791 F.2d 1024 (2nd Cir. 1986), 546, United States v. Carpenter

Docket Nº:546, 524 and 525, Dockets 85-1312, 85-1313 and 85-1314.
Citation:791 F.2d 1024
Party Name:UNITED STATES of America, Appellee, v. David CARPENTER, Kenneth P. Felis, and R. Foster Winans, Defendants-Appellants.
Case Date:May 27, 1986
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 1024

791 F.2d 1024 (2nd Cir. 1986)

UNITED STATES of America, Appellee,

v.

David CARPENTER, Kenneth P. Felis, and R. Foster Winans,

Defendants-Appellants.

Nos. 546, 524 and 525, Dockets 85-1312, 85-1313 and 85-1314.

United States Court of Appeals, Second Circuit

May 27, 1986

Argued Nov. 26, 1985.

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Jed S. Rakoff, New York City (Howard W. Goldstein, James Niss, Mudge Rose Guthrie Alexander & Ferdon, New York City, of counsel), for appellant David Carpenter.

E. Michael Bradley, New York City (I. Scott Bieler, Brown, Wood, Ivey, Mitchell & Petty, New York City, of counsel), for appellant Kenneth P. Felis.

Don D. Buchwald, New York City (Buchwald & Kaufman, New York City, of counsel), for appellant R. Foster Winans.

Peter J. Romatowski, Asst. U.S. Atty., New York City (William M. Tendy, Acting U.S. Atty., for Southern Dist. of N.Y., Charles M. Carberry, Stuart E. Abrams, Asst. U.S. Attys., New York City, of counsel), for appellee U.S. of America.

Daniel L. Goelzer, Jacob H. Stillman, Esq., Rosalind C. Cohen, Richard A. Levine (Paul Gonson, of counsel), on the brief for Securities and Exchange Com'n, Washington, D.C., as amicus curiae.

Benjamin W. Heineman, Jr., Carter G. Phillips, and Mark D. Hopson (Sidley & Austin, Washington, D.C., of counsel), on the brief for Reporters' Committee for Freedom of the Press, the Nat. Ass'n of Broadcasters, the N.Y. Financial Writers Ass'n, the Media Institute, the Newspaper Guild, the Radio-Television News Directors Ass'n, American Society of Magazine Editors, Nat. Newspaper Ass'n, and Associated Press Managing Editors, as amici curiae in support of defendants-appellants.

Before MANSFIELD, PIERCE and MINER, Circuit Judges.

PIERCE, Circuit Judge:

This is an appeal from judgments of conviction in the United States District Court for the Southern District of New York, Charles E. Stewart, Jr., Judge, entered after a twenty-day non-jury trial, following which Winans and Felis were found guilty of securities fraud by misappropriating material, nonpublic information from the Wall Street Journal ("Journal") in connection with the purchase and sale of securities, and of mail and wire fraud. Winans and Felis were also convicted of conspiracy to commit such securities and mail and wire frauds and to obstruct justice. Carpenter was convicted of aiding and abetting in the commission of securities fraud and mail and wire fraud. United States v. Winans, et al., 612 F.Supp. 827 (S.D.N.Y.1985).

Appellants contend, inter alia, that they may not be held criminally liable for violating, or conspiring to violate or aiding and abetting in violating, section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Secs. 78j(b), 78ff, and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.10b-5, because they were not corporate insiders or "quasi-insiders" and did not misappropriate

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material nonpublic information from such insiders or "quasi-insiders."

We hold that section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 proscribe an employee's unlawful misappropriation from his employer, a financial newspaper, of material nonpublic information in the form of the newspaper's forthcoming publication schedule, in connection with a scheme to purchase and sell securities to be analyzed or otherwise discussed in future columns in that newspaper, and that the use of the newspaper's interstate wire and mail production and distribution channels for purposes of effectuating said scheme may serve as a predicate for criminal liability for mail and wire fraud. We therefore affirm the convictions based on these substantive counts. We also affirm the district court's conviction of defendants Winans and Felis of conspiracy and of defendant Carpenter of aiding and abetting. However, we reverse Winans' conviction of conspiracy to the extent that it is based upon certain trades made between Felis and a third party, named Stephen Spratt, since these transactions were not within the scope of the unlawful agreement to trade on the misappropriated information.

Affirmed in part and reversed in part.

BACKGROUND

Defendants Kenneth P. Felis ("Felis"), and R. Foster Winans ("Winans") appeal from judgments of conviction for federal securities fraud in violation of section 10(b) of the 1934 Act and Rule 10b-5; mail fraud in violation of 18 U.S.C. Sec. 1341; and wire fraud in violation of 18 U.S.C. Sec. 1343, all in connection with certain securities trades conducted on the basis of material, nonpublic information regarding the subject securities contained in certain articles to be published in the Wall Street Journal. Winans and Felis also appeal from judgments of conviction for conspiracy to commit securities fraud and mail and wire fraud and to obstruct justice, in violation of 18 U.S.C. Sec. 371, and David Carpenter ("Carpenter") appeals from a judgment of conviction for aiding and abetting.

Since March 1981, Winans was a Wall Street Journal reporter and one of the writers of the "Heard on the Street" column (the "Heard" column), a widely read and influential column in the Journal. Carpenter worked as a news clerk at the Journal from December 1981 through May 1983. Felis, who was a stockbroker at the brokerage house of Kidder Peabody, had been brought to that firm by another Kidder Peabody stockbroker, Peter Brant ("Brant"), Felis' longtime friend who later became the government's key witness in this case.

Since February 2, 1981, it was the practice of Dow Jones, the parent company of the Wall Street Journal, to distribute to all new employees "The Insider Story," a forty-page manual with seven pages devoted to the company's conflicts of interest policy. The district judge found that both Winans and Carpenter knew that company policy deemed all news material gleaned by an employee during the course of employment to be company property and that company policy required employees to treat nonpublic information learned on the job as confidential. 1

Notwithstanding company policy, Winans participated in a scheme with Brant and later Felis and Carpenter in which Winans agreed to provide the two stockbrokers (Brant and Felis) with securities-related information that was scheduled to appear in "Heard" columns; based on this advance information the two brokers would buy or sell the subject securities. Carpenter, who was involved in a private, personal, non-business relationship with Winans, served primarily as a messenger between the conspirators. Trading accounts were established in the names of Felis, Carpenter, Winans, Brant, David Clark, Western

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Hemisphere, and Stephen Spratt. 2 During 1983 and early 1984, defendants made prepublication trades on the basis of their advance knowledge of approximately twenty-seven Wall Street Journal "Heard" columns, although not all of those columns were written by Winans. Generally, Winans would inform Brant of the subject of an article the day before its scheduled publication. Winans usually made his calls to Brant from a pay phone, and often used a fictitious name. The net profits from the scheme approached $690,000. The district court found that this scheme did not affect the subject matter or quality of Winans's columns, since "[m]aintaining the journalistic purity of the column was actually consistent with the goals of the conspirators," given that the predictability of the columns' market impact depended in large part on the perceived quality and integrity of the columns. 612 F.Supp. at 835 n. 4.

In November 1983, when Kidder Peabody's Compliance Department noticed a correlation between "Heard" articles and trading in the Felis and Clark accounts, Felis was questioned by a Kidder Peabody supervisor. Felis denied any impropriety. However, he and Brant moved certain funds among accounts to conceal the continued operation of the scheme. Indeed, Felis had previously advised his friend, Stephen Spratt, to whom he had provided advance information on four occasions, to change the names on certain accounts so as to avoid being discovered. When the SEC began inquiring into the scheme, Clark and Brant both made misstatements to agency officials, and Carpenter produced false invoices that apparently had been designed to conceal the truth from the SEC. Later, on March 29, 1984, Winans and Carpenter voluntarily testified fully at the SEC about this and about the scheme.

DISCUSSION

The fairness and integrity of conduct within the securities markets is a concern of utmost significance for the proper functioning of our securities laws. In broadly proscribing "deceptive" practices in connection with the purchase or sale of securities pursuant to section 10(b) of the Securities Exchange Act of 1934, Congress left to the courts the difficult task of interpreting legislatively defined but broadly stated principles insofar as they apply in particular cases. This case requires us to decide principally whether a newspaper reporter, a former newspaper clerk, and a stockbroker, acting in concert, criminally violated or conspired to violate or aided and abetted in the violation of federal securities laws by misappropriating material, nonpublic information in the form of the timing and content of the Wall Street Journal's confidential schedule of columns of acknowledged influence in the securities market, in contravention of the established policy of the newspaper, for their own profit in connection with the purchase and sale of securities.

I.

Although the facts render the securities fraud issue herein one of first impression, we do not write on a clean slate in assessing whether this case falls within the purview of the "misappropriation" theory of section 10(b) and Rule 10b-5 thereunder. 3

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