The opinion of the court was delivered by: John Gleeson, United States District Judge
The six defendants who went to trial in this case and were found guilty by the jury have moved for a dismissal of the indictment, or, in the alternative, for a new trial, on the ground that the government failed to disclose the transcripts of 12 depositions taken by the Securities and Exchange Commission ("SEC"), which the defendants claim violated the government's disclosure obligations. For the reasons set forth below, the motion is denied.
Familiarity with the extensive procedural history of this case, which is now five years old, is assumed.
In a three-week trial commencing March 30, 2009, six of the defendants in superseding indictment "S-5" were tried before me on a single charge. Three of them, Kenneth A. Mahaffy, Jr., Timothy J. O'Connell and David G. Ghysels, Jr., were stock brokers. At times relevant to the indictment, Mahaffy worked at Merrill Lynch and Smith Barney; O'Connell worked at Merrill Lynch; and Ghysels worked at Lehman Brothers. The other defendants, Robert Malin, Linus Nwaigwe and Keevin Leonard, all worked at A. B. Watley, Inc. ("Watley"), a broker dealer engaged primarily in the practice of day trading -- a stock-trading strategy that produces a high volume of trades that consist of buying and selling securities within short periods of time, seeking to profit from slight changes in the market price during those short time periods.
The defendants were charged with conspiring to (1) defraud the brokerage firms of their right to the honest services of their employees (i.e., Mahaffy, O'Connell or Ghysels, as the case may be); and (2) obtain and misappropriate confidential information (about customer orders) belonging to the brokerage firms, all in connection with securities of companies that had filed registration statements with the SEC, in violation of 18 U.S.C. § 1349. The jury was not only instructed that unanimity was required as to either or both of the objectives of the charged conspiracy, it was asked to render separate verdicts on each, and on April 22, 2009, all defendants were found guilty of violating § 1349 both by agreeing to deprive the brokerage firms of the honest services of their employees and by agreeing to misappropriate the brokerage firm's confidential information. This latter theory of liability was founded on Carpenter v. United States, 484 U.S. 19 (1987), which held that the impermissible prepublication use by an employee of The Wall Street Journal of confidential business information belonging to the newspaper constituted a scheme to defraud of "property" protected by the mail and wire fraud statutes. 484 U.S. at 25. Although the defendants' motions challenge their convictions in their entirety, the gist of their arguments, and particularly the heavy emphasis in both the written submissions and the oral argument on the claim that the undisclosed depositions would have helped them prove the business information in question was not confidential, relates more directly to the second objective of the charged conspiracy.*fn1
The charged scheme centered on the brokerage firms' use of "squawk boxes," internal broadcast systems that disseminated information throughout the firm. The information that came over the squawk boxes varied in nature, but some of it was sensitive and valuable information about pending orders of the firm's clients to buy or sell blocks of stock -- on occasion very large blocks of stock. A principal purpose of disseminating the information within the firm was to permit the firm's brokers to find "the other side of that trade." Tr. 220. If, for example, Client A placed an order to buy 100,000 shares of IBM stock, a broker who learned of that order over the squawk box might fill part of that order because Client B wished to sell 5,000 shares of IBM. That would allow part of the order to be filled without affecting the price of the shares, and would also allow the brokerage firm to collect commissions from both Clients A and B. The brokers might also use the information about the buy order by calling Clients C through Z and affirmatively inquiring as to whether they might provide all or part of the other side of the IBM trade. In this manner, the firm's confidential, proprietary information (the buy order from Client A) would be directly or indirectly disseminated outside the firm (through the brokers' inquiries of those clients) in an effort "to provide liquidity to [Client A]." Tr. 220.
There was much testimony at trial about the need for discretion and good judgment on the part of the brokers in this regard. For example, a broker should not call a client that never trades in technology stocks to ask if they want to sell a large block of IBM stock, because that would divulge the confidential information of Client A's order (thereby potentially affecting the market price for those shares) in circumstances that would provide little chance of providing a seller of the IBM stock. Similarly, even when speaking to clients who trade in technology stocks, a broker should not say that the firm wants to buy 100,000 shares if that client historically has traded only in lots of 5,000 shares. That would divulge more information than necessary to meet the liquidity needs of Client A.
In sum, the evidence at trial established that some of the information broadcast over the squawk boxes -- information about actual client orders, which were identifiable among the other transmissions due to certain accompanying words, such as "natural" or "print" -- was confidential information of the brokerage firm. "Confidential" in this context did not mean that the content of the client's order could never be revealed in any form; to the contrary, an effort to get another of the firm's clients to take all or part of the other side of the trade often required disclosure, at least indirectly, of at least part of the information about the original client's order.
This need for a legitimate purpose on the part of the brokers, and the subtleties that surround the broker's "filtering system as to how and why [the broker] will call clients in the hopes of finding the other side of that trade," Tr. 221, did not dilute the clarity of the factual theory that lay at the heart of the government's case: the information disseminated over the squawk boxes could not properly be sold to day traders who would never take the other side of the trade but rather would try to profit by quickly trading ahead of the block orders they learned about from the squawk boxes. That was what the defendants were charged with doing in this case.
Specifically, the broker defendants were charged with providing to the day traders at Watley live access to the brokerage firms' squawk boxes. In the morning before the trading began, the broker defendants would call Watley. Once the connection was established, the broker defendants would place the telephone receiver next to the broker's squawk box so the traders at Watley could listen all day long to the transmissions. Those transmissions included a significant amount of chaff, such as mere indications of interest in certain stock. But they also included some wheat -- actual orders to buy or sell stock in large enough blocks that filling those orders could result in a movement in the market price for those stocks. The Watley traders' business plan was to pay for the right to listen to the squawk box transmissions and trade ahead of certain orders they heard about over them. Watley never took the other side of any orders, and it never served the interests of the brokerage firms or their clients to have the clients' orders shared with Watley. The evidence showed, however, that it served the interests of the broker defendants, because Watley paid them for access to squawk boxes, either in cash or through "wash trades," paired purchases and sales of the same stock made for no reason other than to generate commissions for the broker defendants.
There was ample evidence of guilt at trial. Four accomplice witnesses testified about the scheme; documentary evidence corroborated their testimony, and several defendants ...