US v. Chestman

• Decision Date: 13 January 1989
• Docket Number: No. 88 Cr. 455 (JMW).,88 Cr. 455 (JMW).
• Citation: 704 F. Supp. 451
• Parties: UNITED STATES of America v. Robert CHESTMAN, Defendant.
• Court: U.S. District Court — Southern District of New York

704 F. Supp. 451

UNITED STATES of America v. Robert CHESTMAN, Defendant.

No. 88 Cr. 455 (JMW).

United States District Court, S.D. New York.

January 13, 1989.

Otto Obermaier, Barry A. Bohrer, Alan J. Brudner, David Meister, Obermaier, Morvillo & Abramowitz, New York City, for defendant Robert Chestman.

Robert Plotz, Asst. U.S. Atty., New York City, Daniel Goelzer, Jacob H. Stillman, Richard A. Kirby, Andrew Bennet, S.E.C., Washington, D.C., for U.S.

OPINION AND ORDER

WALKER, District Judge:

Before the Court are defendant's pre-trial motions seeking dismissal of certain counts of the indictment; severance of another count; a declaration that the indictment is multiplicitous; and suppression of tape recorded conversations. For the reasons set forth below, the Court denies defendant's motions in their entirety.

BACKGROUND

The indictment in this case contains thirty-one counts. In brief, defendant Robert Chestman is charged with ten instances of trading in the stock of Waldbaum, Inc., on November 26, 1986, on the basis of material, nonpublic information — allegedly supplied to him by Keith Loeb, a member of the Waldbaum family — shortly before the public announcement that Waldbaum, Inc. would be acquired by the Great Atlantic & Pacific Tea Company. More specifically, the indictment charges Chestman with ten counts of securities fraud in violation of 15 U.S.C. §§ 78j(b), 78ff, and Rule 10b-5 promulgated thereunder; ten counts of securities fraud in violation of 15 U.S.C. § 78n(e) and Rule 14e-3 promulgated thereunder; and ten counts of mail fraud in violation of 18 U.S.C. § 1341. Each of the ten transactions is thus alleged to have occurred in violation of three provisions of law. In addition, Chestman is charged with one count of perjury in violation of 18 U.S.C. § 1621 arising out of sworn testimony he gave before the Securities and Exchange Commission ("SEC") relating to the Waldbaum transaction.

Pursuant to Rule 12(b) Fed.R.Crim.P., Chestman now moves this Court for an order (1) dismissing the Rule 10b-5 counts because the misappropriation theory on which these charges are based is invalid as a matter of law; (2) dismissing the mail fraud counts because there is allegedly no nexus between the mailings and the alleged scheme to defraud; (3) severing the perjury count on the basis that its joinder with the remaining counts is inherently prejudicial and deprives defendant of a fair trial; (4) suppressing tape recorded conversations of defendant because they were allegedly obtained in violation of ethical obligations; (5) dismissing the Rule 14e-3 counts because the rule is an invalid exercise, as applied in a criminal prosecution, of the SEC's rulemaking authority; and (6) declaring the first thirty counts of the indictment to be multiplicitous and directing the government to elect.

The first three motions are more easily dismissed than the latter motions, particularly because defendant's contention that Rule 14e-3 is invalid raises issues of first impression. Defendant concedes that, under the law of this Circuit, the Rule 10b-5 and mail fraud counts are properly charged. Defendant has made these first two motions to preserve his position on issues he believes are still subject to Supreme Court review. See Def. Mem. at 3, 12. Accordingly, Chestman's motions to dismiss the 10b-5 and mail counts are denied. The Court further denies defendant's motion for a severance of the perjury count against him. There is no undue prejudice to Chestman from the joinder of the perjury count since the evidence of the alleged perjury would be admissible at the trial of the substantive offenses as a false exculpatory statement. The law in this Circuit is settled, and it "clearly supports the joinder of underlying substantive crimes with perjury counts where, as here, the false declarations concern the substantive offenses." United States v. Potamitis, 739 F.2d 784, 791 (2d Cir.), cert. denied, 469 U.S. 934, 105 S.Ct. 332, 83 L.Ed.2d 269 (1984).

The Court will now address in turn the defendant's three remaining motions.

DISCUSSION

1. Suppression of the two taped conversations:

Chestman has moved to suppress two tapes of conversations between himself and Keith Loeb, who was cooperating with the government, that were recorded after Chestman had appeared with an attorney at the SEC. Chestman argues that the recordings violate Disciplinary Rule 7-104(A)(1) of the American Bar Association's Code of Professional Responsibility ("DR 7-104(A)(1)").

On or about April 20, 1987, and again later that month, Loeb secretly recorded two conversations he had with defendant. Defendant argues that Loeb was acting on behalf of the United States Attorney's office at a time when the government allegedly knew that Chestman was represented by counsel in connection with this matter, and that therefore the government's actions violate DR 7-104(A)(1). That rule states:

A. During the course of his representation of a client a lawyer shall not:

1. Communicate or cause another to communicate on the subject of the representation with a party he knows to be represented by a lawyer in that matter unless he has the prior consent of the lawyer representing such other party or is authorized by law to do so.

On the basis of that rule, defendant moves to suppress the two tape recorded conversations.¹

The Second Circuit Court of Appeals squarely addressed this issue in United States v. Hammad, 846 F.2d 854 (2d Cir. 1988) ("Hammad I"), and again when it revised that opinion, on its own initiatve, in United States v. Hammad, 858 F.2d 834 (2d Cir.1988) ("Hammad II"). The Second Circuit framed the question in these terms:

To what extent does DR 7-104(A)(1) restrict the use of informants by government prosecutors prior to indictment, but after a suspect has retained counsel in connection with the subject matter of a criminal investigation?

Hammad II, at 839. In Hammad II, the Court of Appeals sought to balance the twin goals of respecting the protection afforded a defendant by DR 7-104(A)(1), which goes beyond the protection provided by the Sixth Amendment, id. at 838, and of "imposing adequate safeguards without crippling law enforcement." Id. at 839. Recognizing that "prosecutors have a responsibility to perform investigative as well as courtroom-related duties in criminal matters," id. at 839, the court concluded that

The use of informants by government prosecutors in a pre-indictment, non-custodial situation, absent the type of egregious misconduct that occurred in this case where the prosecutor used a counterfeit grand jury subpoena, bearing the purported seal of the district court and the false signature of the Clerk, will generally fall within the "authorized by law" exception to DR 7-104(A)(1) and therefore will not be subject to sanctions such as suppression.

Id. at 840.

For the purposes of defendant's motion, the Court assumes not only that defendant was represented by counsel in connection with this criminal proceeding at the time the two recordings were made, but also that the government was aware of that representation.² The Court concludes that the government's actions in this case fall within the "authorized by law" exception to DR 7-104(A)(1). As the Second Circuit explained, a prosecutor is "`authorized by law' to employ legitimate investigative techniques in conducting or supervising criminal investigations, and the use of informants to gather evidence against a suspect will frequently fall within the ambit of such authorization." Hammad II, supra at 839. In this case, the recordings were pre-indictment, non-custodial, and occurred in the absence of any "egregious misconduct" — such as the prosecutor's use in Hammad of a sham Grand Jury subpoena — that might support their suppression.

A wholly separate ground supports the Court's decision as well. In Hammad II, even in the face of the prosecutor's "egregious misconduct," the Court of Appeals reversed the district court's decision to suppress the evidence at issue because of the unsettled nature of the law:

The government should not have its case prejudiced by suppression of its evidence when the law was previously unsettled in this area. Therefore, in light of the prior uncertainty regarding the reach of DR 7-104(A)(1), an exclusionary remedy is inappropriate in this case.

Id. at 842. The conversations at issue in this case occurred in April 1987; the district judge in Hammad issued his suppression order on September 21, 1987, see 678 F.Supp. 397 (E.D.N.Y.1987); Hammad I was decided on May 12, 1988; Hammad II was issued on September 23, 1988. If the Second Circuit considered the law unsettled enough during September 1987 to justify its reversal of the district court's decision in Hammad, then the law was no less unsettled in April 1987 when the recordings at issue here were made under more benign circumstances. This uncertainty as to the law provides an independent basis for denying defendant's motion to suppress.

2. The Rule 14e-3 counts:

Chestman has moved to dismiss Counts 11 through 20 under Rule 14e-3 on the ground that the rule as promulgated represents an invalid exercise of the SEC's rulemaking authority pursuant to § 14(e). It appears that this issue, raised in the context of a criminal proceeding, is one of first impression.

At the outset, it is important to note the appropriate standard of review. Congress has delegated substantive rulemaking authority to the SEC. As the Supreme Court has explained, in such a situation a department or agency head

adopts regulations with legislative effect. A reviewing court is not free to set aside those regulations simply because it would have interpreted the statute in a different manner ... The regulation or rule is therefore entitled to more than mere deference or weight. It can be set aside only if the Secretary exceeded his statutory authority or if the regulation is "arbitrary, capricious, an abuse of discretion, or otherwise

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