An appeals court ruling that reversed the convictions of six brokers and traders for misusing brokerage firm “squawk boxes†was a setback for the Justice Department.
The court, which found that prosecutors violated a central tenet of due process, went so far as to question whether the government should try again to convict the defendants and called the violation “entirely preventable.†This is only the latest case in which the government failed to turn over important information and raises questions about whether prosecutors can abide by the rules.
The squawk box case involved brokers from Merrill Lynch, Lehman Brothers, and Smith Barney who allowed traders from A.B. Watley, a day-trading firm, to listen to the firm's in-house broadcasts that included pending client orders to buy or sell large blocks of stock. The Watley traders used information gleaned from the conversations to trade ahead of the execution of the customer orders, a practice known as â €œfrontrunning.â€
Last week, in United States v. Mahaffy, the United States Court of Appeals for the Second Circuit ruled that the Justice Department had violated the defendants' rights after it withheld material that the government had in its files that could be helpful to the defense.
The obligation to turn over what is known as “Brady material†stems from the Supreme Court's seminal decision in Brady v. Maryland, which found that it violated a defendant's due process right for the government to withhold from the defense critical evidence.
In the squawk box case, the government originally charged the defendants with multiple counts of securities fraud, witness tampering and conspiracy. The first trial ended with an acquittal on almost all the charges for most defendants, but the jury was unable to reach a verdict on one count of conspiracy to commit securities fraud.
Prosecutors decided to retry the conspiracy count on the theory that letting the Watley traders listen to the squawk boxes defrauded the firms through the improper disclosure of confidential information about customer orders. The defense argued that information broadcast on the squawk boxes was not confidential, and therefore disclosing it did not deprive the firms of any property.
The jury convicted the defendants after the retrial, based in part on the testimony of witnesses from the brokerage firms who said that customer order information was in fact confidential.
The appeals court, however, overturned the convictions because the prosecutors did not provide the defense with transcripts from the Securities and Exchange Commission investigation of the Watley trading operation. In those transcripts, other witnesses from the brokerage firms testified that order information transmitted over the squawk boxes was “sensitive†but not considered confidential. The transcripts only came to light after the second criminal trial when the S.E. C. turned them over to the defendants as part of the discovery in its civil enforcement case.
The transcripts would not necessarily have resulted in an acquittal in the criminal case, but it certainly would have been helpful to the defense in cross-examining witnesses who claimed the customer order information was “confidential.†If nothing else, it could have undermined the government's argument that the order information constituted valuable property, a key element to prove the securities fraud conspiracy.
The failure to disclose the information is mystifying because an S.E.C. lawyer assigned to help on the criminal case even cautioned the other prosecutors that at least one transcript contained Brady material.
But the prosecutors in the second case decided not to revisit decisions made by other prosecutors before the first trial, apparently never reviewing the materials gathered by the S.E.C. to determine whether they contained exculpatory evidence.
There is no clear test for when evidence rises to the level of being “exculpatory,†thereby requiring the government to disclose it to the defense.
In a street crime case, it is often easier to determine what is helpful to the defendant. In Brady v. Maryland, for example, the prosecution withheld a co-defendant's statement that he had killed the victim, information crucial in deciding whether to impose the death penalty.
In a white-collar crime case, the major issues are more likely to revolve around fuzzier issues like a defendant's intent and the legal meaning of particular terms, such as “confidential.â€
What is exculpatory rarely leaps off the page, unlike direct information on the identity of a murderer or robber. Therefore, prosecutors in white-collar cases have to be much more careful in assessing what evidence has to be turned over.
The label “prosecutorial misconduct†is often assigned to cases involving violations of the Brady disclosure obligation because the decision on whether information is exculpatory is made initially by the prosecutor, not the judge. Unlike in civil cases, which involve broad discovery, federal criminal cases allow much more limited discovery by the defendant, so there is a greater chance that information the defense considers important might not come to light before trial.
One of the most prominent cases involving a Brady violation involved former United States Senator Ted Stevens of Alaska, whose conviction was overturned and the charges dismissed because of government misconduct. A 672-page report on the case excoriated prosecutors for repeated Brady violations.
After the report about Mr. Stevens's case, a bill was introduced in the Senate called the Fairness in Disclosure of Evidence Act, which would require prosecutors to turn over all evidence that “may reasonably appear to be favorable to the defendant.†This standard is much broader than the current requirement under the Brady case, which is limited to material evidence that goes to a defendant's guilt or punishment.
Not surprising, the Justice Department opposes the legislation. The deputy United States attorney general, James M. Cole, testified at a Senate Judiciary Committee hearing in June that the problems in the Stevens case “does not suggest a systemic problem warranting a significant departure from longstanding criminal justice practices.â€
Unfortunately, the squawk box case is another example of the failure of federal prosecutors to adhere to their obligation to disclose information when it was sitting right in front of them. Although there may not be a “systemic problem,†that is little solace to individuals facing the prospect of criminal prosecution without the tools to adequately defend themselves.
Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University L aw School.
