SUPREME COURT OF THE UNITED STATES

Transcription

1 Team No. 105

2 Team No. 105 Docket No IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM 2015 UNITED STATES, Petitioner, v. DANA DINOFRIO, Respondent. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR PETITIONERS Attorneys for Petitioner

3 QUESTIONS PRESENTED I. Whether the Thirteenth Circuit erred in holding that a gift of confidential information by a corporate insider requires the expectation of a pecuniary quid pro quo and that a tippee who knowingly trades on information disclosed in violation of a fiduciary duty must know the nature of the personal benefit. II. Whether the Thirteenth Circuit erred in holding that the district court abused its discretion by excluding grand jury testimony for lack of similar motive when the Government did not have a substantially similar interest in developing the testimony at the investigatory proceedings, which had low burdens of proof, and after the witness made incriminating admissions. i

4 TABLE OF CONTENTS QUESTIONS PRESENTED. i TABLE OF CONTENTS.. ii TABLE OF AUTHORITIES... v OPINIONS BELOW.. 1 CONSTITUTIONAL PROVISIONS, STATUTES, AND RULES... 2 STATEMENT OF THE CASE I. FACTUAL BACKGROUND.. 3 a. itech s Revised Earnings Report and Subsequent Suspicious Trades. 3 b. Alex s Disclosure of itech s Nonpublic Reports and Dana s Knowledge of It. 4 c. The SEC s Civil Suits and Initial Department of Justice Investigations 5 II. PROCEEDINGS BELOW. 7 SUMMARY OF THE ARGUMENT. 12 ARGUMENT. 15 I. THE JURY INSTRUCTIONS CORRECTLY STATED TIPPEE LIABILITY AND THE THIRTEENTH CIRCUIT IMPERMISSIBLY RAISED THE BAR FOR TIPPEE LIABILITY, CONTRAVENING SUPREME COURT PRECEDENT A. The Thirteenth Circuit s Narrowed Definition of Personal Benefit Conflicts With the Language of Dirks i. The Thirteenth Circuit conflated a gift of information with a quid pro quo.. 17 ii

5 ii. The inference of Alex s personal benefit is unassailable without the Thirteenth Circuit s subjective qualification of the tipper-tippee relationship B. Dirks Does Not Require the Tippee to Know the Nature of the Personal Benefit, and A Tippee Can Willfully Violate the Law Absent Specific Knowledge of the Benefit.. 22 i. Dirks only requires the tippee to have knowledge of the breach, not the nature of the personal benefit.. 22 ii. A tippee willfully violates securities laws even if she does not know all the facts making her conduct illegal 25 C. The Thirteenth Circuit Failed to Review the Jury Instructions for Harmless Error.. 28 II. THE DISTRICT COURT CORRECTLY EXCLUDED ALEX S GRAND JURY TESTIMONY AS THE GOVERNMENT DID NOT HAVE A SIMILAR MOTIVE TO DEVELOP THE TESTIMONY, AND ITS EXCLUSION WAS HARMLESS A. The Thirteenth Circuit Incorrectly Assessed Whether the Government had a Similar Motive to Develop Alex s Testimony Because it Ignored the Context of the Grand Jury Proceedings i. Courts recognize that grand juries are fundamentally different than trials. 32 ii. The Second Circuit s fact specific, substantially similar interest test appropriately accounts for how grand juries may give rise to dissimilar motives. 33 B. The District Court Did Not Abuse Its Discretion by Excluding Alex s Grand Jury Testimony 37 i. The district court properly excluded Alex s first grand jury testimony concerning his knowledge of Dana s relationships because the Government lacked motive to develop it during the investigatory stage of its grand jury against Corinne.. 38 iii

6 ii. The district court properly excluded Alex s second grand jury testimony because the Government lacked a substantial interest in developing the testimony after Alex admitted gifting the information to Ben.. 41 C. Even If the District Court Abused Its Discretion by Excluding Alex s Grand Jury Testimony, Any Error was Harmless CONCLUSION. 46 APPENDIX 47 iv

7 TABLE OF AUTHORITIES CASES Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985) Battle ex rel. Battle v. Mem l Hosp. at Gulfport, 228 F.3d 544 (5th Cir. 2000). 35 Carter v. United States, 530 U.S. 255 (2000)... 22, 25, 27 Chapman v. California, 386 U.S. 18 (1967) Chiarella v. United States, 445 U.S. 222 (1980) Christmas v. Sanders, 759 F.2d 1284 (7th Cir. 1985).. 44 Dirks v. SEC, 463 U.S. 646 (1983)... passim Hicks v. Quaker Oats Co., 662 F.2d 1158 (5th Cir.Unit A Dec. 1981). 37 In re Investors Management Co., 44 S.E.C. 633 (1971) In re Oliver, 333 U.S. 257 (1948) Neder v. United States, 527 U.S. 1 (1999) SEC v. Jasper, 678 F.3d 1116 (9th Cir. 2012) 39, 40 SEC v. Maio, 51 F.3d 628 (7th Cir. 1995)... 17, 19, 21, 24 v

8 SEC v. Obus, 693 F.3d 276 (2d Cir. 2012) 16, 23 Smith v. Bear, 237 F.2d 79 (2d Cir. 1956) United States v. Al Mudarris, 695 F.2d 1182 (9th Cir. 1983).. 32 United States v. Bergeson, 425 F.3d 1221 (9th Cir. 2005).. 32 United States v. Calandra, 414 U.S. 338 (1974) United States v. Carson, 455 F.3d 336 (1st Cir. 2006). 35, 36, 41, 43 United States v. Ciambrone, 601 F.2d 616 (2d Cir. 1979).. 33 United States v. DiNapoli, 8 F.3d 909 (2d Cir. 1993).. passim United States v. Duenas, 691 F.3d 1070 (9th Cir. 2012) 31, 44 United States v. Frazier, 387 F.3d 1244 (11th Cir. 2004)... 30, 37, 44 United States v. Foster, 128 F.3d 949 (6th Cir. 1997).. 30, 36 United States v. Kaiser, 609 F.3d 556 (2d Cir. 2010).. 25 United States v. Lang, 904 F.2d 618 (11th Cir. 1990).. 37 United States v. Martoma, No. 12 Cr. 973, 2014 WL (S.D.N.Y Jan ). 41 United States v. Moran-Toala, 726 F.3d 334 (2d Cir. 2013).. 28 vi

9 United. States v. McFall, 558 F.3d 951 (9th Cir. 2009) 30, 35, 36, 37 United States v. Miller, 904 F.2d 65 (1st Cir. 1990) 35, 36 United States v. Newman, 773 F.3d 438 (2d Cir. 2014).. passim United States v. O Hagan, 521 U.S. 642, (1997) United States v. Omar, 104 F.3d 519 (1st Cir. 1997). passim United States v. Peterson, 100 F.3d 7 (1st Cir. 1996) 42, 43, 44 United States v. Pizarro, 717 F.2d 336 (7th Cir. 1983). 31 United States v. Salerno, 505 U.S. 317 (1992)... 30, 34, 35 United States v. Salman, 792 F.3d 1087 (9th Cir. 2015) 17, 19 United States v. Staples, 511 U.S. 600 (1994)... 25, 26 United States v. Tarallo, 380 F.3d 1174 (9th Cir. 2004) 25, 26 United States v. Thevis, 665 F.2d 616 (5th Cir. Unit B 1982) United States v. Weintraub, 273 F.3d 139 (2d. Cir. 2001).. 25, 27 United States v. Whitman, 555 F. App x 98 (2d Cir. 2014) 38, 39, 40 vii

10 United States v. Wright, 651 F.3d 764 (7th Cir. 2011). 44 United States v. X Citement Video, Inc., 513 U.S. 64 (1994).. 25 Whelchel v. Washington, 232 F.3d 1197 (9th Cir. 2000).. 45 STATUTES AND REGULATION Securities Exchange Act of 1934, 15 U.S.C. 78a Et seq.: 15 U.S.C. 78j(b) (2012) U.S.C. 78ff(a) (2012) C.F.R b RULES Fed. R. Evid. 801(c) Fed. R. Evid. 804(a)(4) Fed. R. Evid. 804(b)(1) Fed. R. Evid. 804 Advisory Note MISCELLANEOUS Webster s New International Dictionary (3d 1986) 18 viii

11 OPINIONS BELOW The United States District Court for the District of Wisteria issued a memorandum and order on March 4, 2014 denying Dana DiNofrio s motion for a new trial on the grounds that the court erred in instructing the jury and excluding potentially exculpatory testimony. (R. at 12, 21). On appeal, the Thirteenth Circuit reversed and remanded the district court s decision on both claims. (R. at 22, 30). 1

12 CONSTITUTIONAL PROVISIONS, STATUTES, AND RULES This case involves Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) (2012), as well as 15 U.S.C. 78ff(a) (2012), Rule 10b-5 under the Securities Exchange Act of 1934, 17 C.F.R b-5, and Federal Rule of Evidence 804(b)(1). These provisions are provided in the attached appendix. 2

13 STATEMENT OF THE CASE I. FACTUAL BACKGROUND A. itech s Revised Earnings Report and Subsequent Suspicious Trades. In preparation of NovaPC Company s NovaPC Watch launch, its parent company, itech Holdings Ltd. ( itech ), conducted market research and predicted that sales would increase itech s third quarter profits to $5 per share. (R. at 1). itech prepared press releases and earnings reports reflecting their predictions and planned on reporting quarterly performance on Monday, August 27, (R. at 1). At 5:00 p.m. on Friday, August 24, itech s Finance Department learned its third quarter profits would only be $3.50 per share due to poor sales. (R. at 1). itech Finance Director, Alex Abernethy ( Alex ), ordered his team to re-run the financial reports and prepare new press releases reflecting actual profits. (R. at 1). Copies were sent to DDD Press Co. ( DDD ) for release on Monday at 2:00 p.m. (R. at 1). Later Friday night, Alex and other itech executives received an from itech Corporate Security informing them that foreign hackers had infiltrated the DDD s press release servers. (R. at 2). DDD confirmed that the hackers obtained itech s earning reports, but could not confirm whether the original or revised reports were obtained. (R. at 2). The first news of the DDD hack was not published until weeks later. (R. at 2). During the morning of Monday, August 27, in advance of itech s earnings release, the Securities and Exchange Commission s ( SEC ) monitoring software flagged two trades involving itech stock as suspicious. (R. at 5). Dana DiNofrio 3

14 ( Dana ), an advisor at Rye Fund, sold her itech stock; and Trimont Group, at the direction of its general partner Corinne Cuzick ( Corinne ), sold its entire itech holding. (R. at 4 5). At 2:00p.m. itech released its revised earnings and the market reacted sharply; itech s stock fell by 20%. (R. at 5). As a result of Dana s morning divestment, she avoided a $3.0 million loss, the largest loss avoidance from any sale of itech stock. (R. at 5 6). Trimont Group likewise averted a $2.1 million loss. (R. at 5). As a result of these sales, the SEC s Enforcement Division began to investigate Dana s and Corinne s trading. (R. at 6). B. Alex s Disclosure of itech s Nonpublic Reports and Dana s Knowledge of It. On the Saturday prior to Dana s itech divestment, she attended the birthday party for itech Financial Director Alex s grandmother. (R. at 2,4). Dana had been invited to the party by Corinne, her friend and former colleague. (R. at 4). Corinne was best friends with stockbroker Ben Bookwalter ( Ben ), Alex s cousin. (R. at 2, 4). Alex and Ben both graduated from Summit Private Business School and Alex had encouraged Ben s interest to attend for years. (R. at 2 3). Alex and Ben saw each other at family gatherings a few times a year, where they mostly talked about work. (R. at 2 3). At the party, Alex revealed to Ben that itech s earnings had been grossly overestimated, and would be $1.50 per share lower than forecasted. (R. at 3). Alex confirmed that no one else knew yet, explaining that he was telling Ben as a favor. (R. at 3). 4

15 Ben did not own any itech stock, but divulged Alex s tip to his best friend, Corinne. (R. at 4). Ben told Corinne that Alex told him as a favor, looking out for family, and that he always turned out to be right when Alex told Ben something he did not already know. (R. at 4). Ben reminded Corinne that she didn t hear it from [him]. (R. at. 4) Corinne smiled as she got out her phone and scheduled sales of Trimont s itech holdings for Monday. (R. at 4). Corinne then approached Dana, and told her to sell itech now! (R. at 5). Corinne explained, I just heard from good authority that [itech s] earnings will be down Monday. (R. at 5). Dana knew that Corinne and Ben were best friends and that Alex and Ben were cousins. (R. at 4). Corinne had told Dana that Alex s mother had loaned Ben s mother money to purchase a house. (R. at 4 5). At the party, Dana saw Alex and Ben engaged in conversation before Corinne told her, on good authority, about itech s earnings. (R. at 5). Dana sold her itech stock at 9:30 a.m. Monday. (R. at 5). C. The SEC s Civil Suits and Initial Department of Justice Investigations. The SEC suspected an exchange of information between Dana and Corinne, and asked Corinne to testify. (R. at 6). Corinne s testimony revealed the details of her conversation with Ben, which lead the SEC to file a civil enforcement action against Dana and Corinne for insider trading. (R. at 6). The SEC then deposed Ben, who testified he learned of itech s lower-than-expected earnings from Alex at the party. (R. at 6). Ben also testified that Alex disclosed the information as a favor, and that Alex said something about not getting anything in return. (R. at 7). 5

16 After the SEC filed its case it shared the details of its investigation with the Department of Justice ( DOJ ). (R. at 7). This resulted in the DOJ seeking grand jury indictments against Dana and Corinne. (R. at 7). First, in the grand jury against Corinne, the DOJ called Alex to testify. (R. at 8). Alex confirmed that Dana, Ben, and Corinne were at the party and that he knew of Corinne and Dana, but did not see them interact with Ben. (R. at 8). The DOJ believed merely proving Dana, Ben, and Corinne were at the same party would be sufficient for indictment, so they did not question Alex further. (R. at 8). The grand jury returned no bill on all charges against Corinne, in part because they had not heard sufficient evidence that Ben, Corinne, and Dana knew each other or had talked at the party. (R. at 8). Three days after the grand jury decision, Corinne and Ben were killed in a car crash while carpooling to work. (R. at 8). Unable to prosecute Corinne, the DOJ turned to building a case against Dana and Alex. (R. at 9). The DOJ impaneled a grand jury against Dana and called Alex to testify. (R. at 9). Alex testified that he told Ben about itech s earnings revision at the party as a favor to him, and that he had the bank statements to prove he received nothing in exchange. (R. at 9). Alex also confirmed that he knew of his mother s $50,000 loan to Ben s mother. (R. 9 10). Subsequently, Alex was diagnosed with dementia, rendering him medically unfit for future testimony. (R. at 10). The DOJ argued it was not a coincidence that Dana sold her stock immediately before itech released poor earnings reports after she attended a party 6

17 at which Alex leaked the information to his cousin Ben. (R. at 10). The grand jury indicted Dana on one count of insider trading. (R. at 10). II. THE PROCEEDINGS BELOW The DOJ charged Dana with securities fraud, in violation of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and filed in the United States District Court, District of Wisteria. (R. at 13, 23). The DOJ put on a principally circumstantial case against Dana. (R. at 10). Dana argued that the Government failed to establish she knew the information she traded on came from an insider violating their fiduciary duty. (R. at 10). She testified she never talked to Ben. (R. at 11). Dana also attempted to introduce Alex s grand jury testimony and Ben s SEC deposition to support her argument that Alex did not profit from the disclosure, and that Ben did not share the information with anyone but Corinne. (R. at 10). The DOJ objected to the admissibility of both Ben s SEC deposition and Alex s grand jury testimony under Federal Rules of Evidence 804(b)(1). (R. at 11). The trial judge admitted Ben s deposition but excluded Alex s testimony. (R. at 11). At the close of oral argument, the court, over Dana s objection, instructed the jury as follows: COURT: You should return a verdict of guilty on the count of insider trading if the Government has proved, beyond a reasonable doubt that (1) Alex was entrusted with a fiduciary duty; (2) Alex breached his fiduciary duty by disclosing confidential information to Ben in exchange for a personal benefit; (3) the Defendant was the ultimate recipient of that confidential information and knew of Alex s breach; and (4) the Defendant still used that information to trade in a security. 7

18 Alex obtained a personal benefit if he obtained anything of any value in exchange for his disclosure. The benefit may consist of tangible things, like money, goods, services, or any other tangible thing. It also may consist of intangible things, like favors, future obligations, reputational benefits, or the personal satisfaction of helping or strengthening a relationship with a friend or relative. The benefit may have been obtained directly or indirectly. The benefit may have been received or accrued at any time before, during, or after the disclosure of the information as long as the receipt of the benefit was caused by the disclosure of the information. The requirement of Defendant s knowledge is satisfied if Defendant actually knew or if she reasonably should have known that Alex received a benefit for his disclosure. The jury found Dana guilty on the sole count of insider trading. (R. at 11 12). Dana moved for a new trial, arguing that the court erred by providing an inappropriately broad definition of personal benefit and by excluding potentially exculpatory testimony. (R. at 12). The district court denied Dana s motion for a new trial. (R. at 13). The court found, contrary to Dana s argument, that personal benefit in the insider trading context includes the gift of confidential information to a trading relative or friend, and that the jury could have reasonably found Alex was building a reputation as a source of reliable market information... [that] would one day allow Alex to call in the favor in some way. (R. at 16). Moreover, the court held that the jury may have inferred Alex disclosed the confidential information with the intent to benefit Ben. (R. at 17). 8

19 Dana also argued the record did not contain sufficient evidence that she knew the information had come from an insider in breach of a fiduciary duty by disclosing the information for personal benefit. (R. at 18). The district court found that tippee liability contemplates imputed knowledge and that the circumstantial evidence could lead a reasonable jury to conclude it implausible that Dana did not know that the source of the confidential information was the Director of Finance at itech, who happened to be the grandson of the woman whose birthday party Dana was attending when Corinne informed Dana that she had just heard of a hot tip about itech. (R. at 5, 18). The court placed special emphasis on Dana as an experienced and sophisticated investor. (R. at 18). The district court also found that prior testimony may only be used in a subsequent proceeding if the party the testimony is being offered against had a substantially similar interest to develop the testimony at the first proceeding. (R. at 19). The district court held that the DOJ did not have a similar motive because the grand jury s purpose was to determine the scope of an insider trading ring. (R. at 19). Therefore, unlike an adversarial proceeding, the DOJ did not have a vested interest in the content of Alex s testimony beyond a reasonable degree of confidence that he was telling the truth, so they did not press further after Alex denied knowing Dana or whether she and Ben communicated at the party. (R. at 19). Dana also argued that, having let Ben s SEC deposition in, the court should not have excluded Alex s testimony. (R. at 19 20). The district court rejected Dana s argument due to the fundamentally different nature of the two proceedings: the 9

20 SEC had already sued Corinne and Dana when Ben was deposed, and therefore had the same motive to test the credibility of his testimony as if Ben testified at trial. (R. at 20). Dana appealed from the district court s denial of her motion alleging two errors: 1) the district court s definition of personal benefit impermissibly included non-material rewards and failed to instruct the jury that the DOJ had to prove Dana knew the nature of the personal benefit obtained by the insider; and 2) excluding Alex s potentially exculpatory testimony as to his lack of receiving a benefit and Dana s lack of knowledge. (R. at 12). The Thirteenth Circuit reversed the district court on both issues. (R. at 22 23). Reviewing de novo, the court held that the jury instructions failed to instruct that the DOJ had to prove: 1) a family relationship not only existed between Alex and Ben but that the relationship was of a sort that Alex s gratuitous offering of insider information would create at least the increased likelihood of eventual pecuniary benefit; and 2) that Dana knew the facts giving rise to Alex s breach of fiduciary duty i.e. that she knew the personal benefit Alex had obtained. (R. at 26 27). The court explained: there is no evidence that Ben ever gave anything of material benefit to Alex, such that Alex would believe that his gift of information might eventually lead to some sort of pecuniary quid pro quo. (R. at 27). Further, that Dana s limited knowledge of Alex and Ben s relationship does not equate to knowledge that Alex received a personal benefit in exchange for his disclosure. (R. at 28). 10

21 In addressing the second issue, the Thirteenth Circuit held the district court abused its discretion by excluding Alex s grand jury testimony. (R. at 30). The court found the DOJ s fundamental objective was the same at both the grand jury and the trial: to elicit testimony supporting its theory of an insider-trading ring. (R. at 29). Moreover, it found the DOJ possessed a substantially similar motivation to establish that Alex received a personal benefit at both proceedings. (R. at 29). The Thirteenth Circuit reversed and remanded the case to the district court for further proceedings. (R. at 22). The DOJ filed a petition for writ of certiorari to the Supreme Court of the United States, which this Court granted. (R. at 31). 11

22 SUMMARY OF THE ARGUMENT I. This Court should reverse the decision of the Thirteenth Circuit and find that the district court correctly instructed the jury on the definition of personal benefit, together with the tippee s knowledge of the breach, as set forth in Dirks v. SEC. The Thirteenth Circuit eliminated a category of personal benefit that this Court identified as arising from an insider s gift of confidential information to a trading relative or friend. Under the Thirteenth Circuit s definition, the insider now must expect a pecuniary quid pro quo in exchange for their gift to a relative or friend. Not only is this definition contrary to the plain meaning of gift, it ignores that this Court distinguished quid pro quo scenarios from those involving gifts. Moreover, the Thirteenth Circuit raised the bar on tippee liability by inserting a subjective qualification: now the familial relationship must be of a sort that increases the likelihood of pecuniary gain. This subjective qualification has no basis in this Court s precedent and is contrary to the emphasis Dirks placed on objective criteria upon which to infer a personal benefit has been received. Secondly, the Thirteenth Circuit raised the knowledge requirement for liability by adding that the tippee must know the nature of the personal benefit the tipper received. However, this Court required only that the tippee know, or should know, of a breach. A personal benefit can be inferred from the objective facts and circumstances surrounding the insider s disclosure, such as when the insider gifts valuable corporate information to a trading relative. Likewise, the relevant statute 12

23 only requires a mens rea for criminal violations sufficient to distinguish innocent from wrongful conduct. And trading on material information knowingly received as the result of a breach of fiduciary duty satisfies this standard. Even if this Court agrees with the Thirteenth Circuit it should still reverse the decision, as any error in jury instructions was harmless. There was ample evidence in the record to establish beyond a reasonable doubt that Alex and Ben s relationship was sufficiently close to increase the likelihood of eventual pecuniary gain, and that Dana knew these facts. She was with Alex and Ben at their grandmother s party, she knew they were cousins, she knew that Alex s family loaned Ben s family money to buy a house, and that the information Alex disclosed was valuable. As such, this Court should reverse the Thirteenth Circuit s decision and reinstate the jury verdict. II. This Court should reverse the Thirteenth Circuit s decision and find that the district court did not abuse its discretion in excluding Alex s grand jury testimony because the Government did not have a similar motive to develop it. The former testimony hearsay exception s similar motive requirement is premised on the reliability and fairness of evidence produced through vigorous cross-examination by the party the testimony is to be used against in a subsequent proceeding. Grand juries, because of their non-adversarial nature and investigatory purpose, combined with lower burdens of proof and evidentiary requirements, are 13

24 different than prior trials. The Second Circuit properly recognized that grand juries may therefore present a party with different motives than a trial, unless a substantially similar interest in developing the testimony is shown. The district court did not abuse its discretion in finding the Government lacked a similar interest in developing Alex s testimony because of the lower burden of proof at the grand jury stage, the investigatory approach of Alex s grand juries, the lack of evidence to contradict Alex s story, and Alex s admission of gifting confidential information to a trading relative. At an adversarial trial, the Government would have a motive to discredit Alex s self-exculpatory denials of pecuniary gain, and his lack of knowledge of Dana s relationships. At the grand jury stage, however, the Government was only seeking probable cause to issue an indictment. Even if the district court abused its discretion by excluding Alex s testimony, any error was harmless because Alex s testimony was cumulative of evidence already let in the record Ben s SEC deposition. Thus, this Court should reverse the Thirteenth Circuit s decision and reinstate the jury verdict. 14

25 ARGUMENT I. THE JURY INSTRUCTIONS CORRECTLY STATED TIPPEE LIABILITY AND THE THIRTEENTH CIRCUIT IMPERMISSIBLY RAISED THE BAR FOR TIPPEE LIABILITY, CONTRAVENING SUPREME COURT PRECEDENT. The Thirteenth Circuit redefined the requirements for tippee insider trading liability, contravening this Court s precedent. Therefore, this Court should reverse the Thirteenth Circuit s decision and reinstate the verdict of the jury, as the district court correctly instructed the jury on the requirements of tippee liability. Corporate insiders possessing material nonpublic information about the corporation have a duty to abstain from trading or to publically disclose the information to avoid tak[ing] unfair advantage of uninformed... stockholders. Chiarella v. United States, 445 U.S. 222, (1980) (citation omitted). An insider violates this duty, as well as Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) (2012), and Rule 10b-5 thereunder, 17 C.F.R b-5, when they trade in their corporation s stock on the basis of such information. United States v. O Hagan, 521 U.S. 642, (1997). In Dirks v. SEC this Court recognized the need to define the scope of tipper-tippee liability that is, when an insider (the tipper) breaches his duty by providing nonpublic information to a third party trader (the tippee), and when the tippee is liable for trading on that information. 463 U.S. 646, 659 (1983). This Court found that whether an insider s disclosure violates his duty turns on the propriety of his purpose, and the test is whether the insider personally will benefit, directly or indirectly, from his disclosure. Id. at 662. This Court identified three categories of personal benefits in 15

26 Dirks: 1) disclosures for a pecuniary gain, 2) disclosures for a reputational benefit that will translate to future earnings, and 3) when an insider makes a gift of confidential information to a trading relative or friend. Id. at ; Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 312 n.21 (1985). The Court further held that a tippee assumes a fiduciary duty... not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach. Dirks, 463 U.S. at The Thirteenth Circuit improperly defined personal benefit, along with the tippee s requisite knowledge of the insider s fiduciary breach by changing the express language of Dirks. First, the Thirteenth Circuit, eliminated the third category of personal benefit the gift of confidential information to a trading relative or friend and subjectively qualified the relationship the Government must prove existed between tipper and tippee. (R. at 27). Second, the Thirteenth Circuit added that the Government must also prove that Dana knew the facts giving rise to Alex s breach of fiduciary duty. (R. at 27). However, in Dirks this Court only required that a tippee know[] or should know[] that there had been a breach. Dirks, 463 U.S. at 660. Lastly, even if this Court finds that the Thirteenth Circuit s revisions to the jury instructions are correct, the district court s error was harmless. Accordingly, this Court should reverse the Thirteenth Circuit s decision. 1 For a tippee who did not receive the tip directly from the insider-tipper to be liable [t]he final tippee must both know or have reason to know that the information was obtained through a breach and trade on the basis of that information. SEC v. Obus, 693 F.3d 276, 288 (2d Cir. 2012). 16

27 A. The Thirteenth Circuit s Narrowed Definition of Personal Benefit Conflicts With the Language of Dirks. The Thirteenth Circuit narrowed personal benefit in two ways inconsistent with this Court s articulation of improper disclosures for personal benefit. See Dirks, 463 U.S. at First, the Thirteenth Circuit eliminated a category of personal benefit identified by this Court the gift of confidential information to a trading relative or friend by stating that Alex must believe that his gift... [would lead] to some sort of pecuniary quid pro quo. (R. at 27). And second, the Thirteenth Circuit added a subjective qualification to the type of familial relationship needed to be proven, to one that was of a sort... [that] would create at least the increased likelihood of pecuniary benefit. (R. at 27). Thus, the Thirteenth Circuit did not faithfully apply Dirks and is inconsistent with other Courts of Appeals understanding of personal benefit. See United States v. Salman, 792 F.3d 1087 (9th Cir. 2015); SEC v. Maio, 51 F.3d 628 (7th Cir. 1995). Therefore, this Court should reject the Thirteenth Circuit s definition of personal benefit. i. The Thirteenth Circuit conflated a gift of information with a quid pro quo. The Thirteenth Circuit redefined the basic meaning of gift by requiring Alex to expect some sort of pecuniary quid pro quo, in exchange for his gift of information. (R. at 27). The Second Circuit mirrored this mistake by holding that the inference of a personal benefit based on a gift of information is impermissible in the absence of a meaningfully close personal relationship that generates an exchange that... represents at least a potential gain of a pecuniary or similarly 17

28 valuable nature. United States v. Newman, 773 F.3d 438 (2d Cir. 2014), reh'g en banc denied, 2015 WL (2d Cir. Apr. 3, 2015); cert. denied, No , cert. denied 2015 WL (U.S. Oct. 5, 2015). Both decisions conflict with the plain meaning of the word gift. See Webster s New International Dictionary 956 (3d 1986) (defining gift as something that is voluntarily transferred by one person to another without compensation ). In Dirks, the Supreme Court confirmed that tippee liability derived from tipper liability, and addressed whether corporate insiders who disclosed confidential information to expose fraud had breached their duty. Dirks, 463 U.S. at 659. In so doing this Court identified what objective facts and circumstances allow a fact finder to infer that a corporate insider has received a personal benefit and thereby breached his duty. Id. at 664. Sometimes, there may be a relationship between the insider and the recipient that suggests a quid pro quo... or an intention to benefit the particular recipient. Id. And, alternatively, a fact finder may infer that an insider breached their fiduciary duty when an insider makes a gift of confidential information to a trading relative or friend. Id. Thus, because the Dirks insiders were motivated to expose fraud, the Supreme Court held they had not breached their duty because they received no monetary or personal benefit for revealing Equity Funding s secrets, nor was their purpose to make a gift of valuable information to Dirks. Id. at 667 (emphasis added). This Court explicitly disconnected a gift of information to a relative or friend from a quid pro quo of information for monetary reward. For the Thirteenth or Second Circuit to collapse 18

29 the two categories erases a type of personal benefit unambiguously recognized by this Court. Moreover, both the Seventh and the Ninth Circuits have distinguished gifts from quid pro quo arrangements. In Maio a corporate insider gave nonpublic information about a tender offer to Maio, who shared the information with a friend. Maio, 51 F.3d at On appeal the tippee-friend argued the disclosure was not improper because the insider did not receive any direct or indirect personal benefit. Id. at 632. The Seventh Circuit rejected this argument, concluding that since the disclosure was an improper gift of confidential corporate information the personal benefit requirement was satisfied. Id. at 633 (emphasis added). Likewise, in Salman, out of the Ninth Circuit, a Citigroup insider disclosed merger information to his brother, who then disclosed it to the tippee-defendant. Salman, 792 F.3d at The court rejected the tippee s argument on appeal that his conviction should be overturned due to lack of evidence the insider received a tangible benefit in exchange for his tips. Id. at Doing so, the Ninth Circuit recognized, would require us to depart from the clear holding of Dirks that the element of breach of fiduciary duty is met where an insider makes a gift of confidential information to a trading relative or friend. Id. (citation omitted). The Ninth Circuit explicitly rejected the Second Circuit s decision in Newman as inconsistent with Dirks. Id. at (citing Newman, 773 F.3d at 452). The Thirteenth Circuit s personal benefit definition is therefore inconsistent with this Court s well-established precedent. Alex disclosed information for a 19

30 personal benefit when he disclosed itech s revised earnings data to his cousin Ben as a favor, even though he received no pecuniary benefit. Alex s gift of confidential information to Ben is all that Dirks requires show a breach, and this Court should reject the Thirteenth Circuit s holding to the contrary. ii. The inference of Alex s personal benefit is unassailable without the Thirteenth Circuit s subjective qualification of the tipper-tippee relationship. The Thirteenth Circuit, similarly to the Second Circuit in Newman, raised the bar for tippee liability by requiring the Government to prove a family relationship not only existed, but that it was of a sort that... increased the likelihood of eventual pecuniary benefit. (R. at 27); see Newman, 773 F.3d at 452 (stating the government must also pro[ve] a meaningfully close personal relationship existed between the tipper making the gift and the tippee). This Court should reject the Thirteenth Circuit s subjective qualification of the tipper-tippee relationship, as it has no basis in precedent. In Dirks, the Supreme Court emphasized the importance of crafting guiding principle[s] of liability based on objective criteria for those subject to insider trading laws. Dirks, 463 U.S. at With this in mind the Court stated in unqualified terms, [t]here are objective facts and circumstances that often justify the inference that an insider has disclosed for a personal benefit, including when an insider makes a gift of confidential information to a trading relative or friend. Id. at 664. The Thirteenth and Second Circuits additional requirements move away from this Court s focus on objective facts and clear guiding principles, to a subjective 20

31 standard where the relationship must be of a desired sort, or meaningfully close neither court defined what these relationships look like, nor how a fact finder discerns their existence. Moreover, as the Seventh Circuit explained, the inference of a personal benefit is insurmountable when a corporate insider gifts material nonpublic information to a tippee relative. See Maio, 51 F.3d at 633. The corporate insider has an existing duty to keep this information confidential and so, [a]bsent some legitimate reason for [the] disclosure... the inference that [the] disclosure was an improper gift of confidential corporate information is unassailable. Id. Dana has never argued, nor has Alex ever testified, that there was a legitimate corporate purpose for his disclosure of valuable information to Ben, or that Alex mistakenly believed the information was public. 2 The Thirteenth Circuit rejected this Court s emphasis on objective criteria by adding an indefinable subjective qualification of the tipper-tippee relationship. However, without a legitimate corporate purpose, Alex would not disclose such information to his cousin Ben, but for a personal benefit. Because the Thirteenth Circuit s requirement is unnecessary and has no basis in Dirks, this Court should reject it. 2 This Court in Dirks stated that a corporate official would not breach their duty if they mistakenly believed the information was public or would not affect the markets. Dirks, 463, U.S. at 662. However, no such argument has been made in this case. 21

32 B. Dirks Does Not Require the Tippee to Know the Nature of the Personal Benefit, and A Tippee Can Willfully Violate the Law Absent Specific Knowledge of the Benefit. The Thirteenth Circuit mischaracterized the tippee knowledge requirement in two ways contradicted by this Court s precedent and principles of statutory interpretation. First, the Thirteenth Circuit impermissibly created a higher bar for tippee knowledge by requiring the Government to prove Dana knew the specific nature of the personal benefit Alex received. (R. at 26 27). Second, the Thirteenth Circuit incorrectly held that to prove Dana willfully violated the statute, the Government must show she knew the facts making her conduct illegal. (R. at 27 28). The first condition is directly at odds with the allowance for imputed knowledge in Dirks. See Dirks, 463 U.S. at 660. The second condition is a misapplication of the presumption requiring mens rea for criminal violations. See Carter v. United States, 530 U.S. 255, 269 (2000). Because the Thirteenth Circuit s tippee knowledge requirement contradicts precedent and principles of statutory interpretation, this Court should reject it. i. Dirks only requires the tippee to have knowledge of the breach, not the nature of the personal benefit. The Thirteenth Circuit, following the Second Circuit, incorrectly required the Government to prove Dana not only knew of Alex s breach (that he disclosed for a personal benefit), but also that she knew the nature of the personal benefit Alex actually received. (R. at 23 24); see Newman, 773 F.3d at 448 (finding that without establishing that the tippee knows of the personal benefit... the Government 22

33 cannot meet its burden of showing that the tippee knew of a breach ). However, this Court was clear in defining the elements of tippee liability: [A] tippee assumes a fiduciary duty to the shareholders... only when the insider has breached his fiduciary duty... by disclosing the information to the tippee and the tippee knows or should know that there has been a breach. See Dirks, 463 U.S. at 660 (emphasis added). The Second Circuit discussed this standard previously in Obus: Dirk s knows or should know standard... is a fact-specific inquiry turning on the tippee s own knowledge and sophistication and on whether the tipper s conduct raised red flags that confidential information was being transmitted improperly. 693 F.3d at 288. It is undisputed that a tippee s liability is derivative of the tipper s a tippee cannot be liable unless the tipper has breached his fiduciary duty by disclosing confidential information for a personal benefit. Dirks, 463 U.S. at 662. However, when this Court specifically discussed the tippee s knowledge requirement, it plainly stated that a tippee assumes a fiduciary duty... [only when] the tippee knows or should know that there has been a breach (id. at 660) not that the tippee should have known the tipper disclosed for a personal benefit (the breach) and the nature of the personal benefit received. In explaining its meaning, the Court cited to an earlier SEC decision that limited tippee liability to when the tippee had reason to know that the information was non-public and had been obtained improperly by selective disclosure or otherwise. Id. at 660 n.19 (quoting In re Investors Management Co., 44 S.E.C. 633, 650 (1971). 23

34 The Thirteenth Circuit s argument is based on an incomplete reading of Dirks. As this Court stated, whether an insider s selective disclosure is a breach of duty... depends in large part on the purpose of the disclosure. Dirks, 463 U.S. at And the tipper has an improper purpose when he discloses for a personal benefit. Id. at 662. However, in determining the propriety of the insider s purpose, Dirks requires courts to focus on objective criteria... such as a pecuniary gain or a reputational benefit... [or] when an insider makes a gift of confidential information to a trading relative or friend. Id. at Thus, Dana need not know the nature of Alex s personal benefit to know that he is disclosing for a personal benefit because [t]here are objective facts and circumstances... justify[ing] such an inference when she knew that Alex gifted the information to his cousin Ben. See Id. at 664; Maio, 51 F.3d at 633 (finding such an inference unassailable ). The Thirteenth Circuit s finding that a tippee must know the nature of the personal benefit to know that a fiduciary breach occurred is incorrect Dirks expressly provided for objective facts and circumstances surrounding a disclosure to allow a tippee to know a fiduciary breached for personal benefit. Dirks, 463 U.S. at 664. Thus, properly instructed, as the jury below was, a reasonable jury could, and did, find Dana liable based on the circumstances: Dana was with Alex the Director of itech s Finance Department at his grandmother s birthday; Dana saw Alex and Ben talking; Ben was Corinne s best friend; and Corinne told Dana I just heard on good authority that [itech s] earnings will be down on Monday. (R. at 4 5). Dana, 24

35 as an expert trader, should know Alex would be breaching his fiduciary duty by disclosing the earnings information prior to itech s Monday announcement. Because the district court s jury instruction properly allowed the knowledge requirement to be satisfied if Dana reasonably should have known of Alex s breach (R. at 11), this Court should reverse the Thirteenth Circuit s decision. ii. A tippee willfully violates securities laws even if she does not know all the facts making her conduct illegal. The Thirteenth Circuit relied on United States v. Staples, 511 U.S. 600, 605 (1994) to find that, under the securities laws, to prove Dana willfully violated the law (15 U.S.C. 78ff(a) (2012)), the Government must establish that Dana knew the facts that make [her] conduct illegal. (R. at 25). However, its reliance on Staples is misplaced. When Congress s intent is unclear, the presumption requiring mens rea for criminal violations, requires a court to read into a statute only that mens rea which is necessary to separate wrongful conduct from otherwise innocent conduct. Carter, 530 U.S. at 269 (quoting United States v. X Citement Video, Inc., 513 U.S. 64, 72 (1994)). Wrongfulness is defined as knowing the conduct is likely subject to strict regulation or that it is likely culpable. United States v. Weintraub, 273 F.3d 139, 148 (2d Cir. 2001). In fact, both the Second and Ninth Circuits agree that, generally, 78ff(a) only requires knowledge of wrongfulness. See United States v. Kaiser, 609 F.3d 556, 569 (2d Cir. 2010) (its 78ff(a) jurisprudence do[es] not require a showing that a defendant had awareness of the general unlawfulness of his conduct, but rather, that he had an awareness of the general wrongfulness of his conduct ); United States v. Tarallo, 380 F.3d 1174, 1188 (9th Cir. 2004) (holding 25

36 willfully as it is used in 78ff(a) means intentionally undertaking an act that one knows to be wrongful). Staples involved a statute that criminalized the unregistered possession of machine guns, but was silent on the requisite mens rea. Staples, 511 U.S. at 605. To avoid criminalizing innocent gun ownership, this Court issued a narrow holding that the statute required proof that the defendant knew his firearm possessed the characteristic (firing multiple bullets per trigger pull) bringing it within the scope of the Act i.e., the defendant [knew] the facts that make his conduct illegal. Id. at 608, 619. While, like Staples, congressional intent for tippee liability is similarly unclear (because insider-trading liability is a product of this Court s jurisprudence (see Dirks, 463 U.S. at 653) and not the statute), this case otherwise deals with a different class of activity than Staples. In Staples, the Court had to distinguish wholly innocent activity (possession of a firearm) with wholly criminal activity (possession of an unregistered machinegun); there was no room between illegality and wrongfulness. See Staples, 511 U.S. at 605. However, a tippee need not know all the facts making the tipper s disclosure illegal to know that their trading is wrongful. See Tarallo, 380 F.3d at This is because this Court previously limited tippee liability to instances where the tippee knew the tipper disclosed the information for personal benefit in violation of his duty to shareholders, as opposed to the innocent conduct of merely trading on nonpublic information. Dirks, 463 U.S. at As discussed supra, the objective facts and circumstances that alert a 26

37 tippee the information received was the result of a disclosure for personal benefit, also show that, when traded upon, the tippee knows their conduct is wrongful, and likely subject to strict regulation. See Weintraub, 273 F.3d at 148. Therefore, the Second Circuit in Newman was similarly incorrect to find a tippee must know the illegality of his act to know that his conduct was wrongful (Newman, 773 F.3d at 450), because tippee liability rests on the tippee s knowledge of the breach under objective circumstances alerting him that the disclosure was for personal benefit. Thus, the tippee knows his conduct is wrongful and likely culpable, without knowing the particulars of the personal benefit. By instructing the jury that Dana was liable only if she traded itech stock on the basis of nonpublic information that she knew Alex disclosed for personal benefit (R. at 11), the district court correctly instructed the jury that Dana must know her conduct was wrongful. As a trader, Dana would know trading on confidential information that objective facts indicate was disclosed for personal benefit is subject to regulation, even without knowing the particular benefit, and therefore she willfully violated the statute. See Carter, 530 U.S. at 269. However, even if this Court agrees with the Thirteenth Circuit that to be liable a tippee must have knowledge of the nature of the personal benefit, it should still reverse. As the discussion supra shows, Dana had knowledge of the personal benefit Alex received when she knew he gifted confidential itech information to his cousin Ben. See Dirks, 463 U.S. at 664 (defining personal benefit to include the gift of information to a trading relative). 27

38 C. The Thirteenth Circuit Failed to Review the Jury Instructions for Harmless Error. The Thirteenth Circuit correctly reviewed for the existence of error de novo (United States v. Moran-Toala, 726 F.3d 334, 343 (2d Cir. 2013), but its analysis should not have ended there. Instructional errors that omit or mischaracterize an element of an offense, like the Thirteenth Circuit found here, receive harmless error review. See Neder v. United States, 527 U.S. 1, 10 (1999). Under the harmless error inquiry the court must assess whether it is clear beyond a reasonable doubt that a rational jury would have found the defendant guilty absent the error. Chapman v. California, 386 U.S. 18, 24 (1967). As the Newman court instructed, in determining whether it is clear beyond a reasonable doubt, [t]he harmless error inquiry requires us to view whether the evidence introduced was uncontested and supported by overwhelming evidence. Newman, 773 F.3d at 451 (quoting Neder, 527 U.S. at 18). Regardless of whether a gift of confidential information alone is sufficient to show personal benefit, the conversation between Ben and Corinne established Alex was deriving reputational benefits for providing market advice. (R. at 4). Thus, as the district court concluded [i]t would have been reasonable for the jury to infer that Alex knew and intended that his track record of helpfulness to Ben would one day allow him to call in the favor in some way. (R. at 16). This Court in Dirks, as well as the Thirteenth Circuit in its opinion below, identified such a reputational benefit that translated to future earnings as satisfying the element of personal benefit, and the jury was instructed accordingly. See Dirks, 463 U.S. at 663. Furthermore, this Court also stated that an intention to benefit the particular 28