Tag Archives: U.S. v. Georgiou

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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Third Circuit Adopts “Craven Watchdog” Standard for Extraterriorial Reach of Securities Laws in U.S. v. Georgiou

In United States v. Georgiou, No. 10-4774 (Jan. 20, 2015), the Third Circuit recently applied the Supreme Court’s extraterritoriality ruling in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), to a criminal securities fraud conviction.  Georgiou was convicted of securities fraud, wire fraud, and conspiracy for a stock manipulation scheme orchestrated outside of the United States. The court affirmed the conviction, finding that even though the securities trading did not occur on a U.S. securities exchange, it was actionable under the U.S. securities laws because an aspect of the securities transactions was completed within the United States.  A copy of the opinion can be found here: US v Georgiou.

The case involved an alleged classic manipulative scheme to buy thinly-traded stocks, inflate their prices with matched trades, wash sales, and the like, and dump the stocks at the artificially high prices.  Georgiou used brokerage accounts in Canada, the Bahamas, and Turks and Caicos for the manipulative trading.  The stocks were traded over-the-counter on the OTC Bulletin Board (“OTCBB”) or the Pink OTC Markets (“Pink Sheets”).

In Morrison, the Supreme Court limited the application of section 10(b) to the use of “manipulative or deceptive device[s]” in securities transactions involving either (i) “the purchase or sale of a security listed on an American stock exchange,” or (ii) “the purchase or sale of any other security in the United States.”  Morrison , 561 U.S. at 273.  The Third Circuit sought to apply that standard to the Georgiou trades.

The court first considered whether securities listed on the OTCBB and the Pink Sheets are “listed on an American stock exchange.”  It noted that the SEC identifies 18 nationally registered securities exchanges, but does not include the OTCBB and the Pink Sheets.  It also noted that both the OTCBB and the Pink Sheets are self-described as trading mechanisms for securities not listed on any exchange.  Finally, it noted that the securities statutes themselves distinguish between “securities exchanges” and “over-the-counter markets.”  For those reasons, it found the transactions here were not the purchase or sale of a security on “an American stock exchange,” and therefore were not subject to U.S. securities laws on that basis. See slip op. at 13-15.

The analysis then moved to the second Morrison prong: whether these transactions were the purchase or sale of securities “in the United States.”  The court took note of the fact that Morrision involved a so-called “foreign-cubed” transaction – foreign plaintiffs suing a foreign issuer based on securities transactions in foreign countries.  In contrast, the securities in the Georgiou case were those of U.S. issuers, and the transactions involved the participation of “market makers” operating in the United States.

Morrison instructed that transactions are “domestic transactions” based not on “the place where the deception originated,” but the place where the purchases and sales occurred.  Morrison, 561 U.S. at 266-67.  It is the “location of the transaction” that determines the applicability of the U.S. securities laws.  See id. at 268.  The Georgiou court noted that the 2d, 9th, and 11th Circuits had previously found that a “domestic transaction” was one (i) where the parties became obligated to proceed in the U.S., or (ii) where the actual transfer of title occurred in the U.S.  Georgiou, slip op. at 16-17 (referring to Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 69 (2d Cir. 2012); Quail Cruise Ship Mgmt Ltd. v. Agencia de Viagens, 645 F.3d 1307, 1310-11(11th Cir. 2011); SEC v. Levine, 462 Fed. App’x717, 719 (9th Cir. 2011)).  The court then “agreed” that “commitment” is “a simple and direct way of designating the point at which . . . the parties obligated themselves to perform . . . even if the formal performance of their agreement is to be after a lapse of time.”  Slip op. at 17 (quoting Absolute Activist, 677 F.3d at 68).  Accordingly, “the point of irrevocable liability” can be used to determine where a securities purchase or sale occurred; “territoriality under Morrison turns on ‘where, physically, the purchaser or seller committed him or herself’ to pay for or deliver a security.”  Slip op. at 17 (citations omitted).

This is all largely consistent with previous decisions.  But here the Third Circuit took a detour. The court found the involvement of U.S.-based market makers in “facilitating” at least some of the otherwise foreign transactions made them “domestic transactions” under Morrison: “Here, at least one of the fraudulent transactions in each of the Target Stocks was bought and sold through U.S.-based market makers. . . .    [A]ll of the manipulative trades were ‘facilitate[d]’ by U.S.-based market makers, i.e., an American market maker bought the stock from the seller and sold it to the buyer. . . .  Therefore, some of the relevant transactions required the involvement of a purchaser or seller working with a market maker and committing to a transaction in the United States, incurring irrevocable liability in the United States, or passing title in the United States.”  Id. at 18.  The court concluded: “We now hold that irrevocable liability establishes the location of a securities transaction. Here, the evidence is sufficient to demonstrate that Georgiou engaged in ‘domestic transactions’ under the second prong of Morrison, i.e., transactions involving ‘the purchase or sale of any [] security in the United States.’  See Morrison, 561 U.S. at 273.  Thus, the District Court’s application of Section 10(b) to Georgiou’s transactions was proper.” Slip op. at 19.

The rationale adopted by the court is, at best, designed to satisfy Morrison’s letter rather than its spirit.  Although the opinion is somewhat opaque, it seems apparent that the court concluded that the mere involvement of a U.S. person as a market intermediary in a transaction that in all other respects was between foreign persons is sufficient to make the transaction one properly governed by the U.S. securities laws.  But to allow the apparently unknown involvement of U.S. market makers “as intermediaries for foreign entities” to serve as the basis for subjecting a transaction to U.S. law seems to violate both the language and spirit of the Morrison opinion.  It totally ignores the point made by the Morrison Court that the standard for applicability of U.S. law to a transaction could not be whether some aspect of the transaction touched upon the United States: “For it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States. But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.”  Morrison, 561 U.S. at 266.

The Morrison Court noted that the subject “purchase-and-sale transactions are the objects of the statute’s solicitude.” Id. at 267.  It did not look to see if the interstices of those transactions involved some other agreement (i.e., between the seller’s foreign broker and a U.S. market maker) that occurred in the United States, because any such “facilitating” transaction was not “the object of the statute’s solicitude.”  Instead, “it is parties or prospective parties” to the purported unlawful transaction that “the statute seeks to ‘protec [t].’”  Id.  In the Georgiou case, the U.S. market maker is not one of those parties.

If the acknowledged test for the locus of a transaction is, as the Third Circuit says, where the parties “irrevocably” “obligated” themselves to the transaction, then, by all appearances, in this case that was outside of the United States, where the buyer and seller made their purchase and sale commitments.  It is not faithful to Morrison to rule that because the market mechanism by which those commitments were implemented included a transaction by other unaffiliated persons within the U.S., the transaction at issue morphed into a “domestic transaction.”  In a globalized electronic marketplace, almost any securities transaction that parties commit to on foreign soil can involve an “intermediary” in the United States that “facilitates” its completion.  To allow that to trigger the extraterritorial reach of the U.S. securities lawyers would, in fact, make “the presumption against extraterritorial application . . . a craven watchdog . . . retreated to its kennel.” Morrison, 561 U.S. at 266.

Straight Arrow

January 23, 2015

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