential information to the tippee. Id. at 662. Dirks set forth numerous
examples of personal benefits that prove the tipper’s breach: a “pecuniary
gain,” a “reputational benefit that will translate into future earning,” a
“relationship between the insider and the recipient that suggests a quid pro quo
from the latter,” the tipper’s “intention to benefit the particular recipient,”
and a “gift of confidential information to a trading relative or friend” where
“[t]he tip and trade resemble trading by the insider himself followed by a gift
of the profits to the recipient.” Id. at 663–64. The tipper’s personal benefit need
not be pecuniary in nature. See Salman, 137 S. Ct. at 428.
We have applied Dirks to uphold a wide variety of personal benefits.
We held that a jury could infer a personal benefit from the fact that a tipper
“hoped to curry favor with his boss,” Obus, 693 F.3d at 292, and from the fact
that another tipper and the tippee “were friends from college,” id. at 291. We
found evidence of a personal benefit sufficient where the tippee gave one
tipper “an iPhone, live lobsters, a gift card, and a jar of honey,” and where the
21
tippee had another tipper admitted into an investment club where the tipper
“had the opportunity to access information that could yield future pecuniary
gain” (even though he never realized that opportunity). Jiau, 734 F.3d at 153.
In another case, we held that the government “need not show that the tipper
expected or received a specific or tangible benefit in exchange for the tip,” and
that the personal benefit element is satisfied where there is evidence that the
tipper “intend[ed] to benefit the . . . recipient.” S.E.C. v. Warde, 151 F.3d 42, 48
(2d Cir. 1998) (internal quotation marks omitted).
As we understand the dissent, our core disagreement is over whether
intent to benefit is a standalone personal benefit under Dirks. The dissent
argues that it is not, claiming instead that the correct formulation is a
“relationship . . . that suggests . . . an intention to benefit” the tippee. See
Dissent, slip. op. at 10–12. The key sentence of Dirks is admittedly ambiguous,
and we acknowledge that the dissent has offered a plausible reading. See 463
U.S. at 664 (“For example, there may be a relationship between the insider
and the recipient that suggests a quid pro quo from the latter, or an intention to
benefit the particular recipient.”). But that is not the only reading. The comma
separating the “intention to benefit” and “relationship . . . suggesting a quid
22
pro quo” phrases can be read to sever any connection between them. The
sentence, so understood, effectively reads, “there may be a relationship
between the insider and the recipient that suggests a quid pro quo from the
latter, or there may be an intention to benefit the particular recipient.” And
that is the reading this Court adopted in Warde, where we read the “intention
to benefit” language independently of the language of relationships: “The
‘benefit’ element of § 10(b) is satisfied when the tipper ‘intend[s] to benefit
the . . . recipient’ or ‘makes a gift of confidential information to a trading
relative or friend.’”6 Warde, 151 F.3d at 48 (quoting Dirks, 463 U.S. at 664). We
adhere to Warde.
Our understanding is also more consonant with Dirks as a whole.
Because the existence of a breach “depends in large part on the purpose of the
disclosure,” Dirks, 463 U.S. at 662, it makes perfect sense to permit the
6 Warde’s use of friendship to find the evidence of intent to benefit sufficient
does not prove otherwise. See 151 F.3d at 49. Warde teaches only that such evidence
is relevant and may even be sufficient in an appropriate case. It nowhere suggests
that it is necessary. Cf. S.E.C. v. Payton, 219 F. Supp. 3d 485, 490 (S.D.N.Y. 2016)
(finding evidence of tipper’s intent to benefit the tippee sufficient where tipper gave
tippee a Post‐It note with the stock ticker symbol, told the tippee they “could make
some money on” the stock, and said the stock was a “good opportunity”), aff’d, 2018
WL 832917 (2d Cir. Feb. 13, 2018) (summary order).
23
government to prove a personal benefit with objective evidence of the tipper’s
intent, without requiring in every case some additional evidence of the tipper‐
tippee relationship. Cf. United States v. Falcone, 257 F.3d 226, 230 (2d Cir. 2001)
(Sotomayor, J.) (explaining that “the key factor” in proving a personal benefit
is “the tipper’s intent in providing the information”). For example, suppose a
tipper discloses inside information to a perfect stranger and says, in effect,
you can make a lot of money by trading on this. Under the dissent’s approach,
this plain evidence that the tipper intended to benefit the tippee would be
insufficient to show a breach of the tipper’s fiduciary duty to the firm due to
the lack of a personal relationship. Dirks and Warde do not demand such a
result. Rather, the statement “you can make a lot of money by trading on
this,” following the disclosure of material non‐public information, suggests an
intention to benefit the tippee in breach of the insider’s fiduciary duty.
We are not persuaded by our dissenting colleague’s arguments to the
contrary. The dissent contends that proof that the tipper had an intent to
benefit the tippee does not prove that the tipper truly “received” a personal
benefit. See Dissent, slip op. at 13. The dissent would evidently have there be
proof of something more concrete. However, as we have explained, it is
24
settled law that personal benefits may be indirect and intangible and need not
be pecuniary at all. The tipper’s intention to benefit the tippee proves a breach
of fiduciary duty because it demonstrates that the tipper improperly used
inside information for personal ends and thus lacked a legitimate corporate
purpose. That is precisely what, under Dirks, the personal benefit element is
designed to test. See 463 U.S. at 662. Is evidence that an insider intended to
benefit an outsider with valuable confidential information any less probative
of the absence of a legitimate corporate purpose than evidence that the tippee
gave the tipper trivialities like shellfish and a gift card? See Jiau, 734 F.3d at
153.7
The dissent argues that its formulation is more faithful to the personal
benefit standard because evidence of a relationship suggesting an intent to
benefit the tippee “provides reason to believe that the tipper benefits by
In any event, even assuming arguendo that a more concrete benefit is
7
required, the tipper’s intention to benefit the tippee would still be an appropriate
personal benefit. A tipper’s disclosure of valuable confidential information with the
intent to benefit the tippee can satisfy the personal benefit requirement because it
can allow for the inference that the tipper has not acted simply out of the goodness
of his heart, but because he expects to receive some future benefit. Cf. Obus, 693 F.3d
at 292 (finding evidence of personal benefit sufficient where tipper “hoped to curry
favor with his boss”).
25
benefitting, since the tipper is understood as contributing to a relationship
from which both tipper and tippee benefit,” a rationale that does not apply
where there has been no proof of a relationship. Dissent, slip op. at 16. We
disagree. That rationale would justify a personal benefit in the form of a
relationship suggesting an intention to benefit both tipper and tippee, from
which it is straightforward to infer that the tipper personally benefited from
the tip. But what Dirks in fact refers to is an intention to benefit the tippee
alone. See 463 U.S. at 664. Whichever way Dirks is read, it recognizes that
purposely benefitting the tippee with inside information proves that the
tipper has received a personal benefit in breach of a fiduciary duty. The
question is whether Dirks requires that to be proved with evidence of a
relationship or not. We think it clear that the answer is no. And although few
reported decisions have relied on the intent to benefit theory, its legitimacy
has until today been uncontroversial. To take an example close to home, it
featured in the jury instructions in this very case, see Tr. 3191, and no objection
was raised, nor was any challenge to this language pressed on appeal.
Finally, we are warned that this approach creates a “subjective” test
and allows for convictions based on sheer speculation into the tipper’s
26
motives. See Dissent, slip op. at 10–11, 21–22. These fears are unwarranted.
Intent elements are everywhere in our law and are generally proved with
circumstantial evidence. See, e.g., United States v. Heras, 609 F.3d 101, 106 (2d
Cir. 2010) (“The law has long recognized that criminal intent may be proved
by circumstantial evidence alone.”); United States v. Salameh, 152 F.3d 88, 143
(2d Cir. 1998) (“[A]s a general rule most evidence of intent is circumstantial.”).
Insider trading is no different. A factfinder may infer the tipper intended to
benefit the tippee from the sort of objective evidence that is commonly offered
in insider trading cases. To return to the example above, the statement “you
can make a lot of money by trading on this” is strong circumstantial evidence
of the tipper’s intention to benefit the tippee. And the requirement of proof
beyond a reasonable doubt remains a formidable barrier to convictions
resting on speculation. See United States v. Torres, 604 F.3d 58, 66 (2d Cir. 2010).
We are thus satisfied that the personal benefit element can be met by
evidence that the tipper’s disclosure of inside information was intended to
benefit the tippee. And as is clear from the purpose of the personal benefit
element, the “broad definition of personal benefit set forth in Dirks,” and the
27
variety of benefits we have upheld, the evidentiary “bar is not a high one.”
Obus, 693 F.3d at 292.
B. This Court’s Decision in Newman
It is against that background that we must assess how Newman affected
this Court’s insider trading law. The central question in Newman was an issue
of scienter on which our district courts had been split: whether a tippee must
be aware, not only that the tipper breached a fiduciary duty in disclosing
inside information, but also that the tipper received a personal benefit.
Newman, 773 F.3d at 447–51. The Court persuasively explained that both were
required. Id. at 449 (“[A] tippee’s knowledge of the insider’s breach
necessarily requires knowledge that the insider disclosed confidential
information in exchange for personal benefit.”). This important teaching of
Newman is not before us. We observe that, unlike the defendants in Newman,
Martoma received confidential information directly from the tipper, and he
does not claim that he was unaware of any personal benefit Dr. Gilman
received. Cf. id. at 448 (“In Jiau, the defendant knew about the benefit because
she provided it.”).
28
Newman’s second holding is the focus of this appeal. After resolving the
scienter question, Newman considered the sufficiency of the personal benefit
evidence for two tippers, where the government relied chiefly on evidence
that they were friendly with their tippees. The first tipper and tippee were not
“close” friends but “had known each other for years, having both attended
business school and worked at Dell together,” and the tippee had provided
modest “career advice and assistance” to the tipper. Id. at 452. The second
tipper and tippee were “family friends” that “had met through church and
occasionally socialized together.” Id. The government argued that these
relationships were “sufficient to prove that the tippers derived some benefit
from the tip.” Id.
The Newman panel rejected the government’s argument, holding that
the personal benefit “standard, although permissive, does not suggest that the
Government may prove the receipt of a personal benefit by the mere fact of a
friendship, particularly of a casual or social nature.” Id. As the Newman Court
reasoned, if that were enough, then “practically anything would qualify,” and
“the personal benefit requirement would be a nullity.” Id. And in the sentence
29
that forms the basis of Martoma’s argument on appeal, Newman stated as
follows:
To the extent Dirks suggests that a personal benefit
may be inferred from a personal relationship between
the tipper and tippee, where the tippee’s trades
‘resemble trading by the insider himself followed by
a gift of the profits to the recipient,’ we hold that such
an inference is impermissible in the absence of proof
of a meaningfully close personal relationship . . . .
Id. at 452 (citation omitted) (quoting Dirks, 463 U.S. at 664). On the facts before
it, the Newman Court found that standard had not been satisfied. Id. at 452–53.
Martoma focuses on this single sentence of Newman to argue that a jury
may not infer that a tipper received a personal benefit from gifting
confidential information in the absence of a “meaningfully close personal
relationship.” The term “meaningfully close personal relationship” is new to
our insider trading jurisprudence, and, viewed in isolation, it might admit
multiple interpretations. But Newman provided substantial guidance.
Immediately after introducing the “meaningfully close personal relationship”
concept, Newman held that it “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].’” Newman, 773 F.3d at 452 (quoting Jiau, 734
30
F.3d at 153 (quoting Dirks, 463 U.S. at 664)). As explained above, each of these
is an independently sufficient basis to infer a personal benefit under Dirks and
its progeny. See, e.g., Jiau, 734 F.3d at 153 (quid pro quo‐like relationship). In
other words, Newman cabined the gift theory using two other freestanding
personal benefits that have long been recognized by our case law.8 And
although the dissent urges in strong terms that this reading is mistaken or
even improper, its dispute is in truth with the plain language of Dirks, as
construed by Warde. We do no more than read literally Newman’s own
explanation of its novel standard in light of these decisions, thereby fulfilling
our legitimate function to construe and give effect to prior panel decisions.
With that understanding of Newman, we conclude that the personal
benefit jury instructions in Martoma’s trial, issued prior to that decision, were
8 Our cases applying Dirks demonstrate that the government can prove a
personal benefit in several ways that do not require proof of any sort of personal
relationship. Consider the underling who disclosed inside information to “curry
favor with his boss,” see Obus, 693 F.3d at 292, or the tipper’s admission into an
investment club that yielded the possibility of future benefits that were never
realized, see Jiau, 734 F.3d at 153, or the tipper’s receipt of a cell phone, gift card, and
various foodstuffs from the tippee, see id. In none of these situations was the
government required to show any degree of personal closeness between tipper and
tippee. Newman, with its focus on the gift theory, does not require a different result
in these cases.
31
erroneous. The instructions allowed the jury to find a personal benefit based
solely on the conclusion that Dr. Gilman tipped Martoma in order to
“develop[] or maintain[] . . . a friendship.” Under Newman, this articulation of
the gift theory is incomplete. A properly instructed jury would have been
informed that it could find a personal benefit based on a “gift of confidential
information to a trading relative or friend” only if it also found that Dr.
Gilman and Martoma shared a relationship suggesting a quid pro quo or that
Dr. Gilman intended to benefit Martoma with the inside information. But, of
course, there was no error in the district court’s instructions that the jury
could also find a personal benefit based on either of those two factors alone,
i.e., if it concluded that Dr. Gilman disclosed confidential information “with
the intention of conferring a benefit on Mr. Martoma,” or “with the intention
of benefiting [himself] in some manner.” See Tr. 3191. Each of these personal
benefits is unaffected by Newman’s interpretation of the gift theory, and
neither requires proof that Dr. Gilman and Martoma share any type of
“personal relationship.”
Although the jury instructions were inaccurate, we conclude that the
error did not affect Martoma’s substantial rights. See Nouri, 711 F.3d at 139–40.
32
The government produced compelling evidence that Dr. Gilman, the tipper,
“entered into a relationship of quid pro quo” with Martoma. See Jiau, 734 F.3d
at 153. Dr. Gilman, over the course of approximately 18 months and 43 paid
consultation sessions for which he billed $1,000 an hour, regularly and
intentionally provided Martoma with confidential information from the
bapineuzumab clinical trial. Martoma kept coming back, specifically
scheduling consultation sessions so that they would occur shortly after the
safety monitoring committee meetings, when Dr. Gilman would have new
information to pass along. Starting at least in August 2007, Dr. Gilman would
reschedule his conversations with Martoma if he had no new information to
reveal at the time they were scheduled to meet. By that point, the consulting
relationship between Dr. Gilman and Martoma involved no legitimate service,
see Dissent, slip op. at 21; as Dr. Gilman testified at trial, “the purpose of those
consultations was for [him] to disclose to [Martoma] confidential information
about the results . . . of the last Safety Monitoring Committee [meeting].” Tr.
1274. And because Martoma continued to see Dr. Gilman to receive
confidential information, Dr. Gilman continued to receive consulting fees. The
fact that Dr. Gilman did not specifically bill for his July 17 and 19, 2008
33
conversations with Martoma in which Dr. Gilman divulged the final drug
efficacy data is also of no moment because, as he admitted at trial, doing so
“would [have been] tantamount to confessing that [he] was . . . giving
[Martoma] inside information.” Tr. 1918. In the context of their ongoing
“relationship of quid pro quo,” Dr. Gilman’s disclosures of confidential
information were designed to “make good on the substantial pecuniary
benefit he had already earned,” Dirks, 463 U.S. at 663, and as a result, “it is
clear beyond a reasonable doubt that a rational jury would have found
[Martoma] guilty absent [any] error.” Mahaffy, 693 F.3d at 136 (internal
quotation marks omitted).
The dissent argues that under our analysis, a fact‐finder must always
find that tipper and tippee had a quid pro quo‐like relationship whenever a tip
is exchanged within a paid consulting relationship. Dissent, slip. op. at 21.
Not so. We merely hold that on the compelling facts of this case, it is clear
beyond a reasonable doubt that a properly instructed jury would have found
Martoma guilty. Nor does our decision mean that a tipper who accidentally or
unknowingly reveals inside information can be found guilty. See id. at 16.
Such a tipper would be protected by the requirement that the tipper know (or
34
is reckless in not knowing) that the information is material and non‐public, see
Obus, 693 F.3d at 286, or by the requirement that the tipper expect the tippee
to trade, see United States v. Gansman, 657 F.3d 85, 92 (2d Cir. 2011).
II.
We next turn to Martoma’s challenge to the sufficiency of the personal
benefit evidence and whether, “evaluating . . . the evidence in the light most
favorable to the government,” a rational jury could have found Martoma
guilty of insider trading. See Coplan, 703 F.3d at 62. As an initial matter, it
follows from our conclusion that the faulty jury instructions were harmless
because of the compelling evidence that Dr. Gilman and Martoma shared a
relationship suggesting a quid pro quo that this evidence was also sufficient to
support his conviction. In particular, the jury was free to place no weight on
the fact that Dr. Gilman did not bill Martoma for the July 17 and 19, 2008
sessions. We reiterate, however, that while the government presented
compelling evidence on this point, the evidentiary bar is “modest.” Jiau, 734
F.3d at 153.
Moreover, even if a jury were inclined to accept Martoma’s argument
that there was no quid pro quo‐like relationship because Dr. Gilman did not bill
35
Martoma for two key sessions, a rational jury could nonetheless find that Dr.
Gilman personally benefited by disclosing inside information with the
“intention to benefit” Martoma. See Dirks, 463 U.S. at 664. We think a jury can
often infer that a corporate insider receives a personal benefit (i.e., breaches
his fiduciary duty) from deliberately disclosing valuable, confidential
information without a corporate purpose and with the expectation that the
tippee will trade on it. See id. at 659 (explaining that “insiders [are] forbidden
by their fiduciary relationship” from giving inside information “to an outsider
for the . . . improper purpose of exploiting the information for their personal
gain”); cf. Salman, 137 S. Ct. at 428 (recognizing that where a tipper discloses
information with the “expectation that [the recipient will] trade on it,” the
information is “the equivalent of . . . cash”). Here, as previously noted, Dr.
Gilman knew that Martoma was an investment manager who was seeking
information on which to base securities trading decisions. And Dr. Gilman
plainly understood the valuable nature of the information about the
bapineuzumab clinical trial, as Martoma had previously paid him $1,000 per
hour over the course of 43 consultations to convey his knowledge on the
subject, and had visited Dr. Gilman in his Ann Arbor office to receive the key
36
drug efficacy results firsthand. From these facts, a reasonable jury could infer
that Dr. Gilman personally benefited by conveying inside information about
the trial with the purpose of benefiting Martoma, even if it was not persuaded
that the two had a relationship suggesting a quid pro quo (or a personal
relationship, for that matter).9 See Dirks, 463 U.S. at 667.
For the foregoing reasons, we hold that “a rational trier of fact could
have found the essential elements of the crime [of insider trading] beyond a
reasonable doubt.” Coplan, 703 F.3d at 62 (quoting Jackson, 443 U.S. at 319).10
9 As this discussion demonstrates, the dissent’s concern that intent to benefit
can be shown only with subjective evidence or speculation is unfounded. See supra at
26–27. We conclude that the evidence was sufficient to infer that Dr. Gilman
intended to benefit Martoma based, not on “subjective” evidence or speculation, but
on the circumstantial evidence surrounding the tip.
10 We further find that even if the district court erroneously excluded the
testimony of Steven Cohen under Federal Rule of Evidence 804(b)(1), such error was
harmless because much of the testimony was inculpatory. See United States v.
Dukagjini, 326 F.3d 45, 61 (2d Cir. 2003) (“In order to uphold a verdict in the face of
an evidentiary error, it must be ‘highly probable’ that the error did not affect the
verdict.” (quoting United States v. Forrester, 60 F.3d 52, 64 (2d Cir. 1995)). Cohen’s
testimony before the SEC described Martoma as having played a substantial role in
his decision both to accumulate large positions in Elan and Wyeth, and then to sell
them off. J.A. 91–92, 96–97. This was consistent with other trial evidence that
Martoma received credit for SAC’s trades in those companies. Tr. 497–99. It is
therefore highly improbable that Cohen’s vague statements that Martoma told him
that he was “getting uncomfortable with the Elan position,” J.A. 95, and that he
heard that Martoma’s reasons for being uncomfortable were “normal” and
37
CONCLUSION
We have considered Martoma’s remaining arguments and find them
without merit. Accordingly, we AFFIRM the judgment of the district court.
“typical,” J.A. 97, would have affected the jury’s verdict.
38
1 POOLER, Circuit Judge:
2 I respectfully dissent. Last year, my colleagues filed an opinion in this
3 matter in which they abrogated our prior decision in United States v. Newman, 773
4 F.3d 438, 452 (2d Cir. 2014). They declared that a non‐insider could be convicted
5 of insider trading on a gift theory even if she did not have a meaningfully close
6 personal relationship with the insider from whom she received the confidential
7 information. See United States v. Martoma, 869 F.3d 58, 69 (2d Cir. 2017). Applying
8 this reasoning to the case at hand, they held that the jury instructions permissibly
9 allowed for conviction based on speculation about Dr. Gilman’s desire to be
10 friends with Martoma. I dissented from that opinion because it improperly
11 abrogated a prior panel decision without en banc review or an intervening
12 Supreme Court precedent, undermined the personal benefit rule central to
13 holding corporate outsiders liable for insider trading, and approved of a
14 conviction based on erroneous jury instructions that affected Martoma’s
15 substantial rights.
16 My colleagues now issue a modified opinion. In it, they purport to agree
17 that our precedent prevents a jury from being charged with inferring that a tip
18 was given as a gift unless it finds that there was a meaningfully close personal
1
1 relationship between the tipper and the tippee. They no longer declaim Newman.
2 They even agree that the jury instructions were in error.
3 But these apparent concessions are semantic rather than substantial. My
4 colleagues also attempt to redefine “meaningfully close personal relationship” in
5 subjective rather than objective terms, rendering Newman a relic. To provide
6 support for this move, they improperly construe binding authority. They then
7 hold that the erroneous jury instructions were harmless since the jury could have
8 convicted based on a different theory.
9 The majority’s attempt to undercut the meaningfully close personal
10 relationship requirement is in derogation of circuit precedent and unnecessary to
11 arrive at their disposition. Only by abrogating Newman could my colleagues
12 announce a new rule that a jury can infer a personal benefit based on a
13 freestanding “intention to benefit” and that this “intention to benefit” is at the
14 core of the meaningfully close personal relationship standard. Slip op. at 22‐28,
15 30‐31. Today’s opinion must be interpreted consistently with the rule that, as a
16 three‐judge panel, we are unable to abrogate prior circuit decisions. See In re
17 Zarnel, 619 F.3d 156, 168 (2d Cir. 2010) (“This panel is bound by the decisions of
18 prior panels until such time as they are overruled either by an en banc panel of
2
1 our Court or by the Supreme Court.”) (internal quotation marks omitted).
2 Newman and a consistent line of cases preceding it make clear that a
3 meaningfully close personal relationship cannot be proven without objective
4 evidence about the nature of the tipper‐tippee relationship. Bare speculation into
5 insiders’ motives has always been insufficient; it remains so today in spite of the
6 majority’s dicta.
7 Therefore, I continue to respectfully dissent.
8
9 I. Gifts and the Law of Insider Trading
10 Dirks, the foundational case on holding a non‐insider liable for insider
11 trading, established that a jury’s “initial inquiry” must be whether a corporate
12 insider passed on information to the non‐insider “for personal advantage” rather
13 than for the advantage of shareholders. Dirks v. S.E.C., 463 U.S. 646, 662‐63
14 (1983). Making the inquiry into “whether the insider receives a direct or indirect
15 personal benefit” by disclosing confidential information “requires courts to focus
16 on objective criteria.” Id. at 663. The question for a finder of fact is not whether
17 the insider wished ill on shareholders or wished good on the tippee, but whether
18 she received something in return for her tip.
3
1 As the Supreme Court explained,1 making objective evidence of a personal
2 benefit a prerequisite to holding a non‐insider tippee liable serves several
3 purposes. It creates “a guiding principle for those whose daily activities must be
4 limited and instructed by the SEC’s inside‐trading rules” so that participants in
5 securities markets are not left to the whims of prosecutorial enforcement
6 priorities. Dirks, 463 U.S. at 664. It protects “persons outside the company such as
7 an analyst or reporter who learns of inside information” from the threat of
8 prosecution for uncovering information about securities issuers just because they
9 also traded on it. Id. at 664 n.24 (italics omitted). It limits the government’s ability
10 to hold non‐insiders liable when insiders “mistakenly think…information
11 already has been disclosed or that it is not material enough to affect the market.”
12 Id. at 662.
13 Restricting proof of a personal benefit to objective evidence avoids turning
14 the rule into a mere formality. Absent objective evidence, a slip of the tongue
15 might be presented to a jury as a purposeful tip with a good cover story, an off‐
16 the‐record comment to a trusted reporter might be portrayed as a means of
1 And as I explained in my previous dissent. See Martoma, 869 F.3d at 75‐78
(Pooler, J., dissenting).
4
1 bribing a journalist for favorable coverage. The difference between guilty and
2 innocent conduct would be a matter of speculation into what a tippee knew or
3 should have known about the tipper’s intent. A trader, journalist, or analyst
4 attempting to avoid running afoul of criminal law would have little to guide her
5 behavior. The conservative thing to do would be to avoid seeking inside
6 information too aggressively, even if the whole market could benefit from such
7 investigation. Those who decided to cultivate insider sources would risk
8 prosecution in any case, so they might have fewer scruples about compensating
9 their sources and trading on the information they purchased.
10 What does objective evidence of a personal benefit consist of? In the easiest
11 case, a tippee has paid the insider for the coveted tidbit. If the government can
12 adduce evidence indicating that money changed hands, it has established all of
13 the objective facts needed to infer that an insider personally benefitted by
14 tipping. In the presence of an obvious quid pro quo, no further facts about the
15 nature of the tipper‐tippee relationship will be needed. The insider has
16 effectively made the “secret profits” that securities law has prohibited since its
17 inception, but by selling information to a trader rather than trading on it herself.
18 In re Cady, Roberts & Co., 40 S.E.C. 907, 916 n.31 (1961); see also United States v.
5
1 O’Hagan, 521 U.S. 642, 653 (1997) (characterizing misappropriation as an insider
2 “secretly converting the [corporation’s] information for personal gain”).
3 The majority rightly points out that “[t]he tipper’s personal benefit need
4 not be pecuniary in nature.” Slip op. at 21; see also id. at 25. But that does not
5 obviate the requirement that it be provable via “objective evidence.” In‐kind
6 compensation in goods or services given to the tipper may also constitute a
7 personal benefit, and can be established in court in much the same way monetary
8 compensation can, i.e. with objective evidence pointing to the goods or services
9 received. See, e.g., United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013) (discussing
10 “an iPhone, live lobsters, a gift card, and a jar of honey”). The government can
11 also prove a benefit on the theory that the tipper received potentially profitable
12 social connections, such as admission into an investment club, so long as the
13 prosecution’s case relies on evidence of these connections and their potential
14 value to the tipper. Id.
15 When the alleged benefit to the tipper is less concrete, objective evidence
16 about the nature of the relationship between tipper and tippee takes on more
17 importance in identifying the benefit. For instance, unlike with money, goods,
18 services, and connections, one cannot directly trace a “reputational benefit that
6
1 will translate into future earnings.” Dirks, 463 U.S. at 663. Instead, one must draw
2 upon circumstantial evidence about the power of a tippee to materially benefit
3 someone in the tipper’s position and the inclination of a tippee to view the tipper
4 in a better light based on the tipper’s provision of inside information. Evidence
5 about the tipper‐tippee relationship will make these conclusions easier, as
6 illustrated by the facts of S.E.C. v. Obus, 693 F.3d 276 (2d Cir. 2012). In that case,
7 we concluded that it was sufficient that the tipper, an employee of a hedge fund
8 that “was a large holder” of the stock in question, “hoped to curry favor with his
9 boss,” the tippee, who was the principal of that hedge fund. Id. at 280, 292.
10 Bosses, of course, have substantial say over subordinates’ future earnings, and
11 the boss of a hedge fund trading in a particular stock is likely to value employees
12 that can get him information about that stock.
13 More directly on point, if the government fails to put forward evidence of
14 any particular quo that was provided in exchange for the quid of inside
15 information, it can still establish objective facts that point to a “relationship
16 between the insider and the [tippee] that suggests a quid pro quo.” Dirks, 463 U.S.
17 at 664 (emphasis added). That is, an apparently gratuitous tip can reasonably be
18 understood as recompense for past benefits or as a means of keeping a good
7
1 thing going so long as there is objective evidence of a history of mutually
2 enriching exchanges or favors between tipper and tippee.
3 The personal benefit rule is also satisfied by other “relationships between
4 the insider and the recipient” that “suggest an intention to benefit the particular
5 recipient” even when the insider receives no immediately discernible
6 compensation. Id. In particular, as relevant here, an apparently uncompensated
7 tip can be said to “resemble trading by the insider himself followed by a gift of
8 the profits to the recipient” when it is given to a “trading relative or friend.” Id.;
9 see also Salman v. United States, 137 S. Ct. 420, 427‐28 (2016). Friends and relatives
10 tend to internalize each other’s interests, see Transcript of Oral Argument at 8,
11 Salman v. United States, 137 S. Ct. 420 (2016) (No. 15‐628) (“[T]o help a close
12 family member [or friend] is like helping yourself.”), to give each other things of
13 value to demonstrate care, or to commit acts of generosity with the assumption
14 that the other would do the same in a rough sort of quid‐pro‐quo.2 For any of
2 Following Newman’s suggestion, the majority holds that a jury could conclude
that tipper and tippee shared a meaningfully close relationship so long as they
shared a relationship suggesting quid pro quo. Slip op. at 30‐31 (citing Newman,
773 F.3d at 452). But, as the majority rightly points out, Dirks and subsequent
cases established that a relationship suggesting quid pro quo itself can itself give
rise to the inference of a personal benefit to the tipper, without any need to
determine whether it gives rise to the intermediate inference of a meaningfully
close personal relationship. Slip op. at 30. It would make for a less confusing bit
8
1 these reasons, a tipper can be said to benefit himself by giving something
2 valuable to somebody with who he shares a “meaningfully close personal
3 relationship.”3 Newman, 773 F.3d at 452. Without objective evidence of such a
4 relationship, however, the inference that a gratuitous tip functioned as a gift will
5 not be available. Newman made clear that the “gift theory” is not applicable to
6 casual acquaintances or mere members of the same club, church, or alumni
7 association—or, it should go without saying, to perfect strangers—at least not
8 without additional evidence indicating meaningful closeness. 773 F.3d at 452‐55.
9 Other boundaries of the concept of meaningful closeness remain to be
10 developed. See Salman, 137 S. Ct. at 429 (“…there is no need for us to address
11 those difficult cases today…”).
12
of doctrine to cleanly separate quid‐pro‐quo and meaningfully close personal
relationships, and I do not think Newman requires conflating them. But the
majority’s interpretation is consistent with Newman, and, in any case, a jury can
infer personal benefit from the former whether or not it gives rise to an inference
of the latter.
3 Salman made clear that the tipper need not also “receive something of
pecuniary or similarly valuable nature in exchange for a gift to family or
friends.” 137 S. Ct. at 428 (internal quotation marks omitted). While my
colleagues earlier opinion read Salman to have eliminated the meaningfully close
personal relationship standard entirely, Martoma, 869 F.3d at 68‐71, they now
agree that that aspect of Newman remains good law.
9
1 II. The Majority’s Error
2 Last year the majority attempted to rewrite this doctrine explicitly. Today
3 they attempt to do so more subtly. In their now withdrawn opinion, they held
4 that a gratuitous tip could be understood as beneficial to the tipper so long as a
5 jury concludes that a tipper expects the tippee will trade on it. Martoma, 869 F.3d
6 at 70‐71. Now they hold that an uncompensated tip can be found to personally
7 benefit the tipper so long as the jury concludes that the tipper intended to benefit
8 the tippee. Slip op. at 22‐28. All that “meaningfully close personal relationship”
9 means, they inform us, is a tipper‐tippee pairing in which the tipper has such an
10 intention.4 Id. at 30‐31.
11 This interpretation would eliminate the rule that has been with us since
12 Dirks that the government must prove objective facts indicating that the tipper
13 benefitted from her relationship with the tippee. On the majority’s proposal, the
14 prosecution could pile up insinuations about the tipper’s subjective
15 understanding of the purpose of the tip, and the jury would be charged with
4 As discussed supra in note 2, the majority, following Newman’s suggestion,
holds that a relationship suggesting a quid pro quo is also a meaningfully close
personal relationship. I do not find this part of their analysis objectionable
(except in the sense discussed in note 2).
10
1 resting their inferences about her benefit on those wobbly foundations. The only
2 objective facts the government would have to prove would be the
3 communication of material non‐public information. All of the protections of the
4 personal benefit rule—a clear guide for conduct, preventing liability for slip ups
5 and other innocent disclosures—would erode.
6 It is good news, then, that binding precedent stands for the opposite
7 principle. The only time Dirks refers to an “intention to benefit” is when it
8 discusses the need to prove “a relationship between the insider and the recipient
9 that suggests…an intention to benefit the particular recipient.” 463 U.S. at 664
10 (emphasis added). Reading “intention to benefit” out of context, my colleagues
11 assert that, under Dirks, an intention can be inferred without any objective
12 evidence about relationships. Slip op. at 21. But Dirks does not say that, and it has
13 never been applied to allow such a freestanding inference of intent in this Circuit
14 or elsewhere. Salman, 137 S. Ct. at 427 (applying gift theory to sibling
15 relationship) Jiau, 734 F.3d at 153 (discussing gift theory as relationship‐based
16 before finding quid pro quo); Obus, 693 F.3d at 285 (discussing “trading relative
17 or friend” standard); United States v. Bray, 853 F.3d 18, 26‐27 (1st Cir. 2017)
18 (“good friends”); United States v. Parigian, 824 F.3d 5, 16 (1st Cir. 2016) (friendship
11
1 and quid pro quo); S.E.C. v. Rocklage, 470 F.3d 1, 7 n.4 (1st Cir. 2006) (siblings);
2 S.E.C. v. Sargent, 229 F.3d 68, 77 (1st Cir. 2000) (“reconciliation” between friends
3 and reputational benefit); S.E.C. v. Maio, 51 F.3d 623, 632‐33 (7th Cir. 1995)
4 (exchange of favors within a friendship); S.E.C. v. Yun, 327 F.3d 1263, 1280 (11th
5 Cir. 2003) (“a friend and frequent partner in real estate deals”).
6 S.E.C. v. Warde, 151 F.3d 42 (2d Cir. 1998), cited in the majority opinion, is
7 not to the contrary. Slip op. at 22‐23. In that case, “[t]he evidence showed that
8 Warde[, the tippee,] was a good friend of Edward Downe,” the tipper. Warde, 151
9 F.3d at 45 (emphasis added). We found that the “close friendship between Downe
10 and Warde suggests that Downe’s tip was ‘inten[ded] to benefit’ Warde…” Id. at
11 49 (emphasis added, brackets in original). Thus, we did not find that a
12 freestanding “intention to benefit” would have been sufficient to prove Downe’s
13 personal benefit. Instead, we followed the principle that an intention to benefit
14 can only be inferred from objective facts about the nature of the relationship
15 between tipper and tippee. Again, the majority extracts the phrase “intention to
16 benefit” from its context, suggesting that the relationship between tipper and
17 tippee did not matter when it was the central focus of our inquiry.
12
1 The majority offers an alternative interpretation in which the sentence at
2 issue in Dirks “effectively reads, ‘there may be a relationship between the insider
3 and the recipient that suggests a quid pro quo from the latter, or there may be an
4 intention to benefit the particular recipient.’” Slip op. at 23. Perhaps one could
5 read the sentence in that way in isolation, but doing so would certainly not be
6 “more consonant with Dirks as a whole” or with the subsequent case law relying
7 on Dirks. Id. The Dirks court included that sentence to provide examples of
8 “objective facts and circumstances that often justify…an inference” that “the
9 insider receive[d] a direct or indirect personal benefit from the disclosure.” Dirks,
10 463 U.S. at 663‐64. It is difficult to understand why the Court would have
11 mentioned an intention to benefit, which is a subjective fact, as an example of a
12 personal benefit, which is an objective fact. Nearly as difficult to understand is
13 why the Dirks court would have provided an intention to benefit a tippee as an
14 example of a benefit to the tipper. Intending to benefit somebody is not in itself a
15 benefit. That is, not unless one has reason to believe that the person with the
16 intention to benefit benefits from the beneficiary’s benefit or one adopts the
17 trivializing view of human psychology wherein everything any individual does
18 is to benefit herself.
13
1 Perhaps the majority’s theory is that an intention to benefit a tippee is
2 circumstantial evidence that a tipper is receiving some other benefit by providing
3 the information. On this theory, so long as objective evidence would allow a jury
4 to infer that a tipper intended to benefit the tippee, the jury should be allowed to
5 infer from that inference that the tipper somehow benefitted by benefitting the
6 tippee without actually having to determine what that benefit might be. This
7 theory fails to deal with the fact that an intention to benefit is not itself an
8 “objective fact or circumstance,” as Dirks requires, but rather an inference drawn
9 from objective facts or circumstances. Additionally, this theory makes it difficult
10 to understand why the Dirks court would have adopted the personal benefit test
11 in the first place. If a jury can conclude that a tipper breached his duty so long as
12 it concludes that she intended to benefit the tippee, why should it have to go
13 through the tortuous process of concluding that the tipper received a personal
14 benefit based on its conclusion that the tipper intended to benefit the tippee?
15 Why should we care about the tipper’s benefit at all?
16 At times the majority seems to suggest that Dirks does not really require
17 proof of a personal benefit. Rather, the personal benefit test is mentioned merely
18 as a guide to prosecutors regarding the sort of evidence that will help them
14
1 establish the tipper’s intention to benefit the tippee. Thus, when Dirks says that
2 “a breach of duty…depends in large part on the purpose of the disclosure,” it is
3 announcing the real test for a breach of the duty to shareholders. Id. at 662.
4 “Identifying personal benefits is…simply how courts and juries analyze breaches
5 of” this duty. Slip op. at 20. When the government can adduce other evidence
6 that a tipper “lacked a legitimate corporate purpose,” Slip op. at 25, then “it
7 makes perfect sense to permit the government to prove a personal benefit with
8 [only] objective evidence of the tipper’s intent.” Slip op. at 23‐24.
9 But Dirks is entirely unambiguous that “the test [for whether duty has
10 been breached] is whether the insider personally will benefit, directly or
11 indirectly, from his disclosure.” 463 U.S. at 662. Whatever the insider’s purpose
12 in disclosing the information, “[a]bsent some personal gain [to the insider], there
13 has been no breach of duty to stockholders.” Id. Nowhere does Dirks suggest that
14 the need to prove personal benefit can be ignored simply because a tipper’s
15 intent or purpose can be independently demonstrated.5 And Dirks expressly
5 I do not deny that “[i]ntent elements are everywhere in our law and are
generally proved with circumstantial evidence.” Slip op. at 27. I deny that one
can replace proof of personal benefit to the tipper with proof of the tipper’s
intention to benefit the tippee. As I discussed in my previous dissent, insider
trading law separately requires that the insider expect the tippee will trade on
the information, and this expectation can be proven with circumstantial
15
1 declaims the idea that “personal benefit” is merely a synonym for a tipper “not
2 act[ing] simply out of the goodness of his heart.” Slip op. at 25 n.7; Dirks, 463 U.S.
3 at 663 (stating that proof of personal benefit should not be focused on mind
4 reading). The personal benefit test may well be a way to get at a tipper’s purpose,
5 but it is the former and not the latter that the prosecution must prove.
6 None of these puzzles is presented if one reads the relevant sentence in
7 Dirks the way I have suggested. It is easy to understand why the Dirks court
8 would have mentioned a relationship suggesting an intention to benefit, an
9 objective circumstance, when it was providing examples of objective facts and
10 circumstances. Unlike a standalone intention to benefit, a relationship suggesting
11 an intention to benefit provides reason to believe that the tipper benefits by
12 benefitting, since the tipper is understood as contributing to a relationship from
13 which both tipper and tippee benefit. See supra at 8. And the focus on
14 relationships rather than bare intentions fits neatly with Dirks’s cabining of the
15 gift theory to disclosures to “trading relative[s] or friend[s].” 463 U.S. at 664.
evidence. See Martoma, 869 F.3d at 82 (Pooler, J., dissenting) (citing Obus, 693 F.3d
at 286‐87; United States v. Gansman, 657 F.3d 85, 92 (2d Cir. 2011)). The majority’s
approach comes close to conflating this element of insider trading liability and
the separate personal benefit test.
16
1 This cannot be so, my colleagues protest. They ask us to imagine a
2 situation where a tipper “discloses inside information to a perfect stranger and
3 says, in effect, you can make a lot of money by trading on this.” Slip op. at 27.
4 Wouldn’t it be absurd if this perfect stranger could not be held liable for insider
5 trading if he went ahead and traded on this information? No, it would not be. At
6 least, not if one takes the personal benefit rule seriously. Ex hypothesi, the
7 fictional tipper in their scenario receives absolutely nothing in return for his
8 disclosure, except, I suppose, the warmth that comes with knowing that
9 somebody else might have made some money because of his actions (or perhaps
10 the schadenfreude that comes with knowing that shareholders were defrauded).
11 But if those sorts of “benefits” were enough, then every disclosure of inside
12 information without affirmative indication of a pure heart would be
13 presumptively beneficial to the tipper. Dirks rejected that possibility, and every
14 appellate court to have considered the issue, including us, has consistently done
15 the same. That is the law whether we like or not, but, for what it’s worth, I see no
16 reason to worry that truly random acts of enrichment can go unpunished.
17 Even assuming arguendo that there was any ambiguity on the topic in our
18 precedents, Newman removed it by requiring a “meaningfully close personal
17
1 relationship” in order to prove personal benefit via the gift theory. 773 F.3d at
2 452. In the majority’s withdrawn opinion, they candidly acknowledged that they
3 were abrogating Newman, relying on a justification for doing so that they no
4 longer advance. Martoma, 869 F.3d at 68‐70. Today they do not even attempt to
5 argue they can do so. Instead, they call into question settled law in non‐binding
6 dicta. Newman remains good law.
7
8 III. The Jury Instructions
9 Turning to the case at hand, I agree with my colleagues’ updated view that
10 the jury was erroneously instructed. However, in light of the foregoing, I
11 disagree with their formulation of the proper instruction. A properly instructed
12 jury would have instead been asked whether Dr. Gilman and Martoma shared a
13 relationship suggesting a quid pro quo or were close enough friends that it
14 would be reasonable to understand Dr. Gilman’s provision of information to
15 Martoma as a gift. The jury could not conclude that their relationship was
16 meaningfully close based on the mere possibility of a future friendship. Nor
17 could it make a relationship‐independent inference about Dr. Gilman’s
18 intentions, contrary to the majority’s dicta. That is because Newman’s
18
1 interpretation of the gift theory does “require[] proof that Dr. Gilman and
2 Martoma share[d] any type of personal relationship.” Slip op. at 32 (internal
3 quotation marks omitted).
4 Moreover, I disagree that the error in the jury instructions was harmless.
5 The majority rightly states that we can only find harmlessness in this context if
6 “it is clear beyond a reasonable doubt that a rational jury would have found the
7 defendant guilty absent the error.” United States v. Mahaffy, 693 F.3d 113, 136 (2d
8 Cir. 2012) (internal quotation marks omitted).6 This record provides plenty of
9 reasons to doubt that Dr. Gilman and Martoma shared a meaningfully close
10 personal relationship. The government itself repeatedly denied that Dr. Gilman
6 As I discussed in my previous dissent, I would hold that the modified plain
error rule applies here. Martoma, 869 F.3d at 87‐88 (Pooler, J., dissenting). We
have long held that where “the source of an alleged jury instruction is a
supervening decision, we employ a modified plain error rule, under which the
government, not the defendant, bears the burden to demonstrate that the error
was harmless.” Mahaffy, 693 F.3d at 136 (internal quotation marks omitted). The
majority points out that multiple panels in this Circuit have called into question
the continued applicability of the modified plain error rule after Johnson v. United
States, 520 U.S. 461 (1997), without deciding the matter either way. Slip op. at 16
n.4. But Johnson did not provide any reason to abandon the well‐established
modified plain error rule. Johnson only “cautioned against any unwarranted
expansion of Rule 52(b),” which provides for plain error review in criminal
matters in which an issue has not been raised below. 520 U.S. at 466. The
modified plain error rule does not expand Rule 52(b). It merely allocates the
burden of proof, a matter on which Rule 52 is silent.
19
1 and Martoma had anything other than a “commercial, pecuniary relationship.”
2 Recording of Oral Argument at 34:18‐34:27, 26:27‐26:58, United States v. Martoma,
3 No. 14‐3599 (2d Cir. Oct. 28, 2015). Dr. Gilman testified that he shared almost
4 nothing about his personal life with Martoma and that Martoma acted friendlier
5 than Dr. Gilman thought appropriate for a professional relationship. Tr. at 1238,
6 1236. As the government itself pointed out to the district court, there is no
7 evidence that Martoma and Dr. Gilman ever interacted outside of their
8 consulting sessions. Recording of Oral Argument at 34:18‐34:27, United States v.
9 Martoma, No. 14‐3599 (2d Cir. Oct. 28, 2015).
10 A reasonable jury could also have doubted whether the relationship
11 between Dr. Gilman and Martoma suggested a quid pro quo. Dr. Gilman took no
12 payment for the consulting sessions in which he provided the inside information
13 at issue here, and there is no evidence in the record that his compensation before
14 or after that session was higher than usual. He was in high demand as an expert
15 and a researcher, so there is reason to doubt that he would have risked
16 prosecution just to keep up his consulting relationship with SAC and Martoma.
17 See Tr. at 1552‐60. A reasonable jury could have found a relationship suggesting a
18 quid pro quo, but it was not required to. Ruling otherwise would lead to the
20
1 holding that whenever inside information is revealed within a paid consulting
2 relationship where other, legitimate services are rendered, a fact‐finder must
3 infer that the insider was paid to breach his duties. That rule would allow
4 convictions for erroneously revealed information or for information revealed
5 based on a misunderstanding about its materiality or its confidentiality.
6
7 IV. Sufficiency of the Evidence
8 Because the jury instructions amount to reversible error, I would not reach
9 the sufficiency of the evidence question. But even were the majority correct that
10 there was sufficient evidence here, it is incorrect and ill‐advised to go on to
11 speculate that the jury could have inferred an intention to benefit merely because
12 “a corporate insider…deliberately disclos[ed] valuable, confidential information
13 without a corporate purpose and with the expectation that the tippee will trade
14 on it.” Slip op. at 36.
15 In addition to undermining Newman in the manner already discussed, this
16 musing flirts with the possibility that the personal benefit test that goes back to
17 Dirks may no longer be good law. The very reason the government must
18 establish a personal benefit is to allow for the possible conclusion that the insider
21
1 provided information without a “corporate purpose.” Dirks, 463 U.S. at 654, 655
2 n.14. If the government can put forward evidence that an insider did not have a
3 corporate purpose in order to establish that the insider personally benefitted
4 from providing the information, it can convict based on circular reasoning.
5 “Personal benefit” would then no longer have any independent meaning. The
6 government would need only convince the jury to “read [the tipper’s] mind[],”
7 Dirks, 463 U.S. at 663. The tipper would need not have benefitted in any objective
8 sense so long as the prosecution could convince a jury that she was not thinking
9 of the corporation’s interest. Dirks stands for the opposite proposition.7
10
11 CONCLUSION
12 Setting our disagreement about the harmfulness of the district court’s error
13 to one side, my colleagues could have reached the conclusion they did by
7 The majority suggests that the abundance of objective evidence in this case
demonstrates that my concern about differentiating guilty from innocent conduct
based entirely on inferences about intent is “unfounded.” Slip op. 35 n.8. If so,
then Dirks’s and Newman’s similar concerns are also unfounded. see Dirks, 463
U.S. at 663; Newman, 773 F.3d at 452. Anyway, assuming arguendo that the
evidence here was more than sufficient, that fact alone does not mean that we
should endorse a rule that would allow for convictions based on speculation in
cases where the evidence is thinner or more ambiguous. See supra at 4‐5.
22
1 following the path our precedent provides. They need only have held that the
2 jury instructions were erroneous because they allowed for conviction absent
3 objective evidence of a meaningfully close personal relationship but harmless
4 because there was objective evidence of a relationship suggesting a quid pro quo.
5 Instead, they have taken a detour to declare that subjective evidence could have
6 worked as well. This detour calls into question well‐established principles of
7 insider trading law that we have neither reason nor power to abrogate.
23