United States v. Martoma

Katzmann, Chief Judge:

Defendant-appellant Mathew Martoma was convicted, following a four-week jury trial, of one count of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and two counts of securities fraud in violation of 15 U.S.C. §§ 78j(b) & 78ff in connection with an insider trading scheme. On appeal, Martoma argues that the jury was improperly instructed and that there was insufficient evidence to sustain his conviction.

Martoma's contentions focus on the "personal benefit" element of insider trading law. In Dirks v. S.E.C. , the Supreme Court held that a "tippee"-someone who receives confidential information from a corporate insider, or "tipper," and then trades on the information-can be held liable under the insider trading laws "only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach." 463 U.S. 646, 660, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). "[T]he test" for whether there has been a breach of the tipper's duty "is whether the [tipper *68] personally will benefit, directly or indirectly, from his disclosure" to the tippee. Id. at 662, 103 S.Ct. 3255. Dirks set forth several personal benefits that could prove the tipper's breach, including, for example, "a relationship" between the tipper and tippee "that suggests a quid pro quo from the latter," the tipper's "intention to benefit" the tippee, and "a gift of confidential information to a trading relative or friend" where "[t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient." Id. at 664, 103 S.Ct. 3255.

Martoma first argues that the jury in his case was not properly instructed in light of the Second Circuit's decision in United States v. Newman , 773 F.3d 438 (2d Cir. 2014). Martoma asserts that, under Newman , evidence that the tipper made a gift of inside information to a trading relative or friend establishes a "personal benefit" only if tipper and tippee share a "meaningfully close personal relationship." See Newman , 773 F.3d at 452. Martoma contends that the jury instructions were flawed because they did not qualify that evidence of a gift to a trading relative or friend establishes a personal benefit only where there is a "meaningfully close personal relationship." Second, Martoma argues that the evidence at trial was insufficient to sustain a conviction under any theory of personal benefit.

We agree that the jury instructions are inconsistent with Newman , though not for the reasons Martoma advances. Newman held that a personal benefit in the form of "a gift of confidential information to a trading relative or friend," see Dirks , 463 U.S. at 664, 103 S.Ct. 3255, requires proof that the tipper and tippee shared what the decision called a "meaningfully close personal relationship," see Newman , 773 F.3d at 452. The Court explained that this standard "requires evidence of 'a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].' " Id. (quoting United States v. Jiau , 734 F.3d 147, 153 (2d Cir. 2013) (quoting Dirks , 463 U.S. at 664, 103 S.Ct. 3255 ) ). Thus, Martoma's jury instructions were erroneous, not because they omitted the term "meaningfully close personal relationship," but because they allowed the jury to find a personal benefit in the form of a "gift of confidential information to a trading relative or friend" without requiring the jury to find either that tipper and tippee shared a relationship suggesting a quid pro quo or that the tipper gifted confidential information with the intention to benefit the tippee.

We nonetheless conclude that this instructional error did not affect Martoma's substantial rights. At trial, the government presented compelling evidence that at least one tipper received a different type of personal benefit from disclosing inside information: $70,000 in "consulting fees." This evidence establishes the existence of a relationship suggesting a quid pro quo between the tipper and tippee. For this reason, Martoma's challenge to the sufficiency of the personal-benefit evidence fails. Moreover, the government presented sufficient evidence for a rational trier of fact to conclude that at least one tipper received a personal benefit by disclosing inside information with the intention to benefit Martoma. Accordingly, we AFFIRM the judgment of the district court.

BACKGROUND

Martoma's convictions stem from an insider trading scheme involving securities of two pharmaceutical companies, Elan Corporation, plc ("Elan") and Wyeth, that were jointly developing an experimental drug called bapineuzumab to treat Alzheimer's disease. Martoma worked as a *69portfolio manager at S.A.C. Capital Advisors ("SAC"), a hedge fund owned and managed by Steven A. Cohen. In that capacity, Martoma managed an investment portfolio with buying power of between $400 and $500 million that was focused on pharmaceutical and healthcare companies. He also recommended investments to Cohen, who managed SAC's largest portfolio. While at SAC, Martoma began to acquire shares in Elan and Wyeth in his portfolio and recommended that Cohen acquire shares in the companies as well.

In order to obtain information about bapineuzumab, Martoma contacted expert networking firms and arranged paid consultations with doctors knowledgeable about Alzheimer's disease, including two who were working on the bapineuzumab clinical trial. Dr. Sidney Gilman, chair of the safety monitoring committee for the bapineuzumab clinical trial, participated in approximately 43 consultations with Martoma at the rate of around $1,000 per hour.1 As a member of the safety monitoring committee, Dr. Gilman had an obligation to keep the results of the clinical trial confidential. His consulting contract reiterated that he was not to disclose any confidential information in a consultation. He nevertheless provided Martoma, whom he knew to be an investment manager seeking information to help make securities trading decisions, with confidential updates on the drug's safety that he received during meetings of the safety monitoring committee. Dr. Gilman also shared with Martoma the dates of upcoming safety monitoring committee meetings, which allowed Martoma to schedule consultations with Dr. Gilman shortly after each one. Another consultant, Dr. Joel Ross, one of the principal investigators on the clinical trial, met with Martoma on many occasions between 2006 and July 2008 and charged approximately $1,500 per hour. Like Dr. Gilman, Dr. Ross had an obligation to maintain the confidentiality of information about the bapineuzumab clinical trial. Nevertheless, during their consultations, Dr. Ross provided Martoma with information about the clinical trial, including information about his patients' responses to the drug and the total number of participants in the study, that Dr. Ross recognized was not public.

On June 17, 2008, Elan and Wyeth issued a press release regarding the results of "Phase II" of the bapineuzumab clinical trial. The press release described the preliminary results as "encouraging," with "clinically meaningful benefits in important subgroups" of Alzheimer's patients with certain genetic characteristics, but indicated that the drug had not proven effective in the general population of Alzheimer's patients. J.A. 547. The press release further stated that the results of the trials would be presented in greater detail at the International Conference on Alzehimer's Disease to be held on July 29, 2008. Elan's share price increased following the press release.

In mid-July of 2008, the sponsors of the bapineuzumab trial selected Dr. Gilman to present the results at the July 29 conference. It was only at this point that Dr. Gilman was unblinded as to the final efficacy results of the trial. Dr. Gilman was "initially euphoric" about the results, but identified "two major weaknesses in the data" that called into question the efficacy of the drug as compared to the placebo. Tr. 1419-20. On July 17, 2008, the day after being unblinded to the results, Dr. Gilman spoke with Martoma for about 90 *70minutes by telephone about what he had learned. That same day, Martoma purchased a plane ticket to see Dr. Gilman in person at his office in Ann Arbor, Michigan. That meeting occurred two days later, on July 19, 2008. At that meeting, Dr. Gilman showed Martoma a PowerPoint presentation containing the efficacy results and discussed the data with him in detail.

The next morning, Sunday, July 20, Martoma sent Cohen, the owner of SAC, an email with "It's important" in the subject line and asked to speak with him by telephone. The two had a telephone conversation lasting about twenty minutes, after which Martoma emailed Cohen a summary of SAC's Elan and Wyeth holdings. The day after Martoma spoke to Cohen, on July 21, 2008, SAC began to reduce its position in Elan and Wyeth securities and entered into short-sale and options trades that would be profitable if Elan's and Wyeth's stock fell.

Dr. Gilman publicly presented the final results from the bapineuzumab trial at the International Conference on Alzehimer's Disease in the afternoon of July 29, 2008. Elan's share price began to decline during Dr. Gilman's presentation and at the close of trading the next day, the share prices of Elan's and Wyeth had declined by about 42% and 12%, respectively. The trades that Martoma and Cohen made in advance of the announcement resulted in approximately $80.3 million in gains and $194.6 million in averted losses for SAC. Martoma personally received a $9 million bonus based in large part on his trading activity in Elan and Wyeth.

At Martoma's trial, the district court instructed the jury on the personal benefit element of insider trading law as follows:

If you find that Dr. Gilman or Dr. Ross disclosed material, non-public information to Mr. Martoma, you must then determine whether the government proved beyond a reasonable doubt that Dr. Gilman and Dr. Ross received or anticipated receiving some personal benefit, direct or indirect, from disclosing the material, non-public information at issue.

The benefit may, but need not be, financial or tangible in nature; it could include obtaining some future advantage, developing or maintaining a business contact or a friendship, or enhancing the tipper's reputation.

A finding as to benefit should be based on all the objective facts and inferences presented in the case. You may find that Dr. Gilman or Dr. Ross received a direct or indirect personal benefit from providing inside information to Mr. Martoma if you find that Dr. Gilman or Dr. Ross gave the information to Mr. Martoma with the intention of benefiting themselves in some manner, or with the intention of conferring a benefit on Mr. Martoma, or as a gift with the goal of maintaining or developing a personal friendship or a useful networking contact.

Tr. 3191.

After Martoma was convicted and while his appeal was pending, this Court decided United States v. Newman , 773 F.3d 438 (2d Cir. 2014), an insider trading case that considered one of the personal benefits described in Dirks and mentioned in Martoma's jury instructions-making a "gift" of inside information to "a trading relative or friend."2 This Court stated:

To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee, where the tippee's trades 'resemble trading by the insider himself *71followed by a gift of the profits to the recipient,' see 463 U.S. at 664 [103 S.Ct. 3255], we hold that such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.

773 F.3d at 452. An initial round of briefing focused in large part on whether Martoma's conviction could stand in light of this passage from Newman .

Shortly thereafter, the Supreme Court decided Salman v. United States , --- U.S. ----, 137 S.Ct. 420, 196 L.Ed.2d 351 (2016), another case involving the gift theory. The defendant, relying on Newman , urged the Supreme Court to hold that a " 'gift of confidential information to a trading relative or friend' " is insufficient to establish insider trading liability "unless the tipper's goal in disclosing inside information [wa]s to obtain money, property, or something of tangible value." Id. at 426 (quoting Dirks , 463 U.S. at 664, 103 S.Ct. 3255 ). The Supreme Court rejected the defendant's argument and "adhere[d] to Dirks ," id. at 427, observing that "[t]o the extent the Second Circuit held that the tipper must also receive something of a 'pecuniary or similarly valuable nature' in exchange for a gift to family or friends, ... this requirement is inconsistent with Dirks ," id. at 428 (quoting Newman , 773 F.3d at 452 ); see also id. ("Here, by disclosing confidential information as a gift to his brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to Citigroup and its clients ....").

The government now takes the position that Salman fully abrogated Newman 's interpretation of the personal benefit element, whereas Martoma argues that Newman 's"meaningfully close personal relationship" standard survived Salman . However, because there are many ways to establish a personal benefit, we conclude that we need not decide whether Newman 's gloss on the gift theory is inconsistent with Salman . At trial, the government presented compelling evidence that Dr. Gilman received a different type of personal benefit: $70,000 in consulting fees, which can be seen either as evidence of a quid pro quo -like relationship, or simply advance payments for the tips of inside information that Dr. Gilman went on to supply.3 The government also introduced sufficient evidence to prove Dr. Gilman received a personal benefit by disclosing inside information with the intention to benefit Martoma. We accordingly conclude that Martoma has provided no basis for his judgment of conviction to be vacated or reversed.

DISCUSSION

As noted above, Martoma challenges both the adequacy of the district court's jury instructions and the sufficiency of the evidence presented at trial. "We review a jury charge in its entirety and not on the basis of excerpts taken out of context." United States v. Mitchell , 328 F.3d 77, 82 (2d Cir. 2003) (quoting United States v. Zvi , 168 F.3d 49, 58 (2d Cir. 1999) ). "A conviction based on a general verdict is subject to challenge if the jury was instructed on alternative theories of guilt and may have relied on an invalid one." Hedgpeth v. Pulido , 555 U.S. 57, 58, 129 S.Ct. 530, 172 L.Ed.2d 388 (2008). Such a challenge, however, is subject to harmless error review. See ibr.US_Case_Law.Schema.Case_Body:v1" id="p72" href="#p72" data-label="72" data-citation-index="1" class="page-label">*72id. at 58, 61-62, 129 S.Ct. 530. And because Martoma raises his challenge to the jury instructions for the first time on appeal, we review only for plain error. United States v. Vilar , 729 F.3d 62, 70 (2d Cir. 2013). Under the plain error standard, an appellant must demonstrate that "(1) there is an error; (2) the error is clear or obvious, rather than subject to reasonable dispute; (3) the error affected the appellant's substantial rights ...; and (4) the error seriously affects the fairness, integrity or public reputation of judicial proceedings."4 United States v. Marcus , 560 U.S. 258, 262, 130 S.Ct. 2159, 176 L.Ed.2d 1012 (2010) (internal quotation marks and alteration omitted). "[W]e look not to the law at the time of the trial court's decision to assess whether the error was plain, but rather, to the law as it exists at the time of review." Vilar , 729 F.3d at 71. Even with respect to an instructional error that "incorrectly omitted an element of the offense," we will not overturn a conviction "if we find that the jury would have returned the same verdict beyond a reasonable doubt," and thus that "the error did not affect [the defendant's] substantial rights." Nouri , 711 F.3d at 139-40 (internal quotation marks omitted).

With respect to Martoma's second argument, a defendant challenging the sufficiency of the evidence "bears a heavy burden," and "the standard of review is exceedingly deferential." United States v. Coplan , 703 F.3d 46, 62 (2d Cir. 2012) (internal quotation marks omitted). "In evaluating a sufficiency challenge, we 'must view the evidence in the light most favorable to the government, crediting every inference that could have been drawn in the government's favor, and deferring to the jury's assessment of witness credibility and its assessment of the weight of the evidence.' " Id. (quoting United States v. Chavez , 549 F.3d 119, 124 (2d Cir. 2008) ). "Although sufficiency review is de novo , we will uphold the judgment[ ] of conviction if 'any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.' " Id. (citation omitted) (quoting Jackson v. Virginia , 443 U.S. 307, 319, 99 S.Ct. 2781, 61 L.Ed.2d 560 (1979) ). "A judgment of acquittal is warranted only if the evidence that the defendant committed the crime alleged is nonexistent or so meager that no reasonable jury could find guilt beyond a reasonable doubt." Jiau , 734 F.3d at 152 (alteration and internal quotation marks omitted).

I.

We first turn to Martoma's challenge to the district court's jury instructions, which focuses on Dirks ' statement that the personal benefit necessary to establish insider trading liability in a tipping case can be inferred from a "gift of confidential information to a trading relative or friend." Dirks , 463 U.S. at 663-64, 103 S.Ct. 3255 ; see also Salman , 137 S.Ct. at 428. Martoma argues that the district court's jury instructions ran afoul of this Court's decision in Newman by permitting the jury to conclude that a gift of confidential information given with the goal of "developing or *73maintaining ... a friendship" qualifies as a personal benefit. According to Martoma, the jury should have been instructed that the tipper and tippee must share a "meaningfully close personal relationship" in order to find a personal benefit based on a gift of inside information to a friend.

A. The Personal Benefit Requirement

The Supreme Court long ago held that there is no "general duty between all participants in market transactions to forgo actions based on material, nonpublic information." Chiarella v. United States , 445 U.S. 222, 233, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980). However, the "traditional" or "classical theory" of insider trading provides that a corporate insider violates § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (2017), when he "trades in the securities of his corporation on the basis of material, non-public information" because "a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation." United States v. O'Hagan , 521 U.S. 642, 651-52, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997) (alteration in original) (quoting Chiarella , 445 U.S. at 228, 100 S.Ct. 1108 ). Similarly, the "misappropriation theory" of insider trading provides "that a person ... violates § 10(b) and Rule 10b-5[ ] when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information." Id. at 652, 117 S.Ct. 2199. It is thus the breach of a fiduciary duty or other "duty of loyalty and confidentiality" that is a necessary predicate to insider trading liability. See id.5

The personal benefit element has its origin in Dirks , where the Supreme Court examined how a recipient of inside information who was not himself a corporate insider-i.e. , a tippee-can acquire a duty to disclose or abstain from trading. The Supreme Court held that a tippee acquires the duty to disclose or abstain only if the insider disclosed the confidential information in breach of a fiduciary duty to the firm. Dirks , 463 U.S. at 660-61, 103 S.Ct. 3255. "Whether disclosure is a breach of duty," the Supreme Court explained, "depends in large part on the purpose of the disclosure." Id. at 662, 103 S.Ct. 3255. The personal benefit requirement is designed to test the propriety of the tipper's purpose. See id. at 661-63, 103 S.Ct. 3255. This logic is sound. A firm's confidential information belongs to the firm itself, and an insider entrusted with it has a fiduciary duty to use it only for firm purposes. The insider who personally benefits-i.e. , whose purpose is to help himself-from disclosing confidential information therefore breaches that duty; the insider who discloses for a legitimate corporate purpose does not. Identifying personal benefits is not, however, the central focus of insider trading law, but simply how courts and juries analyze breaches of fiduciary duty.

The Supreme Court defined personal benefit broadly. As noted above, the test for a personal benefit is whether objective evidence shows that "the insider personally will benefit, directly or indirectly, from his disclosure" of confidential information to the tippee.

*74Id. at 662, 103 S.Ct. 3255. Dirks set forth numerous examples of personal benefits that prove the tipper's breach: a "pecuniary gain," a "reputational benefit that will translate into future earning," a "relationship between the insider and the recipient that suggests a quid pro quo from the latter," the tipper's "intention to benefit the particular recipient," and a "gift of confidential information to a trading relative or friend" where