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United States v. Mahaffy

March 16, 2007

UNITED STATES OF AMERICA
v.
KENNETH E. MAHAFFY, JR., TIMOTHY J. O'CONNELL, DAVID G. GHYSELS, JR., ROBERT F. MALIN, LINUS NWAIGWE, MICHAEL A. PICONE, AND KEEVIN H. LEONARD, DEFENDANTS.



The opinion of the court was delivered by: Glasser, United States District Judge

MEMORANDUM AND ORDER

Trial in this criminal action alleging conspiracy, securities fraud, and false statements is scheduled to begin on Monday, March 19, 2007. The government has moved in limine pursuant to Federal Rule of Evidence 404(b) ("Rule 404(b)") and the Second Circuit's opinion in United States v. Towne, 870 F.2d 880 (2d Cir. 1989), cert. denied 490 U.S. 1101 (1989), to admit evidence regarding several uncharged acts or crimes of various defendants. For the reasons stated below, the government's motion is granted in part, and decision is deferred to trial in part.

BACKGROUND

The forty-one count Superseding Indictment ("Sup. Ind.") alleges, in essence, that the defendants cooperated in a fraudulent scheme whereby, between roughly August 2002 and February 2004, defendants Mahaffy, O'Connell, and Ghysels (the "Broker Defendants"), who during all or part of that time were employed as stock brokers at Merrill Lynch, Citigroup (a.k.a. "Smith Barney"), and Lehman Brothers, conspired to provide material inside information regarding those institutions' upcoming securities transactions to day traders at A. B. Watley, Inc., who were under the supervision of defendants Malin, Nwaigwe, Picone, and Leonard (the "A. B. Watley Defendants") and the former CEO of A. B. Watley ("CW-1"), who is now a cooperating witness for the government, for the purpose of enabling the day traders to engage in a fraudulent "front-running" scheme*fn1 whereby the traders exploited their knowledge of those upcoming institutional transactions so as to profit by the movements in stock prices caused by those transactions. The Broker Defendants allegedly conveyed this information by permitting A. B. Watley's day traders to listen, via an open telephone line, to the Broker Defendants' internal "squawk boxes"*fn2 for significant portions of the trading day. The A. B. Watley Defendants allegedly compensated the Broker Defendants by executing a series of "wash trades"*fn3 with the Broker Defendants "solely as a means of generating commissions for [the Broker Defendants] in exchange for Squawk Box access." Id. The Superseding Indictment further alleges that, after the completion of the charged acts of conspiracy and securities fraud, defendants O'Connell, Mahaffy, Nwaigwe, and Picone made false statements to regulatory and law enforcement agents in an attempt to impede investigations by the United States Securities and Exchange Commission ("SEC"), the National Association of Securities Dealers ("NASD"), and the United States Attorney's Office into the charged securities fraud schemes and other alleged wrongdoing.

The government now seeks to introduce evidence of various uncharged acts of wrongdoing or false statements on the part of several defendants that it argues are admissible pursuant to Rule 404(b) and the case law of the Second Circuit. The Court shall discuss each item of evidence in greater detail below.

DISCUSSION

Rule 404(b) states that evidence of uncharged crimes, wrongs, or acts "is not admissible to prove the character of a person in order to show action in conformity therewith." However, such evidence may be admitted for other purposes, "such as proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident." Id. The Second Circuit has adopted an "inclusionary approach," whereby evidence of uncharged crimes or acts may "be admitted for any purpose other than to demonstrate criminal propensity." United States v. LaFlam, 369 F.3d 153, 156 (2d Cir. 2004); see also United States v. Concepcion, 983 F.2d 369, 392 (2d Cir. 1993) ("when the other-act evidence is relevant to prove a material fact other than the defendant's propensity, it is not barred by Rule 404(b)."). The government "bears the burden of demonstrating admissibility under Rule 404(b)." United States v. Cushing, No. S3 00-CR-1098, 2002 WL 1339101, at *2 (S.D.N.Y. June 18, 2002) (citing United States v. Nachamie, 101 F. Supp. 2d 134, 137 (S.D.N.Y. 2000)).

The process by which this Court must evaluate the government's proffered evidence is therefore well-established. First, the district court must determine if the evidence is offered for a proper purpose, one other than to prove the defendant's bad character or criminal propensity. If the evidence is offered for a proper purpose, the district court must next determine if the evidence is relevant to an issue in the case, and, if relevant, whether its probative value is substantially outweighed by the danger of unfair prejudice. Finally, upon request, the district court must give an appropriate limiting instruction to the jury.

United States v. Pitre, 960 F.2d 1112, 1119 (2d Cir.1992) (citation omitted); see also Huddleston v. United States, 485 U.S. 681, 691 (1988). Evidence of acts not specifically charged in the indictment is also directly admissible, without reference to Rule 404(b), if the acts were taken in furtherance of a charged conspiracy, see Concepcion, 983 F.2d at 392 ("[a]n act that is alleged to have been done in furtherance of the alleged conspiracy, however, is not an 'other' act within the meaning of Rule 404(b); rather, it is part of the very act charged"), or if the acts are "inextricably intertwined" with the crimes charged in the indictment and introduction of the evidence is therefore "necessary to complete the story of the crime on trial." Towne, 870 F.2d at 886.

As the Pitre court indicated, even if the evidence is proffered for a purpose other than to prove criminal propensity, and is therefore admissible under Rule 404(b), it may nevertheless be excluded pursuant to Federal Rule of Evidence 403 ("Rule 403"), which states that otherwise admissible evidence "may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by consideration of undue delay, waste of time, or needless presentation of cumulative evidence."*fn4 Evidence is "prejudicial" under Rule 403 not when it simply tends to prove that the defendant is guilty of the crimes charged, but "only when it tends to have some adverse effect upon a defendant beyond tending to prove the fact or issue that justified its admission into evidence." United States v. Figueroa, 618 F.2d 934, 943 (2d Cir.1980). In other words, "the prejudice must be unfair in the sense that it could unduly inflame the passion of the jury, confuse the issues before the jury, or inappropriately lead the jury to convict on the basis of conduct not at issue in the trial." United States v. Quattrone, 441 F.3d 153, 186 (2d Cir. 2006). The Second Circuit has held that evidence of other crimes or bad acts is generally admissible under Rule 403 where the uncharged acts "did not involve conduct any more sensational or disturbing than the crimes with which [the defendant] was charged." United States v. Roldan-Zapata, 916 F.2d 795, 804 (2d Cir. 1990).

With these principles in mind, the Court shall examine each category of evidence pertaining to uncharged crimes or acts that the government seeks to introduce against the defendants at trial.

1. The Wachovia Front-Running Scheme

The government seeks to introduce evidence that, between July 2002 and July 2003, defendants Malin and Leonard, together with CW-1 and others, conspired with a broker at Wachovia Securities ("Wachovia") to obtain access to Wachovia's squawk box for the purpose of engaging in a front-running scheme, and that, when the Wachovia broker was fired for participating in this uncharged conspiracy, "CW-1, Malin, Leonard and several other A. B. Watley employees had numerous conversations about the Wachovia broker's termination for improper use of the Squawk Boxes." Government's Motions In Limine ("Gov. Mem.") at 7. The government argues, first, that evidence of the Wachovia front-running scheme is admissible without reference to Rule 404(b) because it is "inextricably intertwined with the charged front-running scheme," and second, that even if Rule 404(b) applies, the evidence that the defendants were aware of the Wachovia broker's termination is admissible as evidence that the defendants were aware that A. B. Watley's receipt of squawk box information from the other brokerage firms described in the indictment was improper. Gov. Mem. at 7.

Neither Malin nor Leonard object to the introduction of this evidence; however, Malin requests that an instruction be issued at the time that this and other 404(b) evidence against him is elicited, instructing the jury that such evidence may be considered only for the limited purpose for which it is introduced, and not as a substitute for proof that the defendants committed the crimes charged in the indictment or as evidence of bad character or propensity. The Court must therefore determine whether evidence of the Wachovia front-running scheme constitutes 404(b) evidence such that a limiting instruction is appropriate, or is "inextricably intertwined" with the charged offenses, such that the evidence may be admitted without reference to Rule 404(b) and without a limiting instruction. United States v. Towne, 870 F.2d 880, 886 (2d Cir. ...


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