Please join me and the Irish American Bar Association on June 16, 2014, at 6:00 p.m. in the rotunda of the New York State Courthouse at 60 Centre Street for IABANY's Fifth Annual Bloomsday Celebration. This event showcases James Joyce's masterwork, Ulysses, and Joyce's contribution to the First Amendment, and features the John Quinn Memorial address, named after the famed Irish lawyer who defended the publishers of Ulysses in New York in 1922. This year, the keynote address, entitled "Copyright, Creativity and the First Amendment," will be delivered by the Hon. Gerard Lynch, United States Court of Appeals Judge for the Second Circuit, and will be followed by readings from Ulysses. A private reception will be held from 7:30pm to 9:30pm in the beautiful Granite Room at City Hall Restaurant, located at 131 Duane Street, a short walk from the courthouse, and will include an open bar and passed hors-d'oeuvres.
The Rotunda event is free, but requires registration. The City Hall Restaurant reception carries a charge to offset the cost of the event, and requires registration and payment. This event sells out quickly, so please register early here.
JaneAnne Murray
jm@mlawllc.com
Bloomsday Founder and Organizer
My latest article, an analysis of the prosecution of Dominique Strauss-Kahn as a lens though which we can critique our criminal process, can be downloaded (without registration) here:
The abstract is as follows:
People v. Strauss-Kahn is an ideal lens through which to examine the operation of a criminal justice system that privileges the presumption of guilt, or, to use the words of the U.S. Supreme Court in the 2012 decisions Lafler v. Cooper and Missouri v. Frye, has become “a system of pleas, not a system of trials.”
Strauss-Kahn is both an excellent example of a transparent and objective invocation of the criminal sanction, and a sharp counterpoint to the vast majority of cases where law enforcement conclusions are trusted and rarely second-guessed. Stage by stage, the Strauss-Kahn case illustrates how to counterbalance the presumption of guilt and give expression to the presumption of innocence in the pretrial period through vigilantly-invoked and enforced due process protections.
Drawing from this examination, the paper will then explore how to approach this model process in the more standard cases, which typically see a fraction of the judicial, law enforcement, and defense resources afforded Dominique Strauss-Kahn. The Strauss-Kahn prosecution offers several insights, three of which will be sketched at the paper’s conclusion: a requirement that prosecutorial decision-making be subject to a reasonable doubt standard; early enforcement of the prosecutor’s obligation to disclose information that is favorable to the accused; and finally, a requirement that a prosecutor explain in writing any decision to dismiss the felony charges in indicted felony cases, so that the factual, legal and policy bases of these decisions (numbering almost one quarter of New York’s superior court felony cases annually) can be aggregated, analyzed and publicized.
Thank you all for your continuing support as I navigate a professional role as a practitioner-academic!
The abstract is as follows:
People v. Strauss-Kahn is an ideal lens through which to examine the operation of a criminal justice system that privileges the presumption of guilt, or, to use the words of the U.S. Supreme Court in the 2012 decisions Lafler v. Cooper and Missouri v. Frye, has become “a system of pleas, not a system of trials.”
Strauss-Kahn is both an excellent example of a transparent and objective invocation of the criminal sanction, and a sharp counterpoint to the vast majority of cases where law enforcement conclusions are trusted and rarely second-guessed. Stage by stage, the Strauss-Kahn case illustrates how to counterbalance the presumption of guilt and give expression to the presumption of innocence in the pretrial period through vigilantly-invoked and enforced due process protections.
Drawing from this examination, the paper will then explore how to approach this model process in the more standard cases, which typically see a fraction of the judicial, law enforcement, and defense resources afforded Dominique Strauss-Kahn. The Strauss-Kahn prosecution offers several insights, three of which will be sketched at the paper’s conclusion: a requirement that prosecutorial decision-making be subject to a reasonable doubt standard; early enforcement of the prosecutor’s obligation to disclose information that is favorable to the accused; and finally, a requirement that a prosecutor explain in writing any decision to dismiss the felony charges in indicted felony cases, so that the factual, legal and policy bases of these decisions (numbering almost one quarter of New York’s superior court felony cases annually) can be aggregated, analyzed and publicized.
Thank you all for your continuing support as I navigate a professional role as a practitioner-academic!
The New York State Association of Criminal Defense Lawyers recently published its winter edition of
Atticus, showcasing the two impressive honorees at the upcoming annual dinner of the NYSACDL
Foundation, Chief Judge Jonathan Lippman and David Ruhnke, Esq. In it, I also have an article addressing
three recent Second Circuit decisions of note: United
States v. Banki (reach of a regulatory crime narrowed under the rule
of lenity); United States v. Lee (government abused
its authority when it withheld a third “acceptance of responsibility” point
because the defendant had challenged errors in his presentence report); and United States v. Rivera (ameliorating “shameful
inequalities” of crack-cocaine disparity by applying the rule of lenity to an
ambiguous sentencing guideline). It is
available here.
The NYSACDL Foundation’s annual dinner is this Thursday, January 26, at
the Prince George Ballroom. If last
year’s elegantly fast-paced event is anything to go by, this will be a
memorable celebration of two champions of criminal defendants’ rights and
indigent defendants in particular, and the
Finally, a belated Happy New Year to my loyal readers from
snowy
The NYSACDL has published its latest edition of Atticus, downloadable here, featuring this author's column "Second Thoughts." This quarter, I consider the Court's decisions in Curley (admissibility of prior-act evidence involving the defendant and others), Cedeno (right of defense to cross-examine a detective regarding a prior adverse credibility finding against him)) and Andino (scienter of drug type and quantity in drug conspiracy cases). There is also a fascinating account by Steve Zissou of his experience on the Ghailani defense team.
The NYSACDL has published its latest edition of Atticus, focusing on the organization’s often unsung and unknown efforts to influence the legislative process. It includes my article addressing three recent Second Circuit decisions, including Capers (setting up some serious hurdles to the admission of statements obtained through a “two-step”– question first, Mirandize later – interrogation procedure), Cossey (“a sentencing decision that relies on factual findings that were unsupported in the record . . . seriously affects the fairness, integrity, and public reputation of judicial proceedings”), and Brown (“when a claim of ineffective assistance of counsel is first raised in the district court prior to the judgment of conviction, the district court may, and at times should, consider the claim at that point in the proceeding.”)
Guest blogger Valerie A. Gotlib of Sher LLP writes:
Buried in the impressive reversal of the fraud conviction of Mark Kaiser, an executive at U.S. Food Services (“USF”) in United States v. Kaiser, 609 F.3d 556 (2d. Cir. 2010), issued last summer, is a quotable acknowledgement that insider trading is a very different and unique kind of securities fraud, deserving of a heightened level of scienter. As the Court notes, “[u]nlike securities fraud, insider trading does not necessarily involve deception, and it is easy to imagine an insider trader who receives a tip and is unaware that his conduct was illegal and therefore wrongful. The same cannot be said of one who deliberately misleads investors about a security.”
In addition to that notable dictum, the court held that the district court committed two independent errors. First, the district court instructed the jury with respect to conscious avoidance without informing the jury that it could find that Kaiser had knowledge of the fraud if he was aware of a “high probability” of its existence unless he “actually believed” that it did not exist. Second, the district court admitted double hearsay when it allowed a USF employee, Tim Lee, to testify that USF’s CEO had told Lee that USF’s general counsel wanted to go to the SEC to expose Kaiser’s improper accounting entries. The Second Circuit found that both errors were grounds for reversal.
Facts
As one of the largest food distributors in the United States, USF was in the business of purchasing food products from manufacturers and selling them to restaurants. Between 1994 and 2001, Kaiser managed the company’s dealings with its food vendors. An important source of revenue for USF was derived from “promotional allowances,” or “PAs,” a type of rebate paid to USF by vendors upon satisfaction of certain purchasing targets. Part of Mr. Kaiser’s job included negotiating PAs with vendors. Early in 2001, Mr. Kaiser was named Chief Marketing Officer of USF, but he continued to be involved in negotiating PAs.
The indictment alleged that Mr. Kaiser fraudulently inflated USF’s PA income for the years 2001 and 2002, hid the inflated numbers from outside auditors, and made various misrepresentations to the auditors concerning the PA agreements with vendors. The scheme included recording prepayments from vendors as income and, thereby, artificially inflating the amount of revenue earned from PA payments to ensure that USF met its earnings and other budgetary targets. USF’s executives, including Mr. Kaiser, received bonuses only if USF met these targets.
At trial, the government presented a case based primarily on the testimony of three alleged coconspirators, including Tim Lee, who cooperated with the government and testified pursuant to plea agreements. Kaiser argued in his defense that he had been setup by the three USF employees and had been unaware of the fraud. Kaiser was convicted of securities fraud, making false filings with the SEC, conspiracy to commit those crimes, and conspiracy to falsify books and records. Kaiser appealed.
Conscious Avoidance Jury Instruction
On appeal, Kaiser argued that the district court’s jury instructions with respect to conscious avoidance omitted two necessary elements: “that knowledge of the existence of a particular fact is established 1) if a person is aware of a high probability of its existence, 2) unless he actually believes that it does not exist.” United States v. Schultz, 333 F.3d 393, 413 (2d Cir. 2003) (internal quotations marks omitted) (emphasis added). The court reviewed Kaiser’s conscious avoidance argument for plain error because he had failed to raise an objection to the instruction at trial.
The court held (and the government conceded) that the district court erred in instructing the jury on conscious avoidance because it “did not contain either the ‘high probability’ or the ‘actual belief’ language,” which the court had “long held is essential for an accurate conscious avoidance instruction.” 609 F.3d at 566. The government argued nonetheless that there was no prejudice from the instruction in light of the overwhelming evidence that Kaiser had actual knowledge of the fraudulent scheme. The court disagreed and found that there was a risk that the jury convicted Kaiser based on its conclusion that he was merely negligent and could have convicted him even if it found that Kaiser actually believed the PA numbers were correct. Because there was ample evidence for the jury to question the credibility of the government’s witnesses, the court concluded that there was a reasonable probability that the jury convicted Kaiser based on a conscious avoidance theory and would not have done so but for the instructional error. The court further held that the error seriously affected the fairness, integrity or public reputation of judicial proceedings and thus met all of the requisite elements for a finding of plain error.
Admission of Hearsay Statement of USF’s General Counsel
Kaiser also argued on appeal that the district court erred in admitting certain testimony. Lee testified that the CEO of USF told him that USF’s general counsel had discovered that Kaiser improperly had booked $18.5 million in prepayments as income and that the general counsel wanted to report this to the SEC. Kaiser objected at trial on the ground that it was double hearsay. The government countered that the testimony was admissible as a statement of an unindicted coconspirator under FRE 801(d)(2)(E) and that the statement was in furtherance of the conspiracy. The district court held that the statement was admissible for the limited purpose of explaining why Lee and the CEO engaged in certain subsequent acts.
On appeal, the Court held that the statement constituted hearsay and did not fall into any of the hearsay exceptions. The court observed that even if the government could have overcome the hearsay objection, the statement would have been inadmissible under FRE 403 because its prejudicial effect outweighed its probative value. Indeed, because of the highly prejudicial nature of the testimony and the risk that the jury could have given it more credence since it came from USF’s general counsel, who was not a co-conspirator, the court concluded that the error was not harmless.
Willfulness Instruction
The Court, however, rejected the defense challenge to the district court’s instruction on willfulness. Acknowledging that insider trading is different (as noted earlier), the Court concluded that securities fraud charges like those at issue in Kaiser required merely that the defendant “had an awareness of the general wrongfulness of his conduct” and “do not require a showing that a defendant had awareness of the general unlawfulness of his conduct.” Here, the jury was charged that they had to find that Kaiser knew the statements were “false and fraudulent” and that he made those statements “with intent to create a deception,” and the government had to prove “the contrary of the idea of mistake or good faith.” If the jury found that Kaiser possessed such an intent, as it did, “it follows necessarily that it also concluded that there was “a realization on the defendant’s part that he was doing a wrongful act.”
Lawyers: Alexandra Shapiro (Macht, Shapiro, Arato & Isseries, LLP) and Richard Morvillo, Andrew Frey, Peter White, Charles Rothfeld, Daniel Brown and Michael Passaportis (Mayer Brown LLP) for defendant; AUSAs Daniel Chung, Daniel Braun.
Buried in the impressive reversal of the fraud conviction of Mark Kaiser, an executive at U.S. Food Services (“USF”) in United States v. Kaiser, 609 F.3d 556 (2d. Cir. 2010), issued last summer, is a quotable acknowledgement that insider trading is a very different and unique kind of securities fraud, deserving of a heightened level of scienter. As the Court notes, “[u]nlike securities fraud, insider trading does not necessarily involve deception, and it is easy to imagine an insider trader who receives a tip and is unaware that his conduct was illegal and therefore wrongful. The same cannot be said of one who deliberately misleads investors about a security.”
In addition to that notable dictum, the court held that the district court committed two independent errors. First, the district court instructed the jury with respect to conscious avoidance without informing the jury that it could find that Kaiser had knowledge of the fraud if he was aware of a “high probability” of its existence unless he “actually believed” that it did not exist. Second, the district court admitted double hearsay when it allowed a USF employee, Tim Lee, to testify that USF’s CEO had told Lee that USF’s general counsel wanted to go to the SEC to expose Kaiser’s improper accounting entries. The Second Circuit found that both errors were grounds for reversal.
Facts
As one of the largest food distributors in the United States, USF was in the business of purchasing food products from manufacturers and selling them to restaurants. Between 1994 and 2001, Kaiser managed the company’s dealings with its food vendors. An important source of revenue for USF was derived from “promotional allowances,” or “PAs,” a type of rebate paid to USF by vendors upon satisfaction of certain purchasing targets. Part of Mr. Kaiser’s job included negotiating PAs with vendors. Early in 2001, Mr. Kaiser was named Chief Marketing Officer of USF, but he continued to be involved in negotiating PAs.
The indictment alleged that Mr. Kaiser fraudulently inflated USF’s PA income for the years 2001 and 2002, hid the inflated numbers from outside auditors, and made various misrepresentations to the auditors concerning the PA agreements with vendors. The scheme included recording prepayments from vendors as income and, thereby, artificially inflating the amount of revenue earned from PA payments to ensure that USF met its earnings and other budgetary targets. USF’s executives, including Mr. Kaiser, received bonuses only if USF met these targets.
At trial, the government presented a case based primarily on the testimony of three alleged coconspirators, including Tim Lee, who cooperated with the government and testified pursuant to plea agreements. Kaiser argued in his defense that he had been setup by the three USF employees and had been unaware of the fraud. Kaiser was convicted of securities fraud, making false filings with the SEC, conspiracy to commit those crimes, and conspiracy to falsify books and records. Kaiser appealed.
Conscious Avoidance Jury Instruction
On appeal, Kaiser argued that the district court’s jury instructions with respect to conscious avoidance omitted two necessary elements: “that knowledge of the existence of a particular fact is established 1) if a person is aware of a high probability of its existence, 2) unless he actually believes that it does not exist.” United States v. Schultz, 333 F.3d 393, 413 (2d Cir. 2003) (internal quotations marks omitted) (emphasis added). The court reviewed Kaiser’s conscious avoidance argument for plain error because he had failed to raise an objection to the instruction at trial.
The court held (and the government conceded) that the district court erred in instructing the jury on conscious avoidance because it “did not contain either the ‘high probability’ or the ‘actual belief’ language,” which the court had “long held is essential for an accurate conscious avoidance instruction.” 609 F.3d at 566. The government argued nonetheless that there was no prejudice from the instruction in light of the overwhelming evidence that Kaiser had actual knowledge of the fraudulent scheme. The court disagreed and found that there was a risk that the jury convicted Kaiser based on its conclusion that he was merely negligent and could have convicted him even if it found that Kaiser actually believed the PA numbers were correct. Because there was ample evidence for the jury to question the credibility of the government’s witnesses, the court concluded that there was a reasonable probability that the jury convicted Kaiser based on a conscious avoidance theory and would not have done so but for the instructional error. The court further held that the error seriously affected the fairness, integrity or public reputation of judicial proceedings and thus met all of the requisite elements for a finding of plain error.
Admission of Hearsay Statement of USF’s General Counsel
Kaiser also argued on appeal that the district court erred in admitting certain testimony. Lee testified that the CEO of USF told him that USF’s general counsel had discovered that Kaiser improperly had booked $18.5 million in prepayments as income and that the general counsel wanted to report this to the SEC. Kaiser objected at trial on the ground that it was double hearsay. The government countered that the testimony was admissible as a statement of an unindicted coconspirator under FRE 801(d)(2)(E) and that the statement was in furtherance of the conspiracy. The district court held that the statement was admissible for the limited purpose of explaining why Lee and the CEO engaged in certain subsequent acts.
On appeal, the Court held that the statement constituted hearsay and did not fall into any of the hearsay exceptions. The court observed that even if the government could have overcome the hearsay objection, the statement would have been inadmissible under FRE 403 because its prejudicial effect outweighed its probative value. Indeed, because of the highly prejudicial nature of the testimony and the risk that the jury could have given it more credence since it came from USF’s general counsel, who was not a co-conspirator, the court concluded that the error was not harmless.
Willfulness Instruction
The Court, however, rejected the defense challenge to the district court’s instruction on willfulness. Acknowledging that insider trading is different (as noted earlier), the Court concluded that securities fraud charges like those at issue in Kaiser required merely that the defendant “had an awareness of the general wrongfulness of his conduct” and “do not require a showing that a defendant had awareness of the general unlawfulness of his conduct.” Here, the jury was charged that they had to find that Kaiser knew the statements were “false and fraudulent” and that he made those statements “with intent to create a deception,” and the government had to prove “the contrary of the idea of mistake or good faith.” If the jury found that Kaiser possessed such an intent, as it did, “it follows necessarily that it also concluded that there was “a realization on the defendant’s part that he was doing a wrongful act.”
Lawyers: Alexandra Shapiro (Macht, Shapiro, Arato & Isseries, LLP) and Richard Morvillo, Andrew Frey, Peter White, Charles Rothfeld, Daniel Brown and Michael Passaportis (Mayer Brown LLP) for defendant; AUSAs Daniel Chung, Daniel Braun.
Despite the Supreme Court’s view in United States v. O’Hagan, 521 U.S. 642 (1997), that the misappropriation theory of insider trading is not an “all-purpose breach of fiduciary duty ban,” it has become that and more – capturing relationships not typically viewed as fiduciary ones, and tippees multiple levels removed from the source of the information. The theory holds that a person violates Section 10(b) of the Securities Exchange Act and its related Rule 10b-5 when s/he misappropriates material non-public information for trading purposes in breach of a fiduciary or fiduciary-like duty owed to the source of the information. One problem, as Justice Scalia identified in United States v. Skilling, 130 S. Ct. 2896 (2010), when addressing the similarly fraught concept of honest services, is not just determining whether a fiduciary relationship exists, but what obligations that fiduciary owes in light of case-law that remains “hopelessly undefined.” The situation is amply illustrated in United States v. Corbin, 2010 WL 4236692 (S.D.N.Y. October 10, 2010), in which SDNY Judge Marrero – meticulously applying Second Circuit precedent – held that marriage can be the fiduciary relationship predicating a charge of insider trading. Moreover, a tippee defendant like Corbin may face criminal insider trading charges despite the fact that he had no relationship either with the source of the information or the individual who owed a duty to the source.
Facts
Corbin was charged with securities fraud arising out of his alleged trading on material, nonpublic information he received from a separately-charged co-conspirator, Matthew Devlin. Devlin, in turn, received the information from his wife, an employee at an international communications firm that provided services to companies engaged in mergers and acquisitions. Policies in place at her firm required Devlin's wife to maintain the confidentiality of information she learned regarding the firm's clients. Apparently unable to honor these policies at home, she had a "domestic confidentiality policy of sorts" with Devlin, requiring him not to use or share any confidential firm information she imparted to him. Despite this, Devlin passed the information on to Corbin and another, who made substantial profits trading on the tips emanating from the woman they dubbed the "golden goose." The government premised the insider trading charges against Corbin on the misappropriation theory, hypothesizing that Corbin had obtained the material, nonpublic information in violation of the duty of trust and confidence that existed between Devlin and his wife. Corbin moved to dismiss under F.R.Crim.P. 12(b)(2) and 12(b)(3), arguing that the application of misappropriation theory to him was unconstitutional because the Devlins’ relationship was not a fiduciary relationship as a matter of law.
Holding
The court rejected Corbin's constitutional challenge, finding that a duty of trust and confidence existed between the Devlins on three separate bases (all of which are set forth in the SEC's Rule 10b5-2(b)): an agreement between them that Devlin would maintain the information in confidence; a history of sharing confidences with an expectation that confidentiality would be maintained; and the spousal relationship itself. The court noted that in addition to being codified in Rule 10b5-2, the Second Circuit has expressly adopted the duty Corbin was charged with violating in United States v. Chestman, 947 F.2d 551 (2d Cir. 1991) (holding that the dynamic in certain marital relationships can constitute a fiduciary-like relationship for insider trading liability). The court also rejected the argument that Rule 10b5-2 was unconstitutional because the SEC exceeded its authority in promulgating it.
Comment
The Supreme Court approved the misappropriation theory in O’Hagan in the context of a lawyer who had traded on information he stole from his law firm’s client. Thus, O’Hagan had breached an archetypical fiduciary duty that he himself owed to the source. Corbin, by contrast, obtained the information from someone who owed an unusual duty to a conduit of the information. The expansion of misappropriation theory to encompass such attenuated tippees and novel duties makes it ripe for a void-for-vagueness constitutional challenge. While the court’s holding in Corbin is entirely consistent with Second Circuit precedent, that precedent may not survive Supreme Court scrutiny. Like § 1346 and its elusive predicate “the intangible right to honest services,” we can expect that when the Supreme Court addresses misappropriation theory again, it will - at the very least - “pare [it] down” to “paramount applications” presenting no vagueness problem (Skilling, 130 S.Ct. at 2928).
Facts
Corbin was charged with securities fraud arising out of his alleged trading on material, nonpublic information he received from a separately-charged co-conspirator, Matthew Devlin. Devlin, in turn, received the information from his wife, an employee at an international communications firm that provided services to companies engaged in mergers and acquisitions. Policies in place at her firm required Devlin's wife to maintain the confidentiality of information she learned regarding the firm's clients. Apparently unable to honor these policies at home, she had a "domestic confidentiality policy of sorts" with Devlin, requiring him not to use or share any confidential firm information she imparted to him. Despite this, Devlin passed the information on to Corbin and another, who made substantial profits trading on the tips emanating from the woman they dubbed the "golden goose." The government premised the insider trading charges against Corbin on the misappropriation theory, hypothesizing that Corbin had obtained the material, nonpublic information in violation of the duty of trust and confidence that existed between Devlin and his wife. Corbin moved to dismiss under F.R.Crim.P. 12(b)(2) and 12(b)(3), arguing that the application of misappropriation theory to him was unconstitutional because the Devlins’ relationship was not a fiduciary relationship as a matter of law.
Holding
The court rejected Corbin's constitutional challenge, finding that a duty of trust and confidence existed between the Devlins on three separate bases (all of which are set forth in the SEC's Rule 10b5-2(b)): an agreement between them that Devlin would maintain the information in confidence; a history of sharing confidences with an expectation that confidentiality would be maintained; and the spousal relationship itself. The court noted that in addition to being codified in Rule 10b5-2, the Second Circuit has expressly adopted the duty Corbin was charged with violating in United States v. Chestman, 947 F.2d 551 (2d Cir. 1991) (holding that the dynamic in certain marital relationships can constitute a fiduciary-like relationship for insider trading liability). The court also rejected the argument that Rule 10b5-2 was unconstitutional because the SEC exceeded its authority in promulgating it.
Comment
The Supreme Court approved the misappropriation theory in O’Hagan in the context of a lawyer who had traded on information he stole from his law firm’s client. Thus, O’Hagan had breached an archetypical fiduciary duty that he himself owed to the source. Corbin, by contrast, obtained the information from someone who owed an unusual duty to a conduit of the information. The expansion of misappropriation theory to encompass such attenuated tippees and novel duties makes it ripe for a void-for-vagueness constitutional challenge. While the court’s holding in Corbin is entirely consistent with Second Circuit precedent, that precedent may not survive Supreme Court scrutiny. Like § 1346 and its elusive predicate “the intangible right to honest services,” we can expect that when the Supreme Court addresses misappropriation theory again, it will - at the very least - “pare [it] down” to “paramount applications” presenting no vagueness problem (Skilling, 130 S.Ct. at 2928).
See Archives for all posts since September 2007.
