SAC Capital Appeal Tests Insider-Trading Law

MANHATTAN (CN) — Fighting Tuesday to clear the name of the man once depicted as the face of Wall Street greed, a defense attorney painted the conviction of former SAC Capital executive Mathew Martoma as part of a pattern of overzealous federal prosecution. 

“The government has literally gone 0-for-3 by swinging for the fences,” Kirkland & Ellis attorney Paul Clement told the Second Circuit this morning.

Martoma’s case had been a high-water mark in the insider-trading crusade of former U.S. Attorney Preet Bharara. Though the Manhattan federal prosecutor had busted multiple multibillion-dollar hedge funds before President Donald Trump sacked him this year, Stamford-based SAC Capital had been one of Bharara’s biggest quarries.

Bharara dubbed Martoma’s $276 million profit as the “most lucrative” example of insider trading in history, and he scored a $1.8 billion settlement against SAC’s billionaire president Steven Cohen, whom the Securities and Exchange Commission briefly banned from managing money. 

Martoma had been the 79th securities fraud conviction under Bharara’s belt, receiving a nine-year prison sentence. How many of those convictions will hold, however, could depend on the Second Circuit’s interpretation of three key decisions: Dirks v. SEC, United States v. Newman and United States v. Salman.

All three cases involved inside tips being passed on to relatives, friends or other people in a personal relationship, and appellate courts have made clear that a conviction must rest on proof of a benefit in the transaction.

Martoma received his tips from Dr. Sidney Gilman, a consultant who fed the executive information about clinical trials of an Alzheimer’s drug.

Prosecutors say that the financial gain was clear: Gilman received $1,000 per hour for each of the 43 consultations where he traded inside trips, and Martoma’s valuable information netted him a $9 million bonus from a powerful hedge fund.

“It was a pecuniary case, and that was how the jury decided it,” Assistant U.S. Attorney Robert Allen told the Second Circuit on Tuesday.

But Gilman, whose own son died under tragic circumstances, also testified that he thought of Martoma as his child.

Martoma’s attorneys hope to prove that the prosecution failed to prove whether money or friendship inspired Gilman’s tips.

“That’s what you cannot do in a post-Newman world,” Clement argued, referring to the Second Circuit ruling loosening securities fraud laws.

The Newman precedent forced prosecutors to drop charges against Martoma’s former colleague Michael Steinberg, an ex-portfolio manager at SAC Capital.

The U.S. Supreme Court later restored insider-trading law to some of its former strength, however, in the case of Bassem Salman, a grocery wholesaler who made $2 million on information from his investment banker brother-in-law.

Both the Newman and Salman cases interpret a far earlier precedent: the Dirk decision from 1983.

Attempting to thread the needle of this judicial trio, a three-judge panel today struggled to define when a personal relationship implicates securities laws.

“What does a ‘meaningfully close’ relationship mean?” Chief U.S. Circuit Judge Robert Katzmann asked. “How do we put teeth into that?”

Drawing a hypothetical, Katzmann asked both parties whether a tip of inside information to the doorman of an apartment in lieu of money would qualify.

“A gift to a doorman is just as impermissible as a gift to a brother or sister,” Allen, the prosecutor, replied.

U.S. Circuit Judge Denny Chin appeared skeptical that the government needed to show anything more than the financial motive.

“Why isn’t what the government pointed to enough?” Chin asked.

Today marks the second time that the Second Circuit has heard Martoma’s appeal. The court called for a new round of hearings in light of evolving precedent.

The last time around, U.S. Circuit Judge Rosemary Pooler noted, prosecutors argued that it was logically impossible for the jury to have convicted on what it called the “pure friendship theory.”

Clement, a onetime U.S. solicitor general, took the opportunity to land a dig at his former colleagues in government. “They may have said that,” Clement said, “but they may not know what ‘logically’ and ‘possible’ mean.”

The judges reserved decision on the appeal, leaving another cliffhanger in the securities-fraud saga.

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