Saturday, July 3, 2010

Quality Control at the Second Circuit: 38 Years of Willfulness Jurisprudence Thrown Out in Kaiser?


Former U.S. FoodService ("USF") purchasing and marketing chief Mark Kaiser's convictions on charges of conspiracy and securities fraud were reversed on Thursday, and the case was remanded for a new trial. The Second Circuit's opinion is here. The reversal was based on Judge Griesa's faulty charge on conscious avoidance which was held to constitute plain error. Judge Griesa's conscious avoidance jury instruction did not contain two elements that the Second Circuit has repeatedly stated are necessary: "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." When Judge Griesa suggested sua sponte that a conscious avoidance charge was appropriate, the government reminded him that the two elements must be included, but they did not make their way into the final instruction. Although the defense did not object to the conscious avoidance charge in its final form, the law is so settled on this point that the Second Circuit had little difficulty finding plain error. Failure to include these two limiting elements in a conscious avoidance charge is a longstanding pet peeve of the Second Circuit.

Kaiser also complained that Judge Griesa's instruction on willfulness did not inform the jury that willfulness required knowledge of illegality. Under 15 U.S.C. Section 78ff(a), a/k/a Section 32(a) of the Exchange Act, "[a]ny person who willfully violates any provision of this chapter...or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter, or any person who willfully and knowingly makes, or causes to be made, any statement in any application, report, or document required to be filed under this chapter or any rule or regulation thereunder...which statement was false or misleading with respect to any material fact, shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years, or both."

A long line of Second Circuit precedent, going back at least to United States v. Dixon and reconfirmed in United States v. Cassese, has established that willfulness in the context of criminal Exchange Act prosecutions requires the government to prove a defendant's awareness of the general unlawfulness of his conduct under the securities laws. To paraphrase Senator McCarthy, virtually every schoolboy knows this, and the standard jury instruction to this effect is included in Judge Sand's widely used treatise, Modern Federal Jury Instructions-Criminal. The government does not have to prove the defendant's knowledge of the particular Exchange Act provision or SEC regulation or rule that he is charged with violating. (This would be inconsistent with Section 32(a)'s language that "no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation."  If a defendant can be convicted, although not imprisoned, under Section 32(a), even if he had no knowledge of the specific SEC rule he was violating, it stands to reason that the willfulness required to convict under the statute does not encompass knowledge of these same specific rules and regulations.)

The standard Second Circuit Exchange Act criminal willfulness instruction sets a high scienter requirement for the government and can literally make the difference between a verdict of guilty or not guilty. The Kaiser Court examined Judge Griesa's willfulness instruction under plain error analysis. Although both the government and the defense submitted the standard Second Circuit charge requiring the government to prove Kaiser's knowledge that his conduct was illegal, Judge Griesa "did not give the proposed instructions, and did not rule on the proposed instructions before giving the charge, calling the practice 'a waste of time.'" In other words, Judge Griesa appeared to disregard the clear mandate of Federal Rule of Criminal Procedure 30(b). But neither party objected to the final charge, thereby bringing plain error review into play. 

It is hard to read the Court's opinion on the willfulness issue as anything other than a fundamental misinterpretation of Second Circuit precedent in this area, complete with importation of contrary precedent from other circuits. (I will have more to say on the specifics of the opinion in a future post.) The really unfortunate thing about this decision is that it is unlikely to be taken up and reconsidered en banc. Why? The defendant already has his new trial. The government now has a ruling that significantly lessens its burden of proof in future criminal Exchange Act prosecutions.


P.S. - This case, reversing the conviction, was handled by Dan Brown of the law firm of Murphy & McGonigle. See also here. As noted by a comment to the blog - the case was argued, on behalf of Mr. Kaiser, by Alexandra A.E. Shapiro of Macht, Shapiro, Arato & Isserles LLP.


July 3, 2010 in Current Affairs, Fraud, Judicial Opinions, News, Prosecutions, SEC, Securities | Permalink | Comments (1) | TrackBack (0)

Tuesday, June 29, 2010

Skilling Decision Brings Down Scrushy, Siegelman, Hargrove, and Hereimi

In today's Supreme Court Order, we see the first wave of cases being affected by the Skilling decision.  The Court granted the Petitions for Writ of Certiorari in the following cases, and remanded them to the circuits listed below for reconsideration in light of the Skilling decision.  This does not mean that the cases will automatically be dismissed, but it does open each of them to review in light of the fact that section 1346 only includes bribery and kickbacks.

Richard Scrushy v.United States; Don E. Siegelman v. United States - remanded to the Eleventh Circuit

Jack L. Hargrove v. United States - remanded to the Seventh Circuit (same Circuit as the Conrad Black case)

Imad S. Hereimi v. United States - remanded to the Ninth Circuit

Paula Harris v. United States - remanded to the Ninth Circuit

Mustafa Redzic v. United States - remanded to the Eighth Circuit


June 29, 2010 in Fraud, Judicial Opinions | Permalink | Comments (2) | TrackBack (0)

Ouch, That Hurts! Judge Koeltl Pulverizes SEC in Rorech Case


Attached is SDNY U.S. District Judge John G. Koeltl's Opinion and Order in SEC v. Jon-Paul Rorech and Renato Negrin, issued last Thursday. With the exception of Koeltl's ruling that the VNU credit default swaps at issue are covered under Section 10(b) of the Exchange Act and Rule 10b-5, the holding was a total defeat for the SEC. For those not wanting to read the entire 122-page opinion, here is the SEC v. Rorech-Introduction and Conclusions of Law portion.

The case centered around Negrin's purchase of VNU credit default swaps from Deutsche Bank's high-yield bond salesman Rorech. Negrin was a portfolio manager for Millennium Partners hedge fund. The case was brought under the misappropriation theory of insider trading. The SEC alleged that Rorech misappropriated confidential information from his employer Deutsche Bank and provided it, during two cell phone calls, to Negrin. The allegedly confidential information was that VNU, a Dutch media holding company, was going to restructure a bond offering and that another Deutsche Bank customer had placed a $100 million indication of interest in such an offering. The restructured bond offering would provide "deliverable instruments" for VNU credit default swaps that were being traded at the time.

Judge Koeltl concluded that:

1. The inside information about the restructured bond offering did not yet exist when Rorech allegedly passed it to Negrin.

2. The information that Rorech did possess at the time of the calls was not material. Rorech's knowledge about a potential restructuring of the bond offering was speculative in nature and already widely shared in the marketplace. Rorech's knowledge regarding another customer's indication of interest was not materially different from information already in the market regarding substantial investor demand for deliverable VNU bonds, through a restructured bond offering. 

3. Rorech did not breach any duty of confidentially owed to Deutsche Bank because Deutsche Bank did not consider Rorech's ideas or opinions or, any general information, about a possible VNU bond offer restructuring to be confidential. Rorech was expected by Deutsche Bank to share such information with prospective customers and this was standard practice in the high-yield bond market. The same went for sharing information regarding other customers' indications of interest.

4. Courts cannot infer that inside information was passed from phone calls followed by trading, without something more. Additionally, Negrin's trades were consistent with his past investment practices.

5. There was no evidence of scienter. Rorech and Negrin had no prior personal relationship, there was no quantifiable or direct personal benefit to Rorech from any tip, and there was no deception by Rorech of Deutsche Bank. (This lack of deception is also relevant to the "disclose or refrain from trade" principle of insider trading. Judge Koeltl found that Rorech had in fact disclosed his interactions with Negrin to Deutsche Bank supervisors.) Moreover, Negrin did nothing to hide his dealings with Deutsche Bank.

There is considerably more in the Opinion and Order. The decision is worth reading alone for Judge Koeltl's succinct recapitulation of governing Rule 10b-5 case law, and for his analysis of why the credit default swaps at issue here fall under the purview of Rule 10b-5. Rule 10b-5 often forms the basis of criminal securities fraud charges brought under the Exchange Act (through 15 U.S.C. Section 78ff), and the civil case law, although not identical to the criminal case law, can be highly relevant.

The facts were obviously important here. The SEC didn't have any.


June 29, 2010 in Civil Enforcement, Civil Litigation, Current Affairs, Fraud, Insider Trading, Judicial Opinions, News, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Open Questions Post Skilling Related to the Honest Services Issue

As a result of the Skilling decision see here, here, here, here, and here, many questions are left for consideration by lower courts and perhaps Congress and the Supreme Court in future cases.  What are some of these questions:

  • Can Congress rewrite a statute that would pass constitutional muster? (but perhaps they should think twice about doing this - see here)
  • Did the Court engage in interpretation or invention?
  • What cases will require reversal as a result of the holding in Skilling (e.g., Will Governor Ryan's conviction stand?)
  • Are there other available statutes to prosecute conflicts of interest and self-dealing?
  • When does harmless error require a reversal of a case that alleged honest services?
  • The Court in footnote 37 notes the disagreement of lower courts on whether one has to violate state law, is this now an irrelevant question?
  • The Court limits "bribery and kickbacks" to the "core of the pre-McNally case law.  What does this include?
  • Does the Rule of Lenity only apply after the Court has made its interpretive (inventive) decision?
  • The Court states that its definition only covers "serious culpable conduct." Does this mean that minor frauds cannot be prosecuted under the honest services provisions?
  • Does the Court really set up a "uniform national standard" for honest services, and therefore can state law not be used to determine whether it is a bribery or kickback?
  • If the Court says you use pre-McNally caselaw on bribery and kickbacks, how do you interpret conflicting opinions by lower courts?
  • What does bribery mean?  The Court references 201 (b) and not (c), so is bribery limited?
  • In footnote 46 the Court refers to state and local corruption - but what statutes get included here?
  • Has the Court redefined what constitutes vagueness for purposes of statutory interpretation?
  • In adopting a position expressed by a law professor in an amicus brief, is the Court saying that law professors should focus on writing amici briefs and not law review articles?


June 29, 2010 in Enron, Fraud, Judicial Opinions, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Monday, June 28, 2010

In the News & Around the Blogosphere

David Glovin, Bloomberg, Reputations Don't Return When Prosecutors Drop Charges

Christopher M. Matthews, Main Justice,Terwilliger to Propose New Rules for FCPA Disclosures

Chloe Albanesius, PC Magazine, DOJ, FBI to Monitor Foreign Web Sites for IP Piracy

Mark H. Tuohey III Joins Brown Rudnick's Washington DC Office - see here

BuckleySandler announced that David S. Krakoff and Christopher F. Regan have joined their firm. See here - Download BuckleySandler Advisory_06232010

Geogrey Dunn, Huffington Post, Palin Guilty of Major Ethics Act Violation: Must Return $386,000 in Contributions

Sue Reisinger, Corporate Counsel,, U.S. Government's FCPA Probe of Weatherford Expands

Keith L. Alexander, Wash Post, As Wone trial closes, judge questions defendants' reticence


June 28, 2010 in News | Permalink | Comments (0) | TrackBack (0)