A federal appeals panel on August 23, 2017 upheld the insider trading conviction of Mathew Martoma, the former analyst at SAC Capital Advisors.


Attorneys for Mr. Martoma had 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.

Also, attorneys for Mr. Martoma, who is serving a nine-year prison sentence, had argued in light of the December 2016 ruling by the United States Supreme Court in Salman v. United States that the jury in the trial had not been properly instructed and that the evidence was not sufficient to support a conviction.1

As previously reported, the two important recent court cases involving insider trading are:

United States v. Newman

In 2014, the United States Court of Appeals for the Second Circuit in Manhattan required that prosecutors had to also prove that the tipper had to have received something “of a pecuniary or similar valuable nature” – a more difficult standard to meet.

Salman v. United States

In 2016, the Supreme Court found that the government did not always have to show that something valuable changed hands to prove a crime was committed. Justice Samuel A. Alito, Jr., writing for the Supreme Court, said that the giving of a gift to a friend or relative, whether in the form of cash or in the form of a tip, benefited the insider.2

Martoma Appeals Court Decision

In a 2-1 decision, the panel of the Second Circuit Appeals Court found that “the district court’s instruction was not obviously erroneous.” It added that the government had “presented overwhelming evidence that at least one tipper had received a financial benefit from providing confidential information to Martoma,” a reference to a standard for proving insider trading.

Mr. Martoma’s attorneys had argued that the Supreme Court ruling in the Salman case applied only to insider trading cases involving close family members or personal friends. But the three-judge Appeals Court panel said that after the Salman ruling, the requirement in the Newman case that prosecutors must show the tipper and recipient of inside information had a “meaningfully close personal relationship,” among other things, was no longer valid.

“We respectfully conclude that Salman fundamentally altered the analysis    underlying Newman’s ‘meaningfully close personal relationship’ requirement such that the ‘meaningfully close personal relationship’ requirement in no longer good law,” a majority of the panel said in the Martoma case.

The panel noted that the doctor with whom Mr. Martoma had cultivated a friendship to receive confidential information about a clinical drug trial received a substantial financial benefit in exchange – $1,000 a meeting. The Court also said that another doctor and insider with whom Mr. Martoma met received about $1,500 for an information session.

The 2-1 Appeals Panel Vote

In the 44-page dissent, concerns were raised that the ruling went beyond Supreme Court precedents, saying it could greatly expand the liability for anyone who passes inside tips to another person.

In response, it was stated that the new ruling applies only to people who disclose inside information to someone he or she expects to trade on the tip. Someone who accidently discloses confidential information, for instance, wouldn’t be held liable.

The dissenting opinion may set the stage for Mr. Martoma’s attorneys to ask for the entire Second Circuit Appeals Court to consider the appeal.

Effect of Newman Ruling

The Newman decision in 2014 disrupted a crackdown on insider trading. The convictions of two hedge fund managers were thrown out as a result. After the Newman decision, Preet Bharara, then the United States Attorney in Manhattan, was forced to vacate guilty pleas and indictments against about a dozen hedge fund traders or analysts charged with insider trading.3


With the Martoma decision, it is unclear how much of the ruling in Newman still stands given how the Salman decision, and now this case, have diminished it. Future insider trading trials will decide.


  1. Stevenson, Alexandra, “Conviction Of a Trader Is Upheld On Appeal,” The New York Times, August 24, 2017, and Hong, Nicole, “Ruling Buoys Insider Prosecutions,” The Wall Street Journal, August 24, 2017.
  2. Peluso, Romano I., “Continuing To Define Insider Trading,” Perkins Coie LLP, https://www.corporatetrustinsider.com., March 13, 2017.
  3. Endnote 1.