United States v. Winans

• Citation: 612 F. Supp. 827
• Decision Date: 24 July 1985
• Docket Number: No. SS 84 Cr. 605 (CES).,SS 84 Cr. 605 (CES).
• Parties: UNITED STATES of America v. R. Foster WINANS, David Carpenter and Kenneth P. Felis, Defendants.
• Court: U.S. District Court — Southern District of New York

612 F. Supp. 827

UNITED STATES of America v. R. Foster WINANS, David Carpenter and Kenneth P. Felis, Defendants.

No. SS 84 Cr. 605 (CES).

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

June 24, 1985.

As Amended July 24, 1985.

COPYRIGHT MATERIAL OMITTED

William M. Tendy, Acting U.S. Atty., S.D.N.Y. by Peter J. Romatowski, New York City, for plaintiff.

Buchwald & Kaufman by Don D. Buchwald, New York City, for defendant Winans.

Mudge Rose, Guthrie, Alexander & Ferdon by Jed S. Rakoff, Howard W. Goldstein, Caroline A. Riggio, New York City, for defendant Carpenter.

Brown, Wood, Ivey, Mitchell & Petty by E. Michael Bradley and I. Scott Bieler, New York City, for defendant Felis.

OPINION

STEWART, District Judge:

Defendants R. Foster Winans ("Winans"), David Carpenter ("Carpenter") and Kenneth P. Felis ("Felis") are charged in Counts Two through Sixty-One with participating in a scheme to trade in securities based on information misappropriated from the Wall Street Journal ("WSJ" or "the Journal"). The information allegedly stolen from the Journal was the timing, content and tenor of market-sensitive stories scheduled to appear in the paper. This conduct was allegedly in breach of a fiduciary duty owed to Winans' employer, Dow Jones & Co., the parent company of the Wall Street Journal. As such, Dow Jones was allegedly defrauded, and the indictment charges that these activities were in violation of Sections 10(b) and 32 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78ff and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and the mail and wire fraud statutes, 18 U.S.C. §§ 1341, 1343. All three defendants are also charged in Count One with conspiracy to violate those statutes and to obstruct justice by their agreement to cover up and obstruct any investigation of the scheme by disguising payments, by making false statements to Kidder Peabody, the WSJ and officers of the SEC, and by preparing false documents intended for submission to the SEC. Peter Brant, not a defendant in this action, is also named as a conspirator.¹

Winans was a reporter at the Wall Street Journal, and one of the writers of the "Heard on the Street" column ("the Heard column"). Winans and Carpenter are homosexuals who have been involved in what they describe as a "spousal relationship" for over ten years. Carpenter also worked at the Wall Street Journal, but for a briefer period of time than Winans. Felis was a stockbroker at Kidder Peabody, who was brought into that brokerage firm by Peter Brant, the government's key witness in this prosecution. It is fair to say that Winans and Brant were the chief architects of this trading arrangement.

I

After a twenty-day trial, we find the facts as follows. Winans was originally hired by the Dow Jones News Service in late March 1981. Referred by Winans, David Carpenter was hired by Dow Jones as a news clerk in December of 1981. Beginning on February 2, 1981, it was the practice of the Journal to distribute to all new employees "The Inside Story," a forty-four-page pamphlet with seven pages devoted to the conflicts of interest policy. Winans denied ever receiving this booklet, or any other written conflicts policy, although he testified to receiving benefits information at the time of hire; "The Inside Story" does contain data on benefits, but Winans testified that the form of benefits information he received was distinct from this particular pamphlet. As for Carpenter, who worked at the Wall Street Journal for approximately one and a half years, the government offers the same general practice testimony. However, Ms. Malloy, Personnel Manager for the New York region of Dow Jones, could not recall if she followed that practice with Carpenter, even though she was the one who conducted his orientation.

Winans received a promotion in the summer of 1982 when he became one of two full-time "Heard on the Street" writers. This column, the focus of the case, is a daily market gossip feature, which highlights a stock or group of stocks and analyzes notable volumes of trading or price movements occurring in the market. The Heard column reports both negative and positive information about its featured stocks, but also takes a point of view with respect to investment in the stocks that it reviews. Numerous witnesses, including Winans, testified that the column has an effect on the price of stocks mentioned in the column.² Testimony was presented by the defendants concerning the investment thesis of each column at issue in an attempt to show that price movements were related to factors other than the column's publication. We find that the Heard column does have an impact on the market, difficult though it may be to quantify in any particular case. It is certainly obvious that the defendants believed that the column had such an impact.

The Dow Jones Conflicts of Interest Policy is a three and one-half-page statement. It covers a number of subjects and specifically forbids the purchase or sale of securities on the basis of articles an employee knows will appear in the newspaper; it also states that employees should not disclose the paper's future contents to anyone outside the company. The policy also states that "all material gleaned by you in the course of your work for Dow Jones is deemed to be strictly the Company's property." Winans denied knowledge of any conflicts of interest policy, written or verbally conveyed, although he admitted that maintaining the confidentiality of the contents and timing of the columns was a "practice" of which he was aware.

Stewart Pinkerton, the New York Bureau Manager at the time of Winans' hire, testified to a conversation in which he told Winans of the confidential and sensitive nature of the Heard column, as well as the essentials of the conflicts of interest policy. Winans testified that this meeting was a brief "welcome aboard" talk, in which he and Pinkerton discussed salary and exchanged platitudes. Richard Rustin, who was Assistant Chief of the New York bureau and Winans' supervisor on the Heard column, testified that he too told Winans of the sensitivity of the column, and the importance of not investing in stocks the writer is covering. He also cautioned Winans that he should not let sources know what would be appearing in the column. Both Pinkerton and Rustin testified to follow-up reminders about the confidentiality of the column, after hearing rumors of leaks or having overheard Winans speak inappropriately to sources. Winans denies these conversations as well.

Seven months after Winans started to write the Heard column, on April 14, 1983, Pinkerton wrote Winans, summarizing a job performance discussion about errors in Winans' columns. Pinkerton wrote:

As you were made aware last August when you were hired to do the Heard on the Street Column, it's one of the most important columns we run. People rely on its insight, accuracy and integrity. When trust begins to erode on anything the Journal does, it creates grave concern, but especially so with something as sensitive as the Heard column.

Moreover, shortly after Winans' move to the Heard column, on August 19, 1982, he wrote Pinkerton a letter disclosing his freelance activities and his plans to withdraw from them. Both these documents support Pinkerton's testimony that he and Winans had a substantive discussion about the ethical responsibilities associated with the Heard column and conflicts of interest in general.

We find that Winans had actual knowledge of the policy with respect to maintaining the confidentiality of the column. His testimony carefully used the word "practice" as opposed to "policy," but the factual distinction is meaningless. Winans knew he would be fired if his conduct came to light. He knew that part of his job responsibilities were to keep the subject matter and the publication date of the column secret. He discussed the topic with his co-writer, Gary Putka, and cautioned a new writer, Ed Leefeldt, not to be too obvious about the column's subject when dealing with sources. Winans also knew that he was supposed to tell his editors if he heard that word was out about a column's topic. He told his editors about one leak prior to his arrangement with Brant. Even during the course of the scheme, while deliberately tipping to Brant, he went to his editor to say that a source was aware that they were working on a certain column. On neither occasion did the editor choose to kill the column, but Winans knew that it was part of his job to allow his employer that option.

Defendants argue that there is a legal significance to a distinction between the violation of a policy and the failure to ad-here to a practice. The legal argument will be addressed below, but we believe it is unnecessary for us to make the fine, factual distinctions between knowledge of a policy and knowledge of a practice that the defendants would have us make. In any event, we accept the testimony of Pinkerton and Rustin. We also find incredible Winans denial that he ever received the conflicts of interest policy statements.

As for David Carpenter, the government argues that he too knew of the policy from his work as a news assistant on the national news desk. According to the testimony of Nancy Cardwell, the Night News Editor who supervised him at the time, part of Carpenter's job was to answer the phones. She testified that in performing that task, he often had to deflect callers who sought to learn about the appearance of an article. Sometime in January of 1983, Carpenter asked Cardwell how to look up the stock symbol for American Surgery; he said "that's my stock" and over the next few weeks, she noticed he would frequently check the price. She believes at some point he commented, "Foster likes that stock," but for all she knew, that meant Winans had written a column about it and he had read it. We find that Carpenter was aware generally of the policy.

The American Surgery investment is the first...