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SAC Capital Trader’s Inside-Trading Convictions Upheld

Cementing the legacy of a former U.S. attorney who crusaded against insider trading, the Second Circuit closed the book Wednesday on convicted SAC Capital executive Mathew Martoma.

MANHATTAN (CN) - One of the crown jewels of the state’s insider-trading crackdown, former SAC Capital executive Mathew Martoma failed Wednesday to overturn his convictions and accompanying nine-year prison sentence.

Depicted as the face of Wall Street greed, Martoma was convicted in 2014 of capitalizing off illness through his advanced knowledge of clinical trial results for a drug that treats Alzheimer’s disease.

Martoma's marked the the 79th conviction in a securities fraud clampdown by then-U.S. Attorney Preet Bharara.

Though the federal prosecutor lost his job this year to the whims of President Donald Trump, Bharara’s legacy persevered Wednesday at the Second Circuit.

Martoma’s appeal hinged upon three key precedents — Dirks v. SEC, United States v. Newman and United States v. Salman — all cases involving inside tips being passed on to relatives, friends or other people in a "meaningfully close personal relationship.”

Appellate courts have made clear that a conviction must rest on proof of a benefit in the transaction, but Martoma argued that this was not the case with the consultant, Dr. Sidney Gilman, who fed him clinical trial information.

Feeding the question of whether personal interest or friendship inspired the exchange of information, Gilman testified that he thought of Martoma like his son, who had died under tragic circumstances.

But the Second Circuit majority found the distinction unavailing, resting on a hypothetical U.S. Circuit Judge Katzmann proposed during May oral arguments.

“Imagine that a corporate insider, instead of giving a cash end-year gift to his doorman, gives a tip of inside information with instructions to trade on the information and consider the proceeds of the trade to be his end-year gift,” the 37-page opinion states. “In this example, there may not be a ‘meaningfully close personal relationship’ between the tipper and tippee, yet this clearly is an illustration of prohibited insider trading, as the insider has given a tip of valuable inside information in lieu of a cash gift and has thus personally benefitted from the disclosure.”

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.

Echoing this point, Katzmann wrote: “Dr. Gilman’s disclosure of confidential information was designed to ‘translate into future earnings.’”

U.S. Circuit Judge Rosemary Pooler wrote in dissent that her colleagues have weakened precedent that limits securities fraud prosecution to cases that involve a personal benefit.

“Adhering to the Supreme Court’s precedent may challenge us when it leaves unethical conduct unpunished,” the 44-page dissent states. “But there is great wisdom in the Supreme Court’s limitations on broad rules, particularly when those rules might otherwise allow punishment of the absentminded in addition to persons with corrupt intentions.”

Martoma's attorney Paul Clement, a former U.S. solicitor general now serving as a partner for Kirkland & Ellis, did not immediately respond to telephone and email requests for comment.

Acting U.S. Attorney Joon Kim applauded the appellate court’s decision.

“The strength of our securities markets rests on their integrity and fairness,” Kim said in a statement. “And the successful prosecution of those who cheat by trading on illegally obtained inside information, as Martoma did to the tune of over $275 million, is critical to maintaining that integrity and fairness in our markets.”

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