U.S. v. Smith, 97-50137

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Citation155 F.3d 1051
Docket NumberNo. 97-50137,97-50137
PartiesFed. Sec. L. Rep. P 90,274, 98 Cal. Daily Op. Serv. 6590, 98 Daily Journal D.A.R. 9127 UNITED STATES of America, Plaintiff-Appellee, v. Richard J. SMITH, Defendant-Appellant.
Decision Date25 August 1998

Page 1051

155 F.3d 1051
Fed. Sec. L. Rep. P 90,274, 98 Cal. Daily Op. Serv. 6590,
98 Daily Journal D.A.R. 9127
UNITED STATES of America, Plaintiff-Appellee,
Richard J. SMITH, Defendant-Appellant.
No. 97-50137.
United States Court of Appeals,
Ninth Circuit.
Argued and Submitted June 3, 1998.
Decided Aug. 25, 1998.

Page 1053

Brian A. Sun, O'Neill, Lysaght & Sun, Santa Monica, California, for defendant-appellant.

David Z. Seide, Assistant United States Attorney, Los Angeles, California, for plaintiff-appellee.

Susan K. Strauss, Securities and Exchange Commission, Washington, DC, for amicus.

Appeal from the United States District Court for the Central District of California Harry L. Hupp, District Judge, Presiding. D.C. No. CR-96-00517-HLH.

Before: O'SCANNLAIN, TROTT, and FERNANDEZ, Circuit Judges.

O'SCANNLAIN, Circuit Judge:

In this appeal from an insider securities trading conviction, we must decide difficult evidentiary issues involving an illegal interception of voicemail, as well as whether internal corporate earnings projections may constitute "material" inside information and whether conviction requires proof of actual use of that inside information.


PDA Engineering, Inc. ("PDA") was, in 1993, a software design firm with headquarters in Orange County, California. Shares in PDA were publicly traded on the National Association of Securities Dealers Exchange (commonly referred to as "NASDAQ"). Richard Smith served as PDA's Vice President for North American Sales and worked in PDA's Nashville, Tennessee, office. By early 1993, after nearly three years with PDA, Smith had accumulated 51,445 shares of PDA stock.

In a series of transactions between June 10 and June 18, 1993, Smith liquidated his entire position in PDA. In addition to selling his own shares, Smith "sold short" 1 25,000 shares on July 8, and another 10,000 shares on July 20. Smith's parents also sold and sold short a total of 12,000 shares.

Amidst this flurry of sales activity, on June 19, Smith telephoned Angela Bravo de Rueda ("Bravo"), an employee in the Los Angeles office of PDA, and left her the following voicemail message:

Hi, Angie, Rich.... I talked to Tom last night after I left you some messages and he and Lou discovered that there was about a million and a half dollar mistake in the budget, so now we're back at ground zero and we've got to scramble for the next few days. Anyway, finally I sold all my stock off on Friday and I'm going to short the stock because I know its going to go down a couple of points here in the next week as soon as Lou releases the information about next year's earnings. I'm more concerned about this year's earnings actually. 2

Page 1054

Unbeknownst to either Smith or Bravo, another Los Angeles-based PDA employee, Linda Alexander-Gore ("Gore"), guessed correctly Bravo's voicemail password and accessed Bravo's mailbox. When Gore encountered Smith's message, she forwarded it to her own mailbox. In order to retrieve it, she then called her own voicemail from her home telephone, played the message, and recorded it with a handheld audiotape recorder. 3 After recording the message, Gore approached a co-worker, Robert Phillips ("Phillips"). She informed him of the general nature of the communication and provided him with a copy of the recording.

Phillips listened to the message and telephoned the United States Attorney's Office for the Central District of California, where he spoke to Assistant United States Attorney Bart Williams ("Williams"). Phillips told Williams that he believed he had information, in the form of an audiotape, that indicated possible criminal activity. He played the tape for Williams approximately four times and attempted to answer several questions about the contents of the recording. He informed Williams that he believed that the speaker on the tape was Smith and that the references in the message to "Tom" and "Lou" were probably to Tom Curry and Lou Delmonico, both corporate officers at PDA. Phillips offered to send Williams a copy of the tape itself, but Williams declined. Phillips never spoke to Williams again.

Williams referred the matter to Special Agent Maura Kelly ("Kelly") of the Federal Bureau of Investigation ("FBI"). Kelly contacted the Pacific Regional Office of the Securities and Exchange Commission ("SEC") and relayed to a staff attorney that an "anonymous informant had told [Williams] about insider trading in the stock of a company called PDA Engineering by a person named Richard Smith and that the anonymous informant had a tape of a conversation involving an individual purporting to be Smith discussing insider trading." In November 1993, the SEC issued a formal order of investigation against Smith. Over the course of the ensuing eight months, the SEC obtained documentary evidence from various sources and deposed a number of witnesses. Sometime during the seventh month of its eight-month investigation (in July 1994), the SEC obtained via administrative subpoena an audiotape copy of the recorded voicemail message.

In September 1994, the SEC referred the matter back to the United States Attorney in Los Angeles for possible criminal prosecution. Throughout the next eighteen months, the United States Attorney's Office and the FBI conducted substantial additional investigation, during which they interviewed fifteen individuals and subpoenaed sixteen additional boxes of documents.

Smith was indicted on eleven counts of insider trading in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, and on one count of obstruction of justice in violation of 18 U.S.C. § 1505. Smith moved to suppress the evidence supporting the eleven insider trading counts and to dismiss the indictment as a whole, including the obstruction-of-justice count. After an extensive hearing, the district court suppressed the voicemail message itself, but refused to exclude the remainder of the government's evidence, concluding that it was not "derived from" the initial illegal recording. Although the court granted Smith's motion to dismiss the obstruction count, 4 it denied his motion to dismiss with respect to the insider trading counts.

After a week-long trial, a jury returned guilty verdicts on all eleven insider trading counts. Smith filed a motion for judgment of acquittal or, in the alternative, for a new trial. The district court denied the motion, and Smith appealed.

Smith's contentions on appeal are essentially these: (1) that the government's evidence of insider trading was "derived from" an illegal wiretap and, therefore, should have been excluded pursuant to 18 U.S.C. § 2515; (2) that the information he possessed was

Page 1055

forward-looking, or "soft," information, and hence was not "material" within the meaning of Rule 10b-5; and (3) that the district court erroneously instructed the jury that it could convict Smith based upon his mere possession, as opposed to his use, of inside information.

Prior to trial, the district court suppressed the tape of the voicemail message because it concluded that the tape had been illegally "intercepted" within the meaning of 18 U.S.C. § 2515. The court refused, however, to exclude the remainder of the government's evidence. Smith contends on appeal that all evidence produced by the government at trial should have been suppressed because it was "derived from" an illegal wiretap in violation of § 2515. The government counters on two fronts. In addition to its argument that the district court correctly rejected Smith's "derived from" argument, see infra Part II.B, the government maintains (as an alternative basis for affirmance 5) that the district court erred in concluding that § 2515 governs this case in the first place. The government contends that a separate section of Title 18-- § 2701--applies to situations like the one presented here and thus controls the evidentiary question. Because the government's alternative argument presents a threshold issue, we address it first.


When the Fifth Circuit observed that the Wiretap Act "is famous (if not infamous) for its lack of clarity," Steve Jackson Games, Inc. v. United States Secret Service, 36 F.3d 457, 462 (5th Cir.1994), it might have put the matter too mildly. Indeed, the intersection of the Wiretap Act (18 U.S.C. §§ 2510-2520) and the Stored Communications Act (18 U.S.C. §§ 2701-2710) is a complex, often convoluted, area of the law. This case turns, at least in part, on issues at the very heart of that intersection.

Smith insists that the Wiretap Act controls. The district court agreed. Section 2515 provides, in relevant part, that "[w]henever any wire ... communication has been intercepted, no part of the contents of such communication and no evidence derived therefrom may be received in evidence in any trial." 18 U.S.C. § 2515 (emphasis added). Section 2510(1) defines "wire communication" as "any aural transfer made in whole or in part through the use of facilities for the transmission of communications by the aid of wire, cable, or other like connection" and expressly includes within its scope "any electronic storage of such communication." 18 U.S.C. § 2510(1) (emphasis added). 6 Section 2510(4) defines "intercept" as "the aural or other acquisition of the contents of any wire ... communication through the use of any electronic, mechanical, or other device." 18 U.S.C. § 2510(4).

In view of the rather broad definitions supplied in § 2510, Smith argues, the voicemail message Gore retrieved from Bravo's mailbox seems rather plainly to fit within the language of the exclusionary provision of § 2515. For starters, the message itself, which Smith left in the voicemail system via telephone, was a "wire communication"; it was an "aural transfer," made using a wire facility (the telephone line), and was subsequently "electronic[ally] stor[ed]" within the voicemail system. In addition, Gore's act of recording the...

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