     09-5349-cr(L)
     United States v. Mahaffy, et al.
 1
 2
 3                                      UNITED STATES COURT OF APPEALS
 4                                           FOR THE SECOND CIRCUIT
 5                                            _____________________
 6
 7                                               August Term, 2011
 8
 9           (Argued: March 5, 2012                                      Decided: August 2, 2012)
10
11   Docket No. 09-5349-cr(L) 09-5352-cr(con), 10-0036-cr(con), 10-0181-cr(con), 10-0154-cr(con),
12                   10-835(con), 10-2996(con), 10-3091(con), 10-4634-ag(con)
13                                   _____________________
14
15                                           UNITED STATES OF AMERICA,
16
17                                                                                             Appellee,
18
19                                                      v.
20
21     KENNETH E. MAHAFFY, JR., LINUS N. NWAIGWE, TIMOTHY O’CONNELL, DAVID G. GHYSELS,
22                          KEEVIN H. LEONARD, ROBERT F. MALIN,
23
24                                                                               Defendants-Appellants.
25
26                                            _____________________
27
28                                           KENNETH E. MAHAFFY, JR.,
29
30                                                                                            Petitioner,
31
32                                                      v.
33
34                         UNITED STATES SECURITIES AND EXCHANGE COMMISSION,
35
36                                                                                          Respondent.
37                                             ___________________
38
39   Before: MCLAUGHLIN, B.D. PARKER, and WESLEY, Circuit Judges.
40
41           Appeal from judgments of conviction in the United States District Court for the Eastern
42   District of New York (Gleeson, J.), following retrial, on conspiracy to commit honest services
43   and property fraud. See 18 U.S.C. §§ 1348, 1349. After sentencing, the government disclosed
44   transcripts of depositions taken by the SEC prior to the first trial. We hold that the transcripts
 1   contained material that was required to be disclosed under Brady v. Maryland, 373 U.S. 83
 2   (1963), and that the district court did not adequately instruct the jury that it had to find bribery in
 3   order to convict under an honest services fraud theory of conspiracy to commit securities fraud.
 4
 5           VACATED and REMANDED.
 6                              ___________________
 7
 8                                              ANDREW J. FRISCH (Jeremy B. Sporn, on the briefs),
 9                                                Law Offices of Andrew J. Frisch, New York, NY,
10                                                for Defendant-Appellant Kenneth E. Mahaffy, Jr.
11
12                                              DONNA R. NEWMAN, New York, NY, for Defendant-
13                                                Appellant Linus N. Nwaigwe.
14
15                                              YUANGCHUNG LEE, Federal Defenders of New York,
16                                                Inc., for Defendant-Appellant Timothy O’Connell.
17
18                                              SUSAN WOLFE, Hoffman Pollok, LLP, New York, NY,
19                                                 Matthew Brissenden, Garden City, NY, for
20                                                 Defendant-Appellant David G. Ghysels.
21
22                                              THOMAS F.X. DUNN, New York, NY, Mitchell Alan
23                                                 Golub, Golub & Golub, LLP, New York, NY, for
24                                                 Defendant-Appellant Keevin H. Leonard.
25
26                                              SUSAN G. KELLMAN, Law Offices of Susan G. Kellman,
27                                                 Brooklyn, NY, for Defendant-Appellant Robert F.
28                                                 Malin.
29
30                                              JAMES F. MCMAHON, Assistant United States Attorney
31                                                 (David C. James, Claire S. Kedeshian, Assistant
32                                                 United States Attorneys, on the brief), for Loretta E.
33                                                 Lynch, United States Attorney, Eastern District of
34                                                 New York, for Appellee United States of America.
35
36                                    HOPE H. AUGUSTINI, Senior Litigation Counsel (Mark
37                                       D. Cahn, General Counsel, Jacob H. Stillman,
38                                       Solicitor, on the brief), for Appellee Securities and
39                                       Exchange Commission.
40   ______________________________________________________________________________
41

42


                                                        2
 1   BARRINGTON D. PARKER, Circuit Judge:

2           This appeal arises from an indictment that charged that traders employed by several

3    brokerage firms conspired with employees of A.B. Watley, a day trading firm, to commit

4    securities fraud by providing confidential information belonging to their employers to Watley.

5    After a first trial in 2007 in the United States District Court for the Eastern District of New York

 6   (Glasser, J.), the jury acquitted the defendants on thirty-eight of thirty-nine counts.1 The jury

 7   hung, and the court subsequently declared a mistrial, on the remaining count, which charged the

 8   defendants with conspiring to commit securities fraud. See 18 U.S.C. §§ 1348, 1349. In 2009

 9   the government retried the conspiracy count before Judge John Gleeson, with honest services

10   fraud and property fraud as the charged objects of the conspiracy. After a jury deadlock and a

11   supplemental charge, the jury convicted all defendants under each of those theories. The

12   Supreme Court subsequently decided Skilling v. United States, 130 S. Ct. 2896 (2010), which

13   limited the scope of the honest services fraud statute to cover only fraudulent schemes

14   effectuated through bribes or kickbacks. Id. at 2928, 2933.

15           Shortly after sentencing, the SEC initiated administrative proceedings against defendant

16   Kenneth Mahaffy. In connection with those proceedings, the SEC disclosed in December 2009

17   and January 2010 30 transcripts of investigative depositions taken as early as December 2004.

18   Once they had access to those transcripts, the defendants moved for a new trial, contending that

19   12 of the transcripts included material required to be disclosed pursuant to Brady v. Maryland,

20   373 U.S. 83 (1963). Specifically, they contended that information in the transcripts contradicted

            1
              The defendants were acquitted on twenty substantive securities fraud counts (18 U.S.C
     § 1348), one Travel Act conspiracy count (18 U.S.C. § 371), eleven substantive Travel Act
     counts (18 U.S.C. § 1952), and various other counts.


                                                      3
or1undermined the testimony of key government witnesses on a central question at trial, namely, whether the

 2      allegedly misappropriated information was confidential under Carpenter v. United States, 484

 3      U.S. 19 (1987). The district court criticized the government’s conduct but ultimately concluded

 4      that the jury would not have reached a different result had the transcripts been disclosed.

 5              We disagree. We conclude that the government’s failure to disclose portions of the

 6      transcripts violated Brady and that these Brady violations undermined confidence in the jury’s

 7      verdict. Therefore, we vacate the misappropriation of confidential information component of the

 8      conspiracy convictions. Finally, because the district court did not adequately instruct the jury on

 9      the scope of honest services fraud, we vacate the honest services fraud component as well.

10                                              BACKGROUND

11              The operative indictment charged that Mahaffy, Timothy O’Connell, and David Ghysels,

12      who were employed by various brokerage firms as stockbrokers to private clients2 (the “Broker

13      Defendants”), committed securities fraud by providing confidential information belonging to

14      their employers to the day trading firm A.B. Watley. During the relevant time period, O’Connell

15      worked at Merrill Lynch, Mahaffy was O’Connell’s partner there until he left to join Smith

16      Barney/Citigroup, and Ghysels worked at Lehman Brothers. Robert Malin ran Watley’s day-to-

17      day operations and, along with other family members, owned the firm. Linus Nwaigwe was




                2
                As private client brokers, the Broker Defendants assisted clients in executing the
        purchase and sale of blocks of shares of stocks.


                                                         4
 1   Watley’s compliance officer, and Keevin Leonard recruited and supervised Watley’s day

 2   traders.3, 4

 3            Merrill, Smith Barney, and Lehman each had an internal communications system with

4    devices colloquially known as “squawk boxes” or “hoots” located throughout the firm. During

5    the day, firm personnel transmitted internal communications (“squawks”) concerning a variety of

 6   securities trading matters. A small portion of that information related to pending client orders

 7   for specific blocks of particular securities, though clients’ identities were never disclosed over

 8   the squawk boxes. According to brokerage firm representatives who testified at trial, squawks

 9   concerning block orders were transmitted in order to allow each firm’s traders to find a client to

10   take the other side of the squawked trade. If the firms could thereby keep both sides of trades in

11   house, they could earn commissions on both sides while avoiding exposing the trades to external

12   market fluctuations.

13            The indictment alleged a scheme in which the Broker Defendants placed phone receivers

14   up to their respective squawk boxes and transmitted squawks over open phone lines directly to

15   Watley, where traders then placed trades in the squawked securities before the brokerage firms

16   executed the squawked customer orders. The government alleged that by engaging in that

17   behavior, sometimes referred to as “frontrunning,” Watley hoped to buy or sell shares at a more

18   attractive price than would have been available once the squawked customer orders were

19   executed. The government contended that, in exchange for providing access to the direct feeds

              3
                  We refer to Malin, Nwaigwe, and Leonard, collectively, as the “Watley Defendants.”
              4
             Watley’s traders were propriety traders, meaning that they executed trades using
     Watley’s funds and on Watley’s behalf. In that capacity, they bought and sold stocks within the
     same trading day, closing all trading positions by the day’s end.


                                                       5
 1   of squawks, Watley placed “wash trades” with the Broker Defendants in which Watley traders

 2   simultaneously bought and sold the same security at the same price through different accounts.

 3   These trades presented no real economic risk or upside and served only to generate commissions

 4   for the Broker Defendants. Those commissions were allegedly bribes meant to compensate the

 5   Broker Defendants for the squawk feeds they transmitted, as was a $500 cash payment that a

 6   Watley trader made to Mahaffy.

 7          The government’s theory was that the Broker Defendants defrauded their employers of

 8   confidential information by directly transmitting squawks to Watley. The viability of that theory

 9   depended on, among other things, the government proving beyond a reasonable doubt that the

10   squawked information was confidential.

11          There is no real dispute that each of the Broker Defendants used open phone lines to

12   transmit squawk box feeds directly to Watley, or that Watley sought to take advantage of that

13   information by frontrunning. In early 2002, Malin hired day trader Jay Amore,5 first as a

14   consultant to Watley and later as the firm’s Chief Executive Officer. Amore brought former co-

15   workers with him, including Leonard, along with access to Mahaffy’s Merrill squawk box and

16   Ghysels’ box at Lehman. According to Amore, he had used that access to frontrun at his prior

17   day trading firm and he planned to do the same at Watley.

18          After Amore demonstrated his frontrunning strategy to Malin and others, Leonard hired

19   more than a hundred day traders to implement the strategy. The brokerage firms’ squawks were

20   transmitted over speakers throughout Watley, apparently loudly enough to be heard on Watley’s


            5
               As discussed below, Amore served as a cooperating witness and his testimony was
     central to the government’s case.


                                                     6
 1   trading floor and in individual offices, including Malin’s and Nwaigwe’s. Watley’s traders

 2   listened to the squawks and bought or sold in front of squawked trades whenever possible. They

 3   never took the other side of one of the brokerage firms’ squawked trades.

 4          The first trial had proceeded on one count of conspiracy to commit securities fraud,

 5   twenty substantive securities fraud counts, one count of conspiracy to violate the Travel Act,

 6   eleven substantive Travel Act counts, and several counts charging substantive witness

 7   tampering, conspiracy to commit witness tampering, and making false statements. After two

 8   months of trial including a week of jury deliberations, the jury hung on Count One, the securities

 9   fraud conspiracy count. Aside from convicting O’Connell of one count each of witness

10   tampering and making a false statement,6 the jury acquitted the defendants on all other charges.

11   The district court declared a mistrial on Count One.

12          After the government indicated its intention to retry the defendants on Count One, the

13   defendants moved to bar the retrial on double jeopardy and collateral estoppel grounds,

14   contending that their acquittal on Count Twenty-Two, the Travel Act conspiracy count,

15   precluded retrial. The district court denied the motion. United States v. Mahaffy, 499 F. Supp.

16   2d 291 (E.D.N.Y. 2007). After an interlocutory appeal we affirmed, holding that because it was

17   not possible to determine the reasons underlying the Count Twenty-Two acquittal, it was not

18   possible to determine whether the verdict necessarily decided facts that would bar a new trial.

19   United States v. Mahaffy, 283 F. App’x 852 (2d Cir. 2008) (summary order).




            6
              O’Connell has not challenged his witness tampering conviction on appeal. A panel of
     this Court previously vacated O’Connell’s false statement conviction. That count was later
     dismissed. United States v. Mahaffy, 285 F. App’x 797 (2d Cir. 2008).


                                                     7
1           In the retrial, the defendants were each charged with one count of conspiracy to commit

2    securities fraud under 18 U.S.C. §§ 1348 and 1349 on two theories: (1) that the Broker

3    Defendants deprived their employer firms of their honest services (“honest services fraud”)

 4   under 18 U.S.C. § 1346 (“honest services fraud”); and (2) that, when they transmitted squawks

 5   directly to Watley, the Broker Defendants deprived their employer firms of confidential

 6   information, which qualified as property (“property fraud”) under Carpenter v. United States,

7    484 U.S. 19 (1987).7 A critical issue was whether portions of the squawked information actually

 8   were confidential. There is no dispute that the majority of squawked information was not

 9   confidential, instead consisting of publicly available information including research, indications

10   of interest, advertising, general “market color,” and other items that did not include actual block

11   order information.

12          The evidence at the retrial, which lasted roughly three weeks, focused in large part on the

13   manner in which the Broker Defendants’ respective employer firms treated squawks and

14   squawked information, and the consideration that flowed between the defendants in respect of

15   the squawked information. To make its case, the government called a representative from each

16   of the employer firms to testify that his firm regarded the client order information as confidential

17   information that brokers should not have disseminated to Watley. On cross-examination,

18   defense counsel elicited testimony that the firms did not train brokers on proper use of squawks

19   or squawk boxes and that, although each firm had a written policy concerning the confidentiality

20   of client order information generally, throughout the relevant period none of the firms had a

            7
              Under Carpenter, 484 U.S. at 26-27, a business’s information may be confidential if the
     business exclusively possesses the information and considers it to be, and treats it as,
     confidential.


                                                      8
 1   policy that specifically addressed how employees should treat squawks or squawk boxes or that

2    expressly delineated squawked information as confidential. The defendants also introduced

3    evidence that squawks were broadcast and freely available through firm offices, including to

4    non-employee visitors; that brokers were expected to share clients’ block orders with certain

 5   other clients; and that firm supervisors were aware of the Broker Defendants’ direct transmission

6    of squawks. Based on that evidence, defense counsel argued during summations that squawked

7    information was not confidential.

8             After two days of deliberation, the jury declared itself deadlocked. The next day, the

9    jury asked to have the court’s instructions read back, and then requested a “plain English”

10   definition of conspiracy to defraud the brokerage firms of honest services and conspiracy to

11   defraud the brokerage firms of property. Over defense objection, the district court drafted and

12   delivered a supplemental charge. The jury returned a guilty verdict approximately thirty minutes

13   later.

14            Shortly after sentencing, the SEC disclosed the thirty transcripts to the defendants. As

15   we discuss below, the transcripts included Brady material. Most importantly, the transcripts

16   contained information that contradicted testimony from key government witnesses on the central

17   question whether the Broker Defendants misappropriated confidential business information from

18   their employers.

19            The prosecutions were products of close collaboration between the United States

20   Attorney’s Office and the SEC, and the government’s trial teams each consisted of ostensibly

21   experienced attorneys from both offices. Several weeks prior to the first trial, Sandeep

22   Satwalekar – the primary SEC staff attorney investigating the case who conducted almost all of


                                                      9
1    the SEC depositions, who was cross-designated as a Special AUSA, and who sat at counsel table

2    during the trial – emailed two of his colleagues on the trial team, AUSAs Michael Asaro, the

3    lead prosecutor, and Sean Casey, the Deputy Chief of the Business and Securities Fraud Unit.

4    He specifically cautioned them that portions of at least one of the deposition transcripts

 5   contained possible Brady material:9

 6           This is the last time I will bring this possible Brady issue up, but look over this
 7           excerpt when you get a chance. Tell me whether this requires some disclosure to
 8           defense counsel. . . . ”
 9
10   There is no question that the government knew about the transcript that Satwalekar attached,

11   along with the other twenty-nine transcripts, prior to the first trial. Satwalekar conducted the

12   majority of the depositions. Nine of the twelve on which the defendants based their

13   Brady motion below took place after the initial indictment. The government possessed all thirty

14   transcripts within its electronic database. Ultimately, however, neither the excerpt that

15   Satwalekar sent to his colleagues nor any other portion of the SEC depositions was disclosed in

16   connection with the first trial.

17           The second trial team also failed to disclose any of the transcripts. Although it was

18   aware of the transcripts and had read some of them prior to the retrial, the second team elected

19   not to revisit disclosure decisions, relying instead on the first team’s decisions.

20           After the government disclosed the transcripts, the defendants moved for a new trial on

21   the ground that twelve of them were Brady material. The district court denied the motion.

             9
               The excerpt was from the deposition of Brian Hull, a high-ranking Merrill employee,
     who testified before the SEC that squawked block order information was not confidential
     because it was “in the marketplace or could be in the marketplace,” and that he “d[id]n’t think
     there’s actually anything wrong with” brokers directly transmitting squawks. As discussed
     below, see infra pp. 20-21, this information was unquestionably Brady material.


                                                       10
 1   United States v. Mahaffy, No. 05-CR-613, 2010 WL 2925952 (E.D.N.Y. July 21, 2010). This

 2   appeal followed.

 3                                              DISCUSSION

 4                                                     I.

 5          We begin by discussing the defendants’ challenge to the sufficiency of the evidence. We

 6   do so in order to set out details of the prosecution’s case, particularly with regard to the

 7   brokerage firms’ treatment of allegedly confidential squawked information. The defendants

 8   argue that, at the retrial, the government did not introduce evidence sufficient to prove that: (1)

 9   the Broker Defendants misappropriated their employers’ confidential information; (2) the Broker

10   Defendants made affirmative misrepresentations or breached an employer-imposed disclosure

11   duty; (3) the Broker Defendants engaged in bribery; or (4) Nwaigwe knew that confidential

12   information was transmitted from the brokerage firms to Watley.

13          We review a challenge to the sufficiency of the evidence de novo, considering if the

14   evidence, when viewed in its totality and in the light most favorable to the government, would

15   permit any rational jury to find the essential elements of the crime beyond a reasonable doubt.

16   United States v. Yannotti, 541 F.3d 112, 120 (2d Cir. 2008). If we determine that the

17   government failed to introduce sufficient evidence at the retrial, the Double Jeopardy Clause

18   would bar a third trial. Richardson v. United States, 468 U.S. 317, 323 (1984); Burks v. United

19   States, 437 U.S. 1, 18 (1978).

20          “To prove conspiracy, the government must show that the defendant agreed with another

21   to commit the offense; that he knowingly engaged in the conspiracy with the specific intent to

22   commit the offenses that were the objects of the conspiracy; and that an overt act in furtherance


                                                      11
 1   of the conspiracy was committed.” United States v. Monaco, 194 F.3d 381, 386 (2d Cir. 1999)

 2   (quotation marks omitted). Although neither Carpenter nor the case law interpreting it have

 3   clearly stated what is required to prove that an employer’s information is confidential, the

 4   government and the defendants do not dispute that, under Carpenter, the brokerage firms had to

 5   treat squawked information as confidential by, among other things, maintaining their exclusive

 6   use over it. With regard to the property fraud object, then, the government was required to prove

 7   that the defendants knowingly agreed to participate in a scheme that involved the

 8   misappropriation of squawks that they knew – based in part on the firms’ conduct – constituted

 9   confidential information. See United States v. Wallace, 85 F.3d 1063, 1068 (2d Cir. 1996)

10   (defining unlawful intent in conspiracies as “specific intent to achieve th[e] object [of the

11   conspiracy]”).

12          At the retrial, the government called representatives from each of the brokerage firms

13   who testified that their respective firms considered block order information to be confidential

14   and that each firm expected its brokers and traders to take care and filter squawked information,

15   only transmitting such information to clients whom they had reason to believe might take the

16   other side of a squawked trade. Michael Molnar, former manager of middle markets institutional

17   sales trading at Smith Barney, testified that the confidentiality of block order information is

18   “broker 101” and “such a basic concept of employment and handling confidential information

19   that the business didn’t feel obligated to generate a memo to that effect.” Similarly, Bradford

20   Deflin, a former senior vice president of Lehman, testified that “the Squawk Box . . . information

21   . . . is used on a need to know basis, again, with professional judgment, and for the purposes of

22   accommodating a transaction and fulfilling . . . client[s’] needs.” And Merrill’s Henry


                                                      12
 1   Mulholland testified that traders “were supposed to use their knowledge of their clients to seek

 2   those clients . . . that potentially could provide the other side of [a squawked] trade.” He

 3   expected traders “to strike a balance between providing . . . enough information, to let that client

 4   make a reasoned judgment about whether to transact with us but also to protect the information

 5   from the original client.”

 6          Each of these firm representatives testified that his firm did not permit its employees to

 7   allow outsiders to listen directly to squawks or hear squawks in their entirety. Molnar said that

 8   doing so would be “as black and white [a] violation of the [firm’s] written policy in the spirit of

 9   how we do our business as I can imagine. Just an egregious act. Breach of the trust.”

10   Mulholland testified that Merrill did not allow individuals outside the firm to have a direct feed

11   to the squawk box, and did not provide such a feed to anyone. And Deflin testified that holding

12   a phone up to a squawk box violated Lehman’s code of conduct, which required employees to

13   “be discrete” with customer order information. Finally, the government introduced written

14   policies from each firm regarding the confidentiality of customer order information.

15          The government also introduced evidence that the Broker Defendants knew that their

16   respective firms treated squawked information as confidential. Each of the Broker Defendants

17   was Series 7 licensed. Various witnesses testified that, in order to pass the Series 7 exam, an

18   individual would have known of the dangers of frontrunning and an accompanying need to keep

19   block order information confidential. Amore, a witness for the government and former Watley

20   trading head, testified that he promised Mahaffy and Ghysels that he would “execute away” if

21   “something got too close to home,” and that he would “pay [their] bar tab.” An acceptable

22   inference, which the government argued, is that in order not to raise suspicions within the


                                                      13
 1   brokerage firms, Amore would have his traders execute their frontrunning trades through

 2   brokerage houses other than the ones to whose squawks he listened, and that he would

 3   compensate the Broker Defendants in exchange for squawked information. Based on that

 4   testimony, the jury reasonably could have concluded that Mahaffy and Ghysels knew that they

 5   had to hide their conduct from their employer firms, and that they were to be compensated, for

 6   engaging in improper behavior.

 7          Other evidence also supports a conclusion that the Broker Defendants knew their conduct

 8   was illegal and that disseminating squawks violated their firms’ confidentiality policies.

 9   O’Connell asked his trading assistant, cooperating witness Irene Santiago, falsely to tell Merrill

10   attorneys that he never put his phone next to his squawk box. Ghysels transmitted squawks over

11   a cell phone that he kept in a drawer rather than out in the open, and that cell phone was in the

12   name of a Watley trader rather than his own. Ghysels argues that his conduct was innocent, and

13   that might be correct. But a jury reasonably could have inferred that Ghysels’s actions were

14   intended to conceal conduct that he knew was illegal and violated firm policy.

15          Lastly, and perhaps most tellingly, evidence showed that Watley traders never took the

16   other side of a squawked order. A jury reasonably and permissibly could have concluded,

17   therefore, that the Broker Defendants knew that they were not transmitting squawks for the

18   accepted purpose of finding the other sides of squawked trades.

19          The defendants also argue that the government failed to prove false representations or

20   material omissions, which are required to secure convictions, pursuant to the government’s

21   property fraud theory, under 18 U.S.C. § 1348(2). First, we note that the indictment charged the




                                                     14
 1   Defendants with violating 18 U.S.C. § 1348, rather than either particular subsection of the

 2   statute. 18 U.S.C. § 1348 provides that:

 3          Whoever knowingly executes, or attempts to execute, a scheme or artifice--
 4
 5                  (1) to defraud any person in connection with any commodity for future
 6                  delivery, . . . or any security of an issuer with a class of securities
 7                  registered under section 12 of the [Exchange Act] or that is required to file
 8                  reports under section 15(d) of the [Exchange Act]; or
 9
10                  (2) to obtain, by means of false or fraudulent pretenses, representations, or
11                  promises, any money or property in connection with the purchase or sale
12                  of . . . any security of an issuer with a class of securities registered under
13                  section 12 of the [Exchange Act] or that is required to file reports under
14                  section 15(d) of the [Exchange Act];
15
16          shall be fined under this title, or imprisoned not more than 25 years, or both.
17
18   The district court’s jury charge, which the defendants do not challenge in this respect, instructed

19   the jury to find each defendant guilty if the jurors unanimously concluded beyond a reasonable

20   doubt that he knowingly and intentionally violated, or aided and abetted the violation of, either

21   subsection 1348(1) or 1348(2). False representations or material omissions are not required for a

22   conviction under § 1348(1). See, e.g., United States v. Motz, 652 F. Supp. 2d 284, 294

23   (E.D.N.Y. 2009) (identifying elements of securities fraud under § 1348(1) as (1) fraudulent

24   intent, (2) scheme or artifice to defraud, and (3) nexus with a security). Accordingly, the jury

25   could have convicted under § 1348 without considering false representations or material

26   omissions.

27          Second, even if the jury were required to find either affirmative misrepresentations or

28   violations of an employer-based duty to disclose, the government introduced sufficient evidence.

29   “[T]he concealment by a fiduciary of material information which he is under a duty to disclose to



                                                      15
 1   another under circumstances where the non-disclosure could or does result in harm to another is

 2   a violation of [the fraud statutes].” United States v. Newman, 664 F.2d 12, 19 (2d Cir. 1981)

 3   (citation and quotation marks omitted), overruled on other grounds by McNally v. United States,

 4   483 U.S. 350 (1987). Although this rule may not be “used in bootstrap fashion by finding an

 5   obligation to disclose in every breach of fiduciary duty,” id., the evidence here was sufficient to

 6   establish that the Broker Defendants each violated employer-imposed disclosure obligations.

 7   Each brokerage firm had a policy that required employees to report violations of the firm’s code

 8   of conduct. As discussed above, there was sufficient evidence that transmitting squawks

 9   violated these policies. We believe that this evidence was sufficient for a jury to have concluded

10   beyond a reasonable doubt that each Broker Defendant violated an employer-imposed disclosure

11   obligation.

12          Next, the defendants contend that there was insufficient evidence of bribery to support an

13   honest services fraud conviction. We disagree. After Skilling, it is clear that to convict a

14   defendant of honest services fraud, the government must prove paradigmatic kickbacks (which

15   were not charged or at issue here) or bribery. Skilling, 130 S.Ct. at 2933; see Part IV infra.

16   There is no genuine dispute that the Broker Defendants earned commissions from trades that

17   Watley traders placed through the Broker Defendants or that no Watley trader ever took the

18   other side of a trade that he learned about from a squawk. These facts, alone, are sufficient for a

19   jury to determine that the Broker Defendants received money in the form of commissions from

20   Watley traders in exchange for direct access to squawk box feeds. There was also evidence that,

21   on one occasion, Mahaffy received a $500 cash payment from Watley trader Keith Rogers.




                                                      16
 1   Although Mahaffy argues that that payment was not a bribe, a jury reasonably could have

 2   concluded otherwise.

 3          Nwaigwe argues that there was insufficient evidence that he knew that the squawked

 4   information Watley received from the Broker Defendants was confidential. We disagree.

 5   Amore testified that Nwaigwe, who was Watley’s compliance officer, approached him and

 6   demanded a raise based on the risk that Watley was taking, ostensibly referring to Watley’s

 7   frontrunning scheme. Amore further testified that Nwaigwe “pretty much kn[ew] what [wa]s

 8   going on. He want[ed] more money if he’s going to participate.” Amore, Malin, and Malin’s

 9   brother decided to give Nwaigwe the raise he demanded because Malin did not know “how he

10   would get another compliance officer in here that would let the squawk boxes be front running

11   all day long.”

12          In addition, at one point, the NASD conducted an on-site inspection of Watley.

13   Nwaigwe, as the firm’s compliance officer, learned of the pending inspection in advance, and

14   told Amore that he was concerned about the squawk box transmissions. Amore, Nwaigwe,

15   Malin, and others then had a meeting where they decided, in order to avoid NASD scrutiny, to

16   give headphones to the Watley traders so that they could listen to squawks without having the

17   squawks broadcast over the firm’s loudspeakers, as they usually were.

18          Last, evidence indicated that Nwaigwe falsely testified to the SEC regarding Watley’s

19   use of squawked information. Nwaigwe told the SEC that he had never heard of a squawk box.

20   Various witnesses, however, testified that they discussed squawk boxes with Nwaigwe, and three

21   witnesses testified that the squawk box broadcasts at Watley were loud enough to be heard in




                                                    17
 1   Nwaigwe’s office.10 Taken as a whole, the evidence against Nwaigwe was sufficient for the jury

 2   to find that he knew the squawks Watley received were confidential and that he knowingly

 3   agreed to participate in a scheme to transmit that information to Watley.

 4                                                 II.

 5          We turn now to whether the government improperly withheld Brady material. When

 6   reviewing alleged Brady violations, we examine the record de novo to determine whether the

 7   information in question is material as a matter of law. United States v. Madori, 419 F.3d 159,

 8   169 (2d Cir. 2005). The trial judge’s factual conclusions as to the effect of nondisclosure are

 9   entitled to great weight. Id.

10          Brady requires that the government disclose material evidence favorable to a criminal

11   defendant. United States v. Rivas, 377 F.3d 195, 199 (2d Cir. 2004). Evidence is favorable if it

12   is either exculpatory or impeaching, Strickler v. Greene, 527 U.S. 263, 281-82 (1999), and it is

13   material if “there is a reasonable probability that, had the evidence been disclosed to the defense,

14   the result of the proceeding would have been different.” Youngblood v. West Virginia, 547 U.S.

15   867, 870 (2006) (quotation marks omitted). “[A] showing of materiality does not require

16   demonstration by a preponderance that disclosure of the suppressed evidence would have

17   resulted ultimately in the defendant’s acquittal,” but rather, a conviction must be reversed “upon

18   a showing that the favorable evidence could reasonably be taken to put the whole case in such a

19   different light as to undermine confidence in the verdict.” Id. (quotation marks omitted).

            10
               Nwaigwe was acquitted at the first trial of making false statements to the SEC. He
     argues that evidence of that acquittal should have been admitted at the retrial. That argument
     fails. “[A] judgment of acquittal is not usually admissible to rebut inferences that may be drawn
     from the evidence that was admitted.” United States v. Viserto, 596 F.2d 531, 537 (2d Cir.
     1979).


                                                     18
1           For the government to secure convictions under its property fraud theory, it had to prove

2    beyond a reasonable doubt that the brokerage firms had exclusive use of the squawked

3    information, considered that information to be confidential, and that they treated it as such.

 4   Carpenter, 484 U.S. at 26-27.11 Consistent with Carpenter, the jury was instructed to consider

 5   whether the government proved that the brokerage firms regarded the block order information

 6   contained in squawks as confidential and treated it as such. The government’s evidence on that

 7   point (discussed supra Part I) included testimony from brokerage firm representatives

 8   concerning each firm’s confidentiality policy. Because the defendants lacked the SEC

 9   depositions and admissible evidence to which those depositions might have led, the jury viewed

10   and heard primarily government evidence. In contrast to the picture the government presented,

11   however, several of the witnesses who testified before the SEC, including senior personnel from

12   Merrill, Smith Barney, and Lehman, squarely contradicted that picture. They testified that

13   squawked information was not confidential and that no firm policies prohibited the direct

14   transmittal of squawks outside each respective firm. We now consider the transcripts.

15          Brian Hull supervised Mulholland, the head of U.S. trading for Merrill’s institutional

16   equity department, whom the government called as Merrill’s corporate representative at both




            11
               In Carpenter, the Court affirmed a Wall Street Journal reporter’s property fraud
     conviction after he gave advance notice to two stockbrokers of particular stocks he intended to
     cover in his “Heard on the Street” column. The Court concluded that that information was
     confidential because it was the “official policy and practice” at the Journal that the column’s
     contents were confidential prior to publication and the Journal “had a right to decide how to use”
     that information prior to disclosing it to the public. Id. at 23, 25-28. “[E]xclusivity is an
     important aspect of confidential business information,” and the facts that the Journal intended for
     its employee to keep the contents of his column private until publication, and that the employee
     knew that, exposed him to criminal fraud liability. Id. at 26-27.


                                                      19
 1   trials. In contrast with Mulholland’s trial testimony that Merrill did not allow direct feeds from

 2   the firm’s squawk boxes to individuals outside the firm, Hull had testified before the SEC that

 3          when you go over the squawk box to a larger community [within the firm],
 4          knowing that the people that are going to hear that are going to then make several
 5          calls each hoping to find the other side [of a trade], that information will get
 6          spread or be out in the marketplace or broader. . . . [T]hat part of the order that
 7          [brokers are] showing to the marketplace is no longer confidential, just as if you
 8          were working it on the floor of the stock exchange and showing it into the crowd
 9          that you were a buyer and displaying it on the book, it’s no longer confidential.
10
11   [JA 502] Hull elaborated on this theme further, stating that, although “[c]lient orders and client

12   relationships are always confidential,”

13          when the trader goes over the squawk box and gives an indication, he could have
14          already . . . put that order on the floor and could be in the crowd displaying that
15          interest as well. . . . So when I say confidential, I don’t want to take away that we
16          have a confidential relationship with our client, but that order is in the
17          marketplace or could be in the marketplace.
18
19   He made the same point repeatedly.

20          Hull also discussed Merrill’s responsibility to handle client orders “with the appropriate

21   amount of care,” and that it was important for Merrill’s traders “to use professional judgment

22   and discretion in how they convey to their customers the order information that [they] have

23   heard over the squawk box.” When asked what was wrong with transmitting squawked

24   information directly, however, Hull replied that he “d[id]n’t think there’s actually anything

25   wrong with it.”

26          Joseph Lauricella was a Merrill branch manager with compliance responsibilities. He

27   supervised the firm’s account with Warren Fellus, a cooperating witness and day trader who had

28   worked at Watley and then later at Millennium Brokerage LLC. At trial, Fellus testified that he




                                                     20
 1   received direct transmissions of squawks from Merrill while at both Watley and Millennium.

 2   Ronald Ledwith was a broker at Merrill who reported to Lauricella.

 3          During their SEC depositions, Lauricella and Ledwith both testified about a Merrill

 4   broker, Matt Shulman, who had transmitted squawks directly to Millennium. The two together

 5   phoned Merrill’s compliance manager Howie Geiler to tell him that Shulman was transmitting

 6   squawked information to Millennium word for word. Lauricella indicated that he did not “see

 7   the difference between . . . whether or not [a phone] was held up to the machine or if someone is

 8   just repeating it word for word.” In response, according to Lauricella, Geiler said that “he never

 9   knew of any rule that said you could not broadcast that information,” and that “in the old days

10   people used to actually come into the office and listen to [the squawk box] directly in the office.”

11   Geiler then told Lauricella that “he was going to research it. He said he had never heard of such

12   a rule. . . . He spoke about how he is going to triple check and make sure there is no rule or

13   anything like that.” When Geiler called Lauricella back, he “said he checked all the rules,” and

14   “[n]o one has ever heard of a rule. . . . Between all of us [with a combined] 100 years of

15   experience [at Merrill], . . . [Geiler] said he never heard of a rule that you can’t disseminate the

16   information on a squawk box.” When asked if anyone from Merrill ever told Lauricella that

17   “you had to be careful in using a squawk box because of a risk of front-running,” Lauricella

18   responded, “No. It was actually the exact opposite the way I understood it. The people at the

19   desk described it as it wasn’t the magic bullet to try to trace or monitor any type of portfolio. . . .

20   It was akin to reading tea leaves.” In other words, Lauricella had testified before the SEC that he

21   did not believe that transmitting squawks actually threatened to lead to manipulated prices in the

22   market as a result of front-running.


                                                       21
 1          Similarly, Ledwith testified that Geiler told Lauricella and him that Geiler had “never

 2   heard of a prohibition on using the box,” and that Geiler had consulted his boss, Tom Tiedman,

 3   who also did not think there was any prohibition on transmitting squawked information. And

 4   when Ledwith asked another supervisor “if it was okay to provide direct access to . . . [t]he

 5   squawk box feed to the outside client,” the supervisor told him that “some people just pick up the

 6   phone and call their clients all day long.”

 7          Robert Moore was a Smith Barney position trader who had been the head of various

 8   trading groups, including U.S. equities and U.S. cash trading. He testified before the SEC that

 9   Smith Barney’s squawks were “sensitive, not confidential”: sensitive because “the job of every

10   capital markets person in equities was to execute an order . . . with the least amount of market

11   impact,” but not confidential because “when you advertise [a customer’s order], at some point,

12   you are going to have to act on that order, so [if one went] down to the floor of the New York

13   Stock Exchange, one could see that Citigroup is buying that stock.”

14          Michael Legieza worked at Lehman as, alternately, co-head of the firm’s New York

15   office, administrative manager of the New York office, and the firm’s Business Control Manager

16   for private investment management. He testified before the SEC that he “d[id]n’t know what the

17   purpose of having a [squawk] system would be if it weren’t to facilitate the communication of

18   information to the appropriate people within the organization and then ultimately to our

19   customer base,” and that, although “there is always a judgment to be made and information may

20   not be relevant to all clients,” disseminating squawked information broadly was not necessarily

21   prohibited. Legieza further testified that, at a point in time when he was responsible for




                                                     22
 1   approving requests for access to Lehman’s squawk boxes, he did not believe that squawked

 2   information was confidential and no one ever told him that such information was confidential.

 3          Carlos Romero was Ghysels’s partner at Lehman. His SEC deposition in large part

 4   concerned his and Ghysels’s relationship with Amore, the key government cooperator. Amore

 5   testified at trial that he had made clear to brokerage firm employees who transmitted squawks to

 6   him that he planned to facilitate improper frontrunning of those trades. But Romero had testified

 7   to the contrary before the SEC. Romero testified that Amore had told him that Watley was

 8   interested in squawked information in order to “have color” regarding pending block buy or sell

 9   orders in order potentially to take the other side of trades. Romero also suggested that the

10   practice of transmitting squawks over open phone lines was widespread throughout Lehman

11   when he testified that, during a visit to Lehman’s New York office, he saw another broker’s desk

12   with a phone receiver sitting on top of a squawk box.

13          Donald Lee was a Watley trader who placed trades with Merrill. At trial, after the district

14   court denied a motion in limine by Mahaffy, the government introduced an email exchange in

15   which Mahaffy asked Lee if Lee “need[ed] to be hooked up,” and Lee responded that he did not.

16   The government argued that being “hooked up” meant that Mahaffy would provide Lee with

17   access to Merrill’s squawks. But Lee testified before the SEC that he never frontran, that the

18   traders he worked with at Watley did not employ a frontrunning strategy, and also that he did not

19   remember Mahaffy’s providing information about block orders.

20          On appeal, the government advances a host of excuses as to why this testimony was not

21   Brady material. It argues that: (1) taken as a whole, the testimony of Hull, Moore, Legieza and

22   others is consistent with the government’s prosecution theory and reinforces that squawks were


                                                     23
 1   to be used only to find the other side of trades, and that brokers were required to handle

 2   squawked information with appropriate care; (2) Lauricella’s and Ledwith’s testimony is not

 3   exculpatory because they mistakenly believed that Shulman transmitted squawks to Millennium

 4   in order to find the other side of trades; (3) testimony from Lauricella and Ledwith (and Geiler)

 5   would have been inadmissible as irrelevant hearsay that would have confused the jury and

 6   wasted time; (4) Romero’s deposition testimony did not add to what was already available to the

 7   defense because Ghysels knew that Romero had a conversation with Amore; (5) Lee’s testimony

 8   was not suppressed because Mahaffy would have known, without the testimony, whether he

 9   offered to provide Lee with a squawk box feed; and (6) the distinction Moore drew between

10   sensitive and confidential information should be disregarded because he did not understand or

11   use “confidential” as a legal term. None of this excuses the government’s misconduct.

12          The transcripts contained substantial Brady material, much of which was easily identified

13   as such. The fact that the government is able to argue that portions of the transcripts were

14   consistent with the prosecution’s theory fails to lessen the exculpatory force of sworn SEC

15   testimony from senior members of the brokerage firms, that squawked information was not

16   confidential or treated as such. Where suppressed evidence is inculpatory as well as exculpatory,

17   and “its exculpatory character harmonize[s] with the theory of the defense case,” a Brady

18   violation has occurred. United States v. Triumph Capital Grp., 544 F.3d 149, 164 (2d Cir.

19   2008); Rivas, 377 F.3d at 199-200. Hull, Moore, and Legieza each testified before the SEC that

20   information concerning pending customer orders was intended to be, and was, frequently

21   broadcast broadly to firm customers and on the floor of the stock exchange. That testimony

22   harmonizes with the defendants’ theory that their respective employer firms did not treat


                                                     24
 1   squawked information as confidential or take steps to prevent its disclosure. The brokerage

 2   firms may have expected that employees would treat client order information with care and

 3   would actively filter squawked information before disseminating it externally, as the

 4   government’s witnesses testified. If jurors had been privy to the withheld SEC testimony, they

 5   might still have concluded that the brokerage firms took steps sufficient to render squawked

 6   information confidential. On the other hand, they could just as well have concluded that

 7   whatever care brokers were supposed to exercise, the firms’ actions – including corporate

 8   policies, employee training, and the conduct of other employees who possessed block order

 9   information – did not compel the conclusion that squawked information was confidential.

10          Similarly, Lauricella and Ledwith testified that neither Geiler nor Tiedman was aware of

11   any Merrill prohibition on directly transmitting squawks outside the firm. Any mistaken belief

12   by Lauricella, Ledwith, Geiler, or Tiedman that squawks were being transmitted to Millennium

13   in order to find the other sides of trades does not mean their testimony is immaterial. According

14   to Lauricella and Ledwith, Geiler’s conclusion was that there was no policy against directly

15   transmitting squawks, not that firm policy allowed such transmissions but only under certain

16   circumstances. That conclusion, along with Geiler’s statement that “in the old days they used to

17   let the clients come in and listen,” might have undercut the government’s argument that Merrill

18   treated squawked information as confidential. There is a reasonable probability that the jury

19   would have reached a different conclusion if the Lauricella and Ledwith transcripts had been

20   disclosed. See Youngblood, 547 U.S. at 870.

21          The government is correct that Lauricella and Ledwith’s testimony contains what appears

22   to be inadmissible hearsay. Even so, items may still be material and favorable under Brady if not


                                                    25
 1   admissible themselves so long as they “could lead to admissible evidence.” United States v. Gil,

 2   297 F.3d 93, 104 (2d Cir. 2002). That testimony could have led the defendants to interview and

 3   possibly subpoena Geiler, Tiedman, and Shulman, who could have identified the other senior

 4   Merrill employees with whom Geiler spoke and who were unaware of any firm policy that

 5   prohibited the direct transmittal of squawks outside the firm. If their testimony was consistent

 6   with Geiler’s recounting, it reasonably could have led jurors to conclude that squawked

 7   information was not confidential.

 8           For the purposes of our Brady analysis, it simply does not matter that Ghysels knew that

 9   Romero, his former partner, had a conversation with Amore. Whatever Ghysels knew, he did

10   not know what Romero told the SEC under oath. According to Ghysels, Romero refused to meet

11   with Ghysels’s counsel prior to trial. Not knowing what Romero might testify to, Ghysels did

12   not call him at trial.

13           Aside from exculpatory material, Brady applies to material that “would be an effective

14   tool in disciplining witnesses during cross-examination.” Id. Armed with Romero’s SEC

15   testimony, Ghysels quite possibly would have called Romero at trial. If Romero testified

16   consistent with his SEC testimony that he saw another broker in the New York office with his

17   phone up to a squawk box, and also that Amore represented to Romero that he was interested in

18   taking the other side of squawked trades, Romero’s testimony would have bolstered Ghysels’s

19   defense. If Romero testified otherwise, Ghysels could have confronted him with a prior

20   inconsistent sworn statement in the form of Romero’s SEC deposition transcript.12

             12
              The government cites to cases that it contends establish that potentially exculpatory
     testimony is not considered suppressed where the defense knows the witness’s identity. Those
     cases require more. It is not enough that a defendant knew a potential witness’s identity; the


                                                     26
1           In addition, the government argues – and the district court determined – that to the extent

2    the suppressed Romero testimony would have been useful in order to impeach Amore, the

3    testimony is not material because Amore was subject to thorough cross-examination at trial.

4    Specifically, the district court concluded that “Amore was cross-examined extensively at trial,

5    and I have no doubt that additional cross-examination about his failure to mention a meeting

6    with Romero would not have changed the jury’s verdict.” Mahaffy, 2010 WL 2925952, at *6

 7   n.4; see also United States v. Diaz, 176 F.3d 52, 108 (2d Cir. 1999) (holding that “suppressed

 8   impeachment evidence is not material where the new evidence merely constitutes ‘an additional

 9   basis on which to impeach a witness whose credibility has already been shown to be

10   questionable’”).

11          Romero’s SEC testimony would have done more than merely provide an additional basis

12   for impeachment. It would have called squarely into question the credibility of Amore, the

13   government’s key cooperating witness, regarding his claim that he discussed his frontrunning

14   strategy with every broker who provided him with a squawk box feed. Without Romero’s

15   testimony, the defendants were able to “chip[] away on cross examination,” but were denied “the

16   assault that was warranted.” Kyles v. Whitley, 514 U.S. 419, 443 n.14. As any trial lawyer

17   knows, “chipping away” question-by-question on cross-examination is far less effective than



     defendant had to know “or should have known the essential facts permitting him to take
     advantage of any exculpatory evidence.” United States v. Salerno, 868 F.2d 524, 542 (2d Cir.
     1989) (quotation marks omitted) (concluding no Brady violation where government informed
     defendants that they “might want to interview” particular witness); United States v. Grossman,
     843 F.2d 78, 85 (2d Cir. 1988) (no Brady violation where government informed defendant that
     witness’s grand jury testimony might be exculpatory). Here, Ghysels did not know that Romero
     met with the SEC or that his previous testimony might be exculpatory.



                                                    27
1    using an SEC deposition transcript. Given that the jury hung at the first trial and was deadlocked

2    prior to the district court’s supplemental instruction during the retrial, we cannot be confident

3    that Romero’s withheld testimony would have made no difference to the jury’s assessment of

4    Amore or to the ultimate question of guilt.

5           Next, just as Ghysels’s knowledge that Romero spoke with Amore does not alter our

6    Brady analysis, neither does Mahaffy’s knowledge of his own relationship with Lee. Mahaffy

7    did not know what Lee told the SEC under oath. The government contends that Lee’s testimony

8    is not exculpatory because it did not contradict the inference that Mahaffy offered Lee access to

9    Mahaffy’s squawk box. Although Lee’s testimony did not directly address that email from

10   Mahaffy, Lee stated that he did not remember Mahaffy’s giving him information about orders.

11   [JA 599] Lee might have explained Mahaffy’s email in some other way if confronted with his

12   prior testimony. There could have been a perfectly innocent explanation for Mahaffy’s question

13   that Lee understood and would have explained if given the chance. If Mahaffy had known what

14   Lee told the SEC, Mahaffy would have had a reason to interview Lee prior to trial and perhaps to

15   call him as a trial witness. Without Lee’s deposition transcript, however, Mahaffy was unaware

16   that Lee might contradict inferences the government urged based on evidence it introduced.

17   Also, as with Romero, Mahaffy would have been able to discipline Lee with his prior testimony

18   if Mahaffy had the transcript and Lee’s trial testimony diverged from his SEC testimony.

19          The exculpatory nature of Moore’s SEC testimony goes beyond his statement that

20   squawked information was “sensitive, not confidential.” Moore apparently was reluctant to call

21   information “confidential” because, as a non-lawyer, he did not want to misuse the term.

22   However, his testimony indicates that squawked information concerning block trades was also


                                                      28
 1   available on the floor of the stock exchange. Crucial to the determination whether squawked

 2   information was confidential under Carpenter is whether the brokerage firms viewed and treated

 3   it as such. The distinction that Moore drew appears to be entirely in line with the law: if

 4   squawked block order information was publicly available, it might not have been confidential.

 5   That conclusion would have flowed from Moore’s factual testimony concerning block order

 6   information, not the legal terms he used to describe the information. Accordingly, the fact that

 7   Moore was not a lawyer does not bear on the materiality or exculpatory nature of his testimony.

 8          The withheld SEC testimony strongly suggests that the brokerage firms did not treat

 9   squawked block order information as confidential and that senior employees and management at

10   the respective firms did not bar the transmission of squawks or take steps to maintain exclusive

11   control of pending block order information. Romero’s testimony also calls into question

12   Amore’s trial testimony that he made his frontrunning strategies known to every broker who

13   transmitted squawks to him, and Lee’s testimony cuts against the inference that Mahaffy offered

14   to transmit squawks to Lee. Transcript excerpts such as these which harmonize with a

15   defendant’s theories are material and favorable to the defense. After the first trial ended with

16   thirty-eight counts of acquittal and a hung jury on the securities fraud conspiracy count, and the

17   jury in the second trial was deadlocked after deliberating for two days on the retried securities

18   fraud conspiracy count, we have little confidence that the result would have been the same had

19   the government complied with its Brady obligations and disclosed the SEC transcripts.13

            13
                Despite the district court’s ultimate conclusion that none of the SEC depositions was
     Brady material that warranted a new trial, the court took the prosecution to task, stating that it
     was “mystified by the government’s failure to disclose the testimony of these various witnesses”
     and expressing frustration at “sifting through the transcripts of testimony taken by the SEC after
     the trial has already occurred” and at the government’s decision not to reconsider disclosure


                                                     29
 1           The government’s failures to comply with Brady were entirely preventable. On multiple

 2   occasions, the prosecution team either actively decided not to disclose the SEC deposition

 3   transcripts or consciously avoided its responsibilities to comply with Brady. According to the

 4   government, the second prosecution team made an affirmative decision not to review disclosure

 5   decisions made by the first trial team, and specifically decided not to disclose the transcript of

 6   Romero’s testimony, on the ground that the first team consisted of experienced prosecutors.

 7   That decision not to review or revisit disclosure decisions compounded the government’s failures

 8   to turn over the SEC transcripts prior to the first trial.

 9           The government’s Brady violations have negatively impacted this case in two distinct but

10   related ways. First, the two trials were both unfairly skewed against the defendants, who were

11   forced to mount their defenses without the benefit of material exculpatory and impeaching sworn

12   testimony. Second, the costs of this litigation – in terms of personal, financial and judicial

13   resources and time – have ballooned as a result of the two trials, post-verdict litigation, and two

14   appeals to this court.

15           Our Court and others have long recognized that Brady violations obscure a trial’s truth-

16   seeking function and, in so doing, place criminal defendants at an unfair disadvantage. When the

17   government impermissibly withholds Brady material, “its case [i]s much stronger, and the

18   defense case much weaker, than the full facts would . . . suggest[].” Kyles, 514 U.S. at 429.

19   Where, as here, “the government suppressed evidence in its possession which was both

20   exculpatory and impeaching, . . . there is a reasonable probability that if the evidence had been


     decisions made by the team prosecuting the first trial. Mahaffy, 2010 WL 2925952, at *6. We
     share the district court’s frustration, if not its conclusion.



                                                        30
 1   disclosed, the outcome of the proceeding would have been different.” Triumph Capital, 544

 2   F.3d at 164. Even if “[i]t is by no means certain that” arguments based on wrongfully withheld

 3   evidence “would have swayed the jury, . . . it is a real enough possibility to undermine

 4   confidence in the verdict.” Id. at 163. As close as the trials were, the defendants’ assertion, that

 5   there is a reasonable probability that they would not have been convicted had the transcripts been

 6   disclosed, strikes with particular force.14 Accordingly, we vacate the property fraud component

 7   of the defendants’ convictions. In light of the government’s mishandling of material exculpatory

 8   and impeaching material, we wonder whether the government will choose to subject the

 9   defendants to yet a third trial.

10

11

12                                                   III.

13           In order to provide guidance in the event the government commits itself to further

14   proceedings in this case, we address the defendants’ challenge to the district court’s jury charge

15   concerning the government’s property fraud theory.

16           During the retrial, Ghysels submitted a definition of “confidential business information”

17   as part of a proposed charge on securities fraud. That charge was, in large part, based on case


             14
               The government argues that, although it possessed the SEC deposition transcripts, the
     second trial team was not familiar with those transcripts and did not independently review them.
     That is of no moment. “[T]he suppression by the prosecution of evidence favorable to an
     accused . . . violates due process where the evidence is material either to guilt or to punishment,
     irrespective of the good faith or bad faith of the prosecution.” Brady, 373 U.S. at 87. Our
     confidence in the jury’s verdict is undermined, and would be whether the Brady violations were
     willful or not.



                                                      31
1    law concerning civil trade secret claims and would have instructed the jury to consider, when

2    evaluating whether squawked information was confidential:

 3          (1) the extent to which the information is known outside of the business; (2) the
 4          extent to which it is known by employees and others involved in the business; (3)
 5          the extent of measures taken by the business to guard the secrecy of the
 6          information; (4) the value of the information to the business and its competitors;
 7          (5) the amount of effort or money expended by the business in developing the
 8          information; [and] (6) the ease or difficulty with which the information could be
 9          properly acquired or duplicated by others.
10
11   See N. Atl. Instruments, Inc. v. Haber, 188 F.3d 38, 44 (2d Cir. 1999) (discussing whether, under

12   New York law, customer list was trade secret). The district court declined to give that charge,

13   and instead instructed the jury that

14          [c]onfidential information acquired by a company in the operation of its business
15          is a form of property, to which the company has the exclusive right and benefit.
16          Here the government claims, alleges that some of the information transmitted
17          within the brokerage houses over the squawk boxes was confidential, not to be
18          disseminated outside the firm by allowing others to listen to the squawks as they
19          occurred, and that the defendants were aware of the confidential nature of at least
20          some of that information.
21
22   In its later supplemental charge, the district court instructed:

23          The law prohibiting people from scheming to defraud a company of its property
24          recognizes confidential business information as a type of property and that the
25          company has the exclusive – has the right, rather, to the exclusive use of the
26          information. . . . Even if it lacks commercial value to the company, company
27          policy may be to treat the information as confidential to protect the reputation of
28          the company and its customers. What is key is that the company treat the
29          information as confidential and with knowledge of that fact, its employee
30          nonetheless knowingly discloses that information for an improper use.
31
32           To prevail on their argument that the district court erred when it declined to give the

33   proposed charge, the defendants must show that it accurately stated the law in every respect and




                                                       32
 1   that, viewing the charge actually given in its entirety, they were prejudiced by the court’s failure

 2   to give the proposed charge. United States v. Mulder, 273 F.3d 91, 105 (2d Cir. 2001).

 3           Ghysels’s charge would have instructed the jury to consider factors, borrowed from case

 4   law discussing trade secrets, that do not necessarily bear on the confidentiality of the squawked

 5   information, including the value of the information to the business and business’s investment in

 6   developing the information. Information may qualify as confidential under Carpenter even if it

 7   does not constitute a trade secret. Indeed, that may be the case here. For that reason, the

8    proposed charge did not accurately reflect the law in every respect, and the district court did not

9    err when it declined to give it.

10           Particularly in light of the substance of the improperly withheld Brady material, we

11   caution the district court that, if there is another trial, its instruction regarding confidential

12   business information should provide more fulsome guidance to assist the jury in determining

13   whether the squawked information was confidential.15

14                                                      IV.

15           We turn now to the question whether, post-Skilling, we must vacate the defendant’s

16   convictions under the honest services fraud theory. After the retrial concluded, the Supreme


             15
                 Carpenter requires proof that the information was both considered and treated by an
     employer in a way that maintained the employer’s exclusive right to the information. Should
     this issue arise in future proceedings, district courts would do well to provide additional
     guidance to the jury regarding how to evaluate whether employers treat information as
     confidential. The pertinent factors will, of course, vary from case to case, but may include
     written company policies, employee training, measures the employer has taken to guard the
     information’s secrecy, the extent to which the information is known outside the employer’s place
     of business, and the ways in which other employees may access and use the information. If
     employers “consider” information to be confidential but do not really take affirmative steps to
     treat it as such and maintain exclusivity, Carpenter is not satisfied.


                                                        33
 1   Court held in Skilling that the honest services fraud statute criminalizes only fraudulent schemes

 2   effectuated through bribes or kickbacks. Since that decision, we have recognized that a district

 3   court’s pre-Skilling failure to charge a jury that it must find bribes or kickbacks may require

 4   vacating the conviction unless the error is harmless. United States v. Bruno, 661 F.3d 733 (2d

 5   Cir. 2011); see also United States v. Bahel, 662 F.3d 610, 634-35 (2d Cir. 2011). An error is

 6   harmless in this context if it is “‘clear beyond a reasonable doubt that a rational jury would have

 7   found the defendant guilty absent the error.’” United States v. Kozeny, 667 F.3d 122, 130 (2d

 8   Cir. 2011) (quotation marks omitted) (quoting Neder v. United States, 527 U.S. 1 (1999)).

 9   Where, as here, the source of an alleged jury instruction error is a supervening decision, we

10   employ a “modified plain-error rule, under which the government, not the defendant, bears the

11   burden to demonstrate that the error . . . was harmless.” Bahel, 662 F.3d at 634 (quotation marks

12   omitted).

13          Here, the closest the district court came to instructing that honest services fraud required

14   bribery or any sort of quid pro quo was in its supplemental plain English charge, when it

15   described the honest services fraud statute as “a kind of anti kickback or anti bribery law.” This

16   bare bones statement was not adequate. It did not sufficiently explicate the bribery or kickbacks

17   element of honest services fraud; it merely reiterated that honest services fraud occurs when an

18   individual is “not giving his honest and faithful services” to his employer.

19          The jury in the first trial acquitted on numerous substantive Travel Act counts as well as

20   a Travel Act conspiracy count that alleged bribes. The jury in the retrial was deadlocked prior to

21   requesting a plain English definition of honest services fraud. Under these circumstance, there is

22   a real possibility that the ultimate convictions with regard to honest services fraud were based on


                                                      34
1    the jury’s determination that the Broker Defendants deprived their employers of their honest

2    services, although the jury may well not have concluded that bribery occurred. In any event,

 3   without a charge that adequately explained what Skilling made clear the law requires, it is not

 4   clear beyond a reasonable doubt that the Defendants’ convictions rested on unanimous findings

 5   of bribes or kickbacks. Accordingly, the convictions on honest services fraud grounds are

 6   vacated.

 7                                                    V.

 8          We briefly consider the defendants’ double jeopardy argument. As they did prior to

 9   retrial, the Defendants argue that retrial should have been barred under the Double Jeopardy

10   Clause of the Fifth Amendment and collateral estoppel because the factual issues that were

11   necessarily decided at their first trial preclude conviction with regard to the charged securities

12   fraud conspiracy. We previously concluded that the defendants’ acquittal of conspiracy to

13   violate the Travel Act did not foreclose retrial of conspiracy to commit securities fraud. We

14   adhere to that conclusion on this appeal.

15

16

17                                                    VI.

18          Because we vacate the defendants’ convictions on the grounds discussed above, we

19   decline to reach their remaining arguments as moot, including those concerning sentencing,

20   Mahaffy’s SEC debarment, and whether the government’s case, as tried, prejudicially varied

21   from the operative indictment. We write briefly, however, to address forfeiture. The district

22   court imposed forfeiture against each Broker Defendant in the amount of the gross commissions


                                                      35
 1   that Watley paid to each Broker Defendant’s employer, and jointly against the Watley

 2   Defendants in the total amount of commissions paid by Watley to the brokerage firms.

 3           Under 18 U.S.C. § 981(a)(1)(C), the “proceeds traceable to a violation of . . . any offense

 4   constituting ‘specified unlawful activity’ . . . , or a conspiracy to commit such offense” is subject

 5   to forfeiture to the government. “Fraud in the sale of securities” is a “specified unlawful

 6   activity” pursuant to 18 U.S.C. §§ 1956(c)(7) and 1961(1)(D). Section 981(a)(2) defines

 7   “proceeds” as follows:

 8           (A) In cases involving illegal goods, illegal services, [and] unlawful activities . . .
 9           the term “proceeds” means property of any kind obtained directly or indirectly, as
10           the result of the commission of the offense giving rise to forfeiture, and any
11           property traceable thereto, and is not limited to the net gain or profit realized from
12           the offense.
13
14           (B) In cases involving lawful goods or lawful services that are sold or provided in
15           an illegal manner, the term “proceeds” means the amount of money acquired
16           through the illegal transactions resulting in the forfeiture, less the direct costs
17           incurred in providing the goods or services. . . .
18
19   The government argued below and argues now that forfeiture of gross proceeds is appropriate

20   under § 981(a)(2)(A). The district court apparently agreed, although it denied a defense request

21   for clarification as to why gross proceeds, rather than net proceeds, is the appropriate measure of

22   forfeiture.

23           Because approximately seventy percent of the commission payments went to the

24   brokerage firms rather than the Broker Defendants themselves, there is a substantial difference

25   between the gross amounts paid to the employer firms and the net amounts that each Broker

26   Defendant pocketed. The Broker Defendants argue that § 981(a)(2)(B) applies because “the

27   defendants were engaged in lawful conduct – the purchase and sale of securities – in an allegedly




                                                       36
 1   unlawful manner – i.e., based upon confidential business information.” The government

 2   counters that the district court correctly applied the definition in § 981(a)(2)(A) for gross

 3   proceeds because fraud in the sale of securities is a “specified unlawful activity” and is thus an

 4   “unlawful activity” for purposes of that section.

 5          The Tenth Circuit has held, along with several district courts in our Circuit, that

 6   “specified unlawful activity” is not coterminous with “unlawful activities” in § 981(a)(2)(A);

 7   instead, § 981(a)(2)(A) encompasses inherently unlawful activities, such as robbery, that are not

 8   captured by the words “illegal goods” or “illegal services.” See, e.g., United States v. Nacchio,

 9   573 F.3d 1062, 1088-89 (10th Cir. 2009); In re 650 Fifth Ave & Related Prop., 777 F. Supp. 2d

10   529, 550-51 (S.D.N.Y. 2011); United States v. Kalish, No. 06-cr-656, 2009 WL 130215, at *6-7

11   (S.D.N.Y. Jan. 13, 2009). But see United States v. All Funds on Deposit in United Bank of

12   Switz., 188 F. Supp. 2d 407, 410-12 (S.D.N.Y. 2002).

13          The government’s reading renders § 981(a)(2)(B) essentially meaningless. Almost every

14   predicate crime listed in § 981(a)(1)(C) is also a “specified unlawful activity” listed in §

15   1956(c)(7). If every “specified unlawful activity” is subject to gross forfeiture under §

16   981(a)(2)(A), there would be only a handful of statutes involving counterfeiting, forgery,

17   explosive materials, and fraudulent identification documents that would fall under the auspices

18   of § 981(a)(2)(B). That interpretation would also lead to peculiar results. Some cases involving

19   lawful goods or lawful services would be subject to forfeiture under § 981(a)(2)(B) while other

20   cases involving lawful goods or lawful services, by virtue of constituting a “specified unlawful

21   activity,” would be subject to gross forfeiture under § 981(a)(2)(A).




                                                      37
 1          Having concluded that § 981(a)(2)(A) does not necessarily apply, we turn to whether the

 2   defendants’ conduct involved “unlawful activities” under subsection (A) or “lawful goods or

 3   lawful services” sold in an illegal manner under subsection (B). We agree with the Broker

 4   Defendants in this regard. The alleged scheme involved the purchase and sale of securities.

 5   Trading those securities, as a general matter, is not unlawful. Rather, any illegality occurred

 6   when the defendants bought and sold securities as part of a scheme involving illegal bribery and

 7   frontrunning. If the district court addresses the forfeiture issue again, with the same factual and

 8   legal bases, the proper measure of forfeiture for each Broker Defendant is his net, not gross, gain

 9   (that is, the gross commissions paid to him less the significant portion of those commissions that

10   went to his employer) under § 981(a)(2)(B).

11                                            CONCLUSION

12          For the reasons discussed above, we VACATE the defendants’ convictions and

13   REMAND the case to the district court for further proceedings consistent with this opinion.




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