Supreme Court of the United States

Transcription

1 No IN THE Supreme Court of the United States MARVIN SKRELLY Petitioner, v. UNITED STATES OF AMERICA Respondent. On Petition for Writ of Certiorari to the United States Court of Appeals for the Thirteenth Circuit BRIEF FOR RESPONDENT TEAM SIXTEEN 2016 Julius H. Miner Moot Court Competition [Type here]

2 QUESTIONS PRESENTED 1. Whether a police officer s examination of a defendant s insider trading s impermissibly exceeds the scope of a private search under United States v. Jacobsen, 466 U.S. 109 (1984), where the private searcher opened the folders that contained the incriminating s, read several of the s in each folder, and informed the officer that the s she read contained evidence of a financial crime. 2. Whether, under the gift theory of liability established in Dirks v. S.E.C., 463 U.S. 646 (1983), the personal benefit required to convict a tippee of insider trading can be inferred based on evidence of a close personal relationship between the tipper and tippee. ii

3 TABLE OF CONTENTS QUESTIONS PRESENTED... ii TABLE OF CONTENTS... iii TABLE OF AUTHORITIES...v OPINIONS BELOW... vii STATEMENT OF THE CASE...1 SUMMARY OF THE ARGUMENT...4 ARGUMENT...6 I. THE THIRTEENTH CIRCUIT CORRECTLY HELD THAT LAW ENFORCEMENT S EXAMINATION OF THE INCRIMINATING S WAS NOT A SEARCH WITHIN THE MEANING OF THE FOURTH AMENDMENT BECAUSE THE PRIVATE SEARCHER S PRIOR REVIEW OF THE FOLDERS HAD FRUSTRATED THE DEFENDANT S EXPECTATIONS OF PRIVACY....6 II. a. The folders that contained the incriminating s were privately searched containers, and authorities did not exceed the scope of the private search by examining more items in the containers than the private searcher....7 i. It is consistent with long-standing Fourth Amendment precedent to treat folders as containers and s as items within the container because once a folder is open an abundance of information about the s it contains becomes visible....8 ii. If an folder is treated as a container, law enforcement will be able to effectively investigate the fruits of private searches, and the risk to individual privacy will be low b. Law enforcement examination of the CPP did not exceed the scope of the private search because law enforcement was substantially certain that the Stock Tips folder contained evidence of insider trading THE THIRTEENTH CIRCUIT CORRECTLY HELD THAT EVIDENCE OF A CLOSE PERSONAL RELATIONSHIP BETWEEN TIPPER AND TIPPEE PERMITS AN INFERENCE OF A PERSONAL BENEFIT REQUIRED TO SUSTAIN A TIPPEE S INSIDER TRADING CONVICTION a. The Thirteenth Circuit was correct in holding that a tippee s liability for insider trading is not conditioned on the tipper receiving something of value in exchange i. Dirks establishes the gift theory ii. Newman is consistent with the Thirteenth Circuit s decision iii

4 iii. Alternatively, if this Court views Newman as irreconcilable with the Thirteenth Circuit s holding, it should reject Newman for improperly interpreting Dirks b. The Thirteenth Circuit was correct in holding that the relationship between the defendant and Stump was sufficient to support the defendant s conviction CONCLUSION...21 iv

5 TABLE OF AUTHORITIES CASES Chiarella v. United States, 445 U.S. 222 (1980)...13 Dirks v. S.E.C., 463 U.S. 646 (1983)... passim Rann v. Atchison, 689 F.3d 832 (7th Cir. 2012)...12 Riley v. California, 134 S. Ct (2014)...11 Robbins v. California, 453 U.S. 420 (1981)...7 S.E.C. v. Blackwell, 291 F. Supp. 2d 673 (S.D. Ohio 2003)...19 S.E.C. v. Maio, 51 F.3d 623 (7th Cir. 1995)...16 S.E.C. v. Maxwell, 341 F. Supp. 2d 941 (S.D. Ohio 2004)...19 S.E.C. v. Obus, 693 F.3d 276 (2d Cir. 2012)...15, 17, 19 S.E.C. v. Sekhri, No. 98 CIV (RPP), 2002 WL (S.D.N.Y. Nov. 22, 2002)...18 S.E.C. v. Warde, 151 F.3d 42 (2d Cir. 1998)...15, 17, 18 S.E.C. v. Yun, 327 F.3d 1263 (11th Cir. 2003)...16 United States v. Bowman, 907 F.2d 63 (8th Cir. 1990)...12 United States v. Donnes, 947 F.2d 1430 (10th Cir. 1991)...9 United States v. Jacobsen, 466 U.S. 109 (1984)...6, 8, 9, 11, 12 United States v. Jiau, 734 F.3d 147 (2d Cir. 2013)...17, 18 United States v. Johnson, 806 F.3d 1323 (11th Cir. 2015)...7, 8 United States v. Kinney, 953 F.2d 863 (4th Cir. 1992)...8, 9 United States v. Lichtenberger, 786 F.3d 478 (6th Cir. 2015)...8, 10 United States v. Newman, 773 F.3d 438 (2d Cir. 2014)...14, 15, 16, 17 United States v. Ross, 465 U.S. 798 (1982)...7 v

6 United States v. Runyan, 275 F.3d 449 (5th Cir. 2001)... passim United States v. Salman, 792 F.3d 1087 (9th Cir. 2015)...14, 16, 17, 18 United States v. Skrelly, No (13th Cir. 2015)... passim United States v. Whitman, No. 12 CR. 125 JSR, 2015 WL (S.D.N.Y. July 22, 2015)...15 CONSTITUTIONAL PROVISIONS U.S. CONST. amend. IV...6 STATUTES Securities and Exchange Act of 1934, 15 U.S.C. 78j(b) (2012)...13 Securities and Exchange Act of 1934, 15 U.S.C. 78u-1(d)(5) (2012)...18 vi

7 OPINIONS BELOW The opinion of the District Court for the District of Wigmore is reported at United States v. Skrelly, No CM-0713 (D. Wig May 15, 2015). The opinion for the Thirteenth Circuit is reported at United States v. Skrelly, No (13th Cir. 2015). vii

8 STATEMENT OF THE CASE Martin Skrelly, the defendant and a professional investor, owned the investment firm WUTANG Financial and had a sizable position in Sodreckso, a food services company. United States v. Skrelly, No at *2, *3 (13th Cir. 2015). On March 12, 2013, the defendant went to Silver Spoon County Club, where he introduced himself to Michael Meneghini, a business mogul and member at Silver Spoon. Id. Meneghini introduced the defendant to Barrington Weatherbee Stump III, the CEO and Chairman of Sodreckso. Id. Meneghini and Stump invited the defendant to join their golfing party, and after eighteen holes they retired to the sauna. Id. Meneghini took a phone call, leaving Stump and the defendant alone for thirty minutes. Id. Meneghini testified at the defendant s trial that when he returned to the sauna, he heard the defendant say, Thanks, and heard Stump respond, No problem, I m always happy to do a favor for a friend. Id. at *3 (emphasis added). That evening, Stump sent the defendant two s. Id. In one , the Sodreckso e- mail, Stump gave the defendant nonpublic material information about Sodreckso, specifically that the company would soon go bankrupt. Id. The referenced the fact that Stump and the defendant had discussed this information while alone in the sauna that afternoon. Id. In the second , the CPP , Stump informed the defendant that CPP was about to announce a new line of pizzas, and Stump admitted that he acquired that information by paying a CPP executive. Id. The next day, the defendant sold all of his Sodreckso stock and bought a large position in CPP. Id. Two weeks later, Sodreckso filed for bankruptcy and its stock price fell dramatically. Id. With the fall of its competitor and the launch of its new line of pizzas, CPP stock soared. Id. 1

9 Deborah Rainden was the defendant s assistant and sole employee at WUTANG Financial. Id. After the defendant slighted Rainden by writing her a poor recommendation letter for her graduate school applications, she decided to snoop in the defendant s account on September 15, 2013, hoping to find embarrassing information that she could use against him. Id. Rainden logged into the defendant s office laptop using the company password, and was able to access the defendant s account by guessing his password. Id. at *4. Rainden opened the General Inbox folder and read fifty of five-hundred s, most of which were business-related and some of which were personal. Id. Next, she opened the folder titled Stock Tips and read five of ten s. Id. Insiders at public companies authored all five s and each contained nonpublic information about their companies that was material to their stock price. Id. Suspecting that she was looking at evidence of a financial crime, Rainden brought the laptop to the local police station. Id. When Rainden arrived, Detective Whitney Woodward asked her to write a statement describing the s that she remembered opening during her search. Id. at *4 5. Detective Woodward read the statement and, based on her experience on the financial crimes task force and specialized training in identifying evidence of insider trading, she decided to review the e- mails in the two folders that Rainden had opened. Id. at *5. Once Detective Woodward opened the privately searched folders, but before opening any s, she could already see the list of e- mails, the date and time of transmission, the senders names and addresses, the subject lines, and a sixty-character excerpt. For several s, she was able to identify the address as a corporate address and the sender as a corporate insider. Detective Woodward found the Sodreckso in the General Inbox folder and the CPP in the Stock Tips folder and referred the matter to the U.S. Attorney. Id. 2

10 The defendant was charged with two counts of insider trading for trading nonpublic information material to the price of Sodreckso and CPP stock. Id. Before trial, the defendant moved to suppress the Sodreckso and CPP s on the grounds that they were obtained in violation of the Fourth Amendment. Id. The district court denied the motion. Id. When the government offered the two s as evidence at trial, defendant objected as to their admissibility, and the district court overruled the objection. Id. At the close of the Government s case in chief, the defendant moved for a judgment of acquittal as to the Sodreckso stock count, arguing that the evidence that Stump had received a personal benefit was insufficient. Id. The district court denied this motion. Id. The jury returned a guilty verdict on both counts of insider trading. Id. The defendant renewed his motion for judgment of acquittal, and the district court again denied it. Id. The defendant appealed the district court s denial of his motion to suppress the challenged s and motion for judgment of acquittal. Id. The Thirteenth Circuit affirmed the defendant s conviction, upholding the lower court s decision to admit the challenged s and to deny the motion for judgment of acquittal. Id. at *15, *20. The defendant appealed and this Court granted certiorari on January 15, Id. at *ii. 3

11 SUMMARY OF THE ARGUMENT The Thirteenth Circuit correctly held that police examination of the CPP and Sodreckso s was not a new search within the meaning of the Fourth Amendment because Rainden s private search of the folders had already frustrated the defendant s expectations of privacy. Once a private searcher reviews the contents of a container, police may examine additional items within that container without conducting a new search. folders not individual s should be treated as containers because once the folder is open, the s identifying information is visible. Treating the folders, as opposed to individual s, as containers strikes a proper balance between individual privacy interests and effective police investigation for two main reasons. First, if s are considered containers, police will be deterred from investigating private searches, because the private searcher is likely to forget which s she read, and the officer therefore risks the suppression of all of the s. Second, treating folders as containers in private searches produces little danger to individual privacy because private searches are infrequent and police cannot initiate them. Furthermore, when police are substantially certain of the contents of a closed container based on inferences from the private search, their examination of the contents is not a new search. Therefore, even if this court finds that an is a container, police examination of the CPP e- mail in the Stock Tips folder does not implicate Fourth Amendment protections. Additionally, the Thirteenth Circuit correctly held that that an inference of a personal benefit can be drawn from a relationship between a tipper and tippee, satisfying the gift theory of tippee liability under Dirks v. S.E.C., 463 U.S. 646 (1983). Under the gift theory, if there is a close relationship between the tipper and tippee, an inference can be drawn that the tipper will, or 4

12 has the potential to, receive a personal benefit. Opinions from the Second and Ninth Circuits should be read to support the contention that a close relationship can give rise to an inference of a personal benefit. However, to the extent the Second Circuit s opinion is read to require evidence of a tangible exchange, it is in conflict with Dirks and should not be followed. Furthermore, the Thirteenth Circuit correctly concluded that the relationship between the defendant and Stump was sufficient to infer a personal benefit to Stump. Proving a close relationship requires evidence that suggests a tipper s intention to benefit the tippee, a standard which is not demanding. The totality of factors including the defendant and Stump s friendship, exchange of communication, shared membership in a social club, and the potential reputational and monetary benefit that Stump positioned himself to receive from the defendant support the conclusion that Stump intended to benefit the defendant by tipping him. Accordingly, this Court should affirm the Thirteenth Circuit s decision to uphold the defendant s conviction. 5

13 ARGUMENT I. THE THIRTEENTH CIRCUIT CORRECTLY HELD THAT LAW ENFORCEMENT S EXAMINATION OF THE INCRIMINATING S WAS NOT A SEARCH WITHIN THE MEANING OF THE FOURTH AMENDMENT BECAUSE THE PRIVATE SEARCHER S PRIOR REVIEW OF THE FOLDERS HAD FRUSTRATED THE DEFENDANT S EXPECTATIONS OF PRIVACY. Law enforcement s examination of the CPP and Sodreckso s was not a search within the meaning of the Fourth Amendment because the private searcher frustrated the defendant s expectation of privacy when she opened the folders. Fourth Amendment protections against unreasonable searches do not apply where a private individual effects a search without government involvement. U.S. CONST. amend. IV; United States v. Jacobsen, 466 U.S. 109, 113 (1984). Law enforcement s subsequent examination of the fruits of a private search is not a new search, because a search only occurs when reasonable expectations of privacy are infringed, and the private search destroys any reasonable expectations of privacy. Jacobsen, 466 U.S. at 117. Once the private searcher reviews the contents of a container, a law enforcement officer who reviews more items within the same container does not exceed the scope of the private search. United States v. Runyan, 275 F.3d 449, 465 (5th Cir. 2001). Further, if authorities are substantially certain of the contents of a container that the private searcher has not examined based on inferences drawn from the private search, the examination of its contents is not a new search. Id. at 463. The defendant s folders were containers, and once Rainden opened them and reviewed their contents, the defendant s privacy interest in the folders contents was destroyed. Consequently, Detective Woodward did not exceed the scope of the private search when she examined s that Rainden had not reviewed within these folders. Furthermore, Detective Woodward could be substantially certain that the unopened s in the Stock Tips folder 6

14 contained evidence of insider trading. Id. at 464. Therefore, even if this Court concludes that each is a closed container, Detective Woodward s examination of the CPP does not implicate Fourth Amendment protections. a. The folders that contained the incriminating s were privately searched containers, and authorities did not exceed the scope of the private search by examining more items in the containers than the private searcher. The folders were containers and the s were items within container. Once Rainden opened the folders, police could examine their contents without exceeding the scope of the private search. Fourth Amendment protection applies to containers that conceal their contents from plain view. United States v. Ross, 456 U.S. 798, (1982). If a container were transparent or otherwise clearly revealed its contents, law enforcement examination of the contents would not constitute a search within the meaning of the Fourth Amendment. Robbins v. California, 453 U.S. 420, 427 (1981). Circuit courts have not decided the question of whether an account, a folder within an account, or an individual is a container for Fourth Amendment purposes. The circuits have drawn conflicting conclusions with regards to the boundaries of digital containers. Compare United States v. Johnson, 806 F.3d 1323, 1336 (11th Cir. 2015), with Runyan, 275 F.3d at 464. In Runyan, the Fifth Circuit held that files stored on a computer disk were not containers, but rather items within a container. 275 F.3d at 464. The Runyan court concluded that authorities did not exceed the scope of a private search when they reviewed more files within the privatelysearched disks than the private searchers. Id. In deciding this case, the Thirteenth Circuit followed the logic of Runyan, reasoning that while an account and a folder within an e- mail account bear the markers of a container, an individual does not. United States v. Skrelly, No , at 9* (13th Cir. 2015). By contrast, the Eleventh and Sixth Circuits have 7

15 applied a file-by-file approach, treating each file as a container. See Johnson, 806 F.3d at 1336 (treating each photo and video as a closed container); United States v. Lichtenberger, 786 F.3d 478, (6th Cir. 2015) (same). This Court should reject the file-by-file approach and adopt the Runyan approach because it is consistent with long-standing Fourth Amendment precedent and strikes the proper balance between privacy and effective police investigation. i. It is consistent with long-standing Fourth Amendment precedent to treat folders as containers and s as items within the container because once a folder is open an abundance of information about the s becomes visible. An is not a container because, unlike an opaque, closed container, its identifying information is apparent before it is opened. Jacobsen establishes the private search doctrine and demonstrates that, without implicating Fourth Amendment protections, law enforcement may replicate a private search and examine the contents of transparent containers. 466 U.S. at 115, In Jacobsen, private searchers opened a package and discovered four transparent ziplock bags containing white powder. Id. at 111. A law enforcement officer replicated the private search, removing the plastic bags containing white powder from the package and visually inspecting them. Id. at 118. The officer conducted a field test which revealed that the substance was cocaine. Id. at 111. This Court held that neither the replication of the private search nor the field test implicated Fourth Amendment protections because the private search had already frustrated the owner s privacy interest in the package s contents. Id. at 120, 123. Opinions from the Fourth and Tenth Circuits demonstrate that law enforcement officers exceed the scope of the private search when they open discrete, opaque containers that the private searcher did not examine. In United States v. Kinney, the private searcher found guns in the defendant s closet, and while police examined the guns they discovered and opened an opaque canvas bag containing drug paraphernalia. 953 F.2d 863, (4th Cir. 1992). The 8

16 Fourth Circuit found that police exceeded the scope of the private search when they opened the bag, because the private searcher had not discovered the contents of the bag. Id. at 866. Likewise, in United States v. Donnes, the private searcher found a glove that contained a syringe and an opaque camera lens case. 947 F.2d 1430, 1435 (10th Cir. 1991). The Tenth Circuit held that police exceeded the scope of the private search when they opened the camera lens case containing methamphetamines because the defendant s privacy interest in the closed, opaque container remained intact after the private search. Id. at The unopened s are more like the transparent zip-lock bags in Jacobsen than the opaque camera lens case in Donnes or the canvas bag in Kinney. Characteristics of digital containers do not perfectly track with those of physical containers, but the motivation behind the protections for closed containers remains the same: to preserve reasonable expectations of privacy. Runyan, 275 F.3d at Once Detective Woodward opened the privately searched folders, but before opening any s, she could already see the list of s, the date and time of transmission, the senders names and addresses, the subject lines, and a sixtycharacter excerpt of each . She was able to identify the address as a corporate address and the sender as a corporate insider for several s. Unlike the opaque camera case in Donnes or the canvas bag in Kinney, where the contents were completely obscured, the body of the defendant s s was only partially obscured and their identifying information was visible. Similar to Jacobsen, where officers could infer the contents of the transparent zip-lock bags without opening them, Detective Woodward could infer the contents of the s without opening any individual s. Once Rainden opened the folder, the defendant s privacy interest in the individual s was substantially eroded. Therefore, the Fourth Amendment 9

17 protections that extend to discrete, opaque, closed containers, should not extend to individual e- mails. ii. If an folder is treated as a container, law enforcement will be able to effectively investigate the fruits of private searches, and the risk to individual privacy will be low. A rule that treats s as items within a container unlike the file-by-file rule allows law enforcement to effectively investigate private searches with little risk to individual privacy. The Sixth Circuit s application of the file-by-file rule in Lichtenberger demonstrates that the fileby-file rule is unworkable and should be rejected. In Lichtenberger, the private searcher viewed about one hundred images of child pornography in one folder on the defendant s laptop. Lichtenberger, 786 F.3d at 481. The private searcher brought the laptop to the police and showed the officer four or five images, but she could not be certain whether those were the images she had previously viewed or not. Id. Because the law enforcement officers could not know with virtual certainty that they would not learn something that the private searcher had not told them, the Sixth Circuit ordered that all of the evidence recovered from the laptop be suppressed. Id. at 491. Lichtenberger shows that the file-by-file rule is unworkable because private searchers are unlikely to remember which files in a folder they viewed. Accordingly, the fear that all of the evidence will be suppressed will deter police from investigating private searches. Like the private searcher in Lichtenberger who viewed one hundred images, Rainden, opened fifty-five of five hundred and ten s. While it is reasonable to ask her to remember the two folders she opened, it is unrealistic to ask her to recall all fifty-five s, particularly when many of them were similar in subject matter. If Rainden believed she had opened an , directed law enforcement to open it, and then, once the was opened, realized that she was unable to remember which s she had read, all of the s would have to be suppressed. Id. at 491; see also Runyan, 275 F.3d at 466 n.17 (holding that where there is no way to 10

18 determine which disks the private searcher viewed, all of the disks must be suppressed). Furthermore, if authorities are required to get a warrant before investigating the private search, then they will be unable to confirm whether the private search produced evidence of criminal conduct. Police will be forced to seek unnecessary broad warrants putting the privacy interests of innocent persons at greater risk. While technology admittedly implicates extensive privacy concerns, risk to individual privacy in treating folders as containers in the private search doctrine is low because police can only review evidence that private searchers present to them. In Riley v. California, this Court held that cellphones implicate extensive privacy concerns. 134 S. Ct. 2473, 2489 (2014). Treating folders as containers for private search purposes does not produce a high risk of invasions of individual privacy because law enforcement may only invoke the private search doctrine when private citizens conduct searches without law enforcement involvement and submit the evidence to the police. Additionally, the relative infrequency of private searches contrasts starkly with the ubiquity of cellphone seizures incident to arrest that motivated the Riley rule. Riley, 134 S. Ct. at 2482 ( [W]arrantless searches incident to arrest occur with far greater frequency than searches conducted pursuant to a warrant. ). Thus, when weighing the legitimate government interest in investigating private searches against the potential intrusions on individual privacy, treating the digital folder as a container strikes the appropriate balance. b. Law enforcement examination of the CPP did not exceed the scope of the private search because law enforcement was substantially certain that the Stock Tips folder contained evidence of insider trading. Even if this Court finds that each is a closed container, police examination of the CPP does not implicate Fourth Amendment protections because police were substantially certain that the Stock Tips folder would contain evidence of insider trading. In Jacobsen, this 11

19 Court held that authorities did not exceed the scope of the private search when they conducted a field test to confirm that the white substance in the bags was cocaine. Jacobsen, 466 U.S. at 111. The Fifth Circuit has inferred from this Court s reasoning in Jacobsen that authorities do not conduct a new search when they examine the contents of a closed container provided they are substantially certain of the contents based upon the statements of the private searchers, their replication of the private search, and their expertise. Runyan, 275 F.3d at 463; see Rann v. Atchison, 689 F.3d 832, 834 (7th Cir. 2012) (where private searchers submitted a memory card and zip drive to police reporting that they contained images of child pornography, police did not conduct a new search when viewing images that the private searchers had not viewed because they were substantially certain of the contents); United States v. Bowman, 907 F.2d 63, (8th Cir. 1990) (where the private searcher unwrapped one of five identical bundles revealing a cocaine brick, authorities did not conduct a new search when they unwrapped four other identical bundles). The rationale behind this rule is that if law enforcement is already substantially certain of the contents of a container, then the owner s privacy interests have already been compromised. Runyan, 275 F.3d at 463. As in Rann, where the private searchers told law enforcement what the zip drive and memory card contained, here Rainden told police that she read five of the ten s in the Stock Tips folder and that in all five an insider at a public company provided nonpublic information material to the stock price of the company. Detective Woodward could infer that the Stock Tips folder contained ten homogeneous s because of the title of the folder, the small number of s in the folder, and the similarity between the s Rainden already read. Based on her specialized training in identifying evidence of insider trading, her replication of the private search, and Rainden s statements, Detective Woodward was substantially certain that the 12

20 Stock Tips folder would contain evidence of insider trading. Thus, even if this Court holds that individual s are containers, the examination of the CPP was not a new search and its contents should not be suppressed. II. THE THIRTEENTH CIRCUIT CORRECTLY HELD THAT EVIDENCE OF A CLOSE PERSONAL RELATIONSHIP BETWEEN TIPPER AND TIPPEE PERMITS AN INFERENCE OF A PERSONAL BENEFIT REQUIRED TO SUSTAIN A TIPPEE S INSIDER TRADING CONVICTION. The Thirteenth Circuit correctly determined that an inference of a personal benefit can be drawn from a relationship between a tipper and tippee, satisfying the gift theory of tippee liability under Dirks v. S.E.C., 463 U.S. 646 (1983). Additionally, the Thirteenth Circuit properly upheld the defendant s conviction under 10(b) of the Securities and Exchange Act of 1934 because the relationship between the defendant and Stump was sufficient to infer a personal benefit to Stump. 15 U.S.C. 78j(b) (2012). Therefore, this Court should affirm the Thirteenth Circuit s decision. a. The Thirteenth Circuit was correct in holding that a tippee s liability for insider trading is not conditioned on the tipper receiving something of value in exchange. i. Dirks establishes the gift theory. The paradigmatic example of insider trading occurs when a corporate insider, on the basis of nonpublic material information, violates her fiduciary duty by trading in her own corporation s securities. See Chiarella v. United States, 445 U.S. 222, 230 (1980). However, insider trading has been expanded by courts to reach tippees, like the defendant: those who receive material nonpublic information from an insider tipper. See Dirks, 463 U.S. at 659. In Dirks, this Court held that a tippee can assume a derivative fiduciary duty from a tipper when the tipper has breached her fiduciary duty by disclosing inside information to the tippee and the tippee knows or should have known about the breach. Id. at 660. However, not all 13

21 disclosures of confidential information constitute an insider s breach of her fiduciary duty. Id. at Instead, a breach occurs only when the [tipper] personally will benefit, directly or indirectly, from his disclosure. Id. at 662. Dirks lays out two methods of determining whether a tipper has received a personal benefit. Under the exchange theory, a tipper receives a personal benefit if there is an exchange of a tangible benefit. Id. at 664. Under the gift theory, a tipper receives a personal benefit when she makes a gift of confidential information to a trading relative or friend. Id. The personal benefit that Stump received falls within the gift theory, because though he did not receive an immediate tangible benefit from the defendant, an inference can be drawn from his close relationship with defendant that Stump received or will receive a personal benefit. ii. Newman is consistent with the Thirteenth Circuit s decision. The question before this Court is whether, under the gift theory, a personal benefit can be inferred from evidence of a close relationship between a tipper and a tippee. While the Thirteenth Circuit found that there was a circuit split between the Second and Ninth Circuits, both opinions should be read to support such inferences of personal benefits. See United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014); United States v. Salman, 792 F.3d 1087 (9th Cir. 2015). No other circuit courts have addressed this question. In Newman, the Second Circuit held that an inference of a personal benefit is permissible when a tipper-tippee relationship generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature. 773 F.3d at 452 (emphasis added). However, Newman does not require evidence of a pecuniary or tangible gift, as the Thirteenth Circuit found. Instead, the test was whether there was evidence that the relationship between tipper and tippee was a meaningfully close personal relationship. Id. To 14

22 establish a close personal relationship, there must be evidence of a relationship between tipper and tippee suggesting an intention to benefit the [tippee]. Id. (quotation omitted). In such relationships, there is always an exchange: the tipper receives the benefit of assisting a close friend or relative and the tippee receives inside information. S.E.C. v. Obus, 693 F.3d 276, 285 (2d Cir. 2012). There is also always the potential for a tangible gain: it is very possible that a close friend or relative tippee may give the tipper a pecuniary benefit in the future; much more so than a stranger. Such a reading of Newman is consistent with the Thirteenth Circuit s holding that personal benefits must be classified as non-pecuniary or tangible gifts in certain personal relationships. Skrelly, No at *18. Instead of abolishing inferences of personal benefits without a tangible exchange, Newman merely limits the types of relationships that would raise such inferences. In doing so, Newman affirmatively agrees with Dirks that a personal benefit may be inferred from a personal relationship between tipper and tippee, insofar as the relationship is one that is close and personal. Newman, 773 F.3d at 452. Newman s holding is best understood in contrast with an earlier Second Circuit opinion, S.E.C. v. Warde, 151 F.3d 42 (2d Cir. 1998). In Warde, evidence demonstrated that a tipper and tippee were both friends and stock market investors. Id. The court held that their friendship suggested that the tip was intended by the tipper to benefit the tippee and thus satisfied the personal benefit requirement. Id. at 49. As other courts have noted, Warde can be seen as addressing when an inference that the tipper intended to benefit, or bestow a gift on, the tippee is permissible, while Newman addresses the inverse: when an inference is impermissible, such as when the relationship between tipper and tippee does not involve an aspect of friendship as it did in Warde. United States v. Whitman, No. 12 CR. 125 JSR, 2015 WL , at *5 n.5 15

23 (S.D.N.Y. July 22, 2015). Underlying both cases is the assertion that an inference of a personal benefit can arise from a close relationship between tipper and tippee. The Thirteenth Circuit held that evidence sufficient to show or infer a close relationship between the tipper and tippee is sufficient under the gift theory of liability. Skrelly, No at *18. Although Newman rejects the latter part of this holding, this difference has no bearing on the question presented on appeal, which is limited to whether evidence of a close personal relationship permits an inference of the personal benefit. Newman only requires evidence of a close personal relationship to infer such a benefit it does not require evidence of an exchange that personally benefits a tipper. 773 F.3d at 452. Therefore, because all of the circuit courts that have addressed the issue have held that an inference of a personal benefit can be drawn from a close relationship, this Court should affirm the Thirteenth Circuit s holding. iii. Alternatively, if this Court views Newman as irreconcilable with the Thirteenth Circuit s holding, it should reject Newman for improperly interpreting Dirks. If this Court views Newman as requiring an identifiable benefit to satisfy the personal benefit test, then it should decline to follow Newman. Requiring an identifiable benefit would eviscerate the gift theory and would be in conflict with Dirks, persuasive circuit precedent, and insider trading policy objectives. Instead, this Court should adopt the reasoning of Salman, and affirm the Thirteenth Circuit s decision. 792 F.3d If Newman is to be read as requiring evidence of an exchange to satisfy the personal benefit test, then it is inconsistent with Dirks. Dirks made clear that the personal benefit test could be satisfied by more than just a quid pro quo exchange, 463 U.S. at 667, and this theory has been recognized by many circuit courts. See, e.g., S.E.C. v. Yun, 327 F.3d 1263, 1275 (11th Cir. 2003) (a gift to a trading friend or relative could satisfy the personal benefit requirement); S.E.C. v. Maio, 51 F.3d 623, 632 (7th Cir. 1995) (quoting gift theory language from Dirks). Even 16

24 the Second Circuit itself has held that an inference of a personal benefit from a relationship can satisfy the personal benefit requirement. See United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013) (personal benefit includes the benefit one would obtain from simply mak[ing] a gift ) (quotations and citations omitted)); Obus, 693 F.3d at 291 (college friendship between tipper and tippee was sufficient to find that the tipper could have benefited from tipping the tippee); Warde, 151 F.3d at 49 (a close friendship between tipper and tippee was sufficient to find a personal benefit). To the extent that Newman is read to require an identifiable benefit in satisfying the personal benefit test, it is unsupported by any authority and should not be followed. Instead, this Court should adopt the reasoning from Salman, a recent Ninth Circuit decision that squarely addressed Newman. 792 F.3d at In Salman, the court rejected the defendant s argument that his familial relationship with a tipper could not generate an inference of a personal benefit in light of Newman s holding. Id. The court refused to read Newman so narrowly, because doing so would violate the clear gift theory language in Dirks. Id. Salman exposes a problematic policy concern that would arise if this Court adopted the reasoning from Newman: an insider would be free to tip her relatives, who would then be free to trade on the information, provided only that [they] asked for no tangible compensation in return. Id. at It is not hard to think of scenarios that exploit this obvious liability gap. A brother who tips his sister but receives no immediate tangible benefit in return would not be said to have received a personal benefit. But such reasoning ignores the reality that the benefit to the tipper may be received in the future, and it would be inefficient to have to wait until evidence of a tangible benefit surfaced to charge a tippee. Moreover, a tangible exchange requirement provides no safeguards for an obvious loophole in enforcing tippee liability under its theory the statute of limitations for actions 17

25 brought under 15 U.S.C. 78 runs for only five years. 15 U.S.C. 78u-1(d)(5). Therefore, it is plausible that a tippee could benefit from a tipper s inside information, wait for five years, and then give the tipper a tangible or pecuniary benefit in return. In effect, such a scheme would safeguard tippees from any derivative liability while simultaneously encouraging tippers to improperly share inside information in order to benefit personally at some point in the future. There is no risk of a slippery slope of criminal liability for tippees who lack culpable intent. Even without a tangible benefit requirement, the government must prove that the tipper breached a fiduciary duty, the tippee knew of the tipper s breach, and the tippee used the inside information for personal benefit. Jiau, 734 F.3d at 153. Here, this is not a case that implicates policy concerns of convicting somebody someone on the margins. The defendant is a professional trader who regularly receives inside information from corporate insiders. He received inside information directly from Stump and knew exactly how to use it to cheat the market for his own gain there is no question that his actions were improper. Because the purpose of securities law is to prohibit such unfair and selfish conduct, this Court should affirm the Thirteenth Circuit s decision. b. The Thirteenth Circuit was correct in holding that the relationship between the defendant and Stump was sufficient to support the defendant s conviction. Establishing that a tipper-tippee relationship is a close one requires evidence of a relationship suggesting a tipper s intention to benefit the [tippee]. Dirks, 463 U.S. at 664. Intentions to benefit the tippee are easily found when the relationship is a direct familial one, or one of close friends. See, e.g., Salman, 792 F.3d 1087 (friend and brother-in-law); S.E.C. v. Sekhri, No. 98 CIV (RPP), 2002 WL , at *2 (S.D.N.Y. Nov. 22, 2002) (father-inlaw); Warde, 151 F.3d 42 (friends who discussed business and investing interests ). Intentions to benefit the tippee are not found when the relationship is so tenuous that the tipper and tippee 18

26 are practically strangers. See S.E.C. v. Maxwell, 341 F. Supp. 2d 941, 948 (S.D. Ohio 2004) (barber and customer). [T]he showing necessary to prove an intent to benefit is not extensive. Id. at 947. In fact, some courts have held that the mere allegation that a tipper has disclosed inside information is sufficient to create a legal inference that the [tipper] intended to provide a gift to the [tippee]. S.E.C. v. Blackwell, 291 F. Supp. 2d 673, 692 (S.D. Ohio 2003). However, this Court does not need to adopt such a broad rule in order to affirm the defendant s conviction. In this case, Stump and the defendant are far more than strangers. They spent a considerable amount of time together in conversation, on the golf course, and in the sauna. Moreover, they are both traders who shared membership in the Silver Spoon Country Club, a social club for business and financial elites. Membership in an institution favors a finding of a close personal relationship. See Obus, 693 F.3d at 291 (fact that tippee and tipper were friends when attending the same college was sufficient). Additionally, there is no doubt that Stump intended to benefit the defendant, evidenced by Stump s statement that he was always happy to do a favor for the defendant, whom he called his friend. Skrelly, No at *3. Furthermore, Stump had a reputational benefit to gain from tipping the defendant. Dirks, 463 U.S. at 663. Stump knew that his company was heading for financial ruin and that the defendant was a member of an elite country club. Having friends in high places rich friends, no less would help Stump mitigate the effects of his company s crash. Due to the defendant and Stump s friendship, exchange of communication, shared membership in an exclusive social club, and because Stump stood to benefit personally from the 19

27 defendant s reputational and financial wellbeing, this Court should affirm the Thirteenth Circuit s decision. 20

28 CONCLUSION For the foregoing reasons, Respondent respectfully requests that this Court affirm the Thirteenth s Circuit s decision to uphold defendant s conviction as to both counts of insider trading because the police s examination of the incriminating evidence was constitutional under the Fourth Amendment and the evidence was sufficient to sustain a conviction. 21