Second Circuit Court Of Appeals Reverses Investment Banker’s Insider Trading Conviction
On November 5, 2018, the Second Circuit Court of Appeals in a split decision vacated the insider trading conviction of a former Wall Street analyst and remanded the case back to the district court for a new trial. United States v. Stewart, 2018 U.S. App. LEXIS 31207 (2d Cir. Nov. 5, 2018). The analyst was charged with nine counts, including one count of conspiracy to commit securities fraud and tender offer fraud, one count of conspiracy to commit wire fraud, one count of tender offer fraud, and six counts of securities fraud. The trial took place in the U.S. District Court for the Southern District of New York from July 27, 2016, to August 9, 2016, and the analyst was convicted of all nine counts on August 17, 2016. On appeal, the Second Circuit held that the district court erred by excluding key impeachment evidence the defense had sought to introduce.
As the Second Circuit remarked, the facts of this case are unusual, in that the defendant did not contest that he provided material, non-public information to his father. Given that concession, the key issue at trial was whether the analyst knew that his father was trading on the information he was providing, and thus the “cornerstone of his defense was his professed belief that he could trust his father, who [he] not did intend or expect would misappropriate his confidences for pecuniary gain.”
The prosecution’s most powerful piece of evidence relating to the issue of intent was a recorded statement made by the father to an FBI informant, in which the father said that his son had once said to him: “I can’t believe it. I handed you this on a silver platter and you didn’t invest in this[.]” The defense tried unsuccessfully to have the statement excluded as hearsay. After that request was denied, the defense sought to impeach the statement using subsequent post-arrest statements the father had made to the FBI, in which the father stated that his son was merely stating a hypothetical and did not intend for him to trade on the information (“if you were trading—you could have made like millions of dollars”) and that his son was clearly drinking during the day of the conversation. The district court also denied this request because the post-arrest statements did not expressly deny that the “silver platter” statement had been made, and therefore were not, according to the district court, inconsistent with the statement. The defense also tried to compel the father’s testimony, but that effort failed after the father invoked his Fifth Amendment privilege, and the district court declined to force the government to immunize his potential testimony.
The defense appealed the evidentiary rulings regarding the “silver platter” statement. The Second Circuit affirmed the district court’s ruling on the validity of the father’s invocation of this Fifth Amendment privilege and agreed that the case did not present the sort of “extraordinary circumstances” requiring the government to confer immunity on the father to allow him to testify. However, the Court held that the district court erred by excluding the impeachment evidence and focusing on the fact that the post-arrest statements did not deny the “silver platter” statement had been made. Remarking that a statement “need not be diametrically opposed to be inconsistent,” the Second Circuit explained that the relevant test is whether there is “any variance” “that has a reasonable bearing on credibility” between the impeachment material and the “silver platter” statement. Here, two judges on the panel found there was such variance, stating that “there is a material difference between the possibility that [the son] might have said ‘I can't believe . . . you didn't invest,’ as opposed to [the son] having said ‘if you were trading—you could have made like millions of dollars[.]’” The Second Circuit went on to find that the error was not harmless—after analyzing the strength of the government’s case, the time the jury took to deliberate, and the fact that the jury reported at one point that it was deadlocked—and ordered the conviction be vacated, remanding the case to the district court for a new trial.
In the course of conducting its harmless error analysis, the Circuit emphasized the heightened showing the government needed to make in order to satisfy the “personal benefit” element of this “tipping” insider trading case. Citing the Circuit’s recent Martoma decision, the Court stated that: “the jury had to conclude that Sean intended that his father would trade, thus personally benefitting from the misappropriation of his employer’s material nonpublic information.” This statement is in line with recent Second Circuit and Supreme Court precedent that clarified what constitutes a sufficient “gift” to establish the personal benefit element of insider trading cases. The Circuit’s affirmance of this principle will continue to help defense counsel in litigating against the government. The decision offers defense counsel useful guidance on how inconsistent a statement must be to qualify as an inconsistent statement for impeachment purposes.
One member of the panel, U.S. District Judge Richard M. Berman, sitting by designation, issued a dissent contending that even if the failure to admit the post-arrest impeachment statements was error, he believed it should have been deemed harmless error. Id. at 41-42.