CONTINUING LEGAL EDUCATIONcontent.sfbar.org/source/BASF_Pages/PDF/G191504-M.pdf · All prices...

THE BAR ASSOCIATION OF SAN FRANCISCOCONTINUING LEGAL EDUCATION

WednesdayNovember 20, 2019MCLE Registration: 5:00 - 5:30 p.m.

Program: 5:30 - 7:15 p.m.

The Criminal Law Section presents

The State of Insider Trading Experts discuss proposed legislation, the national blue-ribbon task force, and all things Insider Trading.

Experts discuss proposed legislation, the national blue-ribbon task force, and all things Insider Trading.

Topics• Recent legislative proposals: a fix in search of a problem?• Is the personal benefit requirement any clearer after Salman?• How gray is gray: materiality and the art of information.• Duty, what duty? Is the breach of duty requirement obsolete?• 10b5-1 plans: safe harbor or side door?

Section Co-Chairs: Jonathan Schmidt, San Francisco District Attorney’s Office and K.C. Maxwell, Maxwell Law

Register online: www.sfbar.org/calendar or complete form below.

MCLE: 1 HourTo receive MCLE credit, you must sign in during the designated MCLE registration period. This activity is approved for Minimum Continuing Legal Education credit by the State Bar of California. BASF is a certified provider.

Provider #103

LocationCoblentz, Patch Duffy & Bass120 Kearny Street, Suite 3000San Francisco, CA

Cost$40 BASF Section Members, Government & Nonprofit Attorneys $50 BASF Members $65 Others$30 for BASF Student MembersAll prices increase $10 on the day of the program.

Light Refreshments will be provided.

Event Code: G191504

NOTES: Refunds requests will be given up to 48 hours in advance, less a $10 handling fee. Email [email protected].

Special Requests: People with disabilities should contact BASF regarding reasonable accommodations.

Professor Joseph Grundfest W.A. Franke Professor of Law and BusinessStanford University

Jan Little PartnerKeker, Van Nest & Peters

Adam Reeves First Assistant, United States Attorney’s Office Northern District of California

Jennifer Lee Assistant Regional Director for Enforcement San Francisco Regional Office, Securities and Exchange Commission

Moderator

Tim CrudoPartnerCoblentz, Patch, Duffy & Bass

Speakers

The State of Insider Trading

Speakers

Professor Joseph Grundfest W.A. Franke Professor of Law and Business, Stanford University

Jan Little Partner, Keker, Van Nest & Peters

Adam Reeves First Assistant, United States Attorney's Office

Northern District of California

Jennifer Lee Assistant Regional Director for Enforcement

San Francisco Regional Office, Securities and Exchange Commission

Moderator

Tim Crudo

Partner, Coblentz, Patch, Duffy & Bass

Thursday, November 14, 2019

Location: Coblentz, Patch Duffy & Bass LLP • 120 Kearny St., suite 3000• San Francisco, CA

Event Code: G191504

The State of Insider Trading Speaker Bios

Professor Joseph Grundfest

Joseph A. Grundfest is the William A. Franke Professor of Law and Business at Stanford Law School and Senior Faculty at the Rock Center on Corporate Governance at Stanford University. He joined Stanford's faculty in 1990 after serving for more than four years as a Commissioner of the United States Securities and Exchange Commission.

Professor Grundfest's scholarship in the areas of corporate law, securities regulation, and litigation, has been published in the Harvard, Yale, and Stanford Law Reviews. The National Law Journal has listed Professor Grundfest among the nation’s 100 most influential attorneys. Directorship has listed him among the 100 most influential leaders in corporate governance. California Lawyer has listed him among the top ten lawyers in California. Prior to joining the SEC, Professor Grundfest served as counsel and senior economist for legal and regulatory matters at the President's Council of Economic Advisors. An attorney and economist, Professor Grundfest practiced law with Wilmer, Cutler & Pickering, and was an economist with the Brookings Institution and the Rand Corporation.

Professor Grundfest’s bachelor's degree in economics is from Yale University (1973) and he completed the M.Sc. program in mathematical economics and econometrics at the London School of Economics (1972) (no degree awarded). His law degree is from Stanford (1978) where he also completed all requirements for an economics Ph.D. but for the dissertation (1978).

Professor Grundfest is founder and director of Directors’ College at Stanford Law School and principal investigator for Stanford Law School’s Securities Litigation Clearinghouse and FCPA Database. He has served on the NYSE Legal Advisory Board, on the NASDAQ Legal Advisory Committee, on a rules committee of the United States District Court for the Northern District of California, on the SEC’s Advisory Committee on Improvements to Financial Reporting, and has been elected to membership in the American Law Institute. Professor Grundfest has been selected as a National Fellow by the Hoover Institution, and has been awarded a John M. Olin Faculty Fellowship. Professor Grundfest is admitted to practice in California and in the District of Columbia.

Professor Grundfest has twice received the John Bingham Hurlbut Award for Excellence in Teaching, as well as the Associated Students of Stanford University award as the best professor at the Stanford Law, Business, and Medical Schools. Professor Grundfest is director and chair of the audit committee of KKR & Co. Inc., and chairs the board nominating committee of the NASDAQ Stock Market. He is a founder and former director of Financial Engines, Inc., and a former director of Oracle Corp.

Jan Little

For more than 30 years Jan Little has handled high-stakes criminal investigations and trials and complex civil litigation for publicly-traded corporations, private companies, and senior executives.

Ms. Little's criminal cases have included many substantive areas of white collar defense, including securities fraud, tax fraud, health care fraud, foreign corrupt practice/commercial bribery, money laundering, and public corruption. She has litigated and tried white collar criminal cases in dozens of jurisdictions across the nation. She has also represented corporations and executives in securities class and derivative actions, and in proceedings and enforcement actions before the Securities and Exchange Commission. Ms. Little also handles business litigation and professional liability matters.

Adam Reeves

Adam A. Reeves is the First Assistant United States Attorney at the United States Attorney=s Office in the Northern District of California in San Francisco. Mr. Reeves joined the United States Department of Justice in 2002 and has served in the United States Attorney’s Office since 2007. In twenty-two plus year career as a prosecutor, Mr. Reeves has investigated and tried a wide array of securities fraud, bank fraud, insider trading and other complex fraud cases.

Prior to joining the Department of Justice, Mr. Reeves was an Assistant District Attorney at the New York County (Manhattan) District Attorney=s Office for over six years. He is a former partner of Anderson, Kill & Olick in New York and a graduate of Swarthmore College and New York University Law School.

Jennifer Lee

Jennifer J. Lee is an Assistant Regional Director for Enforcement in the U.S. Securities and Exchange Commission’s San Francisco Regional office. Ms. Lee began working in the San Francisco office as a staff attorney in 2010, was a member of the Division of Enforcement’s Asset Management Unit from 2014-2015, and assumed her current role in 2015.

During her tenure at the SEC, Ms. Lee has conducted and supervised cases involving financial reporting fraud and disclosure issues, insider trading, misconduct by investment advisers, and other securities fraud violations. These matters include the SEC’s accounting fraud action involving Diamond Foods, and the SEC’s first cybersecurity data breach disclosure case involving Yahoo!. Ms. Lee has also worked on several insider trading actions involving trading rings and schemes.

Before joining the SEC, Ms. Lee worked as a litigation associate at the law firms of Williams & Connolly and Wilson Sonsini Goodrich & Rosati. Ms. Lee also served as a law clerk to the Hon. Richard J. Holwell on the U.S. District Court for the Southern District of New York, and the Hon. Roger L. Gregory on the U.S. Court of Appeals for the Fourth Circuit. Ms. Lee received her undergraduate degree from Stanford University and her law degree from Columbia Law School.

Tim Crudo

Tim Crudo is the head of Coblentz Patch Duffy & Bass LLP’s White Collar Defense and Investigations group in San Francisco. Tim focuses on investigations and cases brought by criminal prosecutors, government regulators, and shareholders in white collar, securities, and corporate governance matters. He defends clients in trade regulation, unfair competition, and other complex business and civil cases brought by regulators, consumers, and competitors. Tim also represents Boards of Directors, Audit Committees, and Special Litigation Committees in internal investigations. He has extensive criminal and civil jury, bench, and arbitration trial experience, including several prominent white collar criminal trials.

Tim served as an Assistant United States Attorney in the Securities Fraud Section of the United States Attorney’s Office for the Northern District of California for several years, where he investigated, prosecuted, and tried white collar and securities fraud crimes, including complex accounting fraud, insider trading, market manipulation, investment fraud, and bankruptcy fraud cases. He was named Chief of the Securities Fraud Section in 2007.

A San Francisco native, Tim is actively involved in the Bay Area community. He is Chairman of the Board of Directors of the Okizu Foundation, past president of the St. Thomas More Society of San Francisco, and past director of the American Cancer Society, the Harvard Club of San Francisco, and the St. Ignatius College Preparatory Alumni Board. Tim is a frequent speaker and contributor to various legal publications, where some of his recent articles have addressed insider trading, wire taps, whistleblowers, internal investigations, and the Foreign Corrupt Practices Act.

He earned his law degree in 1989 from the University of California, Berkeley, School of Law, where he was elected to the Order of the Coif, and earned his undergraduate degree, cum laude, from Harvard College in 1984.

UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF FLORIDA

CASE NO.:

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

v.

BRIAN FETTNER,

Defendant,LISELOTTE SANDBERG andKATHY M. MICALI,

Relief Defendants.

COMPLAINT

Plaintiff United States Securities and Exchange Commission ("Commission") alleges as

follows:

SUMMARY

1. This action involves unlawful trading in the securities of G&K Services, Inc.

("G&K") prior to an August 16, 2016 announcement that Cintas Corporation ("Cintas") had

reached an agreement with G&K to purchase all of G&K's outstanding common stock for a

substantial premium over the stock's then publicly-traded price. While the business combination

was being negotiated, and before it had been publicly announced, Brian Fettner ("Fettner" or

"Defendant"), based on material, nonpublic information that he had obtained in breach of a duty

of trust and confidence to a life-long friend, purchased G&K stock in a brokerage account of his

ex-wife, Relief Defendant Liselotte Sandberg, and in a brokerage account of a former girlfriend,

Case 9:19-cv-80613-XXXX Document 1 Entered on FLSD Docket 05/07/2019 Page 1 of 8

Relief Defendant Kathy M. Micali (collectively "Relief Defendants"). Fettner, based on the

material, nonpublic information that he had obtained in breach of a duty of trust and confidence

to a life-long friend, also persuaded others to purchase shares of G&K common stock.

2. By engaging in the conduct described above, Feltner violated Section 10(b) of the

Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule lOb-5

promulgated thereunder [17 C.F.R. § 240.1Ob-5], and unless enjoined will continue to engage in

transactions, acts, practices, and courses of business similar to those alleged in this complaint.

3. The Commission seeks a final judgment enjoining Feltner from future violations

of these same provisions of law; ordering Feltner to pay a civil monetary penalty; and ordering

each of the Relief Defendants to disgorge the illicit gains she individually received, together with

prejudgment interest thereon.

JURISDICTION AND VENUE

4. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e),

21A(a)(1), and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), 78u-1(a)(1), and 78aa].

5. Feltner made use of the means and instrumentalities of interstate commerce or of

the mails, or of a facility of a national securities exchange, in connection with the transactions,

acts, practices, and courses of business alleged herein. Venue is proper in this District pursuant

to Section 27(a) of the Exchange Act [15 U.S.C. § 78aa(a)], because certain of the acts or

transactions constituting the violations of the federal securities laws alleged herein occurred

within the Southern District of Florida, including that Feltner placed a purchase order for G&K

common stock while he was in Boca Raton, Florida.

DEFENDANT

6. Defendant Brian Feltner, age 51, is a United States citizen who resides in

2


Henderson, Nevada.

RELIEF DEFENDANTS

7. Relief Defendant Liselotte Sandberg, age 50, resides in Boca Raton, Florida. She

is the ex-wife of Defendant Feltner. Fenner purchased G&K stock in Sandberg's brokerage

account.

8. Relief Defendant Kathy M. Micali, age 41, resides in Henderson, Nevada. She is

aformer girlfriend of Defendant Feltner. Feltner purchased G&K stock in Micali's brokerage

account.

RELATED ENTITIES

9. G&K was a Minnesota corporation, headquartered in Minnetonka, Minnesota. It

provided branded identity uniforms and facility products and services for rent and purchase.

During the relevant time, G&K's common stock was registered with the Commission pursuant to

Section 12(b) of the Exchange Act [15 U.S.C. § 78l(b)] and was listed on the Global Select

Market of The NASDAQ Stock Market LLC under the symbol "GK." G&K was acquired by

Cintas, and is now G&K Services, LLC, a wholly-owned subsidiary of that corporation. The

business combination was completed on March 21, 2017.

10. Cintas is a Washington corporation with its headquarters in Cincinnati, Ohio. It

provides businesses with such products and services as uniforms, floor care, restroom supplies,

first aid and safety products, fire extinguishers and testing, and safety and compliance training.

Cintas' common stock is registered with the Commission pursuant to Section 12(b) of the

Exchange Act [15 U.S.C. § 78l(b)] and is listed on the Global Select Market of The NASDAQ

Stock Market, LLC under the symbol "CTAS."


FACTUAL ALLEGATIONS

11. Officers of Cintas approached G&K in December 2015 about a possible business

combination. Talks broke off in January 2016, but resumed in May 2016 when Cintas submitted

a revised offer to G&K.

12. The Senior Vice President, Secretary, and General Counsel of Cintas (the

"General Counsel") was one of only a few Cintas senior officers that were aware of and

participated in the negotiations with G&K during this time.

13. In mid-June 2016, G&K provided the General Counsel with a draft nondisclosure

and standstill agreement for his review. The General Counsel took home a folder that included

that document and a few other merger-related documents. The folder was labeled with the code

name for the prospective merger and was kept on the desk in the General Counsel's home in a

room that served as the General Counsel's home office and den. On Monday, June 20, 2016, the

General Counsel executed the nondisclosure agreement on behalf of Cintas.

14. Fettner was along-time friend of the General Counsel. They attended middle

school and high school together and remained close friends thereafter. They have stayed in each

other's homes multiple times over the years. Whenever Feltner visited Cincinnati, he stayed at

the General Counsel's home, even if Feltner was in town to visit his parents.

15. On Tuesday, June 14, 2016, Fettner came to Cincinnati to play in a charity golf

tournament with the General Counsel. Fettner stayed at the General Counsel's home, and the

two played several rounds of golf over the next four days.

16. Early on the morning of June 15, Fettner went into the General Counsel's den to

change into his golf shoes. While there, Fettner saw the folder with the merger documents on the

desk and read at least some of the draft nondisclosure agreement between Cintas and G&K.

4


17. Fettner said nothing to his friend about having seen the merger documents in his

house, and the two left for the golf course.

18. Later that day, on the basis of what he had learned from the merger documents,

Fettner used a mobile device to purchase 4,000 shares of G&K common stock in a brokerage

account of his ex-wife (Sandberg). The shares had an aggregate cost of just over $300,000. The

next day, Fettner spent $160,000 to purchase another 1,500 shares of G&K in her account.

19. The charity golf tournament ended on Saturday June 19. The next morning

Fettner flew to Las Vegas and later that day spent $235,000 to purchase yet another 3,100 shares

of G&K in his ex-wife's account. On June 21, Feltner spent an additional $52,000 to purchase

another 700 shares of G&K in her account.

20. Fettner was not designated as having authority to trade in his ex-wife's account,

but in reality he was the only one who ever traded in the account. She allowed Fettner to make

all the trading decisions and to execute the trades in her account.

21. Feltner regularly had lunch with a girlfriend when he was home in Henderson,

Nevada. On Monday June 27, 2016, the girlfriend purchased 300 shares of G&K common stock

at an aggregate cost of $21,855. The girlfriend purchased the shares because Fettner persuaded

her to do so. Feltner had a history of providing financial advice to the girlfriend, and she had an

understanding with Fettner that he would reimburse her if she lost money because of his trading

advice.

22. On June 29, 2016, Fettner's father purchased 2,000 shares of G&K common stock

at an aggregate cost of approximately $149,000. His father purchased the shares because Fettner

persuaded his father to make the purchase.

23. On July 22, Fettner purchased 200 shares of G&K common stock in a brokerage


account of a former girlfriend (Micali), at an aggregate cost of $16,000. As with his ex-wife's

account, Feltner was not designated as having authority to trade in his former girlfriend's

account, but he is the only one who traded in it. The former girlfriend also had the understanding

that Fettner would reimburse her if she lost money on a trade in her account based on his trading.

24. On July 25, 2016, Feltner purchased an additional 300 shares of G&K common

stock in his ex-wife's account, at an aggregate cost of $24,300.

25. Fettner did not purchase G&K stock in any account of his own. He did not

receive proceeds from any of the G&K trades he placed or from any of the G&K trades he

persuaded others to place. Feltner did not inform the General Counsel about any of the G&K

stock purchases that he made, or that he persuaded others to make.

26. On August 16, 2016, prior to the opening of U.S. financial markets, G&K and

Cintas announced that the companies had entered into an Agreement and Plan of Merger,

pursuant to which Cintas would acquire G&K for $97.50 in cash per share of G&K common

stock.

27. On the day of the announcement, G&K common stock closed at $96.70 per share,

up approximately 17.7% from a closing price of $82.30 the previous day.

28. The aggregate amount of illicit profits from unlawful trades that Feltner placed, or

persuaded others to place, was at least $250,000.

CLAIM FOR RELIEF

29. Paragraphs 1 through 28 are re-alleged and incorporated by reference herein.

30. Fettner, knowingly or recklessly, by use and means or instrumentalities of

interstate commerce or of the mails or a facility of a national securities exchange, in connection

with the purchase or sale of G&K securities, directly or indirectly, employed devices, schemes,


or artifices to defraud, and engaged in acts, practices, or courses of business which would operate

as a fraud or deceit upon a person by purchasing and persuading others to purchase G&K

securities while in possession of material, nonpublic information that he surreptitiously obtained

by examining confidential transaction documents while a trusted guest in the General Counsel's

home, in breach of his duty of trust and confidence to his long-time friend.

31. By reason of the foregoing, Feltner violated Section 10(b) of the Exchange Act

[15 U.S.C. § 78j(b)] and Rule lOb-5 thereunder [17 C.F.R. § 240.1Ob-5].

32. Fettner's ex-wife received profits from the illicit G&K trades that Fenner placed

in her brokerage account. Fettner's ex-wife has no legitimate claim to those profits.

33. Fettner's former girlfriend received profits from the illicit G&K trades that

Fenner placed in her brokerage account. Fettner's former girlfriend has no legitimate claim to

those profits.

RELIEF REQUESTED

WHEREFORE, the Commission respectfully requests that this Court enter a Final

Judgment:

A. permanently restraining and enjoining Fenner from, directly or indirectly, engaging in

conduct in violation of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and

Exchange Act Rule lOb-5 [17 C.F.R. § 240.1Ob-5];

B. ordering Fenner to pay a civil penalty pursuant to Section 21A of the Exchange Act

[15 U.S.C. § 78u-1];

C. ordering Relief Defendant Sandberg and Relief Defendant Micali to each disgorge the

profits she individually received from Fettner's illicit conduct, together with

prejudgment interest thereon; and


D. granting such other and further relief as the Court may deem just, equitable, and

necessary.

Respectfully Submitted.

May 7, 2019 By: y

Christopher G. MargandSenior CounselSpecial Bar No. A5502526Direct Dial: (202) 551-4556E-mail mar an~dc(a~sec. ~ov

David FrohlichAssistant DirectorD.C. Bar No. 425928Direct Dial: (202) 551-4963E-mail: frohlichd(a~sec.gov

Attorneys for PlaintiffU.S. Securities and Exchange Commission100 F Street, N.E.Washington, DC 20549Telephone: (202) 551-6000Facsimile: (202) 772-9286


UNITED STATES DISTRICT COURTDISTRICT OF NEW JERSEY

UNITED STATES OF AMERICA : Hon. Mark Falk

v. : Mag. No. 19-3507

GENE LEVOFF : CRIMINAL COMPLAINT

I, Robert M. Napolitano, being duly sworn, state the following is true andcorrect to the best of my knowledge and belief:

SEE ATI’ACHMENT A

I further state that I am a Special Agent with the Federal Bureau ofInvestigation and that this Complaint is based on the following facts:

SEE A’fl’ACHMENT B

continued on the attached page and made a part hereof.

S ecial Agent Robert M. NapolitanoFederal Bureau of Investigation

Sworn to before me and subscribed in my presence,February 13, 2019 at Newark, New Jersey

HONORABLE MARK FALK

______________________________

UNITED STATES MAGISTRATE JUDGE Si nature of Judicial Officer

Case 2:19-mj-03507-MF Document 1 Filed 02/13/19 Page 1 of 18 PageID: 1

ATTACHMENT A

Count One(Securities Fraud)

From in or around February 2011 through in or around April 2016, inHudson County, in the District of New Jersey, and elsewhere, defendant

GENE LEVOFF

did unlawfully, willfully, and knowingly, directly and indirectly, by the use ofthe means and instrumentalities of interstate commerce, and the mails and ofthe facilities of national securities exchanges, in connection with the purchaseand sale of securities, use and employ manipulative and deceptive devices andcontrivances, in violation of Title 17, Code of Federal Regulations, Section240. iOb-5, by (a) employing devices, schemes, and artifices to defraud; (b)making untrue statements of material facts and omitting to state material factsnecessary in order to make the statements made, in the light of thecircumstances under which they were made, not misleading; and (c) engagingin acts, practices, and courses of business which operated and would operateas a fraud and deceit upon persons, to wit: by executing and causing others toexecute securities fransactions in the securities of Company-i on the basis ofmaterial nonpublic information concerning Company-i in breach of a duty oftrust and confidence that was owed directly, indirectly, and derivatively to theissuers of those securities, the shareholders of the issuers, and to otherpersons who were the source of the material nonpublic information.

In violation of Title 15, United States Code, Sections 78j(b) and 78ff, Title17, Code of Federal Regulations, Section 240. iob-5 and 240. iOb5-2, and Title18, United States Code, Section 2.


ATTACHMENT B

I, Robert M. Napolitano, am a Special Agent with the Federal Bureau ofInvestigation (“FBI”). I am fully familiar with the facts set forth herein based onmy own investigation, my conversations with law enforcement officers,witnesses, and others, and my review of reports, documents, and items ofevidence. Because this Complaint is being submitted for a limited purpose, Ihave not set forth each and every fact that I know concerning thisinvestigation. Where statements of others are related herein, they are relatedin substance and in part. Where I assert that an event took place on aparticular date, I am asserting that it took place on or about the date alleged.All times are approximate and, unless otherwise noted, are in the Pacific TimeZone.

Background Information

1. At all times relevant to this Complaint:

a. Company-i was a global technology company headquarteredin Cupertino, California that designed, developed, and sold consumerelectronics, computer software, and online services. Company-i was a publiclytraded company whose securities were listed on the NASDAQ Stock Market. Interms of market capitalization, Company-i was consistently among the mostvaluable companies in the world.

b. Defendant GENE LEVOFF (“LEVOFF”) was employed byCompany-i at its headquarters in Cupertino. From in or around 2008 throughin or around 2013, LEVOFF, an attorney, was the Director of Corporate Law atCompany-i. From in or around 2013 through his termination in or aroundSeptember 2018, LEVOFF was the Senior Director of Corporate Law atCompany-i. In that role, LEVOFF functioned as the top corporate attorney atCompany-i, reporting directly to Company-i’s General Counsel. Among otherthings, LEVOFF was responsible for overseeing Company-i’s compliance withsecurities laws, which included advising others regarding U.S. Securities andExchange Commission (the “SEC”) filings and financial reporting. In or aroundFebruary 20i8, Company-i named LEVOFF its Corporate Secretary, a title hemaintained until his termination. Before that, LEVOFF held the role ofAssistant Secretary. from in or around September 2008 through in or aroundJuly 20i8, LEVOFF served on Company-i’s Disclosure Committee, and, as aresult, had access to and obtained Company-i’s draft SEC filings and earningsmaterials before Company-i disclosed its quarterly and yearly financial resultsto the public. LEVOFF served as one of the Disclosure Committee’s cochairpersons from in or around December 2012 through in or around July2018.


c. first Republic Securities Company, LLC (“first Republic”)was a brokerage firm based in San Francisco, California that provided variousinvestment services, including online investing. LEVOFF maintained anaccount with First Republic (the “first Republic Account”) that he used, amongother things, to buy and sell securities, including Company-i stock.

d. TD Ameritrade was a brokerage firm based in Omaha,Nebraska that provided online investing services for institutions andindividuals. LEVOFF maintained a brokerage account with TD Ameritrade (the“TD Ameritrade Brokerage Account”) that he used, among other things, to buyand sell securities, including Company-i stock.

e. Virtu Americas, LLC, f/k/a KCG Americas LLC, f/k/a KnightCapital Markets (“Virtu”) was a market maker — i.e., a firm that stands ready tobuy and sell a particular stock on a regular and continuous basis at a publiclyquoted price, thus providing liquidity to the market. The servers that housedVirtu’s electronic trading systems and executed trades involving those systemswere located in Jersey City, New Jersey.

f. Susquehanna International Group, f/k/a Gi ExecutionServices, LLC (“Gi”) was a market maker. The servers that housed Gi’selectronic trading systems and executed trades involving those systems werelocated in Secaucus, New Jersey.

g. BNY Mellon Capital Markets, LLC (“BNY Mellon”) was amarket maker. The third-party affiliate servers that housed BNY Mellon’selectronic trading systems were located in Carteret, New Jersey.

h. Two Sigma Securities, LLC (“Two Sigma”) was a marketmaker. The servers that housed Two Sigma’s electronic trading systems andexecuted trades involving those systems were located in Secaucus, New Jersey.

The Insider Trading Scheme

2. From in or around February 2011 through in or around April2016, LEVOFF orchestrated a scheme to defraud Company-i and itsshareholders by misappropriating material nonpublic information regardingCompany- i’s financial results in order to execute favorable trades involving thesecurities of Company-i. These trades caused LEVOFF to realize profits ofapproximately $227,000 and to avoid losses of approximately $377,000.

3. In particular, LEVOFF used his position as a member and/or aninvitee of Company-i’s Disclosure Committee to obtain material nonpublicinformation regarding Company- i’s financial results before Company-idisclosed that information to the public.

2


4. LEVOFF converted the material nonpublic information to his ownuse by executing trades involving Company-i stock in the TD AmeritradeBrokerage Account and/or the first Republic Account before Company-idisclosed its financial results to the public. When LEVOFF discovered thatCompany-i had posted strong revenue and net profit for a given fmancialquarter, he purchased large quantities of Company-i stock, which he later soldfor a profit once Company-i disclosed the positive earnings information to thepublic and the market reacted to the news. Conversely, when LEVOFF learnedthat Company- i had posted lower-than-anticipated revenue and net profit, hesold large quantities of Company-i stock, thus avoiding the significant lossesthat would occur once Company-i disclosed the information to the public andthe market reacted to the negative news regarding Company-i’s earnings.

5. A number of the trades referenced in this Complaint were executedwith market maker counterparties whose electronic trading systems and/orservers were located in the District of New Jersey, namely, Virtu, G 1, BNYMellon, and Two Sigma.

6. When LEVOFF executed each of the trades described in thisComplaint, he was subject to a regular company-imposed “blackout period”that prohibited him and others like him with access to material nonpublicinformation regarding Company-i from engaging in trades involving Companyi stock. LEVOFF ignored this restriction, as well as Company- i’s InsiderTrading Policy, and instead repeatedly executed trades based on materialnonpublic information without Company- i’s knowledge or authorization.

Company-i’s Periodic SEC Filings, Public Disclosuresof Financial Results, and the Disclosure Committee

7. At all times relevant to this Complaint, Company-i divided itsfinancial year into four quarters that each consisted of three calendar months:

or first quarter (October, November, December); “Q2” or second quarter(January, February, March); “Q3” or third quarter (April, May, June); and “Q4”or fourth quarter (July, August, September). As with other publicly tradedcompanies, Company-i was required to file quarterly form iO-Q reports andannual Form 10-K reports with the SEC. Among other things, Company-i’speriodic SEC filings contained information regarding Company- i ‘s quarterlyand yearly financial results. Once filed, Company- i’s SEC filings wereavailable online to the public.

8. Company-i typically disclosed its quarterly and yearly financialresults to the public shortly before its SEC filings. Company-i announced itsearnings via press releases and executive remarks, which occurred in oraround the following dates each financial year: late-January or early-february(Q 1 financial results); late-April or early-May (Q2 financial results); late-July or

3


early-August (Q3 financial results); and late-October or early-November (Q4and yearly financial results).

9. At all times relevant to this Complaint, Company-i had aDisclosure Committee that reviewed and discussed Company-i’s draft SECfilings and its draft public disclosures of financial results before they were filedwith the SEC and/or disclosed to the public. The composition of theDisclosure Committee changed over time, but its members typically consistedof high-level executives within Company-i, including Vice Presidents andDirectors of various groups. The Disclosure Committee also included various“invitees,” who were typically high-ranking employees within those groups. Atany given point, the Disclosure Committee’s members and invitees generallytotaled approximately fourteen to approximately eighteen individuals.

iO. At all times relevant to this Complaint, LEVOFF was a memberand/or an invitee of the Disclosure Committee. Beginning in or aroundDecember 2012 and continuing through in or around July 2018, LEVOFF ledthe Disclosure Committee, serving as one of its co-chairpersons.

1 1. The Disclosure Committee typically met one or two weeks beforeCompany-i filed its Form iO-Q/Form iO-K reports with the SEC and/ordisclosed its financial results to the public. The Disclosure Committeemeetings took place at Company- i ‘s headquarters in Cupertino, although someDisclosure Committee members and/or invitees participated in meetings bytelephone. During the meetings, Disclosure Committee members and inviteesreviewed and discussed Company-i’s draft SEC filings and/or draft earningsmaterials that would later be disclosed to the public.

12. A few days before each Disclosure Committee meeting, DisclosureCommittee members and invitees received an email or series of emailsattaching Company-i’s draft SEC filings and/or draft earnings materials,which included information regarding Company- i’s financial results.

i 3. The information regarding Company- i’s financial results thatDisclosure Committee members and invitees received by email, and laterreviewed and discussed during Disclosure Committee meetings, was materialnonpublic information. The information ceased being material nonpublicinformation only after Company-i disclosed the information to the public inSEC filings and/or through press releases.

i4. As a Disclosure Committee member and high-ranking Company-iemployee, LEVOFF owed a fiduciary duty to Company-i and its shareholders toprotect material nonpublic information regarding Company- i to which he hadaccess. LEVOFF further owed Company-i and its shareholders a duty not touse such material nonpublic information for his own personal benefit.

4


Company-i’s Insider Trading Policy and Regular Blackout Periods

15. At all times relevant to this Complaint, Company-i prohibited itsofficers, directors, employees, consultants, independent contractors, and theirimmediate families from engaging in insider trading. Company-i memorializedthis prohibition against insider trading in its “Insider Trading Policy,” whichCompany-i periodically amended. Two Insider Trading Policies were in effectduring the time period covered by this Complaint: an Insider Trading Policydated August 21, 2003 (the “August 2003 Insider Trading Policy”) and, later, anInsider Trading Policy dated September 2015 (the “September 2015 InsiderTrading Policy”).

16. Company-i’s August 2003 Insider Trading Policy prohibited anyofficer, director, employee, consultant, independent contractor, or immediatefamily member who received or had access to material nonpublic informationregarding Company-i from engaging “in any transaction involving a purchaseor sale of [Company- i’s] securities” from the date he or she possessed materialnonpublic information until either sixty hours after public disclosure of theinformation or at such time as the nonpublic information was no longermaterial. Similarly, the September 2015 Insider Trading Policy prohibitedindividuals from “buy[ing] or sell[ing] [Company-i] stock when aware ofinformation that ha[dJ not been publicly announced and that could have amaterial effect on the value of the stock” until either twenty-four hours afterpublic disclosure or when the information was no longer material.

17. The August 2003 and September 2015 Insider Trading Policieseach identified Company-i’s “financial results” among the various categories ofsensitive material information that could form the basis of insider trading. TheAugust 2003 and September 2015 Insider Trading Policies also warnedemployees that engaging in transactions involving Company-i’s stock while inpossession of material nonpublic information regarding Company-i violatedfederal securities laws.

18. Since at least in or around 2010, LEVOFF had responsibility forensuring compliance with Company- i’s Insider Trading Policy. In or around2015, LEVOFF initiated and oversaw an update of the policy that resulted inthe revised September 2015 Insider Trading Policy.

19. At all times relevant to this Complaint, Company-i instituted aregular “blackout period” ahead of its public disclosure of Company- i’speriodic financial results. During these blackout periods, individuals likely topossess material nonpublic information regarding Company-i — sometimesreferred to as “insiders” — were prohibited from buying or selling Company-isecurities. Company-i’s blackout periods generally began on the first day ofthe last month of a fiscal quarter — i.e., December/Qi, March/Q2, June/Q3,and September/Q4 - and ended either sixty or twenty-four hours (depending

5


on the Insider Trading Policy in effect at the time) after Company-i publiclydisclosed its periodic financial results in a press release.

20. Prior to each blackout period, Company-i sent an email toindividuals subject to the blackout period notifying them (i) that they weresubject to the blackout period and therefore prohibited from buying or sellingCompany-i stock during that period, and (ii) of the dates the blackout periodbegan and ended. The blackout period emails also reiterated and summarizedCompany- l’s prohibition against insider trading.

21. At certain times relevant to this Complaint, LEVOFF’s complianceresponsibilities in connection with insider trading included notifyingindividuals subject to the blackout period or supervising individuals who madethe notifications. On several occasions, LEVOFF authored and disseminatedthe blackout period notification emails himself. LEVOFF also played a role indetermining who should be placed on the blackout list.

22. At all times relevant to this Complaint, LEVOFF — a memberand/or an invitee of the Disclosure Committee with access to materialnonpublic information regarding Company-i — was subject to Company-i’sblackout periods. As with other insiders, Company-i notified LEVOFF by emailthat he was subject to the blackout periods and of the specific dates of theblackout periods.

23. At no time relevant to this Complaint was LEVOFF authorized byCompany-i or by any other entity to buy or sell Company-i stock while inpossession of material nonpublic information regarding Company-i, nor washe authorized to buy or sell Company-i stock during any applicable blackoutperiod.

LEVOFF Trades Ahead of Company-i’s02 2011 Earnings Announcement

24. The blackout period for Q2 2011 began on or about March i, 2011and ended on or about April 25, 201 i (the “Q2 2011 Blackout Period”).

25. On or about February 24, 2011, LEVOFF sent an email toindividuals subject to the Q2 2011 Blackout Period bearing the subject line,“Commencement of Trading Blackout - March 1, 2011.” In the email, LEVOFF— who was himself subject to the Q2 2011 Blackout Period — notified therecipients that, starting on or about March 1, 2011, they and their immediatefamily members were prohibited from engaging in “any transactions in[Company-il securities” until sixty hours after Company-i announced itsquarterly earnings in or around April 2011. LEVOFF stated in the email thatCompany- i’s Insider Trading Policy prohibited individuals from buying orselling Company-i stock if they possessed material nonpublic information

6


regarding Company-i. Specifically, LEVOFF wrote: “Pursuant to [Company-i’s]Insider Trading Policy, you are prohibited from any transactions in [Company-1] securities if you possess or have access to material nonpublic informationregarding [Company- 1].” To emphasize that Company- l’s prohibition againstinsider trading applied regardless of whether a blackout period was in place,LEVOFF wrote at the top of the email, in capitalized letters: REMEMBER,TRADING IS NOT PERMITTED, WHETHER OR NOT IN AN OPEN TRADINGWINDOW, IF YOU POSSESS OR HAVE ACCESS TO MATERIAL INFORMATIONTHAT HAS NOT BEEN DISCLOSED PUBLICLY ***“ LEVOFF concluded theemail by reiterating that trading on material nonpublic information wasimpermissible and encouraged the recipients to contact a Company-i employeeto discuss any questions they had regarding the policy.

26. On or about April 8, 2011, members and invitees of the DisclosureCommittee, including LEVOFF, received an email attaching Company-i’s draftForm i0-Q report for Q2 2011. The draft Form 10-Q report containedinformation about Company- i’s earnings, including revenue and net profit forQ2 2011.

27. Several hours later, members and invitees of the DisclosureCommittee, including LEVOFF, received an email attaching draft earningsmaterials for Q2 2011, including a draft press release, financials, and preparedexecutive remarks.

28. On or about April ii, 2011, the Disclosure Committee met atCompany-i’s headquarters in Cupertino. LEVOFF attended the meeting inperson as a Disclosure Committee invitee. During the meeting, DisclosureCommittee members and invitees reviewed and discussed Company-i’sproposed Q2 2011 disclosures, including its draft Form iO-Q report and itsdraft press release regarding earnings.

29. On or about April 13, 2011, LEVOFF purchased approximately3,140 shares of Company-i stock in the TD Ameritrade Brokerage Account.LEVOFF purchased the Company-i stock at an average price of approximately$334.47 per share, for a total cost of more than approximately $1 million. Atthe time he purchased the Company-i stock, LEVOFF possessed materialnonpublic information regarding Company-i and was subject to the Q2 2011Blackout Period.

30. On or about April 20, 2011, at approximately 1:30 p.m., Companyi issued a press release disclosing its Q2 2011 financial results to the public.In the April 20, 2011 press release, Company-i announced that it had postedrecord revenue and net profit for Q2 2011. Company-i’s CEO remarked in theposting that Company-i was “firing on all cylinders.”

7


31. Later the same day, LEVOFF sold approximately 3,500 shares ofCompany-i stock in the TD Arneritrade Brokerage Account while he was stillsubject to the Q2 2011 Blackout Period. LEVOFF sold the Company-i sharesat an average price of approximately $353.85 per share. By virtue of his salesof Company-i stock on or about April 20, 201i, LEVOFF realized a profit ofapproximately $60,000.

32. On or about April 22, 2011, LEVOFF sent an email to individualssubject to the Q2 2011 Blackout Period notifying them that the blackout periodwould end on or about April 25, 2011. LEVOFF told the email recipients theycould resume trading Company-i securities on the specified date andreiterated Company- i’s prohibition against insider trading. LEVOFF wrote inthe email: “This information is provided to you in an effort to protect you and[Company-i] from any violations of federal. . . securities laws that may resultfrom a failure to comply with those laws.”

LEVOFF Trades Ahead of Company-i’sQ3 2011 Earnings Announcement

33. The blackout period for Q3 2011 began on or about June 1, 2011and ended on or about July 22, 2011 (the “Q3 2011 Blackout Period”).

34. On or about May 27, 2011, LEVOFF sent an email to individualssubject to the Q3 2011 Blackout Period with the subject line, “Commencementof Trading Blackout - June 1, 2011.” LEVOFF was again among theindividuals subject to the Q3 2011 Blackout Period. In the email — which,except for the dates of the applicable blackout period, was virtually identical tohis February 24, 2011 email — LEVOFF notified the recipients that they andtheir immediate family members were prohibited from trading in Company-isecurities starting on or about June 1, 2011 until sixty hours after Company-iannounced its quarterly earnings in or around July 2011. LEVOFF stated inthe email — as he had in his February 24, 2011 email — that Company-i’sInsider Trading Policy prohibited individuals who possessed or had access tomaterial nonpublic information regarding Company-i from buying or sellingCompany-i stock, regardless of whether a blackout period was in place.

35. On or about July 8, 2011, members and invitees of the DisclosureCommittee, including LEVOFF, received an email attaching draft earningsmaterials for Q3 201 1, including a draft press release, financials, and preparedexecutive remarks.

36. Several hours later, members and invitees of the DisclosureCommittee, including LEVOFF, received an email attaching Company- l’s draftForm iO-Q report for Q3 2011. The draft Form iO-Q report containedinformation about Company-i ‘s earnings, including revenue and net profit for

8


Q3 2011. Soon after receiving this material nonpublic information, LEVOFFbegan purchasing Company-i stock.

37. On or about July 11, 2011, at approximately 6:40 a.m., LEVOFFpurchased approximately 850 shares of Company-i stock in the TD AmeritradeBrokerage Account at an average price of approximately $357.76 per share. Atthe time he made the purchases, LEVOFF possessed material nonpublicinformation regarding Company-i and was also subject to the Q3 2011Blackout Period.

38. At approximately 8:00 a.m. the same day, LEVOFF attended aDisclosure Committee meeting at Company- l’s Cupertino headquarters as aninvitee. During the meeting, the Disclosure Committee members and inviteesreviewed and discussed Company-i’s draft Form 1 0-Q report and draftearnings materials for Q3 2011.

39. The following day, on or about July 12, 2011, LEVOFF purchasedapproximately 860 shares of Company-i stock in the TD Ameritrade BrokerageAccount.

40. On or about July 14, 2011, LEVOFF purchased approximately 600shares of Company-i stock in the TD Ameritrade Brokerage Account.



43. On or about July 19, 2011, LEVOFF purchased approximately 326shares of Company- i stock in the TD Ameritrade Brokerage Account.

44. Between on or about July 11,2011 and on or about July 19, 2011,LEVOFF purchased approximately 3,936 shares of Company-i stock at averageprices ranging from approximately $354.58 to approximately $374.80 pershare. LEVOFF paid nearly $1.4 million for the Company-i stock. At the timehe purchased the shares, LEVOFF was in possession of material nonpublicinformation regarding Company-i and was subject to the Q3 2011 BlackoutPeriod.

45. On or about July 19, 2011, at approximately 1:30 p.m., Company1 issued a press release disclosing its Q3 2011 financial results to the public.The public disclosure announced that Company-i had again posted recordrevenue and net profit for Q3 2011. Company- i’s CEO remarked in the July19, 2011 press release that Company-i was “thrilled to deliver [its] best quarterever.”

9


46. Later the same day, LEVOFF began selling Company-i securities.By the time he was finished, LEVOFF had liquidated approximately 3,936shares of Company-i stock - the same number of shares LEVOFF hadpurchased in the days leading up to Company-i’s July 19, 2011 press release.LEVOFF sold the 3,936 shares at an average price of approximately $397.88per share, well above the prices he had paid for an equal number of Company1 shares days earlier. As a result of his sales of Company-i stock on or aboutJuly 19, 2011 — when he was still subject to the Q3 2011 Blackout Period —

LEVOFF realized a profit of approximately $144,000.

47. On or about July 21, 2011, LEVOFF sent an email notifyingindividuals subject to the Q3 2011 Blackout Period that the trading restrictionwould end on or about July 22, 2011. LEVOFF reminded the recipients thatthey were prohibited from trading Company-i stock if they had access tomaterial nonpublic information regarding Company-i and that such conductviolated federal securities laws.

LEVOFF Trades Ahead of Company-i’sQi 2012 Earnings Announcement

48. The blackout period for Qi 2012 began on or about December 1,201i and ended on or about January 27, 2012 (the “Qi 2012 BlackoutPeriod”).

49. On or about November 28, 2011, a Company-i employee sent anemail to individuals subject to the Qi 2012 Blackout Period, includingLEVOFF. The email — which had the subject line, “Commencement of TradingBlackout — December 1, 201 1” — notified the recipients that they and theirimmediate family members were prohibited from engaging in any transactionsinvolving Company-i stock beginning on or about December 1, 2011 andending sixty hours after Company-i announced its earnings in or aroundJanuary 2012. The email stated that Company-i’s Insider Trading Policyprohibited individuals who possessed or had access to material nonpublicinformation regarding Company-i from buying or selling Company-i stock,regardless of whether a blackout period was in place.

50. On or about January 13, 2012, members and invitees of theDisclosure Committee, including LEVOFF, received an email attaching draftearnings materials for Q 1 2012, including a draft press release, financials, andprepared executive remarks.

51. Several hours later, members and invitees of the DisclosureCommittee, including LEVOFF, received an email attaching Company- i’s draftForm iO-Q report for Qi 2012. The draft Form 10-Q report containedinformation about Company-i’s earnings, including revenue and net profit forQi 2012.

10


52. On or about January 16, 2012, the Disclosure Committee met atCompany- l’s headquarters in Cupertino. LEVOFF attended the meeting inperson as a Disclosure Committee invitee. During the meeting, members andinvitees of the Disclosure Committee discussed Company-i’s draft Form 10-Qreport and draft earnings materials for Qi 2012. After the DisclosureCommittee meeting, LEVOFF began purchasing Company-i securities, all inthe TD Ameritrade Brokerage Account.

53. On or about January 20, 2012, LEVOFF purchased approximately800 shares of Company-i stock at an average price of approximately $423.36per share.

54. On or about January 23, 2012, LEVOFF purchasedapproximately 250 additional shares of Company-i stock at an average price ofapproximately $427.50 per share.

55. On or about the morning of January 24, 2012, LEVOFF purchasedanother approximately 528 shares of Company-i stock at an average price ofapproximately $423.98 per share.

56. Together, LEVOFF paid a total of approximately $669,000 toacquire approximately 1,578 shares of Company-i stock. At the time of thepurchases, LEVOFF possessed material nonpublic information regardingCompany-i and was subject to the Qi 2012 Blackout Period.

57. On or about January 24, 2012, at approximately 1:30 p.m.,Company-i issued a press release disclosing its Qi 2012 financial results tothe public. The January 24, 2012 press release heralded Company-i’s recordrevenue and net profit for the quarter, which Company-i’s CEO credited toCompany-i’s “record-breaking sales” of Company-i products.

58. Later the same day, LEVOFF began selling shares of Company-istock. LEVOFF sold approximately 666 shares of Company-i stock at anaverage price of approximately $454.11 per share, well above the pricesLEVOFF had paid days before. By virtue of LEVOFF’s sales on or aboutJanuary 24, 2012 — which occurred when he was still subject to the Qi 2012Blackout Period — LEVOFF realized a profit of approximately $19,000.

59. On or about January 26, 2012, a Company-i employee sent anemail to individuals subject to the Qi 2012 Blackout Period, includingLEVOFF, advising them that the trading restriction would end on or aboutJanuary 27, 2012. The email went on to reiterate Company-i’s prohibitionagainst insider trading, regardless of whether a blackout period was in place.

11



60. The blackout period for Q3 2015 began on or about June 1, 2015and ended on or about July 24, 2015 (the “Q3 2015 Blackout Period”).

61. On or about May 26, 2015, Company-i sent an email toindividuals subject to the Q3 2015 Blackout Period, including LEVOFF. Theemail notified the recipients that they and their immediate family memberswere prohibited from buying or selling Company-i stock beginning on or aboutJune 1, 2015 until sixty hours after Company-i released its earnings to thepublic in or around July 2015. The email stated that Company-i’s InsiderTrading Policy prohibited individuals who possessed or had access to materialnonpublic information regarding Company-i from buying or selling Company-istock, regardless of whether a blackout period was in place, and provided anemail address and phone number to contact with questions.

62. On or about July 10, 2015, members and invitees of the DisclosureCommittee, including LEVOFF, received an email attaching draft earningsmaterials for Q3 2015, including a draft press release, financials, and preparedexecutive remarks.

63. Several hours later, members and invitees of the DisclosureCommittee, including LEVOFF, received an email attaching Company- i’s draftForm i0-Q report for Q3 2015. The email read: “Each Disclosure Committeemember is required to review the entire Form iO-Q to ensure the Company’sdisclosures are complete and accurate.” Among other things, the attacheddraft Form 10- Q contained information about Company-i’s earnings, includingCompany-i’s revenue and net profit for Q3 2015.

64. On or about July 13, 2015, the Disclosure Committee met atCompany- l’s headquarters in Cupertino. LEVOFF was one of the two cochairpersons of the Disclosure Committee and participated in the meeting bytelephone. During the meeting, Disclosure Committee members and inviteesreviewed and discussed Company- i’s draft earnings materials and draft FormiO-Q report for Q3 2015. After the Disclosure Committee meeting, LEVOFFbegan selling Company-i securities.

65. On or about July 17, 2015, LEVOFF sold approximately 43,750shares of Company-i stock in the TD Ameritrade Brokerage Account at anaverage price of approximately $129 per share. Virtu acted as a counterpartyfor some of these trades.

66 That same day, LEVOFF sold approximately 8,700 shares ofCompany-i stock in the First Republic Account at an average price of

12


approximately $128.94 per share. BNY Mellon acted as a counterparty forsome of these trades.

67. On or about July 20, 2015, LEVOFF sold approximately 7,000more shares of Company-i stock in the TD Ameritrade Brokerage Account atan average price of approximately $131.54 per share. G 1 and Virtu each actedas counterparties for some of these trades.

68. On or about July 21, 2015, LEVOFF sold approximately 17,678shares of Company-i stock in the TD Ameritrade Brokerage Account at anaverage price of approximately $131.07 per share. Virtu and Two Sigma eachacted as counterparties for some of these trades.

69. From on or about July 17, 2015 through on or about July 21,2015, LEVOFF sold approximately 77,128 shares of Company-i stock forapproximately $10 million. At the time of the sales, LEVOFF was in possessionof material nonpublic information regarding Company-i and was subject to Q32015 Blackout Period.

70. On or about July 21, 2015, at approximately 1:30 p.m. — afterLEVOFF had sold his final shares of Company-i stock that day - Company-iissued a press release disclosing its Q3 2015 financial results to the public.The July 21, 2015 press release disclosed revenue and profit below what manyanalysts had predicted, causing Company- l’s stock price to decline by nearly4.2 percent by the close of trading the following day.

71. As a result of LEVOFF’s sale of approximately 77,128 shares ofCompany-i stock ahead of Company-i’s July 21, 2015 press release — when hewas still subject to the Q3 2015 Blackout Period — LEVOFF avoided a loss ofapproximately $345,000.

72. On or about July 23, 2015, Company-i sent an email toindividuals subject to the Q3 2015 Blackout Period, including LEVOFF, statingthat the trading restriction would end the following day, on or about July 24,2015.


73. The blackout period for Q4 2015 began on or about September 1,2015 and ended on or about October 29, 2015 (the “Q4 2015 Blackout Period”).

74. On or about August 27, 2015, Company-i sent an email toindividuals subject to the Q4 2015 Blackout Period, including LEVOFF, withthe subject line, “Commencement of Trading Blackout — Tuesday, September 1,2015.” The email notified the recipients that they and their immediate family

13


members were prohibited from buying or selling Company-i stock beginning onor about September 1, 2015 until sixty hours after Company-i released itsearnings to the public in or around October 2015. The email stated thatCompany-i’s Insider Trading Policy prohibited individuals who possessed orhad access to material nonpublic information regarding Company-i frombuying or selling Company-i stock, regardless of whether a blackout periodwas in place, and provided an email address and phone number to contactwith questions.

75. On or about October 12, 2015, members and invitees of theDisclosure Committee, including LEVOFF, received an email attachingCompany-i’s draft Form 10-K report for financial year 2015. The email statedthat Disclosure Committee members were required to review “the entire Form10-K” to ensure the disclosures it contained were complete and accurate.Among other things, the draft Form 10-K contained information aboutCompany- i’s earnings, including revenue and net profit for financial year2015.

76. On or about October 13, 2015, members and invitees of theDisclosure Committee, including LEVOFF, received an email attaching draftearnings materials for Q4 20i5, including a draft press release, financials, andprepared executive remarks.

77. On or about October 15, 2015, Disclosure Committee membersand invitees met at Company- i’s headquarters in Cupertino to discuss thedraft Form 10-K report. LEVOFF did not attend the meeting or participate bytelephone.

78. On or about October 26, 2015, LEVOFF purchased approximatelyiO,000 shares of Company-i stock in the TD Ameritrade Brokerage Account atan average price of approximately $115.70 per share for a cost ofapproximately $1.15 million. At the time he purchased the Company- isecurities, LEVOFF possessed material nonpublic information regardingCompany-i and was subject to the Q4 2015 Blackout Period. Two Sigma actedas a counterparty for some of these trades.

79. On or about the morning of October 27, 2015, Company-i sent anemail to individuals subject to the Q4 20i5 Blackout Period, includingLEVOFF, informing them that they could resume trading Company-i securitieson or about October 29, 2015. (Company-i’s September 2015 Insider TradingPolicy reduced the waiting period from sixty hours after Company-i disclosedearnings to twenty-four hours.) The email also reiterated Company- i’sstandard prohibition against trading on material nonpublic information.

80. At approximately 1:30 p.m. that afternoon, Company-i issued apress release disclosing its Q4 2015 financial results to the public. In the

14


October 27, 2015 press release, Company-i announced that Company-i hadposted record fourth quarter results, and Company-i’s CEO remarked in thedisclosure that “Fiscal 2015 was [Company-i’sJ most successful year ever.”

81. On or about October 28, 2015 — before the Q4 2015 BlackoutPeriod had terminated — LEVOFF sold approximately 12,174 shares ofCompany-i stock in the TD Ameritrade Brokerage Account at an average priceof approximately $116.20 per share, for a profit of approximately $4,700.


82. The blackout period for Q2 2016 began on or about March 1, 2016and ended on or about April 28, 2016 (the “Q2 2016 Blackout Period”).

83. On or about february 25, 2016, Company-i sent an email toindividuals subject to the Q2 2016 Blackout Period, including LEVOFF. Theemail — which had the subject line, “Commencement of Trading Blackout —

Tuesday, March 1, 2016” — notified the recipients that they and theirimmediate family members were prohibited from engaging in any transactionsinvolving Company-i stock beginning on that date until twenty-four hoursafter Company released its earnings in or around April 2016. The email statedthat Company- i’s Insider Trading Policy prohibited individuals who possessedor had access to material nonpublic information regarding Company-i frombuying or selling Company-i stock, regardless of whether a blackout periodwas in place, and provided an email address and phone number to contactwith questions.

84. On or about April 8, 2016, members and invitees of the DisclosureCommittee, including LEVOFF, received an email attaching Company-i’s draftForm 10-Q report for Q2 2016. The draft Form iO-Q contained informationabout Company- l’s earnings, including revenue and net profit for Q2 2016.

85. On or about April 15, 2016, members and invitees of theDisclosure Committee, including LEVOFF, received an email attaching draftearnings materials for Q2 2016, including a draft press release, financials, andprepared executive remarks.

86. Later the same day, the Disclosure Committee met at Company-i’sheadquarters in Cupertino. LEVOFF, as one of the Disclosure Committee’s cochairpersons, attended the meeting in person. During the meeting, theDisclosure Committee reviewed and discussed Company-i’s draft earningsmaterials for Q2 2016.

87. On or about April 21, 2016, LEVOFf sold approximately 4,009shares of Company-i stock in the TD Ameritrade Brokerage Account at an

15


average price of approximately $105.87 per share. At the time, LEVOFFpossessed material nonpublic information regarding Company-i and wassubject to the Q2 2016 Blackout Period. 01 acted as a counterparty for someof these trades.

88. On or about April 26, 2016, at approximately 1:30 p.m., Company-1 issued a press release disclosing its Q2 2016 financial results to the public.Company-i announced in the April 26, 2016 press release that its revenue andnet profit were each down compared to Q2 2015. Company-i’s CEO remarkedin the press release that Company-i’s team had “executed extremely well in theface of strong macroeconomic headwinds.” By the close of trading the followingday, Company- l’s stock price had fallen approximately 6.2 percent.

89. By virtue of his sales of Company-i stock on or about April 21,2016 — while he possessed material nonpublic information regarding Companyl’s earnings — LEVOFF avoided a loss of approximately $32,000.

90. On or about April 27, 2016, Company-i sent an email toindividuals subject to the Q2 2016 Blackout Period, including LEVOFF. Theemail announced that the recipients could resume trading Company-isecurities on or about April 28, 2016.

16


11/18/2019 Dirks v. SEC, 463 US 646 - Supreme Court 1983 - Google Scholar

https://scholar.google.com/scholar_case?case=9447915731521086485&q=dirks&hl=en&as_sdt=2006 1/14

463 U.S. 646 (1983)

DIRKSv.

SECURITIES AND EXCHANGE COMMISSION

No. 82-276.

Argued March 21, 1983Decided July 1, 1983

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

Supreme Court of United States.

*648 David Bonderman argued the cause for petitioner. With him on the briefs were Lawrence A. Schneider and EricSummergrad.

648

Paul Gonson argued the cause for respondent. With him on the brief were Daniel L. Goelzer, Jacob H. Stillman, and

Whitney Adams.[*]

Edward H. Fleischman, Richard E. Nathan, Martin P. Unger, and William J. Fitzpatrick filed a brief for the Securities IndustryAssociation as amicus curiae.

JUSTICE POWELL delivered the opinion of the Court.

Petitioner Raymond Dirks received material nonpublic information from "insiders" of a corporation with which he had noconnection. He disclosed this information to investors who relied on it in trading in the shares of the corporation. Thequestion is whether Dirks violated the antifraud provisions of the federal securities laws by this disclosure.

I

In 1973, Dirks was an officer of a New York broker-dealer firm who specialized in providing investment analysis of insurance

company securities to institutional investors.[1] On *649 March 6, Dirks received information from Ronald Secrist, a formerofficer of Equity Funding of America. Secrist alleged that the assets of Equity Funding, a diversified corporation primarilyengaged in selling life insurance and mutual funds, were vastly overstated as the result of fraudulent corporate practices.Secrist also stated that various regulatory agencies had failed to act on similar charges made by Equity Funding employees.He urged Dirks to verify the fraud and disclose it publicly.

649

Dirks decided to investigate the allegations. He visited Equity Funding's headquarters in Los Angeles and interviewedseveral officers and employees of the corporation. The senior management denied any wrongdoing, but certain corporationemployees corroborated the charges of fraud. Neither Dirks nor his firm owned or traded any Equity Funding stock, butthroughout his investigation he openly discussed the information he had obtained with a number of clients and investors.Some of these persons sold their holdings of Equity Funding securities, including five investment advisers who liquidated

holdings of more than $16 million.[2]

While Dirks was in Los Angeles, he was in touch regularly with William Blundell, the Wall Street Journal's Los Angelesbureau chief. Dirks urged Blundell to write a story on the fraud allegations. Blundell did not believe, however, that such amassive fraud could go undetected and declined to *650 write the story. He feared that publishing such damaging hearsaymight be libelous.

650

During the 2-week period in which Dirks pursued his investigation and spread word of Secrist's charges, the price of EquityFunding stock fell from $26 per share to less than $15 per share. This led the New York Stock Exchange to halt trading onMarch 27. Shortly thereafter California insurance authorities impounded Equity Funding's records and uncovered evidence

of the fraud. Only then did the Securities and Exchange Commission (SEC) file a complaint against Equity Funding[3] and

https://scholar.google.com/scholar?scidkt=7823972619795262022&as_sdt=2&hl=en



only then, on April 2, did the Wall Street Journal publish a front-page story based largely on information assembled by Dirks.

Equity Funding immediately went into receivership.[4]

The SEC began an investigation into Dirks' role in the exposure of the fraud. After a hearing by an Administrative LawJudge, the SEC found that Dirks had aided and abetted violations of § 17(a) of the Securities Act of 1933, 48 Stat. 84, as

amended, 15 U. S. C. § 77q(a),[5] § 10(b) of the Securities *651 Exchange Act of 1934, 48 Stat. 891, 15 U. S. C. § 78j(b),[6]

and SEC Rule 10b-5, 17 CFR § 240.10b-5 (1983),[7] by repeating the allegations of fraud to members of the investmentcommunity who later sold their Equity Funding stock. The SEC concluded: "Where `tippees' — regardless of their motivationor occupation — come into possession of material `corporate information that they know is confidential and know or shouldknow came from a corporate insider,' they must either publicly disclose that information or refrain from trading." 21 S. E. C.Docket 1401, 1407 (1981) (footnote omitted) (quoting Chiarella v. United States, 445 U. S. 222, 230, n. 12 (1980)).Recognizing, however, that Dirks "played an important role in bringing [Equity Funding's] massive fraud *652 to light," 21 S.

E. C. Docket, at 1412,[8] the SEC only censured him.[9]

651

652

Dirks sought review in the Court of Appeals for the District of Columbia Circuit. The court entered judgment against Dirks"for the reasons stated by the Commission in its opinion." App. to Pet. for Cert. C-2. Judge Wright, a member of the panel,subsequently issued an opinion. Judge Robb concurred in the result and Judge Tamm dissented; neither filed a separateopinion. Judge Wright believed that "the obligations of corporate fiduciaries pass to all those to whom they disclose theirinformation before it has been disseminated to the public at large." 220 U. S. App. D. C. 309, 324, 681 F. 2d 824, 839(1982). Alternatively, Judge Wright concluded that, as an employee of a broker-dealer, Dirks had violated "obligations to theSEC and to the public completely independent of any obligations he acquired" as a result of receiving the information. Id., at325, 681 F. 2d, at 840.

In view of the importance to the SEC and to the securities industry of the question presented by this case, we granted a writof certiorari. 459 U. S. 1014 (1982). We now reverse.

*653 II653

In the seminal case of In re Cady, Roberts & Co., 40 S. E. C. 907 (1961), the SEC recognized that the common law in somejurisdictions imposes on "corporate `insiders,' particularly officers, directors, or controlling stockholders" an "affirmative duty

of disclosure . . . when dealing in securities." Id., at 911, and n. 13.[10] The SEC found that not only did breach of this

common-law duty also establish the elements of a Rule 10b-5 violation,[11] but that individuals other than corporate insiders

could be obligated either to disclose material nonpublic information[12] before trading or to abstain from trading altogether.Id., at 912. In Chiarella, we accepted the two elements set out in Cady, Roberts for establishing a Rule 10b-5 violation: "(i)the existence of a relationship affording access to inside information intended to be available only for a corporate purpose,and (ii) the unfairness of allowing a corporate insider to take advantage of that information *654 by trading withoutdisclosure." 445 U. S., at 227. In examining whether Chiarella had an obligation to disclose or abstain, the Court found that

there is no general duty to disclose before trading on material nonpublic information,[13] and held that "a duty to discloseunder § 10(b) does not arise from the mere possession of nonpublic market information." Id., at 235. Such a duty arisesrather from the existence of a fiduciary relationship. See id., at 227-235.

654

Not "all breaches of fiduciary duty in connection with a securities transaction," however, come within the ambit of Rule 10b-5. Santa Fe Industries, Inc. v. Green, 430 U. S. 462, 472 (1977). There must also be "manipulation or deception." Id., at473. In an inside-trading case this fraud derives from the "inherent unfairness involved where one takes advantage" of"information intended to be available only for a corporate purpose and not for the personal benefit of anyone." In re MerrillLynch, Pierce, Fenner & Smith, Inc., 43 S. E. C. 933, 936 (1968). Thus, an insider will be liable under Rule 10b-5 for insidetrading only where he fails to disclose material nonpublic information before trading on it and thus makes "secret profits."Cady, Roberts, supra, at 916, n. 31.

III

We were explicit in Chiarella in saying that there can be no duty to disclose where the person who has traded on insideinformation "was not [the corporation's] agent, . . . was not a fiduciary, [or] was not a person in whom the sellers [of the

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https://scholar.google.com/scholar_case?about=8913113178873514631&q=dirks&hl=en&as_sdt=2006







securities] had placed their trust and confidence." 445 U. S., at 232. Not to require such a fiduciary relationship, werecognized, would "depar[t] radically from the established doctrine that duty arises from a specific relationship between *655two parties" and would amount to "recognizing a general duty between all participants in market transactions to forgoactions based on material, nonpublic information." Id., at 232, 233. This requirement of a specific relationship between theshareholders and the individual trading on inside information has created analytical difficulties for the SEC and courts inpolicing tippees who trade on inside information. Unlike insiders who have independent fiduciary duties to both the

corporation and its shareholders, the typical tippee has no such relationships.[14] In view of this absence, it has beenunclear how a tippee acquires the Cady, Roberts duty to refrain from trading on inside information.

655

A

The SEC's position, as stated in its opinion in this case, is that a tippee "inherits" the Cady, Roberts obligation toshareholders whenever he receives inside information from an insider:

"In tipping potential traders, Dirks breached a duty which he had assumed as a result of knowingly receiving*656 confidential information from [Equity Funding] insiders. Tippees such as Dirks who receive non-public,material information from insiders become `subject to the same duty as [the] insiders.' Shapiro v. MerrillLynch, Pierce, Fenner & Smith, Inc. [495 F. 2d 228, 237 (CA2 1974) (quoting Ross v. Licht, 263 F. Supp. 395,410 (SDNY 1967))]. Such a tippee breaches the fiduciary duty which he assumes from the insider when thetippee knowingly transmits the information to someone who will probably trade on the basis thereof. . . .Presumably, Dirks' informants were entitled to disclose the [Equity Funding] fraud in order to bring it to lightand its perpetrators to justice. However, Dirks — standing in their shoes — committed a breach of thefiduciary duty which he had assumed in dealing with them, when he passed the information on to traders." 21S. E. C. Docket, at 1410, n. 42.

656

This view differs little from the view that we rejected as inconsistent with congressional intent in Chiarella. In that case, theCourt of Appeals agreed with the SEC and affirmed Chiarella's conviction, holding that "[a]nyone — corporate insider or not— who regularly receives material nonpublic information may not use that information to trade in securities without incurringan affirmative duty to disclose." United States v. Chiarella, 588 F. 2d 1358, 1365 (CA2 1978) (emphasis in original). Here,the SEC maintains that anyone who knowingly receives nonpublic material information from an insider has a fiduciary duty

to disclose before trading.[15]

*657 In effect, the SEC's theory of tippee liability in both cases appears rooted in the idea that the antifraud provisionsrequire equal information among all traders. This conflicts with the principle set forth in Chiarella that only some persons,

under some circumstances, will be barred from trading while in possession of material nonpublic information.[16] JudgeWright correctly read our opinion in Chiarella as repudiating any notion that all traders must enjoy equal information beforetrading: "[T]he `information' theory is rejected. Because the disclose-or-refrain duty is extraordinary, it attaches only when aparty has legal obligations other than a mere duty to comply with the general antifraud proscriptions in the federal securitieslaws." 220 U. S. App. D. C., at 322, 681 F. 2d, at 837. See Chiarella, 445 U. S., at 235, n. 20. We reaffirm today that "[a]duty [to disclose] *658 arises from the relationship between parties . . . and not merely from one's ability to acquireinformation because of his position in the market." Id., at 231-232, n. 14.

657

658

Imposing a duty to disclose or abstain solely because a person knowingly receives material nonpublic information from aninsider and trades on it could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is

necessary to the preservation of a healthy market.[17] It is commonplace for analysts to "ferret out and analyze information,"

21 S. E. C. Docket, at 1406,[18] and this often is done by meeting with and questioning corporate officers and others whoare insiders. And information that the analysts *659 obtain normally may be the basis for judgments as to the market worthof a corporation's securities. The analyst's judgment in this respect is made available in market letters or otherwise to clientsof the firm. It is the nature of this type of information, and indeed of the markets themselves, that such information cannot bemade simultaneously available to all of the corporation's stockholders or the public generally.

659

B








The conclusion that recipients of inside information do not invariably acquire a duty to disclose or abstain does not meanthat such tippees always are free to trade on the information. The need for a ban on some tippee trading is clear. Not onlyare insiders forbidden by their fiduciary relationship from personally using undisclosed corporate information to theiradvantage, but they also may not give such information to an outsider for the same improper purpose of exploiting theinformation for their personal gain. See 15 U. S. C. § 78t(b) (making it unlawful to do indirectly "by means of any otherperson" any act made unlawful by the federal securities laws). Similarly, the transactions of those who knowingly participatewith the fiduciary in such a breach are "as forbidden" as transactions "on behalf of the trustee himself." Mosser v. Darrow,341 U. S. 267, 272 (1951). See Jackson v. Smith, 254 U. S. 586, 589 (1921); Jackson v. Ludeling, 21 Wall. 616, 631-632(1874). As the Court explained in Mosser, a contrary rule "would open up opportunities for devious dealings in the name ofothers that the trustee could not conduct in his own." 341 U. S., at 271. See SEC v. Texas Gulf Sulphur Co., 446 F. 2d 1301,1308 (CA2), cert. denied, 404 U. S. 1005 (1971). Thus, the tippee's duty to disclose or abstain is derivative from that of theinsider's duty. See Tr. of Oral Arg. 38. Cf. Chiarella, 445 U. S., at 246, n. 1 (BLACKMUN, J., dissenting). As we noted inChiarella, "[t]he tippee's obligation has been viewed as arising from his role as a participant after the fact in the insider'sbreach of a fiduciary duty." Id., at 230, n. 12.

*660 Thus, some tippees must assume an insider's duty to the shareholders not because they receive inside information,

but rather because it has been made available to them improperly.[19] And for Rule 10b-5 purposes, the insider's disclosureis improper only where it would violate his Cady, Roberts duty. Thus, a tippee assumes a fiduciary duty to the shareholdersof a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to theshareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach.[20] As Commissioner Smith perceptively observed *661 in In re Investors Management Co., 44 S. E. C. 633 (1971): "[T]ippee responsibility must be related back to insider responsibility by a necessary finding that the tippee knew theinformation was given to him in breach of a duty by a person having a special relationship to the issuer not to disclose theinformation . . . ." Id., at 651 (concurring in result). Tipping thus properly is viewed only as a means of indirectly violating the

Cady, Roberts disclose-or-abstain rule.[21]

660

661

C

In determining whether a tippee is under an obligation to disclose or abstain, it thus is necessary to determine whether theinsider's "tip" constituted a breach of the insider's fiduciary duty. All disclosures of confidential corporate information *662are not inconsistent with the duty insiders owe to shareholders. In contrast to the extraordinary facts of this case, the moretypical situation in which there will be a question whether disclosure violates the insider's Cady, Roberts duty is wheninsiders disclose information to analysts. See n. 16, supra. In some situations, the insider will act consistently with hisfiduciary duty to shareholders, and yet release of the information may affect the market. For example, it may not be clear —either to the corporate insider or to the recipient analyst — whether the information will be viewed as material nonpublicinformation. Corporate officials may mistakenly think the information already has been disclosed or that it is not materialenough to affect the market. Whether disclosure is a breach of duty therefore depends in large part on the purpose of thedisclosure. This standard was identified by the SEC itself in Cady, Roberts: a purpose of the securities laws was to eliminate"use of inside information for personal advantage." 40 S. E. C., at 912, n. 15. See n. 10, supra. Thus, the test is whether theinsider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no

breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach.[22] As CommissionerSmith stated in Investors Management Co.: "It is important in this type of *663 case to focus on policing insiders and whatthey do . . . rather than on policing information per se and its possession. . . ." 44 S. E. C., at 648 (concurring in result).

662

663

The SEC argues that, if inside-trading liability does not exist when the information is transmitted for a proper purpose but isused for trading, it would be a rare situation when the parties could not fabricate some ostensibly legitimate businessjustification for transmitting the information. We think the SEC is unduly concerned. In determining whether the insider'spurpose in making a particular disclosure is fraudulent, the SEC and the courts are not required to read the parties' minds.

Scienter in some cases is relevant in determining whether the tipper has violated his Cady, Roberts duty.[23] But todetermine whether the disclosure itself "deceive[s], manipulate[s], or defraud[s]" shareholders, Aaron v. SEC, 446 U. S. 680,686 (1980), the initial inquiry is whether there has been a breach of duty by the insider. This requires courts to focus onobjective criteria, i. e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as apecuniary gain or a reputational benefit that will translate into future earnings. Cf. 40 S. E. C., at 912, n. 15; Brudney,















Insiders, Outsiders, and Informational Advantages Under the Federal Securities *664 Laws, 93 Harv. L. Rev. 322, 348(1979) ("The theory . . . is that the insider, by giving the information out selectively, is in effect selling the information to itsrecipient for cash, reciprocal information, or other things of value for himself. . ."). There are objective facts andcircumstances that often justify such an inference. For example, there may be a relationship between the insider and therecipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. The elements offiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information toa trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to therecipient.

664

Determining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easyfor courts. But it is essential, we think, to have a guiding principle for those whose daily activities must be limited andinstructed by the SEC's inside-trading rules, and we believe that there must be a breach of the insider's fiduciary duty beforethe tippee inherits the duty to disclose or abstain. In contrast, the rule adopted by the SEC in this case would have no

limiting principle.[24]

*665 IV665

Under the inside-trading and tipping rules set forth above, we find that there was no actionable violation by Dirks.[25] It is

undisputed that Dirks himself was a stranger to Equity Funding, with no pre-existing fiduciary duty to its shareholders.[26] Hetook no action, directly or indirectly, that induced the shareholders or officers of Equity Funding to repose trust or confidencein him. There was no expectation by Dirks' sources that he would keep their information in confidence. Nor did Dirksmisappropriate or illegally obtain the information about Equity Funding. Unless the insiders breached their Cady, Robertsduty to shareholders in disclosing the nonpublic information to Dirks, he breached no duty when he passed it on to investorsas well as to the Wall Street Journal.

*666 It is clear that neither Secrist nor the other Equity Funding employees violated their Cady, Roberts duty to the

corporation's shareholders by providing information to Dirks.[27] *667 The tippers received no monetary or personal benefitfor revealing Equity Funding's secrets, nor was their purpose to make a gift of valuable information to Dirks. As the facts ofthis case clearly indicate, the tippers were motivated by a desire to expose the fraud. See supra, at 648-649. In the absenceof a breach of duty to shareholders by the insiders, there was no derivative breach by Dirks. See n. 20, supra. Dirkstherefore could not have been "a participant after the fact in [an] insider's breach of a fiduciary duty." Chiarella, 445 U. S., at230, n. 12.

666667

V

We conclude that Dirks, in the circumstances of this case, had no duty to abstain from use of the inside information that heobtained. The judgment of the Court of Appeals therefore is

Reversed.

JUSTICE BLACKMUN, with whom JUSTICE BRENNAN and JUSTICE MARSHALL join, dissenting.

The Court today takes still another step to limit the protections provided investors by § 10(b) of the Securities Exchange

*668 Act of 1934.[1] See Chiarella v. United States, 445 U. S. 222, 246 (1980) (dissenting opinion). The device employed inthis case engrafts a special motivational requirement on the fiduciary duty doctrine. This innovation excuses a knowing andintentional violation of an insider's duty to shareholders if the insider does not act from a motive of personal gain. Even onthe extraordinary facts of this case, such an innovation is not justified.

668

I

As the Court recognizes, ante, at 658, n. 18, the facts here are unusual. After a meeting with Ronald Secrist, a formerEquity Funding employee, on March 7, 1973, App. 226, petitioner Raymond Dirks found himself in possession of material

nonpublic information of massive fraud within the company.[2] In the Court's words, "[h]e uncovered . . . startling information





that required no analysis or exercise of judgment as to *669 its market relevance." Ibid. In disclosing that information toDirks, Secrist intended that Dirks would disseminate the information to his clients, those clients would unload their EquityFunding securities on the market, and the price would fall precipitously, thereby triggering a reaction from the authorities.App. 16, 25, 27.

669

Dirks complied with his informant's wishes. Instead of reporting that information to the Securities and ExchangeCommission (SEC or Commission) or to other regulatory agencies, Dirks began to disseminate the information to his clients

and undertook his own investigation.[3] One of his first steps was to direct his associates at Delafield Childs to draw up a listof Delafield clients holding Equity Funding securities. On March 12, eight days before Dirks flew to Los Angeles toinvestigate Secrist's story, he reported the full allegations to Boston Company Institutional Investors, Inc., which on March

15 and 16 sold approximately $1.2 million of Equity securities.[4] See id., at 199. As he gathered more *670 information, heselectively disclosed it to his clients. To those holding Equity Funding securities he gave the "hard" story — all theallegations; others received the "soft" story — a recitation of vague factors that might reflect adversely on Equity Funding'smanagement. See id., at 211, n. 24.

670

Dirks' attempts to disseminate the information to nonclients were feeble, at best. On March 12, he left a message forHerbert Lawson, the San Francisco bureau chief of The Wall Street Journal. Not until March 19 and 20 did he call Lawsonagain, and outline the situation. William Blundell, a Journal investigative reporter based in Los Angeles, got in touch withDirks about his March 20 telephone call. On March 21, Dirks met with Blundell in Los Angeles. Blundell began his owninvestigation, relying in part on Dirks' contacts, and on March 23 telephoned Stanley Sporkin, the SEC's Deputy Director ofEnforcement. On March 26, the next business day, Sporkin and his staff interviewed Blundell and asked to see Dirks thefollowing morning. Trading was halted by the New York Stock Exchange at about the same time Dirks was talking to LosAngeles SEC personnel. The next day, March 28, the SEC suspended trading in Equity Funding securities. By that time,Dirks' clients had unloaded close to $15 million of Equity Funding stock and the price had plummeted from $26 to $15. Theeffect of Dirks' selective dissemination of Secrist's information was that Dirks' clients were able to shift the losses that wereinevitable due to the Equity Funding fraud from themselves to uninformed market participants.

II

A

No one questions that Secrist himself could not trade on his inside information to the disadvantage of uninformedshareholders and purchasers of Equity Funding securities. See Brief for United States as Amicus Curiae 19, n. 12. Unlikethe printer in Chiarella, Secrist stood in a fiduciary relationship *671 with these shareholders. As the Court states, ante, at653, corporate insiders have an affirmative duty of disclosure when trading with shareholders of the corporation. SeeChiarella, 445 U. S., at 227. This duty extends as well to purchasers of the corporation's securities. Id., at 227, n. 8, citingGratz v. Claughton, 187 F. 2d 46, 49 (CA2), cert. denied, 341 U. S. 920 (1951).

671

The Court also acknowledges that Secrist could not do by proxy what he was prohibited from doing personally. Ante, at 659;Mosser v. Darrow, 341 U. S. 267, 272 (1951). But this is precisely what Secrist did. Secrist used Dirks to disseminateinformation to Dirks' clients, who in turn dumped stock on unknowing purchasers. Secrist thus intended Dirks to injure thepurchasers of Equity Funding securities to whom Secrist had a duty to disclose. Accepting the Court's view of tippee liability,[5] it appears that Dirks' knowledge of this breach makes him liable as a participant in the breach after the fact. Ante, at 659,667; Chiarella, 445 U. S., at 230, n. 12.

B

The Court holds, however, that Dirks is not liable because Secrist did not violate his duty; according to the Court, this is sobecause Secrist did not have the improper purpose of personal gain. Ante, at 662-663, 666-667. In so doing, the Courtimposes a new, subjective limitation on the scope of the duty owed by insiders to shareholders. The novelty of this limitation

is reflected in the Court's lack of support for it.[6]








*672 The insider's duty is owed directly to the corporation's shareholders.[7] See Langevoort, Insider Trading and theFiduciary Principle: A Post-Chiarella Restatement, 70 Calif. L. Rev. 1, 5 (1982); 3A W. Fletcher, Cyclopedia of the Law ofPrivate Corporations § 1168.2, pp. 288-289 (rev. ed. 1975). As Chiarella recognized, it is based on the relationship of trustand confidence between the insider and the shareholder. 445 U. S., at 228. That relationship assures the shareholder that

the insider may not take actions that will harm him unfairly.[8] The affirmative duty of disclosure protects *673 against thisinjury. See Pepper v. Litton, 308 U. S. 295, 307, n. 15 (1939); Strong v. Repide, 213 U. S. 419, 431-434 (1909); see alsoChiarella, 445 U. S., at 228, n. 10; cf. Pepper, 308 U. S., at 307 (fiduciary obligation to corporation exists for corporation'sprotection).

672

673

C

The fact that the insider himself does not benefit from the breach does not eradicate the shareholder's injury.[9] Cf.Restatement (Second) of Trusts § 205, Comments c and d (1959) (trustee liable for acts causing diminution of value oftrust); 3 *674 A. Scott, Law of Trusts § 205, p. 1665 (3d ed. 1967) (trustee liable for any losses to trust caused by hisbreach). It makes no difference to the shareholder whether the corporate insider gained or intended to gain personally fromthe transaction; the shareholder still has lost because of the insider's misuse of nonpublic information. The duty is

addressed not to the insider's motives,[10] but to his actions and their consequences on the shareholder. Personal gain is

not an element of the breach of this duty.[11]

674

*675 This conclusion is borne out by the Court's decision in Mosser v. Darrow, 341 U. S. 267 (1951). There, the Court facedan analogous situation: a reorganization trustee engaged two employee-promoters of subsidiaries of the companies beingreorganized to provide services that the trustee considered to be essential to the successful operation of the trust. In orderto secure their services, the trustee expressly agreed with the employees that they could continue to trade in the securitiesof the subsidiaries. The employees then turned their inside position into substantial profits at the expense both of the trustand of other holders of the companies' securities.

675

The Court acknowledged that the trustee neither intended to nor did in actual fact benefit from this arrangement; his motiveswere completely selfless and devoted to the companies. Id., at 275. The Court, nevertheless, found the trustee liable to the

estate for the activities of the employees he authorized.[12] The Court described the trustee's defalcation as "a willful anddeliberate setting up of an interest in employees adverse to that of the trust." Id., at 272. The breach did not depend on thetrustee's personal gain, and his motives in violating his duty were irrelevant; like Secrist, the trustee intended that otherswould abuse the inside information for their personal gain. Cf. Dodge v. Ford Motor Co., 204 Mich. 459, 506-509, 170 N. W.668, 684-685 (1919) (Henry Ford's philanthropic motives did not permit him to *676 set Ford Motor Company dividendpolicies to benefit public at expense of shareholders).

676

As Mosser demonstrates, the breach consists in taking action disadvantageous to the person to whom one owes a duty. Inthis case, Secrist owed a duty to purchasers of Equity Funding shares. The Court's addition of the bad-purpose element to abreach-of-fiduciary-duty claim is flatly inconsistent with the principle of Mosser. I do not join this limitation of the scope of an

insider's fiduciary duty to shareholders.[13]

III

The improper-purpose requirement not only has no basis in law, but it also rests implicitly on a policy that I cannot accept.The Court justifies Secrist's and Dirks' action because the general benefit derived from the violation of Secrist's duty toshareholders outweighed the harm caused to those *677 shareholders, see Heller, Chiarella, SEC Rule 14e-3 and Dirks:"Fairness" versus Economic Theory, 37 Bus. Lawyer 517, 550 (1982); Easterbrook, Insider Trading, Secret Agents,Evidentiary Privileges, and the Production of Information, 1981 S. Ct. Rev. 309, 338 — in other words, because the endjustified the means. Under this view, the benefit conferred on society by Secrist's and Dirks' activities may be paid for with

the losses caused to shareholders trading with Dirks' clients.[14]

677

Although Secrist's general motive to expose the Equity Funding fraud was laudable, the means he chose were not.

Moreover, even assuming that Dirks played a substantial role in exposing the fraud,[15] he and his clients should not profitfrom the information they obtained from Secrist. Misprision of a felony long has been against public policy. Branzburg v.











Hayes, 408 U. S. 665, 696-697 (1972); see 18 U. S. C. § 4. A person cannot condition his transmission of information of acrime on a financial award. As a citizen, Dirks had at least an ethical obligation to report the information to the properauthorities. See ante, at 661, n. 21. The Court's holding is deficient in policy terms not because it fails to create a legal *678norm out of that ethical norm, see ibid., but because it actually rewards Dirks for his aiding and abetting.

678

Dirks and Secrist were under a duty to disclose the information or to refrain from trading on it.[16] I agree that disclosure inthis case would have been difficult. Ibid. I also recognize that the SEC seemingly has been less than helpful in its view ofthe nature of disclosure necessary to satisfy the disclose-or-refrain duty. The Commission tells persons with insideinformation that they cannot trade on that information unless they disclose; it refuses, however, to tell them how to disclose.[17] See In re Faberge, Inc., 45 S. E. C. 249, 256 (1973) (disclosure requires public release through public media designedto reach investing public generally). This seems to be a less than sensible policy, which it is incumbent on the Commissionto correct. The Court, however, has no authority to remedy the problem by opening a hole in the congressionally mandatedprohibition on insider trading, thus rewarding such trading.

IV

In my view, Secrist violated his duty to Equity Funding shareholders by transmitting material nonpublic information *679 toDirks with the intention that Dirks would cause his clients to trade on that information. Dirks, therefore, was under a duty tomake the information publicly available or to refrain from actions that he knew would lead to trading. Because Dirks causedhis clients to trade, he violated § 10(b) and Rule 10b-5. Any other result is a disservice to this country's attempt to providefair and efficient capital markets. I dissent.

679

[*] Solicitor General Lee, Assistant Attorney General Jensen, Stephen M. Shapiro, Deputy Assistant Attorney General Olsen, David A.Strauss, and Geoffrey S. Stewart filed a brief for the United States as amicus curiae urging reversal.

[1] The facts stated here are taken from more detailed statements set forth by the Administrative Law Judge, App. 176-180, 225-247; theopinion of the Securities and Exchange Commission, 21 S. E. C. Docket 1401, 1402-1406 (1981); and the opinion of Judge Wright in theCourt of Appeals, 220 U. S. App. D. C. 309, 314-318, 681 F. 2d 824, 829-833 (1982).

[2] Dirks received from his firm a salary plus a commission for securities transactions above a certain amount that his clients directedthrough his firm. See 21 S. E. C. Docket, at 1402, n. 3. But "[i]t is not clear how many of those with whom Dirks spoke promised to directsome brokerage business through [Dirks' firm] to compensate Dirks, or how many actually did so." 220 U. S. App. D. C., at 316, 681 F. 2d,at 831. The Boston Company Institutional Investors, Inc., promised Dirks about $25,000 in commissions, but it is unclear whether Bostonactually generated any brokerage business for his firm. See App. 199, 204-205; 21 S. E. C. Docket, at 1404, n. 10; 220 U. S. App. D. C., at316, n. 5, 681 F. 2d, at 831, n. 5.

[3] As early as 1971, the SEC had received allegations of fraudulent accounting practices at Equity Funding. Moreover, on March 9, 1973,an official of the California Insurance Department informed the SEC's regional office in Los Angeles of Secrist's charges of fraud. Dirkshimself voluntarily presented his information at the SEC's regional office beginning on March 27.

[4] A federal grand jury in Los Angeles subsequently returned a 105-count indictment against 22 persons, including many of EquityFunding's officers and directors. All defendants were found guilty of one or more counts, either by a plea of guilty or a conviction after trial.See Brief for Petitioner 15; App. 149-153.

[5] Section 17(a), as set forth in 15 U. S. C. § 77q(a), provides:

"It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation orcommunication in interstate commerce or by the use of the mails, directly or indirectly —

"(1) to employ any device, scheme, or artifice to defraud, or

"(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary inorder to make the statements made, in the light of the circumstances under which they were made, not misleading, or

"(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser."

[6] Section 10(b) provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails,or of any facility of any national securities exchange —

.....





"(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any securitynot so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commissionmay prescribe as necessary or appropriate in the public interest or for the protection of investors."

[7] Rule 10b-5 provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mailsor of any facility of any national securities exchange,

"(a) To employ any device, scheme, or artifice to defraud,

"(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, inthe light of the circumstances under which they were made, not misleading, or

"(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, inconnection with the purchase or sale of any security."

[8] JUSTICE BLACKMUN's dissenting opinion minimizes the role Dirks played in making public the Equity Funding fraud. See post, at 670and 677, n. 15. The dissent would rewrite the history of Dirks' extensive investigative efforts. See, e. g., 21 S. E. C. Docket, at 1412 ("It isclear that Dirks played an important role in bringing [Equity Funding's] massive fraud to light, and it is also true that he reported the fraudallegation to [Equity Funding's] auditors and sought to have the information published in the Wall Street Journal"); 220 U. S. App. D. C., at314, 681 F. 2d, at 829 (Wright, J.) ("Largely thanks to Dirks one of the most infamous frauds in recent memory was uncovered andexposed, while the record shows that the SEC repeatedly missed opportunities to investigate Equity Funding").

[9] Section 15 of the Securities Exchange Act, 15 U. S. C. § 78o(b)(4)(E), provides that the SEC may impose certain sanctions, includingcensure, on any person associated with a registered broker-dealer who has "willfully aided [or] abetted" any violation of the federalsecurities laws. See 15 U. S. C. § 78ff(a) (1976 ed., Supp. V) (providing criminal penalties).

[10] The duty that insiders owe to the corporation's shareholders not to trade on inside information differs from the common-law duty thatofficers and directors also have to the corporation itself not to mismanage corporate assets, of which confidential information is one. See 3W. Fletcher, Cyclopedia of the Law of Private Corporations §§ 848, 900 (rev. ed. 1975 and Supp. 1982); 3A id., §§ 1168.1, 1168.2 (rev. ed.1975). In holding that breaches of this duty to shareholders violated the Securities Exchange Act, the Cady, Roberts Commissionrecognized, and we agree, that "[a] significant purpose of the Exchange Act was to eliminate the idea that use of inside information forpersonal advantage was a normal emolument of corporate office." See 40 S. E. C., at 912, n. 15.

[11] Rule 10b-5 is generally the most inclusive of the three provisions on which the SEC rested its decision in this case, and we will refer toit when we note the statutory basis for the SEC's inside-trading rules.

[12] The SEC views the disclosure duty as requiring more than disclosure to purchasers or sellers: "Proper and adequate disclosure ofsignificant corporate developments can only be effected by a public release through the appropriate public media, designed to achieve abroad dissemination to the investing public generally and without favoring any special person or group." In re Faberge, Inc., 45 S. E. C. 249,256 (1973).

[13] See 445 U. S., at 233; id., at 237 (STEVENS, J., concurring); id., at 238-239 (BRENNAN, J., concurring in judgment); id., at 239-240(BURGER, C. J., dissenting). Cf. id., at 252, n. 2 (BLACKMUN, J., dissenting) (recognizing that there is no obligation to disclose materialnonpublic information obtained through the exercise of "diligence or acumen" and "honest means," as opposed to "stealth").

[14] Under certain circumstances, such as where corporate information is revealed legitimately to an underwriter, accountant, lawyer, orconsultant working for the corporation, these outsiders may become fiduciaries of the shareholders. The basis for recognizing this fiduciaryduty is not simply that such persons acquired nonpublic corporate information, but rather that they have entered into a special confidentialrelationship in the conduct of the business of the enterprise and are given access to information solely for corporate purposes. See SEC v.Monarch Fund, 608 F. 2d 938, 942 (CA2 1979); In re Investors Management Co., 44 S. E. C. 633, 645 (1971); In re Van Alstyne, Noel &Co., 43 S. E. C. 1080, 1084-1085 (1969); In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 43 S. E. C. 933, 937 (1968); Cady, Roberts, 40S. E. C., at 912. When such a person breaches his fiduciary relationship, he may be treated more properly as a tipper than a tippee. SeeShapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495 F. 2d 228, 237 (CA2 1974) (investment banker had access to materialinformation when working on a proposed public offering for the corporation). For such a duty to be imposed, however, the corporation mustexpect the outsider to keep the disclosed nonpublic information confidential, and the relationship at least must imply such a duty.

[15] Apparently, the SEC believes this case differs from Chiarella in that Dirks' receipt of inside information from Secrist, an insider, carriedSecrist's duties with it, while Chiarella received the information without the direct involvement of an insider and thus inherited no duty todisclose or abstain. The SEC fails to explain, however, why the receipt of nonpublic information from an insider automatically carries with itthe fiduciary duty of the insider. As we emphasized in Chiarella, mere possession of nonpublic information does not give rise to a duty todisclose or abstain; only a specific relationship does that. And we do not believe that the mere receipt of information from an insider createssuch a special relationship between the tippee and the corporation's shareholders.

Apparently recognizing the weakness of its argument in light of Chiarella, the SEC attempts to distinguish that case factually as involvingnot "inside" information, but rather "market" information, i. e., "information originating outside the company and usually about the supply anddemand for the company's securities." Brief for Respondent 22. This Court drew no such distinction in Chiarella and, as THE CHIEF












JUSTICE noted, "[i]t is clear that § 10(b) and Rule 10b-5 by their terms and by their history make no such distinction." 445 U. S., at 241, n.1 (dissenting opinion). See ALI, Federal Securities Code § 1603, Comment (2)(j) (Prop. Off. Draft 1978).

[16] In Chiarella, we noted that formulation of an absolute equal information rule "should not be undertaken absent some explicit evidenceof congressional intent." 445 U. S., at 233. Rather than adopting such a radical view of securities trading, Congress has expresslyexempted many market professionals from the general statutory prohibition set forth in § 11(a)(1) of the Securities Exchange Act, 15 U. S.C. § 78k(a)(1), against members of a national securities exchange trading for their own account. See id., at 233, n. 16. We observed inChiarella that "[t]he exception is based upon Congress' recognition that [market professionals] contribute to a fair and orderly marketplaceat the same time they exploit the informational advantage that comes from their possession of [nonpublic information]." Ibid.

[17] The SEC expressly recognized that "[t]he value to the entire market of [analysts'] efforts cannot be gainsaid; market efficiency in pricingis significantly enhanced by [their] initiatives to ferret out and analyze information, and thus the analyst's work redounds to the benefit of allinvestors." 21 S. E. C. Docket, at 1406. The SEC asserts that analysts remain free to obtain from management corporate information forpurposes of "filling in the `interstices in analysis'. . . ." Brief for Respondent 42 (quoting Investors Management Co., 44 S. E. C., at 646). Butthis rule is inherently imprecise, and imprecision prevents parties from ordering their actions in accord with legal requirements. Unless theparties have some guidance as to where the line is between permissible and impermissible disclosures and uses, neither corporate insidersnor analysts can be sure when the line is crossed. Cf. Adler v. Klawans, 267 F. 2d 840, 845 (CA2 1959) (Burger, J., sitting by designation).

[18] On its facts, this case is the unusual one. Dirks is an analyst in a broker-dealer firm, and he did interview management in the course ofhis investigation. He uncovered, however, startling information that required no analysis or exercise of judgment as to its market relevance.Nonetheless, the principle at issue here extends beyond these facts. The SEC's rule — applicable without regard to any breach by aninsider — could have serious ramifications on reporting by analysts of investment views.

Despite the unusualness of Dirks' "find," the central role that he played in uncovering the fraud at Equity Funding, and that analysts ingeneral can play in revealing information that corporations may have reason to withhold from the public, is an important one. Dirks' carefulinvestigation brought to light a massive fraud at the corporation. And until the Equity Funding fraud was exposed, the information in thetrading market was grossly inaccurate. But for Dirks' efforts, the fraud might well have gone undetected longer. See n. 8, supra.

[19] The SEC itself has recognized that tippee liability properly is imposed only in circumstances where the tippee knows, or has reason toknow, that the insider has disclosed improperly inside corporate information. In Investors Management Co., supra, the SEC stated that oneelement of tippee liability is that the tippee knew or had reason to know that the information "was non-public and had been obtainedimproperly by selective revelation or otherwise." 44 S. E. C., at 641 (emphasis added). Commissioner Smith read this test to mean that atippee can be held liable only if he received information in breach of an insider's duty not to disclose it. Id., at 650 (concurring in result).

[20] Professor Loss has linked tippee liability to the concept in the law of restitution that " `[w]here a fiduciary in violation of his duty to thebeneficiary communicates confidential information to a third person, the third person, if he had notice of the violation of duty, holds upon aconstructive trust for the beneficiary any profit which he makes through the use of such information.' " 3 L. Loss, Securities Regulation 1451(2d ed. 1961) (quoting Restatement of Restitution § 201(2) (1937)). Other authorities likewise have expressed the view that tippee liabilityexists only where there has been a breach of trust by an insider of which the tippee had knowledge. See, e. g., Ross v. Licht, 263 F. Supp.395, 410 (SDNY 1967); A. Jacobs, The Impact of Rule 10b-5, § 167, p. 7-4 (rev. ed. 1980) ("[T]he better view is that a tipper must know orhave reason to know the information is nonpublic and was improperly obtained"); Fleischer, Mundheim, & Murphy, An Initial Inquiry Into theResponsibility to Disclose Market Information, 121 U. Pa. L. Rev. 798, 818, n. 76 (1973) ("The extension of rule 10b-5 restrictions to tippeesof corporate insiders can best be justified on the theory that they are participating in the insider's breach of his fiduciary duty"). Cf.Restatement (Second) of Agency § 312, Comment c (1958) ("A person who, with notice that an agent is thereby violating his duty to hisprincipal, receives confidential information from the agent, may be [deemed] . . . a constructive trustee").

[21] We do not suggest that knowingly trading on inside information is ever "socially desirable or even that it is devoid of moralconsiderations." Dooley, Enforcement of Insider Trading Restrictions, 66 Va. L. Rev. 1, 55 (1980). Nor do we imply an absence ofresponsibility to disclose promptly indications of illegal actions by a corporation to the proper authorities — typically the SEC and exchangeauthorities in cases involving securities. Depending on the circumstances, and even where permitted by law, one's trading on materialnonpublic information is behavior that may fall below ethical standards of conduct. But in a statutory area of the law such as securitiesregulation, where legal principles of general application must be applied, there may be "significant distinctions between actual legalobligations and ethical ideals." SEC, Report of Special Study of Securities Markets, H. R. Doc. No. 95, 88th Cong., 1st Sess., pt. 1, pp. 237-238 (1963). The SEC recognizes this. At oral argument, the following exchange took place:

"QUESTION: So, it would not have satisfied his obligation under the law to go to the SEC first?

"[SEC's counsel]: That is correct. That an insider has to observe what has come to be known as the abstain or disclosure rule. Either theinformation has to be disclosed to the market if it is inside information . . . or the insider must abstain." Tr. of Oral Arg. 27.

Thus, it is clear that Rule 10b-5 does not impose any obligation simply to tell the SEC about the fraud before trading.

[22] An example of a case turning on the court's determination that the disclosure did not impose any fiduciary duties on the recipient of theinside information is Walton v. Morgan Stanley & Co., 623 F. 2d 796 (CA2 1980). There, the defendant investment banking firm,representing one of its own corporate clients, investigated another corporation that was a possible target of a takeover bid by its client. Inthe course of negotiations the investment banking firm was given, on a confidential basis, unpublished material information. Subsequently,after the proposed takeover was abandoned, the firm was charged with relying on the information when it traded in the target corporation'sstock. For purposes of the decision, it was assumed that the firm knew the information was confidential, but that it had been received in











arm's-length negotiations. See id., at 798. In the absence of any fiduciary relationship, the Court of Appeals found no basis for imposingtippee liability on the investment firm. See id., at 799.

[23] Scienter — "a mental state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder, 425 U. S. 185, 193-194,n. 12 (1976) — is an independent element of a Rule 10b-5 violation. See Aaron v. SEC, 446 U. S. 680, 695 (1980). Contrary to the dissent'ssuggestion, see post, at 674, n. 10, motivation is not irrelevant to the issue of scienter. It is not enough that an insider's conduct results inharm to investors; rather, a violation may be found only where there is "intentional or willful conduct designed to deceive or defraudinvestors by controlling or artificially affecting the price of securities." Ernst & Ernst v. Hochfelder, supra, at 199. The issue in this case,however, is not whether Secrist or Dirks acted with scienter, but rather whether there was any deceptive or fraudulent conduct at all, i. e.,whether Secrist's disclosure constituted a breach of his fiduciary duty and thereby caused injury to shareholders. See n. 27, infra. Only ifthere was such a breach did Dirks, a tippee, acquire a fiduciary duty to disclose or abstain.

[24] Without legal limitations, market participants are forced to rely on the reasonableness of the SEC's litigation strategy, but that can behazardous, as the facts of this case make plain. Following the SEC's filing of the Texas Gulf Sulphur action, Commissioner (and laterChairman) Budge spoke of the various implications of applying Rule 10b-5 in inside-trading cases:

"Turning to the realm of possible defendants in the present and potential civil actions, the Commission certainly does not contemplate suingevery person who may have come across inside information. In the Texas Gulf action neither tippees nor persons in the vast rank and file ofemployees have been named as defendants. In my view, the Commission in future cases normally should not join rank and file employeesor persons outside the company such as an analyst or reporter who learns of inside information." Speech of Hamer Budge to the New YorkRegional Group of the American Society of Corporate Secretaries, Inc. (Nov. 18, 1965), reprinted in The Texas Gulf Sulphur Case — WhatIt Is and What It Isn't, The Corporate Secretary, No. 127, p. 6 (Dec. 17, 1965) (emphasis added).

[25] Dirks contends that he was not a "tippee" because the information he received constituted unverified allegations of fraud that weredenied by management and were not "material facts" under the securities laws that required disclosure before trading. He also argues thatthe information he received was not truly "inside" information, i. e., intended for a confidential corporate purpose, but was merely evidenceof a crime. The Solicitor General agrees. See Brief for United States as Amicus Curiae 22. We need not decide, however, whether theinformation constituted "material facts," or whether information concerning corporate crime is properly characterized as "inside information."For purposes of deciding this case, we assume the correctness of the SEC's findings, accepted by the Court of Appeals, that petitioner wasa tippee of material inside information.

[26] Judge Wright found that Dirks acquired a fiduciary duty by virtue of his position as an employee of a broker-dealer. See 220 U. S. App.D. C., at 325-327, 681 F. 2d, at 840-842. The SEC, however, did not consider Judge Wright's novel theory in its decision, nor did it presentthat theory to the Court of Appeals. The SEC also has not argued Judge Wright's theory in this Court. See Brief for Respondent 21, n. 27.The merits of such a duty are therefore not before the Court. See SEC v. Chenery Corp., 332 U. S. 194, 196-197 (1947).

[27] In this Court, the SEC appears to contend that an insider invariably violates a fiduciary duty to the corporation's shareholders bytransmitting nonpublic corporate information to an outsider when he has reason to believe that the outsider may use it to the disadvantageof the shareholders. "Thus, regardless of any ultimate motive to bring to public attention the derelictions at Equity Funding, Secristbreached his duty to Equity Funding shareholders." Brief for Respondent 31. This perceived "duty" differs markedly from the one that theSEC identified in Cady, Roberts and that has been the basis for federal tippee-trading rules to date. In fact, the SEC did not charge Secristwith any wrongdoing, and we do not understand the SEC to have relied on any theory of a breach of duty by Secrist in finding that Dirksbreached his duty to Equity Funding's shareholders. See App. 250 (decision of Administrative Law Judge) ("One who knows himself to be abeneficiary of non-public, selectively disclosed inside information must fully disclose or refrain from trading"); Record, SEC's Reply to Noticeof Supplemental Authority before the SEC 4 ("If Secrist was acting properly, Dirks inherited a duty to [Equity Funding]'s shareholders torefrain from improper private use of the information"); Brief for SEC in No. 81-1243 (CADC), pp. 47-50; id., at 51 ("[K]nowing possession ofinside information by any person imposes a duty to abstain or disclose"); id., at 52-54; id., at 55 ("[T]his obligation arises not from themanner in which such information is acquired . . ."); 220 U. S. App. D. C., at 322-323, 681 F. 2d, at 837-838 (Wright, J.).

The dissent argues that "Secrist violated his duty to Equity Funding shareholders by transmitting material nonpublic information to Dirkswith the intention that Dirks would cause his clients to trade on that information. Post, at 678-679. By perceiving a breach of fiduciary dutywhenever inside information is intentionally disclosed to securities traders, the dissenting opinion effectively would achieve the same resultas the SEC's theory below, i. e., mere possession of inside information while trading would be viewed as a Rule 10b-5 violation. ButChiarella made it explicitly clear that there is no general duty to forgo market transactions "based on material, nonpublic information." 445U. S., at 233. Such a duty would "depar[t] radically from the established doctrine that duty arises from a specific relationship between twoparties." Ibid. See supra, at 654-655.

Moreover, to constitute a violation of Rule 10b-5, there must be fraud. See Ernst & Ernst v. Hochfelder, 425 U. S., at 199 (statutory words"manipulative," "device," and "contrivance . . . connot[e] intentional or willful conduct designed to deceive or defraud investors by controllingor artificially affecting the price of securities") (emphasis added). There is no evidence that Secrist's disclosure was intended to or did in fact"deceive or defraud" anyone. Secrist certainly intended to convey relevant information that management was unlawfully concealing, and —so far as the record shows — he believed that persuading Dirks to investigate was the best way to disclose the fraud. Other efforts hadproved fruitless. Under any objective standard, Secrist received no direct or indirect personal benefit from the disclosure.

The dissenting opinion focuses on shareholder "losses," "injury," and "damages," but in many cases there may be no clear causalconnection between inside trading and outsiders' losses. In one sense, as market values fluctuate and investors act on inevitablyincomplete or incorrect information, there always are winners and losers; but those who have "lost" have not necessarily been defrauded.









On the other hand, inside trading for personal gain is fraudulent, and is a violation of the federal securities laws. See Dooley, supra n. 21, at39-41, 70. Thus, there is little legal significance to the dissent's argument that Secrist and Dirks created new "victims" by disclosing theinformation to persons who traded. In fact, they prevented the fraud from continuing and victimizing many more investors.

[1] See, e. g., Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723 (1975); Ernst & Ernst v. Hochfelder, 425 U. S. 185 (1976); Piper v.ChrisCraft Industries, Inc., 430 U. S. 1 (1977); Chiarella v. United States, 445 U. S. 222 (1980); Aaron v. SEC, 446 U. S. 680 (1980). Thistrend frustrates the congressional intent that the securities laws be interpreted flexibly to protect investors, see Affiliated Ute Citizens v.United States, 406 U. S. 128, 151 (1972); SEC v. Capital Gains Research Bureau, Inc., 375 U. S. 180, 186 (1963), and to regulatedeceptive practices "detrimental to the interests of the investor," S. Rep. No. 792, 73d Cong., 2d Sess., 18 (1934); see H. R. Rep. No. 1383,73d Cong., 2d Sess., 10 (1934). Moreover, the Court continues to refuse to accord to SEC administrative decisions the deference itnormally gives to an agency's interpretation of its own statute. See, e. g., Blum v. Bacon, 457 U. S. 132 (1982).

[2] Unknown to Dirks, Secrist also told story to New York insurance regulators the same day. App. 23. They immediately assuredthemselves that Equity Funding's New York subsidiary had sufficient assets to cover its outstanding policies and then passed on theinformation to California regulators who in turn informed Illinois regulators. Illinois investigators, later joined by California officials, conducteda surprise audit of Equity Funding's Illinois subsidiary, id., at 87-88, to find $22 million of the subsidiary's assets missing. On March 30,these authorities seized control of the Illinois subsidiary. Id., at 271.

[3] In the same administrative proceeding at issue here, the Administrative Law Judge (ALJ) found that Dirks' clients — five institutionalinvestment advisers — violated § 17(a) of the Securities Act of 1933, 15 U. S. C. § 77q(a), § 10(b) of the Securities Exchange Act of 1934,15 U. S. C. § 78j(b), and Rule 10b-5, 17 CFR § 240.10b-5 (1983), by trading on Dirks' tips. App. 297. All the clients were censured, exceptDreyfus Corporation. The ALJ found that Dreyfus had made significant efforts to disclose the information to Goldman, Sachs, the purchaserof its securities. Id., at 299, 301. None of Dirks' clients appealed these determinations. App. to Pet. for Cert. B-2, n. 1.

[4] The Court's implicit suggestion that Dirks did not gain by this selective dissemination of advice, ante, at 649, n. 2, is inaccurate. The ALJfound that because of Dirks' information, Boston Company Institutional Investors, Inc., directed business to Delafield Childs that generatedapproximately $25,000 in commissions. App. 199, 204-205. While it is true that the exact economic benefit gained by Delafield Childs dueto Dirks' activities is unknowable because of the structure of compensation in the securities market, there can be no doubt that Delafieldand Dirks gained both monetary rewards and enhanced reputations for "looking after" their clients.

[5] I interpret the Court's opinion to impose liability on tippees like Dirks when the tippee knows or has reason to know that the information ismaterial and nonpublic and was obtained through a breach of duty by selective revelation or otherwise. See In re Investors ManagementCo., 44 S. E. C. 633, 641 (1971).

[6] The Court cites only a footnote in an SEC decision and Professor Brudney to support its rule. Ante, at 663-664. The footnote, however,merely identifies one result the securities laws are intended to prevent. It does not define the nature of the duty itself. See n. 9, infra.Professor Brudney's quoted statement appears in the context of his assertion that the duty of insiders to disclose prior to trading withshareholders is in large part a mechanism to correct the information available to noninsiders. Professor Brudney simply recognizes that themost common motive for breaching this duty is personal gain; he does not state, however, that the duty prevents only personalaggrandizement. Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv. L. Rev. 322, 345-348(1979). Surely, the Court does not now adopt Professor Brudney's access-to-information theory, a close cousin to the equality-of-information theory it accuses the SEC of harboring. See ante, at 655-658.

[7] The Court correctly distinguishes this duty from the duty of an insider to the corporation not to mismanage corporate affairs or tomisappropriate corporate assets. Ante, at 653, n. 10. That duty also can be breached when the insider trades in corporate securities on thebasis of inside information. Although a shareholder suing in the name of the corporation can recover for the corporation damages for anyinjury the insider causes by the breach of this distinct duty, Diamond v. Oreamuno, 24 N. Y. 2d 494, 498, 248 N. E. 2d 910, 912 (1969); seeThomas v. Roblin Industries, Inc., 520 F. 2d 1393, 1397 (CA3 1975), insider trading generally does not injure the corporation itself. SeeLangevoort, Insider Trading and the Fiduciary Principle: A Post-Chiarella Restatement, 70 Calif. L. Rev. 1, 2, n. 5, 28, n. 111 (1982).

[8] As it did in Chiarella, 445 U. S., at 226-229, the Court adopts the Cady, Roberts formulation of the duty. Ante, at 653-654.

"Analytically, the obligation rests on two principal elements; first, the existence of a relationship giving access, directly or indirectly, toinformation intended to be available only for a corporate purpose and not for the personal benefit of anyone, and second, the inherentunfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing." In reCady, Roberts & Co., 40 S. E. C. 907, 912 (1961) (footnote omitted).

The first element — on which Chiarella's holding rests — establishes the type of relationship that must exist between the parties before aduty to disclose is present. The second — not addressed by Chiarella — identifies the harm that the duty protects against: the inherentunfairness to the shareholder caused when an insider trades with him on the basis of undisclosed inside information.

[9] Without doubt, breaches of the insider's duty occur most often when an insider seeks personal aggrandizement at the expense ofshareholders. Because of this, descriptions of the duty to disclose are often coupled with statements that the duty prevents unjustenrichment. See, e. g., In re Cady, Roberts & Co., 40 S. E. C., at 912, n. 15; Langevoort, 70 Calif. L. Rev., at 19. Private gain is certainly astrong motivation for breaching the duty.

It is, however, not an element of the breach of this duty. The reference to personal gain in Cady, Roberts for example, is appended to thefirst element underlying the duty which requires that an insider have a special relationship to corporate information that he cannot

















appropriate for his own benefit. See n. 8, supra. It does not limit the second element which addresses the injury to the shareholder and is atissue here. See ibid. In fact, Cady, Roberts describes the duty more precisely in a later footnote: "In the circumstances, [the insider's]relationship to his customers was such that he would have a duty not to take a position adverse to them, not to take secret profits at theirexpense, not to misrepresent facts to them, and in general to place their interests ahead of his own." 40 S. E. C., at 916, n. 31. Thisstatement makes clear that enrichment of the insider himself is simply one of the results the duty attempts to prevent.

[10] Of course, an insider is not liable in a Rule 10b-5 administrative action unless he has the requisite scienter. Aaron v. SEC, 446 U. S., at691. He must know that his conduct violates or intend that it violate his duty. Secrist obviously knew and intended that Dirks would causetrading on the inside information and that Equity Funding shareholders would be harmed. The scienter requirement addresses the intentnecessary to support liability; it does not address the motives behind the intent.

[11] The Court seems concerned that this case bears on insiders' contacts with analysts for valid corporate reasons. Ante, at 658-659. Italso fears that insiders may not be able to determine whether the information transmitted is material or nonpublic. Ante, at 661-662. Whenthe disclosure is to an investment banker or some other adviser, however, there is normally no breach because the insider does not havescienter: he does not intend that the inside information be used for trading purposes to the disadvantage of shareholders. Moreover, if theinsider in good faith does not believe that the information is material or nonpublic, he also lacks the necessary scienter. Ernst & Ernst v.Hochfelder, 425 U. S., at 197. In fact, the scienter requirement functions in part to protect good-faith errors of this type. Id., at 211, n. 31.

Should the adviser receiving the information use it to trade, it may breach a separate contractual or other duty to the corporation not tomisuse the information. Absent such an arrangement, however, the adviser is not barred by Rule 10b-5 from trading on that information if itbelieves that the insider has not breached any duty to his shareholders. See Walton v. Morgan Stanley & Co., 623 F. 2d 796, 798-799 (CA21980).

The situation here, of course, is radically different. Ante, at 658, n. 18 (Dirks received information requiring no analysis "as to its marketrelevance"). Secrist divulged the information for the precise purpose of causing Dirks' clients to trade on it. I fail to understand howimposing liability on Dirks will affect legitimate insider-analyst contacts.

[12] The duty involved in Mosser was the duty to the corporation in trust not to misappropriate its assets. This duty, of course, differs fromthe duty to shareholders involved in this case. See n. 7, supra. Trustees are also subject to a higher standard of care than scienter. 3 A.Scott, Law of Trusts § 201, p. 1650 (3d ed. 1967). In addition, strict trustees are bound not to trade in securities at all. See Langevoort, 70Calif. L. Rev., at 2, n. 5. These differences, however, are irrelevant to the principle of Mosser that the motive of personal gain is notessential to a trustee's liability. In Mosser, as here, personal gain accrued to the tippees. See 341 U. S., at 273.

[13] Although I disagree in principle with the Court's requirement of an improper motive, I also note that the requirement adds to theadministrative and judicial burden in Rule 10b-5 cases. Assuming the validity of the requirement, the SEC's approach — a violation occurswhen the insider knows that the tippee will trade with the information, Brief for Respondent 31 — can be seen as a presumption that theinsider gains from the tipping. The Court now requires a case-by-case determination, thus prohibiting such a presumption.

The Court acknowledges the burdens and difficulties of this approach, but asserts that a principle is needed to guide market participants.Ante, at 664. I fail to see how the Court's rule has any practical advantage over the SEC's presumption. The Court's approach is particularlydifficult to administer when the insider is not directly enriched monetarily by the trading he induces. For example, the Court does not explainwhy the benefit Secrist obtained — the good feeling of exposing a fraud and his enhanced reputation — is any different from the benefit toan insider who gives the information as a gift to a friend or relative. Under the Court's somewhat cynical view, gifts involve personal gain.See ibid. Secrist surely gave Dirks a gift of the commissions Dirks made on the deal in order to induce him to disseminate the information.The distinction between pure altruism and self-interest has puzzled philosophers for centuries; there is no reason to believe that courts andadministrative law judges will have an easier time with it.

[14] This position seems little different from the theory that insider trading should be permitted because it brings relevant information to themarket. See H. Manne, Insider Trading and the Stock Market 59-76, 111-146 (1966); Manne, Insider Trading and the Law Professors, 23Vand. L. Rev. 547, 565-576 (1970). The Court also seems to embrace a variant of that extreme theory, which postulates that insider tradingcauses no harm at all to those who purchase from the insider. Ante, at 666-667, n. 27. Both the theory and its variant sit at the opposite endof the theoretical spectrum from the much maligned equality-of-information theory, and never have been adopted by Congress or ratified bythis Court. See Langevoort, 70 Calif. L. Rev., at 1, and n. 1. The theory rejects the existence of any enforceable principle of fairnessbetween market participants.

[15] The Court uncritically accepts Dirks' own view of his role in uncovering the Equity Funding fraud. See ante, at 658, n. 18. It ignores thefact that Secrist gave the same information at the same time to state insurance regulators, who proceeded to expose massive fraud in amajor Equity Funding subsidiary. The fraud surfaced before Dirks ever spoke to the SEC.

[16] Secrist did pass on his information to regulatory authorities. His good but misguided motive may be the reason the SEC did not join himin the administrative proceedings against Dirks and his clients. The fact that the SEC, in an exercise of prosecutorial discretion, did notcharge Secrist under Rule 10b-5 says nothing about the applicable law. Cf. ante, at 665, n. 25 (suggesting otherwise). Nor does the factthat the SEC took an unsupportable legal position in proceedings below indicate that neither Secrist nor Dirks is liable under any theory. Cf.ibid. (same).

[17] At oral argument, the SEC's view was that Dirks' obligation to disclose would not be satisfied by reporting the information to the SEC.Tr. of Oral Arg. 27, quoted ante, at 661, n. 21. This position is in apparent conflict with the statement in its brief that speaks favorably of asafe harbor rule under which an investor satisfies his obligation to disclose by reporting the information to the Commission and then waiting








a set period before trading. Brief for Respondent 43-44. The SEC, however, has neither proposed nor adopted a rule to this effect, and thuspersons such as Dirks have no real option other than to refrain from trading.

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11/18/2019 Salman v. US, 137 S. Ct. 420 - Supreme Court 2016 - Google Scholar

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137 S.Ct. 420 (2016)

Bassam Yacoub SALMAN, Petitionerv.

UNITED STATES.

No. 15-628.

Argued October 5, 2016.Decided December 6, 2016.

Supreme Court of United States.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT.

Alexandra A.E. Shapiro, New York, NY, for petitioner.

*423 Michael R. Dreeben, Washington, DC, for the respondent.423

Alexandra A.E. Shapiro, Daniel J. O'Neill, Shapiro Arato LLP, New York, NY, John D. Cline, Law Office of John D. Cline, SanFrancisco, CA, for petitioner.

Donald B. Verrilli, Jr., Solicitor General, Leslie R. Caldwell, Assistant Attorney General, Ross C. Goldman, Attorney,Department of Justice, Washington, DC, for the United States in Opposition.

Anne K. Small, General Counsel, Sanket J. Bulsara, Deputy General Counsel, Michael A. Conley, Solicitor, Jacob H.Stillman, Senior Advisor to the Solicitor, David D. Lisitza, Senior Litigation Counsel, Securities and Exchange Commission,Washington, DC, Ian Heath Gershengorn, Acting Solicitor General, Leslie R. Caldwell, Assistant Attorney General, MichaelR. Dreeben, Deputy Solicitor General, Elaine J. Goldenberg, Assistant to the Solicitor General, Ross B. Goldman, Attorney,Department of Justice, Washington, DC, for the Respondent.

*421 Syllabus[*]421

Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's Rule 10b-5 prohibitundisclosed trading on inside corporate information by persons bound by a duty of trust and confidence not to exploit thatinformation for their personal advantage. These persons are also forbidden from tipping inside information to others fortrading. A tippee who receives such information with the knowledge that its disclosure breached the tipper's duty acquiresthat duty and may be liable for securities fraud for any undisclosed trading on the information. In Dirks v. SEC, 463 U.S.646, 103 S.Ct. 3255, 77 L.Ed.2d 911, this Court explained that tippee liability hinges on whether the tipper's disclosurebreaches a fiduciary duty, which occurs when the tipper discloses the information for a personal benefit. The Court also heldthat a personal benefit may be inferred where the tipper receives something of value in exchange for the tip or "makes a giftof confidential information to a trading relative or friend." Id., at 664, 103 S.Ct. 3255.

Petitioner Salman was indicted for federal securities-fraud crimes for trading on inside information he received from a friendand relative-by-marriage, Michael Kara, who, in turn, received the information from his brother, Maher Kara, a formerinvestment banker at Citigroup. Maher testified at Salman's trial that he shared inside information with his brother Michael tobenefit him and expected him to trade on it, and Michael testified to sharing that information with Salman, who knew that itwas from Maher. Salman was convicted.

While Salman's appeal to the Ninth Circuit was pending, the Second Circuit decided that Dirks does not permit a fact-finderto infer a personal benefit to the tipper from a gift of confidential information to a trading relative or friend, unless there is"proof of a meaningfully close personal relationship" between tipper and tippee "that generates an exchange that is *422objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature," United Statesv. Newman, 773 F.3d 438, 452, cert. denied, 577 U.S. ___, 136 S.Ct. 242, 193 L.Ed.2d 133. The Ninth Circuit declined to

422

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follow Newman so far, holding that Dirks allowed Salman's jury to infer that the tipper breached a duty because he made "`agift of confidential information to a trading relative.'" 792 F.3d 1087, 1092 (quoting Dirks, 463 U.S., at 664, 103 S.Ct. 3255).

Held: The Ninth Circuit properly applied Dirks to affirm Salman's conviction. Under Dirks, the jury could infer that the tipperhere personally benefited from making a gift of confidential information to a trading relative. Pp. 425-429.

(a) Salman contends that a gift of confidential information to a friend or family member alone is insufficient to establish thepersonal benefit required for tippee liability, claiming that a tipper does not personally benefit unless the tipper's goal indisclosing information is to obtain money, property, or something of tangible value. The Government counters that a gift ofconfidential information to anyone, not just a "trading relative or friend," is enough to prove securities fraud because a tipperpersonally benefits through any disclosure of confidential trading information for a personal (non-corporate) purpose. TheGovernment argues that any concerns raised by permitting such an inference are significantly alleviated by other statutoryelements prosecutors must satisfy. Pp. 425-427.

(b) This Court adheres to the holding in Dirks, which easily resolves the case at hand: "when an insider makes a gift ofconfidential information to a trading relative or friend ... [t]he tip and trade resemble trading by the insider himself followedby a gift of the profits to the recipient," 463 U.S., at 664, 103 S.Ct. 3255. In these situations, the tipper personally benefitsbecause giving a gift of trading information to a trading relative is the same thing as trading by the tipper followed by a gift ofthe proceeds. Here, by disclosing confidential information as a gift to his brother with the expectation that he would trade onit, Maher breached his duty of trust and confidence to Citigroup and its clients — a duty acquired and breached by Salmanwhen he traded on the information with full knowledge that it had been improperly disclosed. To the extent that the SecondCircuit in Newman held that the tipper must also receive something of a "pecuniary or similarly valuable nature" in exchangefor a gift to a trading relative, that rule is inconsistent with Dirks. Pp. 427-428.

(c) Salman's arguments to the contrary are rejected. Salman has cited nothing in this Court's precedents that underminesthe gift-giving principle this Court announced in Dirks. Nor has he demonstrated that either § 10(b) itself or Dirks's gift-givingstandard "leav[e] grave uncertainty about how to estimate the risk posed by a crime" or are plagued by "hopelessindeterminacy." Johnson v. United States, 576 U.S. ___, ___, ___, 135 S.Ct. 2551, 2557, 2558, 192 L.Ed.2d 569. Salmanalso has shown "no grievous ambiguity or uncertainty that would trigger" the rule of lenity. Barber v. Thomas, 560 U.S. 474,492, 130 S.Ct. 2499, 177 L.Ed.2d 1 (internal quotation marks omitted). To the contrary, his conduct is in the heartland ofDirks's rule concerning gifts of confidential information to trading relatives. Pp. 428-429.

792 F.3d 1087, affirmed.

ALITO, J., delivered the opinion for a unanimous Court.

Justice ALITO delivered the opinion of the Court.

Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's Rule 10b-5 prohibitundisclosed trading on inside corporate information by individuals who are under a duty of trust and confidence thatprohibits them from secretly using such information for their personal advantage. 48 Stat. 891, as amended, 15 U.S.C. §78j(b) (prohibiting the use, "in connection with the purchase or sale of any security," of "any manipulative or deceptivedevice or contrivance in contravention of such rules as the [Securities and Exchange Commission] may prescribe"); 17C.F.R. § 240.10b-5 (2016) (forbidding the use, "in connection with the sale or purchase of any security," of "any device,scheme or artifice to defraud," or any "act, practice, or course of business which operates ... as a fraud or deceit"); seeUnited States v. O'Hagan, 521 U.S. 642, 650-652, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997). Individuals under this duty mayface criminal and civil liability for trading on inside information (unless they make appropriate disclosures ahead of time).

These persons also may not tip inside information to others for trading. The tippee acquires the tipper's duty to disclose orabstain from trading if the tippee knows the information was disclosed in breach of the tipper's duty, and the tippee maycommit securities fraud by trading in disregard of that knowledge. In Dirks v. SEC, 463 U.S. 646, 103 S.Ct. 3255, 77L.Ed.2d 911 (1983), this Court explained that a tippee's liability for trading on inside information hinges on whether the tipperbreached a fiduciary duty by disclosing the information. A tipper breaches such a fiduciary duty, we held, when the tipperdiscloses the inside information for a personal benefit. And, we went on to say, a jury can infer a personal benefit — andthus a breach of the tipper's duty — where the tipper receives something of value in exchange for the tip or "makes a gift ofconfidential information to a trading relative or friend." Id., at 664, 103 S.Ct. 3255.










Petitioner Bassam Salman challenges his convictions for conspiracy and insider trading. Salman received lucrative tradingtips from an extended family member, who had received the information from *424 Salman's brother-in-law. Salman thentraded on the information. He argues that he cannot be held liable as a tippee because the tipper (his brother-in-law) did notpersonally receive money or property in exchange for the tips and thus did not personally benefit from them. The Court ofAppeals disagreed, holding that Dirks allowed the jury to infer that the tipper here breached a duty because he made a "`giftof confidential information to a trading relative.'" 792 F.3d 1087, 1092 (C.A.9 2015) (quoting Dirks, supra, at 664, 103 S.Ct.3255). Because the Court of Appeals properly applied Dirks, we affirm the judgment below.

424

I

Maher Kara was an investment banker in Citigroup's healthcare investment banking group. He dealt with highly confidentialinformation about mergers and acquisitions involving Citigroup's clients. Maher enjoyed a close relationship with his olderbrother, Mounir Kara (known as Michael). After Maher started at Citigroup, he began discussing aspects of his job withMichael. At first he relied on Michael's chemistry background to help him grasp scientific concepts relevant to his new job.Then, while their father was battling cancer, the brothers discussed companies that dealt with innovative cancer treatmentand pain management techniques. Michael began to trade on the information Maher shared with him. At first, Maher wasunaware of his brother's trading activity, but eventually he began to suspect that it was taking place.

Ultimately, Maher began to assist Michael's trading by sharing inside information with his brother about pending mergersand acquisitions. Maher sometimes used code words to communicate corporate information to his brother. Other times, heshared inside information about deals he was not working on in order to avoid detection. See, e.g., App. 118, 124-125.Without his younger brother's knowledge, Michael fed the information to others — including Salman, Michael's friend andMaher's brother-in-law. By the time the authorities caught on, Salman had made over $1.5 million in profits that he split withanother relative who executed trades via a brokerage account on Salman's behalf.

Salman was indicted on one count of conspiracy to commit securities fraud, see 18 U.S.C. § 371, and four counts ofsecurities fraud, see 15 U.S.C. §§ 78j(b), 78ff; 18 U.S.C. § 2; 17 C.F.R. § 240.10b-5. Facing charges of their own, bothMaher and Michael pleaded guilty and testified at Salman's trial.

The evidence at trial established that Maher and Michael enjoyed a "very close relationship." App. 215. Maher "love[d] [his]brother very much," Michael was like "a second father to Maher," and Michael was the best man at Maher's wedding toSalman's sister. Id., at 158, 195, 104-107. Maher testified that he shared inside information with his brother to benefit himand with the expectation that his brother would trade on it. While Maher explained that he disclosed the information in largepart to appease Michael (who pestered him incessantly for it), he also testified that he tipped his brother to "help him" and to"fulfil[l] whatever needs he had." Id., at 118, 82. For instance, Michael once called Maher and told him that "he needed afavor." Id., at 124. Maher offered his brother money but Michael asked for information instead. Maher then disclosed anupcoming acquisition. Ibid. Although he instantly regretted the tip and called his brother back to implore him not to trade,Maher expected his brother to do so anyway. Id., at 125.

*425 For his part, Michael told the jury that his brother's tips gave him "timely information that the average person does nothave access to" and "access to stocks, options, and what have you, that I can capitalize on, that the average person wouldnever have or dream of." Id., at 251. Michael testified that he became friends with Salman when Maher was courtingSalman's sister and later began sharing Maher's tips with Salman. As he explained at trial, "any time a major deal came in,[Salman] was the first on my phone list." Id., at 258. Michael also testified that he told Salman that the information wascoming from Maher. See, e.g., id., at 286 ("`Maher is the source of all this information'").

425

After a jury trial in the Northern District of California, Salman was convicted on all counts. He was sentenced to 36 monthsof imprisonment, three years of supervised release, and over $730,000 in restitution. After his motion for a new trial wasdenied, Salman appealed to the Ninth Circuit. While his appeal was pending, the Second Circuit issued its opinion in UnitedStates v. Newman, 773 F.3d 438 (2014), cert. denied, 577 U.S. ___, 136 S.Ct. 242, 193 L.Ed.2d 133 (2015). There, theSecond Circuit reversed the convictions of two portfolio managers who traded on inside information. The Newmandefendants were "several steps removed from the corporate insiders" and the court found that "there was no evidence thateither was aware of the source of the inside information." 773 F.3d, at 443. The court acknowledged that Dirks and SecondCircuit case law allow a factfinder to infer a personal benefit to the tipper from a gift of confidential information to a tradingrelative or friend. 773 F.3d, at 452. But the court concluded that, "[t]o the extent" Dirks permits "such an inference," the









inference "is impermissible in the absence of proof of a meaningfully close personal relationship that generates anexchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable

nature." 773 F.3d, at 452.[1]

Pointing to Newman, Salman argued that his conviction should be reversed. While the evidence established that Mahermade a gift of trading information to Michael and that Salman knew it, there was no evidence that Maher received anythingof "a pecuniary or similarly valuable nature" in exchange — or that Salman knew of any such benefit. The Ninth Circuitdisagreed and affirmed Salman's conviction. 792 F.3d 1087. The court reasoned that the case was governed by Dirks'sholding that a tipper benefits personally by making a gift of confidential information to a trading relative or friend. Indeed,Maher's disclosures to Michael were "precisely the gift of confidential information to a trading relative that Dirks envisioned."792 F.3d, at 1092 (internal quotation marks omitted). To the extent Newman went further and required additional gain to thetipper in cases involving gifts of confidential information to family and friends, the Ninth Circuit "decline[d] to follow it." 792F.3d, at 1093.

We granted certiorari to resolve the tension between the Second Circuit's Newman decision and the Ninth Circuit's decision

in this case.[2] 577 U.S. ___, 136 S.Ct. 899, 193 L.Ed.2d 788 (2016).

*426 II426

A

In this case, Salman contends that an insider's "gift of confidential information to a trading relative or friend," Dirks, 463U.S., at 664, 103 S.Ct. 3255 is not enough to establish securities fraud. Instead, Salman argues, a tipper does notpersonally benefit unless the tipper's goal in disclosing inside information is to obtain money, property, or something oftangible value. He claims that our insider-trading precedents, and the cases those precedents cite, involve situations inwhich the insider exploited confidential information for the insider's own "tangible monetary profit." Brief for Petitioner 31. Hesuggests that his position is reinforced by our criminal-fraud precedents outside of the insider-trading context, becausethose cases confirm that a fraudster must personally obtain money or property. Id., at 33-34. More broadly, Salman urgesthat defining a gift as a personal benefit renders the insider-trading offense indeterminate and overbroad: indeterminate,because liability may turn on facts such as the closeness of the relationship between tipper and tippee and the tipper'spurpose for disclosure; and overbroad, because the Government may avoid having to prove a concrete personal benefit bysimply arguing that the tipper meant to give a gift to the tippee. He also argues that we should interpret Dirks's standardnarrowly so as to avoid constitutional concerns. Brief for Petitioner 36-37. Finally, Salman contends that gift situationscreate especially troubling problems for remote tippees — that is, tippees who receive inside information from anothertippee, rather than the tipper — who may have no knowledge of the relationship between the original tipper and tippee andthus may not know why the tipper made the disclosure. Id., at 43, 48, 50.

The Government disagrees and argues that a gift of confidential information to anyone, not just a "trading relative or friend,"is enough to prove securities fraud. See Brief for United States 27 ("Dirks's personal-benefit test encompasses a gift to anyperson with the expectation that the information will be used for trading, not just to `a trading relative or friend'" (quoting 463U.S., at 664, 103 S.Ct. 3255; emphasis in original)). Under the Government's view, a tipper personally benefits wheneverthe tipper discloses confidential trading information for a noncorporate purpose. Accordingly, a gift to a friend, a familymember, or anyone else would support the inference that the tipper exploited the trading value of inside information forpersonal purposes and thus personally benefited from the disclosure. The *427 Government claims to find support for thisreading in Dirks and the precedents on which Dirks relied. See, e.g., id., at 654, 103 S.Ct. 3255 ("fraud" in an insider-tradingcase "derives `from the inherent unfairness involved where one takes advantage' of `information intended to be availableonly for a corporate purpose and not for the personal benefit of anyone'" (quoting In re Merrill Lynch, Pierce, Fenner &Smith, Inc., 43 S.E.C. 933, 936 (1968))).

427

The Government also argues that Salman's concerns about unlimited and indeterminate liability for remote tippees aresignificantly alleviated by other statutory elements that prosecutors must satisfy to convict a tippee for insider trading. TheGovernment observes that, in order to establish a defendant's criminal liability as a tippee, it must prove beyond areasonable doubt that the tipper expected that the information being disclosed would be used in securities trading. Brief forUnited States 23-24; Tr. of Oral Arg. 38. The Government also notes that, to establish a defendant's criminal liability as a






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tippee, it must prove that the tippee knew that the tipper breached a duty — in other words, that the tippee knew that thetipper disclosed the information for a personal benefit and that the tipper expected trading to ensue. Brief for United States43; Tr. of Oral Arg. 36-37, 39.

B

We adhere to Dirks, which easily resolves the narrow issue presented here.

In Dirks, we explained that a tippee is exposed to liability for trading on inside information only if the tippee participates in abreach of the tipper's fiduciary duty. Whether the tipper breached that duty depends "in large part on the purpose of thedisclosure" to the tippee. 463 U.S., at 662, 103 S.Ct. 3255. "[T]he test," we explained, "is whether the insider personally willbenefit, directly or indirectly, from his disclosure." Ibid. Thus, the disclosure of confidential information without personalbenefit is not enough. In determining whether a tipper derived a personal benefit, we instructed courts to "focus on objectivecriteria, i.e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gainor a reputational benefit that will translate into future earnings." Id., at 663, 103 S.Ct. 3255. This personal benefit can "often"be inferred "from objective facts and circumstances," we explained, such as "a relationship between the insider and therecipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient." Id., at 664, 103 S.Ct.3255. In particular, we held that "[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when aninsider makes a gift of confidential information to a trading relative or friend." Ibid. (emphasis added). In such cases, "[t]hetip and trade resemble trading by the insider followed by a gift of the profits to the recipient." Ibid. We then applied this gift-giving principle to resolve Dirks itself, finding it dispositive that the tippers "received no monetary or personal benefit" fromtheir tips to Dirks, "nor was their purpose to make a gift of valuable information to Dirks." Id., at 667, 103 S.Ct. 3255(emphasis added).

Our discussion of gift giving resolves this case. Maher, the tipper, provided inside information to a close relative, his brotherMichael. Dirks makes clear that a tipper breaches a fiduciary duty by making a gift of confidential information to "a tradingrelative," and that rule is sufficient to resolve the case at hand. As Salman's counsel acknowledged at oral argument, Maherwould have breached his duty had he personally traded on the information here himself then given the proceeds *428 as agift to his brother. Tr. of Oral Arg. 3-4. It is obvious that Maher would personally benefit in that situation. But Mahereffectively achieved the same result by disclosing the information to Michael, and allowing him to trade on it. Dirksappropriately prohibits that approach, as well. Cf. 463 U.S., at 659, 103 S.Ct. 3255 (holding that "insiders [are] forbidden"both "from personally using undisclosed corporate information to their advantage" and from "giv[ing] such information to anoutsider for the same improper purpose of exploiting the information for their personal gain"). Dirks specifies that when atipper gives inside information to "a trading relative or friend," the jury can infer that the tipper meant to provide theequivalent of a cash gift. In such situations, the tipper benefits personally because giving a gift of trading information is thesame thing as trading by the tipper followed by a gift of the proceeds. Here, by disclosing confidential information as a gift tohis brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to Citigroup andits clients — a duty Salman acquired, and breached himself, by trading on the information with full knowledge that it hadbeen improperly disclosed.

428

To the extent the Second Circuit held that the tipper must also receive something of a "pecuniary or similarly valuablenature" in exchange for a gift to family or friends, Newman, 773 F.3d, at 452, we agree with the Ninth Circuit that thisrequirement is inconsistent with Dirks.

C

Salman points out that many insider-trading cases — including several that Dirks cited — involved insiders who personallyprofited through the misuse of trading information. But this observation does not undermine the test Dirks articulated andapplied. Salman also cites a sampling of our criminal-fraud decisions construing other federal fraud statutes, suggesting thatthey stand for the proposition that fraud is not consummated unless the defendant obtains money or property. Sekhar v.United States, 570 U.S. ___, 133 S.Ct. 2720, 186 L.Ed.2d 794 (2013) (Hobbs Act); Skilling v. United States, 561 U.S. 358,130 S.Ct. 2896, 177 L.Ed.2d 619 (2010) (honest-services mail and wire fraud); Cleveland v. United States, 531 U.S. 12, 121S.Ct. 365, 148 L.Ed.2d 221 (2000) (wire fraud); McNally v. United States, 483 U.S. 350, 107 S.Ct. 2875, 97 L.Ed.2d 292(1987) (mail fraud). Assuming that these cases are relevant to our construction of § 10(b) (a proposition the Government













forcefully disputes), nothing in them undermines the commonsense point we made in Dirks. Making a gift of insideinformation to a relative like Michael is little different from trading on the information, obtaining the profits, and doling themout to the trading relative. The tipper benefits either way. The facts of this case illustrate the point: In one of their tipper-tippee interactions, Michael asked Maher for a favor, declined Maher's offer of money, and instead requested and receivedlucrative trading information.

We reject Salman's argument that Dirks's gift-giving standard is unconstitutionally vague as applied to this case. Dirkscreated a simple and clear "guiding principle" for determining tippee liability, 463 U.S., at 664, 103 S.Ct. 3255 and Salmanhas not demonstrated that either § 10(b) itself or the Dirks gift-giving standard "leav[e] grave uncertainty about how toestimate the risk posed by a crime" or are plagued by "hopeless indeterminacy," Johnson v. United States, 576 U.S. ___,___, ___, 135 S.Ct. 2551, 2557, 2558, 192 L.Ed.2d 569 (2015). At most, Salman shows that in some factual circumstances*429 assessing liability for gift-giving will be difficult. That alone cannot render "shapeless" a federal criminal prohibition, foreven clear rules "produce close cases." Id., at ___, ___, 135 S.Ct., at 2560. We also reject Salman's appeal to the rule oflenity, as he has shown "no grievous ambiguity or uncertainty that would trigger the rule's application." Barber v. Thomas,560 U.S. 474, 492, 130 S.Ct. 2499, 177 L.Ed.2d 1 (2010) (internal quotation marks omitted). To the contrary, Salman'sconduct is in the heartland of Dirks's rule concerning gifts. It remains the case that "[d]etermining whether an insiderpersonally benefits from a particular disclosure, a question of fact, will not always be easy for courts." 463 U.S., at 664, 103S.Ct. 3255. But there is no need for us to address those difficult cases today, because this case involves "precisely the `giftof confidential information to a trading relative' that Dirks envisioned." 792 F.3d, at 1092 (quoting 463 U.S., at 664, 103 S.Ct.3255).

429

III

Salman's jury was properly instructed that a personal benefit includes "the benefit one would obtain from simply making agift of confidential information to a trading relative." App. 398-399. As the Court of Appeals noted, "the Governmentpresented direct evidence that the disclosure was intended as a gift of market-sensitive information." 792 F.3d, at 1094.And, as Salman conceded below, this evidence is sufficient to sustain his conviction under our reading of Dirks. Appellant'sSupplemental Brief in No. 14-10204(CA9), p. 6 ("Maher made a gift of confidential information to a trading relative[Michael]... and, if [Michael's] testimony is accepted as true (as it must be for purposes of sufficiency review), Salman knewthat Maher had made such a gift" (internal quotation marks, brackets, and citation omitted)). Accordingly, the Ninth Circuit'sjudgment is affirmed.

It is so ordered.

[*] The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the convenience ofthe reader. See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 50 L.Ed. 499.

[1] The Second Circuit also reversed the Newman defendants' convictions because the Government introduced no evidence that thedefendants knew the information they traded on came from insiders or that the insiders received a personal benefit in exchange for the tips.773 F.3d, at 453-454. This case does not implicate those issues.

[2] Dirks v. SEC, 463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983), established the personal-benefit framework in a case brought underthe classical theory of insider-trading liability, which applies "when a corporate insider" or his tippee "trades in the securities of [the tipper's]corporation on the basis of material, nonpublic information." United States v. O'Hagan, 521 U.S. 642, 651-652, 117 S.Ct. 2199, 138 L.Ed.2d724 (1997). In such a case, the defendant breaches a duty to, and takes advantage of, the shareholders of his corporation. By contrast, themisappropriation theory holds that a person commits securities fraud "when he misappropriates confidential information for securitiestrading purposes, in breach of a duty owed to the source of the information" such as an employer or client. Id., at 652, 117 S.Ct. 2199. Insuch a case, the defendant breaches a duty to, and defrauds, the source of the information, as opposed to the shareholders of hiscorporation. The Court of Appeals observed that this is a misappropriation case, 792 F.3d, 1087, 1092, n. 4 (C.A.9 2015), while theGovernment represents that both theories apply on the facts of this case, Brief for United States 15, n. 1. We need not resolve the question.The parties do not dispute that Dirks's personal-benefit analysis applies in both classical and misappropriation cases, so we will proceed onthe assumption that it does.











1

Cheryl L. Crumpton Stephan J. Schlegelmilch U.S. SECURITIES AND EXCHANGE COMMISSION 100 F Street, N.E. Washington, DC 20549 Attorneys for Plaintiff

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

U.S. SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

v.

OLEKSANDR IEREMENKO, SPIRIT TRADE, LTD., SUNGJIN CHO, DAVID KWON, IGOR SABODAKHA, VICTORIA VOROCHEK, IVAN OLEFIR, CAPYIELD SYSTEMS, LTD., and ANDREY SARAFANOV,

Defendants, and KYUNGJA CHO, LYUDMILA KALINKINA, ANDREY MELEYNIKOV, and IVAN SOLOVEV

Relief Defendants.

Civil Action No. 19-cv-505

Jury Trial Demanded

COMPLAINT

Plaintiff United States Securities and Exchange Commission (the “SEC”), 100 F Street, N.E.,

Washington, DC 20549, alleges as follows against the following Defendants and Relief Defendants,

whose names and last known addresses are set forth below:

a. Oleksandr Ieremenko – Kiev, Ukraine;

Case 2:19-cv-00505 Document 1 Filed 01/15/19 Page 1 of 43 PageID: 1

2

b. Spirit Trade, Ltd., Wellborne Comm CTR 8, Hong Kong, RM 709, Hong Kong Special Administrative Region of China;

c. Sungjin Cho – 681 S. Norton Avenue, Apt. 116, Los Angeles, CA 90005;

d. David Kwon – 3223 W. 6th Street, Unit 406, Los Angeles, CA 90020;

e. Igor Sabodakha – PR. Geroev Stalingrada 12D, app. 81, Kiev, 04210, Ukraine;

f. Victoria Vorochek – ul. Vilesova 6B, app. 57, Severodonetsk, Luhans'ka Oblast, 93400, Ukraine;

g. Ivan Olefir – Staritskogo 16, Chaika, Kiev Oblast, 08130, Ukraine;

h. Capyield Systems, Ltd. – #1 Mapp Street, Belize City, Belize;

i. Andrey Sarafanov – Nogina, 2-15, Dedovsk, Moskva, 143530, Russian Federation;

j. Kyungja Cho – 56 Neungpyeong-ro 156beon-gil, Opo-eup, Gwangju-si Gyeonggi-do, 12773, Republic of Korea;

k. Lyudmila Kalinkina – Poliny Osipenko 14/1 – 98, Moscow, 123007, Russian Federation;

l. Andrey Meleynikov – The Taras Shevchenko embankment 1/2, 190, Moscow, 121248, Russian Federation; and

m. Ivan Solovev – ul. Sklizkova d 116 korp 1, kv 106, Tver’, 170028, Russian Federation.

SUMMARY

1. This action arises from a fraudulent scheme to hack into the SEC’s online Electronic

Data Gathering, Analysis, and Retrieval (“EDGAR”) system to obtain nonpublic documents

containing earnings announcements of publicly-traded companies, and to then use that information

to profit by trading in advance of the information becoming public. The scheme was the second

part of a long-term effort, the first phase of which targeted at least three newswire services.

2. Starting in at least May 2016 and continuing into at least October 2016, Defendant

Ieremenko and others working with him used a variety of deceptive means to obtain thousands of

nonpublic “test filings” from the SEC’s EDGAR system’s servers. In some instances, these test

filings included submissions by public companies that contained earnings results and other material


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information that the companies had not yet released to the public. The hacked material nonpublic

information was then transmitted to traders who, in connection with approximately 157 earnings

announcements, used it to place profitable securities trades before the information was made public.

3. Defendants Spirit Trade, Ltd., Sungjin Cho, Kwon, Capyield Systems, Ltd., Olefir,

Sabodakha, Vorochek, and Sarafanov (collectively, the “Trader Defendants”) served as part of a

network of securities traders located in the United States, Ukraine, and Russia, who received the

hacked material nonpublic information, directly or indirectly, from Ieremenko. The Trader

Defendants then monetized the information by purchasing or selling short the relevant securities

and profiting from the market reaction once the information was disseminated to the public. The

Trader Defendants then, directly or indirectly, kicked back a portion of the resulting trading profits

to Ieremenko.

4. Defendants’ scheme reaped over $4.1 million in gross ill-gotten gains from trading

based on nonpublic EDGAR filings.

5. These illicit gains are in addition to gains generated during an earlier phase of the

scheme in which Ieremenko and others hacked material nonpublic information from at least three

newswire services. Most of the Trader Defendants previously traded nonpublic information hacked

from newswire services during the previous phase of the scheme, including Sungjin Cho, Capyield,

Olefir, Vorochek, Sabodakha, and Sarafanov. An individual with control over Spirit Trade also

previously traded on information hacked from newswire services.

6. By engaging in the conduct described herein with the requisite scienter, Defendants

violated, and unless enjoined, will continue to violate the securities laws.

NATURE OF PROCEEDING AND RELIEF SOUGHT

7. The SEC brings this action against Defendants pursuant to Section 20(b) of the

Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77t(b)] and Sections 21 and 21A of the


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Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. §§ 78u and 78u-1 ] to enjoin the

transactions, acts, practices, and courses of business alleged in this Complaint and to seek orders of

disgorgement, along with prejudgment interest, civil penalties, and such further relief that the Court

may deem appropriate.

JURISDICTION AND VENUE

8. This Court has jurisdiction over this action pursuant to Sections 20(b) and 22(a) of

the Securities Act [15 U.S.C. §§ 77t(b) and 77v(a)] and Sections 21(d), 21(e), 21A, and 27 of the

Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), 78u-1, and 78aa].

9. Venue in this district is proper pursuant to Section 22(a) of the Securities Act

[15 U.S.C. § 77v(a)] and Section 27 of the Exchange Act [15 U.S.C. § 78aa]. Certain of the purchases

and sales of securities and acts, practices, transactions, and courses of business constituting the

violations alleged in this Complaint occurred within the District of New Jersey, and were effected,

directly or indirectly, by making use of the means, instruments, or instrumentalities of transportation

or communication in interstate commerce, or of the mails, or the facilities of national securities

exchanges. Specifically, the servers from which the material nonpublic information at issue was

obtained through deceptive means were located in Middlesex County, New Jersey. Many of the

illegal securities transactions were also conducted using various national securities exchanges, many

of which handle orders using servers located in Middlesex County, New Jersey.

DEFENDANTS

The Hacker Defendant

10. Oleksandr Ieremenko (a.k.a. Eremenko, Alex Boesky, Lamarez, Sergey

Komarov, Anton Petrov, and Uladzimir Aleinikau), age 27, is a computer hacker who resides in

Kiev, Ukraine. He was previously charged by the SEC and Department of Justice with securities

fraud in connection with the deceptive acquisition of material nonpublic information via hacking


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during the newswire phase of this scheme in SEC v. Dubovoy, et al., District of New Jersey Case No.

15-cv-06076-MCA-MAH; and United States v. Turchynov, et al., District of New Jersey Case No. 2:15-

cr-00390. Ieremenko has not appeared in either case, and both remain pending against him.

The Trader Defendants

11. Spirit Trade, Ltd. is a company ostensibly headquartered in Hong Kong and

controlled by a Ukrainian citizen residing in Kiev, Ukraine (“Individual 1”). On approximately 18

occasions in May 2016, a brokerage account in the name of Spirit Trade traded based on material

nonpublic information hacked from EDGAR. Individual 1 previously traded based on material

nonpublic information obtained through the hack of at least one newswire service during the first

phase of this scheme.

12. Sungjin Cho, age 38, resides in Los Angeles, California and was co-founder and co-

owner of CYGS, LLC, a proprietary securities trading firm charged by the SEC in March 2017 for

acting as an unregistered broker-dealer. On approximately 66 occasions during the period, from

May through October 2016, Sungjin Cho traded based on material nonpublic information hacked

from EDGAR. Sungjin Cho traded using brokerage accounts in his name, the name of CYGS, and

in the names of Relief Defendant Kyungja Cho and at least one other nominee (“Individual 3”).

Sungjin Cho also previously traded based on material nonpublic information obtained through the

hack of at least two newswire services during the first phase of this scheme.

13. David Kwon, age 44, resides in Los Angeles, California. On approximately 18

occasions during the period from July through October 2016, Kwon traded based on material

nonpublic information hacked from EDGAR.

14. Igor Sabodakha, age 33, is a Ukrainian citizen residing in Kiev, Ukraine. On

approximately 49 occasions during the period from May through October 2016, Sabodakha traded

based on material nonpublic information hacked from EDGAR. He also previously traded based


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on material nonpublic information obtained through the hack of at least two newswire services

during the first phase of this scheme.

15. Victoria Vorochek, age 33, is a Ukrainian citizen residing in Severodonetsk,

Ukraine. On approximately 39 occasions during the period from May to October 2016, she traded

based on material nonpublic information hacked from EDGAR. She also previously traded based

on material nonpublic information obtained through the hack of at least two newswire services

during the first phase of this scheme.

16. Ivan Olefir (a.k.a. Ifan Ifanov), age 34, is a Ukrainian citizen residing in the Kiev

region of Ukraine. On approximately 95 occasions during the period from May through October

2016, Olefir traded based on material nonpublic information hacked from EDGAR. Olefir

previously traded based on material nonpublic information obtained through the hack of at least one

newswire service during the first phase of this scheme.

17. Capyield Systems, Ltd. is a proprietary securities trading firm supposedly

headquartered in Belize and beneficially owned by Olefir in Ukraine. On approximately 102

occasions during the period from May 2016 through October 2016, Capyield traded based on

material nonpublic information hacked from EDGAR. Based on the IP addresses used to access

Capyield’s brokerage accounts, the trading by Capyield appears to have been directed from Ukraine.

Capyield also previously traded based on material nonpublic information obtained through the hack

of at least two newswire services during the first phase of this scheme.

18. Andrey Sarafanov, age 36, is a Russian citizen residing in Dedovsk, Russia. On

approximately 121 occasions during the period from July through October 2016, Sarafanov traded

based on material nonpublic information hacked from EDGAR using accounts in his own name and

in the names of Relief Defendants Kalinkina, Meleynikov, and Solovev. In account opening

documents, Sarafanov is identified as the “investment advisor” for accounts held in the names of


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Kalinkina, Meleynikov, and Solovev and had exclusive trading authority for those accounts. He also

previously traded in his own account based on material nonpublic information obtained through the

hack of at least one of the newswire services during the first phase of this scheme.

RELIEF DEFENDANTS

19. Kyungja Cho, age 64, is Sungjin Cho’s mother and resides in Korea. On

approximately four occasions during August 2016, Sungjin Cho and/or others acting at his direction

placed trades based on material nonpublic information hacked from EDGAR using accounts in

Kyungja Cho’s name.

20. Lyudmila Kalinkina, age 64, is a Russian citizen residing in Moscow, Russia. On

approximately 80 occasions during the period from July to October 2016, Sarafanov placed trades

based on material nonpublic information hacked from EDGAR using an account held in Kalinkina’s

name.

21. Andrey Meleynikov, age 46, is a Russian citizen residing in Moscow, Russia. On

approximately 10 occasions during October 2016, Sarafanov placed trades based on material

nonpublic information hacked from EDGAR using an account held in Meleynikov’s name.

22. Ivan Solovev, age 43, is a Russian citizen residing in Moscow, Russia. On

approximately 10 occasions during October 2016, Sarafanov placed trades based on material

nonpublic information hacked from EDGAR using an account held in Solovev’s name.

OTHER RELEVANT PERSONS AND ENTITIES

23. Individual 1, age 42, is a Ukrainian citizen residing in Kiev, Ukraine. Individual 1

controls Spirit Trade, Ltd. He also previously traded based on material nonpublic information

obtained through the hack of at least one of the newswire services during the first phase of this

scheme.


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24. CYGS, LLC was, during the relevant period, a proprietary securities trading firm,

co-founded and co-owned by Sungjin Cho. CYGS was charged by the SEC in March 2017 for

acting as an unregistered broker-dealer. See In the Matter of CYGS, LLC, Exchange Act Release No.

80356. Sungjin Cho traded on the basis of material nonpublic information hacked from EDGAR

using an account in the name of CYGS. Kwon also had a trading account with CYGS. During the

relevant time period, CYGS had an office in Ukraine. An account in the name of CYGS was also

used previously to trade based on material nonpublic information obtained through the hack of at

least one of the newswire services during the first phase of this scheme.

25. Individual 2, age 26, is a Ukrainian citizen residing in Kiev, Ukraine. Before and

during the period of the EDGAR hack, he was a friend and business associate of Ieremenko. A

cryptocurrency account associated with Individual 2 paid for access to a server (the below-described

“Exfiltration Machine”) that was used to hack and exfiltrate test filings from the EDGAR system.

26. Individual 3, age 37, resides in Las Vegas, Nevada. During the period from July

through October 2016, Sungjin Cho and/or others at his direction placed approximately 29 trades

based on material nonpublic information hacked from EDGAR using accounts in Individual 3’s

name. An account in Individual 3’s name was also used previously to trade based on material

nonpublic information obtained through the hack of at least one of the newswire services during the

first phase of this scheme.

27. Individual 4, age 33, is a Ukrainian citizen residing in Kiev, Ukraine. He is an

associate of Ieremenko and several of the other Defendants, including Sungjin Cho and Sabodakha.

Individual 4 also participated in the newswire phase of the scheme.


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TERMS USED IN THIS COMPLAINT

Options

28. A stock option, commonly referred to as an “option,” gives its purchaser-holder the

right to buy or sell shares of an underlying stock at a specified price prior to the expiration date.

Options are generally sold in “contracts,” which give the option holder the opportunity to buy or

sell 100 shares of an underlying stock.

29. A “call” option gives the purchaser-holder of the option the right, but not the

obligation, to purchase a specified amount of an underlying security at a specified price within a

specific time period. Generally, the buyer of a call option anticipates that the price of the underlying

security will increase during a specified period of time.

30. A “put” option gives the purchaser-holder of the option the right, but not the

obligation, to sell a specified amount of an underlying security at a specified price within a specific

time period. Generally, the buyer of a put option anticipates that the price of the underlying security

will decrease during a specified period of time.

Short-Selling

31. Short-selling is the sale of a security not owned by the seller and is a technique used

to take advantage of an anticipated decline in price. An investor borrows stock for delivery at the

time of the short sale. If the seller can buy that stock later at a lower price, a profit results; if,

however, the price rises, a loss results.

Contracts for Differences

32. A contract for difference (“CFD”) is a stock derivative that is an agreement between

two parties to exchange the difference in value of an underlying stock between the time the contract

is opened and the time it is closed. If the share price increases for the underlying security, the seller

pays this difference to the buyer. If, however, the underlying share price declines, the buyer must


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pay the seller the difference. Generally speaking, an investor anticipating a rise in the price of the

referenced security will buy a CFD, and an investor anticipating a decrease in the price of the

referenced security will sell a CFD.

33. A CFD typically mirrors the movement and pricing of its underlying stock on a

dollar-for-dollar basis, such that any fluctuation in the market price of the underlying security is

reflected in the unrealized gain or loss of the CFD position.

34. Generally, the investor in a CFD position benefits by acquiring the future price

movement of the underlying common stock without having to pay for or take formal ownership of

the underlying shares.

35. Generally, the investor in a CFD is not required to pay for the underlying shares of

the security. Instead the CFD investor pays only the transaction fees charged by the CFD provider.

Thus, a CFD, like a stock option, allows an investor to recognize significant value from an

underlying security’s price movement without having to pay for the underlying shares.

36. The counterparty to a CFD transaction often hedges the risk by buying or selling on

a national securities exchange the reference security underlying the CFD or a related stock option in

an amount and at a price that matches the risk position taken by the CFD seller.

Malware, Spoofing, and Phishing

37. “Malware” is software that is intended to damage or disable computers or computer

networks or circumvent installed security and access controls, usually installed using deception and

without the user’s knowledge.

38. “Spoofing” is the deceptive act of creating an email or other electronic

communication that falsely appears to have been sent by or originate from a known or trusted

source.


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39. “Phishing” is the deceptive practice of sending a spoofed communication in order to

induce individuals to reveal personal information, such as passwords or other credentials, or to

deliver malware designed to compromise the recipient’s computer.

IP Address

40. An “internet protocol address” or “IP address” is a unique number required for

online activity conducted by a computer or other device connected to the Internet. Computers use

the unique identifier to send data to specific computers on a network.

41. Often, IP addresses can be used to identify the geographical location of the server

through which a computer accessed the Internet. Thus, in simple terms, it is like a return address on

a letter.

42. An individual can hide the IP address from which he or she is accessing the Internet

by a number of different techniques and tools. Such means allow individuals to assume and use IP

addresses different than their own in a deceptive manner, including IP addresses identified with

different geographical regions.

User Agent String

43. A “user agent string” is a line of text sent to each website accessed by a user, which

identifies the name and version of the web browser being used. Each version of each web browser

has its own distinctive user agent string, and Internet domains often maintain a log containing the

user agent string of each web browser that has accessed the website.

Domain

44. A “domain” is an identifier that refers to a group of Internet resources under

common administration, authority, or control. For example, sec.gov is a domain for which the

United States government has authority and that is administered by the SEC.


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FACTS

The Newswire Hacking Scheme

45. Each of the Defendants, other than Spirit Trade and Kwon, was involved in an

earlier phase of the instant scheme, which similarly involved the exfiltration through hacking of

material nonpublic information used for illegal securities trading.

46. Specifically, Ieremenko, a Ukrainian hacker, was involved in the hacking of at least

three newswire services, one after another. And Defendants Sungjin Cho, Sabodakha, Olefir,

Capyield, Vorochek, and Sarafanov each traded on information hacked from one or more of the

newswire services.

47. Newswire services edit and disseminate press releases for publicly-traded companies

in the United States. Until the newswire services publish a press release to the general public, often

at a specific pre-announced time, the sensitive financial information in the press release constitutes

nonpublic information that may be material.

48. Issuers routinely provide draft press releases to the newswire services. These often

contain material nonpublic information to be included in the final public version of the press release.

Consequently, for each press release, there is a window of time between when the company provides

a draft press release to a newswire service and when the newswire service publishes the release to the

public (the “trading window”). These trading windows vary between a few minutes and a few days.

49. From 2010 until 2015, Ieremenko and others hacked multiple newswire services’

computer systems and accessed over 100,000 draft press releases before they were published. Once

Ieremenko and others obtained the material nonpublic information from the newswire services, they

monetized the information by providing the not-yet-published press releases to a network of traders.

The traders, often using nominees, quickly placed trades based on the hacked information. The


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traders compensated the hackers, including Ieremenko, for the information by either paying regular

fees for access to the hacked press releases or by kicking back a portion of their trading profits.

50. In 2015, Ieremenko’s illegal access to the newswire services was disrupted, and he

and others were charged for their roles in the newswire hacking scheme. See SEC v. Dubovoy, et al.,

District of New Jersey Case No. 2:15-cv-06076; United States v. Turchynov, et al., District of New Jersey

Case No. 2:15-cr-00390; United States v. Korchevsky, et al., Eastern District of New York Case No.

1:15-cr-00381. These cases remain pending and unresolved as to Ieremenko, and, upon information

and belief, he remains at large in Ukraine.

The EDGAR Hacking Scheme

Overview

51. In early 2016, Ieremenko and others working with him focused on a new source of

material nonpublic information that could be used for securities trading: the SEC’s Electronic Data

Gathering, Analysis, and Retrieval system, known as “EDGAR.”

52. Public companies and others who are required or elect to file forms with the SEC

may file those forms using EDGAR. Many of those forms are intended to become public, and the

filers use EDGAR as a means of quickly and efficiently distributing information to the investing

public. For example, companies often file material information about their financial performance

via EDGAR, such as Forms 8-K that contain quarterly earnings or other market-moving

information.

53. Prior to making information public through an EDGAR filing, filers may also elect

to submit “test filings” to EDGAR. Test filings are draft versions of EDGAR filings that are meant

to ensure that an EDGAR filing is in the correct format, free from errors, and will be accepted for

filing by EDGAR. Test filings are not meant for public dissemination and are not publicly available.


14

Test filers also sometimes elected to include material nonpublic information – e.g., drafts of

forthcoming Forms 8-K – that had not yet been publicly released.

54. An EDGAR filer submitting a test filing could request a “return copy,” which was a

version of the test filing that the filer was able to view after submitting it to EDGAR. During the

time period of the conduct described in this Complaint, return copies of test filings were maintained

on SEC computer servers located in Middlesex County, New Jersey, but were not publicly available.

55. In the spring of 2016, Ieremenko and others working with him launched several

concurrent efforts to surreptitiously exfiltrate material nonpublic information located on the SEC’s

EDGAR servers.

56. Ieremenko simultaneously employed a variety of deceptive techniques as part of his

coordinated effort to hack EDGAR in order to attempt to access material nonpublic information

that could be used to profitably trade securities, including (a) using hacking techniques to circumvent

pages of the EDGAR system that required users to login with their credentials to access user

identification information; (b) misrepresenting himself as an authorized EDGAR filer and accessing

nonpublic test filings within the EDGAR system; (c) using numerous aliases to conceal his control

of an IP address used in the EDGAR hack and a related domain used in previous hacks of newswire

services; and (d) inducing SEC computer users to open documents containing malware sent via

spoofed, phishing emails that falsely represented they had been sent by SEC security personnel.

Some of these efforts were successful in accessing material nonpublic information for trading.

57. Ieremenko’s deceptive acts created the false appearance that he was an authorized

user of the EDGAR system and ultimately allowed him to penetrate the EDGAR computer network

to access certain nonpublic return copies of EDGAR test filings. Beginning on or about May 3,

2016, and continuing until at least October 20, 2016, Ieremenko and others working with him used

deception to hack and download thousands of then-unpublished return copies of test filings. Some,


15

but not all, of those return copies contained material nonpublic information that could be used to

trade securities.

58. Some of the hacked test filings included corporate earnings results. It is common for

financial analysis firms to estimate or predict a given issuer’s quarterly or annual earnings. The

“market” reaches a consensus expectation based in part on these different predictions. When an

issuer releases its earnings, the share price for that issuer often increases if its earnings exceed the

market expectation and often decreases if its earnings fall short.

59. The period of time between the filing of a test filing and creation of a return copy,

and the subsequent publication of the information contained in the test filing, created a trading

window, which allowed Ieremenko to pass, directly or indirectly, the fraudulently obtained

information to the Trader Defendants before the information was released to the market. As a

result, the Trader Defendants had an improper trading advantage over other market participants,

because they had material information from hacked EDGAR test filings before that information was

publicly disseminated.

60. The Trader Defendants capitalized on this advantage by initiating trades before the

information was released to the market. The Trader Defendants profited on both positive and

negative earnings news by either buying securities or selling them short depending on their

anticipation of how the market would respond to the information in the hacked EDGAR test filings.

61. The Trader Defendants concealed their access to the hacked information and their

trading activities through the use of multiple brokerage accounts and entities, often using accounts

in the name of nominees.

62. On information and belief, the Trader Defendants also furthered and substantially

assisted the scheme by making payments, directly or indirectly, to Ieremenko. In November 2016,

Sungjin Cho sent an email to an individual who had taken part in the scheme to trade on


16

information hacked from EDGAR and attached an “accounting for the 2nd quarter that u traded.”

In a subsequent email two days later, Sungjin Cho wrote again to the same trader:

Just emailed u when I was going over the accounting w[ith] my group over q2 and q3. I know I probably didn’t explain and that would naturally make you have questions so I apologize if I didn’t explain how the trading strategy fund worked. This straetgy [sic] we been working on for over 5 years now and the reason why we were able to keep our team toegher [sic] for this long (without 1 person stealing it and run outside money) was agreement to disclose all activity and outside money. Any outside account (like yours at [U.S. Broker-Dealer]) we disclose the prices and has[sic] to pay a cut to the coding team (it ended up being 45% so I actually take a loss on yours, but I told u a third is the cut so I’m gonna honor that and your [U.S. Broker-Dealer] account was small so all good . . . .

On information and belief, Sungjin Cho’s reference to a 45% cut of the traders’ profits to the

“coding team” referred to compensation to Ieremenko and others working with him. Such a

payment method is consistent with the manner in which Ieremenko and others were compensated

during the newswire phase of the scheme.

63. After the relevant earnings information was publicly issued, the price of the securities

often changed as the market learned the previously undisclosed information. The Trader

Defendants then closed out the securities positions and reaped substantial profits, a portion of

which they kicked back, directly or indirectly, to Ieremenko.

64. Collectively, the Trader Defendants used the information hacked from EDGAR to

realize over $4.1 million in gross illicit gains.

The Proof of Concept Period – May 3, 2016 to May 19, 2016

65. In the spring of 2016, Ieremenko and others working with him began efforts to hack

the EDGAR System, using common hacking techniques to hunt for access to material nonpublic

information. For example, Ieremenko circumvented EDGAR controls that required user

authentication and then obtained access to nonpublic EDGAR logs that contained user and

document identification information associated with test filings made by authorized EDGAR users.


17

Ieremenko then employed the information he obtained from these nonpublic logs to access certain

return copies of test filings.

66. When accessing EDGAR, Ieremenko was expressly warned, inter alia, that “[The

EDGAR] system is Federal property and is to be used only for authorized government purposes by

users who have been granted access rights by the Office of Information Technology. Misuse of this

computer system is a violation of Federal law (Pub. L.99-474).” He was also notified that only

authorized filers were permitted to access EDGAR:

Notice: Before you can electronically file with the SEC on EDGAR, you must become an EDGAR filer with authorized access codes. This website will allow you to create a Form ID and submit it for authorization to the SEC. Upon acceptance, you will receive a unique CIK via e-mail. You will then return to this site and use your CIK and a passphrase to create your EDGAR access codes. Once you have your access codes, you may use EDGAR to begin electronically filing. This website may also be used to regenerate your access codes. 67. When Ieremenko and others working with him accessed EDGAR test filings, they

misrepresented themselves as authorized EDGAR filers and as using EDGAR for an authorized

government purpose.

68. In the spring of 2016, Ieremenko or others working with him also sent a series of

malicious emails to sec.gov email addresses in an effort to obtain material nonpublic information

from SEC systems. The emails were spoofed to appear as if they were being sent by SEC security

personnel. The spoofed emails contained malware-infected documents, and this phishing

successfully infected several SEC computer workstations in an attempt to obtain material nonpublic

information.

69. Ieremenko accessed the SEC’s EDGAR system using a Romanian IP address he had

previously used to send emails between two email accounts he controlled. During the EDGAR

hack, he used this IP address to access a key EDGAR directory and test filings. Ieremenko had

previously used a domain associated with that same Romanian IP address in connection with two of


18

the earlier newswire hacks. Ieremenko used a series of aliases to conceal his control of this domain

and the Romanian IP address. Additionally, Ieremenko’s newswire hacks and his EDGAR

intrusions involved an identical user agent string, which indicates that the same web browser was

used in both attacks.

70. Ieremenko first successfully accessed a test filing on or about May 3, 2016. On that

same day, Ieremenko began manually exfiltrating electronic copies of test filings.

71. Starting the next day, May 4, 2016, Ieremenko put into action his scheme to

monetize the information he obtained through deception. He did this by using third-party traders,

in yet another significant effort to mislead and insulate himself from detection by separating his

hacking from the resulting illegal trading.

72. Specifically, at 1:09 PM ET, Ieremenko, using deceptive hacking techniques, accessed

and exfiltrated from EDGAR a test filing for Issuer 1, a public company whose securities trade on

the New York Stock Exchange. The hacked test filing contained negative material nonpublic

information about Issuer 1’s soon-to-be-announced first quarter 2016 financial results and had been

uploaded to EDGAR less than an hour earlier.

73. After downloading the information, on information and belief, Ieremenko, directly

or indirectly, passed the information to one or more individuals at Spirit Trade, which, between 2:57

PM and 3:59 PM ET, sold short 5,500 shares of Issuer 1 stock using a U.S.-based brokerage

account. As discussed above, Spirit Trade is controlled by Individual 1. Individual 1 also engaged in

illegal trading in connection with the earlier period of the hacking scheme that targeted the newswire

services.

74. On May 4, 2016, after the close of the market and just minutes after Spirit Trade’s

last shorting transaction, Issuer 1 issued its earnings report for the quarter ending March 31, 2016,

and announced a decline in revenue from the prior period and lower than expected earnings and


19

revenue guidance for the following quarter. During the next day of trading, Issuer 1’s stock price

dipped 9% on the news.

75. On May 5, 2016, within the first 35 minutes of the opening of the market, Spirit

Trade had closed out its short position in Issuer 1 stock, making approximately $9,185 in gross

illegal profits.

76. Ieremenko and Spirit Trade repeated this pattern several times during the month of

May 2016, illegally profiting from both positive and negative financial news contained in hacked test

filings.

77. Another example involved a test filing submitted to EDGAR on behalf of Issuer 2, a

public company whose stock trades on the Nasdaq. On May 6, 2016, Issuer 2 announced that it

would hold a webcast to discuss its second quarter 2016 financial results after market close on May

19, 2016.

78. At approximately 3:32 PM ET on May 19, 2016, a test filing containing positive

material nonpublic information about Issuer 2’s not-yet-released second quarter 2016 financial

results was uploaded to EDGAR. Ieremenko deceptively accessed and extracted Issuer 2’s test filing

only six minutes later. From approximately 3:42 PM to 3:59 PM ET, Spirit Trade purchased Issuer

2 stock. After market close on May 19, 2016, Issuer 2 publicly released its second quarter earnings

report and announced that it expected to deliver record earnings in fiscal 2016. During the next day

of trading, Issuer 2’s stock price rose 14% on the news. By 10:46 AM ET on May 20, 2016, Spirit

Trade had closed out its position in Issuer 2, making approximately $274,663 in gross illegal profits.

79. In all, during the month of May 2016, Spirit Trade made $496,740 in gross illegal

profits from its trading on the information obtained through Ieremenko’s deceptive extraction of

approximately 17 companies’ test filings.


20

80. Spirit Trade’s last trade was May 20, 2016. Less than two months later, Spirit Trade’s

account was closed, and the proceeds of its illegal trading were transferred out.

The Automated Exfiltration Period – May 18, 2016 to October 2016

81. After confirming that the material nonpublic information obtained by hacking

EDGAR could be used to trade profitably, Ieremenko increased the scale of the fraudulent scheme.

82. On May 18, 2016, Ieremenko, or others working in concert with him, deployed a

server (the “Exfiltration Machine”) using a program to perform on an automated basis the deceptive

conduct he performed manually earlier in the month. A few days earlier, a cryptocurrency account

associated with Individual 2 paid for access to this server. Ieremenko’s Exfiltration Machine

employed the same deceptive techniques to misrepresent itself as an authorized EDGAR filer and

access return copies of test filings. Ieremenko’s Exfiltration Machine then periodically downloaded

electronic return copies of test filings on a regular schedule.

83. During this period of the scheme, Ieremenko’s Exfiltration Machine accessed

EDGAR through an IP address and domain ostensibly located in Lithuania. This IP address used

by Ieremenko’s Exfiltration Machine had not been used in the previous manual exfiltration period.

During this time period, Ieremenko also used two other IP addresses ostensibly located in

Switzerland and Luxembourg to download a small number of test filings. On information and

belief, Ieremenko used various tools and techniques to make it appear that the IP addresses from

which he was accessing the Internet were located in different geographical regions. Ieremenko’s use

of numerous IP addresses identified with disparate parts of Europe was yet another effort to conceal

the hack, his identity, and his physical location.

84. Ieremenko’s Exfiltration Machine enabled Ieremenko to obtain hacked test filings on

a greater scale. At the same time that Ieremenko employed his Exfiltration Machine, more traders

began to monetize the information. Again, he used third-party traders as part of his fraudulent


21

scheme in an effort to deceptively insulate himself from detection and liability. And again, both the

Trader Defendants and Ieremenko were essential participants in this fraudulent scheme; neither

could profit without the other.

85. During this period, which ran from at least May 18, 2016, until at least October 20,

2016, Ieremenko worked with traders located in the United States, Ukraine, and Russia to monetize

his illegal conduct, one group operating together from California and Ukraine (the “California and

Ukraine Trading Group”), and, on information and belief, another trader operating in Russia. Each

of the Trader Defendants knew, were reckless in not knowing, should have known, or consciously

avoided knowing that they were each trading upon hacked information and participating, assisting,

and acting in furtherance of a scheme to defraud.

86. With the exception of Kwon, each member of the California and Ukraine Trading

Group also traded in connection with the earlier phase of the fraudulent scheme on the basis of

hacked information obtained from newswire services. Moreover, as alleged below, Sungjin Cho and

Sabodakha are also connected to Ieremenko through mutual connections to Individual 4, who also

traded in the newswire phase of the scheme. Between May 18, 2016, and October 20, 2016,

members of the California and Ukraine Trading Group traded approximately 369 times in the

trading window between the time a test filing was exfiltrated from EDGAR and a press release

announcing the substance of the filing was thereafter publicly released.

87. By July 2016, Sarafanov, a Russian trader who had participated in the newswire phase

of the scheme, also began to trade on hacked EDGAR test filings. During February to July 2015, a

period when Ieremenko and others working with him were exfiltrating press releases from a specific

newswire service, Sarafanov traded ahead of approximately 19 earnings announcements. Of these

19 trades by Sarafanov, approximately 16 were trades in advance of announcements by issuers who

used the hacked newswire service.


22

88. On or about July 18, 2016, Sarafanov began placing his first trades based on material

nonpublic information in EDGAR test filings that had been exfiltrated by Ieremenko. Sarafanov

traded in an account in his own name as well as in accounts that he controlled in the names of at

least three other persons residing in Russia, Relief Defendants Kalinkina, Meleynikov, and Solovev.

Between approximately July 18, 2016, and October 25, 2016, accounts controlled by Sarafanov

traded approximately 121 times in the period between the time a test filing was exfiltrated from

EDGAR and the time that a press release announcing the substance of the filing was publicly

released.

89. Together, the California and Ukraine Trading Group and Sarafanov traded

approximately 490 times on material nonpublic information deceptively obtained from EDGAR for

total gross profits of over $3.6 million. The following are examples that illustrate their trading based

on hacked EDGAR test filings:

Issuer 3 - Second Quarter 2016 Announcement

90. On July 7, 2016, Issuer 3, a public company whose stock trades on the New York

Stock Exchange, announced that it planned to release its second quarter 2016 financial results before

market open on July 26, 2016.

91. At approximately 11:39 AM ET on July 22, 2016, a test filing containing negative

material nonpublic information about Issuer 3’s second quarter financial results was uploaded to

EDGAR. At approximately 2:33 PM ET on July 22, 2016, Ieremenko’s Exfiltration Machine

fraudulently obtained Issuer 3’s test filing containing the not-yet-released financial results.

92. On July 25, 2016, the day before Issuer 3 was expected to publicly release its second

quarter results, Sungjin Cho (using an account in Individual 3’s name), Sarafanov, Olefir, and

Capyield all began shorting the stock of Issuer 3; Sungjin Cho and Sarafanov also began buying

Issuer 3 put options; and Sabodakha and Vorochek began selling Issuer 3 CFDs.


23

93. At approximately 2:24 PM ET on July 25, 2016, Sabodakha began selling Issuer 3

CFDs. Approximately 23 minutes later, at 2:47 PM ET, Vorochek also began selling Issuer 3 CFDs.

Approximately 27 minutes later, at 3:14 PM ET on July 25, 2016, Capyield began selling short Issuer

3 stock. Approximately 15 minutes later, at 3:29 PM ET, Sungjin Cho, using an account in the name

of Individual 3, also began selling short Issuer 3 stock. Approximately nine minutes later, at 3:38

PM ET, Olefir also began selling short Issuer 3 stock. Approximately three minutes later, at 3:41

PM ET, Sungjin Cho began purchasing Issuer 3 put options in an account in his own name, and

Sarafanov began purchasing Issuer 3 put options in an account in his own name. At approximately

3:59 PM ET, Sungjin Cho began purchasing Issuer 3 put options and selling short Issuer 3 stock

using the CYGS account. At approximately 4:06 PM ET, Sarafanov, using an account in the name

of Relief Defendant Kalinkina, began selling short Issuer 3 stock. Also at 4:33 PM ET, Sarafanov

began selling short Issuer 3 stock in his own brokerage account. All of these trades would be

expected to result in immediate profits if the company issued negative news and the stock price

declined.

94. Before market open on July 26, 2016, Issuer 3 issued a press release announcing

second quarter financial results that were largely below analysts’ estimates. On July 26, 2016, Issuer

3 stock closed down approximately 4% from the previous day’s closing price.

95. By the end of that day, July 26, 2016, Sungjin Cho, Sarafanov, Olefir, Capyield,

Sabodakha, and Vorochek had closed out their trading positions in Issuer 3, except for Sarafanov’s

and Sungjin Cho’s put option positions, which were closed out on July 27, 2016, and July 28, 2016,

respectively. In all, these Defendants made gross illegal profits of approximately $96,000 by trading

on the basis of Issuer 3’s hacked EDGAR test filing.


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96. On July 12, 2016, Issuer 4, a public company whose stock trades on the Nasdaq,

announced that it would release its financial results for the second quarter of 2016 after market close

on August 4, 2016.

97. At approximately 2:19 PM ET on August 4, 2016, a test filing containing negative

material nonpublic information about Issuer 4’s second quarter 2016 results was uploaded to

EDGAR. Approximately eight minutes later, at 2:27 PM ET, Ieremenko’s Exfiltration Machine

fraudulently obtained Issuer 4’s test filing.

98. Shortly thereafter, seven of the Trader Defendants began taking short positions in

Issuer 4. At approximately 3:19 PM ET on August 4, 2016, Capyield and Sarafanov (using Relief

Defendant Kalinkina’s account) began selling short stock of Issuer 4. At 3:27 PM ET, Olefir began

buying Issuer 4 put options. At 3:28 PM ET, Sarafanov began selling short stock of Issuer 4 in an

account in his own name, and at 3:40 PM ET, Sarafanov began buying Issuer 4 put options in an

account in his own name. At 3:33 and 3:36 PM ET, respectively, Sabodakha and Vorochek each

began selling Issuer 4 CFDs. At 3:38 PM ET, Sungjin Cho began buying Issuer 4 put options in an

account in his own name, and at 3:40 PM ET and 3:46 PM ET, respectively, Sungjin Cho began

selling short Issuer 4 stock using accounts in the names of Individual 3 and CYGS. At 3:54 PM ET,

Kwon began buying Issuer 4 put options. All of these trades would be expected to result in

immediate profits if the company issued negative news and the stock price declined.

99. At 4:01 PM ET on August 4, 2016, Issuer 4 issued a press release announcing that its

total billings and revenue for the quarter were below expectations.

100. The next trading day, August 5, 2016, the market reacted, and Issuer 4’s stock closed

down approximately 12% from the previous day’s closing price.


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101. By the end of the same day, August 5, 2016, Kwon, Capyield, Olefir, Sabodakha,

Vorochek, Sungjin Cho, and Sarafanov had closed out their trading positions in Issuer 4, except for

Sungjin Cho’s short positions held in CYGS’s account, which were closed out on August 9, 2016.

In all, these defendants made gross illegal profits of approximately $307,000 by trading on the basis

of Issuer 4’s hacked EDGAR test filing.


102. On July 20, 2016, Issuer 5, a public company whose stock trades on the Nasdaq,

announced that it would report its second quarter 2016 financial results after market close on August

3, 2016.

103. At 9:22 PM ET on July 29, 2016, a test filing containing positive material nonpublic

information about Issuer 5’s second quarter 2016 financial results was uploaded to EDGAR. At

9:58 PM ET, Ieremenko’s Exfiltration Machine fraudulently obtained Issuer 5’s test filing.

104. On August 3, 2016, at 3:13 PM ET, Capyield began purchasing stock of Issuer 5. At

3:15 PM ET, Sarafanov began purchasing stock of Issuer 5 in an account in the name of Relief

Defendant Kalinkina. At 3:25 PM ET, Sarafanov began purchasing stock of Issuer 5 in an account

in his name. At 3:35 PM ET, Olefir began purchasing stock of Issuer 5. At 3:38 PM ET,

Sabodakha began purchasing Issuer 5 CFDs. At 3:46 PM ET, Sungjin Cho began purchasing stock

of Issuer 5 in an account in the name of Individual 3. At 3:57 PM ET, Vorochek began purchasing

Issuer 5 CFDs. At 3:58 PM ET, Sungjin Cho began purchasing stock of Issuer 5 in a CYGS

account. All of these trades would be expected to result in immediate profits if the company issued

positive news and the stock price increased.

105. After market close on August 3, 2016, Issuer 5 issued a press release announcing

stronger than anticipated fiscal second quarter sales growth, higher than projected gross profit


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margins, better than expected operating income, and that Issuer 5 was increasing its full year 2016

financial guidance.

106. On August 4, 2016, stock of Issuer 5 closed approximately 8% higher than the

previous day’s closing price. By the end of that day, August 4, 2016, Sungjin Cho, Sabodakha,

Vorochek, Capyield, Olefir, and Sarafanov had closed their positions, reaping gross illegal profits of

over $61,000.

Issuer 2 - Third Quarter 2016 Earnings Announcement

107. On August 5, 2016, Issuer 2 announced that it would release its third quarter 2016

financial results after market close on August 18, 2016.

108. At approximately 6:04 PM ET on August 17, 2016, a test filing containing positive

material nonpublic information about Issuer 2’s third quarter 2016 earnings was uploaded to

EDGAR. Approximately 13 minutes later, at 6:17 PM ET, Ieremenko’s Exfiltration Machine

fraudulently obtained Issuer 2’s test filing.

109. The following trading day, August 18, 2016, at approximately 2:45 PM ET,

Sarafanov began buying Issuer 2 call options in an account in his own name. At 2:48 PM ET,

Sarafanov began purchasing Issuer 2 stock in an account in the name of Relief Defendant Kalinkina.

At approximately 3:05 and 3:07 PM ET, respectively, Vorochek and Sabodakha began purchasing

Issuer 2 CFDs. At 3:06 PM ET, Sarafanov began purchasing Issuer 2 stock. At 3:29 PM ET,

Sungjin Cho began purchasing Issuer 2 stock in an account in his own name. At 3:38 PM ET,

Sungjin Cho began purchasing Issuer 2 stock in the CYGS account. At 3:41 PM ET, Olefir began

purchasing Issuer 2 stock, and Sungjin Cho began purchasing Issuer 2 stock using an account in the

name of Individual 3. At approximately 3:44 PM ET, Sungjin Cho also began purchasing Issuer 2

call options using an account in his mother Relief Defendant Kyungja Cho’s name. At 3:46 PM ET,

Olefir began purchasing Issuer 2 CFDs. At 3:49 PM ET, Capyield began purchasing Issuer 2 stock.


27

And at 3:51 PM ET, Kwon began purchasing Issuer 2 stock. All of these trades would be expected

to result in immediate profits if the company issued positive news and the stock price increased.

110. After market close on August 18, 2016, Issuer 2 announced record results for third

quarter 2016, including record earnings per share and an all-time high for new orders.

111. On August 19, 2016, Issuer 2 stock closed approximately 7% higher than the

previous day’s closing price. By the end of that day, August 19, 2016, Sarafanov, Vorochek,

Sabodakha, Capyield, Sungjin Cho, Olefir, and Kwon had closed out their trading positions, except

for Kalinkina’s and CYGS’s positions in Issuer 2 stock, which were closed out on August 22, 2016.

These Defendants made gross illegal profits of approximately $285,000 by trading on the basis of

Issuer 2’s hacked EDGAR test filing.


112. On July 18, 2016, Issuer 6, a public company whose securities trade on the Nasdaq,

announced that it would release its second quarter 2016 financial results after market close on

August 8, 2016.

113. At approximately 8:25 AM ET on August 8, 2016, a test filing containing positive

material nonpublic information about Issuer 6’s second quarter 2016 earnings was uploaded to

EDGAR. At approximately 1:19 PM ET, Ieremenko’s Exfiltration Machine fraudulently obtained

Issuer 6’s test filing.

114. At 3:37 PM ET on August 8, 2016, Vorochek began purchasing Issuer 6 CFDs. At

3:41 PM ET, Sabodakha began purchasing Issuer 6 CFDs. At approximately 3:42 PM ET, Capyield

began purchasing Issuer 6 stock. At 3:48 PM ET, Sungjin Cho began purchasing Issuer 6 stock in a

CYGS account. At 3:49 PM ET, Sungjin Cho began purchasing Issuer 6 call options in an account

in his own name. At 3:50 PM ET, Sungjin Cho began purchasing Issuer 6 stock in Individual 3’s

account. At 3:55 PM ET, Kwon began purchasing Issuer 6 call options. At 3:56 PM ET, Sungjin


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Cho began purchasing Issuer 6 call options in Relief Defendant Kyungja Cho’s account. On this

day, Sungjin Cho purchased Issuer 6 stock or call options in at least four different accounts,

including those in the names of CYGS, Individual 3, and Kyungja Cho. All of these trades would be

expected to result in immediate profits if the company issued positive news and the stock price

increased.

115. After market close on August 8, 2016, Issuer 6 announced its second quarter 2016

financial results and that they were on-track or ahead of Issuer 6’s expectations for the quarter.

116. On August 9, 2016, Issuer 6 stock closed approximately 22% higher than the

previous day’s closing price. By the end of that day, August 9, 2016, Capyield, Vorochek,

Sabodakha, Sungjin Cho, and Kwon had all closed out their trading positions, making gross illegal

profits of approximately $82,300.

Ieremenko Loses Access to EDGAR

117. In October 2016, SEC IT personnel patched EDGAR software in response to a

detected attack on the system, which also had the effect of preventing Ieremenko from accessing

test filings.

118. After Ieremenko’s access to EDGAR was blocked, some Trader Defendants’

continued to trade for a short time based on material nonpublic information that had been

previously hacked but not yet publicly released. Shortly thereafter, however, with Ieremenko’s

access to new test filings cut off, their illegal trading ahead of the release of EDGAR test filings

ceased entirely.

119. Efforts to compromise EDGAR continued into early 2017. For example, at

approximately the same time that Ieremenko lost access to EDGAR test filings in October 2016, he

returned to his previous efforts to compromise SEC computer workstations through malware,

which he had delivered through phishing emails, spoofed to appear to have been sent by SEC


29

security personnel. Other efforts also continued, including by other people, though none of the

post-October 2016 efforts appear to have led to access to test filings containing material nonpublic

information or to trading.

120. During the summer of 2018, Ieremenko, using the alias “Lamarez,” appeared to take

credit for the hacks of both the newswire services and EDGAR. Specifically, in response to an

online communication regarding hacking, Ieremenko boasted about his successful hack of several

specific newswire companies and “sec.gov” and provided links to English- and Russian-language

news coverage of the newswire hacks.

Connections Between Defendants

121. Defendants’ participation in a common scheme is demonstrated through (a) their

parallel trading, often during very brief trading windows, in the securities of issuers whose test filings

were exfiltrated from EDGAR by Ieremenko; (b) for many of them, the pattern of trading in both

the newswire and EDGAR phases of the scheme; and (c) an extensive web of connections among

them.

122. To begin, nearly all of the Defendants involved in the EDGAR hack were also

involved in the previous hack of the newswire services. Specifically, during the period from 2013

through 2015, Sungjin Cho, Sabodakha, Olefir, Capyield, Vorochek, Sarafanov, and an individual

who controlled Spirit Trade each traded on information that Ieremenko and others hacked from the

newswire services.

123. Generally, the Trader Defendants’ trading profits soared during periods when they

had access to hacked information and plummeted when they did not.

124. For example, considered collectively, the California and Ukraine Trading Group

made hundreds of thousands of dollars trading on hacked earnings announcements in 2013. The

following year, when they did not have access to hacked information from any newswire service


30

because the hack had been disrupted, their trading profits were a small fraction of what they had

been when they had access to hacked information.

125. In 2015, during another period of newswire hacking, trading by the California and

Ukraine Trading Group was again very profitable. But after Ieremenko’s hacking of the newswire

services was disrupted again in mid-2015, these same Defendants’ trading dwindled and was much

less profitable.

126. Later, during the six months of the EDGAR hacking scheme, these same

Defendants’ trading again was extremely profitable.

127. In addition, many of the Trader Defendants often traded on the same hacked

earnings announcements, taking trading positions that indicated that they had a common belief

about the market’s reaction to an upcoming announcement. This uniformity is significant because

corporate earnings announcements may contain a mix of positive and negative news such that

anticipated market reaction may not be readily determinable.

128. Defendants are also connected by a web of business affiliations and relationships,

often spanning years. These connections are evidenced through, among other things, electronic

communications and shared use of specific IP addresses, the latter indicating that they accessed the

Internet from the same network access point. On information and belief, Defendants are also in

possession of additional relevant evidence of their connections to each other and the fraudulent

scheme alleged herein to which the SEC does not currently have access.

Connections Between Ieremenko and Spirit Trade

129. As alleged above, in May 2016, Ieremenko first tested his ability to monetize material

nonpublic information he obtained through hacking the EDGAR system by, directly or indirectly,

passing the information to one or more individuals at Spirit Trade. Spirit Trade then used that

hacked material nonpublic information to trade before earnings announcements.


31

130. Ieremenko and Spirit Trade are connected through Individual 1 and Individual 2.

Prior to May 2016, Ieremenko and Individual 2 were friends and business associates, and on

information and belief, Individual 2 worked with Ieremenko on the EDGAR hack. A

cryptocurrency account associated with Individual 2 was used to pay for Ieremenko’s Exfiltration

Machine. Likewise, prior to May 2016, Individual 1, who had control over Spirit Trade, and

Individual 2 were associates. In or about April and May of 2016, on information and belief,

Individual 1 and Individual 2 were in contact with one another.

Connections Between Ieremenko and the California and Ukraine Trading Group

131. The connections between Ieremenko and the California and Ukraine Trading

Group are illustrated below:

132. Individual 4 is a Ukrainian citizen through whom many of the Trader Defendants are

connected to Ieremenko. Individual 4, like Ieremenko, Sabodakha, and other Defendants, lives in

Kiev and traded during the newswire phase of the scheme. Prior to the EDGAR hack, Individual 4

and Ieremenko were in contact through email, including an email exchange in which Individual 4


32

requested business advice from Ieremenko regarding a potential cryptocurrency business Individual

4 was exploring.

133. Individual 4, in turn, is associated with Sungjin Cho, Sabodakha, and Capyield. For

example, on May 24, 2013, during the newswire phase of the scheme, an email account associated

with Capyield set up a trading account for Individual 4, and trades were contemporaneously placed

in both Sungjin Cho’s and Individual 4’s accounts at two different broker-dealers using the same IP

address. Based on emails exchanged between the two, Individual 4 has been an associate of

Sabodakha since at least 2013, and in 2018, Individual 4 and Sabodakha also served as CEO and

COO, respectively, of a cryptocurrency company.

134. Sungjin Cho is also a long-time associate of Sabodakha, Olefir, Vorochek, Capyield,

and other Ukrainian traders. Sungjin Cho and Olefir have also been working together as securities

traders for at least a decade. In 2010, Sungjin Cho co-founded CYGS, a proprietary securities

trading firm. After its founding, CYGS opened additional offices, including an office in Ukraine.

135. Capyield is another proprietary securities trading firm affiliated with Sungjin Cho and

Olefir. In September 2014, Olefir became the beneficial owner of Capyield. Prior to that, in January

2012, Capyield made a $200,000 loan to Sungjin Cho’s trading firm, CYGS.

136. Sungjin Cho is also a long-time associate of Sabodakha and Vorochek. In August

2012, Sungjin Cho emailed to Sabodakha a photograph of himself with others who appear to include

Sabodakha and Vorochek. Sabodakha then forwarded the photograph to Vorochek.

137. Sungjin Cho is also connected to Kwon, who described himself as Sungjin Cho’s

“uncle” in a September 2017 document describing a $236,000 “gift” from Kwon to Sungjin Cho.

138. In November 2016, after the conclusion of the trading on information hacked from

EDGAR, Kwon sent Sungjin Cho a summary of trading in Kwon’s brokerage account from August

through October 2016. This summary included Kwon’s trading in issuers whose test filings had


33

been exfiltrated by Ieremenko. In subsequent emails, Kwon sent Sungjin Cho invitations to edit a

shared spreadsheet calculating trading gains and losses. Kwon advised Sungjin Cho to “use this

spreadsheet to get the accurate figures and tell you [sic] other traders to do the same . . . .”

Defendants’ Use of Nominee Accounts 139. Several of the Trader Defendants also conducted illegal trading using accounts held

in the names of others, including, but not limited to, Kyungja Cho, Kalinkina, Meleynikov, Solovev,

and Individual 3.

140. Specifically, Sungjin Cho controlled and directed the trading that occurred in the

account ostensibly owned by his mother, Kyungja Cho. During the time period of the EDGAR

hack, Sungjin Cho placed four trades using this account and made approximately $21,000 in gross

illegal profits.

141. Sungjin Cho also controlled an account ostensibly owned by Individual 3. During

the time period of the EDGAR hack, Sungjin Cho or someone at his direction placed approximately

29 trades using this account and made approximately $134,000 in gross illegal profits.

142. Sarafanov also had exclusive trading authority for accounts ostensibly owned by

Relief Defendants Kalinkina, Meleynikov, and Solovev. During the time period of the EDGAR

hack, Sarafanov placed approximately 100 trades using these accounts and made approximately

$413,000 in gross illegal profits.

Overview of Defendants’ Trading During the Period of the EDGAR Hack

143. During the period from May through October 2016, when Defendants had access to

hacked return copies of EDGAR test filings as a result of Ieremenko’s deceptive conduct, the

Trader Defendants’ trading in securities of issuers whose information was contained in hacked

EDGAR test filings was remarkably more successful than trading in securities of issuers whose

information was not obtained by the EDGAR hack. Put another way, when the Trader Defendants


34

traded in the securities of issuers whose test filings had recently been exfiltrated through

Ieremenko’s hack of EDGAR, they had a much higher win rate.

144. The table below illustrates the comparison of the Trader Defendants’ non-hacked

trading activity to their hacked trading activity:

145. The Trader Defendants’ success rates when they had access to hacked earnings

information are particularly notable because earnings announcements may reflect positive or

negative news. The ability of these defendants to profit consistently, regardless of the direction of

the price change, indicates that they had the benefit of deceptively-acquired, material nonpublic

information. Despite this illegal advantage, it is not surprising that the Trading Defendants did not

trade successfully based on this information 100% of the time. This is so because, unlike some

other corporate announcements, it is not always predictable how the market will react to a given

earnings announcement. For example, an earnings release may contain a combination of positive

and negative news, may match analysts’ preexisting expectations, or the market may focus on a


35

particular aspect of a release at the exclusion of other information that points to a contrary

conclusion.

146. During the period when the Trader Defendants had access to hacked EDGAR

filings, they were also much more likely to trade ahead of corporate earnings events that were the

subject of hacked EDGAR test filings than earnings events that were not.

147. Each of the Trader Defendants traded significantly more heavily in hacked events

than would be expected if their trading were uncorrelated with the EDGAR hacks: from 4 times as

many hacked events as would be expected by random chance for Sungjin Cho, Kwon, and

Vorochek to 14 times as many hacked events as would be expected by random chance for Spirit

Trade’s trades.

148. It is virtually impossible that the Trader Defendants’ disproportionate trading in

hacked events, as opposed to thousands of other earnings events during the same time period, could

have occurred by random chance. Statistical analysis shows that for each of the Trader Defendants,

the odds of that trader trading so disproportionately in hacked events by random chance ranged

from less than 7 in 10 million to less than 1 in 1 trillion. This means that for each of the Trader

Defendants, it is nearly impossible that their trading is uncorrelated with the hack of the EDGAR

system.

CONCLUSION

149. At all relevant times, Ieremenko, Spirit Trade, Sungjin Cho, Kwon, Capyield, Olefir,

Sabodakha, Vorochek, and Sarafanov participated in a scheme to defraud. The fraudulent scheme

required all of the Defendants’ participation in order to succeed.

150. Ieremenko obtained, through deception, material nonpublic information from the

SEC’s EDGAR system and provided it, directly or indirectly, to the other Defendants. The other


36

Defendants monetized the material nonpublic information by making profitable securities trades and

then compensated Ieremenko for his deceptive conduct.

151. In perpetrating the fraud, Ieremenko made a series of material misrepresentations,

including his use of spoofed phishing emails, malware, and representations that he was an

authorized EDGAR filer.

152. Spirit Trade, Sungjin Cho, Kwon, Capyield, Olefir, Sabodakha, Vorochek, and

Sarafanov provided substantial assistance to Ieremenko’s hack of the EDGAR system by

monetizing the hacked information through securities trading.


Sarafanov concealed their access to the hacked information and their trading activities through the

use of multiple brokerage accounts and entities, often using accounts in the name of nominees.

Ieremenko’s decision to utilize other members of the scheme to monetize the hacked information

was itself a deceptive act. Defendants also used domains and IP addresses indicating locations in

several different countries to facilitate and further conceal their fraud.

154. The information hacked from EDGAR included material nonpublic information.

155. Hacked information was used to place securities trades on numerous national

securities exchanges through numerous U.S.-based broker dealers, in a manner that utilized the

instrumentalities of interstate commerce.

156. Ieremenko knew, was reckless in not knowing, or should have known that his

material misstatements and omissions were false or materially misleading and that he was

participating, assisting, and acting in furtherance of a scheme to defraud.


Sarafanov knew, were reckless in not knowing, should have known, or consciously avoided knowing

that the material nonpublic information they received, directly or indirectly, from Ieremenko was


37

obtained through a scheme to defraud and through material misstatements and omissions. Indeed,

Spirit Trade, Sungjin Cho, Kwon, Capyield, Olefir, Sabodakha, Vorochek, and Sarafanov knew, were

reckless in not knowing, should have known, or consciously avoided knowing that they were each

participating, assisting, and acting in furtherance of a scheme to defraud.

158. Relief Defendants Kyungja Cho, Kalinkina, Meleynikov, and Solovev and others

have obtained funds as part, and in furtherance, of violations of the securities laws, and, as a

consequence, these Relief Defendants have been unjustly enriched.

FIRST CLAIM FOR RELIEF Violations of Exchange Act Section 10(b) and Rule 10b-5 Thereunder

(All Defendants)

159. The SEC realleges and incorporates by reference each and every allegation in

paragraphs 1 through 158, inclusive, as if they were fully set forth herein.

160. By engaging in the conduct in 2016 that is described above, Defendants knowingly

or recklessly, in connection with the purchase or sale of securities, directly or indirectly, by use of the

means or instrumentalities of interstate commerce, or the mails, or the facilities of a national

securities exchange:

(a) employed devices, schemes, or artifices to defraud;

(b) made untrue statements of material facts or omitted to state material facts

necessary in order to make the statements made, in light of the circumstances under which

they were made, not misleading; and/or

(c) engaged in acts, practices, or courses of business which operated or would

operate as a fraud or deceit upon any person in connection with the purchase or sale of any

security.


38

161. By engaging in the foregoing conduct in 2016, Defendants violated, and unless

enjoined will continue to violate, Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Rule 10b-5

thereunder [17 C.F.R. § 240.10b-5].

SECOND CLAIM FOR RELIEF Violations of Securities Act Section 17(a)

(All Defendants)



163. By engaging in the conduct in 2016 that is described above, Defendants knowingly,

recklessly, or negligently in connection with the offer or sale of securities, by the use of the means or

instruments of transportation, or communication in interstate commerce or by use of the mails,

directly or indirectly:

(a) employed devices, schemes, or artifices to defraud;

(b) obtained money or property by means of untrue statements of material facts,

or omissions to state material facts necessary in order to make the statements made, in light

of the circumstances under which they were made, not misleading; and/or

(c) engaged in transactions, practices, or courses of business which operated or

would operate as a fraud or deceit upon the purchaser.

164. By engaging in the foregoing conduct in 2016, Defendants violated, and unless

enjoined will continue to violate, Securities Act Section 17(a) [15 U.S.C. § 77q(a)].

THIRD CLAIM FOR RELIEF Aiding and Abetting Violations of Exchange Act Section 10(b) and Rule 10b-5 Thereunder

(Defendants Spirit Trade, Ltd., Sungjin Cho, Kwon, Capyield Systems, Ltd., Olefir, Sabodakha, Vorochek, and Sarafanov)




39

166. As alleged above, Defendant Ieremenko and others violated Exchange Act Section

10(b) [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].

167. Through their illicit trading, payments directly or indirectly to Defendant Ieremenko,

and other means alleged above, Defendants Spirit Trade, Ltd., Sungjin Cho, Kwon, Capyield

Systems, Ltd., Olefir, Sabodakha, Vorochek, and Sarafanov knowingly provided substantial

assistance to, and thereby aided and abetted, Ieremenko’s violations of the securities laws.

168. By engaging in the foregoing conduct in 2016, pursuant to Exchange Act Section

20(e) [15 U.S.C. § 78t], Defendants Spirit Trade, Ltd., Sungjin Cho, Kwon, Capyield Systems, Ltd.,

Olefir, Sabodakha, Vorochek, and Sarafanov violated, an unless enjoined will continue to violate

Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].

FOURTH CLAIM FOR RELIEF Aiding and Abetting Violations of Securities Act Section 17(a)

(Defendants Spirit Trade, Ltd., Sungjin Cho, Kwon, Capyield Systems, Ltd., Olefir, Sabodakha, Vorochek, and Sarafanov)



170. As alleged above, Defendant Ieremenko and others violated Securities Act Section

17(a) [15 U.S.C. § 77q(a)].

171. Through their illicit trading, payments directly or indirectly to Defendant Ieremenko,

and other means alleged above, Defendants Spirit Trade, Ltd., Sungjin Cho, Kwon, Capyield

Systems, Ltd., Olefir, Sabodakha, Vorochek, and Sarafanov knowingly provided substantial

assistance to, and thereby aided and abetted, Defendant Ieremenko’s violations of the securities

laws.

172. By engaging in the foregoing conduct in 2016, pursuant to Securities Act Section

15(b) [15 U.S.C. § 77o(b)], Defendants Spirit Trade, Ltd., Sungjin Cho, Kwon, Capyield Systems,


40

Ltd., Olefir, Sabodakha, Vorochek, and Sarafanov violated, and unless enjoined will violate again,

Securities Act Section 17(a) [15 U.S.C. § 77q(a)].

FIFTH CLAIM FOR RELIEF Unjust Enrichment Liability

(Relief Defendants Kyungja Cho, Kalinkina, Meleynikov, and Solovev)



174. Relief Defendants Kyungja Cho, Kalinkina, Meleynikov, and Solovev have obtained

funds as part, and in furtherance, of the securities violations alleged above, and under circumstances

in which it is not just, equitable, or conscionable for these individuals to retain the funds. As a

consequence, these Relief Defendants have been unjustly enriched.

PRAYER FOR RELIEF

WHEREFORE, the SEC respectfully requests that the Court enter Final Judgments:

I.

Finding that Defendants violated the provisions of the federal securities laws alleged herein;

II.

Permanently restraining and enjoining each Defendant from, directly or indirectly, engaging

in conduct in violation of Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Rule 10b-5

thereunder [17 C.F.R. § 240.10b-5], and Securities Act Section 17(a) [15 U.S.C. § 77q(a)], and

permanently enjoining Defendants Spirit Trade, Ltd., Sungjin Cho, Kwon, Capyield Systems, Ltd.,

Olefir, Sabodakha, Vorochek, and Sarafanov from aiding and abetting any violation of Exchange

Act Section 10(b) [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5], and

Securities Act Section 17(a) [15 U.S.C. § 77q(a)];


41

III.

Ordering Defendants to disgorge, with prejudgment interest, all illicit trading profits,

avoided losses, or other ill-gotten gains received by any person or entity as a result of the actions

alleged herein;

IV.

Ordering Defendants to pay civil penalties pursuant to Sections 21 and 21A of the Exchange

Act [15 U.S.C. § 78u, 78u-1]; and

V.

Granting such other and further relief as this Court may deem just, equitable, or necessary.


42

JURY DEMAND

Pursuant to Rule 39 of the Federal Rules of Civil Procedure, Plaintiff demands that this case

be tried to a jury.

Dated: January 15, 2019 Respectfully submitted,

s/ Cheryl L. Crumpton Cheryl L. Crumpton Stephan J. Schlegelmilch Robert A. Cohen

Joseph G. Sansone Carolyn M. Welshhans

U.S. SECURITIES AND EXCHANGE COMMISSION 100 F Street, N.E. Washington, D.C. 20549 Tel: (202) 551-4459 (Crumpton) Tel: (202) 551-4935 (Schlegelmilch) [email protected] [email protected]

Of Counsel: David E. Bennett Michael C. Baker Laura K. D’Allaird Adam B. Gottlieb Arsen R. Ablaev Jason J. Burt James A. Scoggins David W. Snyder Jonathan M. Warner U.S. SECURITIES AND EXCHANGE COMMISSION 100 F Street, N.E. Washington, DC 20549


43

DESIGNATION OF AGENT FOR SERVICE

Pursuant to Local Rule 101.1(f), because the U.S. Securities and Exchange Commission (the

“SEC”) does not have an office in this district, the United States Attorney for the District of New

Jersey is hereby designated as eligible as an alternative to the SEC to receive service of all notices or

papers in the captioned action. Therefore, service upon the United States or its authorized designee,

J. Andrew Ryman, Chief, Civil Division, United States Attorney’s Office for the District of New

Jersey, 402 E. State Street, Room 430, Trenton, NJ 08608 shall constitute service upon the SEC for

purposes of this action.

Dated: January 15, 2019 Respectfully submitted,

s/ Cheryl L. Crumpton Cheryl L. Crumpton Stephan J. Schlegelmilch U.S. SECURITIES AND EXCHANGE COMMISSION 100 F Street, N.E. Washington, DC 20549 Tel: (202) 551-4459 (Crumpton) Tel: (202) 551-4935 (Schlegelmilch) [email protected] [email protected]


Case 1:18-cr-00567-VSB Document 107 Filed 08/06/19 Page 1 of 29

11/18/2019 US v. Martoma, 894 F. 3d 64 - Court of Appeals, 2nd Circuit 2017 - Google Scholar

https://scholar.google.com/scholar_case?case=4308656396293868053&q=martoma+2018&hl=en&as_sdt=2006 1/16

894 F.3d 64 (2017)

UNITED STATES of America, Appellee,v.

Mathew MARTOMA, Defendant-Appellant.

Docket No. 14-3599 August Term, 2016.

Argued: October 28, 2015. and May 9, 2017.Decided: August 23, 2017.Amended: June 25, 2018.

United States Court of Appeals, Second Circuit.

Defendant-appellant Mathew Martoma appeals from a judgment of conviction entered on September 9, 2014 in the UnitedStates District Court for the Southern District of New York (Gardephe, J.). Martoma was found guilty, after a jury trial, of onecount of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and two counts of securities fraud in violationof 15 U.S.C. §§ 78j(b) & 78ff in connection with an insider trading scheme. After Martoma was convicted, this Court issued adecision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), which elaborated on the Supreme Court's ruling in Dirksv. S.E.C., 463 U.S. 646 (1983), concerning liability for a "tippee" who trades on confidential information obtained from aninsider, or a "tipper."

On appeal, Martoma argues that the jury in his case was not properly instructed and that the evidence presented at his trialwas insufficient to sustain his conviction. Martoma contends that the jury instructions ran afoul of Newman by allowing thejury to find that a tipper receives a "personal benefit" from gifting inside information even where the tipper and tippee do notshare a "meaningfully close personal relationship." He further argues that the evidence at trial was insufficient to sustain aconviction under any theory of personal benefit.

We conclude that the jury instructions are inconsistent with Newman. That decision held that a personal benefit in the formof "a gift of confidential information to a trading relative or friend" requires proof that the tipper and tippee share a"meaningfully close personal relationship." 773 F.3d at 452. Newman explained that this standard "requires evidence of `arelationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the[latter].'" Id. Thus, Martoma's jury instructions were erroneous, not because they omitted the term "meaningfully closepersonal relationship," but because they allowed the jury to convict based solely on evidence of friendship without alsorequiring either that the tipper and tippee shared a quid pro quo-like relationship or that the tipper intended to benefit thetippee.

We nonetheless conclude that this instructional error did not affect Martoma's substantial rights. At trial, the governmentpresented compelling evidence that at least one tipper shared a relationship suggesting a quid pro quo with Martoma. Forthe same reason, Martoma's challenge to the sufficiency of the personal-benefit evidence fails. The government alsopresented sufficient evidence for a rational trier of fact to conclude that at least one tipper received a personal benefit bydisclosing inside information with the intention to benefit Martoma. Accordingly, the judgment of the district court isAFFIRMED.

Judge Pooler dissents in a separate opinion.

ROBERT ALLEN and ARLO DEVLIN-BROWN, Assistant United States Attorneys, (Megan Gaffney, Michael A. Levy, andMargaret Garnett, Assistant United States Attorneys, on the brief), for Geoffrey S. Berman, United States Attorney for theSouthern District of New York, New York, NY, for Appellee.

PAUL D. CLEMENT (Erin E. Murphy, Harker Rhodes, and Edmund G. LaCour, Jr., on the brief), Kirkland & Ellis LLP,Washington, DC; Alexandra A.E. Shapiro, Eric S. Olney, and Jeremy Licht, Shapiro Arato LLP, New York, NY; Charles J.Ogletree, Jr., Cambridge, MA, for Defendant-Appellant.

Before: KATZMANN, Chief Judge, POOLER and CHIN, Circuit Judges.

https://scholar.google.com/scholar_case?case=4704380632472121997&q=martoma+2018&hl=en&as_sdt=2006





Judge Pooler dissents in a separate opinion.

*67 KATZMANN, Chief Judge:67

Defendant-appellant Mathew Martoma was convicted, following a four-week jury trial, of one count of conspiracy to commitsecurities fraud in violation of 18 U.S.C. § 371 and two counts of securities fraud in violation of 15 U.S.C. §§ 78j(b) & 78ff inconnection with an insider trading scheme. On appeal, Martoma argues that the jury was improperly instructed and thatthere was insufficient evidence to sustain his conviction.

Martoma's contentions focus on the "personal benefit" element of insider trading law. In Dirks v. S.E.C., the Supreme Courtheld that a "tippee" — someone who receives confidential information from a corporate insider, or "tipper," and then tradeson the information — can be held liable under the insider trading laws "only when the insider has breached his fiduciary dutyto the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been abreach." 463 U.S. 646, 660, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). "[T]he test" for whether there has been a breach of thetipper's duty "is whether the [tipper] *68 personally will benefit, directly or indirectly, from his disclosure" to the tippee. Id. at662, 103 S.Ct. 3255. Dirks set forth several personal benefits that could prove the tipper's breach, including, for example, "arelationship" between the tipper and tippee "that suggests a quid pro quo from the latter," the tipper's "intention to benefit"the tippee, and "a gift of confidential information to a trading relative or friend" where "[t]he tip and trade resemble trading bythe insider himself followed by a gift of the profits to the recipient." Id. at 664, 103 S.Ct. 3255.

68

Martoma first argues that the jury in his case was not properly instructed in light of the Second Circuit's decision in UnitedStates v. Newman, 773 F.3d 438 (2d Cir. 2014). Martoma asserts that, under Newman, evidence that the tipper made a giftof inside information to a trading relative or friend establishes a "personal benefit" only if tipper and tippee share a"meaningfully close personal relationship." See Newman, 773 F.3d at 452. Martoma contends that the jury instructions wereflawed because they did not qualify that evidence of a gift to a trading relative or friend establishes a personal benefit onlywhere there is a "meaningfully close personal relationship." Second, Martoma argues that the evidence at trial wasinsufficient to sustain a conviction under any theory of personal benefit.

We agree that the jury instructions are inconsistent with Newman, though not for the reasons Martoma advances. Newmanheld that a personal benefit in the form of "a gift of confidential information to a trading relative or friend," see Dirks, 463U.S. at 664, 103 S.Ct. 3255, requires proof that the tipper and tippee shared what the decision called a "meaningfully closepersonal relationship," see Newman, 773 F.3d at 452. The Court explained that this standard "requires evidence of `arelationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the[latter].'" Id. (quoting United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013) (quoting Dirks, 463 U.S. at 664, 103 S.Ct.3255)). Thus, Martoma's jury instructions were erroneous, not because they omitted the term "meaningfully close personalrelationship," but because they allowed the jury to find a personal benefit in the form of a "gift of confidential information to atrading relative or friend" without requiring the jury to find either that tipper and tippee shared a relationship suggesting aquid pro quo or that the tipper gifted confidential information with the intention to benefit the tippee.

We nonetheless conclude that this instructional error did not affect Martoma's substantial rights. At trial, the governmentpresented compelling evidence that at least one tipper received a different type of personal benefit from disclosing insideinformation: $70,000 in "consulting fees." This evidence establishes the existence of a relationship suggesting a quid proquo between the tipper and tippee. For this reason, Martoma's challenge to the sufficiency of the personal-benefit evidencefails. Moreover, the government presented sufficient evidence for a rational trier of fact to conclude that at least one tipperreceived a personal benefit by disclosing inside information with the intention to benefit Martoma. Accordingly, we AFFIRMthe judgment of the district court.

BACKGROUND

Martoma's convictions stem from an insider trading scheme involving securities of two pharmaceutical companies, ElanCorporation, plc ("Elan") and Wyeth, that were jointly developing an experimental drug called bapineuzumab to treatAlzheimer's disease. Martoma worked as a *69 portfolio manager at S.A.C. Capital Advisors ("SAC"), a hedge fund ownedand managed by Steven A. Cohen. In that capacity, Martoma managed an investment portfolio with buying power ofbetween $400 and $500 million that was focused on pharmaceutical and healthcare companies. He also recommended

69













investments to Cohen, who managed SAC's largest portfolio. While at SAC, Martoma began to acquire shares in Elan andWyeth in his portfolio and recommended that Cohen acquire shares in the companies as well.

In order to obtain information about bapineuzumab, Martoma contacted expert networking firms and arranged paidconsultations with doctors knowledgeable about Alzheimer's disease, including two who were working on the bapineuzumabclinical trial. Dr. Sidney Gilman, chair of the safety monitoring committee for the bapineuzumab clinical trial, participated in

approximately 43 consultations with Martoma at the rate of around $1,000 per hour.[1] As a member of the safety monitoringcommittee, Dr. Gilman had an obligation to keep the results of the clinical trial confidential. His consulting contract reiteratedthat he was not to disclose any confidential information in a consultation. He nevertheless provided Martoma, whom heknew to be an investment manager seeking information to help make securities trading decisions, with confidential updateson the drug's safety that he received during meetings of the safety monitoring committee. Dr. Gilman also shared withMartoma the dates of upcoming safety monitoring committee meetings, which allowed Martoma to schedule consultationswith Dr. Gilman shortly after each one. Another consultant, Dr. Joel Ross, one of the principal investigators on the clinicaltrial, met with Martoma on many occasions between 2006 and July 2008 and charged approximately $1,500 per hour. LikeDr. Gilman, Dr. Ross had an obligation to maintain the confidentiality of information about the bapineuzumab clinical trial.Nevertheless, during their consultations, Dr. Ross provided Martoma with information about the clinical trial, includinginformation about his patients' responses to the drug and the total number of participants in the study, that Dr. Rossrecognized was not public.

On June 17, 2008, Elan and Wyeth issued a press release regarding the results of "Phase II" of the bapineuzumab clinicaltrial. The press release described the preliminary results as "encouraging," with "clinically meaningful benefits in importantsubgroups" of Alzheimer's patients with certain genetic characteristics, but indicated that the drug had not proven effectivein the general population of Alzheimer's patients. J.A. 547. The press release further stated that the results of the trialswould be presented in greater detail at the International Conference on Alzehimer's Disease to be held on July 29, 2008.Elan's share price increased following the press release.

In mid-July of 2008, the sponsors of the bapineuzumab trial selected Dr. Gilman to present the results at the July 29conference. It was only at this point that Dr. Gilman was unblinded as to the final efficacy results of the trial. Dr. Gilman was"initially euphoric" about the results, but identified "two major weaknesses in the data" that called into question the efficacyof the drug as compared to the placebo. Tr. 1419-20. On July 17, 2008, the day after being unblinded to the results, Dr.Gilman spoke with Martoma for about 90 *70 minutes by telephone about what he had learned. That same day, Martomapurchased a plane ticket to see Dr. Gilman in person at his office in Ann Arbor, Michigan. That meeting occurred two dayslater, on July 19, 2008. At that meeting, Dr. Gilman showed Martoma a PowerPoint presentation containing the efficacyresults and discussed the data with him in detail.

70

The next morning, Sunday, July 20, Martoma sent Cohen, the owner of SAC, an email with "It's important" in the subject lineand asked to speak with him by telephone. The two had a telephone conversation lasting about twenty minutes, after whichMartoma emailed Cohen a summary of SAC's Elan and Wyeth holdings. The day after Martoma spoke to Cohen, on July21, 2008, SAC began to reduce its position in Elan and Wyeth securities and entered into short-sale and options trades thatwould be profitable if Elan's and Wyeth's stock fell.

Dr. Gilman publicly presented the final results from the bapineuzumab trial at the International Conference on Alzehimer'sDisease in the afternoon of July 29, 2008. Elan's share price began to decline during Dr. Gilman's presentation and at theclose of trading the next day, the share prices of Elan's and Wyeth had declined by about 42% and 12%, respectively. Thetrades that Martoma and Cohen made in advance of the announcement resulted in approximately $80.3 million in gains and$194.6 million in averted losses for SAC. Martoma personally received a $9 million bonus based in large part on his tradingactivity in Elan and Wyeth.

At Martoma's trial, the district court instructed the jury on the personal benefit element of insider trading law as follows:

If you find that Dr. Gilman or Dr. Ross disclosed material, non-public information to Mr. Martoma, you mustthen determine whether the government proved beyond a reasonable doubt that Dr. Gilman and Dr. Rossreceived or anticipated receiving some personal benefit, direct or indirect, from disclosing the material, non-public information at issue.



The benefit may, but need not be, financial or tangible in nature; it could include obtaining some futureadvantage, developing or maintaining a business contact or a friendship, or enhancing the tipper'sreputation.

A finding as to benefit should be based on all the objective facts and inferences presented in the case. Youmay find that Dr. Gilman or Dr. Ross received a direct or indirect personal benefit from providing insideinformation to Mr. Martoma if you find that Dr. Gilman or Dr. Ross gave the information to Mr. Martoma withthe intention of benefiting themselves in some manner, or with the intention of conferring a benefit on Mr.Martoma, or as a gift with the goal of maintaining or developing a personal friendship or a useful networkingcontact.

Tr. 3191.

After Martoma was convicted and while his appeal was pending, this Court decided United States v. Newman, 773 F.3d 438(2d Cir. 2014), an insider trading case that considered one of the personal benefits described in Dirks and mentioned in

Martoma's jury instructions — making a "gift" of inside information to "a trading relative or friend."[2] This Court stated:

To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship betweenthe tipper and tippee, where the tippee's trades `resemble trading by the insider himself *71 followed by a giftof the profits to the recipient,' see 463 U.S. at 664 [103 S.Ct. 3255], we hold that such an inference isimpermissible in the absence of proof of a meaningfully close personal relationship that generates anexchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarlyvaluable nature.

71

773 F.3d at 452. An initial round of briefing focused in large part on whether Martoma's conviction could stand in light of thispassage from Newman.

Shortly thereafter, the Supreme Court decided Salman v. United States, ___ U.S. ___, 137 S.Ct. 420, 196 L.Ed.2d 351(2016), another case involving the gift theory. The defendant, relying on Newman, urged the Supreme Court to hold that a"`gift of confidential information to a trading relative or friend'" is insufficient to establish insider trading liability "unless thetipper's goal in disclosing inside information [wa]s to obtain money, property, or something of tangible value." Id. at 426(quoting Dirks, 463 U.S. at 664, 103 S.Ct. 3255). The Supreme Court rejected the defendant's argument and "adhere[d] toDirks," id. at 427, observing that "[t]o the extent the Second Circuit held that the tipper must also receive something of a`pecuniary or similarly valuable nature' in exchange for a gift to family or friends,... this requirement is inconsistent withDirks," id. at 428 (quoting Newman, 773 F.3d at 452); see also id. ("Here, by disclosing confidential information as a gift tohis brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to Citigroup andits clients....").

The government now takes the position that Salman fully abrogated Newman's interpretation of the personal benefitelement, whereas Martoma argues that Newman's "meaningfully close personal relationship" standard survived Salman.However, because there are many ways to establish a personal benefit, we conclude that we need not decide whetherNewman's gloss on the gift theory is inconsistent with Salman. At trial, the government presented compelling evidence thatDr. Gilman received a different type of personal benefit: $70,000 in consulting fees, which can be seen either as evidence ofa quid pro quo-like relationship, or simply advance payments for the tips of inside information that Dr. Gilman went on to

supply.[3] The government also introduced sufficient evidence to prove Dr. Gilman received a personal benefit by disclosinginside information with the intention to benefit Martoma. We accordingly conclude that Martoma has provided no basis forhis judgment of conviction to be vacated or reversed.

DISCUSSION

As noted above, Martoma challenges both the adequacy of the district court's jury instructions and the sufficiency of theevidence presented at trial. "We review a jury charge in its entirety and not on the basis of excerpts taken out of context."United States v. Mitchell, 328 F.3d 77, 82 (2d Cir. 2003) (quoting United States v. Zvi, 168 F.3d 49, 58 (2d Cir. 1999)). "Aconviction based on a general verdict is subject to challenge if the jury was instructed on alternative theories of guilt andmay have relied on an invalid one." Hedgpeth v. Pulido, 555 U.S. 57, 58, 129 S.Ct. 530, 172 L.Ed.2d 388 (2008). Such a












challenge, however, is subject to harmless error review. See id. at 58, 61-62, *72 129 S.Ct. 530. And because Martomaraises his challenge to the jury instructions for the first time on appeal, we review only for plain error. United States v. Vilar,729 F.3d 62, 70 (2d Cir. 2013). Under the plain error standard, an appellant must demonstrate that "(1) there is an error; (2)the error is clear or obvious, rather than subject to reasonable dispute; (3) the error affected the appellant's substantial

rights...; and (4) the error seriously affects the fairness, integrity or public reputation of judicial proceedings."[4] United Statesv. Marcus, 560 U.S. 258, 262, 130 S.Ct. 2159, 176 L.Ed.2d 1012 (2010) (internal quotation marks and alteration omitted). "[W]e look not to the law at the time of the trial court's decision to assess whether the error was plain, but rather, to the lawas it exists at the time of review." Vilar, 729 F.3d at 71. Even with respect to an instructional error that "incorrectly omitted anelement of the offense," we will not overturn a conviction "if we find that the jury would have returned the same verdictbeyond a reasonable doubt," and thus that "the error did not affect [the defendant's] substantial rights." Nouri, 711 F.3d at139-40 (internal quotation marks omitted).

72

With respect to Martoma's second argument, a defendant challenging the sufficiency of the evidence "bears a heavyburden," and "the standard of review is exceedingly deferential." United States v. Coplan, 703 F.3d 46, 62 (2d Cir. 2012)(internal quotation marks omitted). "In evaluating a sufficiency challenge, we `must view the evidence in the light mostfavorable to the government, crediting every inference that could have been drawn in the government's favor, and deferringto the jury's assessment of witness credibility and its assessment of the weight of the evidence.'" Id. (quoting United Statesv. Chavez, 549 F.3d 119, 124 (2d Cir. 2008)). "Although sufficiency review is de novo, we will uphold the judgment[] ofconviction if `any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.'" Id.(citation omitted) (quoting Jackson v. Virginia, 443 U.S. 307, 319, 99 S.Ct. 2781, 61 L.Ed.2d 560 (1979)). "A judgment ofacquittal is warranted only if the evidence that the defendant committed the crime alleged is nonexistent or so meager thatno reasonable jury could find guilt beyond a reasonable doubt." Jiau, 734 F.3d at 152 (alteration and internal quotationmarks omitted).

I.

We first turn to Martoma's challenge to the district court's jury instructions, which focuses on Dirks' statement that thepersonal benefit necessary to establish insider trading liability in a tipping case can be inferred from a "gift of confidentialinformation to a trading relative or friend." Dirks, 463 U.S. at 663-64, 103 S.Ct. 3255; see also Salman, 137 S.Ct. at 428.Martoma argues that the district court's jury instructions ran afoul of this Court's decision in Newman by permitting the juryto conclude that a gift of confidential information given with the goal of "developing or *73 maintaining ... a friendship"qualifies as a personal benefit. According to Martoma, the jury should have been instructed that the tipper and tippee mustshare a "meaningfully close personal relationship" in order to find a personal benefit based on a gift of inside information toa friend.

73

A. The Personal Benefit Requirement

The Supreme Court long ago held that there is no "general duty between all participants in market transactions to forgoactions based on material, nonpublic information." Chiarella v. United States, 445 U.S. 222, 233, 100 S.Ct. 1108, 63 L.Ed.2d348 (1980). However, the "traditional" or "classical theory" of insider trading provides that a corporate insider violates §10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (2017), when he"trades in the securities of his corporation on the basis of material, non-public information" because "a relationship of trustand confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidentialinformation by reason of their position with that corporation." United States v. O'Hagan, 521 U.S. 642, 651-52, 117 S.Ct.2199, 138 L.Ed.2d 724 (1997) (alteration in original) (quoting Chiarella, 445 U.S. at 228, 100 S.Ct. 1108). Similarly, the"misappropriation theory" of insider trading provides "that a person ... violates § 10(b) and Rule 10b-5[] when hemisappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of theinformation." Id. at 652, 117 S.Ct. 2199. It is thus the breach of a fiduciary duty or other "duty of loyalty and confidentiality"

that is a necessary predicate to insider trading liability. See id.[5]

The personal benefit element has its origin in Dirks, where the Supreme Court examined how a recipient of insideinformation who was not himself a corporate insider — i.e., a tippee — can acquire a duty to disclose or abstain fromtrading. The Supreme Court held that a tippee acquires the duty to disclose or abstain only if the insider disclosed the
















confidential information in breach of a fiduciary duty to the firm. Dirks, 463 U.S. at 660-61, 103 S.Ct. 3255. "Whetherdisclosure is a breach of duty," the Supreme Court explained, "depends in large part on the purpose of the disclosure." Id. at662, 103 S.Ct. 3255. The personal benefit requirement is designed to test the propriety of the tipper's purpose. See id. at661-63, 103 S.Ct. 3255. This logic is sound. A firm's confidential information belongs to the firm itself, and an insiderentrusted with it has a fiduciary duty to use it only for firm purposes. The insider who personally benefits — i.e., whosepurpose is to help himself — from disclosing confidential information therefore breaches that duty; the insider who disclosesfor a legitimate corporate purpose does not. Identifying personal benefits is not, however, the central focus of insider tradinglaw, but simply how courts and juries analyze breaches of fiduciary duty.

The Supreme Court defined personal benefit broadly. As noted above, the test for a personal benefit is whether objectiveevidence shows that "the insider personally will benefit, directly or indirectly, from his disclosure" of confidential informationto the tippee. Id. at 662, 103 *74 S.Ct. 3255. Dirks set forth numerous examples of personal benefits that prove the tipper'sbreach: a "pecuniary gain," a "reputational benefit that will translate into future earning," a "relationship between the insiderand the recipient that suggests a quid pro quo from the latter," the tipper's "intention to benefit the particular recipient," and a"gift of confidential information to a trading relative or friend" where "[t]he tip and trade resemble trading by the insiderhimself followed by a gift of the profits to the recipient." Id. at 663-64, 103 S.Ct. 3255. The tipper's personal benefit need notbe pecuniary in nature. See Salman, 137 S.Ct. at 428.

74

We have applied Dirks to uphold a wide variety of personal benefits. We held that a jury could infer a personal benefit fromthe fact that a tipper "hoped to curry favor with his boss," Obus, 693 F.3d at 292, and from the fact that another tipper andthe tippee "were friends from college," id. at 291. We found evidence of a personal benefit sufficient where the tippee gaveone tipper "an iPhone, live lobsters, a gift card, and a jar of honey," and where the tippee had another tipper admitted intoan investment club where the tipper "had the opportunity to access information that could yield future pecuniary gain" (eventhough he never realized that opportunity). Jiau, 734 F.3d at 153. In another case, we held that the government "need notshow that the tipper expected or received a specific or tangible benefit in exchange for the tip," and that the personal benefitelement is satisfied where there is evidence that the tipper "intend[ed] to benefit the ... recipient." S.E.C. v. Warde, 151 F.3d42, 48 (2d Cir. 1998) (internal quotation marks omitted).

As we understand the dissent, our core disagreement is over whether intent to benefit is a standalone personal benefitunder Dirks. The dissent argues that it is not, claiming instead that the correct formulation is a "relationship ... thatsuggests... an intention to benefit" the tippee. See Dissent, op. at 83-84. The key sentence of Dirks is admittedlyambiguous, and we acknowledge that the dissent has offered a plausible reading. See 463 U.S. at 664, 103 S.Ct. 3255("For example, there may be a relationship between the insider and the recipient that suggests a quid pro quo from thelatter, or an intention to benefit the particular recipient."). But that is not the only reading. The comma separating the"intention to benefit" and "relationship... suggesting a quid pro quo" phrases can be read to sever any connection betweenthem. The sentence, so understood, effectively reads, "there may be a relationship between the insider and the recipientthat suggests a quid pro quo from the latter, or there may be an intention to benefit the particular recipient." And that is thereading this Court adopted in Warde, where we read the "intention to benefit" language independently of the language ofrelationships: "The `benefit' element of § 10(b) is satisfied when the tipper `intend[s] to benefit the ... recipient' or `makes a

gift of confidential information to a trading relative or friend.'"[6] Warde, 151 F.3d at 48 (quoting Dirks, 463 U.S. at 664, 103S.Ct. 3255). We adhere to Warde.

*75 Our understanding is also more consonant with Dirks as a whole. Because the existence of a breach "depends in largepart on the purpose of the disclosure," Dirks, 463 U.S. at 662, 103 S.Ct. 3255, it makes perfect sense to permit thegovernment to prove a personal benefit with objective evidence of the tipper's intent, without requiring in every case someadditional evidence of the tipper-tippee relationship. Cf. United States v. Falcone, 257 F.3d 226, 230 (2d Cir. 2001)(Sotomayor, J.) (explaining that "the key factor" in proving a personal benefit is "the tipper's intent in providing theinformation"). For example, suppose a tipper discloses inside information to a perfect stranger and says, in effect, you canmake a lot of money by trading on this. Under the dissent's approach, this plain evidence that the tipper intended to benefitthe tippee would be insufficient to show a breach of the tipper's fiduciary duty to the firm due to the lack of a personalrelationship. Dirks and Warde do not demand such a result. Rather, the statement "you can make a lot of money by tradingon this," following the disclosure of material non-public information, suggests an intention to benefit the tippee in breach ofthe insider's fiduciary duty.

75


















We are not persuaded by our dissenting colleague's arguments to the contrary. The dissent contends that proof that thetipper had an intent to benefit the tippee does not prove that the tipper truly "received" a personal benefit. See Dissent, op.at 84-85. The dissent would evidently have there be proof of something more concrete. However, as we have explained, it issettled law that personal benefits may be indirect and intangible and need not be pecuniary at all. The tipper's intention tobenefit the tippee proves a breach of fiduciary duty because it demonstrates that the tipper improperly used insideinformation for personal ends and thus lacked a legitimate corporate purpose. That is precisely what, under Dirks, thepersonal benefit element is designed to test. See 463 U.S. at 662, 103 S.Ct. 3255. Is evidence that an insider intended tobenefit an outsider with valuable confidential information any less probative of the absence of a legitimate corporate

purpose than evidence that the tippee gave the tipper trivialities like shellfish and a gift card? See Jiau, 734 F.3d at 153.[7]

The dissent argues that its formulation is more faithful to the personal benefit standard because evidence of a relationshipsuggesting an intent to benefit the tippee "provides reason to believe that the tipper benefits by benefitting, since the tipperis understood as contributing to a relationship from which both tipper and tippee benefit," a rationale that does not applywhere there has been no proof of a relationship. Dissent, op. at 86. We disagree. That rationale would justify a personalbenefit in the form of a relationship suggesting an intention to benefit both tipper and tippee, from which it is straightforwardto infer that the tipper personally benefited from the tip. But what Dirks in fact refers to is an intention to benefit the tippeealone. See 463 U.S. at 664, 103 S.Ct. 3255. Whichever way Dirks is read, it recognizes that purposely benefitting the tippeewith inside information proves that the tipper has received a personal *76 benefit in breach of a fiduciary duty. The questionis whether Dirks requires that to be proved with evidence of a relationship or not. We think it clear that the answer is no. Andalthough few reported decisions have relied on the intent to benefit theory, its legitimacy has until today beenuncontroversial. To take an example close to home, it featured in the jury instructions in this very case, see Tr. 3191, and noobjection was raised, nor was any challenge to this language pressed on appeal.

76

Finally, we are warned that this approach creates a "subjective" test and allows for convictions based on sheer speculationinto the tipper's motives. See Dissent, op. at 83-84, 88. These fears are unwarranted. Intent elements are everywhere in ourlaw and are generally proved with circumstantial evidence. See, e.g., United States v. Heras, 609 F.3d 101, 106 (2d Cir.2010) ("The law has long recognized that criminal intent may be proved by circumstantial evidence alone."); United States v.Salameh, 152 F.3d 88, 143 (2d Cir. 1998) ("[A]s a general rule most evidence of intent is circumstantial."). Insider trading isno different. A factfinder may infer the tipper intended to benefit the tippee from the sort of objective evidence that iscommonly offered in insider trading cases. To return to the example above, the statement "you can make a lot of money bytrading on this" is strong circumstantial evidence of the tipper's intention to benefit the tippee. And the requirement of proofbeyond a reasonable doubt remains a formidable barrier to convictions resting on speculation. See United States v. Torres,604 F.3d 58, 66 (2d Cir. 2010).

We are thus satisfied that the personal benefit element can be met by evidence that the tipper's disclosure of insideinformation was intended to benefit the tippee. And as is clear from the purpose of the personal benefit element, the "broaddefinition of personal benefit set forth in Dirks," and the variety of benefits we have upheld, the evidentiary "bar is not a highone." Obus, 693 F.3d at 292.

B. This Court's Decision in Newman

It is against that background that we must assess how Newman affected this Court's insider trading law. The centralquestion in Newman was an issue of scienter on which our district courts had been split: whether a tippee must be aware,not only that the tipper breached a fiduciary duty in disclosing inside information, but also that the tipper received a personalbenefit. Newman, 773 F.3d at 447-51. The Court persuasively explained that both were required. Id. at 449 ("[A] tippee'sknowledge of the insider's breach necessarily requires knowledge that the insider disclosed confidential information inexchange for personal benefit."). This important teaching of Newman is not before us. We observe that, unlike thedefendants in Newman, Martoma received confidential information directly from the tipper, and he does not claim that hewas unaware of any personal benefit Dr. Gilman received. Cf. id. at 448 ("In Jiau, the defendant knew about the benefitbecause she provided it.").

Newman's second holding is the focus of this appeal. After resolving the scienter question, Newman considered thesufficiency of the personal benefit evidence for two tippers, where the government relied chiefly on evidence that they werefriendly with their tippees. The first tipper and tippee were not "close" friends but "had known each other for years, havingboth attended business school and worked at Dell together," and the tippee had provided modest "career advice and











assistance" *77 to the tipper. Id. at 452. The second tipper and tippee were "family friends" that "had met through churchand occasionally socialized together." Id. The government argued that these relationships were "sufficient to prove that thetippers derived some benefit from the tip." Id.

77

The Newman panel rejected the government's argument, holding that the personal benefit "standard, although permissive,does not suggest that the Government may prove the receipt of a personal benefit by the mere fact of a friendship,particularly of a casual or social nature." Id. As the Newman Court reasoned, if that were enough, then "practically anythingwould qualify," and "the personal benefit requirement would be a nullity." Id. And in the sentence that forms the basis ofMartoma's argument on appeal, Newman stated as follows:

To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship betweenthe tipper and tippee, where the tippee's trades `resemble trading by the insider himself followed by a gift ofthe profits to the recipient,' we hold that such an inference is impermissible in the absence of proof of ameaningfully close personal relationship....

Id. at 452 (citation omitted) (quoting Dirks, 463 U.S. at 664, 103 S.Ct. 3255). On the facts before it, the Newman Courtfound that standard had not been satisfied. Id. at 452-53.

Martoma focuses on this single sentence of Newman to argue that a jury may not infer that a tipper received a personalbenefit from gifting confidential information in the absence of a "meaningfully close personal relationship." The term"meaningfully close personal relationship" is new to our insider trading jurisprudence, and, viewed in isolation, it might admitmultiple interpretations. But Newman provided substantial guidance. Immediately after introducing the "meaningfully closepersonal relationship" concept, Newman held that it "requires evidence of `a relationship between the insider and therecipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].'" Newman, 773 F.3d at 452(quoting Jiau, 734 F.3d at 153 (quoting Dirks, 463 U.S. at 664, 103 S.Ct. 3255)). As explained above, each of these is anindependently sufficient basis to infer a personal benefit under Dirks and its progeny. See, e.g., Jiau, 734 F.3d at 153 (quidpro quo-like relationship). In other words, Newman cabined the gift theory using two other freestanding personal benefits

that have long been recognized by our case law.[8] And although the dissent urges in strong terms that this reading ismistaken or even improper, its dispute is in truth with the plain language of Dirks, as construed by Warde. We do no morethan read literally Newman's own explanation of its novel standard in light of these decisions, thereby fulfilling our legitimatefunction to construe and give effect to prior panel decisions.

With that understanding of Newman, we conclude that the personal benefit *78 jury instructions in Martoma's trial, issuedprior to that decision, were erroneous. The instructions allowed the jury to find a personal benefit based solely on theconclusion that Dr. Gilman tipped Martoma in order to "develop[] or maintain[] ... a friendship." Under Newman, thisarticulation of the gift theory is incomplete. A properly instructed jury would have been informed that it could find a personalbenefit based on a "gift of confidential information to a trading relative or friend" only if it also found that Dr. Gilman andMartoma shared a relationship suggesting a quid pro quo or that Dr. Gilman intended to benefit Martoma with the insideinformation. But, of course, there was no error in the district court's instructions that the jury could also find a personalbenefit based on either of those two factors alone, i.e., if it concluded that Dr. Gilman disclosed confidential information "withthe intention of conferring a benefit on Mr. Martoma," or "with the intention of benefiting [himself] in some manner." See Tr.3191. Each of these personal benefits is unaffected by Newman's interpretation of the gift theory, and neither requires proofthat Dr. Gilman and Martoma share any type of "personal relationship."

78

Although the jury instructions were inaccurate, we conclude that the error did not affect Martoma's substantial rights. SeeNouri, 711 F.3d at 139-40. The government produced compelling evidence that Dr. Gilman, the tipper, "entered into arelationship of quid pro quo" with Martoma. See Jiau, 734 F.3d at 153. Dr. Gilman, over the course of approximately 18months and 43 paid consultation sessions for which he billed $1,000 an hour, regularly and intentionally provided Martomawith confidential information from the bapineuzumab clinical trial. Martoma kept coming back, specifically schedulingconsultation sessions so that they would occur shortly after the safety monitoring committee meetings, when Dr. Gilmanwould have new information to pass along. Starting at least in August 2007, Dr. Gilman would reschedule his conversationswith Martoma if he had no new information to reveal at the time they were scheduled to meet. By that point, the consultingrelationship between Dr. Gilman and Martoma involved no legitimate service, see Dissent, op. at 88; as Dr. Gilman testifiedat trial, "the purpose of those consultations was for [him] to disclose to [Martoma] confidential information about the results... of the last Safety Monitoring Committee [meeting]." Tr. 1274. And because Martoma continued to see Dr. Gilman toreceive confidential information, Dr. Gilman continued to receive consulting fees. The fact that Dr. Gilman did not specifically










bill for his July 17 and 19, 2008 conversations with Martoma in which Dr. Gilman divulged the final drug efficacy data is alsoof no moment because, as he admitted at trial, doing so "would [have been] tantamount to confessing that [he] was ... giving[Martoma] inside information." Tr. 1918. In the context of their ongoing "relationship of quid pro quo," Dr. Gilman'sdisclosures of confidential information were designed to "make good on the substantial pecuniary benefit he had alreadyearned," Dirks, 463 U.S. at 663, 103 S.Ct. 3255, and as a result, "it is clear beyond a reasonable doubt that a rational jurywould have found [Martoma] guilty absent [any] error." Mahaffy, 693 F.3d at 136 (internal quotation marks omitted).

The dissent argues that under our analysis, a fact-finder must always find that tipper and tippee had a quid pro quo-likerelationship whenever a tip is exchanged within a paid consulting relationship. Dissent, op. at 88. Not so. We merely holdthat on the compelling facts of this case, it is clear beyond a reasonable doubt that a properly instructed jury would havefound *79 Martoma guilty. Nor does our decision mean that a tipper who accidentally or unknowingly reveals insideinformation can be found guilty. See id. at 72. Such a tipper would be protected by the requirement that the tipper know (oris reckless in not knowing) that the information is material and non-public, see Obus, 693 F.3d at 286, or by the requirementthat the tipper expect the tippee to trade, see United States v. Gansman, 657 F.3d 85, 92 (2d Cir. 2011).

79

II.

We next turn to Martoma's challenge to the sufficiency of the personal benefit evidence and whether, "evaluating... theevidence in the light most favorable to the government," a rational jury could have found Martoma guilty of insider trading.See Coplan, 703 F.3d at 62. As an initial matter, it follows from our conclusion that the faulty jury instructions were harmlessbecause of the compelling evidence that Dr. Gilman and Martoma shared a relationship suggesting a quid pro quo that thisevidence was also sufficient to support his conviction. In particular, the jury was free to place no weight on the fact that Dr.Gilman did not bill Martoma for the July 17 and 19, 2008 sessions. We reiterate, however, that while the governmentpresented compelling evidence on this point, the evidentiary bar is "modest." Jiau, 734 F.3d at 153.

Moreover, even if a jury were inclined to accept Martoma's argument that there was no quid pro quo-like relationshipbecause Dr. Gilman did not bill Martoma for two key sessions, a rational jury could nonetheless find that Dr. Gilmanpersonally benefited by disclosing inside information with the "intention to benefit" Martoma. See Dirks, 463 U.S. at 664, 103S.Ct. 3255. We think a jury can often infer that a corporate insider receives a personal benefit (i.e., breaches his fiduciaryduty) from deliberately disclosing valuable, confidential information without a corporate purpose and with the expectationthat the tippee will trade on it. See id. at 659, 103 S.Ct. 3255 (explaining that "insiders [are] forbidden by their fiduciaryrelationship" from giving inside information "to an outsider for the ... improper purpose of exploiting the information for theirpersonal gain"); cf. Salman, 137 S.Ct. at 428 (recognizing that where a tipper discloses information with the "expectationthat [the recipient will] trade on it," the information is "the equivalent of ... cash"). Here, as previously noted, Dr. Gilman knewthat Martoma was an investment manager who was seeking information on which to base securities trading decisions. AndDr. Gilman plainly understood the valuable nature of the information about the bapineuzumab clinical trial, as Martoma hadpreviously paid him $1,000 per hour over the course of 43 consultations to convey his knowledge on the subject, and hadvisited Dr. Gilman in his Ann Arbor office to receive the key drug efficacy results firsthand. From these facts, a reasonablejury could infer that Dr. Gilman personally benefited by conveying inside information about the trial with the purpose ofbenefiting Martoma, even if it was not persuaded that the two had a relationship suggesting a quid pro quo (or a personal

relationship, for that matter).[9] See Dirks, 463 U.S. at 667, 103 S.Ct. 3255.

*80 For the foregoing reasons, we hold that "a rational trier of fact could have found the essential elements of the crime [of

insider trading] beyond a reasonable doubt." Coplan, 703 F.3d at 62 (quoting Jackson, 443 U.S. at 319, 99 S.Ct. 2781).[10]80

CONCLUSION

We have considered Martoma's remaining arguments and find them without merit. Accordingly, we AFFIRM the judgment ofthe district court.

POOLER, Circuit Judge:

I respectfully dissent. Last year, my colleagues filed an opinion in this matter in which they abrogated our prior decision inUnited States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014). They declared that a non-insider could be convicted of insider















trading on a gift theory even if she did not have a meaningfully close personal relationship with the insider from whom shereceived the confidential information. See United States v. Martoma, 869 F.3d 58, 69 (2d Cir. 2017). Applying this reasoningto the case at hand, they held that the jury instructions permissibly allowed for conviction based on speculation about Dr.Gilman's desire to be friends with Martoma. I dissented from that opinion because it improperly abrogated a prior paneldecision without en banc review or an intervening Supreme Court precedent, undermined the personal benefit rule centralto holding corporate outsiders liable for insider trading, and approved of a conviction based on erroneous jury instructionsthat affected Martoma's substantial rights.

My colleagues now issue a modified opinion. In it, they purport to agree that our precedent prevents a jury from beingcharged with inferring that a tip was given as a gift unless it finds that there was a meaningfully close personal relationshipbetween the tipper and the tippee. They no longer disclaim Newman. They even agree that the jury instructions were inerror.

But these apparent concessions are semantic rather than substantial. My colleagues also attempt to redefine "meaningfullyclose personal relationship" in subjective rather than objective terms, rendering Newman a relic. To provide support for thismove, they improperly construe binding authority. They then hold that the erroneous jury instructions were harmless sincethe jury could have convicted based on a different theory.

The majority's attempt to undercut the meaningfully close personal relationship requirement is in derogation of circuitprecedent and unnecessary to arrive at their disposition. Only by abrogating Newman could my colleagues announce a newrule that a jury can infer a personal benefit based on a freestanding "intention to benefit" and that this "intention to benefit" isat the core of the meaningfully close *81 personal relationship standard. Op. at 74-76, 77. Today's opinion must beinterpreted consistently with the rule that, as a three-judge panel, we are unable to abrogate prior circuit decisions. See In reZarnel, 619 F.3d 156, 168 (2d Cir. 2010) ("This panel is bound by the decisions of prior panels until such time as they areoverruled either by an en banc panel of our Court or by the Supreme Court.") (internal quotation marks omitted). Newmanand a consistent line of cases preceding it make clear that a meaningfully close personal relationship cannot be provenwithout objective evidence about the nature of the tipper-tippee relationship. Bare speculation into insiders' motives hasalways been insufficient; it remains so today in spite of the majority's dicta.

81

Therefore, I continue to respectfully dissent.

I. Gifts and the Law of Insider Trading

Dirks, the foundational case on holding a non-insider liable for insider trading, established that a jury's "initial inquiry" mustbe whether a corporate insider passed on information to the non-insider "for personal advantage" rather than for theadvantage of shareholders. Dirks v. S.E.C., 463 U.S. 646, 662-63, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). Making theinquiry into "whether the insider receives a direct or indirect personal benefit" by disclosing confidential information "requirescourts to focus on objective criteria." Id. at 663, 103 S.Ct. 3255. The question for a finder of fact is not whether the insiderwished ill on shareholders or wished good on the tippee, but whether she received something in return for her tip.

As the Supreme Court explained,[1] making objective evidence of a personal benefit a prerequisite to holding a non-insidertippee liable serves several purposes. It creates "a guiding principle for those whose daily activities must be limited andinstructed by the SEC's inside-trading rules" so that participants in securities markets are not left to the whims ofprosecutorial enforcement priorities. Dirks, 463 U.S. at 664, 103 S.Ct. 3255. It protects "persons outside the company suchas an analyst or reporter who learns of inside information" from the threat of prosecution for uncovering information aboutsecurities issuers just because they also traded on it. Id. at 664 n.24, 103 S.Ct. 3255 (italics omitted). It limits thegovernment's ability to hold non-insiders liable when insiders "mistakenly think ... information already has been disclosed orthat it is not material enough to affect the market." Id. at 662, 103 S.Ct. 3255.

Restricting proof of a personal benefit to objective evidence avoids turning the rule into a mere formality. Absent objectiveevidence, a slip of the tongue might be presented to a jury as a purposeful tip with a good cover story, an off-the-recordcomment to a trusted reporter might be portrayed as a means of bribing a journalist for favorable coverage. The differencebetween guilty and innocent conduct would be a matter of speculation into what a tippee knew or should have known aboutthe tipper's intent. A trader, journalist, or analyst attempting to avoid running afoul of criminal law would have little to guideher behavior. The conservative thing to do would be to avoid seeking inside information too aggressively, even if the whole










*82 market could benefit from such investigation. Those who decided to cultivate insider sources would risk prosecution inany case, so they might have fewer scruples about compensating their sources and trading on the information theypurchased.

82

What does objective evidence of a personal benefit consist of? In the easiest case, a tippee has paid the insider for thecoveted tidbit. If the government can adduce evidence indicating that money changed hands, it has established all of theobjective facts needed to infer that an insider personally benefitted by tipping. In the presence of an obvious quid pro quo,no further facts about the nature of the tipper-tippee relationship will be needed. The insider has effectively made the "secretprofits" that securities law has prohibited since its inception, but by selling information to a trader rather than trading on itherself. In re Cady, Roberts & Co., 40 S.E.C. 907, 916 n.31 (1961); see also United States v. O'Hagan, 521 U.S. 642, 653,117 S.Ct. 2199, 138 L.Ed.2d 724 (1997) (characterizing misappropriation as an insider "secretly converting the[corporation's] information for personal gain").

The majority rightly points out that "[t]he tipper's personal benefit need not be pecuniary in nature." Op. at 74; see also id. at75. But that does not obviate the requirement that it be provable via "objective evidence." In-kind compensation in goods orservices given to the tipper may also constitute a personal benefit, and can be established in court in much the same waymonetary compensation can, i.e. with objective evidence pointing to the goods or services received. See, e.g., UnitedStates v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013) (discussing "an iPhone, live lobsters, a gift card, and a jar of honey"). Thegovernment can also prove a benefit on the theory that the tipper received potentially profitable social connections, such asadmission into an investment club, so long as the prosecution's case relies on evidence of these connections and theirpotential value to the tipper. Id.

When the alleged benefit to the tipper is less concrete, objective evidence about the nature of the relationship betweentipper and tippee takes on more importance in identifying the benefit. For instance, unlike with money, goods, services, andconnections, one cannot directly trace a "reputational benefit that will translate into future earnings." Dirks, 463 U.S. at 663,103 S.Ct. 3255. Instead, one must draw upon circumstantial evidence about the power of a tippee to materially benefitsomeone in the tipper's position and the inclination of a tippee to view the tipper in a better light based on the tipper'sprovision of inside information. Evidence about the tipper-tippee relationship will make these conclusions easier, asillustrated by the facts of S.E.C. v. Obus, 693 F.3d 276 (2d Cir. 2012). In that case, we concluded that it was sufficient thatthe tipper, an employee of a hedge fund that "was a large holder" of the stock in question, "hoped to curry favor with hisboss," the tippee, who was the principal of that hedge fund. Id. at 280, 292. Bosses, of course, have substantial say oversubordinates' future earnings, and the boss of a hedge fund trading in a particular stock is likely to value employees that canget him information about that stock.

More directly on point, if the government fails to put forward evidence of any particular quo that was provided in exchangefor the quid of inside information, it can still establish objective facts that point to a "relationship between the insider and the[tippee] that suggests a quid pro quo." Dirks, 463 U.S. at 664, 103 S.Ct. 3255 (emphasis added). That is, an apparentlygratuitous tip can reasonably be understood as recompense for past benefits *83 or as a means of keeping a good thinggoing so long as there is objective evidence of a history of mutually enriching exchanges or favors between tipper andtippee.

83

The personal benefit rule is also satisfied by other "relationships between the insider and the recipient" that "suggest anintention to benefit the particular recipient" even when the insider receives no immediately discernible compensation. Id. Inparticular, as relevant here, an apparently uncompensated tip can be said to "resemble trading by the insider himselffollowed by a gift of the profits to the recipient" when it is given to a "trading relative or friend." Id.; see also Salman v. UnitedStates, ___ U.S. ___, 137 S.Ct. 420, 427-28, 196 L.Ed.2d 351 (2016). Friends and relatives tend to internalize each other'sinterests, see Transcript of Oral Argument at 8, Salman v. United States, ___ U.S. ___, 137 S.Ct. 420, 196 L.Ed.2d 351(2016) ("[T]o help a close family member [or friend] is like helping yourself."), to give each other things of value todemonstrate care, or to commit acts of generosity with the assumption that the other would do the same in a rough sort of

quid-pro-quo.[2] For any of these reasons, a tipper can be said to benefit himself by giving something valuable to somebody

with who he shares a "meaningfully close personal relationship."[3] Newman, 773 F.3d at 452. Without objective evidence ofsuch a relationship, however, the inference that a gratuitous tip functioned as a gift will not be available. Newman madeclear that the "gift theory" is not applicable to casual acquaintances or mere members of the same club, church, or alumniassociation — or, it should go without saying, to perfect strangers — at least not without additional evidence indicating

https://scholar.google.com/scholar_case?about=8913113178873514631&q=martoma+2018&hl=en&as_sdt=2006











meaningful closeness. 773 F.3d at 452-55. Other boundaries of the concept of meaningful closeness remain to bedeveloped. See Salman, 137 S.Ct. at 429 ("...there is no need for us to address those difficult cases today...").

II. The Majority's Error

Last year the majority attempted to rewrite this doctrine explicitly. Today they attempt to do so more subtly. In their nowwithdrawn opinion, they held that a gratuitous tip could be understood as beneficial to the tipper so long as a jury were toconclude that a tipper expected the tippee to trade on it. Martoma, 869 F.3d at 70-71. Now they hold that anuncompensated tip can be found to personally benefit the tipper so long as the jury were to concludes that the tipperintended to benefit the tippee. Op. at 74-76, 77. All that *84 "meaningfully close personal relationship" means, they inform

us, is a tipper-tippee pairing in which the tipper has such an intention.[4] Id. at 77.

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This interpretation would eliminate the rule that has been with us since Dirks that the government must prove objective factsindicating that the tipper benefitted from her relationship with the tippee. On the majority's proposal, the prosecution couldpile up insinuations about the tipper's subjective understanding of the purpose of the tip, and the jury would be charged withresting their inferences about her benefit on those wobbly foundations. The only objective facts the government would haveto prove would be the communication of material non-public information. All of the protections of the personal benefit rule —a clear guide for conduct, preventing liability for slip ups and other innocent disclosures — would erode.

It is good news, then, that binding precedent stands for the opposite principle. The only time Dirks refers to an "intention tobenefit" is when it discusses the need to prove "a relationship between the insider and the recipient that suggests... anintention to benefit the particular recipient." 463 U.S. at 664, 103 S.Ct. 3255 (emphasis added). Reading "intention tobenefit" out of context, my colleagues assert that, under Dirks, an intention can be inferred without any objective evidenceabout relationships. Op. at 88. But Dirks does not say that, and it has never been applied to allow such a freestandinginference of intent in this Circuit or elsewhere. Salman, 137 S.Ct. at 427 (applying gift theory to sibling relationship) Jiau,734 F.3d at 153 (discussing gift theory as relationship-based before finding quid pro quo); Obus, 693 F.3d at 285 (discussing"trading relative or friend" standard); United States v. Bray, 853 F.3d 18, 26-27 (1st Cir. 2017) ("good friends"); United Statesv. Parigian, 824 F.3d 5, 16 (1st Cir. 2016) (friendship and quid pro quo); S.E.C. v. Rocklage, 470 F.3d 1, 7 n.4 (1st Cir. 2006)(siblings); S.E.C. v. Sargent, 229 F.3d 68, 77 (1st Cir. 2000) ("reconciliation" between friends and reputational benefit);S.E.C. v. Maio, 51 F.3d 623, 632-33 (7th Cir. 1995) (exchange of favors within a friendship); S.E.C. v. Yun, 327 F.3d 1263,1280 (11th Cir. 2003) ("a friend and frequent partner in real estate deals").

S.E.C. v. Warde, 151 F.3d 42 (2d Cir. 1998), cited in the majority opinion, is not to the contrary. Op. at 74-75. In that case, "[t]he evidence showed that Warde[, the tippee,] was a good friend of Edward Downe," the tipper. Warde, 151 F.3d at 45(emphasis added). We found that the "close friendship between Downe and Warde suggests that Downe's tip was`inten[ded] to benefit' Warde..." Id. at 49 (emphasis added, brackets in original). Thus, we did not find that a freestanding"intention to benefit" would have been sufficient to prove Downe's personal benefit. Instead, we followed the principle thatan intention to benefit can only be inferred from objective facts about the nature of the relationship between tipper andtippee. Again, the majority extracts the phrase "intention to benefit" from its context, suggesting that the relationshipbetween tipper and tippee did not matter when it was the central focus of our inquiry.

The majority offers an alternative interpretation in which the sentence at issue in Dirks "effectively reads, `there may be arelationship between the insider and the *85 recipient that suggests a quid pro quo from the latter, or there may be anintention to benefit the particular recipient.'" Op. at 74. Perhaps one could read the sentence in that way in isolation, butdoing so would certainly not be "more consonant with Dirks as a whole" or with the subsequent case law relying on Dirks.Id. The Dirks court included that sentence to provide examples of "objective facts and circumstances that often justify ... aninference" that "the insider receive[d] a direct or indirect personal benefit from the disclosure." Dirks, 463 U.S. at 663-64,103 S.Ct. 3255. It is difficult to understand why the Court would have mentioned an intention to benefit, which is a subjectivefact, as an example of a personal benefit, which is an objective fact. Nearly as difficult to understand is why the Dirks courtwould have provided an intention to benefit a tippee as an example of a benefit to the tipper. Intending to benefit somebodyis not in itself a benefit. That is, not unless one has reason to believe that the person with the intention to benefit benefitsfrom the beneficiary's benefit or one adopts the trivializing view of human psychology wherein everything any individualdoes is to benefit herself.

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Perhaps the majority's theory is that an intention to benefit a tippee is circumstantial evidence that a tipper is receiving someother benefit by providing the information. On this theory, so long as objective evidence would allow a jury to infer that atipper intended to benefit the tippee, the jury should be allowed to infer from that inference that the tipper somehowbenefitted by benefitting the tippee without actually having to determine what that benefit might be. This theory fails to dealwith the fact that an intention to benefit is not itself an "objective fact or circumstance," as Dirks requires, but rather aninference drawn from objective facts or circumstances. Additionally, this theory makes it difficult to understand why the Dirkscourt would have adopted the personal benefit test in the first place. If a jury can conclude that a tipper breached his duty solong as it concludes that she intended to benefit the tippee, why should it have to go through the tortuous process ofconcluding that the tipper received a personal benefit based on its conclusion that the tipper intended to benefit the tippee?Why should we care about the tipper's benefit at all?

At times the majority seems to suggest that Dirks does not really require proof of a personal benefit. Rather, the personalbenefit test is mentioned merely as a guide to prosecutors regarding the sort of evidence that will help them establish thetipper's intention to benefit the tippee. Thus, when Dirks says that "a breach of duty ... depends in large part on the purposeof the disclosure," it is announcing the real test for a breach of the duty to shareholders. Id. at 662, 103 S.Ct. 3255."Identifying personal benefits is ... simply how courts and juries analyze breaches of" this duty. Op. at 73. When thegovernment can adduce other evidence that a tipper "lacked a legitimate corporate purpose," Op. at 75, then "it makesperfect sense to permit the government to prove a personal benefit with [only] objective evidence of the tipper's intent." Op.at 75.

But Dirks is entirely unambiguous that "the test [for whether duty has been breached] is whether the insider personally willbenefit, directly or indirectly, from his disclosure." 463 U.S. at 662, 103 S.Ct. 3255. Whatever the insider's purpose indisclosing the information, "[a]bsent some personal gain [to the insider], there has been no breach of duty to stockholders."Id. Nowhere does Dirks suggest that the need to prove personal benefit can be ignored simply because a tipper's intent or

purpose can be independently demonstrated.[5] *86 And Dirks expressly disclaims the idea that "personal benefit" is merelya synonym for a tipper "not act[ing] simply out of the goodness of his heart." Op. at 75 n.7; Dirks, 463 U.S. at 663, 103 S.Ct.3255 (stating that proof of personal benefit should not be focused on mind reading). The personal benefit test may well be away to get at a tipper's purpose, but it is the former and not the latter that the prosecution must prove.

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None of these puzzles is presented if one reads the relevant sentence in Dirks the way I have suggested. It is easy tounderstand why the Dirks court would have mentioned a relationship suggesting an intention to benefit, an objectivecircumstance, when it was providing examples of objective facts and circumstances. Unlike a standalone intention tobenefit, a relationship suggesting an intention to benefit provides reason to believe that the tipper benefits by benefitting,since the tipper is understood as contributing to a relationship from which both tipper and tippee benefit. See supra at 83.And the focus on relationships rather than bare intentions fits neatly with Dirks's cabining of the gift theory to disclosures to"trading relative[s] or friend[s]." 463 U.S. at 664, 103 S.Ct. 3255.

This cannot be so, my colleagues protest. They ask us to imagine a situation where a tipper "discloses inside information toa perfect stranger and says, in effect, you can make a lot of money by trading on this." Op. at 75. Wouldn't it be absurd ifthis perfect stranger could not be held liable for insider trading if he went ahead and traded on this information? No, it wouldnot be. At least, not if one takes the personal benefit rule seriously. Ex hypothesi, the fictional tipper in their scenarioreceives absolutely nothing in return for his disclosure, except, I suppose, the warmth that comes with knowing thatsomebody else might have made some money because of his actions (or perhaps the schadenfreude that comes withknowing that shareholders were defrauded). But if those sorts of "benefits" were enough, then every disclosure of insideinformation without affirmative indication of a pure heart would be presumptively beneficial to the tipper. Dirks rejected thatpossibility, and every appellate court to have considered the issue, including us, has consistently done the same. That is thelaw whether we like or not, but, for what it's worth, I see no reason to worry that truly random acts of enrichment can gounpunished.

Even assuming arguendo that there was any ambiguity on the topic in our precedents, Newman removed it by requiring a"meaningfully close personal relationship" in order to prove personal benefit via the gift theory. 773 F.3d at 452. In themajority's withdrawn opinion, they candidly acknowledged that they were abrogating Newman, relying on a justification fordoing so that they no longer advance. Martoma, 869 F.3d at 68-70. Today they do not even attempt to argue they can do so.Instead, they call into question settled law *87 in non-binding dicta. Newman remains good law.87









III. The Jury Instructions

Turning to the case at hand, I agree with my colleagues' updated view that the jury was erroneously instructed. However, inlight of the foregoing, I disagree with their formulation of the proper instruction. A properly instructed jury would have insteadbeen asked whether Dr. Gilman and Martoma shared a relationship suggesting a quid pro quo or were close enough friendsthat it would be reasonable to understand Dr. Gilman's provision of information to Martoma as a gift. The jury could notconclude that their relationship was meaningfully close based on the mere possibility of a future friendship. Nor could itmake a relationship-independent inference about Dr. Gilman's intentions, contrary to the majority's dicta. That is becauseNewman's interpretation of the gift theory does "require[] proof that Dr. Gilman and Martoma share[d] any type of personalrelationship." Op. at 78 (internal quotation marks omitted).

Moreover, I disagree that the error in the jury instructions was harmless. The majority rightly states that we can only findharmlessness in this context if "it is clear beyond a reasonable doubt that a rational jury would have found the defendant

guilty absent the error." United States v. Mahaffy, 693 F.3d 113, 136 (2d Cir. 2012) (internal quotation marks omitted).[6] Thisrecord provides plenty of reasons to doubt that Dr. Gilman and Martoma shared a meaningfully close personal relationship.The government itself repeatedly denied that Dr. Gilman and Martoma had anything other than a "commercial, pecuniaryrelationship." Recording of Oral Argument at 34:18-34:27, 26:27-26:58, United States v. Martoma, No. 14-3599 (2d Cir. Oct.28, 2015). Dr. Gilman testified that he shared almost nothing about his personal life with Martoma and that Martoma actedfriendlier than Dr. Gilman thought appropriate for a professional relationship. Tr. at 1238, 1236. As the government itselfpointed out to the district court, there is no evidence that Martoma and Dr. Gilman ever interacted outside of their consultingsessions. Recording of Oral Argument at 34:18-34:27, United States v. Martoma, No. 14-3599 (2d Cir. Oct. 28, 2015).

A reasonable jury could also have doubted whether the relationship between Dr. Gilman and Martoma suggested a quid proquo. Dr. Gilman took no payment for the consulting sessions in which he provided the inside information at issue here, andthere is no evidence in the record that his compensation before or after that session was higher than usual. He was in highdemand as an expert and a researcher, so *88 there is reason to doubt that he would have risked prosecution just to keepup his consulting relationship with SAC and Martoma. See Tr. at 1552-60. A reasonable jury could have found a relationshipsuggesting a quid pro quo, but it was not required to. Ruling otherwise would lead to the holding that whenever insideinformation is revealed within a paid consulting relationship where other, legitimate services are rendered, a fact-finder mustinfer that the insider was paid to breach his duties. That rule would allow convictions for erroneously revealed information orfor information revealed based on a misunderstanding about its materiality or its confidentiality.

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IV. Sufficiency of the Evidence

Because the jury instructions amount to reversible error, I would not reach the sufficiency of the evidence question. Buteven were the majority correct that there was sufficient evidence here, it is incorrect and ill-advised to go on to speculatethat the jury could have inferred an intention to benefit merely because "a corporate insider... deliberately disclos[ed]valuable, confidential information without a corporate purpose and with the expectation that the tippee will trade on it." Op.at 79.

In addition to undermining Newman in the manner already discussed, this musing flirts with the possibility that the personalbenefit test that goes back to Dirks may no longer be good law. The very reason the government must establish a personalbenefit is to allow for the possible conclusion that the insider provided information without a "corporate purpose." Dirks, 463U.S. at 654, 655 n.14, 103 S.Ct. 3255. If the government can put forward evidence that an insider did not have a corporatepurpose in order to establish that the insider personally benefitted from providing the information, it can convict based oncircular reasoning. "Personal benefit" would then no longer have any independent meaning. The government would needonly convince the jury to "read [the tipper's] mind[]," Dirks, 463 U.S. at 663, 103 S.Ct. 3255. The tipper would need not havebenefitted in any objective sense so long as the prosecution could convince a jury that she was not thinking of the

corporation's interest. Dirks stands for the opposite proposition.[7]

CONCLUSION






Setting our disagreement about the harmfulness of the district court's error to one side, my colleagues could have reachedthe conclusion they did by following the path our precedent provides. They need only have held that the jury instructionswere erroneous because they allowed for conviction absent objective evidence of a meaningfully close personal relationshipbut harmless because there was objective evidence of a relationship suggesting a quid pro quo. Instead, they have taken adetour to declare that subjective evidence could have worked as well. This detour calls into question well-establishedprinciples of insider trading law that we have neither reason nor power to abrogate.

[1] Martoma did not pay Dr. Gilman or any other consultant directly. Instead, SAC would pay the expert networking firm, and the expertnetworking firm would in turn pay Dr. Gilman and the other consultants.

[2] For convenience, we sometimes refer to this as the "gift theory" of personal benefit.

[3] The parties focus primarily on Dr. Gilman because it was Dr. Gilman, not Dr. Ross, who gave Martoma the final efficacy data that ledMartoma to reduce SAC's position in Elan and Wyeth.

[4] In the past, we have stated that "[w]here... the source of an alleged jury instruction error is a supervening decision, we employ a`modified plain-error rule, under which the government, not the defendant, bears the burden to demonstrate that the error ... washarmless.'" United States v. Mahaffy, 693 F.3d 113, 136 (2d Cir. 2012) (second alteration in original). We have "on at least twenty-twooccasions," Vilar, 729 F.3d at 71 n.5, observed that the Supreme Court's decision in Johnson v. United States, 520 U.S. 461, 117 S.Ct.1544, 137 L.Ed.2d 718 (1997), "called into question the modified plain error standard of review," United States v. Botti, 711 F.3d 299, 308(2d Cir. 2013). Here, as in the past, "[b]ecause we would reach the same conclusion under either standard, we need not resolve thatquestion." United States v. Nouri, 711 F.3d 129, 138 n.2 (2d Cir. 2013).

[5] Although many of the cases refer to "insiders" and "fiduciary" duties because those cases involve the "classical theory" of insider trading,the Dirks articulation of tipper and tippee liability also applies under the misappropriation theory, where the misappropriator violates someduty owed to the source of the information. See S.E.C. v. Obus, 693 F.3d 276, 286-88 (2d Cir. 2012); see also Newman, 773 F.3d at 445-46.

[6] Warde's use of friendship to find the evidence of intent to benefit sufficient does not prove otherwise. See 151 F.3d at 49. Warde teachesonly that such evidence is relevant and may even be sufficient in an appropriate case. It nowhere suggests that it is necessary. Cf. S.E.C. v.Payton, 219 F.Supp.3d 485, 490 (S.D.N.Y. 2016) (finding evidence of tipper's intent to benefit the tippee sufficient where tipper gave tippeea Post-It note with the stock ticker symbol, told the tippee they "could make some money on" the stock, and said the stock was a "goodopportunity"), aff'd, 2018 WL 832917 (2d Cir. Feb. 13, 2018) (summary order).

[7] In any event, even assuming arguendo that a more concrete benefit is required, the tipper's intention to benefit the tippee would still bean appropriate personal benefit. A tipper's disclosure of valuable confidential information with the intent to benefit the tippee can satisfy thepersonal benefit requirement because it can allow for the inference that the tipper has not acted simply out of the goodness of his heart, butbecause he expects to receive some future benefit. Cf. Obus, 693 F.3d at 292 (finding evidence of personal benefit sufficient where tipper"hoped to curry favor with his boss").

[8] Our cases applying Dirks demonstrate that the government can prove a personal benefit in several ways that do not require proof of anysort of personal relationship. Consider the underling who disclosed inside information to "curry favor with his boss," see Obus, 693 F.3d at292, or the tipper's admission into an investment club that yielded the possibility of future benefits that were never realized, see Jiau, 734F.3d at 153, or the tipper's receipt of a cell phone, gift card, and various foodstuffs from the tippee, see id. In none of these situations wasthe government required to show any degree of personal closeness between tipper and tippee. Newman, with its focus on the gift theory,does not require a different result in these cases.

[9] As this discussion demonstrates, the dissent's concern that intent to benefit can be shown only with subjective evidence or speculationis unfounded. See supra at 75-76. We conclude that the evidence was sufficient to infer that Dr. Gilman intended to benefit Martoma based,not on "subjective" evidence or speculation, but on the circumstantial evidence surrounding the tip.

[10] We further find that even if the district court erroneously excluded the testimony of Steven Cohen under Federal Rule of Evidence804(b)(1), such error was harmless because much of the testimony was inculpatory. See United States v. Dukagjini, 326 F.3d 45, 61 (2d Cir.2003) ("In order to uphold a verdict in the face of an evidentiary error, it must be `highly probable' that the error did not affect the verdict."(quoting United States v. Forrester, 60 F.3d 52, 64 (2d Cir. 1995))). Cohen's testimony before the SEC described Martoma as having playeda substantial role in his decision both to accumulate large positions in Elan and Wyeth, and then to sell them off. J.A. 91-92, 96-97. Thiswas consistent with other trial evidence that Martoma received credit for SAC's trades in those companies. Tr. 497-99. It is therefore highlyimprobable that Cohen's vague statements that Martoma told him that he was "getting uncomfortable with the Elan position," J.A. 95, andthat he heard that Martoma's reasons for being uncomfortable were "normal" and "typical," J.A. 97, would have affected the jury's verdict.

[1] And as I explained in my previous dissent. See Martoma, 869 F.3d at 75-78 (Pooler, J., dissenting).

[2] Following Newman's suggestion, the majority holds that a jury could conclude that tipper and tippee shared a meaningfully closerelationship so long as they shared a relationship suggesting quid pro quo. Op. at 77 (citing Newman, 773 F.3d at 452). But, as the majorityrightly points out, Dirks and subsequent cases established that a relationship suggesting quid pro quo can itself give rise to the inference ofa personal benefit to the tipper, without any need to determine whether it gives rise to the intermediate inference of a meaningfully closepersonal relationship. Op. at 77. It would make for a less confusing bit of doctrine to cleanly separate quid-pro-quo and meaningfully close



















personal relationships, and I do not think Newman requires conflating them. But the majority's interpretation is consistent with Newman,and, in any case, a jury can infer personal benefit from the former whether or not it gives rise to an inference of the latter.

[3] Salman made clear that the tipper need not also "receive something of pecuniary or similarly valuable nature in exchange for a gift tofamily or friends." 137 S.Ct. at 428 (internal quotation marks omitted). While my colleagues earlier opinion read Salman to have eliminatedthe meaningfully close personal relationship standard entirely, Martoma, 869 F.3d at 68-71, they now agree that that aspect of Newmanremains good law.

[4] As discussed supra in note 2, the majority, following Newman's suggestion, holds that a relationship suggesting a quid pro quo is also ameaningfully close personal relationship. I do not find this part of their analysis objectionable (except in the sense discussed in note 2).

[5] I do not deny that "[i]ntent elements are everywhere in our law and are generally proved with circumstantial evidence." Op. at 76. I denythat one can replace proof of personal benefit to the tipper with proof of the tipper's intention to benefit the tippee. As I discussed in myprevious dissent, insider trading law separately requires that the insider expect the tippee will trade on the information, and this expectationcan be proven with circumstantial evidence. See Martoma, 869 F.3d at 82 (Pooler, J., dissenting) (citing Obus, 693 F.3d at 286-87; UnitedStates v. Gansman, 657 F.3d 85, 92 (2d Cir. 2011)). The majority's approach comes close to conflating this element of insider tradingliability and the separate personal benefit test.

[6] As I discussed in my previous dissent, I would hold that the modified plain error rule applies here. Martoma, 869 F.3d at 87-88 (Pooler,J., dissenting). We have long held that where "the source of an alleged jury instruction is a supervening decision, we employ a modifiedplain error rule, under which the government, not the defendant, bears the burden to demonstrate that the error was harmless." Mahaffy,693 F.3d at 136 (internal quotation marks omitted). The majority points out that multiple panels in this Circuit have called into question thecontinued applicability of the modified plain error rule after Johnson v. United States, 520 U.S. 461, 117 S.Ct. 1544, 137 L.Ed.2d 718(1997), without deciding the matter either way. Op. at 72 n.4. But Johnson did not provide any reason to abandon the well-establishedmodified plain error rule. Johnson only "cautioned against any unwarranted expansion of Rule 52(b)," which provides for plain error reviewin criminal matters in which an issue has not been raised below. 520 U.S. at 466, 117 S.Ct. 1544. The modified plain error rule does notexpand Rule 52(b). It merely allocates the burden of proof, a matter on which Rule 52 is silent.

[7] The majority suggests that the abundance of objective evidence in this case demonstrates that my concern about differentiating guiltyfrom innocent conduct based entirely on inferences about intent is "unfounded." Op. 79 n.8. If so, then Dirks's and Newman's similarconcerns are also unfounded. see Dirks, 463 U.S. at 663, 103 S.Ct. 3255; Newman, 773 F.3d at 452. Anyway, assuming arguendo that theevidence here was more than sufficient, that fact alone does not mean that we should endorse a rule that would allow for convictions basedon speculation in cases where the evidence is thinner or more ambiguous. See supra at 81-82.













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