U.S. v. Bhagat

• Citation: 436 F.3d 1140
• Decision Date: 08 February 2006
• Docket Number: No. 03-10029.,03-10029.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Atul BHAGAT, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1140

436 F.3d 1140

UNITED STATES of America, Plaintiff-Appellee, v. Atul BHAGAT, Defendant-Appellant.

No. 03-10029.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 12, 2004.

Submission Withdrawn September 1, 2004.

Resubmitted July 6, 2005.

Filed February 8, 2006.

COPYRIGHT MATERIAL OMITTED

Mary McNamara, Swanson & McNamara LLP, San Francisco, CA, for the defendant-appellant.

Amber S. Rosen, Assistant United States Attorney, San Jose, CA, for the plaintiff-appellee.

Appeal from the United States District Court for the Northern District of California; Ronald M. Whyte, District Judge, Presiding. D.C. No. CR-01-20173-RMW.

Before: SCHROEDER, Chief Judge, TASHIMA, and RAWLINSON, Circuit Judges.

RAWLINSON, Circuit Judge:

Appellant Atul Bhagat (Bhagat) challenges his convictions for insider trading; for securities tipping; and for obstructing the course of an SEC investigation.¹

Because any new factual theory referenced by the government during closing arguments was introduced for the proper purpose of impeaching Bhagat's credibility, and did not effect a constructive amendment or material variance of the indictment; the instructions conveyed all of the elements needed to obtain a conviction on the obstruction charge; and sufficient evidence supports Bhagat's conviction, we affirm the judgment of conviction.

Because the court determined the amount of profit under a mandatory guidelines system, we remand the sentence pursuant to United States v. Ameline, 409 F.3d 1073 (9th Cir.2005) (en banc).

I. FACTUAL and PROCEDURAL BACKGROUND

Bhagat's employer, Nvidia Corporation (Nvidia), successfully competed for a multi-million dollar contract to develop a video game console (the X-Box) for the Microsoft Corporation. Upon receiving the contract, Nvidia's Chief Executive Officer (CEO) sent a company-wide e-mail late Sunday night announcing the contract award. The next morning, Nvidia sent a number of follow-up e-mails. The first e-mail advised Nvidia employees that the X-Box information should be kept confidential. The other e-mails imposed a trading blackout on the purchase of Nvidia stock for several days, and required Nvidia's employees to cancel any open or outstanding orders for Nvidia stock.

A. Insider Trading Allegations Against Bhagat

The government's theory of prosecution was that Bhagat read the CEO's Sunday night e-mail prior to purchasing Nvidia stock. To support this theory, the government introduced evidence that Bhagat arrived at work on Monday midmorning, and that all of the company-wide e-mails were on his computer. The government also introduced evidence that roughly twenty minutes after the final company-wide e-mail was sent, Bhagat purchased a large quantity of Nvidia stock — his largest purchase in nearly three years. There was no direct evidence that Bhagat read any of the e-mail prior to executing his purchase. Instead, the government asked the jury to infer Bhagat's knowledge by virtue of the fact that he had probably read the original e-mail upon entering the office as a "normal, reasonable person" would.

Evidence was also presented that rumors about Nvidia and the X-Box contract began leaking in the industry the day after Bhagat purchased his stock, and the price of the stock rose sharply. Three days later, the news was made public and the price of Nvidia stock skyrocketed. Another four days later, Bhagat sold his stock, reaping a substantial profit.

Bhagat offered a different interpretation of the facts. He testified to conducting personal business for several hours upon reaching the office, and reading the company-wide e-mails at 1:00 p.m. — roughly forty minutes after he purchased the stock. Upon learning of the trading blackout, Bhagat attempted to cancel his trade by contacting his broker, who advised him that it was too late. However, Bhagat could not remember which branch of the trading company he contacted, nor the name, or even the gender, of the representative to whom he spoke. Bhagat made no further attempt to divest himself of the stock. He concluded that to do so would further violate the trading blackout, although he sought no guidance from any Nvidia executive regarding his failure to cancel his pending trade.

To rebut the government's contention that his purchase of Nvidia stock was motivated by insider information, Bhagat testified that he purchased the stock after considering the general strength of the stock, and with the expectation that the company would win the X-Box contract. Bhagat introduced evidence that he was a consistent purchaser of technology-based stock. To counter the inference that he read the X-Box e-mail before executing his trades, Bhagat introduced evidence that, in a one-month period, he often did not send e-mails until after 1:00 p.m.

B. Tipping Allegations Against Bhagat

The prosecution sought to prove that Bhagat advised two friends to buy Nvidia stock before the X-Box information was officially released to the public. Less than one-half hour after Bhagat made his purchase, two of his friends, Puneet Mehrotra (Mehrotra) and Mamat Gill (Gill), purchased Nvidia stock. There was no direct evidence that Bhagat contacted Mehrotra or Gill prior to their purchases. However, Bhagat did send Gill an e-mail during the blackout period, the day after Gill purchased the Nvidia stock, containing a link to an internet article discussing Nvidia and the X-Box. Evidence was also introduced that Bhagat provided his real estate agent with the X-Box information before it was made public. Finally, Gill's purchase was his largest purchase of the year.

Bhagat denied telling anyone about the X-Box contract before it was made public. He countered the prosecution's evidence with the argument that a friend of Gill's, who worked for one of Nvidia's competitors, may have informed Gill of the X-Box contract award.

C. Reasons for the Increase in Nvidia's Stock Price

The parties disagree as to the reasons Nvidia's stock price increased between the time of Bhagat's purchase and the time the contract award was officially announced. The government's expert opined that the increase was primarily caused by rumors regarding Nvidia and the X-Box contract. Bhagat countered that the value of Nvidia's stock rose during this period primarily because Standard & Poor's (S & P) issued a listing announcement indicating that Nvidia was now part of an S & P stock index.

A number of witnesses, including Nvidia's CEO and a financial analyst, testified that stock prices generally rise after a listing announcement. The government's expert confirmed the existence of studies showing that technology-based stocks increase in value by ten percent after becoming listed. However, the expert qualified this observation by noting that the ten percent increase represented the aggregate increase over the course of several days to a few weeks. In light of Nvidia's past performances upon becoming listed in other indices, the expert opined that it was highly unlikely that the listing announcement in this case had such an immediate impact on the market. Thus, according to the expert, any price increases during this time were more likely attributable to the X-Box rumors, and not to the listing announcement.

D. Trial Proceedings

Bhagat was charged with insider trading, tipping, and obstructing an SEC investigation. The most hotly contested issue was whether the government adequately proved that Bhagat possessed prior knowledge of the X-Box contract award. The key provisions of the indictment are as follows:

5. On . . . March 5 . . . NVIDIA entered into a contract with Microsoft to develop . . . a . . . processor for . . . the "X-Box."

6. On Sunday, March 5 . . . NVIDIA's president . . . sent an e-mail message to all NVIDIA employees, including BHAGAT, announcing the contract. The e-mail . . . predicted that "[i]f Xbox becomes as big as Sony Playstation, we generate about $2B in sales over 5 years."

7. On Monday, March 6 ..., at 9:15 ... NVIDIA's Vice President of Marketing sent an e-mail to all NVIDIA employees. The e-mail was entitled "xbox shhhhhh . . ." and said:

. . . keep the xbox news quiet . . . . Microsoft plans to make the news public this Friday . . . [L]ets don't jinx it!

8. On March 6 . . . at . . . 12:23 . . . BHAGAT placed a market order to purchase 1000 shares of NVIDIA stock.

The principal theory of the prosecution during the trial was that Bhagat knew about the contract from reading his own e-mail. During cross-examination, however, the prosecutor also questioned Bhagat about conversations among his co-workers that he had heard that morning concerning the X-Box contract. This line of questioning set the stage for what the parties refer to as the "office `abuzz' theory."

Defense counsel informed the court that because the indictment did not include an allegation that Bhagat learned about the X-Box contract through office conversation, that theory should not be permitted as part of the government's case. In the alternative, defense counsel requested an instruction informing the jury that the mere existence of an open cubicle environment may not, standing alone, give rise to an inference that Bhagat possessed insider information. Ultimately, the court authorized the government to present the argument, and declined to give the requested instruction.

During closing arguments, the government referenced the "office abuzz" theory in passing, stating that the jury should consider the fact that the office was "abuzz" with the news of the X-Box contract, and that Bhagat had to walk through the office to reach his cubicle. The government also repeatedly informed the jury that in order to find Bhagat guilty, the government would have to prove that he read the company-wide e-mails prior to purchasing the stock.

The jury convicted Bhagat of insider trading, of tipping Gill, and of obstructing an SEC investigation by making false statements to SEC investigators....