03 September 2017

U.S. Corporate Law News: Second circuit abandons relationship test in decision to uphold insider trading conviction

Michael A. Rueda
Partner | Head of US Sports and Entertainment | US

On August 23, 2017, the U.S. Court of Appeals for the Second Circuit upheld the conviction of Mathew Martoma (United States v. Martoma), a portfolio manager who traded on information from two insiders at a pharmaceutical company regarding a failed experimental drug trial. In upholding the conviction, the court applied the reasoning in a 2016 U.S. Supreme Court decision, Salman v. United States, to effectively abandon a guiding principle from the Second Circuit's landmark 2015 insider trading decision in United States v. Newman. In Newman, the Second Circuit ruled that in order to establish insider trading liability based on a tip, a “meaningfully close personal relationship” must exist between a tipper and a tippee. Without evidence of such a personal relationship, a jury could not infer that a tipper had divulged inside information in exchange for a personal benefit. The Supreme Court's Salman ruling rejected the notion that evidence of a close personal relationship is necessary to find liability, and the Second Circuit in Martoma affirmed that there should be no distinction between providing information to those with whom a tipper shares a close relationship and those with whom the tipper does not have such a relationship. Click here for more information.

Michael A. Rueda Partner | Head of US Sports and Entertainment | New York

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