Category Archives: Criminal Securities Prosecutions

Supreme Court Filings in U.S. v. Newman and Chiasson Leave Serious Doubts on Grant of Certiorari

With all of the publicity, hubbub, and hype surrounding the Second Circuit’s decision in United States v. Newman and Chiasson, a grant of writ of certiorari at the Government’s request is a foregone conclusion, right?  In a word, “no.”  The filings on the Government’s motion seeking certiorari make it pretty clear that if you remove the publicity, hubbub, and hype – and consider what the Newman opinion says, and not just what the Government portrays it as saying – the Supreme Court’s normal standards for hearing a case simply are not satisfied.  Let me explain.

(The filings on the petition for certiorari can be read here: Petition for Writ of Certiorari in US v. Newman; Newman Opposition to Cert. Petition; Chiasson Opposition to Cert. Petition.

The Government’s entire push for Supreme Court review turns on two arguments: (1) the Second Circuit amended the Supreme Court’s decision in Dirks v. SEC by mandating that a tippee exchange tangible value for tipped material nonpublic information from the tipper, when Dirks says that “gifts” of such information by the tipper to the tippee can be sufficient to create liability; and (2) the Second Circuit’s revision threatens the integrity of the securities markets by undermining investors’ belief in the fairness of those markets.  The briefing on certiorari, however, leaves little doubt that the Government cannot (or at least does not) provide support for either of these arguments.  Instead, these arguments are based on (i) a reading of the opinion that ignores what the court said, and is not how the courts have treated the Newman opinion since it was issued; and (ii) ipse dixit assertions by the Government about the terrible consequences of Newman on markets and law enforcement, which lack any substantiation.

But beyond this, the briefing makes it clear that Newman simply is not the kind of case that the Supreme Court normally would review, for three reasons: (1) the ruling the Government asks for would not, in fact, change the result – Messrs. Newman and Chiasson will be not be prosecutable in any event because the Government does not seek review of determinative aspects of the Second Circuit opinion that prevent any conviction; (2) the aspect of the Newman decision that the Government does challenge is an evidentiary issue – not an important issue of law – that is limited in its impact, other than in support of the view that the actual evidence presented in a case matters, which the Supreme Court is unlikely to countermand; and (3) the ruling the Government asks for would make it difficult for investors and their advisers to gather and use information in ways the Dirks court sought to protect as critical to the functioning of an efficient marketplace.

The Supreme Court Usually Doesn’t Review Cases To Provide an Advisory Opinion

Let’s start with what should be the most important issue for a cert. petition: will Supreme Court review actually make a difference in the case.  The answer here plainly is that it would not.  Why? Well, the Government presents for review only a single question: “whether the court of appeals erroneously departed from this Court’s decision in Dirks by holding that liability under a gifting theory requires ‘proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.’”  Cert. Pet. at (I).  But the Second Circuit reversed the convictions of Messrs. Newman and Chiasson for another, totally independent reason: that because this is a criminal case, a conviction required proof that the defendants knew that the information they used to trade securities was obtained through a breach of duty by an insider, and there was no evidence from which a reasonable juror could make such a finding.  Because of this, even if the Supreme Court were to agree with the Government on its question presented, the defendants’ convictions would still be overturned.  The Supreme Court typically does not accept cases in which its opinion, in effect, becomes an advisory opinion on the law and does not impact the determination of the case before it.

Here is how the Newman cert. opposition discusses this point:

The central legal holding in the court below was that insider trading liability requires a tippee to know that the tipper received a personal benefit.  While the government opposed such a requirement in the trial court and on appeal, it does not challenge that ruling now. Instead, the Petition seeks review of a single, fact-based sufficiency determination regarding whether there was a personal benefit in the first place.  Notably, the government’s articulation of the question presented addresses only the type of evidence required to prove a personal benefit; it does not implicate the court of appeals’ independent holding that Newman committed no crime because he did not know of the benefit.  Accordingly, even if this Court were to agree with the government that the Second Circuit misstated the type of evidence required to support an inference of a benefit, the decision dismissing the indictment on the independent ground that Newman did not know of any benefit would stand.

The government understands, of course, that the Supreme Court does not grant review to issue advisory opinions.  To overcome that obstacle, the government proposes that this Court “correct” the Second Circuit’s analysis of what evidence may be used to prove a personal benefit and then remand to the Second Circuit for reconsideration of both the sufficiency of whether there was a benefit and whether Newman knew of the benefit.  Pet. 29-31.  This attempted sleight of hand is unconvincing.  The Second Circuit determined that, “[e]ven assuming that the scant evidence . . . was sufficient to permit the inference of a personal benefit,” the proof was insufficient to establish knowledge of any benefit because the defendants “knew next to nothing” about the insiders or the circumstances of their disclosures, and the government “presented absolutely no testimony or any other evidence that Newman and Chiasson knew . . . that those insiders received any benefit in exchange for such disclosures . . .” . . . .  This conclusion was not based on a nuanced view of how personal benefit should be defined; it was based on the utter lack of evidence that the defendants knew of any benefit, however defined, or even the basic circumstances under which the disclosures were made.  No decision by this Court on the narrow issue presented for review would change the ultimate disposition of this case.

Newman Cert. Opp. at 1-3.

The Second Circuit Decision Is Inaccurately Portrayed by the Government

Let’s turn now to the guts of the Government argument, and show why it fails because it is founded on a reading on the Newman opinion that is inaccurate and misleading.

The Government’s core argument is that the Second Circuit broke from Dirks by refusing to allow a “gift” from the tipper to the tippee to be considered a basis for the required breach of duty to support an insider trading violation:

The court of appeals’ decision is irreconcilable with Dirks.  In the guise of interpreting this Court’s opinion, the court of appeals crafted a new, stricter personal-benefit test, stating that “[t]o the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee, where the tippee’s trades ‘resemble trading by the insider himself followed by a gift of the profits to the recipient,’ *** we hold that such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” . . .

That new “exchange” formulation erases a form of personal benefit that this Court has specifically identified.  Under Dirks, an inference of a personal benefit to the insider arises in two situations: when the insider expects something in return for the disclosure of the confidential information, or when the insider freely gives a gift of information to a trading friend or relative without any expectation of receiving money or valuables as a result. . . .  The Second Circuit purported to recognize that second form of personal benefit . . . but then rewrote the concept of a “gift” so as to eliminate it.  The court held that an insider cannot be liable on a gift theory unless he receives something from the recipient of information “that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature” . . .  But such an “exchange” is, by definition, not the same thing as a “gift”; rather, it is a quid pro quo, “something for something.”

Cert. Pet. at 18-19.

This argument should fail because the Supreme Court Justices – and their clerks – should easily see that the Second Circuit decision does not say what the Government argument describes.  The Government accepts that the entire discussion of “personal benefit” occurred as the Second Circuit “considered the sufficiency of the evidence that the . . . insiders personally benefitted from disclosing confidential corporate information,” and that in doing so, the court of appeals “acknowledged that in [Dirks, the Supreme] Court stated that ‘personal benefit’ includes reputational benefit and ‘the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.’”  Cert. Pet. at 11 (emphasis added).

The problem was that the Government introduced no evidence showing that in either of the two instances of alleged tipping (involving communications between insiders at Dell and NVIDIA with industry analysts they knew), the tipper either (a) received a tangible benefit in return, or (b) provided the information as a “gift.”  Instead, the Government relied on the mere circumstances of the relationship between the alleged tippers and the alleged tippees to provide a sufficient inference of a “gift” to satisfy the breach of duty requirement laid out in Dirks.  The Second Circuit rejected this effort because a review of the evidence showed no meaningful relationships between these people that would suggest that the insiders transferred information as an intended “gift” to the analysts.

The actual evidence showed that the relationship between the Dell insider and the analyst he spoke to was no more than that they knew each other at business school, spoke on limited occasions when they both worked at Dell, and that the analyst gave career advice to the insider that was not terribly meaningful.  The evidence also showed that the communications between them were consistent with the insider’s job responsibilities to develop relationships with financial firms that could be a source for possible investors, and the insider was never told anyone was trading on information he provided.  The NVIDIA insider attended the same church as the analyst he spoke to and sometimes had lunch with him.  While the analyst said he sometimes traded NVIDIA stock, he never said he would use information they discussed to trade.

Based on this evidence, the Second Circuit proceeded to try to implement the Dirks duty standard, not revise that standard.  As the Newman cert. opposition says: “the Second Circuit’s refusal to accept the mere fact of friendship as per se evidence that a tipper intended to bestow a gift on a tippee is consistent with, and indeed compelled by, Dirks.”  Newman Cert. Opp. at 20.

Dirks said that “there may be a relationship between the insider and the recipient that suggests a quid pro quo . . . or an intention to benefit the particular recipient,” but said no more about the parameters of such a relationship.  See Dirks, 463 U.S. at 663.  The Dirks Court also said that an inference of personal gain to the tipper that would evidence the required breach of duty could flow “when an insider makes a gift of confidential information to a trading relative or friend” (id.), but said nothing about how to determine if such an inference is reasonable, except that such a circumstance could “resemble trading by the insider himself followed by a gift of profits to the recipient.”  Id.  The Dirks Court left it to lower courts to figure out how best to implement these principles.  See id.  The Second Circuit plainly was trying to work out when it might be reasonable to conclude that a communication of information is intended as a “gift” based solely on the nature of the parties’ relationship.

The Government’s argument turns on the appellate court’s use of the term “exchange”:

The court reinterpreted this Court’s holding that an insider personally benefits when he “makes a gift of confidential information to a trading relative or friend,” . . . to require “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” . . .  That holding cannot be reconciled with Dirks, which did not require an “exchange” to find liability for a gift of inside information and did not impose amorphous standards for the relationships that can support liability.

. . . .

Under Dirks, an inference of a personal benefit to the insider arises in two situations: when the insider expects something in return for the disclosure of the confidential information, or when the insider freely gives a gift of information to a trading friend or relative without any expectation of receiving money or valuables as a result. . . .

The Second Circuit purported to recognize that second form of personal benefit . . . but then rewrote the concept of a “gift” so as to eliminate it.  The court held that an insider cannot be liable on a gift theory unless he receives something from the recipient of information “that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature” . . . .  But such an “exchange” is, by definition, not the same thing as a “gift”; rather, it is a quid pro quo, “something for something.” . . .  If the personal-benefit test cannot be met by a gift-giver unless an “exchange” takes place, then Dirks’s two categories of personal benefit are collapsed into one—and the entire “gift” discussion in Dirks becomes superfluous.

Cert. Pet. at 14.

This argument intentionally ignores the gist, and the actual language, of the Newman opinion.  It begins by ignoring the paragraphs leading up to the quoted passage, which emphasize that the intent to gift confidential information to another person can be sufficient, but there needs to be evidence proving it.  If that evidence is nothing more than the nature of the relationship between the parties, then that relationship has to be strong enough to warrant a reasonable inference that the information exchange was intended as a gift.  Here is what the court said:

The circumstantial evidence in this case was simply too thin to warrant the inference that the corporate insiders received any personal benefit in exchange for their tips.  As to the Dell tips, the Government established that Goyal and Ray were not “close” friends. . . .  The evidence also established that Lim and Choi were “family friends” that had met through church and occasionally socialized together.  The Government argues that these facts were sufficient to prove that the tippers derived some benefit from the tip.  We disagree.  If this was a “benefit,” practically anything would qualify.

We have observed that “[p]ersonal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, any reputational benefit that will translate into future earnings and the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.” . . .  This 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.  If that were true, and the Government was allowed to meet its burden by proving that two individuals were alumni of the same school or attended the same church, the personal benefit requirement would be a nullity.  To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee, where the tippee’s trades “resemble trading by the insider himself followed by a gift of the profits to the recipient,” see 643 U.S. at 664, we hold that such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.  In other words . . . this requires evidence of “a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].”. . .

United States v. Newman, slip op. at 21-22 (emphasis added and some cites omitted).

This quote makes it apparent that to justify its argument, the Government badly, and misleadingly, truncates the Second Circuit discussion on this issue.  The Government’s argument ignores language that makes it clear that the Second Circuit did not limit the “gift” concept to a tangible “exchange.”  Instead, in the very paragraph the Government quotes, the court twice says that evidence showing a tipper’s intent to gift information to a tippee would be sufficient to satisfy the Dirks personal benefit standard — (i) including “the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend” as sufficient to show a personal benefit, and (ii) using the disjunctive “or” in describing the need for evidence of “a relationship . . . that suggests a quid pro quo . . . or an intention to benefit the [tippee].”

This makes it plain that the court was not excluding from the range of potentially sufficient evidence an “exchange” in which the tipper’s value received was consummating an “intention to benefit” the tippee.  But there still needs to be evidence of that intention to benefit, and if that evidence is solely the relationship between the parties, proof of a “meaningfully close relationship” is important because relying solely on evidence of a “friendship . . . of a casual or social nature” would undermine the Dirks “personal benefit requirement” by making it an effective “nullity.”

(By the way, this explains why the Second Circuit reached a different result in Newman than the Ninth Circuit did in U.S. v. Salman.  In Salman, there was direct evidence that the transfer of information was made with an intent to benefit the tippee, and even beyond this, the tipper and tippee where brothers, which is well beyond the kind of “casual” friendships at issue in Newman.  In truth, Salman is not even a close case under the Newman standard.  See In U.S. v. Salman, Judge Rakoff Distinguishes Newman in 9th Circuit Opinion Affirming Insider Trading ConvictionThe Government’s argument that this represents a split in the Circuits is, with respect, laughable.)

This is how the Newman cert. opposition addressed this key point:

Dirks recognized that “[d]etermining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.” 463 U.S. at 664.  By characterizing the inquiry as “a question of fact” the Court appreciated that lower courts would need to formulate rules for weighing the evidence in the particular circumstances before them.  That is exactly what the Second Circuit did here.  The court of appeals’ assessment of what kind of proof would support a factual inference is the type of evidence-based analysis that Dirks recognized would be within the province of the lower courts to develop.

Dirks also recognized that a personal benefit in the form of a gift is not simply a matter of whether a tipper gives inside information to a friend or relative.  The Court repeatedly emphasized that it is the purpose of the disclosure that is determinative.  E.g., 463 U.S. at 662 “Whether disclosure is a breach of duty therefore depends in large part on the purpose of the disclosure.”). . . .  The Court’s focus on the purpose of a disclosure would be undermined if a jury were permitted to infer a personal benefit from the bare fact that two people knew each other.  That is because it is not reasonable to presume that the purpose of communicating financial information between casual acquaintances is to provide a gift.  Casual acquaintances typically do not give each other the kind of gifts contemplated by Dirks, i.e. the equivalent of the insider trading stock and gifting the proceeds to someone else.  On the other hand gifts, especially of money, are much more likely among people who take a deep personal interest in each other’s lives, such as close friends or relatives.  The Second Circuit’s evidentiary formulation is thus consistent with the gift theory as articulated in Dirks because it limits the inference of an intentional gift of trading proceeds to circumstances that reasonably support that conclusion.

Newman Cert. Opp. at 20-21.

So, what the Government cert. petition comes down to is a request that the Supreme Court re-examine the evidentiary record to determine whether the agreed-upon Dirks standard was satisfied in this case, even though that issue is not even case-determinative.  That’s not the resolution of an important securities law issue, it is an effort to get the High Court to relieve the Justice Department of the embarrassment of being shot down for an overly-aggressive prosecution fueled more by ambition than evidence.  That’s not cert.-worthy in my book.

There Is No Basis To Expect Harmful Market Consequences from the Newman Decision

The Government’s last argument in support of certiorari – that absent Supreme Court reversal the securities markets and securities law enforcement will be devastated by the purportedly “new,” limited scope of the insider trading prohibition adopted in Newman – fails for multiple reasons.

First, as discussed above, The Newman court did not limit the scope of the law as stated by Dirks.  It tried its best to articulate an evidentiary standard for satisfying the Dirks “personal benefit” standard in the narrow circumstances where there was no quid pro quo from tippee to tipper, and there was no evidence of an intended “gift” from the tipper to the tippee apart from the nature of their relationship.

Second, the Government cited no empirical data even suggesting that requiring evidence of a “meaningfully close relationship” between tipper and tippee to prove insider trading fraud in such cases would harm investor confidence or undermine the overall integrity or efficiency of the securities markets.  Both the Newman and Chiasson cert. oppositions lay out the facts showing that since the Newman decision, Government insider trading cases have not failed because of Newman.  See Newman Cert. Opp. at 27-30; Chiasson Cert. Opp. at 30-33.  Such unsupported “sky is falling” predictions are hardly the grounds for granting certiorari.  In fact, Dirks itself undermines this Government argument, because the Dirks opinion warned against low standards for proving insider trading fraud based on communications with securities analysts, whose purpose is to ferret out information and incorporate it into the market:

Imposing a duty to disclose or abstain solely because a person knowingly receives material nonpublic information from an insider 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.  It is commonplace for analysts to ‘ferret out and analyze information,’ . . . and this often is done by meeting with and questioning corporate officers and others who are insiders.  And information that the analysts obtain normally may be the basis for judgments as to the market worth of a corporation’s securities.  The analyst’s judgment in this respect is made available in market letters or otherwise to clients of the firm.  It is the nature of this type of information, and indeed of the markets themselves, that such information cannot be made simultaneously available to all of the corporation’s stockholders or the public generally.

Dirks, 463 U.S. at 658-59 (footnotes and cites omitted).  Dirks makes it clear that “objective facts and circumstances” must provide evidence of misconduct, especially when we are dealing with communications of information between businesses and analysts.  The Newman opinion is a step in the direction Dirks espoused, made with due regard for the fact that communications of the nature involved in Newman provide the foundation for efficient securities markets.

In Contrast, the Government’s Proposed Rule Would Undermine the Securities Markets

As we have written before, it has long been the Government’s view that the securities laws should be interpreted to mandate equal access of information to all investors, even though that concept is inconsistent with market efficiency, and even market fairness.  (Market efficiency depends on dissemination of information.  Market fairness is undermined when preventing the dissemination of information causes securities transactions to be completed on the basis of incomplete information, and the consequential mispricing of the securities traded.)  See The Myth of Insider Trading Enforcement (Part I), and SEC Insider Trading Cases Continue To Ignore the Boundaries of the Law.  The Government’s cert. petition continues to reflect this bias, notwithstanding the fact that the Supreme Court has rejected this view repeatedly, including this quote from Dirks itself:

Here, the SEC maintains that anyone who knowingly receives nonpublic material information from an insider has a fiduciary duty to disclose before trading.  In effect, the SEC’s theory of tippee liability in both cases appears rooted in the idea that the antifraud provisions require 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.  Judge Wright correctly read our opinion in Chiarella as repudiating any notion that all traders must enjoy equal information before trading: ‘[T]he ‘information’ theory is rejected. Because the disclose-or-refrain duty is extraordinary, it attaches only when a party has legal obligations other than a mere duty to comply with the general antifraud proscriptions in the federal securities laws.’ . . .  We reaffirm today that “[a] duty [to disclose] arises from the relationship between parties . . . , and not merely from one’s ability to acquire information because of his position in the market.”

Dirks, 463 U.S. at 656-58 (footnotes and cites omitted).

This bias is reflected in the Government’s revisionist view that Dirks was consistent with the view that communications between what the Second Circuit called “casual” friends should be sufficient to satisfy the “breach of duty” requirement, and suggesting that in such cases, the burden should shift to the accused to show that “selective disclosures” had “a valid business purpose” or were a “mistake.”  That view, if accepted, would greatly impact the nature of communications between and among securities analysts, and would undermine market efficiency and fairness by presuming every communication of information between acquaintances is unlawful absent their ability to prove otherwise.  This is what the Government says:

Dirks recognizes that not all selective disclosures of confidential information trigger the disclose-or-abstain-from-trading rule. . . .  It explains that if an insider has a valid business purpose for selective disclosure (for instance, supplying data to another company in the course of merger talks), or mistakenly believes that information is not material or is already in the public domain, disclosure does not violate the insider’s fiduciary duties. . . .  The fact that analysts (or others) may be friends with company insiders does not automatically preclude such a legitimate business reason for disclosure.”

Cert. Pet, at 21.

In fact, Dirks makes it crystal clear that the burden falls on the Government to prove that even communications between friends or acquaintances rise to the level of a breach of duty that could support an insider trading fraud finding.  The Chiasson cert. opposition addresses this attempted Government sleight-of-hand:

Finally, at the close of its discussion of Dirks, the Government tips its hand. The Government’s problem is not really with the decision below; it is with Dirks itself.  The Government asserts (at 21) that an insider violates his fiduciary duty by disclosing information unless the insider “has a valid business purpose for selective disclosure” or “mistakenly believes that information is not material or is already in the public domain.” But that turns Dirks on its head. Dirks does not require the insider to prove some “legitimate” reason for his disclosure to avoid liability. . . .  To the contrary, under Dirks, an insider is not liable unless the Government proves that “the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders.” . . .  And the circumstances under which an insider may disclose information without receiving a personal benefit are hardly limited to the two scenarios the Government acknowledges. The Court in Dirks made clear that mistaken disclosures were only an “example” of the type of disclosure that would not constitute a breach. . . .  Even disclosures that violate company policy or confidentiality obligations are not necessarily made for the insider’s personal benefit. . . .  The Government may wish to pursue prosecutions that go beyond what Dirks contemplated, but that is no reason to revisit precedent that has been on the books since the Burger Court.

Chiasson Cert. Opp. at 19-20.

It seems especially strange that the Government is pursuing this argument in the context of a case with facts that seem so close to the kind of communications that Dirks wanted to protect.  The evidence here is that securities analysts were discussing company performance with company officials.  That’s what analysts are supposed to do.  The evidence is also that for at least one of these companies — Dell — the insider’s job was to stay in touch with, and develop relationships with, market analysts who could ultimately be a source of investors.  The communications were not known to be for the purpose of trading.  This strikes me as precisely the kind of communications between company insiders and outside analysts that Dirks wanted to enshrine, not attack.  It truly seems like it is the Government that is trying to alter Dirks, not the Second Circuit.

*                      *                      *

The flaws in the Government’s argument in support of granting the writ of certiorari are manifold and serious.  One normally expects the Justices and their clerks to recognize this, even when the proponent of the writ is the Government.  Yet, it remains possible that all of the brouhaha over the Newman decision – much of which can be traced to the Government’s own hissy fit over losing these cases (which are certainly marginal at best) – will drive the Court towards granting cert.  This person’s view is that if this happens, the Government will regret the decision to elevate this case.  There is much more potential for downside for the Government than upside, because when the Court further specifies the elements of insider trading fraud under section 10(b) and Rule 10b-5, the Government’s discretion to pursue its favored “equality of information” policies is likely to become more, rather than less, constrained.

Straight Arrow

September 3, 2015

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Supreme Court Should Take Action To Rehabilitate Brady Rule in Georgiou v. United States

Justice requires that the Supreme Court shore up the foundations of one of its landmark due process cases, Brady v. Maryland, 373 U.S. 83 (1963).  Otherwise, Brady, one of the seminal due process cases of the 20th Century, will be “more honor’d in the breach than the observance.”

In Brady, the Court ruled that prosecutors could not hide material exculpatory evidence from defendants. It is founded on the simple concept that a fair trial requires that a jury be presented with unbiased evidence, and the Government cannot, consistent with due process, prevent important exculpatory evidence from reaching the jury.

Over the years, prosecutors have largely resisted the concept that they share evidence in their possession that could assist the defense.  This reflects a fundamentally flawed approach to the criminal justice process – too many prosecutors view winning a prosecution as the ultimate goal, when in fact achieving justice – win or lose – is the sine qua non of the criminal justice system of which they are part and parcel.

It is well-known that obtaining exculpatory evidence from prosecutors can be like pulling their teeth, and it has been documented that the failure to follow the simple Brady mandate is a common occurrence.  The courts, which are entrusted to assure the Brady rule is followed, have been unduly neglectful of this key oversight role, showing an unseemly willingness to accept Brady violations under a range of rationalizations.

One of the key rationalizations for permitting Brady violations has been the so-called “due diligence” rule adopted by some courts, under which even the intentional failure of the prosecution to share important exculpatory evidence is ignored if the court develops a hindsight theory of how defense counsel could have uncovered similar information through its own investigations.  The “due diligence” concept finds no support in Brady or other Supreme Court decisions, and, as is readily apparent, flies in the face of the very concept of Brady, which is about the State’s duty to assure a fair trial, not the relative diligence or acumen of the defense lawyers.

This issue has now been placed squarely before the Court in a petition for certiorari in Georgiou v. United States, No. 14-1535.  Some time ago we wrote about some ill-conceived decisions by the Third Circuit in United States v. Georgiou, 777 F.3d 125 (3d Cir. 2014).  The 3rd Circuit first misapplied the Supreme Court decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), by ruling that transactions that touched the United States in only the most ephemeral way were subject to extraterritorial jurisdiction.  See Third Circuit Adopts “Craven Watchdog” Standard for Extraterriorial Reach of Securities Laws in U.S. v. Georgiou.  Then, the court sunk a spear into the heart of Brady by ruling that the prosecutors’ intentional withholding from the defense of key exculpatory evidence was not a Brady violation because the defense lawyers could have figured out how to gain access to that information themselves.  See U.S. v. Georgiou: 3rd Circuit Panel Decision Makes a “Mockery” of Brady Disclosures and Jencks Act Compliance.  The Third Circuit opinion is available here: US v Georgiou.

It is well-documented that prosecutorial violations of the Brady rule – which is critically important to both actual and apparent fairness in criminal prosecutions – are common.  This is one of the shameful aspects of our current criminal justice system that most courts blithely ignore.  It is bad enough that non-compliance with Brady is rife; it is even worse that our courts not only conjure up reasons to allow prosecutors to get away with this, but also, like the Third Circuit in Georgiou, create new rules to provide non-compliant prosecutors with a safe harbor to avoid the appropriate consequences – reversal and retrial – for deciding not to comply with the core fairness principles Brady endorsed and imposed.

The cert. petition in Georgiou and three supporting amicus briefs show (i) the Brady rule is often circumvented by prosecutors, mostly with no consequences; (ii) that is what happened in the Georgiou prosecution; and (iii) the post-hoc absolution of prosecutorial misconduct by focusing on hypothetical defense failures to cure that violation is contrary to Supreme Court precedent, antithetical to Brady, and fosters a prosecutorial mindset that the risk of such due process violations is worth taking in order “win” a conviction.

The Georgiou cert. petition is available here: Cert. Petition in Georgiou v. US.  The three amicus briefs in support of that petition are available here: Georgiou v. US Amicus Brief of Former Prosecutors; Georgiou v. US Center on Administration of Criminal Law Amicus Brief; and Georgiou v. US Amicus Brief of California Attorneys for Criminal Justice.

The Georgiou cert. petition presents these key facts relating to the Brady issue:

The charges arose out of an alleged scheme to artificially inflate the prices of several stocks on the over-the-counter securities market. . . .  According to the indictment, Georgiou and his co-conspirators caused the stocks’ prices to rise by engaging in manipulative trading. . . .

. . . . The Government’s star witness was Kevin Waltzer, an alleged coconspirator.  Waltzer was the only witness who could provide what the Government described as “an insider[’]s view into this stock ring by one of its participants.” . . .  And during the trial, Waltzer testified directly to Georgiou’s mens rea, telling the jury that Georgiou “basically” admitted to him that Georgiou “kn[ew] that the public is going to get fleeced.” . . .

Following trial, Georgiou obtained critical material from Waltzer’s own criminal proceedings. Waltzer himself had been charged with wire fraud and other federal crimes. . . .  [M]ore than a year before the start of Georgiou’s trial . . . a [bail report] regarding whether Waltzer should be released on bail . . . stated that Waltzer had “been diagnosed in the past with Anxiety Disorder, Panic Disorder and Substance Abuse Disorder.” . . .  And it noted that he had been taking Paxil for the last ten years for his anxiety. . . .  Georgiou obtained a copy of this bail report for the first time after the end of his trial.

Georgiou also obtained, for the first time following his trial, a copy of the transcript of Waltzer’s arraignment and guilty plea hearing.  During that hearing, in the presence of an assistant U.S. attorney, Waltzer acknowledged “see[ing] a psychiatrist, psychologist or mental health provider * * * in connection with depression and anxiety.”

The Government had failed to disclose either the bail report or the plea transcript prior to Georgiou’s trial, even though Georgiou had requested “any and all evidence” that “a government witness or prospective government witness * * * is or was suffering from any mental disability or emotional disturbance.” . . .  Georgiou had also requested any “[i]nformation concerning Mr. Waltzer’s * * * current or past psychiatric treatment or counseling.”

Cert. petition at 4-8.

The petition also describes how the availability of that evidence would have permitted the defendant to learn that this key witness was an admitted drug addict, and that his medication had known side-effects of memory impairment.  Id. at 6-7 & notes 2-3.  The Third Circuit ruled that the prosecutors’ intentional withholding of this evidence about the state of mind of the Government’s star witness was not a Brady violation because with greater diligence, the defense could have obtained those materials themselves.  It also found they were not “material” evidence under Brady.

The Georgiou case struck a nerve among both defense lawyers and prosecutors.  This is reflected in the three amicus briefs filed in support of granting the writ of certiorari and reversing Georgiou. One was filed by the California Attorneys for Criminal Justice, one by the Center on the Administration of Criminal Law, and one by an unusual, large group of former federal prosecutors, Department of Justice, and other Government officials.  Those officials include: a former Attorney General and federal district judge, two former Acting Attorneys General, a former White House Counsel, four former Deputy Attorneys General, five former U.S. Attorneys, and an assortment of other former high-level federal criminal justice officials.

These three amicus briefs agree that the exception to the Brady rule adopted by the Third Circuit is wrong as a matter of law under Supreme Court precedent, and dangerous as a matter of policy because of its harmful effects on due process.  They also agree that the documented trend of prosecutors ignoring Brady will continue and worsen if the Supreme Court fails to step in to make it clear that the rule is not just a heuristic concept with no serious consequences if (actually, when) it is ignored, but is mandated by principles of fundamental fairness, due process, and the administration of justice, and must be enforced vigorously and without exception.

The impressive group of former DOJ leaders, prosecutors, and government officials wrote:

As the Supreme Court recognized in Brady v. Maryland, the failure to disclose favorable evidence “violates due process … irrespective of the good faith or bad faith of the prosecution.” 373 U.S. 83, 87 (1963); see also United States v. Nixon, 418 U.S. 683, 709 (1974) (“The very integrity of the judicial system and public confidence in the system depend on full disclosure of all the facts, within the framework of the rules of evidence.”).  While this affirmative duty is above and beyond the demands of the “pure adversary model,” United States v. Bagley, 473 U.S. 667, 675 n.6 (1985), it is grounded in an understanding of the prosecutor’s “‘special role … in the search for truth in criminal trial,’” Banks v. Dretke, 540 U.S. 668, 696 (2004).  From their years of combined experience, amici appreciate the challenging judgment calls prosecutors face on a daily basis, but they also deeply believe that fundamental fairness and public confidence in our justice system relies on prosecutors taking their disclosure obligations seriously and fulfilling this duty capaciously.

Amici do not believe that Supreme Court precedent recognizes an exception to the Brady rule for lack of diligence by the defense and are concerned that the decisions of several federal circuits, including the Third Circuit, have undermined Brady by shifting focus away from the prosecutor’s affirmative obligation to disclose. We submit this brief to emphasize that the introduction of an antecedent “due diligence” inquiry focused on the defendant is inconsistent not only with Supreme Court precedent but also principles codified in the codes of ethical conduct for prosecutors.

Petitioner George Georgiou’s case presents a straightforward question about the appropriateness of conditioning Brady disclosures on a defendant’s exercise of due diligence.  According to the government, Georgiou and his co-conspirators engaged in a scheme that inflated the prices of four securities through various trading strategies and then fraudulently used those manipulated securities as collateral to obtain large loans. . . .  The prosecution relied on the testimony of Kevin Waltzer, Georgiou’s former business partner and alleged co-conspirator. . . .  Waltzer’s testimony corroborated certain physical evidence collected by the government . . . and undergirded the government’s contention that Georgiou acted “wilfully” and had the “intent to defraud.”. . .

Recognizing the importance of Waltzer’s testimony, Georgiou made a pre-trial request that the government turn over any Brady information that would “reflect upon the credibility, ompetency, bias or motive of government witnesses,” including with respect to any mental health problems or substance abuse issues Waltzer might have had. . . .  The government provided limited information regarding Waltzer’s drug use responsive to this request. . . .

Yet the government had been aware from Waltzer’s own criminal proceedings that he had an extensive history of substance abuse and mental health problems, and possessed two pieces of evidence at issue on appeal that it failed to disclose: A Bail Report provided to the government a year before Georgiou’s trial by pretrial services . . . and the transcript of Waltzer’s arraignment and guilty plea hearing . . . .  Both documents contained specific information about the timeline of Waltzer’s mental health and substance abuse issues, as well as the medication and treatment he was receiving in the period leading up to his testimony.  This information might have informed Georgiou’s defense strategy and advanced his efforts to undermine Waltzer’s credibility. . . .

The Third Circuit affirmed the conviction. The court held that the evidence had not been suppressed because Georgiou failed to exercise “reasonable diligence” in seeking evidence of Waltzer’s mental health history. . . .  In particular, the court reasoned that the Bail Report and the Minutes, as public records, were equally available to Georgiou and the prosecution.  . . .

By adopting this circumscribed view of a prosecutor’s obligations under Brady, the Third Circuit has joined a growing list of courts departing in this way from Supreme Court precedent and the fundamental principles that undergird the Brady doctrine.  Where prosecutors are aware of this sort of information, they should disclose it to the defense, and their obligations to the truth-seeking process and principles of fairness are not discharged on the theory that the defendant could seek it out for himself.  Such an approach contributes to a harmful notion that the criminal justice system is a game, and that victory rather than justice is a prosecutor’s goal.

. . . . The Third Circuit has diminished this constitutional and ethical requirement by introducing a rule that excuses a prosecutor from fulfilling her obligation if the defendant could have but did not find the favorable evidence himself.  Rather than ask whether the prosecution has withheld from the defendant evidence that, “if made available, would tend to exculpate him or reduce the penalty,” Brady, 373 U.S. at 87-88, the Third Circuit asks whether the defendant could have obtained the evidence “from other sources by exercising reasonable diligence,” United States v. Perdomo, 929 F.2d 967, 973 (1991).  Such a rule is tantamount to saying that a “‘prosecutor may hide, defendant must seek,’” which this Court in Banks v. Dretke made clear “is not tenable in a system constitutionally bound to accord defendants due process.”  540 U.S. 668, 696 (2004) . . . .  It is also at odds with standards of prosecutorial conduct.

Brief of Former Prosecutors and Officials at 2-7.

The Center for the Administration of Criminal Law (CACL) provided similar views, and focused on the harmful impact of fashioning rules that allow departures from Brady obligations:

Prosecutors’ duty under Brady to disclose exculpatory evidence to defendants is a core component of prosecutors’ ethical duty to seek justice rather than victory.  Nonetheless, many prosecutors fail to live up to the obligations that Brady imposes on them.  Because of the public perception that prosecutorial misconduct is widespread, public confidence in prosecutors’ integrity and the overall fairness of the criminal justice system is in decline.

The Third Circuit’s recognition of a “due diligence” exception to Brady not only undermines defendants’ constitutional right to due process, but also fosters conditions likely to further erode public confidence in the system.  While a legal doctrine excusing Brady violations might appear to be an attractive option for prosecutors, in fact it harms both prosecutors and defendants.  It muddies an otherwise clear ethical obligation to disclose exculpatory information, which is central to prosecutors’ duty to seek justice.  It burdens prosecutors by requiring speculation about information available to their adversaries through due diligence – a determination that prosecutors are ill-equipped to make for myriad reasons.  By undermining defendants’ confidence in the information they receive from prosecutors, it discourages plea bargaining, which is essential to the efficient functioning of today’s criminal justice system.  By undercutting public confidence in prosecutors generally, it hampers their ability to obtain the cooperation of witnesses and the trust of jurors.  And ultimately, it undermines the public’s interest in ensuring that the guilty are convicted and the innocent exonerated, because those outcomes depend on a robust adversarial system in which both sides have actual knowledge of the material facts.

CACL Brief at 3-4.

The CACL brief also focused on the growing problem of non-compliance with Brady:

Unfortunately, Brady’s promise of full disclosure often has not been realized in practice.  In a recent frank opinion, Chief Judge Alex Kozinski of the U.S. Court of Appeals for the Ninth Circuit observed that “Brady violations have reached epidemic proportions in recent years, and the federal and state reporters bear testament to this unsettling trend.”  United States v. Olsen, 737 F.3d 625, 631 (9th Cir. 2013) (Kozinski, J., dissenting from denial of reh’g en banc) (collecting cases).  Some commentators are even more critical.

Empirical studies confirm that Chief Judge Kozinski’s statement was no exaggeration.  According to a study by the Veritas Initiative, prosecutors withheld or delayed disclosing favorable evidence in roughly one-third of the cases sampled.  [Citation omitted.]  Yet in 2001, “[a] nationwide study of all reported cases involving discipline for prosecutorial misconduct found only twenty-seven instances in which prosecutors were disciplined for unethical behavior that compromised the fairness of a trial.”  [Citations omitted.]  Recognizing a due diligence exception, and thereby increasing uncertainty about Brady’s scope, threatens to exacerbate these problems by suggesting judicial sanction for prosecutors’ noncompliance.

. . . .

Disclosing exculpatory evidence helps to “justify trust in the prosecutor,” and supplies legitimacy enabling the prosecutor to fulfill his or her mandate. . . .  By excusing failures to disclose Brady material that might be discovered through “reasonable diligence” . . ., the exception both weakens prosecutors’ disclosure obligations and reduces transparency.  In short, it undermines trust in prosecutors by minimizing their duty to disclose exculpatory evidence.

Id. at 6-7, 10.

The CACL brief goes on to discuss at length why presenting prosecutors with the option to game the Brady rule by speculating about what defense “due diligence” might reveal – thus negating their own obligation to reveal exculpatory evidence they know exists – undermines the rule, and places even good faith prosecutors in an untenable position to make decisions based on guesses or suppositions that they are ill-fitted to make.  Id. at 13-18.

The California Attorneys for Criminal Justice likewise argue that removing the uncertainty of the products of “due diligence” from the Brady disclosure equation is necessary to achieve Brady’s key fairness goals:

The “due diligence” exception adopted by the Third Circuit in this case, and by other circuits and state courts around the country, should be rejected because it undermines the animating principle of Brady and imposes on prosecutors and courts the unavoidably speculative analysis of whether a particular piece of evidence would be meaningfully “available” to a diligent defendant.  The exception also invites prosecutorial mischief, as complex rules that rest on speculative inquiries are far more vulnerable to mistakes, or abuse, than clear and simple commands.  The exception also imposes onerous and inefficient limitations on counsel to indigent defendants, who often do not have resources to conduct fulsome investigations.

. . . .

As Brady itself recognized, “[s]ociety wins not only when the guilty are convicted but when criminal trials are fair; our system of the administration of justice suffers when any accused is treated unfairly.”  373 U.S. at 87. . . .  The “due diligence” rule applied by the Third Circuit in this case undermines these goals. . . .  The due diligence exception has no place in the Brady analysis, and in fact operates only to undermine the promise of fair trials.  As applied by the Third Circuit and other courts, the exception affects the outcome of the Brady analysis only when the defendant has established the failure to disclose evidence that has a reasonable probability of affecting the outcome of a case.  That is, it preserves a conviction precisely, and only, when there is substantial doubt that the defendant was “convicted on the basis of all the evidence which exposes the truth.”

. . . .

The Third Circuit’s opinion in this case relied on the assumption that the undisclosed evidence “could have been accessed through his exercise of reasonable diligence.” . . .  Even if that assumption were warranted here, in many cases a prosecutor’s determination whether evidence is reasonably accessible to defendants will require speculation regarding both the availability of evidence and the resources available to the defendant and his counsel.  And more importantly, even when a defendant might have access to information via rumors or innuendo, a prosecutor might well have access to reliable, admissible documents with far more persuasive value.  Due Process cannot condone withholding admissible, exculpatory evidence on the grounds that a defendant, through the exercise of due diligence, could have had access to inadmissible hearsay.

. . . .

If speculation as to the fruitfulness of “pre-trial depositions and other discovery” is sufficient to establish the “availability” of evidence in an undisclosed police report, and is therefore sufficient to excuse a Brady violation, the result will be that Brady violations, including intentional suppression of exculpatory evidence, will be excused.  And on a practical level, such a rule invites a prosecutor to engage in the same speculation in seeking to determine whether to disclose plainly exculpatory evidence under Brady.  The question of “availability” of evidence therefore becomes yet another opportunity for subjective analysis by prosecutors creating a corresponding risk of error—or temptation into gamesmanship.

California Attorneys for Criminal Justice Brief at 3-5, 8, 10.

Ironically, the lack of equivalence the California Attorneys point to between actual exculpatory evidence known to prosecutors, and the hypothetical prospect that defense counsel might obtain access to some form of similar information in the exercise of so-called “due diligence,” is one that is often addressed under the securities laws — the same laws under which Mr. Georgiou was convicted.  Under the securities laws, however, the availability of material information through exercise of due diligence by investors does not relieve companies or company officials of duties they may have to disclose that same information.  That rule applies for good reason, because obtaining hard information from a reliable company source with a duty to disclose it is different from ferreting out what may be the same information by means that may lack the same provenance.  It is a bizarre world where the duties of corporate officers to disclose business information could be more onerous and inflexible than the duties of public prosecutors to maintain a fair criminal process.

The Georgiou case gives the Supreme Court an opportunity to stem the growing trend of Brady non-compliance, and the creation of exceptions to the Brady rule that ignore its core message and effectively impede its goals.  The fairness of criminal proceedings is not a discretionary concept to be toyed with by aggressive prosecutors or judges unwilling to put teeth behind core due process requirements.  The Georgiou cert. petition should be granted, and the Supreme Court should send a clear message to the lower courts that some concepts are sacred.

Among those concepts is the admonition in Berger v. United States, 295 U.S. 78, 88 (1935), that the federal prosecutor “is the representative not of an ordinary party to a controversy, but of a sovereignty … whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done.”  The prosecutor’s duty is not to win, but to “ensure that a miscarriage of justice does not occur,” and that includes complying with Brady by disclosing “evidence favorable to the accused that, if suppressed, would deprive the defendant of a fair trial.”  United States v. Bagley, 473 U.S. 667, 675 (1985).  In Brady, the Court made it clear that it is in society’s broader interest “when criminal trials are fair,” and that “our system of the administration of justice suffers when any accused is treated unfairly.”  373 U.S. at 87.  A vague, unverifiable, and poorly-conceived “due diligence” exception to the Brady rule – which excuses even intentional prosecutorial efforts to prevent a fair trial — eviscerates that paramount need and requirement.

Straight Arrow

August 20, 2015

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In U.S. v. Salman, Judge Rakoff Distinguishes Newman in 9th Circuit Opinion Affirming Insider Trading Conviction

In an opinion issued July 6, 2015, a Ninth Circuit panel affirmed the insider trading conviction of Bessam Salman in the case captioned United States v. Salman, No. 14-10204 (9th Cir.).  The opinion is relatively straightforward, but is noteworthy for two reasons.  First, it is written by Southern District of New York Judge Jed Rakoff, who seems to attracting insider trading cases of late, and has written several opinions interpreting and applying the Second Circuit U.S. v. Newman decision.  Second, the defendant-appellant argued that the Newman opinion supported reversal of the conviction, which gave Judge Rakoff another chance to state his views on Newman.  The opinion can be read here: U.S. v. Salman.

The opinion does little to advance the interpretive analysis of the Newman decision because it is governed directly by the Supreme Court holding in Dirks v. SEC, 463 U.S. 646 (1983).  In fact, Judge Rakoff says so in no uncertain terms: “Dirks governs this case.”  Slip op. at 10.  The only real comment Judge Rakoff makes on Newman is that if Newman held that a personal gift of material inside information from a tipper breaching a fiduciary duty of confidentiality to a tippee with whom he has a close relationship, for the specific purpose of enriching the tippee, was insufficient to support a conviction, then “we decline to follow it.”  Slip op. at 13.  Since Newman never suggested such a result – which would be plainly contrary to the Dirks opinion – there is no distance between the Salman and Newman opinions.

As Judge Rakoff notes, the facts in Salman and Newman are very different.  In particular, in Newman, the evidence showed no intention by the original sources of the inside information to confer a benefit on a close friend or relative by improperly communicating the inside information.  In Salman, however, the evidence in the record was exactly the opposite.  The tipping brother testified “that he gave [his brother] the inside information in order to ‘benefit him’ and to ‘fulfill[] whatever needs he had.’”  Slip op. at 5.

The Dirks opinion plainly included this in its description of unlawful tipping, as quoted by Judge Rakoff: “[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend.”  Slip op. at 10, quoting Dirks, 463 U.S. at 664.

Some may contend that Salman rejects the concept of a “personal benefit” to the source in the nature of a “quid pro quo” as a prerequisite for tippee liability, referred to in Newman.  See, for example, Ninth Circuit Disagrees with Second Circuit on Personal-Benefit Requirement for Insider Trading.  That is not how I read either Salman or NewmanNewman never questioned that the required benefit to the tipper could be a non-monetary one — like the benefit of directing wealth to a close friend or relative you want to benefit from being more wealthy — it just found the evidence of such a benefit insufficient in that case because the mere fact of providing information, with no evidence that it was to fulfill the tipper’s desire to transfer wealth, was “too thin” to support finding a benefit to the tipper.  And Salman plainly finds, and emphasizes, the strong evidence in the case of a benefit to the tipper in the form of intentionally directing wealth to a beloved relative.

There can be no doubt that the Newman court never rejected that holding in Dirks.  Instead, it tried to apply the Dirks holding to the evidence presented in Newman, which the court found insufficient to show any personal benefit derived by the sources from their “tips” because “the mere fact of a friendship, particularly of a casual or social nature” was not enough to prove a intent to benefit the tippee.  Slip op. at 12-13, quoting Newman, 773 F.3d at 452.  The Newman court found the “circumstantial evidence” in that case “too thin to warrant the inference that the corporate insiders received any personal; benefit in exchange for their tips.”  Slip op. at 13, quoting Newman, 773 F.3d at 451-52.  That obviously does not describe the evidence of benefit presented in Salman, which was neither circumstantial nor thin because the source himself described the pleasure he took in giving the gift of information to his brother.  See slip op. at 11 (testimony from the source and his tippee, who were brothers, showed that the tipping brother “intended to ‘benefit’ his [tippee] brother and to ‘fulfill[] whatever needs he had’”).

If Salman stands for anything meaningful, it is that it shows that Newman was not a meaningful departure from existing insider trading law, but rather a ruling that there are limits to how far the Government can stretch mere casual friendships or acquaintances to prove a transfer of information was intended as the “gift of confidential information” described in Dirks.  In short, the sky did not start falling when the Newman opinion was adopted.  See DOJ Petition for En Banc Review in Newman Case Comes Up Short.

Judge Rakoff’s Salman opinion concludes: “If Salman’s theory were accepted and this evidence found to be insufficient, then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return.  Proof that the insider disclosed material nonpublic information with the intent to benefit a trading relative or friend is sufficient to establish the breach of fiduciary duty element of insider trading.”  Slip op. at 14.  Newman never suggests any different result.

Straight Arrow

July 6. 2015

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Thank You, Judge Charles Breyer, for Advancing the Cause of Prosecutorial Boundaries and Common Sense

This blog post is dedicated to all defense counsel out there who wanted to scream:  “WHY IS THIS HAPPENING?  WHY DOES THE GOVERNMENT THINK THIS CASE IS WORTH ITS (OUR) TIME AND MONEY?  WHAT PUBLIC POLICY GOAL COULD POSSIBLY BE FURTHERED BY THIS PROSECUTION?  WHY WOULD THE GOVERNMENT ALLOCATE HUNDREDS OF THOUSANDS OF DOLLARS OVER A DISPUTE OF NO CONSEQUENCE TO THIS COUNTRY?  DOES ANYONE ACTUALLY REVIEW THESE CASES AND EXERCISE DISCRETION?  WHERE IS THE ADULT SUPERVISION?”

 This blog post is also intended as reading for all Government prosecutors and enforcement lawyers, but especially those who believe prosecution/law enforcement involves finding any possible way to bring an action against someone under one of the thousands of available laws, without regard for proportionality and COMMON SENSE.  The ones who think the U.S. Treasury is their little piggy bank.

It’s an easy blog post to write.  It doesn’t require any analysis or stylistic writing.  It requires only getting the reader to read the transcript of a hearing that took place on April 17, 2015 in the case United States v. Vassiliev, No. CR 14-0341.  My thanks to Judge Charles Breyer for saying what needed to be said, and to a former colleague who sent me the transcript, knowing I would be amused and feel in some sense comforted by the fact that there are still people in the system of justice who haven’t lost their minds.  If you want to skip to the transcript right away, you will find it here: United States v. Vassiliev Hearing Transcript.  There’s a short article about the case here: No extraterritorial jurisdiction for wire fraud: a district court slams DOJ overreach.  For those who want just the highlights, I’ve chosen some choice excerpts.

District Court Judge Charles Breyer

District Court Judge Charles Breyer

Judge Breyer dismissed an indictment under 18 U.S.C. § 666 (bribery concerning programs receiving federal funds) and 18 U.S.C. § 1343 (wire fraud) that never should have been brought, and minced few words in doing so.  So, without further ado, ladies and gentleman    . . .    Judge Charles R. Breyer:

     THE COURT: So this matter is on for a motion to dismiss.  A number of grounds have been urged. And the defendants are basically charged with an honest services wire fraud and a bribery – a series of bribery charges. . . .

What I’m going to do is read the facts as I have gleaned them from the indictment and I’d like the Government to – if the Government believes that I’ve misstated it, I would like you to make note.

The International Civil Aviation Organization has been a United Nations specialized agency since 1944. . . . The time period relevant to the indictment is 2005, 2010.  And during this time, the United States made annual monetary contributions to the agencies exceeding $10,000 per year. . . .

Mr. Siciliano was an employee of this agency and was specifically assigned to work in the Machine Readable Travel Documents Program. Mr. Siciliano worked and resided in Canada, where the agency that we’ve just discussed is headquartered.  He held a Canadian passport, but is actually a Venezuelan national.

Mr. Sidorenko and Mr. Vassiliev were chairmen of a Ukrainian conglomerate of companies that manufactured and supplied security and identity products and their consortium, how they acted, was called EDAPS.

Mr. Sidorenko is a citizen of Ukraine, Switzerland and St. Kitts and Nevis. Not of the United States.  But he primarily resided in Dubai during the relevant time period.

Mr. Vassiliev also resided in Dubai, but he is a citizen of Ukraine and St. Kitts and Nevis.  He’s not an American citizen either.

And, of course, the company is not — I mean, the agency is not an American agency.

The indictment alleges . . . that Mr. Sidorenko and Vassiliev, Ukrainians, provided things of value to Mr. Siciliano in Canada in exchange for Mr. Siciliano using his position at a place in Canada to benefit an Ukrainian company, as well as these — Mr. Sidorenko and Mr. Vassiliev personally, these Ukrainians personally. . . .

All of those activities, everything that I have said, occurred outside the United States of America between these three defendants, who, by the way, aren’t United States citizens, who never worked in the United States and whose use of the wires did not reach or pass through the United States. . . .

Now, when last I looked, the Ukraine, what’s left of it, was not a state of the United States.

That’s correct, right?

     LEUNG: Correct, your Honor.

     THE COURT: Okay. So my first reaction in reading this indictment is that your office is to be congratulated because, apparently, you have reduced crime in the Northern District of California, and indeed in the United States of America, to such a point that you are using resources of your office to go after criminal activity that occurs in foreign countries and for that — that’s a rather interesting concept that, apparently, you thought this is a good use of assets and resources of the United States Attorney’s Office for the Northern District of California.

So it occurred to me: Is this statute or statutes, the honest services statute and the bribery statute, extraterritorial?  And, fortunately, the Supreme Court has addressed this issue.  As recently as 2010, they have said — Justice Scalia writing the opinion for a unanimous court, I might add, said that you just look at the statute.  See what Congress said.  Did Congress say it should be applied extraterritorial?  And you would concede, wouldn’t you, Mr. Leung, there is nothing in the statute that talks about extraterritorial application, is there?

     LEUNG: There is nothing in the text of 666 or 1343.  I would submit that the legislative history of 1343 suggests that it was meant to be applied extraterritorially.

     THE COURT: But you know there are those people, like judges, who look first to the statute. There is nothing in the statute. . . .  So then if there is nothing in the statute, that doesn’t preclude necessarily the application of the statute extraterritorial, but we have to see whether or not that’s consistent with the general purpose of the statute.

And it’s your view that since the Government contributes some funds to this agency, which is involved in national security — I guess we can talk about it in open court, can’t we?

     LEUNG: Yes, your Honor.

    THE COURT: Okay. I didn’t want to clear the Court because of this strong national security interests that apparently are at issue here. . . .

But because they give money to this agency which is engaged in activities, some of which may impact national and international security arrangements, that’s the nexus for the United States Government to apply the statute in an extraterritorial way, is that correct? . . .

And so it occurred to me by that logic, the United States being a very generous country, gives a lot of money to a lot of foreign countries.  They give over a billion dollars to Egypt.  They give vast sums of money to Mexico.  They give sums of money to many, many countries all over the world.

And then I wonder by their giving some money to a foreign country, does that then give them jurisdiction to apply statutes, such as the honest services statute, to individuals who are operating in that country or outside the United States? . . .

So, in other words, if I — it’s your view, your view, that the United States of America can police foreign companies in the exercise of their operation involving foreign citizens on matters unrelated to the program which the United States gave money for — that is, for the specific purpose of the program — and that they then have jurisdiction to act in that regard. . . .

So if there is ever, ever a policy interest of the United States of America in anything a foreign country — that occurs in a foreign country, the United States Attorney’s Office for the Northern District of California will vindicate the way the laws apply — the honest services law applies.  You’re going to wipe out bribery and honest services throughout the world.  I want to congratulate you for that.  And I never in my life, in 50 years of criminal practice, seen a more misguided prosecution as the one that you’ve brought.  I just don’t even get it. I don’t get it, how you can — how you can use resources of the United States Attorney’s Office to prosecute some foreign nationals involved in a foreign company, engaged in conduct which was foreign, on doing things that weren’t directly related to the contribution of the United States to that entity. . . .

    THE COURT: Did you get permission from anyone in the Department of Justice in Washington DC to bring this prosecution?

     LEUNG: It was not required. . . .

    THE COURT: And you didn’t choose fit to ask the Department of Justice whether in their smarter sentencing, smarter criminal law enforcement program this is a good use of your resources?

     LEUNG: We received office approval.  We also coordinated with the State Department, your Honor. . . .

     THE COURT: [Y]ou’re telling me this was a decision of the United States Attorney to bring this prosecution without the knowledge of the Department of Justice.

     LEUNG: It was a duly authorized decision by this office to do so.

     THE COURT: My suggestion, since I’m dismissing this indictment, is that you bring an appeal, right away.  I would be very interested in what the Ninth Circuit has to say about this, whether they think that there is enough of a nexus to apply statutes, such as the bribery statute and the honest services statute, to the conduct that’s alleged in this particular case. . . .

My view is these statutes aren’t intended to apply extraterritorially to the conduct that’s alleged in this case. And just — and the very fact that you get up and say: Well, we could have prosecuted somebody in Mexico if American interests are implicated, or we can prosecute somebody in Canada — by the way, we could phone the Royal Canadian Mounted Police.  They actually have law enforcement in Canada.  If you’re so concerned about the way some Canadians are operating with a Canadian-based company in dealing with Ukrainians, you can always phone the Mounties and they will investigate it if they think it’s appropriate. . . .

There are really no limits to your argument.  There are just no limits.  I don’t understand where you really draw the line.  The United States never gives anything to anybody unless there is some interest in it. And you’re saying whenever they give something to somebody, they can prosecute them, even though everything happens in some other place. . . .

     LEUNG: . . . [T]he statutory interest recognized by the Supreme Court is that the United States has an interest to ensure that the money that it distributes pursuant to federal programs are free from corruption.

     THE COURT: That’s right.  So if you give – your argument is, you give a dollar to some foreign entity, you can then prosecute people who engage — who are involved with that foreign entity even though there are — even though they do it all abroad and do it in connection with something else.  They don’t take the dollar.  Something else.  You say: Well, we can prosecute them for honest services.  How do you actually — do you really think this is going to fly anywhere?  Anyway, I invite you, I invite you to get the judgment of the Ninth Circuit.  Obviously, I’ll be bound by it. . . .

And I’m going to write something so you have my reasons, and you take it right up to the Ninth Circuit and see what they have to say about it.  And I don’t even think you have to ask Washington, right?

     LEUNG: I think we do in this case, your Honor.

     THE COURT: Really?  I mean, you brought the indictment without asking them.  I don’t know why you can’t appeal it without asking them.  But you follow whatever procedure you think is appropriate.  And you please put in the comment that I actually think this is a serious waste of scarce resources.  If you’re not addressing crime in the Northern District of California, you’re not doing your job.  And I think this — I think this prosecution is really a — brings into serious question the manner in which decisions are made by the United States Attorney for the Northern District of California. . . .

     LEUNG: Your Honor, would you consider staying the order while we –

    THE COURT: No. . . .  Go right to the Ninth Circuit.  Get a stay, if you think that’s an appropriate use of your resources.

Straight Arrow

April 28, 2015

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U.S. v. Georgiou: 3rd Circuit Panel Decision Makes a “Mockery” of Brady Disclosures and Jencks Act Compliance

We previously discussed the Third Circuit’s flawed analysis in United States v. Georgiou of the extraterritorial application of the federal securities laws to trading activity centered abroad, based solely on the fact that some trades entered into abroad were executed with the involvement of market makers in the United States.  See Third Circuit Adopts “Craven Watchdog” Standard for Extraterriorial Reach of Securities Laws in U.S. v. Georgiou.  We now turn to a different respect in which that panel decision disappoints.  The defendant in Georgiou recently filed a petition for rehearing en banc on different grounds, focusing on the panel’s use of invalid standards in applying Brady v. Maryland, 373 U.S. 83 (1963).  The issues raised in the brief are significant.  A copy of the motion for rehearing is available here: Georgiou Petition for Rehearing En Banc.

Brady is the landmark Supreme Court decision that ended the ability of the Government to hide from defendants exculpatory evidence in its possession.  Mr. Georgiou raises serious concerns that the panel improperly limited the Brady rule, in a manner inconsistent with previous Third Circuit (and other appellate court) holdings, by allowing the Government to avoid the consequences of failing to make required Brady disclosures based on whether the defendant acted diligently to try to obtain those materials himself.  By using this standard, the panel allowed the prosecutors to get away with withholding evidence that could have strongly undercut the credibility of the Government’s key witness.  The withheld information was revealed only in sentencing proceedings for that witness after the Georgiou trial was over.

As the brief in support of the Georgiou petition describes, the approach adopted by the Third Circuit panel allowed a blatant evasion of the obligations imposed on the Government to disclose exculpatory evidence in its possession.  The degree of diligence used by the defense to obtain that same information simply should not be relevant.  To be blunt, it is not too great a burden to demand that Government lawyers satisfy their duties to make required disclosures without permitting them to insulate their failures from consequences by making an issue of defense diligence.  Whether defense counsel is diligent or not, Government lawyers need to recognize their duties and perform them, period.  Anything less undermines the criminal justice process.

Unfortunately, there is a near-constant need to have the courts assure that prosecutors meet their obligations.  Prosecutors seem addicted to trying to win cases through sharp practices rather than a thorough presentation of the facts to the judge or jury.  It never ceases to amaze me that prosecutors consistently try to minimize the effect of Brady by avoiding the disclosure of potential exculpatory material in their possession.  An attempt to deprive the defendant of information that might be useful at trial reflects a prosecutor’s willful effort to prevent a fair and just trial.  It should not be tolerated by the senior lawyers that manage prosecution teams, and it should not be tolerated by the courts.  Indeed, a knowing avoidance of Brady obligations should expose prosecutors to court and bar sanctions, and in some instances be prosecuted as an obstruction of justice.  Prosecutors routinely take the narrowest view possible of Brady obligations, but why they do so is a mystery to me.  What do they think they are achieving by depriving the defendant of potentially relevant evidence?  Do they really think that their views that a defendant is guilty as charged are so reliable that the jury should not be permitted to consider all of the evidence?  The job of a prosecutor is not to engineer a conviction, but to try to assure that a fair adjudication occurs.  Instead of allowing prosecutors to play games to avoid Brady obligations, U.S. Attorneys should demand that their assistants err on the side of producing potentially exculpatory evidence.

Since that did not occur here, it was up to the courts to elevate justice above the prosecutors’ hubris, or their single-minded desire for a notch in the belt.  Alas, that did not occur.  Instead of casting a jaundiced eye on the prosecution’s questionable disclosure decisions, the Third Circuit panel bent over backwards to justify or exonerate those decisions.  It should have held the prosecutors’ feet to the fire, because adhering to principles that foster a fair and just adjudication is far, far more important than the result in a particular case.  The Third Circuit panel abdicated its role to hold overly-zealous prosecutors in check.

The petition points out another serious error by the Third Circuit panel.  The Government never produced to the defense notes of witness interviews by Government officials of the prosecution’s key witness.  Any such materials known to the prosecutors should have been produced under Brady if aspects of the interviews were exculpatory, and under the Jencks Act because they reflect previous statements of one of the Government’s witnesses.  The panel ruled that even though the SEC was in possession of notes of these interviews, they were not required to be produced by DOJ prosecutors because they were in the possession of the SEC, not the DOJ.  As a result, in the court’s view, these materials “were not within the possession of the prosecutorial arm of the government” and therefore prosecutors were absolved of the duty to produce them, even if they knew they existed and could easily have obtained them.  That is a truly absurd position which has been soundly repudiated by other courts.  Those courts rightfully recognize that accepting this fiction would make a “mockery” of the Brady and Jencks Act disclosure requirements. See, e.g., United States v. Gupta, 848 F. Supp. 2d 491, 493-95 (S.D.N.Y. 2012).

In this case, as in most criminal cases involving allegations of key securities violations, the DOJ worked hand-in-hand with the SEC, often jointly participating in interviews.  To permit avoidance of disclosures by the DOJ based on which government employee took or retained those notes — whether they were SEC officials, FBI agents, U.S. mail inspectors, or some other agency employee — is a gross elevation of form over substance.  All of the law enforcement agencies in these cases cooperate and work together, and all of them should be required to treat these notes as jointly-held materials.  To rule otherwise does, indeed, make a mockery of justice.

Mr. Georgiou faces an uphill battle in his effort to win reconsideration of the decision or en banc review, or, failing so, in getting a grant of certiorari from the Supreme Court.  But if the panel decision stands as written, it represents an embarrassment to criminal justice, regardless of whether Mr. Georgiou is guilty of the crimes charged.

Straight Arrow

February 11, 2015

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