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United States v. Walters

United States Court of Appeals, Second Circuit

December 4, 2018

United States of America, Appellee,
William T. Walters, Defendant-Appellant, Thomas C. Davis, Defendant.

          Argued: May 29, 2018

          On Appeal from the United States District Court for the Southern District of New York

         Appeal from a judgment of conviction and orders of forfeiture and restitution entered in the United States District Court for the Southern District of New York (Castel, J.). Defendant-appellant was convicted, after a three-week jury trial, of securities fraud and related crimes. On appeal, he contends that his indictment should be dismissed because a special agent of the Federal Bureau of Investigation leaked confidential grand jury information to reporters in violation of the grand jury secrecy provision of Federal Rule of Criminal Procedure 6(e) and the Due Process Clause of the Fifth Amendment. Defendant-appellant also raises several other challenges to his conviction, as well as to the district court's forfeiture and restitution orders.

          Brooke E. Cucinella, Assistant United States Attorney (Robert Allen, Michael Ferrara, Sarah K. Eddy, Assistant United States Attorneys, on the brief), for Geoffrey S. Berman, United States Attorney for the Southern District of New York, New York, New York, for Appellee.

          Alexandra A.E. Shapiro (Eric S. Olney, Jacob S. Wolf, on the brief), Shapiro Arato LLP, New York, New York, and Barry H. Berke, Paul H. Shoeman, Kramer Levin Naftalis & Frankel LLP, New York, New York, for Defendant-Appellant.

          Before: Jacobs and Chin, Circuit Judges, and Kuntz, Judge. [*]


         In this case, defendant-appellant William T. Walters, a professional sports gambler, was convicted, after a three-week jury trial, of securities fraud and related crimes based on his insider trading in shares of Dean Foods, Inc. ("Dean Foods") and Darden Restaurants, Inc. ("Darden"). Walters was sentenced principally to 60 months' imprisonment and a $10 million fine, and ordered to forfeit $25, 352, 490 and pay restitution of $8, 890, 969.33.

         On appeal, Walters argues that the indictment in this case should be dismissed because of what he terms "extraordinary government misconduct" - a special agent of the Federal Bureau of Investigation (the "FBI") leaked confidential grand jury information about the investigation to reporters from The Wall Street Journal (the "Journal") and The New York Times (the "Times"), in violation of the grand jury secrecy provision of Federal Rule of Criminal Procedure 6(e) and the Due Process Clause of the Fifth Amendment. Walters also challenges his conviction on the grounds that (1) the prosecution suborned perjury at trial and (2) there was insufficient evidence to support the counts of conviction related to Darden. Finally, Walters contends that the district court erred in ordering restitution and forfeiture.

         For the reasons set forth below, the judgment and order of forfeiture are AFFIRMED; the order of restitution is VACATED; and the case is REMANDED for the district court to reconsider restitution in light of the Supreme Court's decision in Lagos v. United States, 138 S.Ct. 1684 (2018).


         A. The Initial Investigation

         In July 2011, the FBI and the U.S. Attorney's Office (the "USAO" or the "Government") began an investigation into Walters for suspicious trading in shares of the Clorox Company ("Clorox").[1] In connection with the investigation, the Government issued approximately 30 grand jury subpoenas for phone records, bank records, trading records, and credit reports. Special Agent Matthew Thoreson was the FBI's primary case agent for the investigation. His supervisor was FBI Special Agent David Chaves.

          On April 26, 2013, the Financial Industry Regulatory Authority ("FINRA") made a referral to the SEC of suspicious trading by Walters and others in Dean Foods stock shortly ahead of an August 2012 announcement that Dean Foods, a Dallas-based dairy and food company, intended to spin off its branded dairy business, WhiteWave. The SEC shared FINRA's referral with the USAO, and the revelation of Walters's close relationship with Thomas Davis, a member of Dean Foods's board of directors, caused the Government to broaden its investigation to include trading in Dean Foods and other companies. The Government issued grand jury subpoenas for Davis's phone records and accounts, and subpoenas for phone and account records for Walters and others in communication with him around the time of the Dean Foods trades.

         Approximately one year into the investigation, on April 22, 2014, the Government received authorization to conduct a 30-day wiretap on Walters's cellphone. It received a second authorization for a 30-day wiretap on May 23, 2014. Shortly after the second authorization, however, the USAO learned that reporters planned to publish a story about the investigation.[2]

         B. The News Articles

         On May 30, 2014, the Journal published an article revealing the existence of an insider trading investigation into Walters, Carl Icahn, and Phil Mickelson. The Times followed with a story the same day. Additional articles appeared in the Times on May 31 and in the Journal on June 1. The articles contained detailed confidential information about the investigation and attributed the information to "people briefed on the matter" who "spoke anonymously because they were not authorized to discuss the investigation." App. 78-83, 318-20. The articles disclosed details about when the investigation began, who the targets were, which stocks were traded, what specific trades were being investigated, when those trades took place, what evidence was being examined, which investigative techniques were being employed by investigators, and which "theor[ies]" the Government was "exploring," including, e.g., that an inside source gave Walters a heads-up about Dean Foods's plan to spin off WhiteWave. App. 78-99, 321-24.

         Throughout June 2014, several follow-up articles appeared in the Journal and the Times. The articles discussed ongoing details of the investigation into Walters, including information about subpoenas issued to Dean Foods. The articles reported that, for example, federal prosecutors had requested documents from Dean Foods, and certain targets of the broader investigation "ha[d] not received any subpoenas from the authorities." App. 92, 94. The June articles also attributed information about the investigation to "people briefed on the probe." App. 91. The last article at issue, which was published by the Journal on August 12, 2015, identified Davis as a target of the investigation.

         C. The News Leaks

         As discussed further below, it was eventually revealed that from April 2013 through June 2014, FBI Special Agent Chaves had provided information about the investigation to as many as four reporters from the Times and the Journal.

         Specifically, in later interviews, Chaves admitted that in April 2013 he had met with two reporters from the Times for dinner and discussed the investigation into Clorox, mentioning Walters by name. Moreover, Chaves stated that he had met with a reporter from the Journal in late 2013 and asked her “to let him know if she came across any information regarding Walters." App. 221. Chaves also acknowledged having dinner with three reporters from the Times in April 2014 in which the investigation was discussed, including the expansion of the investigation to trading in stocks other than Clorox.

         The USAO and FBI learned about the media's intention to publish an article in early May 2014. Specifically, on May 6, 2014, a Times reporter invited J. Peter Donald, then an FBI New York Field Office media representative, to meet for coffee and stated that she planned to publish a piece on the investigation. On May 8, 2014, the FBI informed the USAO that the Journal also planned to publish an article.

         On May 13, 2014, Donald spoke with other persons at the Journal who agreed to hold the story about the investigation until at least May 22, 2014. Sometime after that conversation on May 13, it appears that the FBI and USAO discussed available options for getting the newspapers to continue to hold their stories, and that ultimately, on May 27, 2014, Chaves, Donald, and several other FBI agents participated in a meeting with the Journal. Two agents, including Chaves, insist that others besides him disclosed "various aspects of the investigation" in exchange for the Journal agreeing to hold publication. The remaining three agents deny this, although one Times reporter told the USAO that he had multiple "sources" about the investigation. App. 220.

         In a May 28, 2014 email to Chaves, Special Agent Thoresen wrote, in reference to learning that reporters had detailed information about the Walters investigation: "Whomever is leaking[] apparently has a specific and aggressive agenda in that they are now going to other media outlets in an effort to derail this investigation." App. 229.

         On May 30, 2014, the day the first Journal and Times articles were published, George Venizelos, the Assistant Director in Charge of the New York Field Office, emailed Donald, Chaves, and others, asking how the reporter had learned certain information and instructing FBI personnel to cease any contact with the reporter, stating that if he found out anyone continued to speak to the reporter, "there will be reassignments immediately." App. 231.

         After the May 31, 2014 Journal article was published, Thoresen forwarded the article to the Assistant United States Attorney ("AUSA") responsible for the investigation, describing the article as "[d]eplorable and reprehensible." App. 235.

          On June 1, 2014, the U.S. Attorney at the time, Preet Bharara, also forwarded a link to a second Journal article to Venizelos, stating "I know you agree these leaks are outrageous and harmful." App. 236. Venizelos then emailed Donald, Chaves, and others, stating that the articles were "now an embarrassement [sic] to this office," and instructing them to meet with him to discuss the issue the next morning. App. 236.

On June 2, 2014, Venizelos met with FBI personnel, expressed anger over the leaks, and again instructed agents to cease contact with the media. Despite Venizelos's directive, however, Chaves appears to have communicated with reporters about the investigation sometime between June 2 and June 11, 2014, though he switched to using his personal cell phone and deleted his personal email account. As noted above, the articles continued into 2015.

         D. The Indictment

         In February 2016, Davis advised the Government that he wished to cooperate, and, in meeting with the Government, he quickly implicated Walters. On May 16, 2016, he pled guilty, pursuant to a cooperation agreement, to a 12-count information. On May 17, 2016, the very next day and almost two years after the first articles were published, the USAO and the FBI presented evidence to a grand jury that Walters had communicated with and received inside information from Davis prior to his purchase or sale of large quantities of Dean Foods stock and those trades resulted in significant profits or avoided losses when news about the company later became public.[3] To support its theory, the Government presented summaries of Walters's trading and phone records, along with information drawn from contemporaneous Dean Foods board meeting minutes and earnings announcements. The grand jury also heard a summary of Davis's expected trial testimony, which was to include, among other things, that Davis had provided Walters with material nonpublic information about Dean Foods along with another company, Darden; made false statements to prosecutors; intentionally destroyed a burner cellphone (referred to at trial as the "bat phone") that Davis used to communicate material nonpublic information to Walters; and entered into a cooperation agreement with the Government pursuant to which he pled guilty.

         The grand jury returned a 10-count indictment the same day, charging Walters with conspiracy, securities fraud, and wire fraud related to insider trading in Dean Foods and Darden. Walters was arrested on May 18, 2016.

         E. Motion for Hearing on the News Leaks

         On September 23, 2016, Walters filed a motion for a hearing on the issue of the news leaks. In his motion, Walters argued that the content of the news articles made clear that the Government must have improperly leaked grand jury information to reporters in violation of the grand jury secrecy provision, Federal Rule of Criminal Procedure 6(e).[4] Walters alleged that the Government leaked this information "as part of a concerted effort to breathe life into a flagging investigation." App. 108. On October 21, 2016, the Government opposed the motion on the basis that Walters had failed to show a Rule 6(e) violation. First, the Government argued that the articles did not necessarily include "matters occurring before the grand jury" because the articles did not contain any information from the referenced records or subpoenas and at least some of the information was public or not protected by the grand jury secrecy provisions. App. 186, 202-05. Second, the Government argued that Walters could not show that the source of the information was a Government agent or attorney: "None of the articles linked a source directly to the Government-Government representatives declined to comment, and civil regulators and others - who are not bound by Rule 6(e) - also had access to the information contained in the articles. App. 206-09. According to the Government, the "natural and logical inferences lead to the conclusion that the source was not a Government official." App. 209.

         The district court issued an order on November 17, 2016, directing the parties to prepare for an evidentiary hearing to determine whether there had been communications between FBI agents or AUSAs involved in the investigation and reporters or employees of the Journal and Times from April 1 to June 30, 2014. In response to the court's directive, the Government identified 14 agents and AUSAs whom it intended to interview in connection with the news leaks. The Government also obtained emails, cell phone logs, and text messages for those individuals for the time period specified by the court.

         On December 16, 2016, a few days before the scheduled hearing, the Government submitted an ex parte letter to the court under seal in which it informed the district court that it had conducted an internal inquiry and that, contrary to its earlier position, it had learned that an FBI agent - Chaves - was the media's source of confidential information about the investigation.[5] The Government acknowledged that "[i]t is now an incontrovertible fact that FBI leaks occurred, and that such leaks resulted in confidential law enforcement information about the Investigation being given to reporters." App. 217.[6] It represented that Chaves had been referred by the FBI to its Office of Professional Responsibility and by the USAO to the Office of Inspector General for the Department of Justice ("DOJ") for his misconduct.[7]

         In its letter, the Government provided the district court with a detailed chronology, summary of findings, and contemporaneous internal emails relating to the leaks. It explained, however, that because "much about the scope and content of the information that Chaves leaked to reporters remains unclear," App. 219, it believed "that the appropriate course is for the Court to assume that a Rule 6(e) violation occurred and proceed to consider the issue of remedy," App. 218.

         In light of the Government's letter, the district court indicated it would presume a Rule 6(e) violation occurred and cancelled the hearing.

         F. Motion to Dismiss the Indictment

         On January 13, 2017, Walters moved to dismiss his indictment on the bases that (1) he was prejudiced by the leaks because they caused Davis to cooperate against him; (2) even absent a showing of prejudice, the indictment should be dismissed because the leaks involved "systematic and pervasive" prosecutorial misconduct; and (3) the Government's conduct was so "outrageous" that it violated the Due Process Clause of the Fifth Amendment. App. 240.

         The district court denied the motion in a written decision on March 1, 2017. First, it held that Walters's contentions as to prejudice amounted to "sheer speculation" because "there is no reason to think that Davis would not have been indicted" in the absence of the government misconduct and articles. Sp. App. 13-14. Second, the court rejected Walters's argument that he was not required to show prejudice because the misconduct at issue was "systematic and pervasive/ noting that the court was "not aware of any case in which an indictment was dismissed" on such grounds. Sp. App. 17. Third, the court rejected Walters's due process argument on the basis that the doctrine was inapplicable to his case and that "[t]he proper remedy here is to investigate and, if appropriate, prosecute the offender, rather than dismiss the indictment." Sp. App. 19.

         Finally, the district court concluded that an evidentiary hearing was unnecessary because "Chaves has indicated that he will refuse to answer questions," and "[i]n any event, the Court has been provided sufficient evidence . . . to make a ruling." Sp. App. 16. On March 1, 2017, the district court issued an order requiring the Government to submit information on a quarterly basis on the status of the investigation into Chaves's misconduct. See March 1, 2017 Memorandum and Order, D. Ct. Dkt No. 104, at 2.

         G. ...

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