Tipping the scales for insider-trading liability: The consequences of Martoma

Abstract

The US government has historically pushed the outer limits of insider-trading liability to cover any use of insider information, regardless of the manner by which it was communicated to the trader in downstream tippee cases. In 2014, in its Newman insider-trading opinion, the US Court of Appeals for the Second Circuit tempered the government’s zeal for expanding the coverage of insider-trading liability by holding that only a tip exchanged for something of tangible value may serve as a predicate for tipper/tippee liability. However, following the US Supreme Court’s review of insider-trading liability in Salman, a divided panel of the Second Circuit reversed Newman in its Martoma decision and greatly expanded the scope of what constitutes insider-trading. In effect, under Martoma, any tip under circumstances in which the tipper could anticipate trading by the tippee can be a predicate for liability, regardless of whether the tipper received anything in exchange for the tip. The authors argue that Martoma gives the government too much unfettered power to decide whether insider-trading occurred in each individual case, is inconsistent with Salman and other Supreme Court precedent, and should be reversed. Until then, however, those who make their living by trading are in greater jeopardy of being pulled into an insidertrading investigation or prosecution. More than ever, investment and compliance professionals must rely on the strictest compliance measures to avoid any trading that could be viewed as sharing of insider information with someone who may act on it.