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
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.
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.
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.
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.
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.
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).
Preacely pled guilty to crack distribution under a cooperation agreement and was released on bail. Between arrest and sentencing, he underwent “exceptional rehabilitation,” overcoming a daily marijuana habit, participating in pro-active cooperation leading to “several successful criminal investigations,” completing two work training programs, and “dramatically transform[ing] his personal life” through marriage, parenting and becoming a youth advisor for the Nassau DA’s gang prevention program.
Preacely’s presentence report determined that he was a “Career Offender” as defined under the Sentencing Guidelines, a category that resulted in a dramatic bump both of his offense level and criminal history category. His applicable guideline was therefore 188-235 months in custody. Rejecting defense counsel’s request for a sentence of time-served (about two years), EDNY Judge Platt noted repeatedly that he could not ignore the fact that he was dealing with a “Category VI” offender (the category to which career offenders are automatically assigned), and imposed a sentence of 94 months, exactly half of the low end of the recommended guideline range.
In a decision written by Ninth Circuit Judge Wallace (sitting by designation), the Court held that it was unclear from Judge Platt’s repeated emphasis of Preacely’s status as a Category VI career offender that he understood he was free to reject the career offender classification entirely. Evidence of Preacely’s rehabilitation was “particularly relevant to determining whether the Career Offender Guideline was appropriate,” but Judge Platt’s statement that he was “dealing with a Category VI career offender, regardless of all of what you said,” “reinforce[d] [the Court’s] doubt that the district judge fully understood his authority to depart from Category VI if it significantly over-represented the seriousness of Preacely’s criminal history and/or the likelihood that he will commit further crimes.” Accordingly, the Court remanded so that Judge Platt could consider that option.
Judge Lynch’s Concurrence
Adding his “common-sense” explanation for the decision, Judge Lynch described the career offender guideline as “a simplistic three-strikes policy,” which in Preacely’s case was “distinctly inflated” and “remarkably severe.” Premised on the likelihood that someone in that category “presents an extreme danger of committing more crimes,” it may not be the appropriate baseline for someone, like Preacely, who “had reformed, and no longer present[s] such a danger.” While the district court was not required to accept Preacely’s claims of reform, “[it] was required to consider those claims” and not simply to assume that he was dangerous based on his classification as a Category VI offender. Judge Lynch adds:
[I]t is extremely useful to give separate consideration to that aspect of the cooperation departure that operates as a pure reward to induce testimony, regardless of the defendant’s character, and the quite separate basis for mitigation that relates to a defendant’s potential reformation (which might be evidenced in part by his cooperation with the authorities).
Judge Raggi’s Dissent
In a dissenting decision, Judge Raggi took issue with the majority’s conclusion that Judge Platt may have misunderstood his power to depart from the career offender guideline, pointing out that he acknowledged on the record that he could depart as far down as a non-custodial sentence. Even if the majority was correct that there was some ambiguity on that score, she proposed that “the proper action would be to remand for clarification, not to vacate and order resentencing.”
As the authors point out in the excellent “Deconstructing the Career Offender Guideline” (and citing the Sentencing Commission’s own research), “[s]entences recommended by the career offender guideline are among the most severe and least likely to promote sentencing purposes in the United States Sentencing Guidelines Manual.” Preacely places that harshness in a stark light – relatively minor convictions catapulted him into the category, while his stunning post-arrest transformation established that he clearly did not belong among the incorrigible offenders for whom the category was written. Indeed, the subtext of the majority’s opinions in Preacely is that his sentence – cruelly returning a newly-productive individual back to prison for at least another five years – was substantively unreasonable. Preacely is therefore an important case not just on the power to depart from the career offender guideline, but the duty to depart from it where the defendant has presented compelling evidence that it should not apply to him. More generally, the case is an important precedent on a sentencing judge’s obligation to consider a defendant’s post-offense rehabilitation efforts, and, in cases involving cooperation, to give additional credit for that aspect of cooperation that reflects the defendant’s actual or potential reformation.
Lawyers: Yuanchung Lee (Federal Defenders of New York, Inc.); AUSA Thomas Sullivan and Susan Corkery
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