Wednesday, March 11, 2015

Manhattan U.S. Attorney Still Feeling Effects of Newman

[This story previously appeared in Securities Regulation Daily.]

By Mark S. Nelson, J.D.

The U.S. Attorney’s Office in Manhattan recently filed a letter with federal Judge Valerie E. Caproni in the insider trading case of John Johnson to clarify that Johnson’s allocution and guilty plea from two years ago is no longer sufficient in light of the Second Circuit’s Newman opinion. Still, the government said it is ready to go to trial in Johnson’s case, or to have the court let him amend the allocation and re-plead. Judge Caproni had asked the government for its views last month (U.S. v. Johnson, March 6, 2015).

Johnson agreed to be prosecuted by a March 2013 information (rather than indictment) accusing him of conspiracy and with engaging in insider trading in violation of Exchange Act Section 10(b). According to the U.S. Attorney’s letter to Judge Caproni, Johnson’s testimony in another criminal case suggested that he chose not to find out key details about a tipper’s source of information concerning the expected acquisition of Foundry Networks, Inc. by Brocade Communications Systems, Inc. This showed Johnson’s attempt to create “a plausible level of deniability” about his trading, said the government.

Johnson, a second-degree tippee, had testified in the government’s case against David Riley. In that case, Judge Caproni last week denied Riley’s bid for judgment of acquittal or for a new trial based on the strength of the evidence against Riley, despite the Newman opinion. The judge was unpersuaded by Riley’s argument that Johnson could not have committed a crime under Newman. But the judge did acknowledged Newman would have influenced the wording of the jury instructions in Riley’s case had the Second Circuit issued its opinion earlier.

In Riley, Judge Caproni also rejected Riley’s argument that Johnson’s plea deal inadequately showed Johnson’s personal knowledge that the initial tipper got a benefit. Put another way, the judge in Riley said Johnson’s credibility as a witness who said he got material, nonpublic information and had pleaded guilty was unaffected by any conceivable post-Newman shift in Johnson’s motivation to testify favorably to the government. As a result, there was no plain error or prejudice to Riley from Johnson’s testimony.

The Newman case has brought renewed national attention to what until now has been a highly successful insider trading strategy pursued by Manhattan U.S. Attorney Preet Bharara, whose office has vigorously objected to the Newman panel’s outcome. The government currently seeks panel or en banc rehearing by the Second Circuit. The SEC also has urged the Second Circuit to upend Newman. Meanwhile, several other individuals who entered pre-Newman insider trading guilty pleas recently won a reprieve in another case from a federal judge who vacated their earlier pleas and instead entered pleas of not guilty based on Newman.

The case is No. 13Cr190.