U.S. v. Mahaffy

• Decision Date: 13 August 2007
• Docket Number: No. 05-CR-613.,05-CR-613.
• Citation: 499 F.Supp.2d 291
• Parties: UNITED STATES of America v. Kenneth E. MAHAFFY, Jr., Timothy J. O'Connell, David G. Ghysels, Jr., Robert F. Malin, Linus Nwaigwe, Michael A. Picone, and Keevin H. Leonard, Defendants.
• Court: U.S. District Court — Eastern District of New York

499 F.Supp.2d 291

UNITED STATES of America v. Kenneth E. MAHAFFY, Jr., Timothy J. O'Connell, David G. Ghysels, Jr., Robert F. Malin, Linus Nwaigwe, Michael A. Picone, and Keevin H. Leonard, Defendants.

No. 05-CR-613.

United States District Court, E.D. New York.

August 13, 2007.

COPYRIGHT MATERIAL OMITTED

Michael Anthony Asaro, United States Attorneys Office, Eastern District of New York, Brooklyn, NY, for Plaintiff.

Richard F. Albert, Morvillo, Abramowitz, Grand, Iason & Silberberg PC, Jeffrey C. Hoffman, Hoffman Pollok LLP, J. Bruce Maffeo, Elizabeth Nicole Warin, Law Offices of J. Bruce Maffeo, David Bernfeld, Thomas F.X. Dunn, New York City, Stephen P. Scaring, Stephen P. Scaring, P.C., Garden City, NY, Mildred M. Whalen, Federal Defenders of New York, Inc., Brooklyn, NY, for Defendants.

MEMORANDUM & ORDER RULE 29, DOUBLE JEOPARDY, & CRIMINAL COLLATERAL ESTOPPEL

WEINSTEIN, Senior District Judge.

I. Introduction

Seven defendants were charged in a 41 count indictment with a "front running" securities operation involving the sharing of allegedly confidential proprietary information by stockbrokers with day traders. The information is alleged to have given the traders an insider's advantage over the market. The scheme is detailed in U.S. v. Mahaffy, No. 05-CR-613, 2006 WL 2224518 (E.D.N.Y. Aug. 2, 2006). After a seven-week trial before another judge of this court and a jury, acquittals were obtained by defendants Mahaffy, Ghysels, Malin, Nwaige, Piccone, and Leonard on all counts, with the exception of Conspiracy to Commit Securities Fraud (Count 1). Defendant O'Connell was convicted of False Statements (Count 36) and Witness Tampering (Count 35).

As to each defendant, the jury was unable to reach a unanimous verdict on Count 1. The government intends to retry each defendant on that conspiracy count. Motions by defendants to prevent a retrial are denied for reasons stated below.

II. Charge

Count 1 charges as follows:

In or about and between August 2002 and February 2004, both dates being approximate and inclusive, within the Eastern District of New York and elsewhere, the defendants KENNETH E. MAHAFFY, JR., TIMOTHY J. O'CONELL, DAVID G. GHYSELS, JR., ROBERT F. MALIN, LINUS NWAIGE, MICHAEL A PICONE and KEEVIN H. LEONARD, together with others, did knowingly and intentionally conspire to execute a scheme and artifice (a) to defraud persons in connection with securities of issuers with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, to wit: shares of public companies for which customers of the Brokerage Firms placed orders to buy and sell, and (b) to obtain, by means of materially false and fraudulent pretenses, representations and promises, money and property in connection with the purchase and sale of securities of issuers with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, to wit: shares of public companies for which customers of the Brokerage Firms placed orders to buy and sell, all in violation of Title 18, United States Code, Section 1348. (Title 18, United States Code, Sections 1349 and 3551 et seq.) The securities fraud alleged to be the object of the charged conspiracy involved the proposed misappropriation of confidential and proprietary information transmitted over brokerage houses' squawk boxes (internal loudspeakers that announce forthcoming large trades, among other information). All defendants argue, in various ways, that no evidence was adduced at trial supporting the contentions that they knew that the information transmitted over squawk boxes was confidential and proprietary, or that they knew it was communicated to the traders in violation of the brokerage houses' internal policies. See, e.g., Malin Br. at 5 ("there was [not] a jot of evidence to show that Malin had any reason to know or believe that the brokerdefendants were violating their respective firms' policies by transmitting the information at issue to AB Watley in the manner described at trial"); Mahaffy Br. at 26 ("[T]here was simply no competent evidence that the Defendant's conduct violated any policy or procedure in place at either Merrill Lynch or Smith Barney.... In the absence of such proof, the Government's assertion that the broker defendants conspired to deprive their employers of `confidential business information' or the right to honest services-[sic] must fail."); Nwaigwe Br. at 12 ("There is nothing in the record from which it can be inferred that Nwaigwe: (1) knew or had reason to believe that the broker-dealers were violating some internal policy; (2) knew or had reason to know that the information was proprietary and confidential; (3) knew of the bribes-wash trades or cash payments. Thus, missing is the element of knowledge, essential for a conviction on Count One.").

The trial judge had instructed the jury that in order to convict any defendant of conspiracy to commit securities fraud under this count, they must find that the government proved the following elements of 18 U.S.C. § 1349 beyond a reasonable doubt:

First: that the conspiracy existed; and

Second: that the defendant knowingly and intentionally became a member of that conspiracy.

Expanding upon the second element, the court stated: "The key inquiry is simply whether the defendant joined the conspiracy with an awareness that its basic aim and purpose was to commit securities fraud, and with the intent to help it succeed in achieving that criminal objective."

Each of the securities fraud counts involved particular sales or purchases of securities. Five of the seven defendants had been charged with-and were acquitted of the substantive crime of securities fraud under 18 U.S.C. § 1348: Ghysels (Counts 2, 3, 4, 6, and 7); Leonard (Counts 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, and 16); Mahaffy (Counts 5, 8, and 9); Malin (Counts 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, and 16); and O'Connell (Counts 5, 8, 9, 10, 12, 13, 14, 17, 18, 19, 20, 21).

III. Rule 29 Motions

After trial each defendant moved pursuant to subdivision (c) of Federal Rule of Criminal Procedure 29 for a judgment of acquittal on the charge of conspiracy to commit securities fraud. To succeed, any Rule 29 motion must demonstrate that, "viewing the evidence in the light most favorable to the government, no rational trier could have found the essential elements of the crime charged beyond a reasonable doubt." United States v. Leslie, 103 F.3d 1093, 1100 (2d. Cir.1997) (quotation marks and citation omitted).

Defendants had first moved for a judgment of acquittal under subdivision (a) of Rule 29 after the close of the government's case. That motion was denied without reservation of decision. See Tr. at 4035-37 ("I'm going to decide the Rule 29 motion now. I'm going to deny it, all of them.... If [the trial judge] concludes that either of the two results, a reasonable doubt or no reasonable doubt, is fairly possible, he must let the jury decide the matter, and I think that's exquisitely applicable to what I had before me.").

"To sustain a conspiracy conviction, the government must present some evidence from which it reasonably can be inferred that the person charged with conspiracy knew of the existence of the scheme alleged in the indictment and knowingly joined and participated in it." United States v. Rodriguez, 392 F.3d 539 (2d Cir.2004). Conspiracy requires a specific intent. To establish guilt the government must prove that the defendant knew of the existence of the scheme to commit the specific crime charged in the indictment. United States v. Morgan, 385 F.3d 196, 206 (2d Cir.2004). "Proof that the defendant knew that some crime would be committed is not enough." United States v. Friedman, 300 F.3d 111, 124 (2d Cir. 2002).

The government offered no direct proof of the defendants' knowledge that information disseminated over the squawk boxes was confidential and proprietary, or that it was being shared with the traders at another firm in violation of the originating brokerage houses' internal policies. Circumstantial evidence may suffice. Rodriguez, 392 F.3d at 544; United States v. Glenn, 312 F.3d 58, 64 (2d Cir.2002). "In fact, the government is entitled to prove its case solely through circumstantial evidence, provided, of course, that the government still demonstrates each element of the charged offense beyond a reasonable doubt." Rodriguez, 392 F.3d at 544.

Sufficient proof was presented at trial from which a rational juror could infer that each defendant — experienced in securities brokerage practice — knew the information on the squawk boxes was confidential, proprietary, and being disseminated to outsiders in contravention of company policy. The evidence included: secrecy with which the squawk box transmissions were shared; payment of cash in exchange for squawk box access; and the internal policy manuals of Merrill Lynch and Citigroup. A rational juror could infer that each defendant was aware that sharing access to squawk boxes with outsiders amounted to a misappropriation of confidential, proprietary information in violation of company policy.

The jury's verdicts of acquittal on counts 2 through 41 are not dispositive in evaluating the sufficiency of the evidence on Count 1. Rule 29(a), which describes the test to be applied by the court in determining whether to grant a motion for a judgment of acquittal under Rules 29(a), (b), and (c), requires the court to "enter a judgment of acquittal of any offense for which the evidence is insufficient to sustain a conviction." Fed.R.Crim.P. 29(a) (emphasis added). Analysis is focused on the evidence which had been adduced at the trial. Consideration of the jury's verdicts on counts otherwise disposed of is not evidence contemplated by a post-verdict subdivision (c) motion.

Whatever the double jeopardy or collateral estoppel effects of the jury's verdicts of acquittal may be, see infra Part IV, they would apply only...