TIMOTHY C. BATTEN, SR., District Judge.
This case comes before the Court on Defendants' objections to Magistrate Judge Russell G. Vineyard's non-final report and recommendation [99], recommending denial of Defendants' motions to sever [40 & 53] and motions to strike surplusage [42, 54 & 56-1], and his final report and recommendation [118], recommending denial of Defendants' pending motions to dismiss the indictment and motion to suppress evidence [46, 48, 51, 57, 71, 75, 80, 82, 84 & 86]. Also before the Court are Berry's motion for reconsideration of Judge Vineyard's ruling on his motion for a bill of particulars [104] and Cain's motion for a speedy trial [43], motion to expedite the trial date [88], and supplemental motion to sever [137].
On December 2, 2014, a grand jury returned an indictment against Defendants Thomas D. Melvin, C. Roan Berry, Michael S. Cain, and Joel C. Jinks, charging seven counts of securities fraud in violation of 18 U.S.C. §§ 1348 and 2. The indictment alleges that from about December 4, 2009 through January 14, 2010, Defendants knowingly and willfully executed and attempted to execute "a scheme and artifice (1) to defraud other persons in connection with stock securities of Chattem, Inc. and (2) to obtain, by means of false and fraudulent pretenses, representations, and promises, money and property in connection with the purchase and sale of stock" of Chattem, Inc. [1] at ¶ 1.
According to the indictment, Defendant Melvin was a certified public accountant licensed in Georgia and a partner in the accounting firm of Melvin, Rooks & Howell in Griffin, Georgia. He served as the personal accountant for Defendants Berry,
According to the indictment, Chattem, an over-the-counter pharmaceutical manufacturer, was a public company whose stock was traded on the NASDAQ stock market. Chattem's securities were registered with the U.S. Securities and Exchange Commission (the "SEC") pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and it was required to file reports with the SEC pursuant to Section 15(d) of the Exchange Act.
Around late 2009, Chattem entered into discussions with Sanofi-Aventis, a French pharmaceutical company, regarding Sanofi's potential acquisition of Chattem. Around November 2009, Chattem's board of directors held a series of confidential meetings in which they discussed Sanofi's proposed acquisition of Chattem at a price of over $90 per share.
Melvin provided accounting services to one of Chattem's board members who was present in the November 2009 board meetings. Around December 4, 2009, this board member met with Melvin to obtain personal tax advice, and during this meeting the board member provided confidential information about the transaction, including the approximate time of the deal and information from which the likely acquisition price was apparent. The board member told Melvin that the information discussed during their meeting was confidential. The indictment states that the Georgia State Board of Accountancy prohibits accountants from disclosing confidential information obtained in the course of performing professional services without client consent.
According to the indictment, Melvin disclosed material, nonpublic information (referred to in the indictment as "Inside Information") regarding Sanofi's planned acquisition of Chattem to Berry, Cain, Jinks, and another person ("Person A") who worked at Melvin's accounting firm. The indictment alleges that Melvin made this disclosure "for his own personal benefit and in violation of duties of trust and confidence, with the understanding that the Inside Information would be used for the purpose of purchasing or selling securities." [1] at ¶ 4. It alleges that Berry, Cain, Jinks, and Person A, "aided and abetted by" Melvin, "carried out the scheme and artifice to defraud by misappropriating Inside Information of Chattem's, knowing that" Melvin had disclosed it "in violation of duties of trust and confidence" that he owed to his clients, so that Berry, Cain, Jinks, and Person A "could execute and cause the execution of securities transactions on the basis of the Inside Information." Id. at 5. Berry, Cain, Jinks, and Person A "in turn executed and caused to execute transactions in Chattem's securities on the basis of the Inside Information provided by" Melvin "for their own benefit through personal online brokerage accounts." Id. at 6.
On December 21, 2009, Sanofi publicly announced that it was acquiring Chattem in a $1.9 billion cash deal. Chattem's stock price increased by approximately 33%, rising from $69.98 per share at closing on December 20 to $93.50 per share at closing the next day. According to the
Defendants object to Judge Vineyard's recommendation that the following motions be denied: (1) motions to sever filed by Cain and Berry, (2) motions to strike surplusage filed by Cain, Berry, and Jinks, and (3) motions to dismiss the indictment on various grounds filed by Melvin, Berry, and Jinks.
A district judge has a duty to conduct a "careful and complete" review of a magistrate judge's R & R. Williams v. Wainwright, 681 F.2d 732, 732 (11th Cir. 1982) (quoting Nettles v. Wainwright, 677 F.2d 404, 408 (5th Cir. Unit B 1982)).
"Parties filing objections must specifically identify those findings objected to. Frivolous, conclusive or general objections need not be considered by the district court." Nettles, 677 F.2d at 410 n. 8. "This rule facilitates the opportunity for district judges to spend more time on matters
The district judge also has discretion to decline to consider arguments that were not raised before the magistrate judge. Williams v. McNeil, 557 F.3d 1287, 1292 (11th Cir.2009). Indeed, a contrary rule "would effectively nullify the magistrate judge's consideration of the matter and would not help to relieve the workload of the district court." Id. (quoting United States v. Howell, 231 F.3d 615, 622 (9th Cir.2000)).
After conducting a complete and careful review of the R & R, the district judge may accept, reject or modify the magistrate judge's findings and recommendations. 28 U.S.C. § 636(b)(1)(C); Williams, 681 F.2d at 732. The district judge may also receive further evidence or recommit the matter to the magistrate judge with instructions. 28 U.S.C. § 636(b)(1)(C).
The Court has conducted a careful, de novo review of the R & Rs and Defendants' objections thereto. Having done so, the Court finds that Judge Vineyard's factual and legal conclusions were correct and that Defendants' objections have no merit.
Pursuant to Rule 8(b) of the Federal Rules of Criminal Procedure, an indictment may charge two or more defendants "if they are alleged to have participated in the same act or transaction, or in the same series of acts or transactions, constituting an offense or offenses." The rule specifies that "defendants may be charged in one or more counts together or separately. All defendants need not be charged in each count." Fed.R.Crim.P. 8(b). Courts look to the indictment to determine whether initial joinder is proper under Rule 8(b). United States v. Weaver, 905 F.2d 1466, 1476 (11th Cir.1990). "Rule 8 `is broadly construed in favor of the initial joinder.'" Id. (quoting United States v. Davis, 773 F.2d 1180, 1181 (11th Cir.1985)).
However, even if Rule 8 is satisfied, Rule 14(a) provides that if the joinder of defendants in an indictment "appears to prejudice a defendant or the government, the court may ... sever the defendants' trials, or provide any other relief that justice requires." In this case, Berry and Cain each seek a separate trial from each other and from Jinks, contending that they were improperly joined under Rule 8, or even if they were properly joined, if they are tried with their co-defendants they will be unfairly prejudiced under Rule 14.
In the R & R, Judge Vineyard concluded that "the defendants and the charged offenses are properly joined [under Rule 8] because they involve the same series of acts or transactions pursuant to a single common scheme to illegally profit from the trade of Chattem stock based on insider information obtained from Melvin." [99] at 10. In doing so, he presented a thorough analysis of the arguments presented by Defendants and the case law cited by the parties. However, Berry and Cain object to Judge Vineyard's decision on several grounds.
First, Cain contends that the R & R does not properly address "the government's critical admission that the defendants did not aid and abet each other." [103] at 2. Paragraphs one and nine of the indictment indicate that Defendants and Person A, "aided and abetted by each other," executed the alleged scheme to defraud and the specific securities transactions identified in paragraph nine. The Government has clarified that it does not contend that the tippee defendants aided and abetted each other in some way but rather that Melvin aided and abetted each
Contrary to the arguments of Berry and Cain, the Court is not convinced that the indictment must include a conspiracy charge or an allegation that each of the defendants aided and abetted one another in order to satisfy the joinder requirements under Rule 8(b). The Court agrees that such allegations would likely simplify the analysis under Rule 8(b). After all, "[i]t is well established that substantive offenses arising out of a single conspiracy can properly be joined, since the conspiracy provides a common link connecting the offenses." United States v. Kopituk, 690 F.2d 1289, 1313 (11th Cir. 1982).
"The litmus test for misjoined counts under Rule 8(b) is whether the acts described in the indictment are tied by a `common thread' to each other or the participants." United States v. McLain, 823 F.2d 1457, 1467 (11th Cir.1987).
In their objections, Cain and Berry cite several cases in support of their contentions that the indictment does not satisfy Rule 8(b), but none of those cases is substantially similar to the present case.
This case is also distinguishable from cases holding that defendants involved in separate, distinct conspiracies were improperly joined because the conspiracies involved different facts, different participants, and at least in one case, different crimes. See United States v. Castro, 829 F.2d 1038, 1045 (11th Cir.1987) ("The only overt acts alleged in the conspiracy count relating to the CD conspiracy were unrelated, in any meaningful way, to the overt acts alleged in the conspiracy count relating to the inventory conspirators. In addition, the crimes committed were of totally different natures and types."), opinion withdrawn in part on denial of reh'g, 837 F.2d 441 (11th Cir.1988); United States v. Marionneaux, 514 F.2d 1244, 1248 (5th Cir.1975) (concluding that two separate conspiracies to obstruct justice were improperly joined because they were not in the same series of acts or transactions and had "different participants and completely different overt actions"); United States v. Giraldo, 859 F.Supp. 52, 54-55 (E.D.N.Y. 1994) (concluding that two separate conspiracies were improperly joined where there was no allegation that they shared a common plan, they did not temporally overlap, and they were not unified by a substantial identity of participants).
Similarly, the Court recognizes that mere similarity of offenses is insufficient for joinder, but this is not like cases where a common participant serves as the only link between similar but otherwise unrelated offenses.
Here, it is not simply that Cain, Berry, and Jinks were charged with a violation of the same statute or that Melvin participated in each of the counts. Cain, Berry, Jinks, and Person A are each alleged to have purchased and sold stock in the same company (Chattem), based on the same inside information that was conveyed to them by the same person (Melvin), on or around the same date, for the same purpose. There is no requirement that all of the allegations against them be identical. If the charges are united by some substantial identity of facts and/or participants, and the Court believes they are, this is sufficient.
Cain and Berry also challenge the magistrate judge's reliance on United States v. Shoemaker, No. 2:11-cr-00038-NBB, 2012 WL 256520, at *2 (N.D.Miss. Jan. 27, 2012). In Shoemaker, the court held that joinder of two separate conspiracies was proper under Rule 8(b) because even though the movant was alleged to have been involved in only one of the schemes and was "not alleged to have been involved in or to have known about" the other scheme, the conspiracies and related underlying charges had "an alleged common objective, to illegally profit from" the same hospital, and the conspiracies were "substantially interrelated by facts" because they involved the same hospital, overlapped in time, had a common participant, and would require proof of common facts. Id. at *2-4. Berry contends that because the Government has not identified a specific victim in this case, Shoemaker is distinguishable from the present case. However, the indictment alleges that Berry, Cain, Jinks, and Person A each traded in the stock of the same company (Chattem), using the same inside information regarding that company, and each did so with the same purpose of profiting from this information. In the face of these allegations, the Court is not persuaded that the Government was required to identify a specific common victim in the indictment in order to satisfy Rule 8(b).
Finally, Cain argues that the magistrate judge improperly relied on the district court's rulings in a related civil case, SEC v. Melvin, No. 1:12-cv-02984-CAP (N.D.Ga. Aug. 28, 2012), to support the finding that the Defendants participated in the same series of transactions. As Cain notes, different rules apply to joinder in the civil and criminal contexts. Rule 20 of the Federal Rules of Civil Procedure permits joinder of defendants when the claims asserted against them arise "out of the same transaction, occurrence, or series of transactions or occurrences." Judge Pannell denied Cain's severance motion in the
The Court recognizes that Judge Pannell's finding is by no means outcome-determinative in this case. Indeed, even without that finding, the Court would still conclude that Berry and Cain are properly joined under Rule 8(b). However, given that both cases involve the same basic allegations, and the same alleged scheme, Judge Pannell's finding is relevant and supports the Court's conclusion that all Defendants in this case participated in the same series of acts or transactions.
Cain and Berry also object to the magistrate judge's conclusion that their motion for severance under Rule 14 should be denied. In the context of a Rule 14 motion, the Court must "balance the prejudice that a defendant may suffer from a joint trial against the public's interest in judicial economy and efficiency." United States v. Schlei, 122 F.3d 944, 984 (11th Cir.1997) (citations and internal quotation marks omitted). "The burden is on the defendant to `demonstrate that a joint trial will result in specific and compelling prejudice to the conduct of his defense.'" Id. (quoting United States v. Walker, 720 F.2d 1527, 1533 (11th Cir.1983)). The Court agrees with the magistrate judge that Cain and Berry have failed to meet their burden in this case.
Cain contends that if he is tried with Berry and Jinks, the Government will introduce evidence that they also lived in or near Griffin, used Melvin as their accountant, and purchased Chattem stock. Cain argues that this evidence "would be overwhelmingly prejudicial" to him and would not be admissible if Cain were tried alone. Berry also contends that he would be prejudiced by a joint trial with Cain and Jinks because it would unfairly link them and suggest concerted action.
Although Cain and Berry argue that evidence of their co-Defendants' trades would be inadmissible in a separate trial, as the magistrate judge noted in the R & R, other courts have admitted such evidence. See, e.g., United States v. Contorinis, 692 F.3d 136 (2d Cir.2012); United States v. Ballesteros Gutierrez, 181 F.Supp.2d 350 (S.D.N.Y.2002). As both Berry and the magistrate judge note, Ballesteros Gutierrez is distinguishable because it involved trading patterns among family members. However, in Contorinis, "the other tippees were strangers to" the defendant. Contorinis, 692 F.3d at 144. Berry criticizes reliance on Contorinis, noting that the Second Circuit avoided establishing a general rule regarding admissibility of other tippees' trades.
The Court agrees with Berry that the admissibility of such evidence should be determined on a case-by-case basis, weighing the probative value of the evidence against the danger of unfair prejudice in accordance with Rule 403 of the Federal Rules of Evidence. As the magistrate judge recognized, in this case the evidence of trading by other alleged tippees is almost certainly "relevant to establish that defendants executed trades of Chattem stock based on the same source of information as the other tippees, and the parallels between each of their trading,
Along the same lines, Berry suggests that a joint trial could result in a "spillover effect." Where "a cumulative and prejudicial `spill over' effect may prevent the jury from sifting through the evidence to make an individualized termination as to each Defendant," this may constitute a basis for severance. United States v. Chavez, 584 F.3d 1354, 1360-61 (11th Cir.2009). But even if there is a potential for a spillover effect, "a court's cautionary instructions ordinarily will mitigate the potential `spillover effect' of evidence of a co-defendant's guilt." United States v. Lopez, 649 F.3d 1222, 1235 (11th Cir.2011) (quoting United States v. Kennard, 472 F.3d 851, 859 (11th Cir.2006)).
The Supreme Court has instructed that "when defendants properly have been joined under Rule 8(b), a district court should grant a severance under Rule 14 only if there is a serious risk that a joint trial would compromise a specific trial right of one of the defendants, or prevent the jury from making a reliable judgment about guilt or innocence." Zafiro v. United States, 506 U.S. 534, 539, 113 S.Ct. 933, 122 L.Ed.2d 317 (1993). Defendants have not shown such a serious risk in this case. Although separate trials might be more advantageous to Defendants, "it is well settled that defendants are not entitled to severance merely because they may have a better chance of acquittal in separate trials." Zafiro, 506 U.S. at 540, 113 S.Ct. 933.
In addition to his objections, Cain has filed a supplement to his motion for severance [137], which the Government opposes. According to Cain, the Government has provided discovery indicating that it intends to introduce evidence regarding additional trades that were made by various individuals connected to one of the Defendants. Cain suggests that this evidence should not be admissible against him and would be highly prejudicial. However, as noted above this evidence is likely admissible against him, and even if it is not, this does not automatically require severance. The Court may use limiting instructions to mitigate any potential prejudice.
Cain also notes that in an interview with the Government, Person A stated that after Melvin conveyed to him information about Chattem, Person A asked Melvin whether he had told anyone else about Chattem, and Melvin stated the names of Berry and Jinks. Cain suggests that because Person A did not mention his name, this statement supports his innocence but prejudices his co-Defendants. In response,
Berry, Cain, and Jinks also moved to strike certain paragraphs and counts from the indictment as surplusage. The motions of Berry and Cain appear to be tied to their motions to sever and will therefore be denied based on the denial of the motions to sever.
Jinks, however, has filed objections to the R & R contending that his motion to strike surplusage was not tied to his co-Defendants' motions to sever. In his objections, Jinks notes several portions of the indictment that he believes should be stricken, including paragraph six, which states:
Jinks contends that this paragraph suggests that the tippees jointly caused the execution of the stock transactions. Jinks also contends that the Government is not required to prove that the tippees sold the stock "for their own benefit" or that they thereby earned "illegal profits" and that this language is inflammatory and/or prejudicial. Jinks further argues that several other paragraphs are duplicative of other portions of the indictment and/or are irrelevant, and certain paragraphs do not pertain to him.
"A motion to strike surplusage from an indictment should not be granted unless it is clear that the allegations are not relevant to the charge and are inflammatory and prejudicial.... [T]his is a most exacting standard." United States v. Awan, 966 F.2d 1415, 1426 (11th Cir.1992) (citations and internal quotation marks omitted). The Court is not satisfied that Jinks has met this standard. It appears to the Court that the allegations in the indictment are relevant to the charges, but even if they are not, Jinks has not demonstrated to the Court how they are inflammatory or prejudicial.
Jinks and Melvin filed motions to dismiss the indictment on the ground that 18 U.S.C. § 1348 is unconstitutionally vague. Jinks and Berry filed separate motions to dismiss the indictment for failure to allege the essential elements of the crimes charged. Melvin also filed several separate motions to dismiss the indictment, or specific counts of the indictment, on various other grounds.
"As generally stated, the void-for-vagueness doctrine requires that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement." Kolender v. Lawson, 461 U.S. 352, 357, 103 S.Ct. 1855, 75 L.Ed.2d 903 (1983). "[T]he vagueness doctrine bars enforcement of `a statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application.'" United States v. Lanier, 520 U.S. 259, 266, 117 S.Ct. 1219, 137 L.Ed.2d 432 (1997) (quoting Connally v. Gen. Constr. Co., 269 U.S. 385, 391, 46 S.Ct. 126, 70 L.Ed. 322 (1926)). In the R & R, the magistrate judge rejected the arguments of Melvin and Jinks that 18 U.S.C. § 1348 is unconstitutionally vague.
Jinks argues that the magistrate judge failed to adequately address the definition of the vague elements of the offense and employed a "backwards" analysis, relying too heavily on the principle that courts rarely find statutes void for vagueness. But the magistrate judge appropriately recognized at the outset that "[t]here is a strong presumption that statutes passed by Congress are valid," United States v. Wayerski, 624 F.3d 1342, 1347 (11th Cir.2010), and he did not merely assume that the statute was constitutional. Instead, he went on to analyze the specific language of the statute and the parties' arguments. As explained in the R & R, Defendants have not shown that 18 U.S.C. § 1348 is unconstitutionally vague.
"The first step in a vagueness inquiry is to examine the plain language of the statute." Wayerski, 624 F.3d at 1347. "When the plain text of the statute sets forth clearly perceived boundaries," the inquiry is over. Id. The statute at issue here, 18 U.S.C. § 1348, provides:
As the R & R notes, at least one other court has rejected a similar vagueness challenge to § 1348, noting that "the requisite elements of the statute are straightforward. In order to prove a violation of the 18 U.S.C. 1348, the Government must show: `(1) fraudulent intent (2) a scheme or artifice to defraud; and (3) a nexus with a security.'" United States v. Motz, 652 F.Supp.2d 284, 295 (E.D.N.Y.2009) (quoting United States v. Mahaffy, No. 05-CR-613, 2006 WL 2224518, at *12 (E.D.N.Y. Aug. 2, 2006)). Motz recited the standard under 18 U.S.C. § 1348(1), but the elements
The Court notes that Melvin and Jinks appear to have different views on whether the Court should conduct a general analysis or apply it to the specific facts of this case. Jinks seems to criticize the magistrate judge's application of the statute to this particular case, arguing that this is somehow circular reasoning.
Although Melvin argues that Motz is distinguishable because it involved a scheme of a different nature, the court's reasoning in Motz was not fact-specific. Instead, the court evaluated the statute generally and noted that Motz did not "articulate why a person of ordinary intelligence would be unable to understand the conduct prohibited by 18 U.S.C. § 1348." Motz, 652 F.Supp.2d at 295. Like Motz, Melvin has failed to articulate why he or his co-Defendants would not have understood that their conduct was prohibited by the statute. The only specific arguments that Melvin appears to make in this regard are that § 1348 must not apply to insider trading schemes because a new bill has been proposed that would specifically ban insider trading, and the Exchange Act already covers insider trading but has different requirements.
Melvin also criticizes the magistrate judge's reliance on United States v. Whitty, 688 F.Supp. 48, 54-55 (D.Me.1988), to show that the language "scheme or artifice to defraud" is not vague and has a well-established meaning. Noting that Whitty involved bank fraud, he contends that securities fraud cases are more complex than bank fraud cases. But Melvin offers no explanation of how this is the case or why this language might be vague in the context of securities fraud but not in the context of bank fraud.
In addition to his general arguments that § 1348 is vague, Jinks specifically contends that the phrase "in connection with" is void for vagueness because it fails to indicate what degree of connection must be made. Jinks compares this phrase to the residual clause of the Armed Career Criminal Act ("ACCA"), which the Supreme Court recently struck down as being unconstitutionally vague. See Johnson, 135 S.Ct. at 2557. The Court does not find this argument persuasive for several reasons.
Under the ACCA, a defendant convicted of being a felon in possession of a firearm faces a harsher sentence if he or she has three or more previous convictions for a "violent felony." The residual clause of that statute defines violent felony to include, in addition to a list of specific felonies, a felony that "otherwise involves conduct that presents a serious potential risk of physical injury to another." 18 U.S.C. § 924(e)(2)(B). Jinks seems to compare the phrase "in connection with" under § 1348 to the phrase "otherwise involves" under the ACCA, but the Supreme Court did not focus on the phrase "otherwise involves" as vague in and of itself. Instead, it looked at the clause as a whole. Specifically, the Supreme Court concluded that "[b]y combining indeterminacy about how to measure the risk posed by a crime with indeterminacy about how much risk it takes for the crime to qualify as a violent felony, the residual clause produces more unpredictability and arbitrariness than the Due Process Clause tolerates." Johnson, 135 S.Ct. at 2558. The Court noted that "the residual clause leaves grave uncertainty about how to estimate the risk posed by a crime," requiring the Court to imagine an "ordinary instance" of a crime, detached from "real-world facts or statutory elements." Id. at 2557.
Unlike the residual clause of the ACCA, § 1348 does not require the Court to apply a qualitative standard to an imagined "ordinary" case. Instead, it looks at whether the specific scheme to defraud at issue is connected with securities. Jinks suggests that there could be varying degrees of connection, which might lead to uncertainty about the statute's reach. But here,
Further, the fact that a statute requires application of a qualitative standard does not automatically render it unconstitutional. In Johnson, the Supreme Court acknowledged, "[a]s a general matter, we do not doubt the constitutionality of laws that call for the application of a qualitative standard such as `substantial risk' to real-world conduct; `the law is full of instances where a man's fate depends on his estimating rightly ... some matter of degree.'" Johnson, 135 S.Ct. at 2561 (quoting Nash v. United States, 229 U.S. 373, 377, 33 S.Ct. 780, 57 L.Ed. 1232 (1913)). In other words, the issue with the residual clause was not simply that it contained a qualitative standard but that it required "application of the `serious potential risk standard to an idealized ordinary case of the crime.'" Id.
"An indictment is considered legally sufficient if it: `(1) presents the essential elements of the charged offense, (2) notifies the accused of the charges to be defended against, and (3) enables the accused to rely upon a judgment under the indictment as a bar against double jeopardy for any subsequent prosecution for the same offense.'" United States v. Jordan, 582 F.3d 1239, 1245 (11th Cir.2009) (quoting United States v. Woodruff, 296 F.3d 1041, 1046 (11th Cir.2002)). When analyzing the sufficiency of an indictment, courts review the indictment "as a whole and give it a `common sense construction.'" Id. (quoting United States v. Gold, 743 F.2d 800, 813 (11th Cir.1984)). In this case, Defendants raise several alleged deficiencies in the indictment, but their primary argument is that even if § 1348 is constitutional, the Government has failed to allege a crime (or to allege all essential elements of that crime) because it has failed to allege the elements required to prove an insider trading scheme in violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
First, Defendants have not offered any authority that expressly indicates the elements required to prove an insider trading violation under § 10(b) and Rule 10b-5 should be imported into § 1348. Jinks admits that § 1348 is a "broader statute" but contends that because insider trading is encompassed within the Exchange Act and because the SEC brought a civil action under § 10(b) and Rule 10b-5 based on the same alleged events, the Government must prove the elements required for a violation of the Exchange Act in this case. The fact that the Government could have brought a criminal action under § 10(b) of the Exchange Act does not mean that it was required to, and the fact that the SEC
Another judge in this district recently confronted, and rejected, a similar argument in United States v. Slawson, No. 1:14-cr-00186-RWS, 2014 WL 5804191, at *6 (N.D.Ga. Nov. 7, 2014), adopted 2014 WL 6990307 (N.D.Ga. Dec. 10, 2014). In Slawson, the Court noted that, like Defendants here, Slawson "ha[d] not offered a single legal authority applying [§ 10(b) and Rule 10b-5] case law to the Title 18 security fraud violations alleged in this indictment," and the Court "decline [d] to impose on the charges set forth in the indictment the requirement to plead elements of offenses not charged in the indictment." Id. at *6-7. Slawson is persuasive, especially in light of the fact that "the overarching purpose of the statute was to broaden the range of conduct proscribed by existing federal securities laws," Motz, 652 F.Supp.2d at 294, and "the text and legislative history of 18 U.S.C. § 1348 clearly establish that it was modeled on the mail and wire fraud statutes," id. at 296, not on the Exchange Act.
But even if the Court were to incorporate the elements required under § 10(b) and Rule 10b-5 into § 1348, the Court is not convinced that the indictment would fail. Defendants contend that the indictment fails to allege the essential elements of insider trading because it does not allege that the tipper received a personal benefit in exchange for disclosing the inside information. The Defendants offer a few different variations of this argument. Jinks argues that it was the Chattem board member, not Melvin, who was the "tipper," and there is no allegation that the Chattem board member breached his duty of confidentiality or received a personal benefit from doing so. But as the Government has noted, even under the Exchange Act, the "misappropriation theory" recognizes that a person may be liable for misappropriation of inside information even if that person was not a corporate insider with duties of confidentiality to the corporation. See United States v. O'Hagan, 521 U.S. 642, 650, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997) (holding that "criminal liability under § 10(b) may be predicated on the misappropriation theory").
In addition to their arguments regarding personal benefit, Defendants assert that they do not have a clear understanding of what they have been charged with or what conduct allegedly constitutes the scheme to defraud, but the Court is not persuaded by this argument. The Eleventh Circuit has stated that "[a]n indictment that tracks the language of the relevant statute is sufficient, as long as it also provides a statement of facts and circumstances that give notice of the offense to the accused." Jordan, 582 F.3d at 1246 (quoting United States v. Walker, 490 F.3d 1282, 1296 (11th Cir.2007)). The Court agrees with the magistrate judge that the indictment in this case meets this standard and gives Defendants "notice sufficient to enable them to prepare a defense." Id.
Defendants also appear to raise various defenses to the charges against them and to question whether the Government has sufficient evidence to prove these charges, but the Court may not consider such things in reviewing a motion to dismiss the indictment. "In ruling on a motion to dismiss for failure to state an offense, a district court is limited to reviewing the face of the indictment and, more specifically, the language used to charge the crimes." United States v. Sharpe, 438 F.3d 1257, 1263 (11th Cir. 2006). "There is no summary judgment procedure in criminal cases. Nor do the rules provide for a pre-trial determination of sufficiency of the evidence." United States v. Critzer, 951 F.2d 306, 307 (11th Cir.1992).
Melvin has also moved to dismiss the indictment on the grounds of double jeopardy, based on civil proceedings arising out of the same conduct. Melvin states that as a result of those proceedings, he was held jointly and severally liable with Cain and Jinks for interest and disgorgement of the profits they gained as a result of their transactions in Chattem stock. A civil penalty in the amount of $108,930.05 was also imposed on him, and he was permanently disqualified from practicing accounting before the SEC. Melvin argues that together, these sanctions "constitute excessive, punitive, and criminal punishment for the alleged insider trading at issue in the instant indictment." [133] at 3. Therefore, according to Melvin, prosecution of this case would be contrary to the Double Jeopardy Clause of the Fifth Amendment.
"The Double Jeopardy Clause provides that no person [shall] be subject for the same offence to be twice put in jeopardy of life or limb." Hudson v. United States, 522 U.S. 93, 98, 118 S.Ct. 488, 139 L.Ed.2d 450 (1997) (internal quotation marks omitted). It "does not prohibit the imposition of all additional sanctions that could ... be described as punishment." Id. at 98-99, 118 S.Ct. 488. Rather, it "protects only against the imposition of multiple criminal punishments for the same offense." Id. at 99, 118 S.Ct. 488. In determining whether a punishment is criminal or civil, the Court must first ask whether the legislature has indicated an intention for the punishment to be one or the other, but even where the legislature indicates an intent to establish a civil penalty, the Court also looks at "whether the statutory scheme was so punitive either in purpose or effect ... as to transfor[m] what was clearly intended as a civil remedy into a criminal penalty." Id. (internal quotation marks omitted).
In the R & R, the magistrate judge noted that other circuits have found that disgorgement of profits and penalties under the Exchange Act were intended by Congress to be civil and are not "so punitive in purpose or effect as to override Congress's intent to provide for civil penalties." [118] at 34 (quoting SEC v. Palmisano, 135 F.3d 860, 865-66 (2d Cir.1998)). Melvin does not disagree that Congress intended the penalties imposed on him to be civil, but he argues that they are so punitive in effect as to constitute a criminal penalty.
Melvin contends that the magistrate judge overlooked the rule that unjust enrichment serves as the requisite basis for disgorgement. He argues that in the cases relied upon by the magistrate judge, the defendant had actually received ill-gotten gains, but in his case there was no legal basis for disgorgement because he never traded stocks or obtained any "ill-gotten gains" from his co-Defendants based on their trades. Based on this and other reasons, Melvin essentially contends that the disgorgement amounts are excessive in his case. There are several problems with this argument.
First, the Eleventh Circuit has indicated that courts should examine the statutory scheme on its face, rather than analyzing the specific penalty at issue. See Grossfeld v. Commodity Futures Trading Comm'n, 137 F.3d 1300, 1303 n. 7 (11th Cir.1998) ("Grossfeld argues that the $1.8 million fine imposed by the Commission is excessive because it is out of line with other Commission fines and it is unrelated to the government's losses. However, Hudson makes it clear that we are to examine the statute on its face.").
Melvin also contends that the magistrate judge overlooked five of the seven factors that courts apply to determine whether a penalty is effectively criminal. The Supreme Court has identified the following seven factors as "useful guideposts" in determining whether a penalty is criminal: "(1) [w]hether the sanction involves an affirmative disability or restraint; (2) whether it has historically been regarded as a punishment; (3) whether it comes into play only on a finding of scienter; (4) whether its operation will promote the traditional aims of punishment — retribution and deterrence; (5) whether the behavior to which it applies is already a crime; (6) whether an alternative purpose to which it may rationally be connected is assignable for it; and (7) whether it appears excessive in relation to the alternative purpose assigned." Hudson, 522 U.S. at 99-100, 118 S.Ct. 488 (citations and internal quotation marks omitted). However, the Court has noted that "`only the clearest proof will suffice to override legislative intent and transform what has been denominated a civil remedy into a criminal penalty.'" Id. at 100, 118 S.Ct. 488 (quoting United States v. Ward, 448 U.S. 242, 249, 100 S.Ct. 2636, 65 L.Ed.2d 742 (1980)).
The Court agrees with the magistrate judge that Melvin has not shown the "clearest proof" needed to transform the sanctions in his civil case into a criminal penalty. Indeed, the analysis here is similar in many respects to the analysis in Hudson. As the Supreme Court noted, "neither money penalties nor debarment has historically been viewed as punishment." Hudson, 522 U.S. at 104, 118 S.Ct. 488. And although Melvin has been prohibited from practicing accounting before the SEC, the sanctions imposed on him "do not involve an `affirmative disability or restraint,' as that term is normally understood." Id.
Melvin notes that, as evidenced by this case, the conduct for which sanctions were imposed may also be criminal, but this "is insufficient to render the money penalties and debarment sanctions criminally punitive." Id. at 105, 118 S.Ct. 488. Likewise, the fact that the sanctions may serve a deterrent purpose does not necessarily render them criminal, "as deterrence may serve civil as well as criminal goals." Id. (citations and internal quotation marks omitted). Just as the sanctions at issue in Hudson "serve[d] to promote the stability of the banking industry," id., so the sanctions imposed on Melvin serve "other important nonpunitive goals, such as encouraging investor confidence, increasing the efficiency of financial markets, and promoting the stability of the securities industry." Palmisano, 135 F.3d at 866. And although the penalties here did involve scienter, "[t]he linkage of the size of the potential fine to the level of the violator's scienter, the risk of loss to others, and the amount of the defendant's unlawful profits minimizes the possibility that a fine will be
Melvin also contends that counts one through seven should be dismissed as to him because the Government failed to charge him with the requisite intent to support the aiding and abetting theory. Pursuant to 18 U.S.C. § 2(a), "[w]hoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal." "[A] person aids and abets a crime when (in addition to taking the requisite act) he intends to facilitate that offense's commission." Rosemond v. United States, ___ U.S. ___, 134 S.Ct. 1240, 1248, 188 L.Ed.2d 248 (2014). "[F]or purposes of aiding and abetting law, a person who actively participates in a criminal scheme knowing its extent and character intends that scheme's commission." Id. at 1249. Melvin contends that the indictment fails to charge him with the specific intent to commit securities fraud, or the specific intent to conduct the securities transactions.
In his initial motion, Melvin focused on the indictment, and in his objections he focuses on the Government's bill of particulars, indicating that Melvin aided and abetted his co-Defendants and Person A "by misappropriating and disclosing the information regarding Chattem's impending acquisition and disclosing it to each of them with the understanding that the inside information would be used for the purpose of stock trading." [114] at 2 (emphasis added). Melvin argues that the word "understanding" is not sufficient to allege the requisite intent. But allegations are not jury instructions, and "[l]inguistic precision is not required in an indictment." United States v. deVegter, 198 F.3d 1324, 1330 (11th Cir.1999). Reviewing the indictment as a whole and giving it a common sense construction, the Court concludes that at the very least, the indictment implicitly alleges the requisite intent for aiding and abetting.
The bill of particulars does not just allege that Melvin disclosed the inside information with the understanding that the tippees might use it for trading. It alleges that Melvin misappropriated the information (indicating a breach of duty) and that he disclosed the information with the understanding that it would be used for the purpose of stock trading. This is consistent with other language in the indictment. The indictment alleges that Melvin "disclosed the Inside Information" to his co-Defendants and Person A "for his own personal benefit and in violation of duties of trust and confidence, with the understanding that the Inside Information would be used for the purpose of purchasing or selling securities." [1] at ¶ 4. And it alleges that Berry, Cain, Jinks and Person A carried out the scheme and artifice to defraud by misappropriating that information "knowing that" Melvin had disclosed it in violation of duties of trust and confidence to his clients "so that" Berry, Cain, Jinks and Person A "could execute and cause the execution of securities transactions on the basis of the Inside Information." Id. at ¶ 5.
Melvin also contends that count one of the indictment should be dismissed because he had a right to disclose inside information to Person A, who was a partner
More to the point, the indictment does negate lawful disclosure. It specifically alleges that Melvin "misappropriated" the inside information in violation of the duties of trust and confidence owed to his client and that he disclosed this information to Person A "for his own personal benefit and in violation of duties of trust and confidence, with the understanding that the Inside Information would be used for the purpose of purchasing or selling securities." [1] at ¶¶ 3-4. These allegations foreclose the possibility that Melvin properly disclosed the inside information to Person A with the reasonable belief that "Person A would keep the information in confidence and would not trade on it." [133] at 31.
Melvin also contends that the magistrate judge erred by denying his motion to dismiss the indictment based on collateral estoppel. For collateral estoppel to apply, the party relying on it must show:
Christo v. Padgett, 223 F.3d 1324, 1339 (11th Cir.2000) (quoting Pleming v. Universal-Rundle Corp., 142 F.3d 1354, 1359 (11th Cir.1998)). Melvin argues that in the SEC administrative proceeding against him, the administrative law judge ("ALJ") "made an unambiguous factual finding that there is no evidence that Melvin received, or made arrangements to receive, any financial or material benefit from his disclosures," [133] at 33 (citations and internal quotation marks omitted), and that therefore the Government cannot re-litigate that issue here.
The Court agrees with the magistrate judge that Melvin has not shown that the issue he seeks to have precluded was actually litigated in the administrative proceeding or that it was a critical and necessary part of the administrative judgment. Melvin notes that "[w]hen an issue is properly raised, by the pleadings or otherwise, and is submitted for determination, and is determined, the issue is actually litigated." Christo, 223 F.3d at 1339 (quoting Pleming, 142 F.3d at 1359). He points to a number of filings in the administrative proceedings that he believes demonstrate that the parties in the administrative proceeding litigated "the critical issues of whether Melvin benefited from his alleged misconduct and, as a result, whether it is appropriate to impose
Additionally, Melvin has failed to explain how the ALJ's determination was a critical and necessary part of the decision when the ALJ ruled against him, concluding that Melvin should be permanently disqualified from practicing before the SEC. Melvin argues that because the ALJ was required to determine the "egregiousness" of his actions, the ALJ necessarily had to determine the nature of the personal benefit to Melvin. The Court is not persuaded that the ALJ was necessarily required to determine the specific nature of the benefit to Melvin, but even if Melvin were correct, the ALJ — as Melvin acknowledges — also concluded that it "appears that the disclosure of the material non-public information allowed Melvin to further his personal and/or professional relationship [with the tippees]." [133-3] at 8. Melvin attempts to distinguish the phrase "it appears" from the phrase "there is no evidence," but the Court is not convinced. As the magistrate judge noted, despite the statement that there was no evidence that Melvin received a financial or material benefit from his disclosure, the ALJ "appears to have nonetheless found a personal benefit sufficient to impose a remedial sanction in the form of a permanent disqualification from practice before the Commission." [118] at 60 n. 30. In short, the Court is not convinced that the ALJ's finding was essential to the resolution.
The magistrate judge concluded that the indictment is not multiplicitous for the reasons stated in the Government's response to his motions. Melvin takes issue with this conclusion.
"An indictment is multiplicitous if it charges a single offense in more than one count." United States v. Williams, 527 F.3d 1235, 1241 (11th Cir. 2008) (citing Ward v. United States, 694 F.2d 654, 660-61 (11th Cir.1983)). To determine whether an indictment is multiplicitous, the Court must "first determine the allowable unit of prosecution." United States v. Smith, 231 F.3d 800, 815 (11th Cir.2000) (quoting United States v. Langford, 946 F.2d 798, 802 (11th Cir.1991)).
The Court agrees with the Government that § 1348 criminalizes the execution of a scheme to defraud. This is consistent, for example, with the Eleventh Circuit's interpretation of the bank fraud statute. See United States v. De La Mata, 266 F.3d 1275, 1287 (11th Cir.2001) (concluding that "[t]he unit of the offense created by § 1344 is each execution or attempted execution of the scheme to defraud, not each act in furtherance thereof"). As the court recognized in De La Mata, "a single scheme can be executed a number of times, and a defendant may be charged in separate counts for each `execution' of the scheme to defraud." Id. Here, each securities transaction was an
Melvin does not contest the foregoing application to the charges against his co-Defendants, but he appears to argue that because he himself did not execute the securities transactions at issue, the unit of prosecution for him must be based on some other conduct (i.e., his disclosure of the inside information). However, Melvin does not cite any persuasive authority to support this argument, and as the Government pointed out in its opposition, this reasoning ignores the fact that Melvin is charged with aiding and abetting Person A and his co-Defendants under 18 U.S.C. § 2. In other words, Melvin may be liable for aiding and abetting even if he did not directly execute the stock trades himself. See United States v. Hassoun, 476 F.3d 1181, 1184 n. 2 (11th Cir.2007) (noting that the inclusion of 18 U.S.C. § 2 in the indictment was not material to the analysis of whether the indictment was multiplicitous because § 2 "simply codifies an alternate theory of liability"). Further, as noted in the R & R, even if the indictment were multiplicitous, this would not necessarily require dismissal. See [118] at 40.
Likewise, the Court is not convinced by Melvin's argument that counts one through seven are fatally defective because they fail to allege that he committed an act that would constitute the execution of the scheme to defraud. See United States v. Ward, 486 F.3d 1212, 1222 (11th Cir.2007) ("[A] defendant may be convicted of mail fraud without personally committing each and every element of mail fraud, so long as the defendant knowingly and willfully joined the criminal scheme, and a co-schemer used the mails for the purpose of executing the scheme.").
Berry has moved for reconsideration of the magistrate judge's ruling partially denying his motion for a bill of particulars. Pursuant to 28 U.S.C. § 636(b)(1)(A), the Court may reconsider a decision regarding such a pretrial matter "where it has been shown that the magistrate judge's order is clearly erroneous or contrary to law." Here, the Court does not believe the magistrate judge's partial denial of Berry's motion for a bill of particulars was clearly erroneous or contrary to law.
Berry contends that he is entitled to a bill of particulars specifying who was defrauded by the alleged scheme to defraud, who made the alleged false or fraudulent pretenses, representations, or promises, and what benefit Melvin allegedly received by providing the inside information to Berry. He insists that this information goes to the heart of the case and is necessary to prepare a defense of the case.
But Berry has not shown how the additional information he seeks is necessary
For the foregoing reasons, the Court hereby adopts as its order the R & Rs [99 & 118] and denies Defendants' motions to sever [40 & 53], motions to strike surplusage [42, 54 & 56-1], motions to dismiss the indictment [46, 48, 51, 57, 71, 75, 80, 82 & 86], and motion to suppress evidence [84]. The Court also denies Berry's motion for reconsideration of the ruling on his motion for a bill of particulars [104] and Cain's motion for a speedy trial [43], motion to expedite the trial date [88], and supplemental motion to sever [137].
