837 F.Supp. 162 (S.D.W.Va. 1993), Crim. 293-00151, United States v. ReBrook
|Docket Nº:||Crim. 293-00151|
|Citation:||837 F.Supp. 162|
|Party Name:||United States v. ReBrook|
|Case Date:||October 26, 1993|
|Court:||United States District Courts, 4th Circuit, Southern District of West Virginia|
[Copyrighted Material Omitted]
Larry R. Ellis and Hunter P. Smith, Jr., Asst. U.S. Attys., Charleston, WV, for plaintiff.
A.T. Ciccarello, Charleston, WV, for defendant.
MEMORANDUM OPINION AND ORDER
HADEN, Chief Judge.
Pending are Defendant's two motions to dismiss the indictment, filed pursuant to the provisions of Rule 12(b)(2), Fed.R.Crim.P., on September 10, 1993 and September 22, 1993. Defendant is charged in a two-count indictment filed June 17, 1993, with wire fraud and insider trading arising from his alleged misuse of confidential information he purportedly gained by virtue of his position as lawyer for the West Virginia Lottery to purchase certain publicly traded stocks and advise others to do so. Defendant contends the indictment is legally insufficient. The Court has carefully considered Defendant's positions and, for reasons set forth below, determines they lack merit.
In 1984, West Virginians approved an amendment to the state constitution authorizing the Legislature to establish a state-run lottery. W.Va. Const. art. VI, § 36 (1984). The Legislature in 1985 created the Lottery 1, mandating its profits be employed to
benefit education, senior citizens and tourism. W.Va.Code § 29-22-18(f). The Legislature also created a seven-member Lottery Commission ("the commission") with authority to establish the type and number of games to be implemented by the Lottery and promulgate game rules. W.Va.Code § 29-22-5. The Legislature as well established the position of Lottery director ("the director") to manage and administer the Lottery and gave the director authority to hire, with commission approval, professional personnel necessary to the Lottery's operation. W.Va.Code §§ 29-22-6 and -8. The commissioners and director are gubernatorial appointees. W.Va.Code §§ 29-22-4 and -6.
Although the Legislature in 1985 appears to have allowed the Lottery to employ games using electronic terminals known in the gaming trade as video lottery machines, 2 it prohibited Lottery games from using themes of bingo, roulette, dice or similar games associated with casino gambling, W.Va.Code § 29-22-9(b)(1) (1985) (repealed in 1990), and required at first the Lottery initiate operation of "the preprinted instant winner type lottery." W.Va.Code § 29-22-9(a). The Legislature repealed the casino-theme prohibition in 1990. Shortly afterward, the commission authorized a video lottery "test run" at Mountaineer Park, a horse racing track in Chester, West Virginia. Expansion of video lottery in West Virginia beyond Mountaineer Park has not occurred.
In brief summary, the allegations of the indictment are as follows. 3 Defendant ReBrook accepted employment as attorney for the West Virginia Lottery in April, 1990. Beginning in February, 1992, several gaming equipment companies sought to obtain a portion or all the video lottery equipment sales that would result from an anticipated plan to expand video lottery statewide. Among these companies was Video Lottery Consultants, Inc. ("VLC"), a publicly traded corporation headquartered in Bozeman, Montana. Defendant, by virtue of his fiduciary relationship with the Lottery as its lawyer, knew of confidential information regarding Lottery business including the bidding for and awarding of contracts with the Lottery.
Among the confidential information to which Defendant was privy was a plan of the Governor of West Virginia and the Lottery director formulated as early as February, 1992, to implement a statewide video lottery immediately following the 1992 general election. Defendant also knew this expansion plan was revised in September 1992, to provide that the State would grant an exclusive contract to a single gaming company, granting the successful bidder a monopoly on the sale of video lottery machines in West Virginia. Such a "sole source contract" would be worth at least $25 million to the entity awarded the monopoly.
Aware of the confidential plan to expand video lottery after the election and the fact that VLC was a likely financial beneficiary of the proposal, Defendant devised a scheme to enrich himself and others by misappropriating the confidential information. Executing that scheme, Defendant purchased 100 shares of VLC stock on September 24, 1992. Then he shared the confidential information with three acquaintances, one of whom bought 2000 shares of stock in VLC on September 25, 1992, and another of whom purchased 4000 shares during early January, 1993. During the period after Defendant purchased VLC stock, he continued to function as Lottery counsel and further the plan to expand video lottery throughout West Virginia.
The Government contends Defendant's activities in connection with the alleged misappropriation of confidential information gained through his position as Lottery attorney constituted
wire fraud in violation of 18 U.S.C. §§ 1343 4 and 1346, 5 and insider trading in violation of 15 U.S.C. §§ 78ff 6 and 78j(b) 7 and 17 C.F.R. § 240.10b-5. 8 Defendant raises several challenges to the legality of the indictment and the sufficiency of its allegations, and insists to require him to defend on these charges at trial would be "contrary to the interests of justice."
At the outset, the Court notes an accused enters upon an arduous course when he moves to dismiss an indictment. Rule 7(c)(1), Fed.R.Crim.P., requires only that an indictment "be a plain, concise and definite written statement of the essential facts constituting the offense charged." When a motion to dismiss attacks the sufficiency of an indictment, the Court must view the evidence in the light most favorable to the Government, United States v. Mills, 995 F.2d 480, 489 (4th Cir. 1993), and must accept as true the allegations of the indictment. United States v. Sampson, 371 U.S. 75, 78-79, 83 S.Ct. 173, 174-75, 9 L.Ed.2d 136 (1962); United States v. Stillwell, 799 F.Supp. 615, 617 (S.D.W.Va.1992).
A motion to dismiss is not a device for the summary trial of evidence and it is addressed only to the facial validity of the indictment. United States v. Eichman, 756 F.Supp. 143, 146 (S.D.N.Y.1991). The Court's duty in considering Defendant's motion is to test whether the indictment sufficiently charges the offenses it sets forth against Defendant. Sampson, 371 U.S. at 78-79, 83 S.Ct. at 174-75. If the indictment sets forth the elements of the crimes of which it accuses the Defendant in sufficient detail to notify him of the charges he faces, and does not present double jeopardy problems, it is immune to attack by a motion to dismiss. 9 Hamling v. United States, 418 U.S. 87, 117, 94 S.Ct. 2887, 2875, 41 L.Ed.2d 590 (1973); Eichman, 756 F.Supp. at 146.
Insider trading, in its "classical" form, involves corporate employees who violate the securities laws by either trading in their company's stock based on material nonpublic information, or by tipping others about the confidential corporate information. The Government does not allege Defendant was a VLC insider, or that he occupied a relationship of trust and confidence with the company. Rather, the Government's theory of prosecution is grounded in Defendant's status as an insider at the Lottery. As Lottery
attorney, Defendant was privy to confidential information about the Lottery and its dealings, both planned and practiced, with particular corporations, including VLC. The Government contends Defendant violated a fiduciary relationship with the Lottery by using this confidential information for his personal gain.
Courts have dubbed this concept of insider trading the misappropriation theory. The theory apparently originated in the concurring opinions and dissent of Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980) (Stevens, J., concurring at 238, 100 S.Ct. at 1119; Brennan, J., concurring at 238-39, 100 S.Ct. at 1120; Burger, C.J., dissenting at 243-45, 100 S.Ct. at 1122-23). See Patrick Coughlin, Insider Trading--The Misappropriation Theory, C859 A.L.I.-A.B.A. 583 (1993). The Second Circuit summarized the theory in United States v. Chestman, 947 F.2d 551, 566 (2d Cir. 1991) (en banc): "Under this theory, a person violates Rule 10b-5 when he misappropriates material nonpublic information in breach of a fiduciary duty or similar relationship of trust and confidence and uses that information in a securities transaction."
Unlike the classical theory of insider trading, the misappropriation theory does not require that the buyer or seller of securities be defrauded; rather, "the predicate act of fraud may be perpetrated on the source of the nonpublic information, even though the source may be unaffiliated with the buyer or seller of securities." Chestman, 947 F.2d at 566. The owner of the misappropriated information need not be the corporation whose shares are traded. United States v. Libera, 989 F.2d 596, 599 (2d Cir. 1993).
To date, the Supreme Court has not validated the misappropriation theory. 10 Nevertheless, four circuits and several district courts have adopted the theory. See, e.g., Libera, 989 F.2d at 599; SEC v. Cherif, 933 F.2d 403, 410 (7th Cir. 1991); SEC v. Clark, 915 F.2d 439, 448 (9th Cir. 1990); Rothberg v. Rosenbloom, 771 F.2d 818, 822 (3d Cir. 1985), cert. denied, 481 U.S. 1017, 107 S.Ct. 1895, 95 L.Ed.2d 501 (1987); SEC v. Willis, 777 F.Supp. 1165, 1169 (S.D.N.Y.1991); SEC v. Peters, 735 F.Supp. 1505, 1519 (D.Kan.1990); United States v. Elliott, 711 F.Supp. 425, 430 (N.D.Ill.1989); SEC v. Clark, 699 F.Supp. 839, 843 (W.D.Wash.1988). Moreover, this Court is unaware of any reported decision either criminal or civil rejecting the theory.
The indictment also charges Defendant with wire fraud. To establish the offense of...
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