Federal prosecution for insider trading got a big boost Wednesday with the 2nd Circuit Court of Appeals ruling allowing charges against those who get a tip as a gift from a friend or business associate.
The New York-based appeals court upheld the 2014 conviction of former SAC Capital Advisors portfolio manager Mathew Martoma for his illegal use of inside tips to make $275 million for SAC on trades in pharmaceutical firms, Wyeth and Elan Corp, over an experimental Alzheimer’s drug.
Martoma’s conviction was the largest individual insider trading prosecution in the U.S. he is currently service a nine-year prison sentencing in Miami. Following a four-week trial, a jury convicted him of conspiracy to commit securities fraud and two counts of fraud in an insider trading scheme.
He paid a doctor who was chair of the safety monitoring committee for the clinical trial on the drug. Dr. Sidney Gilman was paid $1,000 per hour by Martoma as a consultant. Although Gilman had an obligation to keep the drug’s progress confidential and he knew Martoma was an investment manager, he still provided confidential updates on the drug’s safety. A second doctor, Dr. Joel Ross, was a principal investigator on the clinical trial and he was paid $1,500 per hour to provide confidential information to Martoma as well, the court said.
Martoma received a $9 million bonus based in large part on his trading activity in Elan and Wyeth, the court said.
Martoma had argued that he wasn’t liable for insider trading under a “gift theory” and that a prior U.S. Supreme Court decision had held that a tipper must have a “meaningfully close personal relationship” with a tippee to justify the inference that a tipper received a personal benefit from his gift of inside information.
But while Martoma’s appeal was pending, the Supreme Court issued a different ruling that abrogated the prior “close personal relationship” requirement, thus the jury instruction in Martoma’s case was not an obvious error, wrote Judge Robert Katzmann, joined by Judge Denny Chin.
In dissent, Judge Rosemary Pooler expressed concern that the decision will greatly expand potential liability for passing on inside information that is later used to trade, including by reporters and stock analysts.
Case: U.S. v. Martoma, No. 14-3599