Filed: May 20, 2020
Latest Update: May 20, 2020
Summary: United States Court of Appeals For the First Circuit No. 18-2032 UNITED STATES OF AMERICA, Appellee, v. ROSS MCLELLAN, Defendant, Appellant. APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Leo T. Sorokin, U.S. District Judge] Before Howard, Chief Judge, Torruella, and Thompson, Circuit Judges. Martin Weinberg, with whom Kimberly Homan were on brief, for appellant. Stephen E. Frank, Assistant United States Attorney, with whom Andrew E. Lelling, United States A
Summary: United States Court of Appeals For the First Circuit No. 18-2032 UNITED STATES OF AMERICA, Appellee, v. ROSS MCLELLAN, Defendant, Appellant. APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Leo T. Sorokin, U.S. District Judge] Before Howard, Chief Judge, Torruella, and Thompson, Circuit Judges. Martin Weinberg, with whom Kimberly Homan were on brief, for appellant. Stephen E. Frank, Assistant United States Attorney, with whom Andrew E. Lelling, United States At..
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United States Court of Appeals
For the First Circuit
No. 18-2032
UNITED STATES OF AMERICA,
Appellee,
v.
ROSS MCLELLAN,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Leo T. Sorokin, U.S. District Judge]
Before
Howard, Chief Judge,
Torruella, and Thompson, Circuit Judges.
Martin Weinberg, with whom Kimberly Homan were on brief, for
appellant.
Stephen E. Frank, Assistant United States Attorney, with whom
Andrew E. Lelling, United States Attorney, was on brief, for
appellee.
May 20, 2020
TORRUELLA, Circuit Judge. Ross McLellan ("McLellan")
appeals his convictions of securities and wire fraud as well as
conspiracy to commit securities and wire fraud for his leadership
role in a scheme to defraud overseas institutional investors by
applying hidden commissions on the buying and selling of U.S.
securities. First, McLellan disputes that there was sufficient
evidence to sustain his securities fraud convictions under 15
U.S.C. §§ 78j(b), 78ff(a), and 17 C.F.R. § 240.10b-5 (hereinafter
"Rule 10b-5") and objects to the district court's jury instruction
on the elements of said offense. Second, he protests that his
wire fraud conviction under 18 U.S.C. § 1343 was the product of an
improper extraterritorial application of the wire fraud statute,
and relatedly, he submits that it was error for the district court
not to instruct the jury that it had to find a domestic application
of the statute to convict. Third, he contends that the district
court erred by not compelling the U.S. government to exercise its
powers under Mutual Legal Assistance Treaties ("MLATs") with the
United Kingdom and the Republic of Ireland to seek evidence that
could have been favorable to his defense. See Mutual Legal
Assistance Treaty, U.S.-U.K. and N. Ir., Jan. 6, 1994 (hereinafter
"U.S.-U.K. MLAT"); Mutual Legal Assistance Treaty, U.S.-Ir.,
Jan. 18, 2001 (hereinafter "U.S.-Ireland MLAT").
Because we hold that the relevant securities law covers
misrepresentations of the commissions to be applied to securities
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trades by transition managers under the agency model, we find that
the evidence was sufficient to sustain McLellan's convictions and
that to the extent that the jury instructions may have been
overbroad, any error was harmless. Moreover, we need not address
whether § 1343 applies extraterritorially because McLellan was
convicted under a proper domestic application of the statute, and
to that end, the district court's jury instructions on wire fraud
nevertheless required the jury to find a domestic application.
Finally, because the district court correctly determined that it
lacked the authority to order the government to lodge MLAT requests
on behalf of a private party, we find no reversible error.
Accordingly, we affirm McLellan's convictions on all counts.
I. Factual Background
A. State Street's Transition Management Services
Because McLellan challenges the sufficiency of the
evidence, we summarize the evidence in the light most favorable to
the verdict. See United States v. Kanodia, 943 F.3d 499, 501 (1st
Cir. 2019).
McLellan, a former executive vice president of State
Street Bank ("State Street"), a Boston-based corporation, was
charged with committing securities and wire fraud for his part in
a scheme intended to defraud six institutional investors.
In his position, McLellan was the global head of State
Street's Portfolio Solutions Group ("PSG"), which included its
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transition management services, until October 2011. During
McLellan's tenure, State Street was one of numerous firms that
competed to provide transition management services to
institutional clientele. When large institutional investors, such
as pension funds, transition from one asset manager to another,
they typically hire a transition manager to restructure their
portfolios so as to minimize the "implementation shortfall."
Transition management firms specialize in buying and selling
securities on the open market on behalf of their clientele so as
to reduce as much as possible the monetary losses that the supply
and demand pressures of securities markets can cause during
transitions.
Two models dominate the transition services market: the
"principal" model and the "agency" model. Under the principal
model, the firm directly buys securities from and sells securities
to its client. While a transition manager in the principal model
assumes the risk that it will have to make unprofitable trades to
complete the transition for the client, it is also able to keep
any profit made on those trades for itself. Under the agency
model, the firm acts as an intermediary that facilitates the buying
or selling of securities for its clients through a third-party
broker-dealer. Firms utilizing the agency model profit from
transition services through two means: an upfront flat fee for the
entire transition or a disclosed fee per trade. The client -- not
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the transition management firm -- selects the securities to be
sold and bought on the open market. During the relevant time
period, State Street followed the "agency model." State Street
promoted this model to its clients through its advertising
materials and assured them that it would function as a fiduciary
while trading on their behalf.
As overseer of State Street's transition management
services, McLellan engaged Boston-based traders to buy and sell
U.S. securities for State Street clients. State Street's clients
in Europe, the Middle East, and Africa contracted with State Street
through the London-based State Street Bank Europe Ltd. ("SSBEL").
Edward Pennings ("Pennings"), a critical government witness at
trial, headed SSBEL's transition management group first as vice
president and then as senior managing director; he reported
directly to McLellan. Pennings spoke with McLellan daily about
State Street's clients and trades as the transactions at issue
progressed. Rick Boomgaardt ("Boomgaardt") headed SSBEL's
transition management desk in London. Although he reported
directly to Pennings, Boomgaardt periodically communicated with
McLellan about ongoing negotiations and transitions.
In the aftermath of the 2008 economic recession in the
United States, McLellan, Pennings, and Boomgaardt devised a scheme
to promise low commissions, or a flat fee, to potential clients
with the intention of embedding large hidden commissions in the
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price of the securities as reported to the clients during the
transition. McLellan directed Pennings and Boomgaardt to pursue
this scheme for large bond-based deals because those securities
were reported to clients on a "net" basis, which incorporated the
commissions into the price of the security as it was represented
to the client at the end of the transaction. This reporting
practice would make it difficult for clients to notice the hiked-up
charge. Conversely, commissions on stocks are typically reported
separately from the price of the stock, allowing the client to see
the precise purchase or sale price and the commission that the
firm took from the transaction. On occasion, Pennings, while in
his position at SSBEL, would represent to other State Street
employees that the commissions were approved by the European
management and were legal. At times, Pennings also relayed to
other members of the team that the contracts were sufficiently
vague to allow the taking of undisclosed markups despite having
made affirmative representations to the contrary.
B. The Relevant Transitions
The government's case against McLellan hinged on seven
discrete transitions that State Street handled for six clients.
Those clients were: Kuwait-based Kuwait Investment Authority
("KIA"); Netherlands-based Dutch Doctors; Ireland-based National
Treasury Management Agency ("NTMA"); U.K.-based Sainsbury's;
Ireland-based Eircom; and U.K.-based Royal Mail. Each of those
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six clients had a master transition management agreement ("TMA")
with State Street that governed the terms of all subsequent
transactions.
Institutional investors, such as these six clients,
solicit bids from transition management firms through a request
for proposals ("RFP"). Transition managers then submit estimates
of the implementation shortfall to the prospective client in the
hopes of winning its business. For each of these clients, Pennings
and Boomgaardt prepared all of the responses to RFPs, directly
negotiated the contracts for transitions, and prepared periodic
notices and pre-trade estimates. McLellan did not directly
communicate or negotiate with any of the six defrauded investors.
However, McLellan directed the scheme from the United States,
contacted traders in the United States to oversee and implement
the application of hidden commissions, and shaped the team's
response to the discovery of the scheme by attempting to cover it
up.
1. First KIA Transition
In March 2010, KIA, a Kuwaiti sovereign wealth fund,
selected State Street to manage a transition involving $2 billion
in bonds. Pennings negotiated the deal with a KIA representative
named Das. During the negotiations, Pennings represented to Das
that State Street would conduct the transition without taking any
commissions whatsoever even though Pennings always intended
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otherwise. Boomgaardt testified that he and McLellan decided to
make a zero-commission quote in order to compete with other banks
bidding on the KIA transition. After submitting the bid, Pennings
represented to KIA that State Street would make money on "the other
side of the transaction." At trial, Pennings testified that this
explanation to KIA was "nonsense" and meaningless because there
was no way to make money on "the other side of the transactions."
Pennings did tell Das that, absent a commission, State Street would
take a "spread," but he never explained how it would be applied or
how the spread would impact KIA. Pennings and Boomgaardt both
testified that they were not sure if Das understood how State
Street was going to make money on the deal. After the negotiations
were completed, Pennings sent a periodic notice to Das with the
terms of the transition agreement. This document represented in
a footnote that all bonds would be priced "net" per market
convention. The periodic notice, however, did not disclose that
a commission would be charged on each trade. Ultimately, KIA
commissioned State Street to handle half the transition and
commissioned a competitor, Nomura, to handle the other half of the
transition.
McLellan played an active behind-the-scenes role
throughout the KIA transition. Pennings and Boomgaardt testified
that the decision to submit the "zero commission" bid to KIA was
not only "discussed" with McLellan but also "came from" him.
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Pennings told McLellan through email that McLellan was "[g]onna
have to be creative," which Pennings testified meant that McLellan,
as the lead State Street executive in Boston, was going to have to
apply hidden commissions on the securities transactions in the
United States. After KIA accepted the bid, McLellan -- who
happened to be in London at the time -- contacted Stephen Finocchi,
a Boston-based trader, and asked for a report of the highest daily
prices at which the bonds in question were traded. According to
Boomgaardt, McLellan sought this information to ensure that the
price charged with the added commissions was below the daily high
to avoid tipping KIA off to the hidden commissions. Boomgaardt
further testified that he and McLellan looked at the data together
and decided how much commission to add to each of the bonds in the
KIA transition. Despite McLellan's precautions, State Street
still charged KIA above the reported daily high on some of the
bonds, which KIA did not question. In total, State Street skimmed
off $2.6 million in undisclosed commissions across the entire
transition. The final cost of the transition for KIA came in
approximately 0.07 percent below the original pre-trade estimate.
If State Street had not applied hidden commissions, KIA would have
made a net profit of roughly half a million dollars from the
transition.
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2. Dutch Doctors Transition
In June 2010, Dutch Doctors, a Netherlands-based pension
fund for doctors, hired State Street to transition $1.6 billion in
European bonds. Pennings told Dutch Doctors that State Street
would conduct the transition for a commission of 1 basis point, or
0.01 percent of the aggregate value of the assets traded. After
securing the contract, McLellan and Pennings learned that Dutch
Doctors was contractually obligated to reserve all rights to
futures trading to its asset manager, JP Morgan, which meant that
the deal would yield less profit for State Street in the long run.
To cover the expected losses, Pennings secretly raised the charge
to 1.5 basis points, which ultimately translated to a total profit
to State Street of several million dollars, including $1 million
in hidden commissions.
Again, although McLellan did not communicate directly
with Dutch Doctors, he was intimately involved in the scheme and
the transition. On June 10, 2010, Pennings informed McLellan via
email that he was going to bid on a Dutch Doctors contract, which
Pennings claimed was necessary to enlist McLellan in a "push in
the U.S. . . . to make sure that [State Street Global Advisors, an
asset management affiliate of State Street,] would help us win
this deal." In response, McLellan encouraged Pennings to "[j]ust
win, baby," implying that Pennings should secure the contract and
a good deal for State Street by any means necessary. To that end,
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McLellan was in the loop about and encouraged Pennings's plan to
secretly raise the basis point for commissions to compensate State
Street for the loss that it would incur in futures trading.
3. Second KIA Transition
In October 2010, KIA opened bidding for a second
transition involving $4 billion in assets. State Street, through
Pennings, again submitted a zero-commission bid to KIA and won the
transition contract. Once again, Pennings intended to take
undisclosed commissions on the transactions involved in the
trading. Pennings testified that he believed that Das knew how
State Street would make money on the deal.
For his part, McLellan approved Pennings's
zero-commission bid before it was submitted to KIA. After landing
the deal, McLellan requested that Pennings forward him a copy of
the TMA and the periodic notice. McLellan communicated with
various players throughout the transition about the commissions to
be taken in the United States. He personally approved a
London-based trader's instruction to take 18 basis points on the
buy side and 2 basis points on the sell side of each of the
transactions for KIA in the United States.
During the second KIA transition, State Street's newly
established "rates desk," an office within State Street that would
directly buy and sell bonds for clients, sought permission to
participate in the transition. McLellan and Pennings opposed their
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inclusion because of the risk that their scheme would be uncovered
by others within State Street. McLellan asked Pennings if "legal"
had looked at the TMA with KIA, to which Pennings responded:
"[A]bsolutely not. Nor did they look at the periodic notice. This
can of worms stays closed." McLellan agreed with Pennings that
they could not disclose the spread to others within State Street.
Ultimately, however, McLellan did share the agreement with State
Street's legal department. Pennings testified that the legal
department did in fact sign off on the rates desk's involvement
and that he did not know if anyone noticed the zero-commission
language. According to Pennings, State Street earned "$2.6 million
or thereabouts" from the second KIA transition but disclosed
"[z]ero, nothing" to KIA. Since the implementation shortfall of
$2,047,000 was well below the initial estimate, KIA would have
actually made a profit on the transition had State Street not
pocketed the hidden commissions.
4. NTMA Transition
In December 2010, NTMA, an Irish government employee
pension fund, sought to transition $4 billion in assets through
the sale of a combination of stocks and bonds because Irish banks
needed a cash injection at the time. Pennings submitted a bid for
the transition with a management fee of 1.25 basis points and no
commissions despite his intention to apply hidden commissions.
According to Boomgaardt, he did so to beat competitors for the
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bid. NTMA ultimately selected State Street to handle half of the
transition. With the negotiations for the contract completed,
Pennings instructed Boomgaardt not to inform NTMA transition
managers of the hidden commissions.
Pennings eventually renegotiated the fee to 1.65 basis
points based on complications associated with the trades that NTMA
sought to make. An NTMA official testified that the pension fund
believed that 1.65 basis points would be the only cost of the
transition and that additional commissions would not be applied.
In later communications, Pennings informed McLellan of his
intention to secretly increase the markup. At the conclusion of
trading, the transition came in below the estimated shortfall that
Pennings provided to NTMA. However, NTMA's representative
testified that it would not have selected State Street if it had
known that additional hidden commissions were going to be applied
because a competitor, Citibank, would have been less expensive.
Once again, McLellan oversaw the transition from the
United States. While McLellan never communicated directly with
NTMA, he did approve the bid with no commission and told Pennings
that the price charged to the client would have to include a hidden
commission in order for State Street to make a profit, and he spoke
directly with Pennings about the implementation of the scheme.
McLellan reviewed the TMA and periodic notice and determined that
nothing in the documents affirmatively prevented a broker-dealer
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from taking commissions on the trades. He then agreed to
Pennings's proposed commissions on the transition -- 10 to 12 basis
points on fixed income trades and 3 basis points on U.S. equities
-- and directed traders to use a rarely-consulted stock trading
account to evade State Street's automated systems for reporting
equities trades, which would have broken down the trade by market
price and commission charge in the documents given to the client.
He further oversaw the trading in Boston and told traders what
markdowns and markups to take on each of the transactions. At the
end of the transition, State Street had taken millions in
undisclosed commissions on trades for NTMA.
5. Sainsbury's Transition
In January 2011, Boomgaardt received an RFP from
Sainsbury's, a pension-fund for a large supermarket chain in the
United Kingdom, which he forwarded to Pennings. Boomgaardt sent
Sainsbury's a proposal that offered to conduct the
multimillion-dollar transition for a flat fee of £350,000.
Boomgaardt submitted this bid under the assumption that
competitors were also submitting low bids. Boomgaardt, however,
believed that his superiors -- i.e., Pennings and McLellan --
intended to take undisclosed commissions on transactions during
the transition. Pennings reaffirmed Boomgaardt's belief that
McLellan had approved their proposal for the transition. The TMA
with Sainsbury's provided that any commissions taken on the
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transition had to be detailed in the periodic notice, and the
relevant periodic notice provided that State Street would take no
commissions on the transition. A Sainsbury's representative
testified that he understood State Street's proposal to mean that
there would be no difference between the buy or sell cost and the
cost as represented in the final documents submitted to them. At
the conclusion of trading, the transition came in roughly 19.2
basis points below the original shortfall estimate. Nevertheless,
the Sainsbury's representative testified that the company would
not have hired State Street had it known that $1.1 million of
additional commissions would be applied, and it would have given
its business to a competitor, JP Morgan, instead. Once again,
State Street collected millions of dollars in hidden commissions.
6. Eircom Transition
In March 2011, Eircom, a telecommunications company in
Ireland, sought bids for transitioning approximately $1 billion in
assets. Boomgaardt proposed to conduct a transition for a flat
fee of €400,000, and Eircom awarded State Street the contract.
Pennings indicated to Boomgaardt that the contract did not prohibit
commissions and directed him to apply additional hidden
commissions on trades. Pennings testified that McLellan personally
approved the scheme to apply hidden commissions, which Boomgaardt
understood as well. In an email to Boomgaardt in May 2011,
McLellan mentioned the prospect of $1 million in revenue, which
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could only be achieved through the application of hidden
commissions.
7. Royal Mail Transition
In March 2011, Boomgaardt and Pennings proposed a flat
fee of 1.75 basis points to Royal Mail, a pension fund for postal
workers in the United Kingdom, for its transition of $3.2 billion
in assets. Again, Pennings intended to take undisclosed
commissions of roughly 1 basis point on U.S. trades and 2 basis
points on European trades. Pennings, however, forwarded a periodic
notice to Royal Mail that only outlined a flat management fee for
the entire transition and did not inform Royal Mail of his
intention to take commissions. In an email to Royal Mail
representatives, Pennings confirmed that the flat fee was the total
cost for the transition. Royal Mail testified that it would not
have hired State Street if it had known that hidden commissions
were going to be charged.
McLellan, once again, was operating behind the scenes on
the transition. Before bidding on the contract, Pennings told
McLellan of the opportunity, to which McLellan emailed in response:
"thin to win." Pennings understood this email to be an endorsement
of a low bid with hidden commissions to beat competitors in the
market and earn substantial profits. Pennings, however, never
communicated to McLellan that he had made a representation
regarding the flat fee as equating the total costs. Pennings
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nevertheless did notify McLellan of his intent to take commissions
of 1.5 to 2 basis points beyond the flat fee that he proposed.
McLellan coordinated trades in the United States and instructed
U.S. traders to place hidden commissions on the trades.
A Boston-based trader understood that the instruction was a
directive to mislead Royal Mail as to the price of the securities.
State Street collected over $1 million in revenue through
undisclosed commissions throughout the Royal Mail transition.
After receiving the final financial report on the
transition in June 2011, Royal Mail contacted Pennings and inquired
into State Street's charges because it appeared that additional
commissions had been applied to the transition. Pennings initially
denied that commissions had been applied but agreed to investigate
the matter and then discussed the issue with McLellan. McLellan
and Pennings decided to disclose only the commissions taken on
trades in the United States and not those in the European market
to Royal Mail. Pennings then carried out this plan and disclosed
to Royal Mail that the commissions were only an issue in the United
States. Boomgaardt testified that McLellan independently told him
to use the term "fat-finger trading error" when discussing the
commissions issue with Royal Mail. In an email, McLellan stated
that those in State Street should describe the commissions as an
"inadvertent commissions applied" error. Subsequently, McLellan
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authorized Pennings and Boomgaardt to refund the commissions on
U.S. trades, totaling $1 million.
After receiving these disclosures, Royal Mail hired an
independent auditor, Inalytics, to investigate the transition.
McLellan and Pennings instructed Boomgaardt not to forward
information to Inalytics that would disclose the European markups.
Absent this information, Inalytics requested that State Street
sign off on the propriety of the transition, and McLellan asked
Pennings to draft a compliance letter that omitted the commissions
on European securities. McLellan reviewed the letter, which
provided that only $1 million had been taken in commissions and
directed Boomgaardt to send it to Royal Mail. Boomgaardt, however,
refused and told a London-based State Street executive about the
commissions and the scheme.
In August, McLellan sought all information from
Boomgaardt pertaining to Royal Mail including the RFP, the TMA,
and the periodic notice. On a subsequent phone call between
McLellan, Boomgaardt, and Pennings, McLellan discussed how to
"message" a Royal Mail consultant "that we may have the same
booking issue in the U.K. as we do in the States." At that time,
Pennings and McLellan suggested taking the position that the
agreements permitted them to take hidden commissions on trades.
After this phone call, McLellan, however, decided that all
commissions would be refunded to Royal Mail. McLellan then
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directed Pennings to inform Inalytics of the European commissions
and that Pennings should "come clean for everything."
II. Procedural Background
McLellan was indicted on one count of federal conspiracy
under 18 U.S.C. § 371 based on predicates of securities and wire
fraud (Count 1), two counts of securities fraud under 15 U.S.C.
§§ 78j(b), 78ff(a), and 17 C.F.R. 240.10b-5 (Counts 2-3), two
counts of wire fraud under 18 U.S.C. § 1343 (Counts 4-5), and one
count of wire fraud affecting a financial institution under 18
U.S.C. § 1343 (Count 6).
During the pre-trial phase, McLellan requested that the
district court issue letters rogatory to the United Kingdom and
Ireland to obtain documents from NTMA and Eircom. He sought
internal communications from those firms pertaining to: (1) TMA
compensation terms with State Street and the victims'
understanding of those terms; (2) the victims' perception of the
fees; (3) all competing bids; and (4) the victims' perception of
State Street's overcharges. The district court granted the request
and issued nine letters rogatory, see 28 U.S.C. § 1781, each of
which noted in part that McLellan demonstrated "that justice cannot
completely be done amongst the parties without the production of
the documents requested." Those letters were sent to NTMA, Royal
Mail, Sainsbury's, Eircom, Inalytics, Mercer (a U.K. entity that
acted as a consultant to Eircom), Aon (another U.K. entity that
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acted as a consultant to Sainsbury's), Nomura, and Goldman Sachs.
Additionally, the court granted a seven-month continuance of the
trial to provide McLellan with ample time to obtain the documents
requested via letters rogatory. While McLellan concedes that he
did "receive partial compliance with the letters rogatory from
some of the subpoenaed parties," he maintains that he was unable
to access "contemporaneous internal communications that would have
reflected the considerations that went into the selection of State
Street," and he did not receive any material directly from NTMA.
In January 2018, the Judicial Authority of Ireland
notified the district court that it declined to enforce the letters
and determined that an MLAT request was the only means of producing
the materials. McLellan then moved for the district court to order
the Executive Branch to make a request pursuant to the U.S.-Ireland
MLAT. McLellan further requested that the district court order
the government to exercise its MLAT powers to request documents
from U.K. entities when the production of evidence was stalled
within the U.K. police department.1 If the district court
declined, McLellan requested that the court exclude all evidence
1 We note that, prior to trial, McLellan also moved to order the
Attorney General to submit a request to depose a witness located
in the Netherlands who did not respond to the court's Rule 15
deposition order pursuant to the U.S.-Netherlands MLAT, which the
district court denied. However, he does not challenge this
decision on appeal.
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on NTMA and Eircom. The government opposed McLellan's request to
compel it to exercise its treaty powers.
The district court denied McLellan's motion to compel on
the ground that it lacked authority to do so. Additionally, it
found no valid basis to grant McLellan's request to exclude the
government's evidence solely because of his inability to procure
additional evidence. However, the district court did note that
"the more limited power available to McLellan to compel production
of witnesses or documents from outside the United States as
compared to within the United States potentially raise[d] fairness
or due process considerations."
At trial, McLellan objected to the district court's jury
instructions regarding the "in connection with" and "materiality"
elements of the securities fraud charge on the ground that they
were overly broad. Specifically, he argued that the jury should
have been instructed that the "in connection with" element was
only met if the fraud was "material to a decision by one or more
individuals to buy or to sell a covered security." On the wire
fraud counts, the district court held that 18 U.S.C. § 1343, or
the wire fraud statute, applies extraterritorially and denied
McLellan's proposed instruction that would have limited the wire
fraud statute to domestic conduct. Ultimately, the jury convicted
McLellan of securities fraud, wire fraud, and conspiracy (Counts
1-5) and acquitted him of wire fraud affecting a financial
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institution (Count 6). The district court then denied McLellan's
motion for a judgment of acquittal or a new trial.
At sentencing, the district court was "not persuaded"
that "there was an intent to defraud" on the first KIA transition
and thus did not include it in the loss calculation. The district
court then sentenced McLellan to eighteen months of imprisonment
to be followed by two years of supervised release and assessed a
$5,000 fine. McLellan filed a timely notice of appeal the very
same day.
On appeal, McLellan challenges each of his convictions
on the same grounds that he raised below. He asserts that the
district court erred in its interpretation of both the securities
fraud and wire fraud statutes as well as when it refused to compel
the government to exercise its powers under the U.S.-U.K. and
U.S.-Ireland MLATs. We take each of these challenges in turn.
III. Securities Fraud
A. Sufficiency of the Evidence
On appeal, McLellan challenges the sufficiency of the
evidence supporting his securities fraud convictions.
Specifically, he argues that Security Exchange Commission ("SEC")
Rule 10b-5 does not prohibit the misrepresentations for which he
is responsible, which, in his view, were not made "in connection
with" the purchase or sale of any covered securities but rather
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were merely intended to induce prospective clients to retain State
Street's transition management services.
We review challenges to the sufficiency of evidence de
novo. See United States v. Mehanna, 735 F.3d 32, 42 (1st Cir.
2013). "This review eschews credibility judgments and requires us
to take the facts and all reasonable inferences therefrom in the
light most favorable to the jury's verdict."
Id. After reviewing
the record, "a guilty verdict need not be an inevitable outcome;
rather, 'it is enough that the finding of guilt draws its essence
from a plausible reading of the record.'"
Id. (quoting United
States v. Sepúlveda,
15 F.3d 1161, 1173 (1st Cir. 1993)).
Importantly, McLellan's sufficiency challenge does not take aim at
the factual record itself. Instead, he challenges whether the
facts in the record are sufficient to sustain a conviction for
securities fraud premised on a Rule 10b-5 theory as a matter of
law.
1.
The Securities Exchange Act of 1934 ("Exchange Act")
"forbids the use of any manipulative or deceptive devices or
contrivances 'in connection with the purchase or sale of any
security.'" Hidalgo-Vélez v. San Juan Asset Mgmt., Inc., 758 F.3d
98, 104 (1st Cir. 2014) (quoting 15 U.S.C. § 78j(b)). As part of
its enforcement mechanisms, the Exchange Act grants the SEC the
authority to promulgate regulations, such as Rule 10b-5, "which
-23-
likewise prohibits fraud in connection with the purchase or sale
of securities." Id. (citing 17 C.F.R. § 240.10b-5).2 The purpose
of the Exchange Act and complementary SEC regulations is "to insure
honest securities markets and thereby promote investor
confidence." Chadbourne & Parke LLP v. Troice,
571 U.S. 377, 390
(2014) (quoting United States v. O'Hagan,
521 U.S. 642, 658
(1997)). Congress's view was that the statutory scheme would
"protect investors against manipulation of stock prices," Basic
Inc. v. Levinson,
485 U.S. 224, 230 (1988) (citing S. Rep. No.
73-792, at 1-5 (1934)), and rein in "dishonest practices of the
market place [that] thrive upon mystery and secrecy."
Id. (quoting
H.R. Rep. No. 73-1383, at 11 (1934)).
To make out a criminal case of securities fraud under
Rule 10b-5, the government must prove that the defendant, acting
willfully, knowingly, and with intent to defraud, made a material
2 Specifically, Rule 10b-5 declares it unlawful:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which
they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon any
person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
-24-
misstatement or omission in connection with the purchase or sale
of any security. See United States v. Vilar, 729 F.3d 62, 88
(2d Cir. 2013); see also SEC v. Tambone,
597 F.3d 436, 447 n.9
(1st Cir. 2010) (noting that in public enforcement actions under
Rule 10b-5, as opposed to private civil enforcement actions, the
government need not prove reliance). Because McLellan lays siege
to his securities fraud conviction on the ground that his fraud
was not in connection with the purchase or sale of a security, we
train our analysis on that element of the offense.
The "in connection with" element requires the government
to prove that the alleged misrepresentation was "material to a
decision by one or more individuals (other than the fraudster) to
buy or to sell a 'covered security.'" Hidalgo-Vélez, 758 F.3d at
106 (quoting
Troice, 571 U.S. at 387). This is "satisfied only
'where the misrepresentation [would make] a significant difference
to someone's decision to purchase or to sell a covered security.'"
Id. (quoting
Troice, 571 U.S. at 387).3 We have at times referred
to the "in connection with" element as the "transactional nexus"
inquiry, and under this framework, we determine whether the alleged
3 Because Hidalgo-Vélez was a civil case in which the plaintiff
had to prove reliance, it made sense there (as in Troice) to say
that the plaintiff had to prove that the fraud actually made a
difference to a statutorily relevant investment decision; by
contrast, in a criminal case (as we have explained), the government
need only prove that the misrepresentation would have been material
to a reasonable investor.
-25-
scheme to defraud and the security transaction are sufficiently
close to warrant application of Rule 10b-5. Calderón Serra v.
Banco Santander P.R., 747 F.3d 1, 5 (1st Cir. 2014) (noting that
the "in connection with" element should not be read "so broadly as
to convert every common-law fraud that happens to involve
securities into a violation of § 10(b)" (quoting SEC v. Zandford,
535 U.S. 813, 820 (2002))).
In Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit,
the Supreme Court interpreted parallel "in connection with"
language in the Securities Litigation Uniform Standards Act
("SLUSA"), which gave it occasion to explain that Rule 10b-5's
transactional nexus required merely that "the fraud alleged
'coincide' with a securities transaction." 547 U.S. 71, 85 (2006)
(quoting United States v. O'Hagan,
521 U.S. 642, 656 (1997)); see
also
Hidalgo-Vélez, 758 F.3d at 105-06. Subsequently, in Troice,
the Supreme Court reaffirmed Dabit and clarified that a "fraudulent
misrepresentation or omission is not made 'in connection with'"
the purchase or sale of covered securities "unless it is material
to a decision by one or more individuals (other than the fraudster)
to buy or to sell a 'covered security.'"
Troice, 571 U.S. at 387
(emphasis added); see also Calderón
Serra, 747 F.3d at 5 (treating
the question as whether the fraud was "in connection with" inducing
customers to take out loans or to purchase securities). Notably,
Troice reasoned that it did not modify the Dabit standard because
-26-
"[e]very one of [the Supreme Court's prior cases] concerned a false
statement (or the like) that was 'material' to another individual's
decision to 'purchase or s[ell]' a statutorily defined 'security'
or 'covered security.'" Troice, 571 U.S. at 393 (alteration in
original) (quoting
Dabit, 547 U.S. at 75-77). We have since
interpreted Troice to infuse the transactional nexus analysis with
a determinative inquiry into materiality. See Calderón
Serra, 747
F.3d at 6. Although Troice did not modify Dabit, we have understood
the case to mean that the alleged fraud must reach a certain
threshold of materiality to be deemed made "in connection with" a
transaction in securities. See
Troice, 571 U.S. at 387-88.
In an attempt to dissolve the nexus between his fraud
and the discrete purchases and sales of securities, McLellan urges
us to find that his up-front misrepresentations to clients that
State Street would not be charging commissions were only material
to those clients' decisions to select State Street as a transition
manager and not to their decisions to buy or sell particular
securities. At its core, this argument is twofold. On the law,
McLellan argues that under Troice, a misrepresentation which goes
only to the selection of a transition manager is insufficient to
establish securities fraud. On the facts, McLellan maintains that
there is no evidence that State Street's zero-commissions
misrepresentations would have affected a reasonable investor's
decision about whether to buy or sell a statutorily covered
-27-
security. Neither assertion persuades us. After careful review,
we hold that a broker-agent who misrepresents to his prospective
clients how much they will pay, or what value they will receive,
for each securities trade that he makes on their behalf, commits
securities fraud within the meaning of Rule 10b-5.
2.
On a global level, McLellan mistakenly treats this case
as if there is only one investment decision at issue for each
transition: the client's macro-level decision that, over some
period of time, it would like to transition its investment in
Asset X to an investment in Asset Y. While McLellan's
misrepresentations may not have influenced that one macro-level
decision for any of the transitions, we do not understand an
investor's choice between transition managers to be the legal
equivalent of choosing between brokers to execute a purchase of a
single share of stock at the prevailing price at any given time.
To the contrary, as the record demonstrates, the idiosyncrasies of
transition management services (as compared to run-of-the-mill
brokerage services) belie McLellan's attempt to escape liability
for his fraudulent misrepresentations.
Investors that hire transition managers are preparing to
transition sizeable investment portfolios (often valued in the
hundreds of millions if not billions of dollars) from one set of
assets to another. Under the agency model, when the investor hires
-28-
a transition manager to handle a transition, the investor turns
over its portfolio to the transition manager, who enters an
extended series of individual securities transactions on behalf of
the investor. That the clients did not actually make those
micro-level decisions themselves, instead entrusting them to State
Street, does not relieve McLellan of securities fraud liability.
In our view, even if a client had already made a macro-level
decision about the securities it wished to buy or sell before
hiring State Street, the micro-level trading decisions that the
client delegates to State Street as the transition manager under
the agency model -- i.e., the choices of when, at what price, and
in what quantities to trade -- are "decision[s] to purchase or to
sell a covered security" within the meaning of Troice, 571 U.S. at
387.
It follows that McLellan's up-front misrepresentations
that he would not charge commissions were "material" to those
when-and-how decisions because they reasonably induced the clients
to delegate those decisions to State Street as their transition
manager. See Hidalgo-Vélez, 758 F.3d at 106. Moreover, while
McLellan's after-the-fact price reports themselves may not be
material to (i.e., not reasonably capable of influencing) any of
the micro-level decisions that State Street made on its clients'
behalf, McLellan's up-front no-commission lies understated the
total price that clients would ultimately pay or receive for the
-29-
securities that State Street bought and sold on their behalf. In
other words, those lies also translated into back-end price
inflation, which was necessary to conceal and complete the fraud.
And it is well-settled that the price of a security is material to
a reasonable investor's buy-sell decision. See Rayner v. E*Trade
Fin. Corp., 899 F.3d 117, 122 (2d Cir. 2018) ("It is frivolous to
suggest that negatively influencing the price and quantity at which
clients may buy and sell securities would not 'make[] a significant
difference to someone's decision to purchase or to sell a covered
security." (alteration in original) (quoting Troice, 571 U.S. at
387)).
Together, this is enough to satisfy Rule 10b-5's
transactional nexus requirement.
3.
We find clear support for this position in several lines
of precedent. First, we look to SEC v. Zandford, where the client
gave the defendant-broker control over his investment account, and
the broker then "sold the [client's] securities while secretly
intending from the very beginning to keep the proceeds." 535 U.S.
813, 824 (2002). There, the Supreme Court held that the fraud
satisfied the "in connection with" requirement because a broker
"who sells customer securities with intent to misappropriate the
proceeds, violates [Section] 10(b) and Rule 10b-5," even though
the fraudster did not misrepresent the value of any security or
-30-
fraudulently induce the customer to enter a securities
transaction. Id. at 819–20. The Court explained that the
"connection between the deception and the sale" was identical to
a case in which the defendant "sold [the victim] a security ([an]
option) while secretly intending from the very beginning not to
honor the option."
Id. at 823-24 (quoting Wharf (Holdings) Ltd.
v. United Int'l Holdings, Inc.,
532 U.S. 588, 597 (2001)). In
both cases, the fraud "deprived the [victim] of the benefit of the
sale" that the fraudster had expressly or impliedly promised to
deliver.
Id. at 824. Those promises were "material to a transaction
in the relevant securities by or on behalf of someone other than
the fraudster" and met the "in connection with" requirement.
Troice, 571 U.S. at 393 (citing
Zandford, 535 U.S. at 822 and
Wharf, 532 U.S. at 590–92); see also Superintendent of Ins. of
N.Y. v. Bankers Life & Cas. Co.,
404 U.S. 6, 9 (1971) (controlling
shareholders committed securities fraud when they duped company
into authorizing sale of treasury bonds with the misrepresentation
that "it, the seller, would receive the proceeds").
And that is just what happened here; McLellan induced
clients to delegate to him a whole set of investment decisions --
i.e., the micro-level decisions about when and how to execute the
trades -- by promising them the full proceeds from each trade while
planning all along to pocket the undisclosed commissions. Indeed,
McLellan (unlike Zandford, who just sold his clients' securities
-31-
and pocketed the proceeds), made an affirmative, up-front
misrepresentation that overstated the benefit that State Street's
clients would derive from each trade. On that score, his case is
even more straightforward than the one the Supreme Court considered
in Zandford. McLellan tries to distinguish Zandford because there,
he says, each sale breached the broker's fiduciary duty and "in
and of itself was a fraud upon the client," so the fraud "perfectly
coincided" with Zandford's sales of securities; whereas here, the
government did not pursue the same theory; instead, it focused on
McLellan's no-commission lies, which were made to clients after
they had already decided which securities to trade as part of the
transition, before they decided to hire State Street, and before
State Street executed any trade on their behalf. However, in
truth, McLellan's lies were about the trades themselves. He
misrepresented to the clients how much State Street would charge
for each trade it made on their behalf, and the alleged fraud was
not complete until he followed through on the scheme by taking an
unauthorized cut of the proceeds from each trade. Because the
lies overstated the benefit that clients would get from every
purchase and sale, and the complete fraud coincided with each
trade, it had the close nexus to those transactions that we have
required for securities fraud under Rule 10b-5. Hidalgo-Vélez,
758 F.3d at 105; Calderón
Serra, 747 F.3d at 6.
-32-
The Second Circuit's decision in United States v. Litvak
is also consistent with our conclusion. 808 F.3d 160, 167-68
(2d Cir. 2015) (Litvak I). To lay out the facts, Litvak was a
residential mortgage-backed securities ("RMBS") broker-dealer who
acted as a principal, buying and reselling RMBS to investor-buyers
(the victims). In one of his schemes, he bought RMBS from
third-party sellers for one price, then lied to the investor-buyers
by saying that he had paid a higher price, effectively hiding an
undisclosed markup. See Litvak I, 808 F.3d at 167-68. The Second
Circuit held that there was enough evidence for a securities fraud
conviction because, in the opaque market for RMBS (where investors
have to rely on brokers to tell them what prices the securities
are selling for), a broker-dealer's misrepresentations to
investor-buyers about the price he paid for the RMBS can inflate
the price at which the investor-buyer ultimately agrees to pay for
it. See
id. at 167-68 nn.5-7, 175-76. Therefore, although the
buyer-victims in Litvak did not pay Litvak any more than the price
they negotiated to pay him, they would have negotiated a lower
price if they had known Litvak had bought cheaper than he let on
(or so a jury could find). Id.; see also United States v. Litvak,
889 F.3d 56, 67 (2d Cir. 2018) (Litvak II). As here, the broker
fraudulently induced the victims to pay more per trade (in the
amount of a hidden markup) than they would have paid otherwise.
-33-
Along those lines, McLellan cites a pair of Eleventh
Circuit decisions to support his contention that, legally, a
misrepresentation which goes only to the selection of a transition
manager is insufficient to establish securities fraud: Brink v.
Raymond James & Assocs., Inc., 892 F.3d 1142 (11th Cir. 2018); and
SEC v. Goble,
682 F.3d 934 (11th Cir. 2012). However, a closer
inspection leads to the conclusion that McLellan's case is actually
even clearer than Litvak, and distinct from Goble and Brink,
because State Street's clients, unlike the victims in the Eleventh
Circuit cases, did not know "how much [they were] being charged
for costs associated with each [securities] transaction" and were
"charged more than [they] agreed to pay."
Brink, 892 F.3d at 1149.
In Goble, the owner of a brokerage firm directed an
employee to record a fake transaction in the company's books in
order to avoid SEC regulations requiring businesses to set aside
a certain amount of funds. 682 F.3d at 939-40. The Eleventh
Circuit determined that this activity was a "misrepresentation
that would only influence an individual's choice of
broker-dealers," and it was therefore not material to an investment
decision to purchase or sell securities.
Id. at 944. In Brink,
a broker misrepresented to clients the purpose of a "processing
fee" by indicating that the fee was used to facilitate securities
trades but then also built a commission into the
fee. 892 F.3d at
1144-45. The Eleventh Circuit held that a misrepresentation that
-34-
only goes to "the choice of a type of investment account . . . is
not intrinsic to the investment decision itself." Id. at 1148-49.
However, the Eleventh Circuit emphasized in Brink that the
defendant "did not 'mislead [its] customers as to what portion of
the total transaction cost was going toward purchasing securities
versus the cost of the broker's involvement.'"
Id. at 1149
(quoting Litvak
I, 808 F.3d at 176) (alteration in original).
Thus, because the fee was fully disclosed prior to the transaction,
the Eleventh Circuit could conclude that "a reasonable investor
would [not] have made different investment decisions."
Id.
These factual distinctions between McLellan's fraud
(i.e., that of a transition manager under the agency model) and
the misrepresentations at issue in Brink and Goble are critical.
While the fraud in Brink and Goble may have been relevant to an
investor when deciding whether to do business with the broker
generally, the Eleventh Circuit determined that it did not
influence the narrower decision to purchase or sell the securities
through that transaction, and thus it lacked the close nexus
required to prove Rule 10b-5 securities fraud. In those cases,
however, the investors were not misled as to the value or price of
a security, nor did the broker apply undisclosed markups.
Cf. Litvak
I, 808 F.3d at 175-76. Instead, the brokers
misrepresented ancillary facts about their businesses, such as the
nature of a processing fee and the financial state of the firm.
-35-
These types of misrepresentations could be fairly regulated by
competition in the marketplace (as opposed to the Exchange Act)
because, knowing the full cost up front, the customer could always
seek the services of another firm to help purchase or sell the
desired securities. See id.
By contrast, McLellan's misrepresentations concerned the
costs of the trades themselves and required McLellan to distort
the prices of the securities that his firm traded on the back end
to conceal (and complete) the fraud. That is precisely why, under
the agency model of transition management services, McLellan's
no-commission lies have a tight-enough nexus to the relevant
securities transactions to fit "comfortably within the confines of
the 'in connection with' requirement."
Hidalgo-Vélez, 758 F.3d at
107. For the foregoing reasons, misrepresentations that influence
the choice of a transition manager under the agency model, unlike
the choice of a run-of-the-mill broker-dealer, necessarily affect
who makes the micro-level trading decisions, and therefore, the
statutorily relevant investment decisions themselves.
Circling back to Litvak, McLellan also tries to
distinguish the case on its facts because there, he suggests, the
fraud influenced the victims' decisions about whether to buy or
sell the covered securities at all, not just what price to pay or
when to trade. But from Zandford, we know that there need not "be
a misrepresentation about the value of a particular security in
-36-
order to run afoul of the [Exchange] Act"; inducing the victim to
let you sell its securities, then pocketing the proceeds you
promised to pass on, is enough. See 535 U.S. at 820. And the
victims in Litvak did not testify they would have foregone the
trades if Litvak had not lied -- only that they would have paid
less, just as the State Street clients would have here. See
Litvak
I, 808 F.3d at 167-68 nn.5-7.
Moreover, from Dabit, we know that the choice of when to
buy or sell a security, which itself often affects how much you
pay or receive from the sale, is itself a significant investment
decision that the Exchange Act and Rule 10b-5 protect. Dabit
involved a holder action, in which the plaintiffs alleged that
Merrill Lynch's analysts intentionally overvalued stocks held by
its investment banking clients and caused its brokers and their
clients to "continue[] to hold their stocks long beyond the point
when, had the truth been known, they would have sold." Dabit, 547
U.S. at 75. When the truth was revealed, the stock prices tanked.
Id. The brokers and their clients sued alleging that they were
"fraudulently induced, not to sell or purchase, but to retain or
delay selling their securities" and thereby suffered losses.
Id.
at 77. The Supreme Court held that this fraud met the "in
connection with" requirement even though the plaintiffs were not
"defrauded into purchasing or selling particular securities."
Id.
at 85, 85 n.10. And as we have explained, the Court in Troice,
-37-
right after establishing that the "fraudulent misrepresentation or
omission [must be] . . . material to a decision by one or more
individuals (other than the fraudster) to buy or sell a 'covered
security,'" the Court qualified that "[w]e do not here modify
Dabit." Troice, 571 U.S. at 387.
4.
Our conclusion that McLellan's up-front
misrepresentations satisfy the "in connection with" requirement is
also bolstered by the long line of cases finding that the taking
of undisclosed markups constitutes securities fraud. See Grandon
v. Merrill Lynch & Co., 147 F.3d 184, 193 (2d Cir. 1998) (finding
that undisclosed excessive markups violated Rule 10b-5); SEC v.
First Jersey Sec., Inc.,
101 F.3d 1450, 1469 (2d Cir. 1996) ("[A]
broker-dealer who charges customers retail prices that include an
undisclosed, excessive markup violates . . . § 10(b) of the
securities laws."); Bank of Lexington & Tr. Co. v. Vining-Sparks
Sec., Inc., 959 F.2d 606, 613 (6th Cir. 1992) ("[T]he failure to
disclose exorbitant mark-ups violates section 78j(b) and Rule
10b-5."); Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
835 F.2d 1031, 1033-36 (3d Cir. 1987) (reversing a grant of summary
judgment because it had "no doubt" that taking undisclosed
excessive markups violated Rule 10b-5). McLellan argues that these
cases are inapplicable for two reasons. First, he contends that
they all deal with "excessive" markups, but there is no showing
-38-
that State Street's markups were "excessive." Second, he submits
that Troice changed the legal landscape so as to foreclose his
conviction.
First, to be sure, McLellan is right that there is no
finding that the commissions were "excessive" in some abstract
sense. There is no allegation here that State Street's markups
were not "reasonably related to prices charged in an open and
competitive market." Grandon, 147 F.3d at 189. However, the
rationale underlying the undisclosed markup cases is that
broker-dealers make an "implied representation that [they] charge
their customers securities prices that are reasonably related to
the prices charged in an open and competitive market."
Id. Here,
McLellan expressly misrepresented the markups he planned to
charge, charging the clients a higher markup than he represented.
If a broker's failure to disclose an abnormally high markup is a
material omission, McLellan's affirmative promise that he would
charge a lower markup than he planned to charge must be a material
misstatement.
Second, there are reasons to be skeptical that Troice
had such a major impact on what conduct is prosecutable as
securities fraud. For instance, in Troice, the Supreme Court
"specif[ies] at the outset that [the] holding does not limit the
Federal Government's authority to prosecute frauds like the one
here," or otherwise "limit[] the Federal Government's prosecution
-39-
power in any significant way." 571 U.S. at 381 (internal quotation
marks omitted). McLellan essentially asks that we ignore that
language and apply Troice to limit the Federal Government's ability
to prosecute anyway. We decline the invitation.
5.
Finally, we note that McLellan's behavior is the type of
fraudulent behavior which was meant to be forbidden by the Exchange
Act and Rule 10b-5. Unlike the defendant in Troice, State Street
defrauded "victims who took, who tried to take, who divested
themselves of, who tried to divest themselves of," and "who
maintained an ownership interest" in covered securities. Troice,
571 U.S. at 378; see also
id. at 388–89 ("The regulatory statutes
refer to persons engaged in securities transactions that lead to
the taking or dissolving of ownership positions. And they make it
illegal to deceive a person when he or she is doing so."). The
clients sought to "reap the benefit of trading in [those] covered
securities," Hidalgo-Vélez, 758 F.3d at 108, and McLellan deprived
them of part of that benefit, as in Zandford. His fraud therefore
implicates "[t]he purpose of § 10(b) and Rule 10b-5," which is "to
protect persons who are deceived in securities transactions -- to
make sure that buyers of securities get what they think they are
getting and that sellers of securities are not tricked into parting
with something for a price known to the buyer to be inadequate,"
or in the case of State Street, for a deal that is "not to be what
-40-
it purports to be." Chem. Bank v. Arthur Andersen & Co., 726 F.2d
930, 943 (2d Cir. 1984). And in Troice, the Supreme Court was
clear that brokers, accountants, investment advisors, and others
who "give advice, counsel, and assistance in investing in the
securities markets" remain subject to the federal securities laws
unless they "do not sell or participate in selling securities
traded on U.S. national exchanges."
Troice, 571 U.S. at 390.
Transition management services are important to institutional
investors restructuring huge portfolios, and if those investors
cannot trust transition managers to tell them how much the
transition will cost, their services lose much of their value to
the national securities markets and their participants,
potentially influencing investors' decisions about whether to move
at all. See
Zandford, 535 U.S. at 823 (noting that if investors
"cannot rely on a broker to exercise [its] discretion for their
benefit, then the [brokerage] account loses its added value").
So by our lights, a broker-agent's misrepresentation is
material to statutorily relevant investment decisions if it would
reasonably influence an investor's choice to entrust the agent
with the decisions of when, at what price, and in what quantities
to trade the securities. And a lie that clients will receive more
of the benefit of each purchase and sale, when in fact, the
broker-agent intends to (and does) charge hidden commissions on
each trade, is "material" to that choice and, therefore, to the
-41-
myriad investment decisions that it influences. That McLellan's
fraud misled clients about the costs of each trade, and therefore
"depended heavily on misrepresentations about [the] transactions
in covered securities," confirms a tight-enough nexus to those
transactions to satisfy the "in connection with" requirement.
Hidalgo-Vélez, 758 F.3d at 107 (citation omitted).
We therefore conclude that the Troice standard is
satisfied, and we decline to find that misrepresentations that
only affect the selection of a transition manager necessarily lack
a tight-enough nexus to qualify as securities fraud within the
meaning of Rule 10b-5. Accordingly, the evidence was sufficient
to support McLellan's securities fraud convictions.
B. Instructional Error
Relatedly, McLellan takes issue with the district
court's instruction to the jury regarding the "in connection with"
element of Rule 10b-5. Our approach to claims of instructional
error is "two-tiered": we review questions about whether jury
instructions "conveyed the essence of the applicable law" de novo
and questions about whether the district court's "choice of
language was unfairly prejudicial" for abuse of discretion. United
States v. Tkhilaishvili, 926 F.3d 1, 14 (1st Cir. 2019) (quoting
United States v. Sabean,
885 F.3d 27, 44 (1st Cir. 2018)). An
incorrect instruction, however, "will not require us to set aside
-42-
a verdict if the error is harmless." United States v. Sasso, 695
F.3d 25, 29 (1st Cir. 2012).
As to Rule 10b-5's "in connection with" requirement, the
district court instructed the jury:
This requirement is satisfied if you find that Mr.
McLellan's alleged conduct in some way touched upon
or coincided with a securities transaction; that is,
that the alleged fraud or deceit had some relationship
to the individual sales or purchases.
(emphasis added). The court further instructed the jury that it
could find the materiality component of the "in connection with"
element satisfied if there was a "substantial likelihood that a
reasonable investor engaging a transition manager would view the
statement as significantly altering the total mix of information
available." McLellan objected to both instructions as overbroad
because they could have enabled the jury to convict him based on
a theory of misrepresentations that do not satisfy the updated and
narrower "in connection with" requirement. Instead, McLellan
requested to have the jury instructed that the "in connection with"
element was only met if the fraud was "material to a decision by
one or more individuals to buy or to sell a covered security." He
further requested that "material" be defined as "meaningfully
affect[ing] a reasonable investor's consideration about whether to
buy or sell a security, and at what price."
On its face, the framing used by the district court in
its "in connection with" jury instructions displays some degree of
-43-
overbreadth. We have indeed interpreted Troice to cabin the "in
connection with" requirement, such that the fraud (as we have
explained above) must be one that would make a significant
difference to a reasonable investor's decision to purchase or sell
securities rather than merely touch upon or coincide with a
discrete securities transaction. See Hidalgo-Vélez, 758 F.3d at
106. In other words, the government must establish that the
misrepresentation would make "a significant difference to
someone's decision to purchase or to sell a covered security," not
merely that it was, in some sense, related to that decision.
Id.
(quoting Troice, 571 U.S. at 386-87). Nevertheless, it is not
clear either that Troice should be read to require a narrower jury
instruction. For one, the instructional language here is drawn in
part from Dabit, which Troice explicitly indicated that it did not
modify. Plus, Dabit rejected the proposition that the "in
connection with" element is satisfied "only when the plaintiff
himself was defrauded into purchasing or selling particular
securities" and holds that to find securities fraud, "it is enough
that the fraud alleged 'coincide' with a securities transaction."
Dabit, 547 U.S. at 85.
However, even assuming the instructions were overbroad,
such a finding would not warrant overturning the conviction if the
potential error in the jury instruction were harmless. Where a
potentially erroneous instruction deals with an "essential element
-44-
of the crime," United States v. Doherty, 867 F.2d 47, 58 (1st Cir.
1989), it is harmless if "it appears beyond a reasonable doubt
that the error complained of did not contribute to the verdict
obtained." United States v. Wright,
937 F.3d 8, 30 (1st Cir. 2019)
(internal quotation marks omitted). "An erroneous instruction on
an element of the offense can be harmless beyond a reasonable
doubt, if, given the factual circumstances of the case, the jury
could not have found the defendant guilty without making the proper
factual finding as to that element."
Doherty, 867 F.2d at 58; see
also Pope v. Illinois,
481 U.S. 497, 503 (1987). The government
bears the burden of proving "that an instruction that is
constitutionally flawed is harmless."
Wright, 937 F.3d at 30. In
order to engage in this inquiry, we must "review[] the entire
record" and "consider[] the likely impact of the error on the minds
of the jurors."
Doherty, 867 F.2d at 58; see also Neder v. United
States,
527 U.S. 1, 19 (1999).
After doing so, we having little difficulty concluding
that, even assuming the "in connection with" jury instructions
were overboard, any potential error was harmless beyond a
reasonable doubt. The government's case was premised on McLellan's
up-front misrepresentations that State Street would not take
commissions from the securities trades it made on behalf of its
clients as part of their transition, which as a matter of law,
satisfy the transactional nexus requirement under Rule 10b-5. The
-45-
jury was free to believe Pennings, Boomgaardt, and other witnesses
when they testified about the structure and intent of the scheme
to hide commissions, or the jury could have determined that these
witnesses were not credible, in which case they would have
acquitted McLellan. The jury was not free, however, to extrapolate
from Pennings and Boomgaardt's testimony that some other scheme,
not advanced by the government and not supported by the evidence,
was the fraud alleged to have occurred.4 From the confines of the
evidence produced at trial, we find no evidence from which the
jury could rationally have reached a conclusion to convict under
these instructions on a ground other than that McLellan directed
misrepresentations as to commissions, which where material to the
statutorily relevant trading decisions of State Street's clients.
As noted in the previous section, the government's case thus fell
firmly within the scope of Rule 10b-5, and the jury's conclusion
would have remained the same even with a tailored jury instruction.
Therefore, to the extent that the jury instruction as to
the "in connection with" element of Rule 10b-5 might have been
4 This case is thus distinguishable from cases such as Wright,
where the government advanced the theory on which the defendant
was potentially erroneously convicted. See Wright, 937 F.3d at
30. While the government need not advance the erroneous theory
for an instructional error to be harmful, there must be something
in the record from which a jury could have reached a legally
erroneous, but rational, decision to convict. We find nothing in
the record that would support such a rational decision based on
the potentially overbroad instruction.
-46-
overbroad, any potential error was ultimately harmless.
Accordingly, we affirm McLellan's securities fraud convictions.
IV. Wire Fraud
Next, McLellan challenges his conviction for wire fraud.
He argues that the federal wire fraud statute, 18 U.S.C. § 1343,5
does not apply extraterritorially, and that the district court
erred by failing to provide an instruction that would have required
the jury to find a domestic application of the statute. We need
not decide whether § 1343 applies extraterritorially because the
facts underlying McLellan's conviction suffice to establish a
domestic application of § 1343 inasmuch as he committed each
required element of wire fraud from the United States through
domestic wires. As the instructions required the jury to find
that McLellan utilized a wire in the United States, we find that
the district court did not err in refusing to supply a domestic
application instruction.
5 The wire fraud statute, 18 U.S.C. § 1343, provides that:
Whoever, having devised or intending to devise any
scheme or artifice to defraud, or for obtaining money
or property by means of false or fraudulent pretenses,
representations, or promises, transmits or causes to
be transmitted by means of wire, radio, or television
communication in interstate or foreign commerce, any
writings, signs, signals, pictures, or sounds for the
purpose of executing such scheme or artifice, shall
be fined under this title or imprisoned not more than
20 years, or both.
-47-
"A district court's refusal to give a requested
instruction is reviewed de novo." United States v. Figueroa-Lugo,
793 F.3d 179, 191 (1st Cir. 2015) (emphasis added). The defendant
must present evidence sufficient to show "that he was entitled to
the instruction."
Id. "The initial threshold determination we
must make is whether the evidence, viewed in the light most
favorable to the defense, 'can plausibly support the theory of the
defense.'"
Id. (quoting United States v. Gamache,
156 F.3d 1, 9
(1st Cir. 1998)). If the evidence is sufficient, we then move onto
a three-part test where the district court is reversed only if the
proffered instruction was "(1) substantively correct as a matter
of law, (2) not substantially covered by the charge as rendered,
and (3) integral to an important point in the case so that the
omission of the instruction seriously impaired the defendant's
ability to present his defense." United States v. Baird,
712 F.3d
623, 628 (1st Cir. 2013).
McLellan's argument that he is entitled to the domestic
application instruction he seeks is only plausible if the wire
fraud statute does not apply extraterritorially. Otherwise he may
properly be convicted based on foreign conduct, "barring some other
limitation." RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090,
2101 (2016) (quoting Morrison v. Nat'l Aus. Bank Ltd.,
561 U.S.
247, 267 n.9 (2010)).
-48-
A. Extraterritorial Reach of § 1343
We review the extraterritorial application of a statute
in two steps. First, "we ask whether the presumption against
extraterritoriality has been rebutted." RJR Nabisco, 136 S. Ct.
at 2101. "Absent clearly expressed congressional intent to the
contrary, federal laws will be construed to have only domestic
application."
Id. at 2100. The threshold question is "whether
Congress has affirmatively and unmistakably instructed that the
statute" will apply extraterritorially.
Id. In the clearest case,
this intent is evinced when the statute affirmatively proscribes
activities that "tak[e] place outside the United States."
Id. at
2101 (alteration in original) (quoting 18 U.S.C. § 1957(d)(2)).
While such "an express statement . . . is not essential,"
id. at
2102, we nevertheless "assume that Congress legislates with an
awareness of the presumption against extraterritorial
application." Carnero v. Bos. Sci. Corp.,
433 F.3d 1, 7 (1st Cir.
2006).6 "If the statute is not extraterritorial, then at the
6 "The presumption serves at least two purposes."
Carnero, 433
F.3d at 7. First, it prevents "unintended clashes between our
laws and those of other nations."
Id. (quoting Equal Emp't Opp.
Comm'n v. Arabian Am. Oil Co. ("Aramco"), 499 U.S. 244, 248
(1991)). Second, it is premised on the notion that Congress is
primarily concerned with domestic conditions.
Id. In analyzing
a statute, we consult a statute's "text, context, structure, and
legislative history." Id.; see also RJR
Nabisco, 136 S. Ct. at
2101 (employing same approach).
-49-
second step we determine whether the case involves a domestic
application of the statute." RJR Nabisco, 136 S. Ct. at 2101.
While it is "usually . . . preferable for courts to
proceed in [this] sequence," we may "start[] at step two in
appropriate cases." Id. at 2101 n.5. We do so when it is "plain"
that a domestic application is present but the statute itself gives
rise to complex questions of congressional intent. Cf. Pearson v.
Callahan,
555 U.S. 223, 236-37 (2009) (noting efficiency benefits
of skipping to second step of qualified immunity analysis). "One
reason to exercise that discretion is if addressing step one would
require resolving 'difficult questions' that do not change 'the
outcome of the case,' but could have far-reaching effects in future
cases." WesternGeco LLC v. Ion Geophysical Corp.,
138 S. Ct. 2129,
2136 (2018) (quoting
Pearson, 555 U.S. at 236-37).
Because § 1343 contains difficult questions about
whether Congress intended the statute to apply extraterritorially,
we skip to the second step and determine that the present case is
a domestic application of the statute. Compare European Cmty. v.
RJR Nabisco, Inc., 764 F.3d 129, 141 n.11 (2d Cir. 2014), rev'd on
other grounds,
136 S. Ct. 2090 (2016) (finding § 1343 does not
apply extraterritorially), with United States v. Lyons,
740 F.3d
702, 718 (1st Cir. 2014) (finding Wire Act applies
extraterritorially); and United States v. Georgiou,
777 F.3d 125,
137-38 (3d Cir. 2015) (holding § 1343 applies extraterritorially).
-50-
B. Domestic Application of § 1343
We determine whether the wire fraud statute applies
domestically based on the facts at hand "by identifying the
statute's focus and asking whether the conduct relevant to that
focus occurred in United States territory." WesternGeco LLC, 138
S. Ct. at 2136 (internal quotation marks omitted). A statute's
"focus" is the "object of its solicitude."
Id. at 2137 (noting
that the "focus" includes the "conduct it seeks to regulate, as
well as the parties and interests it seeks to protect or vindicate"
(alternations and internal quotation marks omitted)).
In McLellan's view, the "focus" of § 1343 is the fraud
simpliciter that the transmission of communications through wires
seeks to advance and not the use of the wires themselves. Under
that theory, he maintains that there is no possible domestic
application of the wire fraud statute, since the alleged fraud
transpired in a foreign country through Pennings and Boomgaardt's
use of foreign wires. For the following reasons, we disagree.
To be convicted of wire fraud, the government must
establish (1) "a scheme to defraud"; (2) "knowing and willful
participation in the scheme with the intent to defraud";
and (3) "the use of interstate or foreign wire communications to
further that scheme." United States v. Valdés-Ayala, 900 F.3d
20, 33 (1st Cir. 2018) (internal quotation marks omitted). As we
have previously found, the structure, elements, and purpose of the
-51-
wire fraud statute indicate that its focus is not the fraud itself
but the abuse of the instrumentality in furtherance of a fraud.
See United States v. Gordon, 875 F.3d 26, 37 (1st Cir. 2017) ("[I]n
enacting the mail and wire fraud statutes, Congress took aim at
the means of conducting a substantive offense, not at the
substantive offense itself."); see also Pasquantino v. United
States, 544 U.S. 349, 358 (2005) ("[T]he wire fraud statute
punishes fraudulent use of domestic wires."); Bascuñán v. Elsaca,
927 F.3d 108, 122 (2d Cir. 2019) (analyzing the elements of § 1343
and finding that "the regulated conduct is not merely a 'scheme to
defraud,' but more precisely the use of the mail or wires in
furtherance of a scheme to defraud" (emphasis omitted)); United
States v. Driver,
692 F. App'x 448, 449 (9th Cir. 2017) (rejecting
argument that the scheme to defraud is the focus of the wire fraud
statute because "[t]he focus of [the mail and wire fraud statutes]
is upon the misuse of the instrumentality of communication"
(quoting United States v. Garlick,
240 F.3d 789, 792 (9th Cir.
2001))).
A statute is applied domestically "[i]f domestic conduct
satisfies every essential element to prove a violation . . . even
if some further conduct contributing to the violation occurred
outside the United States." European Cmty., 764 F.3d at 142; see
also RJR
Nabisco, 136 S. Ct. at 2101 ("If the conduct relevant to
the statute's focus occurred in the United States, then the case
-52-
involves a permissible domestic application even if other conduct
occurred abroad.").
This framework is easily met in this case. The district
court instructed the jury that it could only convict McLellan if
a "wire communication" was sent by him or was caused to have been
sent by him. The district court defined "wire communication" to
include only "a telephone communication or email from one state to
another or between the United States and another country." It
finally instructed the jury that the wire communication need not
be "essential to the scheme" but "must have been made for the
purpose of carrying out the scheme."
While McLellan argues that he could have been convicted
for one stray domestic wire, this glosses over the indictment and
the district court's instructions. The § 1343 counts pinpointed
two specific email communications between McLellan and Pennings.
The first was an April 5, 2011 email from Pennings to McLellan
that noted plans to "increase the spread" on NTMA trades. The
second was a June 22, 2011 email, which told Pennings to inform
Royal Mail that "inadvertent commissions" were applied in the
United States.
Given the instructions, the jury was required to find
(1) that the emails were sent or caused to be sent to, from, or
within the United States, (2) with the intent to defraud, and (3)
that the emails were for the purpose of carrying out the scheme to
-53-
defraud. A jury, then, could only convict McLellan if it
determined McLellan sent or caused another to send a domestic wire
that met each of these requirements. In doing so, the jury in
effect would be concluding that McLellan abused a domestic
instrumentality while in the United States. Therefore, the
instructions as presented sufficiently ensured a domestic
application of the wire fraud statute. See Baird, 712 F.3d at
628. This conclusion disposes of McLellan's claim that the district
court erred in refusing to apply a domestic application
instruction. To prevail on this claim, he needed to present
evidence sufficient to show that the proffered instruction was
"not substantially covered by the charge as rendered."
Id. He
falters on this prong because the instruction he desired was
substantially covered by the one given by the court.
As we deal with an instance where a domestic defendant
sent or received communications on behalf of a domestic corporation
through domestic wires in a scheme that was in part implemented
domestically, we need not at this stage determine where the precise
line is between domestic and foreign activity "because wherever
that line should be drawn, the conduct alleged here clearly states
a domestic cause of action." European Cmty., 764 F.3d at 142.7
7 In a case where a foreign defendant is alleged to have committed
wire fraud against a foreign victim, and the use of domestic wires
was merely "incidental" to the overall scheme, additional inquiry
may be necessary to ensure a domestic application of the statute.
-54-
However, we make clear what is implied in the Second Circuit
decisions. Where a defendant is charged with wire fraud based on
having sent or received wire communications while in the United
States for the purpose of carrying out a scheme to defraud, the
wire fraud statute has been applied domestically even if the victim
is located outside of the United States. See European Cmty., 764
F.3d at 139 (rejecting conclusion that the presumption against
extraterritoriality "insulat[es] purely domestic conduct from
liability simply because the defendant has acted in concert with
a foreign enterprise"); see also
Elbaz, 332 F. Supp. 3d at 974
("[I]t does not matter if the bulk of the scheme to defraud
involves foreign activity[] [b]ecause the focus of the wire fraud
statute is misuse of U.S. wires to further a fraudulent scheme.").
That the fraud is ultimately conducted through foreign wires does
not mitigate this finding; the jury was required to find that
McLellan's use of domestic wires was in furtherance of the fraud
against the foreign victim. See Pasquantino, 544 U.S. at 371
Bascuñán, 927 F.3d at 122 (establishing two part framework that
finds "wire fraud involves sufficient domestic conduct when (1)
the defendant used domestic mail or wires in furtherance of a
scheme to defraud, and (2) the use of mail or wires was a core
component of the scheme to defraud"); see also United States v.
Elbaz,
332 F. Supp. 3d 960, 974 (D. Md. 2018) (noting difference
in a "scenario in which a fraud scheme [is] perpetrated by
foreigners against other foreigners, with no U.S. nexus other than
the incidental use of U.S. wires, is nevertheless charged as a
domestic offense"). This, however, is not the case presented to
us today.
-55-
(finding domestic application where domestic wires were used to
organize a scheme to defraud a foreign sovereign in that foreign
sovereign's territory). It is McLellan's domestic conduct through
domestic wires that spurred his prosecution. See id.
Not only was the instruction in effect tailored to
require a domestic application, the evidence was more than
sufficient to find a domestic application. On the large scale,
the jury heard substantial evidence that McLellan directed the
scheme from the United States, dictated the commissions to be
applied to U.S.-based trades through email and phone calls, and
used email and phone calls to shape the response to Royal Mail's
discovery of the scheme. On the smaller scale, the April 5th email
was an approval of a scheme to increase, without NTMA's consent,
commissions applied on security trades in the United States. The
June 22nd email was sent by McLellan to direct the coverup of the
scheme. As the given instructions required the jury to find all
the elements for a domestic application and the evidence was
sufficient to support that conclusion, we find that the district
court did not err in declining to provide McLellan's proposed
instruction.
V. Mutual Legal Assistance Treaties
Finally, McLellan asserts that the Due Process Clause of
the Fifth Amendment and the Compulsory Process Clause of the Sixth
Amendment demand that courts have the authority to order the
-56-
government to exercise its MLAT powers to request evidence from
foreign countries. He therefore argues that the district court
erred by declining to compel the government to pursue the evidence
and testimony he sought through the MLAT process when its letters
rogatory proved ineffectual. Because the district court does not
possess the power to order the government to lodge requests under
MLATs, we disagree and find no reversible error.8
We review the district court's determination that it
lacked the power to order the government to make an MLAT request
de novo because it "turn[s] on an interpretation of law." Obiora,
910 F.3d at 560. The district court determined that it lacked the
authority "to compel the government to exercise its rights under
any of the relevant MLATs on behalf of, or for the benefit of, a
private person." First, to support its ruling, it quoted our
decision in United States v. McIntyre (In re Price),
685 F.3d 1,
11 (1st Cir. 2012) (internal quotation marks omitted) (hereinafter
"Price I") for the proposition that "treaties do not generally
8 Alternatively, McLellan argues that the district court erred in
not excluding the government's evidence obtained from foreign
clients. As his claim is reviewed for an abuse of discretion,
United States v. Obiora,
910 F.3d 555, 560 (1st Cir. 2018), and
the evidence the government sought to introduce was probative and
equally available to McLellan, we see no grounds to find that the
district court abused its discretion in not excluding this
evidence. See United States v. Sensi,
879 F.2d 888, 899 (D.C.
Cir. 1989) ("[A] defendant's inability to subpoena foreign
witnesses is not a bar to criminal prosecution.").
-57-
create rights that are privately enforceable in the federal
courts." Second, it referenced United States v. Rosen, 240 F.R.D.
204, 214-15 (E.D. Va. 2007), which "not[ed] that no court has held
that a defendant's compulsory process rights are violated when the
executive branch declines to exercise a treaty power to compel
testimony of a non-American in another country." McLellan
challenges both rationales.
Our opinion in Price I is the lodestar for the MLAT
origin story and the appropriate law to apply when private
individuals seek MLAT relief. As the district court noted,
"treaties do not generally create rights that are privately
enforceable in the federal courts." United States v. Li, 206 F.3d
56, 60 (1st Cir. 2000) (en banc).9 The U.S.-U.K. MLAT is no
exception because it "expressly disclaims the existence of any
private rights." Price
I, 685 F.3d at 13. Article 1, paragraph
3 of the U.S.-U.K. MLAT provides the textual hook for this
conclusion.
Id. at 12-13. It states, in full: "This treaty is
intended solely for mutual legal assistance between the Parties.
The provisions of this Treaty shall not give rise to a right on
9 This comports with the "background presumption" that
"[i]nternational agreements, even those directly benefitting
private persons, generally do not create private rights or provide
for a private cause of action in domestic courts." Medellín v.
Texas,
552 U.S. 491, 506 n.3 (2008) (alteration in original)
(quoting Restatement (Third) of Foreign Relations Law of the United
States § 907 cmt. a, at 395 (1986)).
-58-
the part of any private person to obtain, suppress, or exclude any
evidence, or to impede the execution of a request." U.S.-U.K.
MLAT, art. 1, ¶ 3. In relevant part, the U.S.-Ireland MLAT is a
carbon copy. See U.S.-Ireland MLAT, art. 1, ¶ 4.
However, we recognize that McLellan seeks relief under
the Constitution and only indirectly invokes the MLATs. By asking
the district court for an order to compel the government to
exercise its treaty powers to request potentially favorable
evidence to his case from foreign countries, McLellan seeks to
protect his due process rights rather than "to vindicate a private
treaty right."10 It is well-settled law that "no agreement with a
foreign nation can confer power on the Congress, or on any other
branch of Government, which is free from the restraints of the
Constitution." Boos v. Barry, 485 U.S. 312, 324 (1988) (quoting
Reid v. Covert,
354 U.S. 1, 16 (1957) (plurality opinion)). As
the Ninth Circuit has noted, those restraints certainly include
"the separation of powers and the guarantee of due process." In
re Premises Located at 840 140th Ave. NE, Bellevue, Wash.,
634
F.3d 557, 571-72 (9th Cir. 2011) (citing Am. Ins. Ass'n v.
Garamendi,
539 U.S. 396, 416 n.9 (2003) (holding that treaties are
10 Along those lines, McLellan contends that even if the MLATs
preclude private rights of action, "they do not preclude the
ability of courts to order the government to seek evidence in the
interests of ensuring defendants a fair trial." By his reading,
the language of the MLATs is "broad enough to encompass requests
made by the government on behalf of criminal defendants."
-59-
"[s]ubject . . . to the Constitution's guarantees of individual
rights")). McLellan submits that because MLATs create an
"evidence-gathering imbalance" in criminal cases where the charges
include conduct occurring abroad, the related guarantees of the
Due Process Clause of the Fifth Amendment and the Compulsory
Process Clause of the Sixth Amendment empower the courts to
safeguard these rights to restore the evidentiary balance,
notwithstanding the absence of private rights of action in the
MLATs.
As McLellan notes, we have held that district courts
possess the authority to quash a subpoena issued by the government
pursuant to a U.S.-U.K. MLAT request. United States v. Trs. of
Bos. Coll. (In re Price), 718 F.3d 13, 23 (1st Cir. 2013)
(hereinafter "Price II"). Our reasoning was based on the
observation that "[n]othing in the text of the U.S.-U.K. MLAT, or
its legislative history . . . lead[s] us to conclude that the
courts of the United States have been divested of an inherent
judicial role that is basic to our function as judges." Id.11
Relying on Price II, McLellan contends that if separation of powers
11 Additionally, he cites to the Ninth Circuit case quoted in
Price II rejecting the government's assertion of sole discretion
in MLAT affairs because it "suggests that by ratifying an MLAT,
the legislative branch could compel the judicial branch to reach
a particular result . . . in particular cases, notwithstanding any
concerns, such as violations of individual rights, that a federal
court may have." In re 840 140th Ave.
NE, 634 F.3d at 572.
-60-
justifies a trial court's retention of power to quash MLAT
subpoenas issued by the U.S. government that potentially infringe
on First Amendment protections, then it must also dictate that
courts have the power to "ensure the defendant's right to a
fundamentally fair trial" by "ordering the government to exercise
its undoubted right to obtain the evidence." For the following
reasons, we disagree.
First, our line of cases involving MLAT subpoenas is
readily distinguishable from the predicament that McLellan faces.
In Price I and Price II, the Executive Branch exercised its
diplomatic discretion to comply with the United Kingdom's MLAT
request for information related to an ongoing investigation into
a casualty from the conflict in Northern Ireland. See Price II,
718 F.3d at 16-17. Accordingly, the U.S. government issued two
subpoenas through an appointed commissioner, see 18 U.S.C. § 3512,
to compel Boston College ("BC") to produce interviews from formerly
active participants in the conflict that were compiled by one of
BC's research projects. Price II, 718 F.3d at 16. The central
holding of Price II was that the district court had abused its
discretion by compelling BC to produce interviews that exceeded
the scope of the original subpoena, thus implicating First
Amendment concerns.
Id. at 17. In Price I, we determined that
the treaties precluded private rights of action, and we therefore
denied foreign citizens' motions to intervene in BC's motion to
-61-
quash. 685 F.3d at 3, 13. Additionally, we held that § 701(a)(1)
of the Administrative Procedure Act ("APA") barred jurisdiction
over the prospective plaintiff's APA claim because the U.S.-U.K.
MLAT "by its express language precludes judicial review." Id. at
13. These cases constitute the inverse of McLellan's situation.
Since the U.S. government has not exercised its
discretion to pursue evidence through the relevant MLATs, McLellan
effectively urges the Court to find that the MLATs have expanded
the role of the judiciary to include the ability to compel the
government to seek the type of evidence he requests. Separation
of powers surely cannot be stretched so far in this direction as
to provide an avenue for a district court to compel a co-equal
branch to take certain action on behalf of a private individual
without textual or statutory direction.12 Quite the opposite of
Price II, here, it would offend separation of powers principles to
permit the Judiciary to "impair" the Executive "in the performance
12 This is consistent with the view taken by the Department of
Justice at a hearing before the Senate Foreign Relations Committee:
"While a U.S. court would be able to ask the prosecution to make
a request under the treaty (i.e., to adopt a request as its own),
the court would lack the power or authority to compel the
Government to make a request for the benefit of the defense over
the objection of the prosecution." Consular Conventions,
Extradition Treaties, and Treaties Relating to Mutual Legal
Assistance in Criminal Matters (MLATs): Hearing Before the S. Comm.
on Foreign Relations, 102d Cong. 40 (1992) (statement of Robert
Mueller III, Assistant Att'y Gen., Criminal Div., Dep't of
Justice).
-62-
of its constitutional duties." Price II, 718 F.3d at 22 (quoting
Clinton v. Jones,
520 U.S. 681, 701 (1997)). The Constitution may
protect individuals in the United States from subpoenas to comply
with foreign MLAT requests, but it generally does not vest criminal
defendants with the power to compel the government to lodge
diplomatic requests on their behalf. See United States v.
Sedaghaty,
728 F.3d 885, 917 (9th Cir. 2013) ("[T]he district court
had no authority to order the Executive Branch to invoke the treaty
process to obtain evidence abroad for a private citizen.").13
A contrary finding could potentially open U.S. foreign affairs to
the far-flung theories of criminal defendants and risk delay of
13 Despite our search, we could find no decision contrary to this
proposition. United States v. Schneider, No. 17-935, 2019 WL
4242637, at *17 (E.D. Pa. Sept. 6, 2019) (rejecting the defendant's
argument that the government's use of an MLAT with Russia deprived
him of his "rights to a fair trial, due process and compulsory
process"); Escalante v. Lizarraga, No. ED CV 17-850-R (SHK),
2018
WL 2938520, at *7-9 (C.D. Cal. Apr. 16, 2018) ("[A] criminal
defendant has no rights under the [MLAT between the U.S. and
Mexico] to obtain evidence."); United States v. León, No. 09 CR
383-16, 2018 WL 1832878, at *4 (N.D. Ill. Apr. 16, 2018) ("[T]his
Court has 'no authority to order the Executive Branch to invoke
the treaty process to obtain evidence abroad for a private
citizen.'" (quoting Sedaghaty, 728 F.3d at 911-917)); United
States v. Márquez, No. 10CR3044 WQH,
2012 WL 349580, at *4 (S.D.
Cal. Feb. 2, 2012) ("[T]he Sixth Amendment right to compulsory
process . . . does not require an order compelling the Government
to use the MLAT to obtain evidence on behalf of the Defendant.");
United States v. Jefferson, 594 F. Supp. 2d 655, 674-75 (E.D. Va.
2009) ("It is . . . 'quite clear that the right to compulsory
process extends only to forms of process a court can issue of its
own power, not to forms of process that require the cooperation of
the Executive Branch or foreign courts.'" (quoting Rosen, 240
F.R.D. at 214)).
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trial as other countries respond to those requests. Id. (noting
distinctions between immunity context and international
treaties).14
Second, despite McLellan's protestations, our holding in
United States v. Theresius Filippi, 918 F.2d 244 (1st Cir. 1990),
does not dictate otherwise. The Sixth Amendment encompasses a
criminal defendant's right "to have compulsory process for
obtaining witnesses in his favor." U.S. Const. amend. VI. This
includes "[t]he right to offer the testimony of witnesses, and to
compel their attendance, if necessary." United States v.
Acevedo-Hernández,
898 F.3d 150, 169 (1st Cir. 2018) (quoting
Washington v. Texas,
388 U.S. 14, 18-19 (1967)). This right,
however, is not absolute. See United States v. Resurrección,
978
F.2d 759, 762 (1st Cir. 1992) ("The Constitution does not
automatically entitle a criminal defendant to unobtainable
testimony."). "There can be no violation of the defense's right
to present evidence . . . unless some contested act or
omission (1) can be attributed to the sovereign and (2) causes the
loss or erosion of testimony which is both (3) material to the
14 This is certainly not a case where there was a "stacked deck"
against McLellan. See Sedaghaty, 728 F.3d at 916. McLellan
concedes that he was able to receive some measure of documents
from the relevant clients. This is, therefore, not a case where
the government possesses evidence, or has easy access to evidence,
that a criminal defendant lacks. Instead, "both sides faced
obstacles in obtaining evidence from abroad." See
id.
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case and (4) favorable to the accused." United States v. Hoffman,
832 F.2d 1299, 1303 (1st Cir. 1987); see also Theresius
Filippi,
918 F.2d at 247.
Theresius Filippi featured a criminal defendant facing
drug trafficking charges who was unable to secure the presence of
a key corroborating witness located in Ecuador due to government
inaction. 918 F.2d at 245-46. Since the district court judge
determined that the witness was material and that his testimony
would have been favorable to the defense, our analysis concerned
the attributability and causation prongs of the Hoffman test.
Id.
at 247. We recognized that "the right of compulsory process does
not ordinarily extend beyond the boundaries of the United States."
Id. However, we determined that the government's subpoena power
abroad was not at issue because the witness was willing -- and
indeed intended -- to testify at trial but for his inability to
"overcome the immigration hurdles blocking his entry into the
United States."
Id. In our view, the "onus" was therefore on the
government "merely to make it possible" for the witness to attend
trial "by requesting a Special Interest Parole from the
[Immigration and Naturalization Service]."
Id. Although we
ultimately affirmed the conviction because the defendant waived
his compulsory process rights by "proceed[ing] at trial without
his witness,"
id. at 246,
we also found that the U.S. Attorney's
"deliberate omission to act, where action was required" directly
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caused the defense to lose its only material witness, which rose
to the level of impermissible interference with his Fifth and Sixth
Amendment rights.
Id. at 247.
McLellan's case is readily distinguishable on the
causation and favorability prongs of the Hoffman test. First,
McLellan has not established that the U.S. government actually or
proximately caused the absence of the evidence he seeks. The
omission in this case is the government's discretionary decision
not to initiate MLAT requests for evidence on McLellan's behalf
when the letters rogatory failed to achieve the desired result.
However, while the government may request evidence through the
MLAT process, it cannot guarantee compliance. See United States
v. Mejía, 448 F.3d 436, 444 (D.C. Cir. 2006) ("Having the authority
'to seek' tapes or transcripts through a treaty is not the same
thing as having 'the power to secure' them."); United Kingdom v.
United States, 238 F.3d 1312, 1317 n.5 (11th Cir. 2001)
("[C]ompliance with an MLAT request is not mandatory with respect
to records held by governmental agencies."). The Judicial
Authority of Ireland's reply to the district court's letters
rogatory statement that it understands the U.S.-Ireland MLAT to be
the appropriate avenue for requesting evidence refers to a
protocol, but it does not promise results.
McLellan's claim also stumbles on the favorability
element. Although the district court acknowledged that the
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evidence McLellan sought was material to his case (specifically to
the materiality component of securities fraud), McLellan failed to
provide a plausible showing that the evidence would be favorable
to his defense. See Hoffman, 832 F.2d at 1303 ("There must be a
plausible showing that the testimony was both material and
favorable to the defense."). McLellan sought information from
Ireland-based Eircom and NTMA pertaining to (1) internal
communications related to the firms understanding of the offer
from State Street, (2) communications regarding the fees,
(3) competing bids, and (4) communications related to overcharges.
While McLellan argues strenuously that the evidence was necessary
to cross-examine witnesses on the securities fraud counts, he
presented no plausible basis for the district court to determine
that the evidence in the possession of those firms contained
information that could have led to an acquittal, and he concedes
that he does not know the contents of the documents that he seeks.
See id.15 His arguments only demonstrate that the evidence was
15 In an analogous case, the Supreme Court held that the government
was not required to halt a deportation of a potentially material
and possibly favorable witness, where the criminal defendant made
no showing that the testimony the witness would have given would
have been favorable. United States v. Valenzuela-Bernal, 458 U.S.
858, 870-71 (1982). While the Court recognized that it would be
difficult for an accused defendant to determine if testimony from
the witness would be material and favorable at trial, and relaxing
the requirements might be justified in those instances, it
determined that such difficulty does not "afford[] the basis for
wholly dispensing with such a showing."
Id. at 870.
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material, but he has not demonstrated that the evidence would have
been favorable. A showing of materiality, alone, is insufficient
to show favorability. Id.; see also United States v. Combs, 555
F.3d 60, 63-64 (1st Cir. 2009) (rejecting criminal defendant's
claim that "it [was] impossible to know how [the witness] might
have testified absent [the government's] conduct" as insufficient
to establish favorability).
We conclude, therefore, that the district court does not
have the authority to compel the government to issue MLAT requests.
Nor is the "onus" on the government in this case to "make it
possible" for the defendant to obtain, via an MLAT request,
evidence that he cannot establish is favorable to his case.
Theresius Filippi, 918 F.2d at 247. Thus, we find no reversible
error. However, we believe it important to note that we do not
disagree that the text of the MLATs at issue do not explicitly
preclude the government from using its discretion to lodge requests
on behalf of criminal defendants. Prosecutors have a duty to "act
in accordance with the obligations imposed on [them] as
. . . agent[s] of justice,"
id. at 246,
and where practicable,
deploying the government's MLAT capabilities in such a manner would
be a just way of fulfilling those obligations.16 However, where,
16 In the rare event that a court does make a request for
information under an MLAT, the Department of Justice takes the
position that "[a] decision would be made on a case-by-case basis,"
and even if "the prosecutor is not persuaded that evidence abroad
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as here, a criminal defendant makes no plausible showing that the
government could have secured evidence that is both material and
favorable to his defense, we have little difficulty concluding
that the prosecutors did not violate this duty.
VI. Conclusion
Accordingly, we affirm McLellan's convictions on all
counts.
Affirmed.
really exists or is needed, he or she may well ask the Department
to make the request anyway, in order to alleviate any questions or
concern the court may have on the matter." 102d Cong. 41 (1992).
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