United States v. McLellan

Citation959 F.3d 442
Decision Date20 May 2020
Docket NumberNo. 18-2032,18-2032
Parties UNITED STATES of America, Appellee, v. Ross MCLELLAN, Defendant, Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)

Martin Weinberg, with whom Kimberly Homan were on brief, for appellant.

Stephen E. Frank, Assistant United States Attorney, with whom Andrew E. Lelling, United States Attorney, was on brief, for appellee.

Before Howard, Chief Judge, Torruella, and Thompson, Circuit Judges.

TORRUELLA, Circuit Judge.

Ross McLellan ("McLellan") appeals his convictions of securities and wire fraud as well as conspiracy to commit securities and wire fraud for his leadership role in a scheme to defraud overseas institutional investors by applying hidden commissions on the buying and selling of U.S. securities.

First, McLellan disputes that there was sufficient evidence to sustain his securities fraud convictions under 15 U.S.C. §§ 78j(b), 78ff(a), and 17 C.F.R. § 240.10b-5 (hereinafter "Rule 10b-5") and objects to the district court's jury instruction on the elements of said offense. Second, he protests that his wire fraud conviction under 18 U.S.C. § 1343 was the product of an improper extraterritorial application of the wire fraud statute, and relatedly, he submits that it was error for the district court not to instruct the jury that it had to find a domestic application of the statute to convict. Third, he contends that the district court erred by not compelling the U.S. government to exercise its powers under Mutual Legal Assistance Treaties ("MLATs") with the United Kingdom and the Republic of Ireland to seek evidence that could have been favorable to his defense. See Mutual Legal Assistance Treaty, U.S.-U.K. and N. Ir., Jan. 6, 1994 (hereinafter "U.S.-U.K. MLAT"); Mutual Legal Assistance Treaty, U.S.-Ir., Jan. 18, 2001 (hereinafter "U.S.-Ireland MLAT").

Because we hold that the relevant securities law covers misrepresentations of the commissions to be applied to securities trades by transition managers under the agency model, we find that the evidence was sufficient to sustain McLellan's convictions and that to the extent that the jury instructions may have been overbroad, any error was harmless. Moreover, we need not address whether § 1343 applies extraterritorially because McLellan was convicted under a proper domestic application of the statute, and to that end, the district court's jury instructions on wire fraud nevertheless required the jury to find a domestic application. Finally, because the district court correctly determined that it lacked the authority to order the government to lodge MLAT requests on behalf of a private party, we find no reversible error. Accordingly, we affirm McLellan's convictions on all counts.

I. Factual Background
A. State Street's Transition Management Services

Because McLellan challenges the sufficiency of the evidence, we summarize the evidence in the light most favorable to the verdict. See United States v. Kanodia, 943 F.3d 499, 501 (1st Cir. 2019).

McLellan, a former executive vice president of State Street Bank ("State Street"), a Boston-based corporation, was charged with committing securities and wire fraud for his part in a scheme intended to defraud six institutional investors.

In his position, McLellan was the global head of State Street's Portfolio Solutions Group ("PSG"), which included its transition management services, until October 2011. During McLellan's tenure, State Street was one of numerous firms that competed to provide transition management services to institutional clientele. When large institutional investors, such as pension funds, transition from one asset manager to another, they typically hire a transition manager to restructure their portfolios so as to minimize the "implementation shortfall." Transition management firms specialize in buying and selling securities on the open market on behalf of their clientele so as to reduce as much as possible the monetary losses that the supply and demand pressures of securities markets can cause during transitions.

Two models dominate the transition services market: the "principal" model and the "agency" model. Under the principal model, the firm directly buys securities from and sells securities to its client. While a transition manager in the principal model assumes the risk that it will have to make unprofitable trades to complete the transition for the client, it is also able to keep any profit made on those trades for itself. Under the agency model, the firm acts as an intermediary that facilitates the buying or selling of securities for its clients through a third-party broker-dealer. Firms utilizing the agency model profit from transition services through two means: an upfront flat fee for the entire transition or a disclosed fee per trade. The client -- not the transition management firm -- selects the securities to be sold and bought on the open market. During the relevant time period, State Street followed the "agency model." State Street promoted this model to its clients through its advertising materials and assured them that it would function as a fiduciary while trading on their behalf.

As overseer of State Street's transition management services, McLellan engaged Boston-based traders to buy and sell U.S. securities for State Street clients. State Street's clients in Europe, the Middle East, and Africa contracted with State Street through the London-based State Street Bank Europe Ltd. ("SSBEL"). Edward Pennings ("Pennings"), a critical government witness at trial, headed SSBEL's transition management group first as vice president and then as senior managing director; he reported directly to McLellan. Pennings spoke with McLellan daily about State Street's clients and trades as the transactions at issue progressed. Rick Boomgaardt ("Boomgaardt") headed SSBEL's transition management desk in London. Although he reported directly to Pennings, Boomgaardt periodically communicated with McLellan about ongoing negotiations and transitions.

In the aftermath of the 2008 economic recession in the United States, McLellan, Pennings, and Boomgaardt devised a scheme to promise low commissions, or a flat fee, to potential clients with the intention of embedding large hidden commissions in the price of the securities as reported to the clients during the transition. McLellan directed Pennings and Boomgaardt to pursue this scheme for large bond-based deals because those securities were reported to clients on a "net" basis, which incorporated the commissions into the price of the security as it was represented to the client at the end of the transaction. This reporting practice would make it difficult for clients to notice the hiked-up charge. Conversely, commissions on stocks are typically reported separately from the price of the stock, allowing the client to see the precise purchase or sale price and the commission that the firm took from the transaction. On occasion, Pennings, while in his position at SSBEL, would represent to other State Street employees that the commissions were approved by the European management and were legal. At times, Pennings also relayed to other members of the team that the contracts were sufficiently vague to allow the taking of undisclosed markups despite having made affirmative representations to the contrary.

B. The Relevant Transitions

The government's case against McLellan hinged on seven discrete transitions that State Street handled for six clients. Those clients were: Kuwait-based Kuwait Investment Authority ("KIA"); Netherlands-based Dutch Doctors; Ireland-based National Treasury Management Agency ("NTMA"); U.K.-based Sainsbury's; Ireland-based Eircom; and U.K.-based Royal Mail. Each of those six clients had a master transition management agreement ("TMA") with State Street that governed the terms of all subsequent transactions.

Institutional investors, such as these six clients, solicit bids from transition management firms through a request for proposals ("RFP"). Transition managers then submit estimates of the implementation shortfall to the prospective client in the hopes of winning its business. For each of these clients, Pennings and Boomgaardt prepared all of the responses to RFPs, directly negotiated the contracts for transitions, and prepared periodic notices and pre-trade estimates. McLellan did not directly communicate or negotiate with any of the six defrauded investors. However, McLellan directed the scheme from the United States, contacted traders in the United States to oversee and implement the application of hidden commissions, and shaped the team's response to the discovery of the scheme by attempting to cover it up.

1. First KIA Transition

In March 2010, KIA, a Kuwaiti sovereign wealth fund, selected State Street to manage a transition involving $2 billion in bonds. Pennings negotiated the deal with a KIA representative named Das. During the negotiations, Pennings represented to Das that State Street would conduct the transition without taking any commissions whatsoever even though Pennings always intended otherwise. Boomgaardt testified that he and McLellan decided to make a zero-commission quote in order to compete with other banks bidding on the KIA transition. After submitting the bid, Pennings represented to KIA that State Street would make money on "the other side of the transaction." At trial, Pennings testified that this explanation to KIA was "nonsense" and meaningless because there was no way to make money on "the other side of the transactions." Pennings did tell Das that, absent a commission, State Street would take a "spread," but he never explained how it would be applied or how the spread would impact KIA. Pennings and Boomgaardt both testified that they were not sure if Das understood how State Street was going to make money on the deal. After the negotiations were completed, Pennings sent a periodic notice to Das with the terms of the transition agreement. This document represented in a footnote that all...

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