U.S. v. Hughes

• Decision Date: 26 October 2007
• Docket Number: No. 06-3025.,No. 06-3024.,06-3024.,06-3025.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Kelley L. HUGHES (06-3024); Kevin L. Stacy (06-3025), Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

505 F.3d 578

UNITED STATES of America, Plaintiff-Appellee, v. Kelley L. HUGHES (06-3024); Kevin L. Stacy (06-3025), Defendants-Appellants.

No. 06-3024.

No. 06-3025.

United States Court of Appeals, Sixth Circuit.

Argued: July 26, 2007.

Decided and Filed: October 26, 2007.

ARGUED:

Chad A. Readler, Jones Day, Columbus, Ohio, W. Joseph Edwards, Law Office of W. Joseph Edwards, Columbus, Ohio, for Appellants. J. Michael Marous, Assistant United States Attorney, Columbus, Ohio, for Appellee.

ON BRIEF:

Chad A. Readler, Jones Day, Columbus, Ohio, W. Joseph Edwards, Law Office of W. Joseph Edwards, Columbus, Ohio, for Appellants. J. Michael Marous, Assistant United States Attorney, Columbus, Ohio, for Appellee.

Before: DAUGHTREY and GILMAN, Circuit Judges; ADAMS, District Judge.^*

OPINION

JOHN R. ADAMS, District Judge.

Appellants Kelly Hughes and Kevin Stacy challenge their convictions and alternatively the district court's denial of their motion for judgment of acquittal and/or motion for a new trial. This appeal, originally filed by Hughes, was consolidated with case number 06-3025, filed by Stacy. There are nine issues raised on appeal, two by Hughes, seven by Stacy. Both Appellants allege that there was a variance between the indictment and the evidence presented at trial on the conspiracy counts. They further argue that the variance resulted in substantial prejudice, thus necessitating a new trial. Stacy makes the following additional arguments: that the jury verdict was against the manifest weight of the evidence and was not supported by sufficient evidence with respect to the charge of making false statements and the charges of conspiracy to engage in insider trading and to obstruct justice; that the jury relied on material outside the record in its deliberations; that defense counsel failed to present an adequate defense at trial due to the district court's exclusion of certain expert testimony; that the jury instructions were inadequate; and that prejudice resulted from the cumulative effect of errors made by the district court. For the reasons stated below, we AFFIRM the judgment of the district court, although based upon a slightly different analysis from the one used by that court.

FACTUAL AND PROCEDURAL BACKGROUND

I. Kellogg buyout and suspicious stock purchases¹

This case involves insider trading based on the purchase, by the Kellogg Company ("Kellogg"), of Worthington Foods ("WF"), a small meatless foods company located in Columbus, Ohio. From July 1999, when negotiations began with Kellogg, to October 1999, when the buyout occurred, Appellants' co-defendant Roger Blackwell ("Blackwell") sat on the Board of Directors at WF. As a member of the Board, Blackwell was privy to non-public information about the Kellogg purchase and the price per share negotiated by the parties.

From June to September 1999, many of Blackwell's friends and family bought WF stock. The largest purchaser was Justin Voss ("Voss"), a friend and business associate to Blackwell, who bought 38,000 shares. The second largest purchaser was Jack Kahl ("Kahl"), a friend and business associate to Blackwell, who bought 15,000 shares. Hughes, longtime employee and friend to Blackwell, and her husband, Stacy, were the fifth largest purchasers with 10,286 combined shares. Arnold Jack ("Jack"), longtime friend to Blackwell, and Black Jack Enterprises, co-owned by Jack and Blackwell, purchased 5,500 shares. Dale Blackwell, Blackwell's father, purchased 3,000 shares. Gertrude and Alfred Stephans ("the Stephanses"), parents of Blackwell's wife Kristina Stephans-Blackwell ("Stephans-Blackwell"),² purchased 1,800 shares. Finally, Blackwell's son, Christian Blackwell, purchased 350 shares of WF stock.

II. Appellants' relationship to Blackwell and other co-defendants

Blackwell is a former professor at the Ohio State University's School of Business. Hughes first worked for him while she was still in college, grading papers for the professor. She started her professional career working for him at Roger Blackwell Associates, Inc.³ ("RBA") in 1990 as an administrative assistant. Eventually she became the Director of Marketing, and was responsible for all of RBA's finances, accounting and marketing.

Most years, Hughes met with Blackwell during the month of August to discuss the company's finances. On August 31, 1999, Hughes had such a meeting with Blackwell, just days before her various purchases of WF stock.

Hughes had a close relationship with Blackwell. She was said to be devoted to him. Blackwell also valued Hughes as a friend, stating at his birthday party in 2003 that he "could not have gotten through all this⁴ without her help and support." He also added that he valued her husband Stacy's support.

In addition to her duties at RBA, Hughes was responsible for the investment decisions for the Roger Blackwell Pension Plan ("Pension Plan"). Her first investment for the Pension Plan was in September of 1999 with the purchase of WF stock. At that time, only two employees of RBA, Stephans-Blackwell and Hughes, were vested in the Pension Plan.

Stacy, a surveyor by trade, married Hughes in 1990. He also had a close relationship with Blackwell and was an usher at Blackwell's wedding. Stacy and Hughes socialized many times with Blackwell and his wife, along with Blackwell's friends and family. Stacy even thought of Jack, one of Blackwell's closest friends, as his attorney.

III. Blackwell's direct connection to the conspiracy

Sometime in late July or early August of 1999, Blackwell discussed the possible buyout of WF with his then wife, Stephans-Blackwell. The two discussed the propriety of purchasing stock in WF at that time. Blackwell told his wife that they could not purchase WF stock at that time, but when she asked whether her parents would be able to purchase WF stock, Blackwell responded that he didn't think that would be a problem.

Stephans-Blackwell contacted her mother, Gertrude Stephans, and encouraged her to purchase WF stock. Blackwell was aware of this conversation. Additionally, Blackwell and Stephans-Blackwell provided her parents with $20,000 to purchase WF stock.

Blackwell also informed his friend and business associate, Kahl, of the imminent purchase of WF by Kellogg and the substantial rise in WF stock that would result. Blackwell told Kahl that, if he were to decide to purchase WF stock, he should "go in thinly" and not buy too much because it was a "thinly traded" stock.⁵

Kahl served on the Board of Directors for another company, Henkle, along with Blackwell. In January 2003, Kahl and other members of the Henkle Board received a letter from Blackwell stating:

I also want to clarify a few facts of this situation. First and foremost, I never discussed the merger of Kellogg and Worthington Foods with anyone nor disclosed anything that can be remotely considered insider information. That is my policy at all times for all companies with which I am affiliated.

Kahl questioned the truthfulness of the letter because he had personally received inside information about the WF/Kellogg buyout from Blackwell. Kahl understood the letter to express Blackwell's position in the investigation rather than a true and accurate version of the events surrounding the buyout.

IV. Investigations

In December 1999, the National Association of Securities Dealers ("NASD") launched an investigation into the purchases of WF stock, based on increased activity during the months directly preceding the buyout. NASD sent out a questionnaire requesting information on the relationships among purchasers of stock during the relevant period and those persons who knew about the buyout. Instead of providing the information requested in the questionnaire, Blackwell responded by stating: "I supplied no information about the transaction to any of the people on the list or any one [sic] else. When asked by anyone about [ ] Worthington Foods during this period, I replied that I was not able to comment about the company's stock, as is my standard practice." Blackwell eventually did disclose to NASD his relationships to his father, his son, Jack, Black Jack Enterprises, Hughes and Stacy, but continued to deny providing information to them about the buyout. It is important to note that in a three-day time frame, during the same month the NASD investigation began, Blackwell's telephone calling card was used from New York to call most of the people he was connected to who had purchased WF stock during the period under investigation, including Dale Blackwell, the Stephanses, Hughes and Stacy, Jack, and Voss.

In 2000, the Securities and Exchange Commission ("SEC") subpoenaed Blackwell to testify and to provide various documents regarding the matter. On January 9, 2001, Blackwell testified before the SEC that he did not disclose the information about the Kellogg buyout to anyone. He also responded to a later SEC inquiry, restating his position of non-disclosure. In February of 2002, Stephans-Blackwell, along with her parents, testified before the SEC, stating that they had not received insider information from Blackwell about the buyout. According to Stephans-Blackwell, she and her husband has previously agreed that no one would disclose that Blackwell had provided them with insider information about the buyout.

In November 2000, Hughes and Stacy both provided sworn testimony before the SEC. Both testified that they did not receive inside information about the purchase of WF and did not base their purchases of WF stock on any such information. On May 15, 2002, Hughes again testified before the SEC. She stated that she never received money from Blackwell to help pay for WF stock and that the $30,000 check she received from RBA, discussed below, was not used to purchase WF stock.

V. Hughes and Stacy's stock purchases

From April 1997 through August 1999, Stacy was a fairly conservative investor in his IRA accounts. His transactions involved the purchase of 200 shares in...