Mickelson Seeks Relief from Insider Trading Hazard

Almost two years ago, the Wall Street Journal and New York Times first reported an insider trading investigation involving sports gambler William “Billy” Walters and pro golfer Phil Mickelson.  At the time, the investigation appeared to focus on trading activity surrounding a potential take-over bid of Clorox.  We didn’t think much of potential claims against Mickelson arising out of the Clorox investigation.  Yet, buried in both articles was a reference to a second investigation involving trading in Dean Foods.  Today, the Dean Foods investigation shot up the leaderboard with the announcement of criminal insider trading charges against Walters and former Dean Foods Chairman Thomas Davis.  The SEC also brought civil charges against the pair and has named Mickelson as a “relief defendant,” asserting that Mickelson profited from trading in Dean Foods stock based upon non-public information received from Walters.

As a relief defendant, Mickelson is not accused of any wrongdoing. Rather, a relief defendant may be ordered to repay funds when that person has received ill-gotten gains and does not have a legitimate claim to those funds.  SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1988).  In this case, the SEC alleges that Walters gave Mickelson, who at the time owed Walters for a gambling debt, inside information regarding Dean Foods (which Walters had received from Davis).  Mickelson then used that information to earn a $931,000 profit in just over a week from his $2.4 million position in the company.  That sure beats the $500 he made off of Mike Weir for betting that Jim Furyk would sink a bunker shot, a bet that put him in hot water for violating PGA Tour policy that provides that “player shall not have any financial interest, either direct or indirect, in the performance or the winnings of another player.”  In any event, the “ill-gotten” nature of Mickelson’s Dean Foods’ profit was not alleged to be the result of Mickelson’s conduct, but rather, Walters’.

It is not uncommon for the SEC to pursue disgorgement from individuals who are downstream tippees – traders who are a step or two distant from the insider who breached his or her fiduciary duty in disclosing material, non-public information.  See, e.g., SEC v. McGee, 895 F.Supp.2d 669, 686-689 (E.D. Pa. 2012).  By naming Mickelson as a relief defendant, not charging him civilly or criminally, the government need not prove that Mickelson knew that the insider – here, Davis – received a benefit from the immediate tippee – Walters – in exchange for the inside information. As tipees get further down the chain from the insider, the government faces an increasingly difficult task in proving the requisite knowledge of this benefit, particularly in light of the Second Circuit’s decision clarifying this requirement in United States v. Newman.  See our discussion of Newman here, here, and here.

As for Walters, he is a gambling man, and he’s now facing the gamble of his life.  He faces a federal indictment that alleges gains (and avoided losses) of more than $40 million.  Further, the government has announced that the corporate insider, Davis, has already pleaded guilty to conspiracy, securities fraud, wire fraud, obstruction of justice, and perjury, and is cooperating with the government.

For Mickelson, as the SEC announced today, he has agreed to repay the full disgorgement of his trading profits of $931,738.12 plus interest of $105,291.69.  He has neither admitted nor denied the allegations.  In a statement, Mickelson noted the return of the funds and said that he had “no desire to benefit from any transaction that the SEC sees as questionable.”  Mickelson appears to be identified in Walters’ indictment as “Individual-2” and may well play an ongoing role as a witness in any civil or criminal trial arising out of the SEC’s complaint or the criminal case against Walters.

Supreme Court: Courts Cannot Bar Use of Untainted Assets to Mount Criminal Defense

In a decision of significant importance to the white-collar world, the United States Supreme Court held yesterday that the Sixth Amendment right to counsel extends to permit those accused of crimes to use their “untainted” personal assets to fund their defense. Put another way, this means that if the government accuses you of a crime, and you have legitimate assets with which you want to pay the lawyer of your choice, the government can no longer stand between you and doing so.

A federal statute provides that a court may freeze some assets belonging to those accused of certain federal health care or banking laws. Those assets include: (1) property “obtained as a result of” the crime; (2) property “traceable” to the crime; and (3) other “property of equivalent value.” In October of 2012, a federal grand jury charged Sila Luis with such crimes (related to an alleged $45 million Medicare fraud scheme). Luis had about $2 million dollars remaining in her possession at the time, and the government secured a pretrial order prohibiting her from dissipating those assets, which belonged to the third category above, regardless of whether they had anything to do with her criminal conduct. The district court observed the potential Sixth Amendment complications presented in this case, but held that Amendment did not provide Luis a right to use her untainted assets to pay for her defense, and the Court of Appeals for the Eleventh Circuit affirmed.

The Supreme Court, in a decision divided along uncommon lines, reversed. It concluded that this pretrial restraint on the use of otherwise wholly legitimate assets violated the Sixth Amendment. In reaching this result, Justice Breyer (joined by Chief Justice Roberts and Justices Ginsburg and Sotomayor), reasoned that the nature and grave importance of the right to counsel, taken together with the type of untainted assets at issue led to this conclusion.

It is well-established that every criminal defendant is entitled to counsel of his or her choosing, and settled precedent provides that such persons are entitled “to be represented by an otherwise qualified attorney whom that defendant can afford to hire.” While the government argued that it, too, had a substantial interest (that of preserving criminal defendants’ assets to pay statutory penalties and restitution), the Court first reasoned that this interest was not weighty enough to counteract the criminal defendant’s need to use innocent funds to select counsel of his or her choosing. The Court also noted a lack of support for the government’s position in the common law, remarking that it could find “no decision of this Court authorizing unfettered, pretrial forfeiture of the defendant’s own ‘innocent’ property….” Moreover, it noted “as a practical matter” that to accept the government’s position may “unleash a principle of constitutional law that would have no obvious stopping place,” since Congress could simply “write more statutes” authorizing such pretrial forfeitures.

Justice Thomas, writing for himself, would have held that this balancing act unnecessary, indeed inappropriate, in light of his view that the Sixth Amendment’s “text and common-law backdrop” supplied all the authority necessary to hold such asset freezes unconstitutional.

This ruling is a significant victory for the Sixth Amendment right to counsel and for property rights. It is also a huge win for Luis, whose case will return to the district court, where she must now be permitted to pay her chosen lawyer with her untainted assets.

Seventh Circuit Finds Clear Error on Loss Calculation in Trade Secrets Sentencing

The Seventh Circuit Court of Appeals on Wednesday found clear error in the sentencing of a quantitative finance professional who pleaded guilty to unlawfully possessing and transmitting trade secrets.  The defendant, twenty-eight year old Yihao Pu, stole expensive and proprietary high-speed securities trading software with the hope to use it for his own pecuniary gain.  Unfortunately for Pu, he ended up losing money on the scheme.  Already out $40,000, things got worse for him when his employer, financial giant Citidel, caught on.

From 2009 through 2011, Pu worked at two financial companies using their software systems to conduct trades for their clients.  He illegally copied files during his time at both companies using personal electronic storage devices and employed those files to conduct personal trades for his own benefit.  The wheels came off when Citadel grew increasingly suspicious of activity on Pu’s work computer and conducted an internal investigation revealing the extent of his criminal actions.

Charged by a grand jury with twenty-three criminal offenses, Pu avoided trial by pleading guilty to one count of unlawfully transmitting a trade secret as to Citadel and another count of unlawfully possessing a trade secret as to the other company.  At sentencing, the parties agreed, and the district court found, that there was no actual monetary loss—again, Pu had himself lost $40,000 by the time the government put a stop to his illegal trading.  The district court instead looked to how much money the companies paid their employees to develop the algorithms and source code that Pu stole, arriving at a loss amount of over $12,000,000.  This large-dollar loss calculation increased what would have been a sentencing offense level of nine by twenty points—more than 200-percent for those keeping score.  After a departure downward from the guidelines, the court sentenced Pu to three years’ imprisonment.  The court also ordered Pu to pay more than $750,000 in restitution for the money Citadel paid forensic analysts and attorneys to investigate his conduct based largely, if not solely, on a letter from Citadel reflecting its claimed expenses.

Not okay on either count, said the Seventh Circuit.
Continue reading

Former Texas Governor Rick Perry’s Indictment Dismissed as Unconstitutional

Today, the Texas Court of Criminal Appeals held that the prosecution of former Texas Governor Rick Perry was as much an “oops” as his own slip that famously felled his 2012 Presidential campaign.  The court remanded the case to the district court with orders to dismiss the two-count indictment, charging him for the threat and actual veto of state funds for a district attorney who had been arrested for drunk driving but refused to resign.  We said it back in 2014 and say it again now:  Governor Perry should not have been charged.  Or, as better articulated by Judge David Newell’s concurring opinion in this appeal:

Come at the king, you best not miss.

– Omar Little, The Wire (HBO 2002).

Indeed, the indictment was a miss from the start (as detailed in the amicus brief of constitutional and criminal law scholars filed in the Court of Criminal Appeals).

Count I alleged that the vetoing the funds constituted “abuse of official capacity” under Texas Penal Code § 39.02.  Count II alleged that the threat to veto constituted a “coercion of a public servant” pursuant to Texas Penal Code § 36.03.  The Court of Criminal Appeals rejected the government’s arguments on both counts.

The court concluded that the legislature could not directly or indirectly limit the governor’s veto power.  Because it was the veto that was the alleged illegal act, the prosecution violated the separation of powers.  In a footnote, the court distinguished the indictment with a hypothetical bribery prosecution in which a governor accepted money in exchange for the veto.  In such a case, “the illegal conduct is not the veto; it is the agreement to take money in exchange for the promise.”  Slip op. at 24 n.96.

With respect to the threat and the “coercion of a public servant,” the court concluded that the definition of “coercion” as “a threat, however communicated . . . to take or withhold action as a public servant” is unconstitutionally overbroad in violation of the First Amendment. Id. at 51 (citing Tex. Penal Code § 1.07(a)(9)(F)).

When we first called the indictment a “weak case that shouldn’t have been charged,” we lamented that “it is often a very long road to reveal the truth.”  The appeal tells us that the wait was not necessarily for the “truth” – the facts were undisputed – but the law.  Not without dissent (actually, two), the Court of Criminal Appeals nonetheless rightfully applied the law and ordered the dismissal of the indictment.



Second Circuit Accepts Rajat Gupta’s Insider Trading Appeal

This week I spoke with Fox Business reporter Serena Elavia about the Second Circuit’s decision to grant a certificate of appealability in the Rajat Gupta insider trading prosecution.  Gupta is the high-profile former McKinsey & Co. Managing Director and Goldman Sachs board member who was prosecuted and convicted for providing insider information to former Galleon Group hedge fund manager Raj Rajaratnam.

Gupta, who was first convicted in 2012 and whose direct appeal was denied in 2014, received another bite at the apple earlier this month.  He now has an opportunity for the Second Circuit to determine whether his conviction should be vacated because the jury was erroneously instructed and whether any procedural default may be excused for cause and prejudice or actual innocence.  This opportunity flows directly from the Second Circuit’s United States v. Newman decision, which altered the proof needed for the “personal benefit” to the insider that is required under Dirks v. S.E.C., 463 U.S. 646 (1983).

Newman held that merely “maintaining a good relationship” is not enough to prove the required “personal benefit.”  Instead, the insider must be the beneficiary of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”  Yet, at the time that Gupta was convicted, the district court instructed the jury that the benefit received did “not need to be financial or to be tangible in nature.  It could include, for example, maintaining a good relationship with a frequent business partner, or obtaining future financial benefits.”  Gupta did not object at the time to the instruction (Newman had not been decided).  Gupta and others, including Bassam Salman, whose petition for certiorari the Supreme Court just granted, have argued that Newman did, in fact, change the personal benefit test and thus their convictions under the less stringent “relationship” test should be vacated.

For Gupta personally, the Second Circuit’s order agreeing to hear the appeal is a significant step, although, procedurally, the Second Circuit may have accepted the appeal to put it in a holding pattern.  The Supreme Court will have the final say on this issue as it addresses Salman’s petition on the question of whether the personal benefit:

requires proof of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” as the Second Circuit held in United States v. Newman, or whether it is enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case.

Salman’s Supreme Court brief is due in May.



Supreme Court Holds General Statute of Limitations is Not Jurisdictional Defense

It appears that not even this weekend’s colossal winter snowstorm could deter the Supreme Court from its business, today deciding several criminal cases on its docket.  In addition to the landmark Montgomery v. Louisiana decision, which gives retroactive effect to Miller v. Alabama and will have massive implications for those juvenile defendants serving life sentences for murder who may now seek resentencing or parole, the Court affirmed the convictions of Michael Musacchio, a former logistics industry executive who was convicted of improperly penetrating his past employer’s computer system with help from another former employee.

Musacchio had been president of Exel Transportation Services until he resigned in 2004. In 2005, he started a rival logistics company, Total Transportation Services, and soon thereafter hired Roy Brown, Exel’s former chief of information-technology.  Using a password Brown supplied, both Brown and Musacchio continued to access Exel’s computer system until 2006.

In 2010, a grand jury indicted Musacchio for computer fraud under 18 U.S.C. § 1030(a)(2)(C), which makes it illegal to “intentionally access[ ] a computer without authorization or [to] exceed[ ] authorized access,” and in doing so “obtain[ ]… information from any protected computer.” Id. (emphasis supplied).  Although initially charged under both statutorily provided theories of liability, the government’s superseding indictment limited both the conspiracy-based and substantive charges (Counts 1 and 2, respectively) to the cohorts’ unauthorized access to the Exel computer system.

At Musacchio’s 2012 jury trial, his counsel apparently overlooked that the general five-year federal statute of limitations (codified at 18 U.S.C. § 3282) might have barred Count 2, and so he raised no defense on that basis.  And, for the government’s part, it raised no objection to a clearly erroneous jury instruction that diverged from the indictment and the proposed instructions, and directed the jury to consider whether Musacchio had both “intentionally accessed a computer without authorization” and “exceeded authorized access.” Musacchio v. United States, No. 14-1095, 577 U.S. ___, slip op. at 3 (filed Jan. 25, 2016) (emphasis supplied).  Little did the parties likely know that these omissions would catapult Musacchio’s case all the way to the High Court.

After the Fifth Circuit affirmed Musacchio’s sentence of sixty months’ incarceration, the Supreme Court granted certiorari to (1) determine the proper standard of review of a sufficiency-of-the-evidence claim where the court erroneously instructs the jury and adds an element to the offense as charged, and (2) determine whether Section 3282’s statute of limitations was a nonwaivable defense that could be asserted for the first time on appeal.

Unfortunately for Musacchio, he fared no better at the Court, but his case does provide guidance to practitioners. Continue reading

Former Speaker Hastert Pleads Guilty in Hush-Money Case

This morning, former U.S. House Speaker Dennis Hastert appeared in district court in Chicago and pled guilty to one count of violating bank reporting laws. Hastert’s defense counsel had “indicated two weeks ago that he was planning to plead guilty, though the details of the deal weren’t known at the time and the politician maintained the right to withdraw from the agreement until he entered his formal plea [this] morning.” Jessica Corso, Ex-Speaker Hastert Pleads Guilty to Hush Money Charge, Law 360 (Oct. 28, 2015). Today the deal was revealed: in exchange for his plea, one of the charges against Hastert – making false statements – has been dropped and federal prosecutors have apparently recommended that he serve no more than six months in prison.

As White Collar Alert previously reported, in May Hastert was indicted in connection with his alleged agreement to pay an unknown individual $3.5 million “to compensate for and conceal his prior misconduct” against that unknown person. The indictment does not say what the former representative did that led him to pay the bribe, but it alleges that Hastert first withdrew cash in amounts of $50,000 and then, following questioning by bank representatives, structured his withdraws – reducing his payments to under $10,000 each – to evade the banks’ reporting requirements. He did this at least 106 times over a two-year period. Then, when questioned by the FBI about his conduct, Hastert allegedly lied, informing agents that he had withdrawn the cash and kept it “because he did not feel safe with the banking system.” For this conduct, he was charged with two counts: structuring and making false statements to the FBI.

Hastert pleaded not guilty to both charges but over the last few months his attorneys have been negotiating a plea deal, apparently seeking to avoid a trial that would disclose embarrassing secrets dating back to Hastert’s days as a high-school wrestling coach in Illinois. While the plea deal certainly has its up-sides for Hastert, his future remains uncertain:

  • Possible Disclosure of the Underlying Misconduct: Though the plea deal avoids a trail, some detail regarding Hastert’s misconduct may still come to light. As part of the sentencing process the government and defense counsel will provide the court with relevant information about Hastert’s background and the charged offenses. Furthermore, both parties have the ability to call witnesses at the sentencing hearing, including the individual whom Hastert was bribing. Thus, there is still a possibility that some details regarding the alleged misconduct will be revealed.
  • A Potential Period of Incarceration: While one of the charges against Hastert has been dropped and the government has recommended a sentence of no more than 6 months imprisonment, Hastert faces up to five years’ incarceration and a $250,000 fine. Hastert, however, has numerous arguments in favor of a non-incarceration sentence under the factors set forth in 18 U.S.C. § 3553 (discussed here), including the following:
  • The Collateral Consequences: Regardless of the sentence he serves, like most white collar offenders, the “collateral consequences” of Hastert’s conviction will be harsh and will last the duration of his lifetime. Once powerful and well-liked, Hastert’s name – like many a politician before him – has been completely sullied. Likewise, Hastert’s lucrative lobbying career is almost certainly over: as a convicted felon, Congressmen and Congresswomen will almost certainly refuse to meet with him. United States v. Vigil, 476 F. Supp.2d 1231, 1235 (D.N.M. 2007) (finding variance appropriate where defendant in public corruption case was already collaterally punished by loss of his position, loss of his reputation, and media coverage of his case).

Hastert is set to be sentenced on February 29th. White Collar Alert will be sure to report on the conclusion of Hastert’s case.

Former Speaker Hastert Indicted: Structuring a Costly Cover-Up

Yesterday, the Department of Justice charged former House Speaker Dennis Hastert in an indictment stemming from his alleged agreement to pay an unknown individual $3.5 million “to compensate for and conceal his prior misconduct” against that unknown person. According to the indictment, Mr. Hastert, a former high school teacher and wrestling coach before entering politics, first withdrew cash in amounts of $50,000, but then, following questioning by bank representatives, structured his withdraws – reducing his payments to under $10,000 each – to evade the banks’ reporting requirements. And he did so at least 106 times. So far, Mr. Hastert has paid $1.7 million to this person, who claims to have known the former Speaker for most of his or her life. When questioned by the FBI about his conduct, Mr. Hastert allegedly lied about it. When the FBI asked him if he had taken out large sums of cash on several occasions, “because he did not feel safe with the banking system, as he previously indicated,” he replied, “Yeah . . . I kept the cash. That’s what I’m doing.” For this, he was charged with two counts: making false statements to the FBI and structuring.

The first lesson, of course, is “don’t lie to the FBI.” Ever. It’s not a good idea. Ask Martha Stewart.

But back to structuring. In 1970, Congress passed the Bank Secrecy Act, an anti-money laundering statute that, among other things, requires banks to file Currency Transaction Reports for any deposit or withdrawal of more than $10,000. It is a crime for a person “for the purpose of evading the reporting requirements” to cause a bank to fail to file a report required under the Bank Secrecy Act. 31 U.S.C. § 5324(a). Indeed, the reporting requirements led ultimately to the downfall (but not prosecution) of the infamous Client 9, who, in addition to being a client of a high-priced prostitution ring, also served as the Governor of the State of New York.

The law’s purpose is designed to track down illegal activity. The rationale goes that those who structure their deposits or withdrawals so as to avoid the $10,000 reporting trigger are more likely to be those whose transactions are connected to illegal activity. But that’s certainly not always the case. Maybe, rather than trying to hide currency that is the result of illegal conduct, the goal was to hide the funds from an ex-spouse? Yet the government will have to prove that the former Speaker knew he was trying to avoid the $10,000 reporting trigger. See United States v. MacPherson, 424 F.3d 183, 189 (2d Cir. 2005) (conviction for structuring currency transactions requires that defendant have done so with knowledge that the financial institutions involved were legally obligated to report currency transactions in excess of $10,000).

I suspect that we will eventually find out what “misconduct” Speaker Hastert was trying to hide (if the government’s indictment is to be believed). But the prosecution itself highlights the very real consequences of trying to evade bank reporting requirements . . . and lying about it.

General Petraeus Avoids Jail for Leaking Classified Information to Girlfriend

David PetraeusYesterday, former CIA head and retired General David H. Petraeus was sentenced for leaking classified information about the war in Afghanistan to his biographer/mistress, Paula Broadwell. Broadwell published a biography about him in 2012, “All In: The Education of David Petraeus,” before the affair was exposed. The Charlotte Observer wrote that “[w]ithout the weight and gravitas of his military uniform, the former military icon seemed every bit the white-collar criminal suspect as he passed through a media gauntlet on his way into the courthouse.” Judge David Kessler sentenced him to two years of probation and a $100,000 fine—more than double to the $40,000 he agreed to— as part of his plea deal for one federal misdemeanor count of unauthorized removal and retention of classified material. He faced up to one year in prison for this charge, and Judge Kessler said he increased the fine to “reflect seriousness of the offense.” Before sentencing, General Petraeus apologized for the pain his actions have caused and afterwards proclaimed that “[t]oday marks the end of a two-and-a-half-year ordeal” and that he looks “forward to moving on with the next phase of my life.” General Petreaus, who is now 62, resigned from the CIA after the affair became public.

According to the government, General Petreaus gave Broadwell eight binders of classified material he kept from his time as top military commander in Afghanistan. Some of the information contained in these binders included names of covert operatives, the coalition war strategy, and notes about General Petraeus’ discussions with President Barack Obama. Later, the FBI seized the binders from General Petraeus’ home in Arlington, Virginia, home. General Petraeus resigned from the CIA in November 2012, and signed a form that stated he had no classified material. This and the statements he told FBI agents denying that he gave Broadwell information were documented in court documents. Court documents also reference an email where General Petraeus promises to give the books to Broadwell.

Judge Kessler saw this as a just sentence for what appeared to be an aberration in an otherwise remarkable life. Judge Kessler noted that General Petreaus’ criminal conduct was “in stark contrast to 37 years of achievement.” The sentencing yesterday was the culmination of what the New York Times deemed “a spectacular fall” from grace for General Petreaus, a man once considered as a possible presidential candidate.

More Puritanical Punishment Courtesy of Utah: “White Collar Crime Registry”

This post was co-authored by White Collar Alert contributor, Erin Dougherty.

Yesterday, Utah Governor Gary Herbert signed a new bill into law that creates a “Utah White Collar Crime Offender Registry” (the “Registry”). This Registry – which is the first of its kind relating to white collar crimes – comes upon the heels of news earlier in the week that Utah will now allow firing squads for death penalty cases when the drugs needed for lethal injection aren’t available.

Similar to a sex offender registry, the Registry is expected to be available in about a year and will include a recent photograph of an offender who has been convicted of an enumerated list of felony white collar crimes (i.e. securities fraud, money laundering), a physical description, and any aliases. For a first time offense, a person will be on the Registry for ten years, for the second offense, another ten years, and for the third, on the Registry for life. The Registry does provide for a person to petition a court to be removed from the list if a series of requirements are met: 5 years having passed since the completion of the offender’s sentence, the offender having successfully completed all treatment ordered by the court or the Board of Pardons and Parole relating to the conviction, the offender having not been convicted of any other crime, the offender having paid all restitution ordered by the court, notice having been delivered to the victims and the office that prosecuted the offender, the offender having not been found to be civilly liable in any case in which fraud, misrepresentation, deceit, breach of fiduciary duty, or the misuse or misappropriation of funds is an element.

Like Hester Prynne, Utahns who are convicted of white collar offenses will be destined to carry with them the mark of their crimes, notwithstanding the questionable effect it has on protecting the public.

Like Hester Prynne, Utahns who are convicted of white collar offenses will be destined to carry with them the mark of their crimes, notwithstanding the questionable effect it has on protecting the public.

The NY Times deemed the Registry “a scarlet letter of sorts on the state’s financial felons.” The bill’s chief sponsor, however, representative Mike McKell, has defended the law, and described Utah as a “hotbed for financial fraud” where “[m]any people in our state have trusting relationships with those who take their money in multimillion dollar schemes, and many times those particular people have already been convicted of financial crimes.”

Governor Herbert also proclaimed the worth of it, saying: “Whether a criminal wears a white collar or a blue collar, I am a strong supporter of protecting the consumer and the public from fraud and predatory practices ….This bill helps us do that and I’m proud to sign it.” Continue reading