U.S. v. Libera

• Decision Date: 22 March 1993
• Docket Number: Nos. 1641,D,1642,s. 1641
• Citation: 989 F.2d 596
• Parties: , Fed. Sec. L. Rep. P 97,383 UNITED STATES of America, Appellee, v. Benjamin B. LIBERA and Francis R. Sablone, Jr., Defendants-Appellants. ockets 91-1741, 91-1750.
• Court: U.S. Court of Appeals — Second Circuit

Page 596

989 F.2d 596

61 USLW 2628, Fed. Sec. L. Rep. P 97,383

UNITED STATES of America, Appellee, v. Benjamin B. LIBERA and Francis R. Sablone, Jr., Defendants-Appellants.

Nos. 1641, 1642, Dockets 91-1741, 91-1750.

United States Court of Appeals Second Circuit.

Argued June 9, 1992.

Decided March 22, 1993.

John C. McBride, Boston, MS (Francis T. O'Brien, Jr., McBride, Wheeler & Widegren, Boston, MS, of counsel), for defendant-appellant Benjamin B. Libera.

James A. Wade, Hartford, CT (Linda L. Morkan, Robinson & Cole, of counsel), for defendant-appellant Francis R. Sablone, Jr.

Joseph C. Hutchison, Asst. U.S. Atty., New Haven, CT (Albert S. Dabrowski, U.S. Atty. for the District of CT, of counsel), for appellee.

Before CARDAMONE, WINTER and MAHONEY, Circuit Judges.

WINTER, Circuit Judge:

Benjamin B. Libera and Francis R. Sablone, Jr. appeal from their convictions by a jury before Judge Dorsey. Both were found guilty of conspiracy and of securities fraud for insider trading. Sablone's appeal raises the question whether, in an insider trading prosecution, the tipper must have known that his breach of a fiduciary obligation would lead to the tippee's trading on the misappropriated information. We answer in the negative. Both appellants challenge the sufficiency of the evidence regarding the breach of a fiduciary duty by the tipper and knowledge of that breach by the tippee. The evidence was sufficient. We therefore affirm.

BACKGROUND

Libera and Sablone were indicted by a grand jury on one count each of conspiracy in violation of 18 U.S.C. § 371 (1988). Libera was also charged with fifty-six counts of securities fraud in violation of 15 U.S.C. § 78j(b) (1988), and fifty counts of mail fraud in violation of 18 U.S.C. § 1341 (1988). Additionally, Sablone was charged with fifty-nine counts of securities fraud and fifty counts of mail fraud. Both appellants were found guilty of one count of conspiracy in violation of 18 U.S.C. § 371, and of fifty-six and fifty-nine counts, respectively, of securities fraud in violation of 15 U.S.C. § 78j(b).

Viewed in the light most favorable to the government, the evidence at trial demonstrated the following. R.R. Donnelley & Sons Co. ("Donnelley") operated a printing plant in Old Saybrook, Connecticut, which printed Business Week, a weekly publication owned by McGraw-Hill, Inc. The printing of Business Week began late Wednesday evenings and continued into Thursday.

Both McGraw-Hill and Donnelley follow a policy of keeping the contents of the weekly issue of Business Week confidential until 5:00 p.m. on Thursday. This policy is explicitly based on the fact that the contents of the magazine may affect the price of particular stocks and, prior to release, are regarded as "inside" information by the Securities and Exchange Commission. ¹ This policy had been in effect since at least 1981. In a letter dated April 17, 1987, the Distribution Manager for McGraw-Hill, Thomas Tully, communicated the confidentiality policy directly to Donnelley's Director of the Old Saybrook plant. Further, in a letter dated April 27, 1987, Business Week Editor-in-Chief Steven Shepard communicated it directly to John B. Schwer, President of Donnelley. The letter stated:

In view of recent widespread concern about insider trading, I thought it would be useful to remind you of some long-standing policies and procedures that Business Week expects all of its printers and other suppliers to follow.

1. The official release date of Business Week is 5 p.m. (New York Time) every Thursday. No public distribution of Business Week is permitted prior to that time, either by Business Week employees or any of its printers or other suppliers. Accordingly, please ensure that every person in your organization is instructed that they are not permitted to give anyone a pre-publication copy of Business Week before 5:00 p.m. (New York Time) on Thursday. Moreover, we would appreciate it if you would instruct all employees of your organization that they are not permitted to advise anyone about any information included in Business Week prior to 5:00 p.m. (New York Time) on Thursday.

Donnelley in turn informed its employees of the confidentiality policy. James Roddy, Human Resources Manager for the Old Saybrook plant, testified that new employees were advised at orientation of the need to maintain the confidentiality of customer materials. Employees also received a Donnelley handbook advising them of the confidentiality policy. The handbook forbade even the discussion of the contents of magazines, much less their removal. Employee manuals placed at several locations throughout the plant contained similar warnings. In addition, a poster was placed in the employee entrance hallway stating that all customer materials were to be treated with absolute confidence. Donnelley also posted the April 17, 1987 letter from Tully. Guards were posted at the employee entrance and exit areas.

Accordingly, it was common knowledge among Donnelley employees that company rules forbade the removal of magazines from the plant. Indeed, every Donnelley employee who covertly provided early copies of Business Week to appellants and who testified stated that they knew of the confidentiality policy.

The government's case was that appellants traded in stock based on information in copies of Business Week delivered in violation of the McGraw-Hill/Donnelley confidentiality policy. That case was heavily dependent on the testimony of William Dillon, who had entered into a plea agreement involving two counts of wire fraud. According to his testimony, Dillon's wife, Diana, brought home copies of Business Week on Friday mornings in early 1986 after her four-to-midnight shift at Donnelley. She told her husband that Donnelley forbade the employees from taking magazines out of the plant. Dillon began tracking the stocks of companies analyzed in Gene Marcial's "Inside Wall Street," a regular Business Week column. The column recommended investing in various companies based on Marcial's consultation with analysts and other sources. Dillon observed that the trading in favorably mentioned securities often began increasing in volume and price on the Wednesday before publication and continued through the next Monday.

Dillon's wife did not bring the copies of Business Week home until early Friday morning. This was well after the Business Week Thursday 5:00 p.m. release time but was perhaps nevertheless in violation of the Donnelley rule against removal of magazines. In any event, Dillon, recognizing the value of receiving a copy of Business Week even earlier, sought out another Donnelley employee, William Cobb. Cobb agreed to bring a copy of the magazine, or simply a copy of the "Inside Wall Street" column, to the Monkey Farm Cafe at 9:00 a.m. on Thursday mornings after his shift. Dillon did not pay Cobb. Soon thereafter, Cobb changed shifts and an unidentified employee of Donnelley delivered the magazine to Dillon on one or two occasions. Dillon then approached William Sady, another Donnelley employee, who agreed to bring the magazine out at the end of his midnight-to-eight Thursday morning shift. Sady delivered the magazine to Dillon over an approximately two-year period at an initial price of $20 per copy. Dillon, of course, was using the "Inside Wall Street" information to trade on securities that were the subject of the column.

In the summer of 1986, Dillon approached appellant Brad Libera and told him that early investment in securities named in the "Inside Wall Street" column was a profitable strategy. Dillon also testified that he informed Libera that Donnelley employees were not supposed to remove copies of the magazine.

Libera then began to accompany Dillon to the magazine deliveries. On October 9, 1986, Libera invested in MCA based on Business Week information and thereafter traded regularly in securities mentioned in the "Inside Wall Street" column. He executed a total of sixty-four Thursday trades in such stocks, resulting in a net profit of approximately $95,000. Between October 1986 and February 1987, Libera generally made the morning pickups alone because Dillon had entered a training program for stock brokers with Merrill Lynch. During this time Libera increased the payments to Sady from $20 to $30.

Also in the summer of 1986, Libera met appellant Francis Sablone, an attorney. Sablone and Libera used the same stock broker, Ralph Presutti, at Advest, Inc. Sablone learned of Libera's early acquisition of Business Week and of his trading on information in the "Inside Wall Street" column. Sablone then also began trading regularly on Thursday mornings in Business Week securities, receiving the information either from Libera or Presutti. Sablone made fifty-seven trades at a profit of approximately $36,000. Dillon testified that in early 1987 he informed Sablone that the employees were not permitted to remove magazines from the plant and that Sady was being paid $30 per copy for the magazine.

In the spring of 1987, Sablone took his trading business to Nicholas Bokron of E.F. Hutton. He told Bokron that some of his trades were based on Business Week information. In late September, Bokron was informed by his superiors that trading in securities based on an early acquisition of Business Week raised serious questions of illegal insider trading. Bokron knew that Sablone had recently placed such a trade. He contacted Sablone, advised him of his superior's concerns, and told him that he would not accept any more trades based on Business Week information. On five subsequent occasions Sablone traded in securities based on Business Week information with other brokerage houses.

DISCUSSION

Appellants' convictions are based on the so-called misappropriation theory arising out of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). ² Sitting in banc, we recently restated that theory: "[O]ne who misappropriates nonpublic information in...