Salman is in. Newman is out. Justice Alito writes the opinion for an 8-0 Court. Here is the opinion in Salman v. United States.
Tag: Insider Trading
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The Second Circuit's decision in United States v. Newman is out. The jury instructions were erroneous and the evidence insufficient. The convictions of Todd Newman and Anthony Chiasso are reversed and their cases have been remanded with instructions to dismiss the indictment with prejudice. Here is the holding in a nutshell:
We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.
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To the surprise of nobody I know, Mathew Martoma, the former SAC Capital portfolio manager, was convicted of insider trading last Thursday by a Southern District of New York jury. The evidence at trial was very strong. It demonstrated that Martoma had befriended two doctors advising two drug companies on the trial of an experimental drug, received confidential information from them about the disappointing result of the drug trial prior to the public announcement, and then had a 20-minute telephone conversation with Steven A. Cohen, the SAC chair, a day or so before Cohen ordered that SAC's positions in these companies be sold off. The purported monetary benefit to SAC, in gains and avoidance of loss, of the trades resulting from the inside information is about $275 million, suggesting that Martoma receive a sentence of over 15 years under the primarily amount-driven Sentencing Guidelines (although I expect the actual sentence will be considerably less).
Cohen is white-collar Public Enemy No. 1 to the Department of Justice, at least in its most productive white-collar office, the U.S. Attorney's Office for the Southern District. That office has already brought monumental parallel criminal and civil cases against SAC, receiving a settlement of $1.8 billion, about a fifth of Cohen's reported personal net worth, but it has apparently not garnered sufficient evidence against Cohen to give it confidence that an indictment will lead to his conviction. It had granted a total "walk" — a non-prosecution agreement — to the two doctors whose testimony it felt it needed to convict Martoma, unusually lenient concessions by an office that almost always requires substantial (and often insubstantial) white-collar wrongdoers seeking a cooperation deal to plead to a felony. As an FBI agent told one of the doctor/co-conspirators, the doctors and Martoma were "grains of sand;" the government was after Cohen.
In an article in the New York Times last Friday, James B. Stewart, an excellent writer whose analyses I almost always agree with, asked a question many lawyers, including myself, have asked: why didn't Martoma cooperate with the government and give up Cohen in exchange for leniency? Mr. Stewart's answer was essentially that Martoma was unmarketable to the government because he would have been destroyed on cross-examination by revelation of his years-ago doctoring his Harvard Law School grades to attempt to secure a federal judicial clerkship and covering up that falsification by other document tampering and lying. Mr. Stewart quotes one lawyer as saying Martoma would be made "mincemeat" after defense cross-examination, another as saying he would be "toast," and a third as saying that without solid corroborating evidence, "his testimony would be of little use." See here.
I strongly disagree with Mr. Stewart and his three sources. The prosecution, I believe, would have welcomed Mr. Martoma to the government team in a New York minute — assuming Martoma would have been able to provide believable testimony that Mr. Cohen was made aware of the inside information in that 20-minute conversation. When one is really hungry — and the Department of Justice is really hungry for Steven A. Cohen — one will eat the only food available, even if it's "mincemeat" and "toast." And there is certainly no moral question here; the government gave Sammy "the Bull" Gravano, a multiple murderer, a virtual pass to induce him to testify against John Gotti. Given the seemingly irrefutable direct, circumstantial and background evidence (including, specifically, the phone call, the fact that Cohen ordered the trades and reaped the benefit, and generally, whatever evidence from the civil and criminal cases against SAC is admissible against Cohen), testimony by Martoma to the effect he told Cohen, even indirectly or unspecifically, about the information he received from the doctors would, I believe, have most likely led to Cohen's indictment.
I have no idea why Martoma did not choose to cooperate, if, as I believe, he had the opportunity. "Cooperation," as it is euphemistically called, would require from Martoma a plea of guilty and, very likely in view of the amount of money involved, a not insubstantial prison term (although many years less than he will likely receive after his conviction by trial). Perhaps Martoma, who put on a spirited if unconvincing defense after being caught altering his law school transcript, is just a fighter who does not easily surrender or, some would say, "face reality," even if the result of such surrender would be a comparatively short jail sentence. (In a way, that choice is refreshing, reminding me of the days defense lawyers defended more than pleaded and/or cooperated.) Perhaps Martoma felt cooperation, a condition of which is generally full admission of all prior crimes and bad acts, would reveal other wrongs and lead to financial losses by him and his family beyond those he faces in this case. Perhaps he felt loyalty — which it has been demonstrated is a somewhat uncommon trait among those charged with insider trading — to Cohen, who has reportedly paid his legal fees and treated him well financially (and perhaps Martoma hopes will continue to do so), or perhaps to others he would have to implicate.
And perhaps — perhaps — the truth is that in his conversation with Cohen, he did not tell Cohen either because of caution while talking on a telephone, a deliberate effort to conceal from Cohen direct inside information, or another reason, and he is honest enough not to fudge the truth to please the eager prosecutors, as some cooperators do. In such a case his truthful testimony would have been unhelpful to prosecutors bent on charging Cohen. That neutral testimony or information, if proffered, which the skeptical prosecutors would find difficult to believe, would at best get him ice in this very cold wintertime. Lastly, however unlikely, perhaps Martoma believed or still believes he is, or conceivably actually is, innocent.
In any case, it is not necessarily too late for Martoma to change his mind and get a benefit from cooperation. The government would, I believe, be willing to alter favorably its sentencing recommendation if Martoma provides information or testimony leading to or supporting the prosecution of Cohen. Indeed, I believe the government would ordinarily jump at a trade of evidence against Cohen for a recommendation of leniency (or less harshness), even if Martoma is now even less attractive as a witness than before he was convicted (although far more attractive than if he had testified as to his innocence). However, the five-year statute of limitations for the July 2008 criminal activity in this matter has apparently run, and an indictment for substantive insider trading against Cohen for these trades is very probably time-barred.
To be sure, federal prosecutors have attempted — not always successfully (see United States v. Grimm; see here) — imaginative solutions to statute of limitations problems. And, if the government can prove that Cohen had committed even a minor insider trading conspiratorial act within the past five years (and there are other potential cooperators, like recently-convicted SAC manager Michael Steinberg, out there), the broad conspiracy statutes might well allow Martoma's potential testimony, however dated, to support a far-ranging conspiracy charge (since the statute of limitations for conspiracy is satisfied by a single overt act within the statutory period). In such a case, Martoma may yet get some considerable benefit from cooperating, however belatedly it came about.
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Yesterday, in United States v. Goffer, an insider trading/securities fraud criminal appeal, the Second Circuit again refused to alter a standard conscious avoidance jury instruction to comport more fully with the Supreme Court's opinion in Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2068-72 (2011). According to Judge Wesley, Global-Tech was not "designed to alter the substantive law. Global-Tech simply describes existing case law." The instruction given by the trial court "properly imposed the two requirements imposed by the Global-Tech decision." Moreover, Appellant Kimelman's request "that the district court insert the word 'reckless' into a list of mental states that were insufficient" was unnecessary, because "Global-Tech makes clear that instructions (such as those in this case) that require a defendant to take 'deliberate actions to avoid confirming a high probability of wrongdoing' are inherently inconsistent 'with a reckless defendant…who merely knows of a substantial and unjustified risk of such wrongdoing."
I don't know. Sounds a little circular to me. According to Global-Tech, willful blindness has "an appropriately limited scope that surpasses recklessness and negligence." Why not just say it squarely in a jury instruction? The problem here is that district courts are generally afraid to alter standard jury instructions in light of emerging case law. And appellate courts are generally reluctant to vacate major securities fraud convictions unless the jury instructions are blatantly improper. The Goffer opinion can be found here.
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NPR's Ailsa Chang has a story, Wall Street Wiretaps: Investigators Use Insiders' Own Words To Convict
Them.(esp)
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The sentencing is today at 2:00 PM Southern District of New York Time. (And is there really any other time in the Universe?)
As I noted on Monday, Gupta's Guidelines Range, according to the Government and the Probation Office, is 97-121 months.That's a Level 30. Gupta's attorneys put Gupta's Guidelines Range at 41-51 months. That's a Level 22. The different calculations are based on different views of the gain and/or loss realized and/or caused by Gupta. Gupta's attorneys are seeking a downward variance and asking for probation, with rigorous community service in Rwanda. Serving a sentence in Rwanda is not as strange as it may sound on first hearing. After all, criminal defendants in Louisiana regularly do time in Angola.
But seriously, lawyers and germs, there is a practice pointer in here somewhere. Practitioners naturally strive to obtain the lowest possible Guidelines Range as a jumping off point for the downward variance. It is psychologically easier for a judge to impose a probationary sentence when the Guidelines Range is low to begin with. It is legally easier as well, because the greater the variance from the Guidelines, the greater the judicially articulated justification must be.
But too many lawyers push the envelope in their Guidelines arguments, thereby risking appellate reversal on procedural grounds. This is a particular danger when the judge is already favorably disposed toward the defendant and looking for ways to help him. Failure to correctly calculate the Guidelines is a clear procedural error. (Some of the federal circuits try to get around Booker, Gall, and Kimbrough by setting up rigorous procedural tests. The Fourth Circuit is the most notorious outlier in this regard.) Lawyers must be on guard against the possibly pyrrhic and costly victory of an incorrectly calculated Guideline range, followed by probation. One solution is to have the court rule on alternative theories. "This is the Guidelines Range. These are my reasons for downward variance. Even if the Guidelines Range was really at X, as the Government argues, I would still depart to Y for the same and/or these additional reasons." If the judge already likes your client, getting him or her to do this is often an easy task.
Of course, Judge Rakoff needs no instructions in this regard. One of our ablest and sharpest jurists, and a leading Guidelines critic, he will attempt to correctly calculate the Guidelines Range in an intellectually honest manner and will downwardly (or upwardly) vary as he damn well sees fit, with ample articulation.
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As my colleague Solomon Wisenberg wrote, see here, former Goldman Sachs director Rajat K. Gupta is scheduled to be sentenced this Wednesday, October 24, by Judge Jed S. Rakoff of the Southern District of New York upon his conviction of insider trading and conspiracy.
The sentencing decision in this case is a particularly difficult one. On the one hand, Gupta is (or was) a man of exceedingly high repute who has done extraordinary good works, as attested to in sentencing letters by Bill Gates and Kofi Annan, and, if sentencing were based on an evaluation of the defendant's entire life, even considering the serious blemish of this case, Gupta might well deserve commendation and not punishment.
On the other hand, the crime for which Gupta was convicted, albeit arguably aberrational, was a brazen and egregious breach of the faith which was placed in him precisely because of his outstanding reputation. Indeed, while Gupta's motivation appears not to have been greed or personal gain, a factor that ordinarily would suggest leniency, one may conclude that his crimes resulted from an arrogance of power and privilege and the belief that as a "master of the universe" he was above the law.
Gupta, having gone to trial and expected to appeal (challenging the same wiretap that is a subject of the appeal by Raj Rajaratnam discussed by my other colleague, Ellen S. Podgor, see here), is at somewhat of a disadvantage. Since any statements he may make discussing his motivation or showing remorse could probably be used as admissions in a potential new trial, he did not admit wrongdoing or demonstrate remorse, factors viewed favorably by most sentencing judges. Although I strongly doubt that Judge Rakoff will "punish" Gupta for going to trial, as some judges do, the judge will be unable to consider any understandable and perhaps sympathetic motivation or any remorse, if either exists, as a mitigating circumstance.
As often happens, both sides have made extreme sentencing requests. The government asks for a sentence of 97 to 121 months, what it claims is the appropriate sentencing guidelines range. The defense is seeking probation with community service in Rwanda, supported by a request from a Rwandan governmental official, or alternatively New York. At first blush, the request for community service in Rwanda struck me as either a "Hail Mary" hope, an accommodation to a client or family who are unwilling to accept reality, or a deliberately lowball request in the expectation of a middle ground sentence. On further consideration, however, I believe that a sentence of, say, two years performing "community service" in Rwanda while living in spartan conditions (a modest one-room apartment, cooking his own meals, not having servants, etc.), might not be inappropriate. Rather than wasting Gupta's enormous talents and intellect in prison, such a sentence would enable him to provide considerable benefit to society. Indeed, such a sentence would probably be much more onerous for Gupta than confinement in a federal minimum security camp. To be sure, there is a serious question whether such community service could be suitably monitored.
Of course, Judge Rakoff, however independent, fearless and innovative as he is, will not sentence Gupta in a vacuum. He will no doubt consider sentences that he and other judges have meted out to lesser-known defendants in other insider trading cases and how his sentence will appear to the public in terms of deterrence and equal justice. Gupta should not buy his plane ticket yet.
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Rajat Gupta is scheduled to be sentenced by Judge Jed Rakoff on Wednesday. The Rajat Gupta Sentencing Memo filed last week by his attorneys is an outstanding work of its kind, and the Government's Sentencing Memo in U.S. v. Gupta is also quite good.
Gupta's Guidelines Range, according to the Government and the Probation Office, is 97-121 months. Gupta's attorneys, led by Gary Naftalis, put Gupta's Guidelines Range at 41-51 months. The different calculations appear to be based entirely on different views of the gain and/or loss realized and/or caused by Gupta. Key issues are whether Judge Rakoff should include the acquitted conduct in the loss calculations (which he is allowed but not required to do) and whether the gain should be confined to Gupta and his co-conspirators, as opposed to other investors. Gupta's attorneys are arguing for probation, with a condition of rigorous community service in New York or Rwanda.
My guess is that, however he gets there, Judge Rakoff will impose a prison sentence of 3 to 6 years. The judge is a well-known critic of the Guidelines and Gupta has apparently led a life of extraordinary kindness and good works. On the other hand, Gupta is an enormously wealthy member of the financial elite to whom much has been given. He stands convicted of insider trading, which everybody on Wall Street knows is illegal. This was not a case in which ambiguous admitted conduct did or did not violate the outer edges of the insider trading laws. This was a case in which Gupta either tipped clearly confidential, proprietary inside information or he didn't. The jury has ruled that he did, at least with respect to four of the six charged counts. Judge Rakoff must and will accept that verdict. I believe that Judge Rakoff will see it as his judicial duty to send, through Gupta's sentence, a message of general deterrence.
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On October 25th the Second Circuit will hear oral arguments in the Rajaratnam case. There are several significant issues that are likely to be decided here. The three issues presented by Appellant include an improper wiretap application, alleged misstatements upon which the wiretap is premised, and an argument premised on causation and whether the jury instruction was proper in explaining the causation issue to the jury. The government in response spends a significant portion of its brief on the facts and proceedings, not reaching the legal arguments until page 32 of its brief. They focus on whether the "errors and omissions were made intentionally or with reckless disregard for the truth" and whether these errors were material. It really is a sad commentary when the government has to expend so much time on explaining their mistakes and why their mistakes should be overlooked here. The opening line of the reply brief says it all – "Ironically, like its wiretap affidavit, it is what the government does not say in its brief that is most important."
One aspect pointed out in the amicus brief of the National Legal Aid and Defender Association and the Bronx Defenders – "the government failed in upholding its duty of candor to the authorizing court." These hearings are ex parte hearings and candor is crucial for them. This is also emphasized by the retired judges amicus brief (eight former federal and district court judges) who filed their brief in support of neither party. They state,"[f]rom their years of service on the bench, amici are keenly aware that the warrant process depends on the candor and forthrightness of the government, and that deceptive conduct of the kind that the district court found to have occurred in this case makes meaningful judicial review of wiretap applications impossible."
The most fascinating issue is how the government used wiretapping as a key component of this case. Amicus Author Professor Blakely (w/ Tai H. Park), a key author of the Title III of the Omnibus Crime Control and Safe Streets Act of 1968 reminds the Court of the scope of Title III and the need to retain the right to privacy.
It is hoped that the court will also examine the scope of wiretapping, especially in this white collar SEC case.
The briefs –
Appellant's Brief –
Download 2012.01.25 Apellant BriefUSAO Brief –
Download 2012.04.25 USAO Merits BriefAppellant's Reply Brief –
Download 2012.05.16 Appellant Reply BriefSee Blakely Amicus Brief –
Download Prof_Blakey_Amicus_Brief (final)See National Legal Aid & Defender Assoc Amicus Brief –
Download 2012.02.01 Amicus Brief–Nat'l Legal Aid and Def. AssocSee Retired Judges Amicus Brief –
Download 2012.02.01 Amicus Brief–Reitred FederalSee also Grant McCool, Reuters, Rajaratnam's insider-trading appeal set for Oct. 25.
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In SEC v. Obus (2d Cir. 2012), released yesterday, the Second Circuit provides a primer on insider trading law, with particular attention paid to tipper liability, tippee liability, and scienter. The Court also seeks to reconcile the supposed conflict between Dirks and Hochfelder with respect to the level of scienter that must be proved in tipping situations. Obus is required reading for anyone working in the white collar and securities fraud fields.
MattBray.net 