The opinion of the court was delivered by: STEWART
Defendants R. Foster Winans ("Winans"), David Carpenter ("Carpenter") and Kenneth P. Felis ("Felis") are charged in Counts Two through Sixty-One with participating in a scheme to trade in securities based on information misappropriated from the Wall Street Journal ("WSJ" or "the Journal"). The information allegedly stolen from the Journal was the timing, content and tenor of market-sensitive stories scheduled to appear in the paper. This conduct was allegedly in breach of a fiduciary duty owed to Winans' employer, Dow Jones & Co., the parent company of the Wall Street Journal. As such, Dow Jones was allegedly defrauded, and the indictment charges that these activities were in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78ff and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and the mail and wire fraud statutes, 18 U.S.C. §§ 1341, 1343. All three defendants are also charged in County One with conspiracy to violate those statutes and to obstruct justice by their agreement to cover up and obstruct any investigation of the scheme by disguising payments, by making false statements to Kidder Peabody, the WSJ and officers of the SEC, and by preparing false documents intended for submission to the SEC. Peter Brant, not a defendant in this action, is also named as a conspirator.
Winans was a reporter of the Wall Street Journal, and one of the writers of the "Heard on the Street" column ("the Heard column"). Winans and Carpenter are homosexuals who have been involved in what they describe as a "spousal relationship" for over ten years. Carpenter also worked at the Wall Street Journal, but for a briefer period of time than Winans. Felis was a stockbroker at Kidder Peabody, who was brought into that brockerage firm by Peter Brant, the government's key witness in this prosecution. It is fair to say that Winans and Brant were the chief architects of this trading arrangement.
After a twenty-day trial, we find that facts as follows. Winans was originally hired by Dow Jones News Service in late March 1981. Referred by Winans, David Carpenter was hired by Dow Jones as news clerk in December of 1981. Beginning on February 2, 1981, it was the practice of the Journal to distribute to all new employees "The Inside Store," a forty-four-page pamphlet with seven pages devoted to the conflicts of interest policy. Winans denied ever receiving this booklet, or any other written conflicts policy, although he testified to receiving benefits information at the time of hire; "The Inside Story" does contain data on benefits, but Winans testified that the form of benefits information he received was distinct from this particular pamphlet. As for Carpenter, who worked at the Wall Street Journal for approximately one and half years, the government offers the same general practice testimony. However, Ms. Malloy, Personnel Manager for the New York region of Dow Jones, could not recall if she followed that practice with Carpenter, even though she was one who conducted his orientation.
Winans received a promotion in the summer of 1982 when he became one of two full-time "Heard on the Street" writers. This column, the focus of the case, is a daily market gossip feature, which highlights a stock or group of stocks and analyzes notable volumes of trading or price movements occurring in the market. The Heard column reports both negative and positive information about its featured stocks, but also takes a point of view with respect to investment in the stocks that it reviews. Numerous witnesses, including Winans, testified that the column has an effect on the price of stocks mentioned in the column.
Testimony was presented by the defendants concerning the investment thesis of each column at issue in an attempt to show that price movements were related to factors other than the column's publication. We find that the Heard column does have an impact on the market, difficult though it may be to quantity in any particular case. It is certainly obvious that the defendants believed that the column had such an impact.
The Dow Jones Conflict of Interest Policy is a three and one-half-page statement. It covers a number of subjects and specifically forbids the purchase or sale of securities on the basis of articles an employee knows will appear in the newspaper; it also states that employees should not disclose the paper's future contends to anyone outside the company. The policy also states that "all material gleaned by you in the course of your work for Dow Jones is deemed to be strictly the Company's property." Winans denied knowledge of any conflicts of interest policy, written or verbally conveyed, although he admitted that maintaining the confidentiality of the contents and timing of the columns was a "practice" of which he was aware.
Stewart Pinkerton, the New York Bureau Manager at the time of Winans' hire, testified to a conversation in which he told Winans of the confidential and sensitive nature of the Heard column, as well as the essentials of the conflicts of interest policy. Winans testified that this meeting was a brief "welcome aboard" talk, in which he and Pinkerton discussed salary and exchanged platitudes. Richard Rustin, who was Assistant Chief of the New York bureau of Winans' supervisor on the Heard column, testified that he too told Winans of the sensitivity of the column, and the importance of not investing in stocks the writer is covering. He also cautioned Winans that he should not let sources know what would be appearing in the column. Both Pinkerton and Rustin testified to follow-up reminders about the confidentiality of the column, after hearing rumors of leaks or having overheard Winans speak inappropriately to sources. Winans denies these conversations as well.
Seven months after Winans started to write the Heard column, on April 14, 1983, Pinkerton wrote Winans, summarizing a job performance discussion about errors in Winans' columns. Pinkerton wrote:
As you were made aware last August when you were hired to do the Heard on the Street Column, it's one of the most important columns we run. People rely on its insight, accuracy and integrity. When trust begins to erode on anything the Journal does, it creates grave concern, but especially so with some- thing as sensitive as the Heard column.
Moreover, shortly after Winans' move to the Heard column, on August 19, 1982, he wrote Pinkerton a letter disclosing his freelance activities and his plans to withdraw from them. Both these documents support Pinkerton's testimony that he and Winans had a substantive discussion about the ethical responsibilities associated with the Heard column and conflicts of interest in general.
We find that Winans had actual knowledge of the policy with respect to maintaining the confidentiality of the column. His testimony carefully used the word "practice" as opposed to "policy," but the factual distinction is meaningless. Winans knew he would be fired if his conduct came to light. He knew that part of his job responsibilities were to keep the subject matter and the publication date of the column secret. He discussed the topic with his co-writer, Gary Putka, and cautioned a new writer, Ed Leefeldt, not to be too obvious about the column's subject when dealing with sources. Winans also knew that he was supposed to tell his editors if he heard that word was out about a column's topic. He told his editors about one leak prior to his arrangement with Brant. Even during the course of the scheme, while deliberately tipping to Brant, he went to his editor to say that a source was aware that they were working on a certain column. On neither occasion did the editor choose to kill the column, but Winans knew that it was part of his job to allow his employer that option.
Defendants argue that there is a legal significance to a distinction between the violation of a policy and the failure to adhere to a practice. The legal argument will be addressed below, but we believe it is unnecessary for us to make the fine, factual distinctions between knowledge of a policy and knowledge of a practice that the defendants would have us make. In any event, we accept the testimony of Pinkerton and Rustin. We also find incredible Winans denial that he ever received the conflicts of interest policy statements.
As for David Carpenter, the government argues that he too knew of the policy from his work as a news assistant on the national news desk. According to the testimony of Nancy Cardwell, the Night News Editor who supervised him at the time, part of Carpenter's job was to answer the phones. She testified that in performing that task, he often had to deflect callers who sought to learn about the appearance of an article. Sometime in January of 1983, Carpenter asked Cardwell how to look up the stock symbol for American Surgery; he said "that's my stock" and over the next few weeks, she noticed he would frequently check the price. She believes at some point he commented, "Foster likes that stock," but for all she knew, that meant Winans had written a column about it and he had read it. We find that Carpenter was aware generally of the policy.
The American Surgery investments is the first overt act alleged in the conspiracy county, although it is not charged as a substantive crime. In early January of 1983, Winans started looking into the company in connection with a possible article. On January 10 or 11 he purchased American Surgery stock for a brokerage account held in David Carpenter's name, at a total cost of $1,814.17. Two favorable Heard columns were written about the company and published on January 13, 1983 and March 23, 1983; he bought 1,000 shares of Institutional Investors stock in Carpenter's account on April 28, 1983, and a favorable article appeared on June 1, 1983; the Institutional Investors stock was sold five days later. A $497.59 profit was made on the initial $1,237.50 investment in Institutional Investors.
The government seeks to use the early trades in American Surgery and Institutional Investors as the beginning stages of the conspiracy, which Brant and Felis joined later, providing the know-how in securities trading and large-scale capital. While we are not persuaded by Winans' testimony that these purchases and sales were investment decisions entirely independent of the WSJ articles, we do not believe that any conspiratorial agreement existed at this time between Winans and Carpenter. The account of Merrill Lynch and the subsequent account at Charles Schwab & Co., Inc. (in which these trades were made) were in Carpenter's name, but Carpenter's involvement in the trading decisions was minimal. Winans filled out the applications for the accounts, and either told Carpenter what trades to make or make them himself, identifying himself as Carpenter over the phone. Although Winans was keenly aware of the impropriety of the trading, we cannot accept the government view of this trading as pursuant to a conspiracy between him and Carpenter.
American Surgery remains significant in that it indirectly led Winans to Peter Brant, when Mark Delotte, a public relations consultant for that company, put the two in touch. Delotte suggested Brant as a possible focus of an article about superbrokers. Brant was the number one broker at Kidder Peabody, with a commission income of $1.8 million for the fiscal year December 1982 through November 1983. Brant and Winans met for the first time in mid-May of 1983. While Brant was not enthusiastic about a possible article featuring him, they met again on June 1, 1983 to tour the Racquet Club and have dinner at "21". A third meeting on June 14 was intended to be an opportunity for Winans to observe Brant meeting with a new client, but the potential client cancelled; instead, the meeting was another general chat about investing philosophies and lifestyles. At all of these initial meetings, the discussion related to Brant's phenomenal market success, his personal wealth and flamboyant lifestyle.
From June of 1983 on, Brant became one of Winans' regular sources. He was quoted in an August 31, 1983 article, and quoted again, but not identified, in a Special 2 column. Brant also invited Winans to a July 4th party on this boat, but Winans declined.
Brant and Winans present conflicting stores with respect to the birth of the scheme. Both testified to an October 12 meeting at the Racquet Club. According to Brant, nothing particularly significant took place that day, although there had been previous conversations in which he remarked to Winans about he coincidence of his own trading in two stocks, Apple Computer and Widergren, which later became subjects of Heard columns. Winans testified expansively to a meeting in which Brant turned the topic of conversation away from the broker and on to the reporter; they talked about Winans' work, career goals and financial situation. Winans testified that Brant brought up the coincidental trading in Apple more pointedly. According to Winans, Brant directly said, "You know, if I knew beforehand what was going to be in the column, we could make a lot of money." Winans testified that although the statement was made lightly, there was no doubt in his mind that Brant was not joking, but was making an offer. Brant denies this entirely.
This conflict in the testimony need not be resolved, since it is undisputed that the next weekend, Winans went out to Brant's house, and the two struck a deal on Sunday, October 16, 1983, on the Meadowbrook golf course on Long Island. They agreed that Winans would leak information to Brant with respect to the timing, subject and tenor of Heard columns so that Brant could trade in securities armed with that information. Both testified that it was part of the agreement tha the arrangement would not affect the journalistic purity of Winans' writing. On Winans' side, the agreement would not influence his choice of topic or the contents of any article; he would continue to write balanced pieces, containing both negative and positive information. Brant was told that occasionally columns were killed or delayed because of a superseding newsworthy item. On Brant's end, the timing, volume and type of trading was totally in his hands. As for the distribution of profits, it seems to have been assumed that net profits were to be split after fifty percent was set aside for taxes. It also appears to have been assumed that Winans would receive nothing if there were no profits.
Brant states that Winans described Carpenter as someone he was close to, who would know of the arrangement. In response, Brant asked if Carpenter could be trusted; Winans assured him on this point. Winans testified that his reference to Carpenter was intended to let Brant know that he was a homosexual as well as to see if there was any possibility of a part-time job for Carpenter. Brant says that he told Winans about Felis at that time, describing him as a business partner who would also participate; Winans testified that Brant told him about Felis a day or two later over the phone. Lastly, it was agreed that Brant would advance Winans $15,000, and that the check should be made out to Carpenter to avoid using Winans' name.
On that Sunday afternoon, Brant called Felis to tell him of the arrangement; Brant testified that Felis was enthusiastic. Winans went home and told Carpenter that he was going to be giving Brant stock ideas be picked up in his work and Brant would be giving him money. Carpenter's SEC testimony similarly reflects, that, at first, Carpenter only knew of a business arrangement between Brant and Winans in the most general sense.
The following week, the agreement was put into effect. The advance from Brant was delivered to Winans; the $15,000 check was tucked inside a Kidder Peabody research report. Carpenter endorsed the check, and Winans deposited it the following day in their joint checking account. That Monday, October 17, 1983, Winans leaked to Brant that the Heard column for Tuesday was to be a positive column on oil drilling stocks. Stock and options in Schlumberger, Ltd., one of a number of companies mentioned, were bought in two accounts, one in Brant's name and a second in Felis' name, the latter jointly owned by Brant and Felis. The scheme began inauspiciously, when a more newsworthy article came up, and the oil drilling column was displaced and delayed by a day. The first trade resulted in a loss of $37,914.25 in Felis' account and $9,550.53 in Brant's account.
On October 18, 1983, Brant included David W.C. Clark, a client and friend, in the deal. Brant testified at trial that Clark was depressed and suicidal one night, and Brant told him of the plan and its profit potential in order to cheer him up. Felis' reaction to this addition was to state that "Clark is a pig and he'll get us all caught." Brant traded on information from Winans in Clark's accounts at Kidder Peabody beginning on October 19, 1983 despite this lack of enthusiasm. Winans was never aware of this trading, which is not included in any of the substantive counts; Winans only learned of Clark's existence at the time the SEC started asking questions.
The second trade was in TIE/Communications, Inc., and resulted in a profit of over $100,000 in the Felis and Clark accounts. On October 20, 1983, Winans, Brant and Felis met for drinks at the Racquet Club and went out to dinner. The group discussed that there was a better profit potential in columns focusing on one stock, such as the column on TIE, rather than a column about a group of stocks, such as the mention of Schlumberger as one of a number of oil drillings companies. Felis suggested a flat fee of $25,000 per story for Winans. There was also some discussion about being careful not to attract attention.
The following weekend was spent at Brant's home again, with Carpenter accompanying Winans on this occasion. Apparently little business conversation took place, and Brant recalled none. In contrast to Brant's lack of recall, Winans and Carpenter testified to a conversation on the same golf course, but both Winans, at trial, and Carpenter, in his SEC testimony, described it as a general discussion about stocks and making a lot of money.
From this point in October until the end of February 1984, approximately twenty-seven articles were leaked in advance, not all of which were written by Winans. When the topic was set for the next day, Winans would call Brant. Winans could only recall one specific instance in which he called Felis, in connection with a story on Chicago-Milwaukee, although he though that he may have called Felis additional times. His calls were generally made from a pay phone outside the WSJ building. He also used the name "Howard Cohen," or variations thereof, when calling Brant. Apparently, he was not a very good at remembering his false name and sometimes identified himself as Howard Kahn or Howard Winans.
The execution of the trades was entirely left to Brant, who testified that he would discuss the strategy with Felis and/or Clark. Depending on the positive or negative tone of the article, stock was either bought or sold short, and call or put options were either bought or sold. Most often, the transactions were closed on the same day as an article's publication, thereby maximizing its impact. The net profits amounted to almost $690,000, taking into account trading in all the accounts connected with the defendants.
The distribution of profits was far from mathematically exact; it may be a coincidence that the $30,000 paid to Winans actually does reflect a one-third share of the after-tax profits from the Felis and Western Hemisphere accounts. Brant would generally inform Winans about making money on trades, but Winans does not appear to have been keeping careful track. He asked for money when he needed it. On November 10, 1983, Brant gave Winans 750 British pounds for Carpenter to use on his trip to London. On December 7, in response to another request from Winans in connection with a specific need, Brant wrote a check for $5,000. The last payment was a $10,000 check issued on January 26, 1984.
The $10,000 check written on January 26, 1984 has the handwritten notation "drapes" on it. Brant asked Felis to write the checks. Since it was the first check Felis made out for Winans, he asked "What should I write on this thing, drapes?", to which Brant responded "Yes." While Brant initially testified that this justification for the payments had been previously discussed at his house, in a conversation between Felis, Carpenter and himself, he ultimately backtracked and equivocated, admitting that any such conversation that included both Carpenter and Felis might have taken place after the check was drawn; Brant did state that it was definitely discussed at a February 11, 1984 meeting. However, testimony from Gary Lickle, Brant's friend and attorney who was at the house that weekend, established that on February 11, Carpenter, Brant and Felis never had a private conversation. While this testimony is significant with regard to Carpenter, it means nothing with respect to Felis' knowledge at the time the check was written. He must have had some sort of conversation with Brant at the time he wrote the check, and it is irrelevant whether Brant told him to write the word "drapes" on the check or whether Felis brought it up. As Felis was aware, the check was not for decorating services; the addition of the word "drapes" was to establish a basis for saying that it was.
Nor do we understand Felis' explanation that, in light of Brant's testimony that someone, maybe Carpenter, felt a need to have an explanation of how the payment should be declared as income for tax purposes, the worst this notation shows is a scheme to defraud the IRS. The fact remains that Brant and Felis recognized that there was a problem with the true source of the income, necessitating a false explanation for the payment.
Felis, Brant and Winans met two other times in addition to the October 20 meeting: once at the Racquet Club followed by dinner at Cafe Seiyokin in late October or early November, and once at Brant's house the weekend of February 11, 1984. Carpenter, Brant and Winans met a total of three times: during the October 22 weekend, for drinks and dinner in November of 1983, and during the above-mentioned February 11 weekend accompanied by Felis as well. After the Cafe Seiyokin evening, Winans objected to further meeting at the Racquet Club for fear of running into Wall Street or Wall Street Journal acquaintances.
The government argues that during the agreement's operation, the contents of three of Winans' stories were affected by the conspiracy, in that Winans pushed for publications of articles on Todd Shipyards and Petro Lewis over the objections of his colleague, Gary Putka, who disagreed with the contents and tenor thereof. However, those two instances appear to be only examples of a routine difference of opinion between Winans and Putka. If anything, the fact that the government has the opportunity to make this argument points out the difficulty of maintaining a stance of journalistic purity when the reporter is engaged in a decidedly unpure venture.
More troubling is Winans' testimony at the SEC with respect to his January 19, 1984 article on Digital Switch. Digital Switch was a stock that had helped to make Brant rich. He was heavily invested in the stock, and it was not doing well. Indeed, both the government and the defendants point to the poor market status of this stock as Brant's motive for entering into the arrangement. Winans unequivocally testified at the SEC that Brant's promise of a big distribution of profits if he could get out of Digital Switch was "an inducement" and a factor in his choosing to write the January 19 article. At trial, Winans testified that he was trying to be helpful at the SEC, that this was the only time that Brant had connected their agreement with a story idea, and that in his SEC testimony he misspoke. While Brant may have been offering an inducement, Winans testified that the inducement did not affect his journalistic judgment in choosing to write the article; it was a newsworthy column which was written for that reason. That may be the case, but we do not accept his rejection of his SEC testimony; rather, we accept it as evidence of Winans' criminal intent.
Trading by Winans also continued in Carpenter's Schwarb account during the time in which Winans was profiting from Brant's trading. Six trades took place in the Carpenter account, each on the day before an article appeared in the Wall Street Journal. Like the earlier trading in American Surgery and Institutional Investors, Carpenter's role in this trading was primarily ministerial, although as indicated in his SEC testimony, he was aware that these purchases and sales were connected with the appearance of articles in the Journal.
Felis used the information obtained from Winans beyond the scope of the original agreement. The topic and tone of forthcoming Heard articles was passed by him in seven instances to Douglas McCaskey, a stockbroker and an old college friend of Felis. Similarly, Felis tipped Stephen Spratt, his junior partner in his Connecticut business in four instances. Spratt's broker noticed the correlation between Spratt's transaction and a WSJ article in one such trade. Spratt called Felis, who said "you better change your account." Felis, in an obvious effort to conceal the conspiratorial scheme, told him to move accounts because his broker would start copying his trades, and Spratt would not get good service. At trial, Spratt also testified that Felis told him that there was nothing wrong with the trading, that it was just one of Brant's tips, and that an attorney had said it was legal; Spratt made no mention of this latter part of the conversation when he testified before the SEC.
On November 3, 1983, Kidder Peabody's Compliance Department noticed the correlation between Heard articles and trading in the Felis and Clark accounts. William Kennedy, New York Regional Manager for Kidder Peabody, asked Brant and Felis about the trades. Felis falsely stated that he was merely copying the trades of Clark, who Brant asserted got his information from friends on Wall Street. Brant also falsely denied knowing anyone at the WSJ. Kennedy said that Felis' trading ...