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On July 2, 2015, the Southern District of New York denied a motion by Rajat Gupta, a former director of Goldman Sachs, to vacate his insider-trading conviction for sharing material nonpublic information concerning Goldman Sachs with Galleon Group head Raj Rajaratnam, who traded on the basis of that information. United States v. Gupta, 2015 WL 4036158 (S.D.N.Y. 2015) (Rakoff, J.). Following the Second Circuit’s decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), Gupta had moved, pursuant to 28 U.S.C. § 2255, to vacate the judgment against him on the grounds that the trial court’s jury instruction regarding the “personal benefit” requirement for tipper liability was erroneous. The Southern District of New York found that Newman “did not open the door to an argument that ‘prior . . . case law [had] consistently rejected,’” nor did Newman change the “personal benefit” requirement for tipper liability.

Court Holds Newman Did Not Overrule Any Binding Precedent on Tipper Liability

The court explained that, “where, as here, ‘a criminal defendant has procedurally forfeited his claim by failing to raise it on direct review, the claim may be raised in a § 2255 motion only if the defendant can demonstrate either: (1) cause for failing to raise the issue, and prejudice resulting therefrom; or (2) actual innocence.’” A petitioner “may demonstrate cause for a failure to raise an issue during trial or to preserve it on appeal where doing so would have been futile in light of ‘prior . . . case law that consistently rejected [the] particular . . . claim.’”

With respect to Gupta’s contention that the trial court’s jury instruction regarding the “personal benefit” requirement was erroneous, the court found that this argument would not have been “futile for the simple reason that Newman . . . did not purport to overrule any binding precedent.” The court explained that Newman only “arguably narrowed the range of evidence that would support an inference of ‘benefit.’”

Court Holds Newman Did Not Alter the “Personal Benefit” Requirement for Tipper Liability

Gupta claimed that, if the trial court had instructed the jury on the Newman “personal benefit” standard, the government’s evidence would have been insufficient to convict him. According to Gupta, “Newman requires that a tipper (here Gupta) receive from his tippee (Rajaratnam) a ‘quid pro quo’ in the form of ‘a potential gain of a pecuniary or similarly valuable nature.’” The court found that “Gupta’s argument misread[ ] Newman.”

The court explained that “Newman was concerned with the liability of a remote tippee,” not tipper liability. The court stated that Newman “in no way purport[ed] to change [the] fundamental concept” that “a tipper is liable for securities fraud if he takes sensitive market information provided to him in a fiduciary capacity and exploits it for some personal benefit.” The court found that “the plain language of . . . Newman” makes it clear that “a tipper’s intention to benefit the tippee is sufficient to satisfy the benefit requirement so far as the tipper is concerned.” For purposes of establishing tipper liability, the court found that “no quid pro quo is required.” 

Nevertheless, the court determined that “the proof at trial easily satisfied even Gupta’s view of Newman.” The court explained that Gupta and Rajaratnam “were close business associates with a considerable history of exchanging financial favors.” Gupta benefited in some way, either indirectly through a return favor or directly through his stake in Galleon, with every tip he conveyed to Rajaratnam. The court therefore denied Gupta’s motion to vacate the judgment against him on Newman grounds.