U.S. v. ReBrook, 94-5125

• Decision Date: 30 June 1995
• Docket Number: No. 94-5125,94-5125
• Citation: 58 F.3d 961
• Parties: Fed. Sec. L. Rep. P 98,794 UNITED STATES of America, Plaintiff-Appellee, v. William Edward ReBROOK, III, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 961

58 F.3d 961

Fed. Sec. L. Rep. P 98,794

UNITED STATES of America, Plaintiff-Appellee, v. William Edward ReBROOK, III, Defendant-Appellant.

No. 94-5125.

United States Court of Appeals Fourth Circuit.

Argued Nov. 3, 1994.

Decided June 30, 1995.

ARGUED: Arthur Thomas Ciccarello, Sr., Ciccarello, Del Guidice & Lafon, Charleston, WV, for appellant. Hunter P. Smith, Jr., Asst. U.S. Atty., Charleston, WV, for appellee. ON BRIEF: George A. Daugherty, Elkview, WV, for appellant. Rebecca A. Betts, U.S. Atty., Larry R. Ellis, Asst. U.S. Atty., Charleston, WV, for appellee.

Before LUTTIG and WILLIAMS, Circuit Judges, and MacKENZIE, Senior United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed in part and reversed in part by published opinion. Judge WILLIAMS wrote the opinion, in which Judge LUTTIG and Senior Judge MacKENZIE joined.

OPINION

WILLIAMS, Circuit Judge:

William Edward ReBrook, III, appeals his convictions and sentence for wire fraud, 18 U.S.C. Secs. 1343, 1346, and securities fraud, 15 U.S.C. Secs. 78ff, 78j(b). ReBrook presents four issues on appeal. First, he argues that both of the counts as charged against him are legally infirm and should not have been allowed to go to the jury. Second, ReBrook argues that the district court erred in excluding certain newspaper articles as inadmissible hearsay. Third, because he had been the target of pervasive adverse publicity unrelated to the case, ReBrook argues that the district court erred in failing to grant him individual voir dire. Fourth, ReBrook argues that the district court erred in enhancing his sentence pursuant to U.S.S.G. Sec. 2C1.7(b)(1)(B) (1993) as an "official holding a high-level decision-making or sensitive position." We reverse ReBrook's conviction for securities fraud, but affirm his conviction and sentence for wire fraud.

I.

This criminal proceeding arises from financial dealings relating to the introduction of video lottery machines in the State of West Virginia. In June of 1990, the West Virginia Lottery Commission (the "Lottery Commission") began testing video lottery machines at a single horse racing track in West Virginia. By February of 1992, a number of competing companies in the gaming equipment business, anticipating an expansion of video lottery machines, attempted to gain a stronghold in the West Virginia video gaming market.

In April of 1990, the new Director of the Lottery Commission, Elton "Butch" Bryan, hired ReBrook to serve as the commission's attorney. The position included a variety of responsibilities, such as providing legal advice to the Lottery Commission and its Director, giving political advice to the Director, and reviewing and drafting documents for the Lottery Commission. The job was part-time and paid a salary of up to $25,000 per year.

According to the evidence presented at trial, the general elections for statewide political offices in the autumn of 1992 were to have a direct effect on the expansion of the video gaming market in West Virginia. It was the Government's theory at trial that, from a date early in 1992, ReBrook had knowledge of the Governor's undisclosed plans to allow a statewide expansion of the video lottery immediately following the general election. In particular, Bryan testified at trial that at various points he told ReBrook of conversations that he had with Governor Gaston Caperton concerning the expansion of the video lottery. ¹

Bryan passed on to ReBrook even more sensitive information than that of a general plan for expansion of the video lottery: Bryan informed ReBrook of the selection process by which the contract was to be awarded and, most importantly, which company Bryan intended to win the contract. Bryan testified that at some point in early 1992 he had decided, as the Director of the Lottery Commission, that when the video lottery was expanded, the Lottery Commission would award what is commonly referred to as a "sole source" contract to one of the competing gaming companies. A sole source contract, in the context of this case, means that the company to which the contract to expand the video lottery was awarded would be responsible for providing all of the machines and services to the state and would receive approximately $25 million in gross revenues. Most importantly, Bryan testified that before the general election he told ReBrook--despite rules providing for the unbiased awarding of such contracts--that the Lottery Commission would award the sole source contract to a company named Video Lottery Consultants, Inc. ("VLC").

As the attorney for the Lottery Commission, ReBrook learned additional information concerning VLC and other video lottery competitors. For example, on or about September 23, 1992, Bryan discussed the status of VLC with the company's chief executive officer. That officer told Bryan that the stock's value had dropped approximately 50% in price over the preceding two weeks due to adverse administrative rulings in Australia where VLC also conducted business and that the stock's value would not be dropping any further. This information was not made public by VLC. ReBrook learned of the contents of Bryan's telephone call that same day from either Bryan himself or Jim Moran, an employee with a competing video lottery company.

On September 24, 1992, ReBrook used all his available funds to purchase 100 shares of VLC stock, valued at $14.25 per share. Furthermore, ReBrook passed on the information he learned about the financial health of VLC to two friends who then purchased an additional 6,000 shares of VLC stock in their names. Following his purchase of VLC stock, ReBrook continued to represent the Lottery Commission without informing the Lottery Commission that he owned stock in VLC or that he stood to benefit substantially from the contemplated expansion of video lottery through a single source contract awarded to VLC.

On June 17, 1993, a federal grand jury in Charleston, West Virginia, returned a two-count indictment against ReBrook. Count 1 of the indictment charged ReBrook with wire fraud in violation of 18 U.S.C. Secs. 1343 and 1346. Count 2 of the indictment charged him with securities fraud in violation of 15 U.S.C. Secs. 78ff and 78j(b), and 17 C.F.R. Sec. 240.10b-5.

Before proceeding to trial, ReBrook filed a motion to dismiss the indictment, challenging the validity of both counts for wire fraud and securities fraud. The district court denied the motion. United States v. ReBrook, 837 F.Supp. 162 (S.D. W. Va.1993). On November 5, 1993, a jury convicted ReBrook on both counts. ReBrook filed a posttrial motion challenging the jury's verdict on a number of grounds, including the manner in which the district court conducted voir dire of the jury and certain evidentiary rulings, which the district court denied. United States v. ReBrook, 842 F.Supp. 891 (S.D. W. Va.1994). On February 7, 1994, the district court sentenced ReBrook under the federal sentencing guidelines to 27-month sentences on each count, to run concurrently.

ReBrook now appeals various rulings of the district court, including the validity of both counts in the indictment, the pretrial voir dire, certain evidentiary rulings, and his sentencing.

II.

ReBrook first challenges the district court's decision, as a matter of law, to allow each of the two counts in the indictment to go forward to trial. ReBrook focuses his challenge primarily on the securities fraud conviction under Count 2, arguing that the district court erred in allowing the Government to prosecute him under a "misappropriation theory" of securities fraud. As to Count 1, ReBrook maintains that his conviction for wire fraud must also be reversed because the impermissible securities fraud allegation was the only ground upon which the jury could have based a guilty verdict on the wire fraud count. While we conclude that ReBrook's conviction and sentence for securities fraud must be reversed because of our decision not to adopt the misappropriation theory in this Circuit, we affirm the district court's decision to allow the wire fraud charge to be presented to the jury.

A.

Count 2 charges ReBrook with securities fraud in violation of Sec. 10(b) of the Securities Exchange Act of 1934, codified at 15 U.S.C. Secs. 78j(b) and 78ff, and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5. ² As in the companion case of United States v. Bryan, 58 F.3d 933 (4th Cir.1995), the Government bases the securities fraud count upon what is commonly referred to as the "misappropriation theory" of insider trading, not on any theory of tippee liability. See United States v. Chestman, 947 F.2d 551 (2d Cir.1991) (en banc), cert. denied, 503 U.S. 1004, 112 S.Ct. 1759, 118 L.Ed.2d 422 (1992); SEC v. Cherif, 933 F.2d 403 (7th Cir.1991), cert. denied, 502 U.S. 1071, 112 S.Ct. 966, 117 L.Ed.2d 131 (1992); SEC v. Clark, 915 F.2d 439 (9th Cir.1990); United States v. Newman, 664 F.2d 12 (2d Cir.1981), aff'd after remand, 722 F.2d 729 (2d Cir.1983), cert. denied, 464 U.S. 863, 104 S.Ct. 193, 78 L.Ed.2d 170 (1983). ³ "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." Chestman, 947 F.2d at 566. ReBrook maintains that this Circuit should not adopt the misappropriation theory in this case.

We recently rejected application in this Circuit of the precise misappropriation theory on which ReBrook's conviction was based, in Bryan, 58 F.3d at 943-59. The Bryan case involved the prosecution of the Director of the Lottery Commission, Elton "Butch" Bryan, the same person who played a prominent role in ReBrook's case as a witness for the prosecution. Although the scope of Bryan's criminal activities were arguably broader than those of ReBrook, the prosecution of Bryan for securities fraud focused, in large part, on similar facts to those of...