United States v. Martoma

• Decision Date: 23 August 2017
• Docket Number: Docket No. 14-3599,August Term, 2016
• Citation: 894 F.3d 64
• Parties: UNITED STATES of America, Appellee, v. Mathew MARTOMA, Defendant–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

894 F.3d 64

UNITED STATES of America, Appellee,

v.Mathew MARTOMA, Defendant–Appellant.

Docket No. 14-3599

August Term, 2016

United States Court of Appeals, Second Circuit.

Argued: October 28, 2015 and May 9, 2017

Decided: August 23, 2017

Amended: June 25, 2018

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.

Before: Katzmann, Chief Judge, Pooler and Chin, Circuit Judges.

Judge Pooler dissents in a separate opinion.

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 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, 103 S.Ct. 3255, 77 L.Ed.2d 911 (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, 103 S.Ct. 3255. 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, 103 S.Ct. 3255.

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, 103 S.Ct. 3255, 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 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, 103 S.Ct. 3255 ) ). 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 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 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 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. 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...