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United States v. Klein

United States District Court, E.D. New York

February 10, 2017

UNITED STATES OF AMERICA
v.
TIBOR KLEIN and ROBERT SCHULMAN, Defendants.

          MEMORANDUM & ORDER

          JOAN M. AZRACK, United States District Judge:

         Before the Court are (1) the government's motion to preclude the admission of any testimony or evidence concerning the charging decision of the United States Securities and Exchange Commission ("SEC") in a parallel civil case; (2) the government's notice of its intent to introduce certain evidence of the defendants' relationship with one another; (3) defendant Robert Schulman's motion to preclude the government from pursuing a "gift" theory of insider trading liability; and (4) Schulman's motion to have the Court supervise the government's compliance with its disclosure obligations pursuant to United States v. Brady and Model Rule of Professional Conduct 3.8. These motions were fully briefed as of January 24, 2017, and the Court heard oral argument on all motions on January 26, 2017.

         For the reasons set out below, the Court: (1) grants the government's motion to preclude the admission of any evidence concerning the SEC's charging decision; (2) grants the government's request to introduce evidence concerning the relationship between the defendants, with the condition that such evidence include no mention of the SEC's charging decision; (3) denies Schulman's motion to preclude a "gift" theory at trial; and (4) denies Schulman's motion for the Court to supervise the disclosure of Brady and Rule 3.8 materials.

         I. BACKGROUND

         The grand jury indicted defendants Tibor Klein and Robert Schulman on August 4, 2016. The indictment charges both defendants with conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and with securities fraud in violation of 15 U.S.C. §§ 78(b) and 78ff In relevant part, the indictment alleges:

• That Schulman is an attorney who represented King Pharmaceuticals, Inc. ("King");
• That, in August 2010, Schulman obtained material, non-public information concerning the acquisition of King by Pfizer, Inc. ("Pfizer");
• That Schulman provided that information to Klein, his friend and investment advisor; and
• That Klein traded on that information and realized a profit both for himself and for his clients, including Schulman.

         The indictment further alleges that Klein provided the material, non-public information to Michael Shechtman-an unindicted co-conspirator who has cooperated with the government's investigation-and that Shechtman also traded on the information.

         Beginning in approximately 2011, the SEC began investigating Klein and Shechtman's trading activities. On September 19, 2013, the SEC filed a civil complaint in the Southern District of Florida naming Klein and Shechtman as defendants, alleging that Klein and Shechtman traded on material, non-public information that they had "misappropriated" from Schulman. The SEC complaint does not name Schulman as a defendant. Shechtman has entered into a settlement agreement with the SEC resolving the claims against him. The SEC civil action against Klein is stayed pending the outcome of this criminal matter.

         II. DISCUSSION

         A. The Government's Motion to Preclude Reference to the SEC Complaint and Charging Decision

         The government has moved to preclude defendants from making reference to the SEC complaint and charging decision in the parallel civil action, arguing that the complaint and charging decision are inadmissible hearsay. (Gov't Mem. at 2-4, ECF No. 36; Gov't Reply at 3-21, ECF No. 47.) The government further argues that, even if the SEC's complaint and charging decision qualified for an exception to or exclusion from the hearsay rules, they are inadmissible either under Rule 401 because they are not relevant, or under Rule 403 because their probative value is significantly outweighed by the danger of "unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence."[1](Gov't Reply at 15-18.)

         Defendant Schulman opposes the government's motion. As an initial matter, Schulman correctly argues that there is no rule that "contradictory charging decisions are per se inadmissible." (Schulman SEC Opp. at 2, ECF No. 36.) In support of this position, Schulman relies on United States v. White, 692 F.3d 235 (2d Cir. 2012). White makes clear that there is no per se rule excluding evidence of prior prosecutorial charging decisions and that, when such evidence is proffered, courts are required to engage in a thorough analysis of the relative probative and prejudicial value of the evidence. Schulman assumes that White goes further, however, and stands for the proposition that there is no per se rule excluding either charging decisions by the SEC or the SEC's complaint in a parallel civil suit.[2] Even if this assumption is correct, the SEC complaint and charging decision here are admissible only if they are relevant, fall under one of the exceptions to or exclusions from the hearsay rule, and have probative value that is not substantially outweighed by the danger of prejudice and confusion.

         Schulman argues that the SEC complaint and charging decision are "central to [Schulman's] claim of innocence" and, therefore, are relevant under Rule 401. (Schulman SEC Opp. at 10.) He further argues that the SEC complaint and charging decision are admissible either (1) as public records under Rule 803(8); (2) as statements of a party-opponent under Rule 801(d)(2)(B); or (3) under the residual hearsay exception laid out in Rule 807. (Id. at 2-11.) Schulman argues that the probative value of the proffered evidence is not substantially outweighed by any of the factors listed in Rule 403. (Id. at 11.)

         The Court assumes, for the purpose of deciding the instant motion, that the SEC complaint and charging decision satisfy the liberal relevance standard established by Rule 401. Even on that assumption, however, the SEC complaint and charging decision constitute inadmissible hearsay. Further, the complaint and charging decision have limited probative value that is substantially outweighed by the danger of unfair prejudice and confusion presented by their admission. The SEC complaint and charging decision are thus inadmissible.

         1.The SEC Charging Decision is Inadmissible under Rule 803(8)

         Schulman argues that the SEC's complaint and charging decision are admissible as an exception to the hearsay rule under Rule 803(8)(A)(iii), which allows the admission of a "record or statement of a public office" for use against the government in a criminal case if the statement sets out "factual findings from a legally authorized investigation." If the proponent of the admission of a piece of evidence demonstrates that it qualifies for admission under Rule 803(8)(A)(iii), the evidence may still be excluded if its opponent shows, pursuant to Rule 803(8)(B), "that the source of information or other circumstances indicate a lack of trustworthiness."

         The Supreme Court has held that a public record containing "factually based conclusions or opinions" may be admissible under Rule 803(8) based, among other things, on recognition "that 'factual findings' includes conclusions or opinions that flow from a factual investigation." Beech Aircraft Corp. v. Rainey, 488 U.S. 153, 162-163 (1988). The Court is unaware, however, of any convincing authority in support of the proposition that "factual findings" encompass an agency's allegations or charging decision in a parallel civil case.

         Schulman has cited no Second Circuit case in support of his position. Instead, he relies on United States v. Gluk, a recent Fifth Circuit case allowing the admission of an SEC complaint as evidence in a criminal prosecution of the CEO and COO of a medical device company that had engaged in fraud. 831 F.3d 608 (5th Cir. 2016). As explained below, the Court does not find Gluk to be persuasive and declines to follow it.

         In Gluk, the SEC had conducted an investigation of the medical device company and filed a civil suit against different employees. The SEC complaint in the civil suit affirmatively stated that the SEC did '"not allege that [the CEO and COO] participated in the wrongful conduct' but instead determined that [other employees] 'intentionally withheld' information from" the CEO and COO. Li at 610-612. Nevertheless, the government brought criminal charges against the CEO and COO, who then attempted to introduce the SEC complaint and two factual SEC memoranda into evidence. Id. The trial court excluded all three documents "as more prejudicial than probative." Id.

         On appeal, the Fifth Circuit reversed the district court, finding that all three documents constituted "factual findings" and, therefore, were admissible under Rule 803(8). Id. at 614-615. In so finding, the Fifth Circuit focused largely on the factual memoranda-rather than the SEC complaint-and considered whether those memoranda had been "accepted" by the Commission. Id. at 614. After determining that the factual findings in the memoranda had been accepted by the Commission, the court devoted only a short paragraph to the SEC complaint, noting that it "unambiguously represents an official action of the SEC" and stating, without citation to any authority, that "[w]hen an agency professional transmits a document to others outside the agency, that document is presumptively a factual finding of the agency." Id. The court then found that the statements in the SEC complaint had "the same probative value as the similar statements" in the two factual memoranda. Having already found that the memoranda were admissible, the court summarily found the statements in the complaint to be admissible. Id.

         In doing so, the Gluk court appears to have glossed over the very real distinctions between factual findings and allegations and engaged in no real inquiry into whether the statements at issue constituted factual findings. And, even assuming that the Gluk court appropriately applied Rule 803(8), it appears not to have engaged in any analysis of the probative value of the complaint when compared to the danger of prejudice or confusion, as required by Rule 403. Even taken at face value, however, Gluk supports the admissibility only of the assumed "factual findings" in the complaint; it does not go so far as to hold that the SEC's charging decision was, itself, admissible.

         Beyond Gluk, Schulman cites no authority that directly supports the admissibility of an SEC complaint under Rule 803(8). Instead, he relies on a handful of distinguishable cases. For instance, Schulman cites United State v. Peitz for the proposition that an SEC Action Memorandum-which is a formal communication from staff of the Enforcement Division to the Commissioners-is admissible under Rule 803(8) where the report was "based on a thorough investigation" by the SEC. (Schulman Sur-Reply at 4, ECF No. 51 (quoting United State v. Peitz, No. Ol-cr-852, 2002 WL 31101681, at *5 (N.D. 111. Sept. 20, 2002)).) In Peitz, the court allowed the admission of an Action Memorandum that concluded that there was "no evidence that [the defendant] knowingly participated in, or was aware of, the scheme to defraud investors." Peitz, 2002 WL 31101681, at *5. Schulman appears to argue that, because an Action Memorandum is "drafted before the SEC file[s] a civil action, " the admissibility of the Action Memorandum in Peitz supports the admissibility of the SEC complaint and charging decision here. (Schulman Sur-Reply at 4 (emphasis in original).) The relevant inquiry under Rule 803(8), however, is whether the proffered evidence contains "factual findings from a legally authorized investigation." The fact that an Action Memorandum may be admissible under Rule 803(8) where it contains relevant factual findings does not support the conclusion that the allegations in a subsequent civil complaint constitute factual findings.[3]

         Schulman again glosses over the distinction between factual findings and allegations in his discussion of SEC v. Pentagon Capital Mgmt. PLC, No. 08-cv-3324, 2010 WL 985205 (S.D.N.Y. Mar. 17, 2010). In Pentagon Capital-a civil suit by the SEC-the court allowed the admission of SEC Orders Instituting Proceedings ("OIPs") under Rule 803(8) because the OIPs contained factual findings that contradicted the allegations in a subsequent SEC complaint. Li The court found that the OIPs "ma[de] findings based on facts discovered pursuant to [the SEC's] investigative authority." Id. at *5. That is, the Pentagon Capital court recognized that the OIPs were admissible under Rule 803(8) because they contained the SEC's "factual findings." This does not support the proposition that the allegations in a civil complaint constitute such findings and, therefore, does not support Schulman's argument.

         Schulman also cites a line of Second Circuit cases standing for the proposition "that the findings of an administrative agency [such as the EEOC] resulting from an investigation made pursuant to authority granted by law are generally admissible under the 'public records' exception to the hearsay rule." (Schulman SEC Opp. at 5 (quoting Brabham v. St. Luke's Home Residential. 2016 U.S. Dist. LEXIS 80968 *16 n.3, 2016 WL 3512222 (N.D.N.Y June 22, 2016)).) Again, Schulman fails to appreciate the difference between the "findings of an administrative agency" and the allegations contained in a civil complaint. Indeed, the fact that an agency's findings may qualify as "factual findings" under Rule 803(8) is unsurprising in light of the holding of Beech Aircraft.

         Beyond the unpersuasive reasoning of Gluk, there is simply no support for Schulman's position. The SEC complaint and charging decision are distinct from Action Memoranda, OIPs, EEOC reports, and other reports that contain factual findings. Because the SEC complaint and charging decision do not contain such findings, they are inadmissible under Rule 803(8).

         After engaging with Schulman's legal arguments, the government devotes a substantial portion of its reply brief to arguments concerning the trustworthiness of the SEC complaint. (Gov't Reply at 12-18.) Since the "trustworthiness" inquiry under Rule 803(8)(B) is relevant only where the criteria of Rule 803(8)(A) are satisfied, and since those criteria are not satisfied here, the Court need not determine whether the SEC complaint and charging decision are trustworthy.

         2.The SEC Charging Decision is Inadmissible under Rule 801(d)(2)

         Schulman next argues that the SEC's complaint and charging decision are admissible under Rule 801(d)(2)(B) as a statement of a party-opponent that the opposing party "manifested that it adopted or believed to be true." Schulman argues that the SEC and United States Attorney's Office for the Eastern District of New York "should be treated as the same 'party'" such that the SEC complaint should be treated as a statement made by the government here.[4] (Schulman SEC Opp. at 7.)

         a. Statements by the SEC Cannot be Admitted as Statements by the Government

         In order to find that the SEC complaint and charging decision were admissible under Rule 801(d)(2)(B), the Court would first need to find that two separate criteria are satisfied. First, the Court must find that the SEC and DOJ are, or should be treated as, the same party. Second, the Court must find that the DOJ has "manifested that it adopted or believed [the SEC complaint] to be true." Neither criterion is satisfied here.

         With respect to the first requirement, courts in this Circuit have held that the SEC and DOJ cannot be regarded as the "same party" for purposes of Rule 804(b) where they did not cooperate or collaborate in the relevant investigation. See, e.g., United States v. Martoma, No. 12-cr-973, 2014 U.S. Dist. LEXIS 152926, *14-15, 19-20 (S.D.N.Y. Jan. 8, 2014) (citing United States v. Whitman, No. 12-cr-125 (S.D.N.Y. 2012) (ECF No. 110 at 2305-07)).

         Although Rule 804(b) is distinct from Rule 801(d), the Court agrees with the above-cited courts' analysis concerning the necessary conditions for treating the SEC and DOJ as the "same party." As such, the Court finds that some level of cooperation or collaboration between the agencies in the course of their respective investigations is the bare minimum requirement for such treatment. Here, there is no indication whatsoever that the SEC or DOJ collaborated with respect to their investigations into Klein's trading activities. The SEC investigation was based in Florida, while the DOJ investigation was based out of the Eastern District of New York and, in fact, the DOJ investigation appears not to have commenced until after the SEC investigation had ended. Once the DOJ's investigation commenced, the DOJ conducted an independent investigation that included the re-interview of relevant witnesses. The DOJ does not appear ...


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