Re: 1/3/05 - [Elgindy] Elgindy's Lawyers' Response to the Government's Proposal to Charge
KRAMER LEVIN NAFTALIS & FRANKEL LLP
9 1 9 T H I R D A V E N U E
NEW YORK, NY 10022 - 3852
BARRY H. BERKE
PARTNER
TEL (212) 715-7560
FAX (212) 715-7660
bberke@kramerlevin.com
PARIS 47, AVENUE HOCHE 75008
TEL (33-1) 44 09 46 00
FAX (33-1) 44 09 46 01
January 3, 2005
The Honorable Raymond J. Dearie
United States District Judge
Eastern District of New York
225 Cadman Plaza East
Brooklyn, New York 11201
Re: United States v. Anthony Elgindy, et al., Cr. No. 02-589 (S-1) (RJD)
Dear Judge Dearie:
We write to respond to the government’s letter dated December 22, 2004 and to set forth in greater detail the legal bases for our positions regarding certain of the pending issues with respect to the jury charge.
First, in its letter dated December 22, 2004, the government argues that Mr. Elgindy’s proposed charge on insider trading, which would require the to jury find that nonpublic information was a “significant factor” in his trading, was “expressly rejected” by the Second Circuit in United States v. Teicher, 987 F.2d 112 (2d Cir. 1993). Gov’t. Let. at 2. However, the discussion in Teicher on which the government relies was merely dicta: the Teicher court concluded its opinion by indicating that it was “unnecessary to determine whether proof of securities fraud requires a causal connection, because any alleged defect in the instruction was harmless beyond doubt.” Id. at 121.
In any event, the dicta is substantially undermined by more recent case law. The Teicher court prefaced its discussion by noting that it did not understand then-existing Supreme Court precedent to speak to the issue before it. See id. at 120 (“In support of their position that a causal connection is an element of the violation, Teicher and Frankel rely largely on cases which describe securities charges with phrases such as “trading on the basis of” but which did not address the possibility that the trading was not causally connected to the inside information”). More recently, though, in United States v. O’Hagan, 521 U.S. 642, 656 (1997), the Supreme Court substantially clarified the doctrinal landscape by indicating that a misappropriator must attempt to “capitalize” on and “use” inside information to incur liability. (Emphasis added.) It wrote, “The misappropriation theory targets information of a sort that misappropriators ordinarily capitalize upon to gain no-risk profits through the purchase or sale of securities. Should a misappropriator put such information to other use, the statute’s prohibition would not be implicated. The theory does not catch all conceivable forms of fraud involving confidential information; rather, it catches fraudulent means of capitalizing on such information through securities transactions.” Id. See also id. (“the fiduciary’s fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities”). The “knowing possession” standard is inconsistent with this language, for a person does not attempt to “capitalize” on or “use” information unless he affirmatively seeks benefit from it.
Moreover, since Teicher, three other federal courts of appeal have explicitly ruled on the issue, and all have required that the defendant use, rather than merely possess, nonpublic information in order to violate the securities law. See United States v. Smith, 155 F.3d 1051, 1067 (9th Cir. 1998) ( (relying, in part, on O’Hagan and holding that, in Rule 10b-5 prosecutions, government must prove a causal link between possession and use); SEC v. Adler, 137 F.3d 1325, 1337 (11th Cir. 1998) (holding, in civil case, that “the test best comports with precedent and Congressional intent, and that mere knowing possession--i.e., proof that an insider traded while in possession of material nonpublic information--is not a per se violation” of 10b-5); SEC v. Lipson, 278 F.3d 656, 660 (7th Cir. 2002) (holding that government has the burden of proving “that inside information had played a causal role in Lipson’s decision to sell the shares in the amount, and when, he did,” though noting that the SEC was not urging the knowing possession standard). [1]
[1] In fact, even the new SEC regulation, Rule 10b-5(1), which the government cites as supporting its position, “preserves a diminished requirement of causality.” Lipson, 278 F.3d at 660. Discussing and distinguishing the propriety in the criminal context of such a presumption that a defendant in possession of inside information had used it, the Lipson court noted that “[t]he Ninth Circuit refused to allow such an instruction in a criminal case, mindful of the Supreme Court’s concern with the use of prosecution-favoring presumptions, but did not challenge the presumption adopted in Adler for civil insider-trading cases.” Id. at 661 (emphasis in original) (internal citations omitted).
Second, in its letter, the government argues that its instruction as to when information becomes “public” must be adopted because it is “true to the law in this Circuit,” citing SEC v. Mayhew, 121 F.3d 44, 50 (2d Cir. 1997). Gov’t. Let. at 1-2. However, in Mayhew, the court noted that information becomes public when disclosed “to achieve a broad dissemination to the investing public generally and without favoring any special person or group...or when, although known by only a few persons, their trading on it has caused the information to be fully impounded into the price of the stock.” Id. at 50 (emphasis added). Although Mayhew made clear two separate bases on which information can become public, the government’s proposed charge conflates them as one. It provides, for instance, that “[w]hen an investor with such information chooses to disclose it, the non-public information remains nonpublic for purposes of the insider trading laws until it has been effectively disseminated in a manner sufficient to insure its availability to the investing public and to insure that the market has had an opportunity to ‘absorb’ the disclosed information.” (emphasis added). Under the government’s understanding of insider trading, Mr. Elgindy would be guilty of the offense even if he traded on publicly available information, so long as it had yet been incorporated into the price of a stock. Among other things, this language would render virtually any trader who promptly acted on information provided on the Bloomberg service guilty of insider trading.
The government’s proposed charge on nonpublic information is deficient in two further respects. First, the government contends that in order to become public, “the information must be disseminated in a manner calculated to reach the securities market place in general through recognized channels of distribution. Those channels include, for example, public SEC filings and newspapers of national distribution.” The operative term in this instruction -- “recognized channels of distribution” -- has, to our knowledge, never been adopted by any court, and it is not precisely clear what meaning the government intends to impart to the term. [2] Regardless, an instruction that provides as its only examples of publicly disclosed information “SEC filings” and “newspapers of national distribution” either fails to reflect the law or is likely to be confusing to the jury. [3] The Second Circuit has held that information ceases to be nonpublic when it is disclosed in such a way as to enable “dissemination to the investing public generally” and without favoritism “to any special person or group.” Mayhew, 121 F.3d at 50. See also United States v. Cusimano, 123 F.3d 83, 89 & n.6 (2d Cir. 1997) (quoting, with approval, district court’s jury charge that “nformation is nonpublic if it is not available to the public through such sources as press releases, Securities and Exchange Commission filings, trade publications, analysts’ reports, newspapers, magazines, rumors, word of mouth or other sources.”). Mr. Elgindy’s proposed instruction is faithful to these precedents.
[2] We note that two courts have made passing reference to the term “recognized channels of distribution,” though without adopting it as law. See In re Keyspan Corp. Securities Litigation, 2003 WL 1702279, *12 (E.D.N.Y. 2003) (quoting plaintiff’s brief); Dupont Glore Forgan, Inc. v. Arnold Berhand & Co., Inc., 1978 WL 1062, *6 (S.D.N.Y. 1978) (quoting 1973 SEC opinion). Notably, in Keyspan, Judge Ross rejected a litigant’s claim that documents in question were not public on the apparent ground that they were available to individuals with access to a personal computer and an internet connection. See Keyspan, 1702279, at *12.
[3] It is unclear whether the government’s instruction would render nonpublic material reported in newspapers of local distribution or content on the Bloomberg service.
Second, the government contends that criminal history information should be considered nonpublic. In its jury charge submission, it apparently places primary reliance on the Supreme Court’s decision in United States Department of Justice v. Reporters Committee for Freedom of the Press¸ 489 U.S. 749 (1989). There, the Court held that the government could decline to disclose an individual’s rap sheet pursuant to FOIA because of that individual’s “personal privacy” interest in avoiding disclosure of a “compilation” of his convictions. Id. at 763-64. Even putting aside the fact that the case turned on interpretation of the statutory provisions of FOIA, the government’s reliance on it is unavailing. Although the Court found that the rap sheets need not themselves be disclosed, it also noted that the convictions themselves were, generally, “a matter of public record” and that “[a]rrests, indictments, convictions, and sentences, are public events that are usually documented in court records.” Id. at 753. In this case, the question is not whether the offender was by statute entitled to have the government keep his records confidential but whether the facts contained therein were themselves publicly available. As the Court itself noted, convictions are a matter of public record, and they are typically available to any member of the public who seeks access to them. For this reason, it is difficult to differentiate them from SEC filings, which the government concedes, as it must, are quintessentially public information.
Third, the government’s proposed charge on insider trading, and in particular on the “benefit” requirement, fails to draw the crucial distinction for the jury, as laid out in SEC v. Dirks, 463 U.S. 646 (1983), between a person whose motive or purpose in disclosing information is to gain some personal and tangible benefit (in which may it may constitute insider trading) and a person -- like the corporate insiders in Dirks -- whose purpose and motive was “to expose the fraud” (in which case it cannot constitute insider trading). As the Supreme Court clearly stated:
The tippers received no monetary or personal benefit for revealing Equity Funding’s secrets, nor was their purpose to make a gift of valuable information to Dirks. As the facts of this case clearly indicate, the tippers were motivated by a desire to expose the fraud. In the absence of a breach of duty to shareholders by the insiders, there was no derivative breach by Dirks.
Id. at 666-67 (internal citation omitted). See also id. at 662 (“Whether disclosure is a breach of duty therefore depends in large part on the purpose of the disclosure.”). [4]
[4] The Dirks majority went on to reject the position of the dissenting Justices -- who perceived a “breach of fiduciary duty whenever inside information is intentionally disclosed to securities traders” -- explaining that this lead to the erroneous result that “mere possession of inside information while trading would be viewed as a Rule 10b-5 violation.” Id. at 666 n. 27.
We respectfully submit that the government’s charge fails to capture both the crucial focus on “motive” and “purpose” and the important distinction between what constitutes an improper benefit and what does not. We request that the Court instead give the following charge, which is a modified (and we think simplified) version of our prior alternative language:
You must find beyond a reasonable doubt that Mr. Royer’s purpose in sharing the alleged inside information was to personally benefit, directly or indirectly, from the disclosure. This benefit can be in the form of pecuniary gain. It can also be in the form of reputational benefit or of a promise of future earnings. But if you find that Mr. Royer’s motivation and purpose in sharing the alleged inside information was to expose fraudulent or scam companies or to cause them to be shut down, you cannot find an improper benefit within the meaning of the law.
Fourth, the government objects to Mr. Elgindy’s proposed instruction on the characteristics of a fiduciary relationship, which is adopted from Judge Koeltl’s charge in United States v. Szur and was later approved by the Second Circuit. See United States v. Szur, 289 F.3d 200, 210 (2d Cir. 2002) (quoting Judge Koeltl’s instruction on the parameters of a fiduciary relationship). The general substance of this charge, which emphasizes that “reliance and de facto control and dominance” lie at the heart of such a relationship, is essentially mandated by Second Circuit precedent. Most clearly, in United States v. Brennan, 183 F.3d 139, 150-51 (2d Cir. 1999), the court noted that there was “strong reason to think that the district court’s instruction to the jury on the nature of fiduciary duties was flawed” precisely because it failed to include this language. See also United States v. Chestman, 947 F.2d 551, 569 (2d Cir. 1991)(en banc) (discussing parameters of fiduciary relationship in similar terms).
Fifth, in its market manipulation instruction, the government fails to take account of pertinent Second Circuit precedent. In United States v. Mulheren, 938 F.2d 364, 370 (2d Cir. 1991), the court noted, in the course of finding that the government had not adduced sufficient evidence to sustain a market manipulation charge, that “perhaps most telling...that [the brokerage firm at which defendant worked] lost over $64,000 on [defendant’s] October 17th transactions. This is hardly the result a market manipulator seeks to achieve. One of the hallmarks of manipulation is some profit or personal gain inuring to the alleged manipulator.” Courts have since construed Mulheren to indicate that “profit to the manipulator” is a necessary element of a claim for market manipulation. See Nanopierce Technologies, Inc. v. Southridge Capital Management, 2002 WL 31819207, *8, n. 17 (distilling from Mulheren that elements of openmarket manipulation claim of “1) profit to the manipulator; 2) deceptive intent; 3) market domination; and 4) economic reasonableness of the scheme”) (Sand, J.) (citing In re College Bound Litigation, 1995 WL 450486 (S.D.N.Y. July 31, 1995) (Mukasey, J.)).
Sixth, with regard to the extortion counts, and as argued in the context of Rule 29 motions, we ask that the Court instruct the jury on the difference between extortion and “hard bargaining” in the context of this case, as set forth in our request to charge.
Seventh, we respectfully ask, in light of the government’s contentions in its submission responding to our Rule 29 motion, that the Court instruct the jury that Mr. Elgindy cannot be convicted of obstruction of justice based on any of the following: Mr. Royer’s letter in support of Mr. Elgindy’s application for early termination of his supervised release in Texas; any actions Mr. Elgindy allegedly undertook to hide assets prior to his arrest in this case; and any conduct in which Mr. Elgindy allegedly engaged after he was indicted by the grand jury or after he was arrested. None of this conduct is charged in the indictment, which alleges only that the defendants conspired to obstruct justice by virtue of Mr. Royer’s “accessing and causing to be accessed a confidential FBI database in order to gain information concerning the EDNY Grand Jury Investigation to provide it to ELGINDY and others.” Indictment at ¶ 51. The additional arguments perhaps presaged in the government’s Rule 29 submission would, if argued to the jury, constitute constructive amendments to the indictment, and should not be allowed. At most they would require the jury to speculate as to how any of these alleged activities had the “natural and probable effect” of obstructing the Eastern District grand jury’s investigation. United States v. Aguilar, 515 U.S. 593, 599 (1995).
Eighth, at least four of the wire fraud counts set forth in the indictment, each of which is confined to Mr. Elgindy’s statements regarding a single security on a given day of chat, are not supported by any of the entries on the government’s summary charts. They are: count 26, count 29, count 30, and count 31. Insofar as the government has particularized no proof as to these counts, Mr. Elgindy requests that no charge be given for any of them.[5]
[5] To the extent that any further wire fraud counts set forth in the indictment are not particularized on the government’s summary charts, Mr. Elgindy moves that no charge be given for them as well.
Thank you for your consideration.
Respectfully submitted,
______/s/_________________
Barry H. Berke, Esq.
Eric A. Tirschwell, Esq.
Erin A. Walter, Esq.
cc: AUSA Kenneth Breen
AUSA Seth Levine
SAUSA Valerie Szezepanik
Larry Gerzog, Esq.
Clerk of the Court (RJD)
Eastern District of New York |
