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Notable Insider Trading Decision Affirmed, Despite Asserted “Personal Benefit” Error

In a short summary order issued on October 25, 2018, the Second Circuit (Newman, Lynch, Droney) affirmed the denial of a habeas petition in the case of Whitman v. United States.  This case could have given the Second Circuit an opportunity to address again a complicated area of insider trading law, but the Court instead rejected the appeal based on procedural grounds, holding that procedural default prevented the district court from granting the petition.

The Procedural History

Whitman was one of the many insider trading prosecutions in the Southern District of New York during the years in which Preet Bharara was the U.S. Attorney.  The procedural history of Whitman is somewhat tangled.  In the district court, Whitman’s trial attorneys asked the district court to give a more narrow definition of “personal benefit” than the district court ultimately delivered.  Whitman appealed his conviction, but did not raise on appeal any argument that the jury instructions relating to the personal benefit requirement were erroneous.  His conviction was affirmed on appeal in a summary order.

Not long after this affirmance in 2014, the Second Circuit decided a major case that narrowed the definition of “personal benefit” that judges should use when instructing juries in tippee cases.  United States v. Newman, 883 F.3d 438 (2d Cir. 2015) reversed an insider trading conviction on this ground.  After the Second Circuit’s decision in Newman, Whitman filed a petition under 28 U.S.C. § 2255 in early 2015 claiming that Newman entitled him to a new trial because of the erroneous jury instruction.  The district court denied this motion on the basis of procedural default:  Whitman did not raise the personal benefit argument on direct appeal, and he could not show cause for his failure to present this argument on appeal   Cause is required to overcome a procedural default.  The district court held that Whitman could not show that his challenge was “so novel that its legal basis [was] not reasonably available to counsel” on appeal, because his trial counsel made an argument similar to the one that prevailed in Newman.  The district court denied a certificate of appealability, but the Second Circuit granted such a certificate, allowing Whitman to appeal the 2255 petition denial and no doubt raising hope that the Circuit might undo his conviction.

Further changes in the law unfolded after the denial of the 2255 petition.  The Supreme Court partly abrogated Newman in its decision in Salman v. United States, 137 S. Ct. 420 (2016), but the Circuit left Newman standing in the more recent decision in United States v. Martoma, 894 F.3d 64 (2d Cir. 2018) (affirming conviction).  Based on these decisions, the Whitman panel held that the definition of personal benefit was “sufficiently narrowed . . . to render Whitman’s jury instruction unlawful if it were given today.”

The Circuit’s Decision

Despite this conclusion that the personal benefit jury instruction was incorrect, the denial of Whitman’s 2255 petition was affirmed.  As the district court held, Whitman procedurally defaulted by failing to present his personal benefit argument on appeal.  The argument was preserved at trial, but not made to the Second Circuit.  To show cause, a defendant must demonstrate “that some objective factor external to the defense” prevented the defendant from raising the claim.  Novelty of an argument can constitute cause, and Whitman so argued here.  But the Court held that there was “no doubt” that the personal benefit argument that prevailed in Newman and was argued in Martoma was also available to Whitman.  “Whitman’s trial counsel raised the same argument in district court. . . . If other counsel were able to raise the argument, including Whitman’s former attorney, we cannot say the same argument was unavailable to his appellate counsel.”  Absent cause, the Court did not have to reach the question of prejudice.

The Court also rejected the argument that the failure to raise the personal benefit argument on direct appeal amounted to ineffective assistance of counsel.  While the panel concluded that the personal benefit argument was available to defense counsel—thus preventing Whitman from showing cause—the argument was not “significant and obvious” given the law in the Circuit prior to Newman.  The Court held that it could not find “that choosing to attack Whitman’s conviction on other ground . . . was a ‘clearly and significantly weaker’ appellate strategy.”  Therefore, the Court affirmed on this basis as well.

Some observers expected the Circuit to use Whitman as a means of returning to the personal benefit issue and perhaps to try to harmonize the decisions in Newman, Martoma and Salman.  The current legal landscape leaves some uncertainty about the line between legal and illegal conduct.  But the Whitman case ultimately proved an imperfect vehicle for any such further development of the law, as Whitman’s failure to raise a personal benefit argument on appeal doomed his 2255 petition.  If the Court is to speak further on this subject, it will not come in the context of this case. 

The parallel ruling on ineffective assistance of counsel further demonstrates how challenging such claims are.  Here, the Court held that if the relevant legal issue had been made on appeal and therefore preserved for the habeas petition, the Court would have concluded that there was a notable error in Whitman’s trial.  If presented on appeal, it could have led to a reversal of his conviction and a new trial.  But the Court still did not find that appellate counsel was ineffective for having failed to raise this claim.

-By Julia Stepanova and Harry Sandick