U.S.A. v. McDermott

• Decision Date: 29 January 2001
• Docket Number: Docket No. 00-1572
• Citation: 245 F.3d 133
• Parties: (2nd Cir. 2001) United States of America, Appellee, v. James J. McDermott, Jr., Defendant-Appellant, Kathryn B. Gannon, also known as Kathryn B. Gannon-Akahoshi, also known as Marylin Star, and Anthony P. Pomponio, Defendants. Argued:
• Court: U.S. Court of Appeals — Second Circuit

Page 133

245 F.3d 133 (2nd Cir. 2001)

United States of America, Appellee, v. James J. McDermott, Jr., Defendant-Appellant, Kathryn B. Gannon, also known as Kathryn B. Gannon-Akahoshi, also known as Marylin Star, and Anthony P. Pomponio, Defendants.

Docket No. 00-1572

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: Jan. 29, 2001

Decided: March 29, 2001

[Copyrighted Material Omitted]

Robert J. Anello, New York, NY (Morvillo, Abramowitz, Grand, Iason & Silberberg, PC, of counsel), for Defendant-Appellant.

James J. Benjamin, Jr., Assistant United States Attorney, New York, NY (Mary Jo White, United States Attorney, Jamie L. Kogan, Assistant United States Attorney, of counsel), for Appellee.

Before OAKES, STRAUB and POOLER, Circuit Judges.

Defendant was convicted of insider trading and conspiracy following a jury trial in the United States District Court for the Southern District of New York, Kimba Wood, Judge, presiding.

Reversed in part; vacated and remanded in part.

OAKES, Senior Circuit Judge:

Defendant James J. McDermott appeals from a judgment entered against him in the United States District Court for the Southern District of New York following a jury trial before Kimba Wood, Judge, convicting him of conspiracy to commit insider trading in violation of 18 U.S.C. § 371 and of insider trading in violation of 15 U.S.C. §§ 78(j)(b) and 78ff and of 17 C.F.R. § 240.10b-5. On appeal, McDermott contends principally that (1) the evidence was insufficient as a matter of law to support his convictions; (2) he was unfairly prejudiced as a result of variance between the indictment and the proof at trial; and (3) the district court abused its discretion under Federal Rule of Evidence 403. We agree that there is insufficient evidence to support the conspiracy count, although sufficient evidence exists to support McDermott's conviction on the substantive offenses. Nevertheless, because of the variance between the single conspiracy charged in the indictment and the proof adduced at trial, we find that McDermott was prejudiced to the point of being denied a fair trial. Accordingly, we reverse the conspiracy count and remand for a new trial on the substantive counts.

BACKGROUND

The present prosecution arose out of a triangulated love affair involving the president of a prominent investment bank, a pornographic film star and a New Jersey businessman.

Until May 1999, McDermott was the president, CEO and Chairman of Keefe Bruyette & Woods ("KBW"), an investment bank headquartered in New York City that specializes in mergers and acquisitions in the banking industry. Around 1996, McDermott began having an extramarital affair with Kathryn Gannon. Gannon was an adult film star and an alleged prostitute who performed using the stage name "Marylin Star." During the course of their affair, McDermott made numerous stock recommendations to Gannon. Unbeknownst to McDermott, Gannon was simultaneously having an affair with Anthony Pomponio and passing these recommendations to him. Although neither Gannon nor Pomponio had extensive training or expertise in securities trading, together they earned around $170,000 in profits during the period relevant to this case.

The government indicted McDermott, Gannon and Pomponio for conspiracy to commit insider trading and for insider trading on the theory that McDermott's recommendations to Gannon were based on non-public, material information.¹ McDermott and Pomponio were tried together, but Gannon was not present.

The evidence at trial concerned primarily the relationship between McDermott and Gannon and the trading activities of Gannon and Pomponio. The Government built its case against McDermott almost entirely on circumstantial evidence linking records of telephone conversations between McDermott and Gannon with records of Gannon's and Pomponio's trading activities. Telephone records revealed that McDermott and Gannon engaged in approximately 800 telephone calls during the charged period, including up to 29 calls in one day. Trading records revealed correlations between the telephone calls and stock trades. In addition to these records, the sensational highlight of the government's evidence, which formed the basis of its perjury count against Pomponio, consisted of audiotape recordings of Pomponio's SEC deposition. These tapes undermined Pomponio's defense and credibility, as they recorded him poorly telling lies, evading questions and affecting incredulous reactions.² McDermott was sentenced to eight months' imprisonment, to be followed by a two-year term of supervised release, a $25,000 fine and $600 in special assessments.

DISCUSSION

A. Legal Sufficiency

McDermott challenges the sufficiency of the evidence to establish his convictions both for a single conspiracy to commit insider trading and for the related substantive offenses.

"A defendant challenging the sufficiency of the evidence bears a heavy burden[.]" United States v. Pipola, 83 F.3d 556, 564 (2d Cir. 1996); see also United States v. Gore, 154 F.3d 34, 39-40 (2d Cir. 1998). When reviewing sufficiency challenges, "we 'view the evidence in the light most favorable to the government, drawing all inferences in the government's favor'[.]" United States v. Shareef, 190 F.3d 71, 76 (2d Cir. 1999) (quoting United States v. Allah, 130 F.3d 33, 45 (2d Cir. 1997)). An appellant must demonstrate that "no 'rational trier of fact could have found the essential elements of the crime charged beyond a reasonable doubt.'" United States v. Jones, 16 F.3d 487, 490 (2d Cir. 1994) (quoting Jackson v. Virginia, 443 U.S. 307, 319 (1979)). We apply these principles equally to direct and to circumstantial evidence. See Gore, 154 F.3d at 40. Finally, we note that the task of choosing among competing, permissible inferences is for the fact-finder, not for the reviewing court. See United States v. Friedman, 998 F.2d 53, 56 (2d Cir. 1993).

Measured against this high standard, we find that the evidence was insufficient as a matter of law on the conspiracy count, but sufficient to establish McDermott's conviction for the substantive offenses.

i). The Conspiracy Count

"[I]n order to prove a single conspiracy, the government must show that each alleged member agreed to participate in what he knew to be a collective venture directed toward a common goal. The coconspirators need not have agreed on the details of the conspiracy, so long as they agreed on the essential nature of the plan." United States v. Maldonado-Rivera, 922 F.2d 934, 963 (2d Cir. 1990) (internal quotations and citations omitted). We have frequently noted that the "essence of conspiracy is the agreement and not the commission of the substantive offense." Gore, 154 F.3d at 40 (citing United States v. Abel, 258 F.2d 485, 489 (2d Cir. 1958), aff'd on other grounds, 362 U.S. 217 (1960)); see also United States v. Walker, 142 F.3d 103, 112 (1998). Additionally, it is a long-standing principle of this Court's law of conspiracy that "[n]obody is liable in conspiracy except for the fair import of the concerted purpose or agreement as he understands it; if later comers change that, he is not liable for the change; his liability is limited to the common purposes while he remains in it." United States v. Peoni, 100 F.2d 401, 403 (2d Cir. 1938).

Despite this well-settled law, the government here asks us to redefine a conspiracy by its purpose, rather than by the agreement of its members to that purpose. The government argues that from the perspective of Gannon and Pomponio, albeit not from McDermott's perspective, there was a unitary purpose to commit insider trading based on information furnished by McDermott. According to the government, therefore, McDermott was part of the conspiracy even though he did not agree to pass information to both Gannon and Pomponio.

United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986), aff'd, 484 U.S. 19 (1987), forecloses the government's argument. In Carpenter, we reversed the conspiracy conviction of defendant Winans, a Wall Street Journal reporter who participated in a scheme with his friends Felis and Brant to misappropriate insider information and to use it for personal gain. See id. at 1026-27, 1036. Felis then passed the insider information to Spratt, who was not part of the original agreement. See id. at 1036. We reversed Winans's conspiracy conviction to the extent that it involved Spratt's trades. See id. at 1035-36. Because Winans's original trading agreement with Felis and Brant was narrowly limited to specific persons not including Spratt, about whom Winans had no knowledge, we found that by passing the information to Spratt, Felis had "'used the information obtained from Winans beyond the scope of the original agreement.'" See id. at 1036 (quoting United States v. Winans, 612 F. Supp. 827, 835 (S.D.N.Y. 1985)).

In Carpenter, we left open three hypothetical avenues of liability against Winans. First, we emphasized that Winans "might have been liable for the Spratt trades had the scope of the trading agreement been broader, to include trading by or for persons other than the small group of conspirators herein." Id. at 1036 (citing Pinkerton v. United States, 328 U.S. 640, 646-47 (1946)). Second, we noted that Winans might have been liable for the Spratt trades had the trades been "'part of the ramifications of the plan which could... be reasonably forseen [sic] as a necessary or natural consequence of the unlawful agreement.'" Id. (quoting Pinkerton, 328 U.S. at 648). Third, we suggested that Winans might have been liable had he "at least known of the Felis-Spratt relationship." Id. (citations omitted).

Because none of these avenues of liability is applicable to this case, we find that McDermott is not liable for the trades made by Pomponio. There is no record evidence suggesting that McDermott's agreement with Gannon encompassed a broader scope than the two of them. McDermott and Gannon were having an affair, and it is not...