On January 11, the Second Circuit Court of Appeals denied the appeal of Rajat Gupta, who was seeking to undo his insider trading conviction.  Relying on the Second Circuit’s decision in United States v. Newman, Gupta argued that—to satisfy the requirement that Gupta personally benefit from tipping inside information—the Government must show “a quid pro quo – in which [Gupta] receive[d] an ‘objective, consequential . . . gain of a pecuniary or similarly valuable nature.’”[1]  In other words—intangible benefits should not, standing alone, constitute a personal benefit sufficient to uphold a criminal conviction.  The Second Circuit rejected this argument, finding that the Supreme Court’s decisions in Dirks v. SEC and Salman v. United States foreclosed such a narrow definition of “benefit,” opting instead for a test that looked at “varying sets of circumstances”—including those that involve indirect, intangible, and nonquantifiable gains, such as an anticipated quid quo pro that can be inferred from an ongoing, business relationship—to satisfy the “personal benefit” test.[2]  This case is the latest in a line of decisions—in the Supreme Court, as well as the Second and Ninth Circuits—to reject defendants’ arguments for a narrow definition of the “personal benefit” element of insider trading law based on Newman.


In 2012, a jury convicted Gupta of insider trading after he shared inside information, which he learned as a member of Goldman Sachs’ board of directors, with Raj Rajaratnam, founder of the Galleon Group, as well as business associate and friend of Gupta.[3]  After unsuccessfully appealing his conviction, Gupta returned to the Southern District of New York in 2015 and filed a habeas petition to vacate his conviction, arguing that the lower court’s jury instruction—that Gupta could be guilty if he received a benefit that did not need to be financial or tangible in nature, such as maintaining a good relationship with a frequent business partner—was legally invalid following the Second Circuit’s decision in Newman.[4]

Newman had held that the personal benefit inferred from a “gift of confidential information to a trading relative or friend,” then well-established under Dirks, required “proof of a meaningfully close personal relationship that generates an exchange that . . . represents at least a potential gain of a pecuniary or similarly valuable nature.”[5]  On July 2, 2015, the District Court rejected Gupta’s habeas petition, holding that Gupta could not overcome the procedural forfeit of his claim as he could not show cause or actual innocence.[6]  Gupta filed an appeal with the Second Circuit.

In 2016, Gupta’s pending attempt to vacate his conviction suffered another blow when, in Salman, the Supreme Court rejected the Newman pecuniary formulation in favor of the original test from Dirks.[7]

Gupta v. U.S. (2019)

In his appeal, Gupta, as others did before him,[8] focused on the limiting language in Newman as the basis for his habeas petition.  Specifically, Gupta argued that the jury instruction at his criminal trial was legally invalid because the instruction did not require a quid pro quo from which Gupta received at least the potential for a pecuniary gain.[9]  He further argued that Salman was not dispositive because its holding applied only to the gift theory, which Gupta never invoked.[10]

The Second Circuit affirmed the District Court, finding the jury instruction consistent with Dirks and, restating Salman, clarified that personal benefits “need not be pecuniary at all.”[11]  “Where the recipient of the tip is the tipper’s ‘frequent’ ‘business’ partner, the tipper’s anticipation of a quid pro quo is easily inferable.”[12]  The Court found that ample evidence was presented at trial to show that Rajaratnam and Gupta were frequent business associates and at least good friends, and that Gupta intended to benefit from sharing the inside information with Rajaratnam.[13]  The Court further noted that Dirks set out a broad, non-exclusive description of “personal benefit,” stating that the examples listed by the Supreme Court in Dirks were just that:  a disjunctive and non-exclusive list of “varying sets of circumstances . . . [that] warrant a finding of the tipper’s illegal purpose.”[14]  The Court was careful to note that this interpretation was merely a reiteration of Dirks’ focus on the personal benefit as a means to show the illegal “use of insider information for personal advantage.”[15]  Moreover, the Court clearly stated that “[t]he Newman formulation” that a tipper must receive something of a “pecuniary or similarly valuable nature” in exchange for a gift to a friend “was expressly rejected by the Supreme Court in Salman[].”[16]

The Gupta decision adds to the post-Newman cases clarifying that the personal benefit element does not require a tangible or pecuniary benefit.  Gupta provides additional confirmation that, to the extent that Newman held that the tipper must experience a pecuniary or quantifiable gain, that holding is inconsistent with Dirks as reaffirmed in Salman.  In the wake of the uncertainty and confusion created by Newman, it appears the Second Circuit is further laying the controversial case to rest and re-focusing the interpretation of personal benefit on the holding of Dirks.  Relying on Dirks, the Second Circuit noted that the ultimate goal of the personal benefit requirement is to distinguish between those using information to act as a lawful fiduciary and those misappropriating for a personal advantage or purpose.[17]  In the future, courts addressing insider trading law may build on Gupta by continuing to highlight Dirks’ vision of accountability for those that use inside information for illegitimate purposes, as opposed to permissible purposes (such as whistleblowing).[18]

[1] Gupta v. United States, — F.3d —, No. 15-2707(L), 2019 WL 165930, at *2 (2d Cir. Jan. 11, 2019).

[2] Gupta, — F.3d —, 2019 WL 165930, at *3–4.  Note that Dirks articulates five independently sufficient bases for satisfying the personal benefit requirement of insider trading law: a (1) “pecuniary gain;” (2) “reputational benefit;” (3) “a relationship between the [tipper] and the [tippee] that suggests a quid pro quo from the latter;” (4) “intention to benefit the [tippee];” or (5) “gift of confidential information to a trading relative or friend.”  Dirks v. SEC 463 U.S. 646, 663–64 (1983).

[3] See United States v. Gupta, 111 F. Supp. 3d 557, 558 (S.D.N.Y. 2015), aff’d, — F.3d —, No. 15-2707(L), 2019 WL 165930 (2d Cir. Jan. 11, 2019).

[4] Gupta, — F.3d —, 2019 WL 165930, at *2 (citing Gupta brief on appeal at 10–11).   

[5] United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014).  For further analysis of Newman, see Second Circuit Reverses Insider Trading Convictions of Remote Tippees, Cleary Gottlieb Alert Memorandum (Dec. 15, 2014), https://www.clearygottlieb.com/-/media/organize-archive/cgsh/files/publication-pdfs/second-circuit-reverses-insider-trading-convictions-of-remote-tippees.pdf.

[6] Gupta, 111 F. Supp. 3d at 559.

[7] Salman v. United States, 580 U.S. —, 137 S. Ct. 420, 428 (2016).

[8] See, e.g., Whitman v. United States, — F. App’x —, No. 15-2686-PR, 2018 WL 5828118, at *1 (2d Cir. Nov. 7, 2018).

[9] Gupta, — F.3d —, 2019 WL 165930,at *2.

[10] Resp. to Government’s Rule 28(j) Letter, Gupta, — F.3d —, 2019 WL 165930, ECF No. 122.

[11] Gupta, — F.3d —, 2019 WL 165930, at *4 (citing United States v. Martoma, 894 F.3d 64, 75 (2d Cir. 2018)).

[12] Id. at *3.

[13] Id. at *4–5.

[14] Id. at *4 (emphasis added).  See also United States v. Klein, — F.3d —, No. 17-3355, 2019 WL 149629, at *4 (2d Cir. Jan. 10, 2019) (also suggesting the non-exclusivity of Dirks’ list of examples when stating that “[p]ersonal benefit can be established in a number of ways, including by illustrating the nature of the relationship between the tipper and the tippee or the tipper’s receipt of something of value”).

[15] Gupta, — F.3d —, 2019 WL 165930, at *3 (quoting Dirks, 463 U.S. at 662).

[16] Id. at *4

[17] Id. at *3–4 (citing Dirks, 463 U.S. at 662, 664).

[18] See, e.g., Klein, — F.3d at —, 2019 WL 149629, at *4 (“The critical question regards the tipper’s purpose: did the tipper share the material non-public information with the tippee intending that the tippee use the information to improperly trade in securities?” (emphasis added)); see also United States v. Pinto-Thomaz, No. 18-CR-579, 2018 WL 6378118, at *3 (S.D.N.Y. Dec. 6, 2018).