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U.S. v. WILLIS

December 2, 1991

UNITED STATES OF AMERICA, PLAINTIFF,
v.
ROBERT HOWARD WILLIS, DEFENDANT.



The opinion of the court was delivered by: Cedarbaum, District Judge.

OPINION

For the third time, defendant has moved to dismiss the indictment in this case.*fn1 Familiarity is assumed with my previous opinion denying defendant's earlier motions. That opinion is reported at 737 F. Supp. 269 (1990). I shall not repeat my extensive discussion of the charges set out in the indictment or of the misappropriation theory of liability under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder on which the government relies in this prosecution. I shall only note that the gravamen of the charges is that the defendant, who is a practicing psychiatrist, traded on material, nonpublic information confided to him by his patient as part of a course of treatment, and that the indictment charges that the patient received the information from her insider husband "in a relationship of trust and confidence." Indictment, ¶ 12.

In my previous opinion, I considered the decision of the Second Circuit in United States of America v. Robert Chestman, 903 F.2d 75 (2d Cir. 1990) ("Chestman I"). The Second Circuit has reconsidered Chestman I, and recently issued an in banc decision, United States of America v. Robert Chestman, 947 F.2d 551 (2d Cir. 1991) ("Chestman II"). Defendant grounds this motion on his contention that Chestman II requires dismissal of the indictment.

Thus, the only issue now before me is the effect of Chestman II on the indictment in this case. Chestman II was not decided on the face of the indictment, but rather, after a trial at which the facts were fully developed. I turn first to the facts proved in that case as stated in the majority opinion of the Second Circuit.

THE FACTS OF CHESTMAN II

    Robert Chestman is a stockbroker. Keith Loeb
  first sought Chestman's services in 1982, when
  Loeb decided to consolidate his and his wife's
  holdings in Waldbaum, Inc. (Waldbaum), a publicly
  traded company that owned a large supermarket
  chain. During their initial meeting, Loeb told
  Chestman that his wife was a granddaughter of
  Julia Waldbaum, a member of the board of directors
  of Waldbaum and the wife of its founder. Julia
  Waldbaum also was the mother of Ira Waldbaum, the
  president and controlling shareholder of Waldbaum.
  From 1982 to 1986, Chestman executed several
  transactions involving Waldbaum restricted and
  common stock for Keith Loeb. To facilitate some of
  these trades, Loeb sent Chestman a copy of his
  wife's birth certificate, which indicated that his
  wife's mother was Shirley Waldbaum Witkin.
    On November 21, 1986, Ira Waldbaum agreed to
  sell Waldbaum to the Great Atlantic and Pacific
  Tea Company (A & P). The resulting stock purchase
  agreement required Ira to tender a controlling
  block of Waldbaum shares to A & P at a price of
  $50 per share. Ira told three of his children, all
  employees of Waldbaum, about the pending sale two
  days later, admonishing them to keep the news
  quiet until a public announcement. He also told
  his sister, Shirley Witkin, and nephew, Robert
  Karin, about the sale, and offered to tender their
  shares along with his controlling block of shares
  to enable them to avoid the administrative
  difficulty of tendering after the public
  announcement. He cautioned them "that [the sale
  was] not to be discussed," that it was to remain
  confidential.
    In spite of Ira's counsel, Shirley told her
  daughter, Susan Loeb, on November 24 that Ira was
  selling the company. Shirley warned Susan not to
  tell anyone except her husband, Keith Loeb,
  because disclosure could ruin the sale. The next
  day, Susan told her husband about the pending
  tender offer and cautioned him not to tell anyone
  because "it could possibly ruin the sale."
    The following day, November 26, Keith Loeb
  telephoned Robert Chestman at 8:59 a.m. Unable to
  reach Chestman, Loeb left a message asking
  Chestman to call him "ASAP." According to Loeb, he
  later spoke with Chestman between 9:00 a.m. and
  10:30 a.m. that morning and told Chestman that he
  had "some definite, some accurate information"
  that Waldbaum was about to be sold at a
  "substantially higher" price than its market
  value. Loeb asked Chestman several times what he
  thought Loeb should do. Chestman responded that he
  could not advise Loeb what to do "in a situation
  like this" and that Loeb would have to make up his
  own mind.
    That morning Chestman executed several purchases
  of Waldbaum stock. At 9:49 a.m., he bought 3,000
  shares for his own account at $24.65 per share.
  Between 11:31 a.m. and 12:35 p.m., he purchased an
  additional 8,000 shares for his clients'
  discretionary accounts at prices ranging from
  $25.75 to $26.00 per share. One of the
  discretionary accounts was the Loeb account, for
  which Chestman bought 1,000 shares.
    Before the market closed at 4:00 p.m., Loeb
  claims that he telephoned Chestman a second time.
  During their conversation Loeb again pressed
  Chestman for advice. Chestman repeated that he
  could not advise Loeb "in a situation like this,"
  but then said that, based on his research,
  Waldbaum was a "buy." Loeb subsequently ordered
  1,000 shares of Waldbaum stock.

Chestman II, 947 F.2d at 555.

Based on the foregoing evidence, the Second Circuit reversed Chestman's conviction for aiding and abetting Loeb's misappropriation from his wife ...


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