United States v. Mahaffy

• Citation: 693 F.3d 113
• Decision Date: 02 August 2012
• Docket Number: Docket No. 10–0181–cr(con).,Docket No. 10–3091(con).,Docket No. 09–5349–cr(L).,Docket No. 10–2996(con).,Docket No. 10–4634–ag(con).,Docket No. 10–835(con).,Docket No. 10–0154–cr(con).,Docket No. 10–0036–cr(con).,Docket No. 09–5352–cr(con).
• Parties: UNITED STATES of America, Appellee, v. Kenneth E. MAHAFFY, Jr., Linus N. Nwaigwe, Timothy O'Connell, David G. Ghysels, Keevin H. Leonard, Robert F. Malin, Defendants–Appellants. Kenneth E. Mahaffy, Jr., Petitioner, v. United States Securities and Exchange Commission, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

693 F.3d 113

UNITED STATES of America, Appellee,

v.Kenneth E. MAHAFFY, Jr., Linus N. Nwaigwe, Timothy O'Connell, David G. Ghysels, Keevin H. Leonard, Robert F. Malin, Defendants–Appellants.

Kenneth E. Mahaffy, Jr., Petitioner,

v.United States Securities and Exchange Commission, Respondent.

Docket Nos. 09–5349–cr(L) 09–5352–cr(con), 10–0036–cr(con), 10–0181–cr(con), 10–0154–cr(con), 10–835(con), 10–2996(con), 10–3091(con), 10–4634–ag(con).

United States Court of Appeals,Second Circuit.

Argued: March 5, 2012.

Decided: Aug. 2, 2012.

Andrew J. Frisch (Jeremy B. Sporn, on the briefs), Law Offices of Andrew J. Frisch, New York, NY, for Defendant–Appellant Kenneth E. Mahaffy, Jr.

Donna R. Newman, New York, NY, for Defendant–Appellant Linus N. Nwaigwe.

Yuangchung Lee, Federal Defenders of New York, Inc., for Defendant–Appellant Timothy O'Connell.

Susan Wolfe, Hoffman Pollok, LLP, New York, NY, Matthew Brissenden, Garden City, NY, for Defendant–Appellant David G. Ghysels.

Thomas F.X. Dunn, New York, NY, Mitchell Alan Golub, Golub & Golub, LLP, New York, NY, for Defendant–Appellant Keevin H. Leonard.

Susan G. Kellman, Law Offices of Susan G. Kellman, Brooklyn, NY, (Marc Fernich, Jonathan Savella, Law Office of Marc Fernich, New York, NY, on the brief), for Defendant–Appellant Robert F. Malin.

James F. McMahon, Assistant United States Attorney (David C. James, Claire S. Kedeshian, Assistant United States Attorneys, on the brief), for Loretta E. Lynch, United States Attorney, Eastern District of New York, for Appellee United States of America.

Hope H. Augustini, Senior Litigation Counsel (Mark D. Cahn, General Counsel, Jacob H. Stillman, Solicitor, on the brief), for Appellee Securities and Exchange Commission.

Before: McLAUGHLIN, B.D. PARKER, and WESLEY, Circuit Judges.

BARRINGTON D. PARKER, Circuit Judge:

This appeal arises from an indictment that charged that traders employed by several brokerage firms conspired with employees of A.B. Watley, a day trading firm, to commit securities fraud by providing confidential information belonging to their employers to Watley. After a first trial in 2007 in the United States District Court for the Eastern District of New York (Glasser, J.), the jury acquitted the defendants on thirty-eight of thirty-nine counts. ¹ The jury hung, and the court subsequently declared a mistrial, on the remaining count, which charged the defendants with conspiring to commit securities fraud. See18 U.S.C. §§ 1348, 1349. In 2009 the government retried the conspiracy count before Judge John Gleeson, with honest services fraud and property fraud as the charged objects of the conspiracy. After a jury deadlock and a supplemental charge, the jury convicted all defendants under each of those theories. The Supreme Court subsequently decided Skilling v. United States, ––– U.S. ––––, 130 S.Ct. 2896, 177 L.Ed.2d 619 (2010), which limited the scope of the honest services fraud statute to cover only fraudulent schemes effectuated through bribes or kickbacks. Id. at 2928, 2933.

Shortly after sentencing, the SEC initiated administrative proceedings against defendant Kenneth Mahaffy. In connection with those proceedings, the SEC disclosed in December 2009 and January 2010 30 transcripts of investigative depositions taken as early as December 2004. Once they had access to those transcripts, the defendants moved for a new trial, contending that 12 of the transcripts included material required to be disclosed pursuant to Brady v. Maryland, 373 U.S. 83, 83 S.Ct. 1194, 10 L.Ed.2d 215 (1963). Specifically, they contended that information in the transcripts contradicted or undermined the testimony of key government witnesses on a central question at trial, namely, whether the allegedly misappropriated information was confidential under Carpenter v. United States, 484 U.S. 19, 108 S.Ct. 316, 98 L.Ed.2d 275 (1987). The district court criticized the government's conduct but ultimately concluded that the jury would not have reached a different result had the transcripts been disclosed.

We disagree. We conclude that the government's failure to disclose portions of the transcripts violated Brady and that these Brady violations undermined confidence in the jury's verdict. Therefore, we vacate the misappropriation of confidential information component of the conspiracy convictions. Finally, because the district court did not adequately instruct the jury on the scope of honest services fraud, we vacate the honest services fraud component as well.

BACKGROUND

The operative indictment charged that Mahaffy, Timothy O'Connell, and David Ghysels, who were employed by various brokerage firms as stockbrokers to private clients ² (the “Broker Defendants”), committed securities fraud by providing confidential information belonging to their employers to the day trading firm A.B. Watley. During the relevant time period, O'Connell worked at Merrill Lynch, Mahaffy was O'Connell's partner there until he left to join Smith Barney/Citigroup, and Ghysels worked at Lehman Brothers. Robert Malin ran Watley's day-to-day operations and, along with other family members, owned the firm. Linus Nwaigwe was Watley's compliance officer, and Keevin Leonard recruited and supervised Watley's day traders.^3,4

Merrill, Smith Barney, and Lehman each had an internal communications system with devices colloquially known as “squawk boxes” or “hoots” located throughout the firm. During the day, firm personnel transmitted internal communications (“squawks”) concerning a variety of securities trading matters. A small portion of that information related to pending client orders for specific blocks of particular securities, though clients' identities were never disclosed over the squawk boxes. According to brokerage firm representatives who testified at trial, squawks concerning block orders were transmitted in order to allow each firm's traders to find a client to take the other side of the squawked trade. If the firms could thereby keep both sides of trades in house, they could earn commissions on both sides while avoiding exposing the trades to external market fluctuations.

The indictment alleged a scheme in which the Broker Defendants placed phone receivers up to their respective squawk boxes and transmitted squawks over open phone lines directly to Watley, where traders then placed trades in the squawked securities before the brokerage firms executed the squawked customer orders. The government alleged that by engaging in that behavior, sometimes referred to as “frontrunning,” Watley hoped to buy or sell shares at a more attractive price than would have been available once the squawked customer orders were executed. The government contended that, in exchange for providing access to the direct feeds of squawks, Watley placed “wash trades” with the Broker Defendants in which Watley traders simultaneously bought and sold the same security at the same price through different accounts. These trades presented no real economic risk or upside and served only to generate commissions for the Broker Defendants. Those commissions were allegedly bribes meant to compensate the Broker Defendants for the squawk feeds they transmitted, as was a $500 cash payment that a Watley trader made to Mahaffy.

The government's theory was that the Broker Defendants defrauded their employers of confidential information by directly transmitting squawks to Watley. The viability of that theory depended on, among other things, the government proving beyond a reasonable doubt that the squawked information was confidential.

There is no real dispute that each of the Broker Defendants used open phone lines to transmit squawk box feeds directly to Watley, or that Watley sought to take advantage of that information by frontrunning. In early 2002, Malin hired day trader Jay Amore,⁵ first as a consultant to Watley and later as the firm's Chief Executive Officer. Amore brought former co-workers with him, including Leonard, along with access to Mahaffy's Merrill squawk box and Ghysels' box at Lehman. According to Amore, he had used that access to frontrun at his prior day trading firm and he planned to do the same at Watley.

After Amore demonstrated his frontrunning strategy to Malin and others, Leonard hired more than a hundred day traders to implement the strategy. The brokerage firms' squawks were transmitted over speakers throughout Watley, apparently loudly enough to be heard on Watley's trading floor and in individual offices, including Malin's and Nwaigwe's. Watley's traders listened to the squawks and bought or sold in front of squawked trades whenever possible. They never took the other side of one of the brokerage firms' squawked trades.

The first trial had proceeded on one count of conspiracy to commit securities fraud, twenty substantive securities fraud counts, one count of conspiracy to violate the Travel Act, eleven substantive Travel Act counts, and several counts charging substantive witness tampering, conspiracy to commit witness tampering, and making false statements. After two months of trial including a week of jury deliberations, the jury hung on Count One, the securities fraud conspiracy count. Aside from convicting O'Connell of one count each of witness tampering and making a false statement,⁶ the jury acquitted the defendants on all other charges. The district court declared a mistrial on Count One.

After the government indicated its intention to retry the defendants on Count One, the defendants moved to bar the retrial on double jeopardy and collateral estoppel grounds, contending that their acquittal on Count Twenty–Two, the Travel Act conspiracy count, precluded retrial. The district court denied the motion. United States v. Mahaffy, 499 F.Supp.2d 291 (E.D.N.Y.2007). After an interlocutory appeal we affirmed, holding that because it was not possible to determine the reasons underlying the Count Twenty–Two acquittal, it was not possible to determine whether the verdict...