Courts will define the boundaries of friendship in insider trading.


The issue in these cases revolves around how to interpret the United States Supreme Court’s December 6, 2016 decision in Salman v. United States1 which found that the government did not always have to show that something valuable changed hands to prove a crime was committed.

The source of the controversy was the 2014 decision by the United States Court of Appeals for the Second Circuit in Manhattan in United States v. Newman2 which had required prosecutors to also prove that the tipper received something “of a pecuniary or similar valuable nature” – a more difficult standard to meet.

The two brothers in the Salman case had a close relationship, speaking almost daily, with one giving out information to help the other. The question was whether their personal relationship was sufficient without further proof that something tangible passed between them beyond the warm feeling one gets for being beneficent.3

As previously reported, Justice Samuel A. Alito, Jr., writing for the Supreme Court, said that the giving a gift to a friend or relative, whether in the form of cash or in the form of a tip, benefited the insider.

While the Supreme Court’s decision in Salman resolved the very important issue of whether a gift of confidential information to a trading relative or friend constitutes a personal benefit, the Court’s standard did not provide much guidance regarding gifts of material non-public information to casual acquaintances. Also, what was not addressed in the Court’s decision were cases against traders who received confidential information second or third hand.

Insider trading defendants want to preserve Newman’s description of the requisite personal relationship by limiting the Salman opinion as much as possible to cases involving close family members.

Government prosecutors on the other hand want the Supreme Court’s decision construed as a clear rejection of the “meaningful close” requirement so that most friendships, even a casual one, can suffice to show a gift.

Did the Supreme Court reject only Newman’s tangible benefit requirement, or did it also mean to negate the reference to a meaningful relationship?4

Two court cases may provide the answer.

USA v. Martoma, Case 14-3599

The Second Circuit Appeals Court will hear additional arguments in May about whether to uphold the conviction of Mathew Martoma, the former analyst at SAC Capital Advisors. The case was first argued in October 2015, but the decision was held until after the Salman decision.

Mr. Martoma was convicted in February 2014 and sentenced in September 2014 to nine years in prison.

Mr. Martoma has argued that the government prosecutors did not introduce enough evidence that he had a sufficiently close relationship with Dr. Sidney Gilman who leaked confidential information about a clinical trial of an Alzheimer’s drug that led SAC Capital to sell out its position in two pharmaceutical companies, resulting in gains and losses avoided of over $250 million.

The prosecutors’ position is that the two men developed a lucrative relationship through an expert networking firm for which SAC Capital paid Dr. Gilman thousands of dollars to speak with Mr. Martoma. The prosecutors also argue that the Salman decision made it “clear that a gift of confidential information to a trading friend or relative is enough to satisfy the personal benefit requirement” – with no mention of the “meaningfully close” language of Newman.

Mr. Martoma’s case will be an opportunity for the Second Circuit Appeals Court to flesh out the meaning of the Salman gift analysis.5

United States v. Rajaratnam, Case 09 Cr. 1184

Another court case that may also help define insider trading was the trial of Raj Rajaratnam in the U.S. District Court for the Southern District of New York. Mr. Rajaratnam was the billionaire co-founder of the hedge fund Galleon Group who was found guilty of securities fraud and conspiracy in 2011. He was sentenced to eleven years in prison. Mr. Rajaratnam has appealed several of his convictions.6


After a Supreme Court opinion is rendered, there is a measure of uncertainty as to how lower courts apply it to new cases. How they interpret the opinion will be the real test as the insider trading law moves forward.



  1. 15-268,580 U.S. (Dec 6, 2016).
  2. 773 F.3d 438 (2d Cir. 2014).
  3. Henning, Peter J., “Courts Will Define Boundaries of Friendship in Insider Trading,” The New York Times, March 6, 2017.
  4. Peluso, Romano I., “In An Insider Trading Case, Supreme Court Sides With Prosecutors,” Perkins Coie LLP,, December 12, 2016 and Endnote 3.
  5. Germaine, Carmen, “2nd Asks How Salman Applies to SAC Trader’s Case,”, December 12, 2016.
  6. Stempel, Jonathan, “Raj Rajaratnam seeks to cut 11-year insider trading sentence,”, June 9, 2015.