U.S.A v. Lay, 08-3892.

• Decision Date: 14 July 2010
• Docket Number: No. 08-3892.,08-3892.
• Citation: 612 F.3d 440
• Parties: UNITED STATES of America, Plaintiff-Appellee,v.Mark D. LAY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

612 F.3d 440

UNITED STATES of America, Plaintiff-Appellee,v.Mark D. LAY, Defendant-Appellant.

No. 08-3892.

United States Court of Appeals,

Sixth Circuit.

Argued: April 27, 2010.

Decided and Filed: July 14, 2010.

Rehearing and Rehearing En Banc Denied Aug. 25, 2010.

ARGUED: Michael L. Cioffi, Blank Rome LLP, Cincinnati, Ohio, for Appellant. Antoinette T. Bacon, Assistant United States Attorney, Cleveland, Ohio, for Appellee. ON BRIEF: Michael L. Cioffi, Nathaniel R. Jones, Rachel L. Payne, Blank Rome LLP, Cincinnati, Ohio, for Appellant. Antoinette T. Bacon, Laura McMullen Ford, Assistant United States Attorney, Cleveland, Ohio, for Appellee.

Before: GIBBONS, ROGERS, and KETHLEDGE, Circuit Judges.

ROGERS, J., delivered the opinion of the court, in which GIBBONS, J., joined. KETHLEDGE, J. (pp. 449-50), delivered a separate opinion concurring in part and dissenting in part.

OPINION

ROGERS, Circuit Judge.

Defendant Mark D. Lay appeals his fraud convictions related to a hedge fund investment by the Ohio Bureau of Workers' Compensation. Lay primarily argues that the jury instructions were improper and that insufficient evidence supports the jury's verdict because, as a hedge fund adviser, Lay had a fiduciary relationship only with the hedge fund, not with its investors. Lay also seeks a new trial based on three of the district court's evidentiary rulings and its restitution and forfeiture determinations. Because a hedge fund adviser can, in some circumstances, have a fiduciary relationship with an investor, the jury instructions were correct and sufficient evidence supports Lay's conviction. We also reject Lay's challenges to the district court's evidentiary rulings and its restitution and forfeiture determinations.

I. Background

The facts of this case-based on the indictment and the evidence presented by the Government in support of the allegations in the indictment-are set out in careful detail in the district court's opinion denying Lay's motion for judgment of acquittal. United States v. Lay, 566 F.Supp.2d 652, 655-68 (N.D.Ohio 2008). A brief summary is sufficient here. In 1992 Lay began serving as investment adviser to the Ohio Bureau of Workers' Compensation when Lay's company, Capital Management, Inc., began managing the Bureau's investment in a long-term bonds fund, the Long Fund. The Bureau remained Lay's client as to its Long Fund investment from 1992 onward. In 1998, Lay founded the Active Duration Fund, a hedge fund. In September of 2003, the Bureau shifted $100 million from the Long Fund to the Active Duration Fund. The hedge fund agreement governing the Bureau's Active Duration Fund investment set a non-binding 150% leveraging guideline, but in fact Lay consistently leveraged Active Duration Fund assets far over 150%. In March of 2004, the Active Duration Fund lost $7 million. In May of 2004, after Bureau officials discussed the loss with Lay, the Bureau invested an additional $100 million in the Active Duration Fund. The Active Duration Fund's value continued to decline. In September of 2004, the Bureau invested an additional $25 million in that fund to avoid losing its entire investment, and then terminated its interest in the fund. The Bureau recovered only about $9 million from its $225 million Active Duration Fund investment.

A federal grand jury indicted Lay on one investment adviser fraud count and multiple mail and wire fraud counts. The investment adviser fraud count tracked the following Investment Advisers Act provisions, codified at 15 U.S.C. § 80b-6, which make it unlawful for an investment adviser to use the mails or the instrumentalities of interstate commerce

(1) to employ any device, scheme, or artifice to defraud any client or prospective client;

(2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;

....

(4) to engage in any act, practice or course of business which is fraudulent, deceptive, or manipulative.

The Superseding Indictment charged that Lay acted to:

(a) employ devices, schemes, and artifices to defraud, the client, the [Bureau] and thereby the [Active Duration Fund]; (b) engage in transactions, practices and courses of business which operated as a fraud and deceit upon, the client, the [Bureau] and thereby the [Active Duration Fund]; and (c) engage in any act, practice and course of business which was fraudulent, deceptive and manipulative, to wit: exercising leverage in excess of 150% in the [Active Duration Fund], in violation of the [hedge fund agreement], and concealing and failing to disclose to the full extent his exercise of leverage in excess of 150%.

The Superseding Indictment also alleged that Lay's conduct constituted mail fraud and wire fraud because Lay sent interstate emails, faxes, and trade confirmations to carry out these trades.

At trial, Terry Gasper, the Bureau's Chief Financial Officer and the person who initially decided to invest Bureau money in the Active Duration Fund, testified that his “understanding [of the Active Duration Fund and Long Fund investments] was that if Mr. Lay felt that bond prices in general were going to decline ... the [Active Duration Fund] would be used to hedge those bonds ... so that if the bond market did, in fact, go down in value, we would make some money in the [Active Duration Fund] to offset the ... unrealized losses we would have suffered in [the Long Fund].” Gasper indicated that his experience with Lay and the Long Fund was “one of the primary reasons” he invested in the Active Duration Fund, that he felt the Active Duration Fund investment was “very conservative” and “low risk,” and that the Bureau was “simply diversifying the product under a current manager” when it invested Long Fund assets already under Lay's management in the Active Duration Fund. Gasper testified that in the first half of 2003, before the Bureau invested in the Active Duration Fund, Lay told Gasper that the Active Duration Fund “would be using leverage only to reflect the value of what he had in the fund” and that Gasper had viewed the 150% leveraging guideline in the hedge fund agreement as “a way to give [Lay] some flexibility in running money and moving monies around.” Gasper testified that when the Bureau had invested a second $100 million in the Active Duration Fund, he had assumed that Lay was acting in “an appropriate fiduciary way ... that the leverage in the [Active Duration Fund] was exactly what we agreed to, that maximum of 150 percent of fund value.”

James McLean, the Bureau's Chief Investment Officer, testified that he and Lay had agreed in April of 2004, after the initial $7 million loss and before the second $100 million investment, that “the fund was ... intended to be more of a net positive rate of return fund ... [meaning] that [Lay is] investing in high quality fixed income securities, and if they're yielding a rate of return of say five percent on an interest bearing basis, then that fund, all things being equal and nothing else being done, would earn a five percent rate of return.” As to leverage, McLean testified that he and Lay agreed that the Active Duration Fund was “allowed to use a bit of leverage to take positions to enhance that five percent rate of return when [Lay saw] opportunities within the marketplace,” but that with this “modest” leverage, “even if that account were to lose a little bit based upon the leveraging of a bet that [Lay] placed on the short position ... you still earn one or two percent based upon the core of the hedge fund portfolio.” Lay had regularly reported to McLean in writing regarding the Long Fund's performance, and these reports had included a one-line summary of the Active Duration Fund's value under the heading “other assets.”

FBI Special Agent Jeremy Durgin testified that, of the Bureau's $214 million total loss, approximately $212 million was due to trades that had leveraged Active Duration Fund assets over 150%. Durgin testified that Lay had begun leveraging those assets over 150% in early 2004, that two-thirds of Lay's Active Duration Fund trades involved leveraging over 150%, that over one-fifth of those trades involved leveraging over 1000%, and that some trades involved leveraging over 10,000%.

Over Lay's objection, the district court also permitted the jury to hear Lay's deposition testimony from a previous civil case. In that deposition, Lay repeatedly stated that his company, Capital Management, Inc., “was the investment adviser for the [Active Duration Fund]” and “provided a service to the [Active Duration Fund].” Lay also stated in that deposition that the Bureau was Capital Management, Inc.'s “client” and that “the Bureau, as a client, pays the fees.”

The district court instructed the jury that, in order to find Lay guilty of investment adviser fraud, the Government had to prove “ each element of either [15 U.S.C. § ] 80b-6(1) or 80b-6(2) or 80b-6(4).” 566 F.Supp.2d at 692 (emphasis in original). With respect to § 80b-6(1) & (2), the court instructed that

In order to [establish that Lay committed investment adviser fraud under these provisions], the government must prove beyond a reasonable doubt that the [Bureau] was Mark Lay's client with respect to its investment in the ... Active Duration Fund....

A client is an individual or entity which compensates an investment adviser to provide advice directly or through publications or writings about the value of securities or the advisability of investing in, purchasing, or selling securities....

It is for you to determine as a matter of fact whether Mark Lay had an investment adviser-client relationship with the [Bureau] with respect to its investment in the ... Active Duration Fund. There are two possible outcomes of your determination on this issue.

First, you could find that the government failed to prove beyond a reasonable doubt that Mark Lay had an investment adviser-client relationship with the [Bureau] with respect to its investment in the

...