SCOTUS Leaves a Big Pharma Insider-Trading Conviction Intact

SCOTUS Leaves a Big Pharma Insider-Trading Conviction Intact

On June 3, the US Supreme Court denied certiorari in the matter of Martoma v. US. This is the end of the line, then, for the appeals of Mathew Martoma’s criminal conviction and sentence.

Martoma is a former portfolio manager for SAC Capital, now known as Point72 Asset Management. He was convicted of securities fraud and conspiracy in the federal district court for Manhattan in February of 2014 and sentenced later that year. That conviction was upheld at the Second Circuit, both by a panel (2017) and by the full bench (2018), and now with the SCOTUS denial of cert … it appears that Martoma will serve out his term in prison.

The Tipper’s Benefit

More important for everyone except Martoma himself, is the principle at stake in the litigation. In general, an insider tip can be the predicate of an insider trading prosecution against a non-insider if and only if the insider gets some benefit, direct or indirect, from making the disclosure. But there has been a good deal of confusion in recent years about what kind of benefit is enough.

Over time, the idea has gained acceptance that a tipper gets a non-pecuniary benefit by showing off to his family members, presumably boosting his ego by demonstrating that he knows hush-hush stuff. In the Salman case, an inside tipper was said to have received a personal benefit because he got his annoyingly inquisitive brother off his back.

Martoma claimed (and there was some precedent in support of this proposition) that for such an interpersonal benefit (in the absence of a payoff) to make the tippee’s trading a crime there must have been a “meaningfully close personal relationship” between the tipper and the first tippee. The Second Circuit (the federal districts of New York, Connecticut, and Vermont) has now decisively rejected that contention. Benefit can take the form of a reasonable quid pro quo expectation. The denial of cert does not mean that Martoma becomes law in the rest of the country, but the Second Circuit is a big one for this purpose.

The Underlying Scheme

The underlying insider scheme involved the stock prices of two pharmaceutical companies, Elan and Wyeth, and their joint efforts on an Alzheimer’s treatment drug called bapineuzumab. On the strength of information about the development of this drug Martoma initially took long positions on Elan and Wyeth and recommended that his boss, Steven A. Cohen, do likewise. As the (inside) information changed, they changed their positions.

Martoma got much of his information about the development of bapineuzumab from Dr. Sidney Gilman and Dr. Joel Ross, who were supervising clinical trials. In their roles in that capacity, both doctors had an obligation to keep trial information confidential, an obligation they violated by talking to Martoma.

Regarding tipper Ross’ case, the doctor may have benefitted in a direct and pecuniary way from As to Gilman, the benefit may have been more intangible.

And it was Gilman who presented the final results from the bapineuzumab trial at an international medical conference on July 29, 2008. The news was not good, and the share prices of Elan and Wyeth declines (42% and 12% respectively) the following day. Martoma and Cohen had taken positions on the short side. They made millions, and Martoma received a $9 million bonus from SAC based, in large part, on this coup.

The Issue on Appeal

Short sellers and long/short equity strategists ought to take away from this case an awareness of the broader scope it offers to prosecutors.

Martoma argued on appeal that Gilman did not receive any objective consequential gain, pecuniary or otherwise, from the looseness of his lips. Further, he did not have the sort of relationship with Gilman that brothers or close friends might be expected to have, so that relationship didn’t generate any intangible “personal benefit” either.

The Second Circuit, with the Supreme Court’s acquiescence, has now said that neither a payment nor a personal relationship is required. Gilman had a documented ongoing relationship with Martoma, such that he could reasonably expect that if he scratched Martoma’s back, he would get his own back scratched in due course. So, a rational trier of fact could well have found, under a pecuniary quid pro quo standard and without any actual billing or payment for these specific conversations, that Gilman received a benefit in the sense necessary to predicate this prosecution.

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