United Statesv v. Mahaffy, No. 09-5349-cr (2d Cir. August 2, 2012) (McLaughlin, Parker, Wesley, CJJ)
This, the court’s most recent Brady decision, presents a truly shocking instance of prosecutorial misconduct.
The Brady violation was here was straightforward: the defendants were employees of brokerage houses and a day trading firm called A.B. Watley, accused of securities fraud by running a “frontrunning” scheme. Here’s how it worked: the brokerage houses had “squawk boxes” which, during the day, would transmit internal communications about, amongst other things, client trading orders. The squawks would allow the firms’ traders to find a client to take the other side of the trade. In the scheme, the brokerage defendants would place phone receivers over their squawk boxes and transmit the squawks directly to Watley employees, who would then place trades in the squawked securities before the brokerage houses could execute the customer orders. Watley hoped to buy or sell at a more favorable price than would be available once the squawked orders were executed. The payback would be “wash trades” - Watley traders would simultaneously buy or sell the same securities at the same price and place the orders through the brokerage house that provided the squawk. These trades had no economic upside or risk, but generated commissions for the defendants in the brokerage houses.
The defendants were first tried on a variety of securities-fraud related offenses and were acquitted of all but one of them; the jury hung on a single count of conspiracy to commit securities fraud. The government retried the defendants on this single count, which was predicated on two theories - property fraud, because the brokerage defendants allegedly deprived their employers of confidential information, and honest services fraud.
Most of the trial action centered on whether the squawks were indeed confidential information. Principals from each brokerage firm testified that the firms regarded the client order information contained in the squawks as confidential information that the brokers should not have disseminated to Watley. After another near-deadlock, the jury convicted.
The Brady Violation
Before the first trial, during a parallel SEC investigation, high-level members of the brokerage houses testified in depositions that the information in the squawks was not confidential, was not treated as confidential, and that there were good business reasons for this. The government clearly knew about these depositions: the primary SEC attorney who conducted them was a “Special AUSA” who sat at counsel table during the first trial. He even emailed his colleagues on the trial team about the need to disclose the transcripts to the defense as Brady material, but the trial prosecutors decided not to. A different trial team conducted the retrial; it too knew of the transcripts but deferred to the first trial team’s decision not to disclose them.
The government finally disclosed the transcripts after the defendants had been sentenced. This prompted the defendants to move for a new trial under Rule 33, which the district court denied.
The Circuit’s Decision
The circuit clearly saw the importance the withheld exculpatory material and, in a strongly worded opinion, vacated the convictions and remanded. The court also suggested that it would not be wise to retry these defendants a third time.
The opinion has a long and detailed explanation of how and why the withheld material was material to the defense - here are a few highlights, although the opinion details many more:
- A Merrill Lynch employee had testified at trial that Merrill did not allow direct feeds from its squawk boxes to individuals outside the firm. But his supervisor testified in his SEC deposition that squawked information would be “spread or be out in the marketplace or broader” and was then “no longer confidential.” Two other Merrill supervisors told the SEC that there was no difference between holding a phone up to the squawk box and repeating the information in the squawk “word for word” and that there was no rule “that said you could not broadcast that information.”
- A Smith Barney employee testified that the firm’s squawks were “sensitive, not confidential,” since at some point someone would have to act on the order.
- A Lehman supervisor did not view squawks as confidential, either. Their purpose was to facilitate the communication of information, including to “our customer base.”
In trying to defend itself, the government, as it usually does in such cases, trotted out every pathetic Brady excuse it could cobble together. The circuit shot them all down:
1. The government: the withheld information was not really exculpatory. The circuit: It does not matter that some potions of the transcripts might have been inculpatory. Since the exculpatory part “harmonized with the theory of the defense case,” there was a Brady violation.
2. The government: the witnesses whose testimony helped the defense were "mistaken." The circuit: even if mistaken on some points, the testimony was still material. The witnesses clearly testified that there was “no policy against directly transmitting squawks.” This particular excuse, by the way, is a variant on the classic "we did not believe the testimony, so we did not have to disclose it." The circuit has debunked that so many times that it is truly a wonder that the government still bothers with it.
3. The government: the testimony was “irrelevant hearsay” that would have “confused the jury and wasted time.” The circuit: it does not matter that some of the specific evidence that the government withheld might have been inadmissible, as long it could have led to admissible evidence. If necessary, the defense could have called the witnesses themselves.
4. The government: for one of the depositions, the defense already knew that the witness had had the conversation that turned out to be exculpatory. The circuit: that does not matter. It is not enough that the defense know a potential witness’ identity - the potentially exculpatory testimony is still deemed suppressed if a defendant did not know “the essential facts permitting him to take advantage of any exculpatory evidence.” Here, the defendants did not know what that witness said to the SEC under oath. If they had, they might have called the witness himself.
5. The government: for another one of the witnesses, the withheld deposition was immaterial because it related to that witness’ conversation with one of the defendants, who ought to have known the substance of their conversation. The circuit: again, it does not matter, because the defendant could not have known what the witness told the SEC under oath.
6. The government: the Smith Barney witness simply avoided the word “confidential” in favor of the word “sensitive,” because he was trying to avoid misusing a legal term. The circuit: that witness’ testimony went beyond his avoiding the use of the term legal “confidential.” His factual testimony about how the firm treated the information suggested that the firm did not treat the information in the squawks as confidential, and was thus material to the defense.
In sum, since the withheld testimony “strongly suggests that the brokerage firms did not treat squawked ... information as confidential and that senor employees and management at the respective firms did not bar the transmission of squawks or take steps to maintain exclusive control of pending block order information,” it should have been disclosed. And the court had “little confidence” that the result of the trial “would have been the same had the government complied with its Brady obligations.”
Finally, an interesting footnote on forfeiture. The district court ordered forfeiture of the gross commissions that Watley paid to each brokerage defendant’s employer. But the defendants only kept about thirty per cent of those payments. Accordingly, the district court erred in ordering forfeiture of the full amount. The proper amount to be forfeited should have been only each defendant’s “net, not gross, gain.”