By Amanda Maine, J.D.
The American Bar Association recently hosted a webinar where panelists outlined recent federal court decisions on insider trading laws and their possible implications for the future. The webinar featured a discussion on the Second Circuit’s ruling in U.S. v. Newman and cases that followed that have spawned debate about the current state of insider trading law in the U.S.
Newman and Salman. Moderator Antonia Apps of Milbank Tweed discussed the Second Circuit’s 2013 Newman decision, which upended the prevailing theory of what a “personal benefit” is under Dirks. Dirks, Apps explained, was the origin of the personal benefit test. The language seized upon in Dirks by the Newman panel involved a “trading relative or friend.” In the Newman decision, the court tried to narrow the scope of a personal benefit for proving insider trading liability, stating that “to the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee … such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”
Carl Loewenson, Jr. of Morrison & Foerster turned the discussion to U.S. v. Salman. The Ninth Circuit had upheld the defendant’s insider trading conviction in an opinion written by Southern District of New York District Judge Jed Rakoff (sitting by designation), who Loewenson quipped “has a way of appearing on an awful lot of insider trading cases.” The Supreme Court affirmed the conviction, but Loewenson noted that the Court’s ruling was quite narrow. Deferring to Dirks, the unanimous opinion felt that the language in Dirks mentioning a “trading relative” was sufficient to resolve the case at hand. While the government had tried to use the Salman case as a challenge to Newman, the court rejected this approach in favor of a much narrower ruling, Loewenson advised.
Martoma. U.S. v Martoma brought up the issue of when tipping a perfect stranger crosses the line to legal liability, Apps said. The issue can end up in ridiculous hypotheticals, but those are just part of the discussions that make up the dialogue on what is a “personal benefit.” The jury in Martoma had found the defendant guilty, but Martoma later appealed because the jury instructions were given prior to the Newman decision. Martoma’s argument was based on the Newman-inspired personal benefit test; however, the Second Circuit panel held that the Salman decision had effectively overruled the Newman personal benefit test. Judge Pooler penned a strong dissent, and following an en banc hearing, the Second Circuit ruled that its prior decision had gone too far and that the personal benefit test articulated in Newman was not overruled by Salman—although it still upheld Martoma’s criminal conviction. Martoma has recently filed with the Supreme Court a petition for certiorari.
Now and beyond. Ruti Smithline of Morrison & Foerster used U.S. v. Blaszczak to illustrate the convoluted nature of the current state of insider trading law. Smithline noted that the defendant had been charged with both Title 15 securities fraud and Title 18 securities fraud. The jury instructions for the Title 15 charges took 20 pages of transcripts and presented the jury with 10 specific issues to address, including the tipper’s breach of duty and expectation of a personal benefit. In contrast, Smithline said, the jury instructions for the Title 18 charges took only four pages and did not include elements of liability such as breach of duty and personal benefit. The result: verdicts of not guilty on all Title 15 counts and guilty on all four Title 18 fraud counts.
Responding to the question “Where do we go from here?” on insider trading law, Loewenson harkened back to the Dirks opinion, which he said may have predicted the current state of affairs when it stated that determining what a personal benefit is will not always be easy for the courts. He also namechecked Judge Rakoff again, quoting him as saying, “The crime of insider trading is a straightforward concept that some courts have somehow managed to complicate.” Loewenson slyly added that by “some courts,” Rakoff probably meant the Second Circuit. Between Newman, Martoma, and Martoma, it is difficult to determine what the law is. “The Second Circuit’s efforts to untangle these concepts of personal benefit and meaningfully close personal friendship is like trying to count the angels dancing on the head of a pin,” Loewenson remarked.