In U.S. v. Martoma, Second Circuit Eliminates “Meaningfully Close Personal Relationship” Element Articulated in Newman for Insider Trading Prosecutions

On August 23, 2017, the U.S. Court of Appeals for the Second Circuit issued a ruling in the case of U.S. v. Martoma, upholding the 2014 conviction of former S.A.C. Capital Advisors trader Mathew Martoma for securities fraud and insider trading. The Second Circuit ruling refers to several earlier landmark cases in the evolving jurisprudence regarding insider trading, including U.S. v. Newman, upon which Martoma had drawn heavily in his defense. In the view of the Second Circuit, the Supreme Court’s ruling in Salman v. U.S. supersedes and repudiates certain of Newman’s highly specific requirements to establish insider trading violations, including Newman’s “meaningfully close personal relationship” criterion. The ruling in Martoma is of monumental significance for investment advisers and traders because it weighs the differing legal standards under Newman and Salman and affirms a significantly lower bar for pursuing insider trading charges. This marks a decisive shift in a body of jurisprudence around insider trading that has evolved in numerous directions since the landmark 1983 ruling in Dirks v. SEC. To help readers understand the evolution of this body of law, this article summarizes the Martoma case within the context of earlier rulings and includes the views of attorneys with expertise in insider trading matters. For background on the Martoma case, see “Five Takeaways for Other Hedge Fund Managers From the SEC’s Record $602 Million Insider Trading Settlement With CR Intrinsic” (Mar. 21, 2013); and “Fund Manager CR Intrinsic and Former S.A.C. Portfolio Manager Are Civilly and Criminally Charged in Alleged ‘Record’ $276 Million Insider Trading Scheme” (Nov. 21, 2012).

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