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United States v. Stewart

United States Court of Appeals, Second Circuit

November 5, 2018

United States of America, Appellee,
v.
Sean Stewart, Defendant-Appellant, Richard Cunniffe, Robert Stewart, aka Bob, Defendants.

          Argued: February 26, 2018

         Defendant-appellant Sean Stewart appeals from a judgment of conviction entered on February 24, 2017, in the United States District Court for the Southern District of New York (Swain, J.). In connection with an insider trading scheme, the defendant-appellant was found guilty after a jury trial of conspiracy to commit securities fraud and tender offer fraud, in violation of 18 U.S.C. § 371; conspiracy to commit wire fraud, in violation of 18 U.S.C. § 1349; six counts of securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78f; and tender offer fraud, in violation of 15 U.S.C. §§ 78n(e) and 78ff. On appeal, the defendant-appellant argues that he was deprived of an opportunity to examine a key witness in light of that witness's improper invocation of the Fifth Amendment privilege against self-incrimination; that his due process rights were violated by the district court's decision not to immunize that witness in order to allow the witness to testify without fear of self-incrimination; and that several evidentiary errors were made. Although we disagree with the defendant's constitutional arguments, we nevertheless find that certain impeachment material that might have influenced the jury's deliberations should not have been excluded. Accordingly, the judgment of the district court is VACATED and REMANDED.

          Brooke E. Cucinella (Sarah K. Eddy, Brian Blais, and Margaret Garnett, on the brief), Assistant United States Attorneys, for Geoffrey S. Berman, United States Attorney for the Southern District of New York, New York, NY.

          Alexandra A.E. Shapiro, (Sean Nuttall, on the brief), Shapiro Arato LLP, New York, NY, for Sean Stewart.

          Before: Katzmann, Chief Judge, Leval, Circuit Judge, and Berman, District Judge. [*]

          PER CURIAM.

         This is an unusual insider trading case, in that defendant-appellant Sean Stewart does not contest that he provided material, nonpublic information to his father, Robert Stewart. Rather, Sean readily acknowledges that "he was very close to his father, routinely confided in him, and even occasionally mentioned potential deals," and that his father and others then invested based upon that information. Def. Br. 1. The key question facing the jury was whether to believe Sean when he denied that he knew that his father would trade on the information that Sean had provided. Evidently they did not, as Sean was convicted on all counts brought against him.

         The government's case largely hinged on the so-called "silver platter statement," in which Sean purportedly told Robert that he expected Robert to invest based upon information to which Sean had access through his work as an investment banker. In this matter, a silver platter proved to be the government's silver bullet. Because we agree that Sean should not have been precluded from impeaching the silver platter statement, however, we VACATE the conviction and REMAND this matter to the district court for further proceedings.[1]

         Background

         Sean Stewart testified that he was "very close" to his parents growing up and that he had an "excellent" relationship with his father, Robert Stewart, in particular. Tr. 1129-30. Into adulthood, Sean would regularly speak with his parents several times per week by phone and would see them in person once or twice per month. Among the topics that they often discussed were Sean's career and what he was working on. Although Sean knew that company policy forbade him from discussing confidential information with anyone other than his colleagues, he did not abide by that rule. Rather, he admitted that he "spoke very freely" with his family, explaining that he "grew up in a household where there were no secrets, and [his family] shared everything about [their] lives." Id. at 1189.

         Sean began working as an analyst at JP Morgan Chase in 2003. Among the matters that Sean worked on while at JP Morgan was the sale of a pharmaceutical research company, Kendle International, Inc. Robert began purchasing Kendle common stock on February 7, 2011, shortly after Sean had attended a kick-off meeting for the Kendle project. In addition, Robert asked a colleague, Mark Boccia, to make further investments in Kendle on Robert's behalf. Boccia began doing so in mid-February, with some of the investments made on his own behalf and some on behalf of Robert. Kendle's acquisition was publicly announced on May 4, 2011. The following day, Robert sold his Kendle securities, and, acting on Robert's advice, Boccia did the same. Boccia then paid Robert a share of his trading profits in cash.

         At around the same time, JP Morgan was also involved in the sale of Kinetic Concepts, Inc., a medical device company known as "KCI." Although Sean did not work on the KCI transaction directly, he was involved with ensuring that it was properly staffed. Boccia began purchasing KCI call options on behalf of both himself and Robert on April 5, 2011, with Robert this time telling Boccia that Sean "knew that [KCI was] going to merge." Id. at 371. Robert also asked another colleague, Richard Cunniffe, to purchase KCI call options on his behalf, explaining that he could not do so directly because "he was too close to the source." Id. at 623. Cunniffe began purchasing KCI call options on April 21, 2011. In addition, Robert began personally purchasing KCI common stock on May 5, 2011, the same day on which he had sold his Kendle shares. The KCI transaction was publicly announced on July 13, 2011, generating significant profits for Cunniffe and Robert, though Boccia's options had already expired by that time.

         Meanwhile, on May 25, 2011, Sean was made aware that the Financial Industry Regulatory Authority ("FINRA") was investigating suspicious trading in Kendle securities. In connection with that investigation, Sean was asked whether he knew any of the individuals whose names appeared on a list circulated by FINRA. Although Robert appeared on the list, Sean initially denied recognizing any of the listed names. JP Morgan requested that Sean review the list again after FINRA inquired further, at which time Sean acknowledged that the list included his father's name. JP Morgan's legal and compliance staff subsequently arranged to meet with Sean on August 26, 2011.

          The night before that meeting, Sean and Robert met at the Yale Club. According to Sean, he told Robert about the upcoming meeting and said that Robert's name had appeared on FINRA's list. Sean testified that he confronted his father about the Kendle trades because he was "confused, ashamed, [and] taken aback," and he "wanted to know why [Robert] would do something so foolish, so stupid," as Sean knew Robert might have learned of the Kendle transaction from their conversations. Id. at 1235. Sean described Robert as "embarrassed" and "nervous" upon being asked about Kendle, claiming to have invested based upon public information, though Sean did not believe him. Id.

         The following day, Sean told JP Morgan compliance and legal personnel that he had not discussed Kendle with his father. Sean has admitted that he "lied," explaining that he "was nervous about [Robert] getting in trouble" and recognized that his father's investments "would be potentially damaging for [his] prospects" professionally. Id. at 1236. Sean claimed that a few days after his meeting at JP Morgan, he told Robert "to never do that again, and [Robert] promised that he would not." Id. at 1237. Sean believed Robert, who Sean described as having been "pretty shaken up" by the experience. Id. at 1251.

         Although neither FINRA nor JP Morgan took any disciplinary measures against Sean, FINRA nevertheless referred the matter to the Securities and Exchange Commission, which conducted its own investigation. The SEC spoke with Robert, who acknowledged that Sean worked at JP Morgan but denied having discussed Kendle with Sean either before or after he had purchased the company's stock. The SEC subsequently closed its investigation without taking any enforcement action.

         Sean left JP Morgan for Perella Weinberg Partners, a boutique investment bank, in September 2011. While at Perella Weinberg, Sean worked on the acquisitions of Gen-Probe, Inc., and CareFusion, both medical device companies, and learned of the planned acquisition of Lincare Holdings, Inc., a home healthcare company. Cunniffe purchased the securities of each of these companies in advance of the acquisitions, doing so at the suggestion of Robert in each instance, and sold the securities after each acquisition was publicly announced. Each time, Cunniffe shared the investment proceeds with Robert.

         The profits from these five investments totaled $1.15 million. In approximate terms, Cunniffe received $1 million; Robert received $150, 000; and Boccia lost money as a result of the expiration of his KCI call options. There is no evidence that Sean directly profited from the investments.

         Unbeknownst to Robert, the Federal Bureau of Investigation approached Cunniffe sometime in the spring of 2015, after all of the investments at issue. Cunniffe decided to cooperate with the FBI, and subsequently recorded several conversations with Robert. Most relevant to this litigation is a conversation between Robert and Cunniffe that occurred on March 24, 2015, during which they had the following exchange regarding Robert's Kendle investments:

Robert: And then like about a year later I get a call from the SEC questioning me on that transaction. [Indiscernible] 5, 000 dollar transaction. What are they gonna do? And then nothing happened. I don't know what they're doing now. I figure it's a 3 year statute, 4 year, 5 year whatever it it's way way over that. But it pretty much put a fear in me that a [indiscernible].
Cunniffe: Would scare the shit out of me [indiscernible] that's for sure.
Robert: Yeah. I mean I still, I still remember being [indiscernible] years ago. Sean would always say, ah I can't believe you [indiscernible]. Said I can't believe it. I handed you this on a silver platter and you didn't invest in this, and you know. I said, Sean, did you ever get a call from the SEC, like I'm gonna actually do this [indiscernible], and he says [indiscernible]. I mean [Laughter]. Yeah, that is something.

Supp. App. 143-44 (alterations in original, emphasis added). The district court referred to the italicized portion of this conversation as the "silver platter statement," nomenclature which we hereby adopt.[2]

         Robert was arrested and interviewed by the FBI shortly thereafter. During the attendant questioning, Robert claimed that Sean only learned of the Kendle trades "after the fact," at which point Sean became "[s]urprised and ang[ry]," prompting Robert to acknowledge that "it was stupid" for him to have invested. S.D.N.Y. Dkt. No. 120-2 at 11, 16. When asked why Sean told Robert about other deals that he was working on following the Kendle episode, Robert speculated that Sean "figured I probably wouldn't do it again-you know-in his eyes, y'know-I'm his father-I'm-y'know-on a pedestal." Id. at 16. Robert repeatedly denied that Sean was aware of any of the other investments or that Sean had intended that Robert would trade on any of the information that Sean had provided.

         The FBI asked Robert twice about the silver platter statement. The following colloquy occurred near the start of the interview:

FBI: [H]ow do you explain a comment you made to Rick [Cunniffe], that Sean got angry with you when he gave you this information on a silver platter and you didn't invest.
Robert: I think I was just saying to Rick because Sean said, "Uh y'know, all these deals-if you were trading-you could have made like millions of dollars[, ]" and I said, "Sean nobody's going to trade and make millions of dollars on this stuff." That wasn't his intention.
FBI: So why was Sean giving you this information?
Robert: I think he was just proud of the fact that he was doing deals and y'know, almost like ["]hey, this deal is going to go way up[, "] not intending that somebody was going to trade on it.

Id. at 1-2. Subsequently, the interview returned to the same topic:

FBI: So why did he get mad at you? Why did he get mad at you and say, "I served this up to you on a silver platter and you didn't invest in it." Why did he get mad at you about that?
Robert: Um, I think that-that day, he was clearly drinking.
FBI: You remember that day specifically?
Robert: I remember-y'know-during that period, because he was getting divorced, he's-y'know-and um, he just said[, ] I think he might've said, "Y'know, Uh, y'know, I said I was working on this deal-gee, if you had invested, you would've made millions of dolars." And I said, "Sean, y'know, people[, ] y'know[.]"
FBI: Get arrested for that?
Robert: "Get arrested for making millions and millions of dollars on confidential information."
FBI: Mmhm.
Robert: And that was the end of the conversation.

Id. at 11.

         The operative indictment was filed in the Southern District of New York on July 15, 2015, charging both Sean and Robert with conspiracy to commit securities fraud and tender offer fraud, conspiracy to commit wire fraud, tender offer fraud, and six counts of securities fraud. Robert pleaded guilty to a single conspiracy count on August 12, 2015, while Sean proceeded to trial. The parties engaged in extensive motion practice before that trial commenced. The following recitation reflects only those motions and rulings as are relevant to this appeal.

         First, Sean moved to preclude introduction of the silver platter statement as hearsay. The district court denied that motion, reasoning that Robert's relaying of the statement to Cunniffe was against Robert's penal interest.

         Having failed to exclude the silver platter statement, Sean subsequently moved for leave to introduce Robert's post-arrest statements to the FBI in order to impeach the credibility of the silver platter statement. That, too, was denied, on the ground that Robert did not specifically state that the silver platter statement had not been made.

         Next, Sean sought to compel Robert's testimony via subpoena. Robert responded by invoking his Fifth Amendment right against self-incrimination in response to each topic on which either Sean or the government hoped to inquire, after which the district court conducted an in camera proceeding with only Robert and his counsel present to assess the viability of Robert's claimed privilege. The district court thereafter sustained Robert's invocation of the Fifth Amendment.

         As a last resort, Sean sought to have Robert immunized in order to allow him to testify without the risk of self-incrimination. The district court denied that request as well, finding an absence of extraordinary circumstances that would merit providing Robert with immunity for his testimony.

         Sean's trial began on July 27 and concluded on August 9, 2016. The cornerstone of his defense was his professed belief that he could trust his father, who Sean not did intend or expect would misappropriate his confidences for pecuniary gain. To rebut that argument, the government relied heavily on the silver platter statement. The jury convicted Sean on all counts on August 17, 2016. This appeal followed.

         Discussion

         I. Privilege Against Self-Incrimination

         In relevant part, the Fifth Amendment provides that "[n]o person . . . shall be compelled in any criminal case to be a witness against himself." U.S. Const. amend. V. "The privilege afforded not only extends to answers that would in themselves support a conviction under a . . . criminal statute but likewise embraces those which would furnish a link in the chain of evidence needed to prosecute the claimant for a . . . crime." Hoffman v. United States, 341 U.S. 479, 486 (1951). "To sustain the privilege, it need only be evident from the implications of the question, in the setting in which it is asked, that a responsive answer to the question or an explanation of why it cannot be answered might be dangerous because injurious disclosure could result," the assessment of which requires that the trial judge "'be governed as much by his [or her] personal perception of the peculiarities of the case as by the facts actually in evidence.'" Id. at 486-87 (quoting Ex Parte Irvine, 74 F. 954, 960 (C.C.S.D. Ohio 1896) (Taft, J.)).

         The danger that Robert's potential testimony posed to him is evident from the subject-matter on which the parties sought to question him. Those topics were submitted in advance to the district court and clearly related to both his trading activities and the veracity of his prior statements to the FBI and SEC. Robert expressly invoked his Fifth Amendment privilege against self- incrimination with respect to each such topic, after which the district court discussed these issues further with Robert's counsel in camera. Moreover, the government made clear that it believed Robert had engaged in additional insider trading for which he had not been charged and that he had also violated 18 U.S.C. § 1001(a) by making false statements to federal law enforcement officials.

         Although trial judges must engage in a "particularized inquiry as to whether each of [a witness's] claims of privilege could provide evidence that would tend to incriminate him" if the danger of self-incrimination "is not readily apparent from the implications of the questions asked or the circumstances surrounding the inquiry," this is not such a case. Estate of Fisher v. Comm'r of Internal Revenue, 905 F.2d 645, 649, 651 (2d Cir. 1990). Where the hazards of self- incrimination are readily apparent, a witness's invocation of the privilege against self-incrimination need not be tested by the rote recitation of questions that have obvious answers of which the judge is already aware.

         II. Procedural Due Process

         "The government is under no general obligation to grant use immunity to witnesses the defense designates as potentially helpful to its cause but who will invoke the Fifth Amendment if not immunized." United States v. Ebbers, 458 F.3d 110, 118 (2d Cir. 2006). Nevertheless, "under 'extraordinary circumstances,' due process may require that the government confer use immunity on a witness for the defendant." United States v. Praetorius, 622 F.2d 1054, 1064 (2d Cir. 1979). A defendant requesting such relief must make a two-pronged showing:

First, the defendant must show that the government has used immunity in a discriminatory way, has forced a potential witness to invoke the Fifth Amendment through overreaching, or has deliberately denied immunity for the purpose of withholding exculpatory evidence and gaining tactical advantage through such manipulation. . . . Second, the defendant must show that the evidence to be given by an immunized witness will be material, exculpatory and not cumulative and is not obtainable from any other source.

Ebbers, 458 F.3d at 119 (internal quotation marks and citations omitted). "We review the court's factual findings about government actions and motive for clear error, but its ultimate balancing for abuse of discretion," although the situations in which conferring immunity would be required are "[s]o few and exceptional" that "we have yet to reverse a failure to immunize." United States v. Ferguson, 676 F.3d 260, 291 (2d Cir. 2011). This case is no exception.

         Sean first argues that the district court engaged in discriminatory tactics by conferring immunity on Boccia while declining to immunize Robert. The district court did not abuse its discretion in rejecting that argument. "Our Circuit's approach to defense witness immunity . . . recognizes the essential unfairness of permitting the Government to manipulate its immunity power to elicit testimony from prosecution witnesses who invoke their right not to testify, while declining to use that power to elicit from recalcitrant defense witnesses testimony" that might exculpate a defendant. United States v. Dolah, 245 F.3d 98, 106 (2d Cir. 2001), abrogated on other grounds by Crawford v. ...


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