U.S. v. Heron
| Decision Date | 19 December 2007 |
| Docket Number | Criminal Action No. 06-674-01. |
| Parties | UNITED STATES of America v. Kevin HERON. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
On October 17, 2007, at the close of the Government's case-in-chief, defendant Kevin Heron moved for a judgment of acquittal in accordance with Fed.R.Crim.P. 29(a). Because this case presents close questions touching on exactly what evidence the Government must present in order to prove securities fraud, we chose to reserve judgment under Fed.R.Crim.P.
Two days later, a jury of this Court convicted Heron of one count of conspiracy to commit securities fraud and three counts of securities fraud. Because we had reserved our ruling on Heron's motion, we ordered the parties to brief in detail the questions that motion raised. All briefs having now been received, we proceed to address the matter on the merits.
At all times relevant to this indictment, Kevin Heron was the General Counsel of Amkor Technology, a public company that is an outsourcer of semiconductor assembly and test services. Heron also held the title of Chief Compliance Officer. In that role, he monitored the company's insider trading policy2 and pre-cleared trades for those employees and directors who were subject to that policy. He also advised the company on other issues related to compliance with the securities laws, including helping to determine whether and when the company was obliged to make certain disclosures.
The Government charged that, during three periods in 2003 and 2004, Heron traded in Amkor securities while he had material, non-public information about the company. More specifically, the Government charged that:
(1) Between October 15, 2003 and October 17, 2003, while Heron knew that Amkor would likely be releasing positive quarterly earnings on October 27, 2003; he purchased 4,000 shares of Amkor stock;
(2) Between April 1, 2004 and April 26, 2004, while Heron knew that Amkor would likely be releasing negative quarterly earnings on April 27, 2004, he sold 17,000 shares of Amkor stock and traded 140 Amkor option contracts; and
(3) Between May 20, 2004 and July 28, 2004, while Heron knew that Amkor's financial performance was poor and that Amkor was involved in negotiations with Unitive, Inc. for a joint business transaction that the investment community might not applaud, he sold 22,100 shares of Amkor stock and traded one hundred Amkor option contracts.
The Government also charged that Heron conspired with Stephen Sands, an employee of another publicly held company, Neoware, to "exchange[] information regarding their respective companies, including material, non-public, information such as financial performance and pending corporate deals, that they relied upon in making securities transactions in Amkor and Neoware." Indictment3 at 5.
After a five-day trial from October 15-19, 2007, a jury of this Court, after less than three hours' deliberation, convicted Heron of all four counts.
When a Court reserves its ruling on a Rule 29 motion, "it must decide the motion on the basis of the evidence at the time the ruling was reserved." Fed. R.Crim.P. 29(b). Heron made his motion at the close of the Government's case and did not renew it at the close of all the evidence. We must, therefore, consider only the evidence that had been presented as of the conclusion of the Government's case.4 We review that evidence "in the light most favorable to the prosecution to determine whether any rational trier of fact could have found proof of guilt beyond a reasonable doubt based on the available evidence." United States v. Wolfe, 245 F.3d 257, 261 (3d Cir.2001) (citing Jackson v. Virginia, 443 U.S. 307, 99 S.Ct. 2781, 61 L.Ed.2d 560 (1979)). We therefore "draw all reasonable inferences in favor of the jury verdict." United States v. Anderskow, 88 F.3d 245, 251 (3d Cir.1996). In doing so, we "must be ever vigilant ... not to usurp the role of the jury by weighing credibility and assigning weight to the evidence, or by substituting [our] judgment for that of the jury." United States v. Brodie, 403 F.3d 123, 133 (3d Cir.2005).
While we must make all reasonable inferences, in favor of the Government, we must also hold the Government to its proof and ensure that a rational jury could have reached a guilty verdict on the basis of the available evidence. In doing so, the question is whether the jury, making reasonable inferences from the evidence presented and correctly applying the law as it was given to them, could have found Heron guilty beyond a reasonable doubt.
Before we begin our analysis of the substantive counts, we pause to consider the materiality standard.
We instructed the jury that "[i]nformation is material if there is a substantial likelihood that the information would have been viewed by a reasonable investor as important in deciding whether to buy, sell, or hold securities." In order for a fact to be material, the finder of fact must find "a substantial likelihood that, under all the circumstances, the [information] would have assumed actual significance in the deliberations of the reasonable shareholder" or that "disclosure of the omitted fact would have been viewed by the reasonable investor as having, significantly altered the `total mix' of information made available." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). This standard is applicable in actions under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988).
In dealing with information that is indefinite, such as ongoing negotiations, materiality "will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity." Id. at 238, 108 S.Ct. 978 (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir.1968)). Thus, the materiality of particular information is not fixed, but fluctuates in relation both to its definiteness and its effect on the company's prospects as a whole. Materiality must be considered as of the time of each trade.
Definiteness and reliability are always issues in determining materiality since a reasonable investor would base trading decisions only on information that was at least moderately definite and reliable. Reasonable investors do not rely on rank speculation to decide when to trade. Our Court of Appeals has identified seven factors to consider in determining the materiality of future projections:
the facts upon which the information is based; the qualifications of those who prepared or compiled it; the purpose for which the information was originally intended; its relevance to the stockholders' impending decision; the degree of subjectivity or bias reflected in its preparation; the degree to which the information is unique; and the availability to the investor of other more reliable sources of information.
Walter v. Holiday Inns, Inc., 985 F.2d 1232, 1242 (3d Cir.1993) (quoting Flynn v. Bass Bros. Enters., 744 F.2d 978, 988 (3d Cir.1984)).
As several witnesses testified, one way of measuring materiality after the fact is the reaction of the market once information becomes public.5 Our Court of Appeals has incorporated this idea, often called the Market Impact Test, into its jurisprudence: "In the context of an `efficient' market,6 the concept of materiality translates into information that alters the price of the firm's stock." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425 (3d Cir.1997). By extension, then, information that has no impact on the price of the underlying stock when disclosed is generally immaterial as a matter of law.7 Id.
For each count in this indictment, the Government bore the burden of establishing that the information exchanged and/or traded upon was material. At this procedural posture, therefore, we review the record to determine whether, based on the evidence presented and making all reasonable inferences in favor of the Government, a rational jury could have found that the information was material beyond a reasonable doubt.
With this exposition of the concept of materiality, we now move on to examine the substantive counts on which the jury convicted Heron.
Count I of the Second Superseding Indictment alleges that between July 1, 2003 and June 4, 2004 Heron and Stephen Sands conspired to commit securities fraud by "exchang[ing] information regarding their respective companies, including material, non-public information such as financial performance and pending corporate deals, that they relied upon in making securities transactions in Amkor and Neoware" in violation of 18 U.S.C. § 371. Indictment at 5.
Conspiracy is "an agreement, either explicit or implicit, to commit an unlawful act, combined with intent to commit an unlawful act, combined with intent to commit the underlying offense.", United States v. Kapp, 781 F.2d 1008, 1010 (3d Cir.1986). "To establish a conspiracy, the government must show: (1) a unity of purpose between two or more persons; (2) an intent to achieve a common goal; and (3) an agreement to work together." United States v. Helbling, 209 F.3d 226, 238 (3d Cir.2000).8 Because direct evidence of such an agreement rarely exists, a conspiracy may be proven by indirect and circumstantial evidence. Brodie, 403 F.3d at 134. Thus...
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