SRZ: Court overrules aspect of US v. Newman

August, 2017

Last week, a divided panel of the US Court of Appeals for the Second Circuit issued another in a series of important insider trading decisions regarding the personal benefit requirement in the context of gifting confidential information, sustaining the conviction of Mathew Martoma, a former portfolio manager, report Schulte Roth & Zabel. In doing so, the panel expressly overruled a significant aspect of the Court’s 2014 decision in United States v. Newman, holding that a “meaningfully close personal relationship” was no longer required, at least in the Second Circuit, to prove both civil and criminal insider trading when a tipper makes a gift of material, non-public information.

Under the panel’s ruling, the personal benefit requirement may be satisfied whenever an insider discloses material, non-public information with the expectation that the recipient will trade on it and the disclosure resembles a gift of trading profits from the insider to the recipient — even if the recipient is not a friend or relative. This holding drew a sharp rebuke from one of the judges on the panel, who both challenged the majority’s reasoning and criticized the panel for overruling a decision of an earlier panel without convening an en banc session of the full Court.

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