A golfer convicted of trading on a tip passed to him by a fellow country-club member lost his appeal to the First Circuit. The men’s friendship and the tipper’s testimony provided sufficient evidence of a personal benefit. Furthermore, while the trial court clearly erred in instructing the jury on state of mind, the error did not “seriously impair” the integrity of the proceedings (U.S. v. Bray, February 24, 2017, Stahl, N.).
The stock tip. Both tipper and tippee were members of the Oakley Country Club in Watertown, Massachusetts, making this the third insider trading case from that club to come before the First Circuit in the last year. The defendant, a real-estate developer, was friendly with the tipper, an executive in the due-diligence team at Eastern Bank. In 2010, the defendant asked for “bank stock tips.” The Eastern Bank executive wrote the word “Wainwright” on a napkin and passed it to the defendant.
The next day, the defendant placed an order for 25,000 shares of Wainwright Bank & Trust stock, which had an average trading volume of around 1000 to 2000 shares per day. He liquidated much of his portfolio to buy more shares over the next two weeks. Eastern Bank then publicly announced its agreement to acquire Wainwright for $19 per share, nearly double the previous day’s closing price. The defendant then offered the tipper an investment opportunity. The defendant netted about $300,000 when he sold his shares pursuant to the acquisition agreement.
Sufficiency of evidence. The defendant challenged the conviction under the government’s misappropriation theory. Under Dirks and, more recently, Salman, a tippee can be liable for trading on misappropriated information where the tipper personally benefits from sharing the information. The defendant admitted that he traded based on material, nonpublic information and that the tipper breached his duty of loyalty and confidentiality. The defendant argued, though, that there was insufficient evidence that the tipper expected a personal benefit or that the defendant had knowledge of such an expectation or breach of fiduciary duty.
The court determined that there was sufficient evidence of the men’s friendship from which to infer a personal benefit. The defendant argued that the men were only casual rather than close friends, falling short of the Dirks standard. The Second Circuit in U.S. v. Newman held that it could not infer a personal benefit in the absence of proof of a meaningfully close personal relationship. The Supreme Court abrogated part of the Newman holding in Salman, but did not discuss the “meaningfully close personal relationship” language.
The First Circuit likewise did not need to go that far, instead holding narrowly that the record evidence and testimony provided a sufficient basis for a reasonable jury to conclude that the tipper acted in expectation of a personal benefit. The tipper testified that he and the defendant had known each other for 15 years and often socialized together. The defendant also bonded with the tipper’s son. The tipper also testified that he “figured the tip would enhance” his reputation with the defendant, from which a reasonable jury could infer that he expected a benefit down the road.
Such a jury could also have inferred that the defendant knew the tipper expected to benefit personally from sharing the information and knew that the tipper had breached a duty of confidentiality. Until the Wainwright tip, the executive had only given the defendant investing advice based on publicly available information. Only after the defendant expressly requested a tip on which he could make a “big score” did the tipper provide the Wainwright tip, and the defendant did not comment or ask questions.
Jury instructions. The defendant also argued that the trial court clearly erred by instructing the jury that it could convict if he “should have known” that the tipper had an obligation to keep the Wainwright information confidential. He also claimed that the trial court wrongly equated the concept of “willful blindness” with negligence. The appeals court agreed that there was plain error on both these points. However, to establish reversible plain error, the defendant must show not only that a clear or obvious error occurred, but that the error affected his substantial rights and seriously impaired the fairness, integrity, or public reputation of the judicial proceedings.
The defendant could not satisfy the last prong of this test. Unlike a First Circuit case finding “serious impairment,” here the government’s case was sufficiently strong that it was unlikely a properly instructed jury would have acquitted. The district court also emphasized to the jury that the government had to prove the defendant acted willfully, knowingly, and with the intent to defraud—hardly rendering state of mind an inconsequential afterthought.
The case is No. 16-1579.
The case is No. 16-1579.