United States District Court, S.D. New York
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For David Riley, Defendant: Eric Brendan Bruce, Kobre & Kim LLP, New York, NY; John Francis Kaley, Doar, Rieck, Kaley & Mack, New York, NY.
For Matthew Teeple, Defendant: Matthew I. Menchel, LEAD ATTORNEY, Joshua Lawrence Ray, Kobre & Kim LLP, New York, NY.
For USA, Plaintiff: Steve C. Lee, Telemachus Philip Kasulis, United States Attorney Office, New York, NY.
OPINION & ORDER
VALERIE CAPRONI, United States District Judge.
After a 10-day jury trial and several days of deliberations, David Riley was convicted of two counts of securities fraud, in violation of 15 U.S.C. § § 78j(b) and 78ff, 17 C.F.R. § § 240.10b-5 and 240.10b5-2, and 18 U.S.C. § 2; and one count of conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371; the jury did not reach a unanimous decision on a third securities fraud count. At trial the Government adduced substantial evidence showing that Riley provided material, nonpublic information (" MNPI" ) to Matthew Teeple, an analyst who worked for a hedge fund. Riley informed Teeple of, inter alia, nonpublic information regarding his employer's worldwide sales data, an impending (but unannounced) acquisition of his employer, and obstacles delaying the acquisition.
Relying on the Second Circuit's decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), Riley moves for a judgment of acquittal or, in the alternative, for a new trial. Fed. R. Crim. P. 29, 33. Although the Court's instructions to the jury would have been different following Newman, the evidence adduced at trial left no reasonable doubt of Riley's guilt. Accordingly, Riley's motion is DENIED.
David Riley was the Chief Information Officer (" CIO" ) and the Vice-President for Information Systems (" IS" ) and Information Technology (" IT" ) at Foundry Networks, Inc. (" Foundry" ), a network equipment company that was a leading producer of ethernet switch routers. Tr. 556, 722. As CIO, Riley was responsible for maintaining Foundry's sophisticated IS and IT infrastructure, which meant that he oversaw all of Foundry's computer hardware and software. Tr. 560-61. Riley, as a senior officer of the corporation, reported direct to Foundry's Chief Financial Officer (" CFO" ). Tr. 560.
Foundry was historically a seasonal business; sales were weakest in the first quarter of each fiscal year, and strongest
at the end of each year. Tr. 650-51. When Foundry experienced a quarter that was significantly above or below investor expectations, it would pre-announce its quarterly revenue to help smooth the market correction. Tr. 652-53. Although Foundry would share some information with investors who participated in " bus tours," Tr. 650, it was careful to tailor its responses to investor inquiries and to keep most information regarding its revenue secret, even from its sales force, until it was publicly announced each quarter. Tr. 912. Foundry relied on an Oracle software system to manage its worldwide sales and other information. Tr. 457, 481. Foundry Business Online (" FBOL" ), part of Oracle, enabled Foundry's sales force to view their sales and the sales of staff below them in the organization (limited to their direct reporting chain). Tr. 482, 381-82. The sales portion of the FBOL database was called FNI Web BBB Data, for Bookings, Billings, and Backlog. Tr. 483-84. Regional sales directors could view BBB data for their entire region or sector, but very few Foundry employees could view worldwide BBB data. Tr. 488. BBB data was not identical to revenue information, but it was a " strong predictor of the revenue [of] the company." Tr. 565, 1726.
When he was hired by Foundry, Riley was still in touch with Matthew Teeple, a man with whom he had worked at Riverstone Networks. After Riverstone, Teeple had joined the Field Check Group, a company that provided research regarding technology companies to a small number of clients who made or managed investments. Tr. 128, 203. In 2007, Teeple left the Field Check Group to work as an analyst for Artis Capital Management, LP (" Artis" ), a hedge fund. Tr. 93, 766, 966, 980. Teeple advised Artis's leadership, including Michael Harden, an analyst, Tr. 723, and Stuart Peterson, Artis's founder and president, Tr. 533-34, mostly about networking companies and the semiconductor industry, Tr. 1249. While it is not clear whether Riley was aware of Teeple's exact employment, Riley knew that Teeple advised hedge and mutual funds " with a primary focus on Silicon Valley tech companies." GX 4104.
From at least 2007 through 2009, Teeple would frequently travel to San Jose, where he would meet with Riley, among other Foundry employees. Tr. 203, 286, 331; GX 413, GX 414, GX 428, GX 429; see, e.g., GX 4000, GX 4001. After and during at least some of his trips to meet with Riley and other Foundry employees, Teeple would contact Harden and Peterson. On at least some occasions, immediately thereafter, Artis would alter its position in Foundry. GX 240, GX 4005, GX 708, GX 2218 (pattern of meeting between Teeple and Riley, Teeple's contacting Artis, and Artis's changing its position in Foundry in September 2007); GX 4008, GX 300, GX 701, GX 712, GX 2224 (same in February 2008). Teeple's insights were predicated in part on information that was available only to a small subset of Foundry insiders. See, e.g., GX 18, Tr. 566.
One of the most lucrative pieces of information that Teeple received was information concerning the planned acquisition of Foundry by Brocade Communications Systems, Inc. (" Brocade" ), a storage area networking company that specialized in storage disk drives and arrays. Tr. 98. When this acquisition was publicly announced, the Foundry share price rose dramatically. Tr. 625, GX 2258. On the morning of July
16, 2008 (prior to the public announcement), Teeple called 15 individuals who immediately obtained (or caused their companies to obtain) bullish positions in Foundry. GX 704, GX 2257. Several of the individuals whom Teeple called that day and thereafter, including Andrew Miller and Karl Motey, testified that Teeple informed them during the call that Brocade would be acquiring Foundry and told them a rough estimate of the per share acquisition price. Tr. 346-47, 828-29. Immediately before his calling spree, Teeple had met with Riley, GX 4012, GX 3801, GX 716, who had been informed of the planned acquisition earlier that month, GX 271, Tr. 614. Several months later, when Brocade had trouble securing financing for the acquisition, Riley again spoke to Teeple prior to the public announcement. Also in advance of the public announcement, Artis sold Foundry's securities short, avoiding significant losses when the price dropped following the public announcement. Tr. 633, GX 2208, GX 2209, GX 2210, GX 2211, GX 2212, GX 705.
Artis's trading pattern surrounding the Brocade acquisition was suspicious enough to elicit attention from the Securities and Exchange Commission (" SEC" ). Tr. 531. In explaining their fortuitous decisions to acquire and sell Foundry securities at the best possible times, Artis failed to mention Teeple at all, despite the fact that his phone calls to Artis's leadership, made from a location near to Foundry's office, immediately preceded Artis's well-timed securities transactions. Tr. 543.
Teeple's communications with Riley were not confined to discussing insider information about Foundry, however. The pair discussed Riley's " side business," an entity started by a friend of Riley, that sought to develop " the next generation CD/DVD-Rom and HD drives." GX 4000; see, e.g., GX 4002. Teeple also gave Riley investment advice, notably in Marvell Technology Group Ltd. (" Marvell" ), Palm, Inc., and Motorola. GX 4005, GX 2235, GX 701, GX 300, Tr. 1176-77. Teeple assisted Riley in a job search (first getting him a foot in the door at Marvell and later helping to shop his resume around more generally). GX 4112, GX 4116, GX 4015. Finally, when Riley formed an " angel" investment group with other former Foundry executives, Teeple advised the group regarding potential investment opportunities. GX 4125.
Ultimately, several of the people whom Teeple tipped, including John Johnson and Karl Motey, pled guilty to insider trading, based in part on the information that Teeple provided to them. Teeple pled guilty in May 2014. Dkt. 150. Riley was tried in September 2014; the jury convicted him on two of three counts of securities fraud and one count of conspiracy to commit securities fraud. Dkt. 188. The jury was unable to reach a verdict as to the third count of securities fraud. Riley now moves for judgment notwithstanding the verdict and for a new trial, pursuant to Rules 29 and 33.
Although Riley raises scores of alleged errors, this Opinion addresses only those that the Court believes to have some weight. Riley moves, pursuant to Rule 33, for a new trial, alleging that (1) the Court's " personal benefit" instruction was plain error; (2) the Court's response to a jury note regarding motive was inappropriate; (3) Riley was prejudiced by Johnson's testimony as to his plea deal; and (4) evidentiary errors deprived Riley of a fair trial. Riley also moves, pursuant to Rule 29, for a judgment notwithstanding the verdict, alleging that there was insufficient evidence for a reasonable jury to conclude that (1) Riley had access to MNPI; (2)
Riley passed MNPI to Teeple; (3) the information that Riley passed to Teeple was material and nonpublic; (4) Riley knew that he was passing MNPI to Teeple; (5) a conspiracy existed; and (6) Riley obtained a personal benefit from Teeple's insider trading. For the following reasons, none of Riley's arguments is persuasive.
I. Riley's Rule 33 Motion for a New Trial
" Federal Rule of Criminal Procedure 33(a) provides that 'upon the defendant's motion, the court may vacate any judgment and grant a new trial if the interest of justice so requires.'" United States v. James, 712 F.3d 79, 107 (2d Cir. 2013) (quoting Fed. R. Crim. P. 33(a)) (alteration omitted). " The ultimate test on a Rule 33 motion is whether letting a guilty verdict stand would be a manifest injustice." United States v. Ferguson, 246 F.3d 129, 134 (2d Cir. 2001). " To grant the motion, 'there must be a real concern that an innocent person may have been convicted.'" United States v. Aguiar, 737 F.3d 251, 264 (2d Cir. 2013) (quoting Ferguson, 246 F.3d at 134) (alteration omitted).
A. Riley Was Not Prejudiced by the Court's Instruction as to Personal Benefit
A tipper cannot be prosecuted for just any revelation of MNPI -- his disclosure of inside information runs afoul of the law only if " the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings." Dirks v. S.E.C., 463 U.S. 646, 663, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983). The Second Circuit has " observed that 'personal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, any reputational benefit that will translate into future earnings and the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.'" Newman, 773 F.3d at 452 (quoting United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013)) (alteration omitted). In the context of an appeal from two remote tippees, in Newman, the Circuit narrowed this " permissive" definition to exclude " the mere fact of a friendship, particularly of a casual or social nature," unless there is " proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." Id. The Circuit further emphasized that the tipper's gain does not have to be " immediately pecuniary," but " the personal benefit received in exchange for confidential information must be of some consequence." Id. (emphasis in original). The existence of some quid pro quo is the sine qua non of tipper liability for insider trading. Cf. id.; Jiau, 734 F.3d at 153. The precise exchange need not be known by the parties at the time of the tip, so long as the tip leads to a " 'reputational benefit that will translate into future earnings.'" Jiau, 734 F.3d at 153 (quoting Dirks, 463 U.S. at 663).
Riley argues that the Court's instruction to the jury regarding the personal benefit element of securities fraud was erroneous in light of Newman. The Court's charge permitted the jury to find that Riley had obtained a personal benefit in exchange for the MNPI that he provided if he provided the information for the purpose of " maintaining or furthering a friendship." Tr. 2204.
Because he did not object to this part of the Court's instructions, Riley's argument is subject to the plain error standard of Rule 52(b). See, e.g., United States v. Middlemiss, 217 F.3d 112, 121 (2d Cir. 2000). " Plain error review applies equally where the defendant did not object . . . because he failed to recognize an error, and where the defendant did not object because the trial court's [charge] was correct at the time but assertedly became erroneous due to a supervening legal decision." United States v. Vilar, 729 F.3d 62, 70 (2d Cir. 2013) (citing Johnson v. United States, 520 U.S. 461, 466-67, 117 S.Ct. 1544, 137 L.Ed.2d 718 (1997)). " Under a plain error standard of review, if th[e] Court finds that the jury instruction (i) was error; (ii) that the error was plain; and (iii) that the error affected substantial rights, then th[e] Court (iv) has discretion to correct the error, 'but it is not required to do so.'" United States v. Botti, 711 F.3d 299, 310 (2d Cir. 2013) (quoting United States v. Olano, 507 U.S. 725, 735, 113 S.Ct. 1770, 123 L.Ed.2d 508 (1993)); see also United States v. Marcus, 560 U.S. 258, 262-63, 130 S.Ct. 2159, 176 L.Ed.2d 1012 (2010). There are two types of plain error review -- " modified," under which courts " place the burden on the government to demonstrate that the error did not affect the defendant's substantial rights," and " traditional," under which courts " requir[e] the defendant to show that it did." Vilar, 729 F.3d at 71 n.5. The Second Circuit has " declined to reach the question of whether the modified plain error standard of review continues to apply when there has been a supervening change in the law after a conviction," Botti, 711 F.3d at 309 (collecting cases), presumably because it is " skeptical that the allocation of the burden of demonstrating harm will ever be dispositive in this context," Vilar, 729 F.3d at 71 n.5.
Assuming arguendo that the Court's instruction was error in light of Newman, Riley fails the other three prongs of the " plain error" test.
1. Any Error Was Not Plain
First, Riley has not shown that any error is " plain." The existence of " error" and " plain error" are not coextensive. See, e.g., United States v. Bastian, 770 F.3d 212, 223 (2d Cir. 2014); Vilar, 729 F.3d at 87 n.22. The Newman decision makes it " plain" that " the mere fact of a friendship, particularly of a casual or social nature," between the tipper and the tippee is not sufficient evidence that a personal benefit inured to the tipper. 773 F.3d at 452. But the Court's instruction to the jury did not permit it to convict just because Teeple and Riley were ...