TABLE OF CONTENTS
BACKGROUND ..............................................................................267
I- All Defendants' Claims ............................................................273
A- Stock Price Data ..............................................................273
B- Jury Charges ..................................................................275
1- "Willfully Caused" Instruction ............................................275
2- "Conscious Avoidance" Instruction .........................................277
3- "Specific Unanimity" Instruction ..........................................279
4- "No Ultimate Harm" Instruction ............................................280
C- Prosecutorial Misconduct ......................................................281
1- Napier's Potential Perjury ................................................281
2- Summation Remarks .........................................................283
II- Ferguson's Claims .................................................................284
A- Sufficiency Challenge to Scienter Evidence ....................................284
B- Graham's Email: "[Ferguson] et al[.] have been advised of, and have
accepted, the potential reputational risk" ..................................285
1- Double-Hearsay ............................................................285
2- Severance from Graham .....................................................286
3- Summation .................................................................288
C- Finding that Conspiracy Began with First Call .................................288
III- Graham's Claims ...................................................................289
A- Requested Jury Instructions ...................................................289
1- Professional Responsibility Rules .........................................289
2- Non-Contractual Understandings ............................................290
B- Treatment of Graham's Boss ....................................................290
IV- Milton's Claims ...................................................................291
A- Admissibility of Recordings Denigrating AIG ...................................291
B- Severance from Gen Re Defendants ..............................................292
V- Monrad's Claims ...................................................................293 VI- Garand's Claims ...................................................................294 CONCLUSION ..............................................................................294
DENNIS JACOBS, Chief Judge:
This criminal appeal arose from a "finite reinsurance" transaction between American International Group, Inc. ("AIG") and General Reinsurance Corporation ("Gen Re"). That transaction (the "Loss Portfolio Transfer," or "LPT") reallocated risk in a way that shored up AIG's flagging loss reserves, which were feared to be dragging down its stock price. Finite reinsurance transactions, which entail some (usually low) risk, are acceptable accounting measures in the insurance industry, and have their uses; but in this instance it is charged that the transaction entailed no risk at all, and was a fraud. The defendants, four executives of Gen Re and one of AIG, appeal from judgments entered in 2008 and 2009 by the United States District Court for the District of Connecticut (Droney, J.), convicting them of conspiracy, mail fraud, securities fraud, and false statements made to the Securities and Exchange Commission ("SEC"). They were sentenced principally to prison terms ranging from one to four years, and are free on bail pending this appeal.
The government's case depended heavily on testimony from two cooperating witnesses — Richard Napier, a senior executive of Gen Re; and John Houldsworth, a senior executive of Cologne Re Dublin ("CRD"), an Irish subsidiary of Gen Re — who had pled guilty to similar charges. Their testimony was bolstered by contemporaneous recordings of calls involving Houldsworth (a normal business practice in Ireland for derivatives traders). The government also introduced AIG stock-price data to show the LPT's material effect on investors: The price declined steeply as details about regulatory scrutiny of the deal were released. After a six-week trial, the jury convicted the defendants on all counts.
The defendants appeal on a variety of grounds, some in common and others specific to each defendant, ranging from evidentiary challenges to serious allegations of widespread prosecutorial misconduct. Most of the arguments are without merit, but the defendants' convictions must be vacated because the district court abused its discretion by admitting the stock-price data.
AIG's announcement of its 3Q earnings in 2000 met analysts' expectations, but the stock price dropped significantly nevertheless. The cause was thought to be a $59 million decline in loss reserves that quarter.
Loss reserves are liabilities on an insurer's balance sheet that approximate expected claims on insurance contracts. Stock analysts and investors evaluate loss reserves in conjunction with new policies: If loss reserves do not rise when new policies are written (or worse, if they fall), the insurer's stock may drop notwithstanding better-than-expected income because a contract of insurance that is not covered by sufficient loss reserves inflates present income at the expense of future income. Thus, counterintuitively, a net decrease in a balance sheet liability may cause a stock price to drop.
Loss reserves can be transferred between companies through reinsurance arrangements.
An insurer's creativity with finite reinsurance transactions is not unconstrained: Accounting rules require that each transaction transfer a threshold of risk. Under Financial Accounting Standards ("FAS") 113,
Transactions that fall short of the risk threshold in FAS 113 cannot be treated as reinsurance; any premium paid must be deposit accounted, which has no effect on loss reserves. Each party makes its own determination as to whether a transaction has risk sufficient to qualify as reinsurance. Since risk can be hard to quantify, counterparties' good-faith determinations may conflict, with one booking the transaction as reinsurance and the other, as a deposit. Such asymmetric accounting may draw the attention of regulators, but is not a violation per se. See FAS 113 ¶ 47 (rejecting symmetrical-accounting requirement).
In view of the defendants' convictions, we summarize the facts in the light most favorable to the government. United States v. Riggi, 541 F.3d 94, 96 (2d Cir. 2008).
Maurice "Hank" Greenberg, CEO of AIG, was convinced that AIG's decreased loss reserves were depressing the stock. On October 31, 2000, he called Ronald Ferguson, the CEO of Gen Re, to discuss ways to shore up AIG's reserves. AIG was Gen Re's largest client, so Ferguson was eager to assist. (Greenberg was named as an unindicted coconspirator; Ferguson is a defendant.)
Greenberg requested a particular deal: AIG wished to "borrow" a specific range of loss reserves ($200 million to $500 million) over a six- to nine-month time period. This was unusual in several respects. Cooperating witness Napier, who had worked on hundreds of reinsurance deals, had never encountered a deal premised on a request for a specific amount of loss reserves. To the contrary, loss reserves are typically calculated through a detailed actuarial analysis, after a deal has been negotiated. It was also uncommon for AIG to act as the reinsurer; it typically sought reinsurance from Gen Re. The deal was to be largely funds-withheld, meaning that the ceding party would retain a large percentage of the premium it owes and only claim such losses as exceed the premium. A funds-withheld arrangement may not be irregular, but the insistence upon it is suggestive: AIG could register a substantial
An important question for this case is whether the call between Ferguson and Greenberg initiated a conspiracy. It may have been a high-level brainstorming session about using accounting rules aggressively — but lawfully — to achieve an accounting objective; but it may (instead or also) have been an unlawful agreement to deceive AIG stockholders by booking a no-risk transaction (which by definition would not satisfy FAS 113) as reinsurance.
Shortly after the call from Greenberg, Ferguson created a deal team at Gen Re. He briefed Napier, a senior VP and the manager of Gen Re's relationship with AIG, and asked him to spearhead the effort. Ferguson suggested that Napier contact: (1) Christian Milton, the VP of reinsurance at AIG, to discuss specific requirements of the deal; and (2) Joe Brandon, the president of Gen Re. (Milton is a defendant; Brandon was named as an unindicted co-conspirator.)
Napier spoke with Brandon the same day, and Milton the next. Milton confirmed that AIG only wanted reserve impact to address criticism from stock analysts, and he and Napier began preliminary discussions about the particulars of the deal. Brandon suggested that defendant Chris Garand, a senior VP and Chief Underwriter of Gen Re's finite reinsurance operations, would be a good resource.
It is unclear when Napier first contacted Garand. Emails reflect that within a week, defendant Elizabeth Monrad, the Chief Financial Officer of Gen Re, became involved. Napier claims that he contacted Garand that same week, and that Garand pitched a "no risk" transaction in a November 13 meeting with Monrad and him.
For convenience, the role and affiliation of each player referenced in this opinion are listed in the margin.
Napier's testimony concerning Garand is suspicious. Garand was added as a defendant in a superseding indictment, filed more than seven months after the other defendants were charged. On the same day the superseding indictment was filed, Napier confidently named Garand as the source of the no-risk idea. This identification contradicted Napier's previous identifications (recanted at trial) of Milton and Ferguson as the source. He made that identification of Milton while he was looking at the same undated page of notes that he later attributed to a meeting with Garand and Monrad (which he does not contend that Milton attended). Garand calls this allegation a perjurious attempt to curry favor with the government, and argues that the government was complicit in the perjury, or complacent.
The documentary evidence bearing on the November 13 meeting does not show
Joint Appendix at 1959-60. Garand claims that this call on November 14 was the first he heard of the LPT.
The Gen Re team continued designing the transaction. On November 15, Houldsworth circulated a draft slip contract of the LPT to Monrad, Garand, Napier, and two others. (Ferguson did not receive the email, but he reviewed a hard copy of the email and slip.) The draft contract contemplated Gen Re paying AIG $10 million for assuming $100 million of risk. The premium was $500 million on a 98% funds-withheld basis, meaning that Gen Re would pay only $10 million but could charge AIG only for losses beyond the $500 million premium (up to a $600 million cap on losses, yielding $100 million of risk).
The slip omitted two key terms of the transaction, however, which were discussed frankly in the cover email:
First, in selecting contracts for AIG to reinsure, Houldsworth designated over $300 million in contracts that had already been reinsured, leaving "no possibility" (or making it "virtually impossible") for the remaining contracts to have claimable losses (i.e., over the $500 million premium). Trial Tr. at 2286. This accommodated AIG's request, which Houldsworth characterized as seeking loss reserves "with the intention that no real risk is transferred." Joint Appendix at 1978.
Second, Gen Re was to receive a fee for the deal as well as reimbursement for the portion of the premium it would pay:
Joint Appendix at 1978 (emphasis added) (Houldsworth's cover email). Houldsworth confirmed at trial that the exclusion of these fees from the slip was intentional, because AIG wanted a piece of paper that would allow the contract to be booked as a reinsurance deal. At one point, Napier clumsily suggested that fees be written into the contract. Houldsworth replied:
Joint Appendix at 2003. Similarly, Monrad rejected the idea of memorializing the fees in a separate written agreement: "Those always get a little tricky because sometimes firms ... feel obliged to show their auditors them." Joint Appendix at 2015.
By November 17, Ferguson had secured Hank Greenberg's agreement to the rough contours of the deal, including the no-risk aspect, the repayment of the $10 million premium, and Gen Re's $5 million net fee. Greenberg tapped Milton as a point person for the transaction at AIG. Napier then forwarded the slip contract to Milton, describing in his cover email the fee and premium repayment (which remained conspicuously absent from the contract).
With a preliminary agreement in place, Gen Re began internal discussions about the accounting treatment of the deal. At some point during these discussions, defendant Robert Graham, an in-house lawyer at Gen Re, joined the team. The Gen Re side understood that AIG wished to book the transaction as reinsurance to invigorate its loss reserves. But recognizing that the deal lacked the necessary risk, they wanted to protect Gen Re by booking the transaction using deposit accounting.
Ferguson asked his team to alert AIG that Gen Re was contemplating asymmetric accounting. On November 20, defendants Monrad, Graham, and Garand (and co-conspirator Napier) of Gen Re called defendant Milton of AIG to advise that Gen Re would be booking the LPT as a deposit transaction. Milton confirmed that Gen Re's deposit accounting would not be an issue for AIG. Napier relayed the good news to Ferguson.
Milton accepted the deal on AIG's behalf on December 7, but he asked Gen Re to create a paper trail to disguise the transaction's origin. On December 18, Houldsworth circulated an offer letter to AIG suggesting that the deal had first been solicited by Gen Re. Milton at AIG circulated the offer letter and draft contract to AIG accountants and informed them that it would be booked as reinsurance, thus ensuring that the usual underwriting and actuarial due diligence on such a large transaction would not be performed.
Gen Re's in-house counsel Graham drafted the final contracts for the deal. They omitted the $5 million fee and $10
Joint Appendix at 2192. The discomfort must have been fleeting, however, because the contracts were shortly thereafter finished and sent off to Milton.
In January 2000, the offer letter (annotated with written instructions from Milton) and draft slip contract were routed to Lawrence Golodner, an assistant comptroller at AIG. (The documents were sent by Golodner's boss, John Blumenstock, but their route from Milton to Blumenstock is not entirely clear.) Golodner followed Blumenstock's instructions, booking $250 million in loss reserves for each of 4Q 2000 and 1Q 2001.
The deal worked, up to a point. AIG announced increased loss reserves in 4Q 2000 and IQ 2001 that, without the LPT, would have been declines.
Meanwhile, Gen Re sought to enforce the unwritten fee agreements. It refused to deliver the $10 million premium (that it was contractually obliged to pay) until it had collected the $15 million that it was owed under the secret side deal. Garand orchestrated a scheme to effect the payment without directly transferring funds (which could have attracted regulatory scrutiny).
The matter was dormant for several years. In a typical reinsurance arrangement, the ceding company files claims with the reinsurer, which pays the claims and, over time, reduces loss reserves commensurately. But Gen Re made no claims, AIG paid no claims, and there were no adjustments to AIG's loss reserves (excluding a $250 million reduction in AIG's loss reserves in late 2004, when the parties commuted half of the deal).
Beginning in February 2005, the SEC and the Office of the New York Attorney General began investigating the transaction. News articles about the investigations trickled out for several months, while AIG's stock price declined steadily. On May 31, 2005, AIG concluded that the LPT did not transfer sufficient risk for reinsurance accounting, and restated its financials for the duration of the LPT's existence.
The defendants were charged with conspiracy, mail fraud, securities fraud, and making false statements to the SEC.
After four days of deliberations, the jury convicted the defendants of all charges. The court denied the defendants' perfunctory Fed.R.Crim.P. 33 motions for a new trial.
In hundreds of pages of briefing, the defendants raise numerous issues on appeal, ranging from evidentiary challenges to serious allegations of widespread prosecutorial misconduct.
Several arguments affect all five defendants. We consider each in turn.
Materiality is an element of most of the charged offenses. There must have been a "substantial likelihood" that the LPT-related misstatements would be important to a reasonable investor. See Basic Inc. v. Levinson, 485 U.S. 224, 231, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). As evidence of materiality, the government introduced (inter alia) articles about the LPT's impropriety, which it connected to contemporaneously declining stock prices. Excluded as overly prejudicial was a line graph tracing AIG's stock price from February to March 2005 (as it declined by 12%). However, the court permitted the government to show a functionally identical chart to the jury during opening statements,
The charts were prejudicial because the LPT was one of several problems besetting AIG at that time. Unrelated allegations of bid-rigging, improper self-dealing, earnings manipulations, and more, had to be redacted from the articles about the LPT, to avoid prejudicing the defendants. The stock-price evidence presented the defendants with a dilemma: [i] allow the jury to attribute the full stock-price decline to the LPT, or [ii] introduce prejudicial evidence of the other besetting scandals, wrongdoing, and potentially illegal actions at AIG. The defendants sought to sidestep by stipulating to materiality, but the government refused.
We conclude that the district court abused its discretion in admitting the three bar-charts and that the defendants' substantial rights were affected. Marcic v. Reinauer Transp. Cos., 397 F.3d 120, 124 (2d Cir.2005).
The district court's rulings on the stock-price charts were inconsistent. The chart showing the full decline in stock price was excluded as overly prejudicial, but it was functionally identical to the chart shown during the government's opening argument. In any event, the court's solution, to allow only isolated ranges of stock-price data, did not mitigate the prejudice: Instead of a downward line, there were three dropping sets of dots; it is inevitable that jurors would connect them. So the risk that jurors would attribute the full 12% decline to the LPT was unabated by the court's precaution.
The government may of course reject a proposed stipulation in order to present a "coherent narrative" of its case. Old Chief v. United States, 519 U.S. 172, 191-92, 117 S.Ct. 644, 136 L.Ed.2d 574 (1997). But the charged offenses here do not require a showing of loss causation ("a causal connection between the material misrepresentation and the loss"). Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). The stock-price evidence therefore fell "outside the natural sequence of what the defendant[s] [were] charged with thinking and doing." Old Chief, 519 U.S. at 191, 117 S.Ct. 644. Although the evidence was admitted only to show materiality, the government exploited it to emphasize the losses caused by the transaction. For example, the government reminded the jury during rebuttal summation that:
Trial Tr. at 4584. The prosecution's use of the evidence, while aggressive, was not "egregious misconduct" that "so infect[ed] the trial with unfairness as to make the resulting conviction a denial of due process." United States v. Shareef, 190 F.3d 71, 78 (2d Cir.1999) (internal quotation marks omitted). Still, the government used this evidence to humanize its prosecution, not to complete the narrative of its case.
If no offer to stipulate were forthcoming, the government could have relied upon the sufficiency of its other materiality evidence
The fraudulent aspect of the transaction at issue was that it entailed zero risk as opposed to an ordinary — and permissible — finite reinsurance transaction, in which the risk would be minimal. As between a permissible transaction with minimal risk, and an illegal one with none, it would be difficult for the jury to appreciate what adverse effect the transaction would have had on anyone. Moreover, since the permissible transaction with minimal risk would have had the same advantageous effect on AIG's accounts as the impermissible transaction with no risk, there would seem in fact to have been no effect whatsoever in financial terms — except that stockholders might have developed qualms about the honesty of the company's leadership. Other than the charts, nothing in the record conveyed the impression that the transaction had a palpable financial impact and that stockholders were hurt — and hurt seriously.
The defendants challenge the particulars of the "willfully caused" jury instruction, as well as the district court's refusal to give certain instructions and insistence upon giving others. We review the jury charge de novo, examining "the entire charge to see if the instructions as a whole correctly comported with the law." United States v. Jones, 30 F.3d 276, 283 (2d Cir.1994). A defendant challenging jury instructions must show that he was prejudiced by a charge that misstated the law. See United States v. Goldstein, 442 F.3d 777, 781 (2d Cir.2006).
A defendant commits an offense if he "willfully causes an act to be done which if directly performed by him or another would be an offense against the United States." 18 U.S.C. § 2(b). In seeking to accommodate the reasonable phrasings offered by the various parties, the court ended up with a charge that allowed the jury to convict without finding causation. The court instructed the jury about "willfully causing" liability through a similar pair of questions for each offense:
Trial Tr. at 4760-61.
It appears the judge was led into error. The original instruction submitted by the government contained a proper causation standard;
The instruction is not saved by the plain meaning of "willfully caused," which is the term the court undertook to define. The word "cause" should convey a causation requirement. But the jury was not invited or permitted to rely on the phrase's plain meaning, given the superseding definition provided in the charge: "The meaning of the term `willfully caused' can be found in the answers to the following questions...." Trial Tr. at 4760.
Although the defendants objected to the instruction, they did not "specific[ally] object[ ]" about causation; the objection on that ground was thus not preserved, and we review for plain error. See Fed.R.Crim.P. 30(d). But the error is plain enough. When a jury is instructed on multiple theories of liability, one of which is defective, a court must ascertain whether a flawed instruction had a "`substantial and injurious effect or influence in determining the jury's verdict.'"
The government argued a "willfully causing" theory of liability to the jury, rendering it a likely basis for the jury's conviction. See, e.g., Trial Tr. at 4203 ("[Did defendants] document a false [transaction] in order to deceive AIG's internal auditors and their external auditors and accountants[?]"); Trial Tr. at 4620 ("These five defendants helped actively create false documents to deceive AIG's accountants. So they cannot now try to say that they expected those very same accountants to do their job properly."). But the record contained sufficient evidence for the jury to find in the defendants' favor on the omitted causation element — more precisely, the record contained insufficient evidence of why AIG booked the transaction as it did to render a finding of causation a foregone conclusion — and the defendants vigorously argued that the government failed to demonstrate that their conduct caused AIG to book the transaction as no risk. Trial Tr. at 4458-59 ("[T]he black hole in this case is the prosecution's failure to prove beyond a reasonable doubt anything the defendants allegedly did had any effect on AIG's accounting decision.").
We doubt, but need not decide, that the jury would have necessarily returned a verdict of guilty on any of the other theories of liability.
The district court instructed the jury that the government could prove that a defendant acted knowingly if he "was aware of a high probability that [a] statement was false" but "deliberately and consciously avoided confirming that fact, unless the evidence show[s] that [he] actually believed the statement was true." Trial Tr. at 4730. Such a conscious avoidance
United States v. Quattrone, 441 F.3d 153, 181 (2d Cir.2006) (internal citations and quotation marks omitted). The government need not choose between an "actual knowledge" and a "conscious avoidance" theory. United States v. Kaplan, 490 F.3d 110, 128 n. 7 (2d Cir.2007).
The defendants claim not to have known (1) that the LPT contained insufficient risk transfer or (2) how AIG would account for the LPT. The government argues that the factual predicate for the charge is the same evidence that establishes scienter. (The government emphasizes the November 20 call ordered by Ferguson in which Monrad, Napier, Graham, and Garand told Milton that Gen Re would use deposit accounting for the LPT.)
Red flags about the legitimacy of a transaction can be used to show both actual knowledge and conscious avoidance. See United States v. Nektalov, 461 F.3d 309, 312, 317 (2d Cir.2006). In Nektalov, a jeweler was convicted of money laundering for repeatedly selling gold to a government informant posing as a narcotics dealer. Id. at 312. We upheld a conscious avoidance instruction because the prior dealings between the parties (cash payments using small bills) and the statements about the transactions ("moving gold" to Colombia; money from selling "product" "in the streets") provided the factual predicate for the charge. Id. at 317. Similarly, several red flags are waving here, including: the secret side agreements, the fake offer letter, the accounting pretext for the reinsurance transaction, and the insistence on strict confidentiality.
The defendants claim they could not have consciously avoided present knowledge of how AIG would book the LPT on some future date. It is true that, "in general, conscious avoidance instructions are only appropriate where knowledge of an existing fact, and not knowledge of the result of defendant's conduct, is in question." United States v. Gurary, 860 F.2d 521, 526 (2d Cir.1988). In Gurary, the defendants sold fake invoices that were commonly used by purchasers to fraudulently reduce taxable income. Id. at 523. The defendants challenged the conscious avoidance instruction on the ground that they could not know the nefarious ends of the purchasers. We upheld the instruction because the repeated (subsequent) frauds provided sufficient "`proof of notice of high probability'" of purchasers' tax fraud. Id. at 527. But we also noted that a "future conduct" challenge to a conscious avoidance instruction "might hold water if th[e] case involved the sale of invoices on a single occasion." Id. at 526.
The conscious avoidance instruction was not error.
The jurors were presented with four theories of liability: principal, aiding and abetting, willfully causing, and Pinkerton.
In dicta, we have suggested that a jury is unanimous even if some jurors convicted on a theory of principal liability and others on aiding and abetting. United States v. Peterson, 768 F.2d 64, 67 (2d Cir.1985); accord, e.g., United States v. Garcia, 400 F.3d 816, 820 (9th Cir.2005) ("It does not matter whether some jurors found that [the defendant] performed these acts himself, and others that he intended to help someone else who did, because either way, [his] liability is the same...."). Just as there is "no general requirement that the jury reach agreement on the preliminary factual issues which underlie the verdict," neither must it agree on "alternative mental states." Schad v. Arizona, 501 U.S. 624, 631-32, 111 S.Ct. 2491, 115 L.Ed.2d 555 (1991) (internal quotation marks omitted) (holding that specific unanimity not required for theories of Arizona first-degree murder — premeditated and felony murder).
Nothing limits the Peterson analysis to principal versus aiding-and-abetting liability. The four theories are compatible — they are zones on a continuum of awareness, all of which support criminal liability.
Even assuming that the jury had to agree on the theory of liability, the general unanimity instruction — "it is necessary that each juror agrees to [the verdict]," Trial Tr. at 4788 — was sufficient to remove any genuine danger that the jury would convict on disparate theories. The accounting and insurance concepts in the case may have been complicated, but they did not add significant complexity to the theories of liability. At the same time, the assurance of a just result would have been reinforced if the instruction were given.
The court instructed the jury that "[n]o amount of honest belief on the part of a defendant that the scheme will ultimately make a profit for the investors, or not cause anyone harm, will excuse fraudulent actions or false representations by him or her." Trial Tr. at 4730. Graham claims that this "no ultimate harm" instruction lacked a factual basis and undermined his defense of good faith.
Our leading precedent on the "no ultimate harm" instruction is United States v. Rossomando, 144 F.3d 197, 200-03 (2d Cir. 1998), which rejected the instruction in a case in which a former firefighter underreported his post-retirement income on pension forms. Rossomando believed that he was causing no harm to the pension fund, which distinguished him from a person for whom the instruction is proper:
Id. at 201.
Rossomando is "limited to the quite peculiar facts that compelled [its] result," United States v. Gole, 158 F.3d 166, 169 (2d Cir.1998) (Jacobs, J., concurring), so Graham's analogy is not persuasive. The "no ultimate harm" instruction given in the present case ensured that jurors would not acquit if they found that the defendants knew the LPT was a sham but thought it beneficial for the stock price in the long run. It may well have been proven beneficial to AIG stockholders, but the immediate harm in such a scenario is the denial of an investor's right "to control [her] assets by depriving [her] of the information necessary to make discretionary economic decisions." Rossomando, 144 F.3d at 201 n. 5 (citing United States v. Dinome, 86 F.3d 277, 280, 284 (2d Cir. 1996)). Moreover, the jury charge given here could not have undermined Graham's good-faith defense; the instructions made clear that "[a] defendant who acted in good faith cannot be found to have acted knowingly, willfully, and with the unlawful intent required for the charge you are considering," Trial Tr. at 4711, and that "[h]owever misleading or deceptive a plan may be, it is not fraudulent if it was devised or carried out in good faith," id. at 4729.
The defendants argue that prosecutorial misconduct — ranging from intentional grammatical errors to eliciting perjury — warrants reversal because the ensuing "substantial prejudice" "so infect[ed] the trial with unfairness as to make the resulting conviction a denial of due process." United States v. Shareef, 190 F.3d 71, 78 (2d Cir.1999) (internal quotation marks omitted). Certain factual inconsistencies in Napier's testimony are sufficiently obvious to raise an eyebrow, but most of the arguments are meritless.
Compelling inconsistencies suggest that Napier may well have testified falsely. Napier provided important testimony (i) that he attended a meeting with Monrad at which AIG's CFO was warned that Gen Re would book the LPT on a deposit basis; and (ii) that Garand first proposed a no-risk deal.
(i) Napier testified that Monrad, at Ferguson's behest, led a meeting at AIG in late November or early December 2000, in which she informed Howie Smith and Mike Castelli (AIG's CFO and Controller, respectively) that Gen Re would book the LPT as a deposit. The disclosure ensured that AIG could not later claim to be surprised by Gen Re's accounting. The testimony was thus strong evidence of Monrad's scienter.
Neither Napier nor the government could produce "one scrap of paper" showing that the meeting actually took place (Trial Tr. at 1274): no preparatory documents or emails, no AIG sign-in or security records confirming that Monrad and Napier had visited the office at that time; no records of the Gen Re car (and drivers) that Napier claimed provided their transportation. Napier's calendar entries could not confirm the meeting, because none of his historic calendar data was recoverable. No one sent an email summarizing the discussion for those not in attendance or memorializing it for those who were.
Monrad's counsel cross-examined Napier about an email describing an earlier meeting he had with Howie Smith at AIG on an unrelated matter. The earlier meeting — which Monrad did not attend — contradicted Napier's testimony that the purported LPT meeting was the first time that he had met Smith. Napier admitted that he may have confused the LPT meeting with this meeting.
(ii) Garand challenges as perjury (and relatedly, as government misconduct) Napier's belated recollection (with "certain[ty]," Trial Tr. at 1670) that it was Garand who originated the idea of a no-risk transaction. Among the circumstances he cites as suspicious are: Napier did not recollect Garand's role as originator until the day that the government filed the superseding indictment in which Garand was first named as a defendant; Napier's certainty is incompatible with his concession on cross-examination that he was "having a hard time remembering the events of [that day]" and was "drawing a blank on the entire date"; Napier had earlier been uncertain about Garand's first involvement (he had suggested that Garand may not have been involved until Gen Re collected on the side deal in 2001); the identification contradicted Napier's previous identification (recanted at trial) of Milton as the source; and his identification of Milton was made while looking at the same undated page of notes that he attributed at trial to a meeting with Garand and Monrad (which he does not contend that Milton attended). Moreover, when Houldsworth delicately broached the LPT in a call with Garand the next day, Garand evinced no recognition of the transaction. Houldsworth formed the impression that Garand
The government argues that we should not review these arguments at all because the defendants waived them; but where a defendant does not "intentional[ly] relinquish[ ] or abandon[ ]" a known right, but simply "fail[s] to make the timely assertion of [it]," the result is not waiver but forfeiture. United States v. Olano, 507 U.S. 725, 733, 113 S.Ct. 1770, 123 L.Ed.2d 508 (1993) (internal quotation marks omitted). We review such forfeited arguments for plain error. If these arguments had been presented to the trial court, a factual record about Napier's potential perjury (and the extent of the government's awareness and diligence) could have been made. The district court requested substantive briefing and argument on the issue, but was not taken up. The defendants may have had their reasons for sidestepping the issue of Napier's possible perjury and the government's alleged responsibility for it; but "our review for plain error [is] more rigorous" where the failure to object was a "strategic decision" that "resulted in an incomplete record or inadequate findings." United States v. Brown, 352 F.3d 654, 665 (2d Cir.2003).
There are ambiguities in our case law regarding the proper standard to use, which could not have helped the district judge in sorting this out. The parties appear to agree that the two-part test from United States v. Wallach applies:
935 F.2d 445, 456 (2d Cir.1991). But that test is in tension with the four-part test from United States v. Zichettello, which supplements the Wallach factors with two factors from precedent
208 F.3d 72, 102 (2d Cir.2000) (internal quotation marks omitted). Later cases add to the confusion by applying Wallach without referencing Zichettello. See, e.g., United States v. Stewart, 433 F.3d 273, 297 (2d Cir.2006). The tests are not necessarily incompatible, however.
The remainder of the misconduct claims involve the government's comments at opening statement, in summation, and on rebuttal. "It is a `rare case' in which improper comments ... are so prejudicial that a new trial is required." United States v. Rodriguez, 968 F.2d 130, 142 (2d Cir.1992) (quoting Floyd v. Meachum, 907 F.2d 347, 348 (2d Cir.1990)). Such comments do not amount to a denial of due process unless they constitute "egregious misconduct." Shareef, 190 F.3d at 78 (internal quotation marks omitted). In assessing a claim, we consider: (1) "the severity of the misconduct"; (2) "the measures adopted to cure it"; and (3) "the certainty of conviction in the absence of the misconduct." Id. (internal quotation marks omitted).
The defendants did not contemporaneously object to the statements they now claim constitute misconduct. (The one objection was made a day after the challenged statement was made.) They were thus able to pore at leisure over the transcript, hunting for any plausible (or nearly plausible) claims. The remarks do not amount to misconduct, separately or in the aggregate.
First, Graham challenges two mistakes that the prosecution made when quoting his email:
In quoting the line that "regulators (insurance and securities) may attack the transaction," the prosecutor repeatedly used "would" rather than "may." However, the distinctions among "may," "might," "will" and "would" are among the slipperiest in the English language. The distinction should have been preserved, but it cannot be said that a slip — even a recurring slip — was misconduct. It is easy to make such mistakes, but there is reason to think that there will be heightened vigilance on retrial.
The prosecution also misquoted "potential reputational risk" as "potential risk" in two slides shown to the jury (and referenced by the prosecutor twice). Graham
These misstatements were "minor aberrations in a prolonged trial," rather than misconduct. United States v. Modica, 663 F.2d 1173, 1181 (2d Cir.1981) (internal quotation marks omitted).
Second, the defendants contend that the government oversimplified the case by emphasizing Gen Re's lack of need for reinsurance and AIG's acquiescence to paying a $5 million fee despite accepting risk. These features of the transaction, it is claimed, are irrelevant because they may also inhere in any lawful finite reinsurance transaction. It is true that these facts alone are insufficient to support a conviction, but neither are they irrelevant: It was within the province of the jury to determine whether these were incidents of fraud or incidental to a lawful transaction of that specialized kind.
Third, the defendants claim that the government knowingly invited a false inference. One defense theory was that the LPT could not have been fraudulent because Warren Buffet — the CEO of Berkshire Hathaway, Gen Re's parent company — vetted aspects of the deal. Defendants attack the prosecution statement that there was no evidence Warren Buffet knew anything significant about the deal. No false inference was invited: Although the government led with its inference that Buffett knew nothing of significance, it then described in detail all of the Buffett evidence. The jury could assess the evidence as it saw fit; the prosecution was free to offer its assessment as well.
Finally, the defendants challenge the government's rebuttal assertion that Milton's delivery of the fake slip and offer letter successfully deceived two AIG employees, who therefore booked the transaction as reinsurance. They claim the statement was intended to paper over the government's missing proof of causation. But this single sentence had an insignificant (if any) effect on the prosecution's causation evidence, especially in view of the court's later reminder to the jury that statements from summations are not evidence. The statement fell far short of misconduct.
Ronald Ferguson, the CEO of Gen Re, and Hank Greenberg envisioned a creative and unusual deal, but Ferguson claims that he was unaware that the deal would be fraudulent. He cautions that the jury may have disregarded the flimsy evidence of his scienter (some of which he claims was admitted in error) and convicted him merely because he was in charge as CEO.
Ferguson argues that the jury finding of his scienter was supported by insufficient evidence. He has the "heavy burden" of showing that "no rational juror could have found [his scienter] beyond a reasonable doubt." United States v. Bryce, 208 F.3d 346, 352 (2d Cir.1999) (internal quotation marks omitted). For a sufficiency challenge, we view "all of the evidence in the light most favorable to the government and draw all reasonable inferences in its favor." Id.
In any event, that testimony, taken together with other evidence — Ferguson's unusual request for internal confidentiality, his review of the Houldsworth email noting that "no real risk"
Ferguson challenges the admissibility of a December 2000 email from Graham, which assured Gen Re's General Counsel, Timothy McCaffrey, that:
Joint Appendix at 2192. The email was admitted as a coconspirator statement under Rule 801(d)(2)(E). Ferguson argues that the email: (1) was inadmissible double-hearsay; (2) mandated severance because it created tension between his lack-of-scienter defense and Graham's good-faith defense; (3) and led the government to invite the inference that Graham himself told Ferguson about the potential reputational risk, which it knew to be false.
Double-hearsay
In any event, the unnamed speaker need not be identified to conclude that the statement is nonhearsay. First, the statement was not offered for its truth; it was offered solely for the purpose of showing that the statement was made to Ferguson. See, e.g., George v. Celotex Corp., 914 F.2d 26, 30 (2d Cir.1990) ("[A]n out of court statement offered not for the truth of the matter asserted, but merely to show that the defendant was on notice of a danger, is not hearsay."). Second, no nonmember of the conspiracy could have given Ferguson the advice about potential reputational risk, because only co-conspirators would have been aware of the particular reputational risk that the conspiracy's object entailed (especially in view of Ferguson's order for an unusual level of internal secrecy about the deal). The statement, made in furtherance of the conspiracy, is thus also a nonhearsay co-conspirator statement under Rule 801(d)(2)(E).
Ferguson wished to keep Graham's email out of evidence, but Graham wanted it in — as evidence that he acted in good faith by soliciting his supervisor's imprimatur on a legally questionable transaction. Ferguson and Graham claim that the email created unavoidable tension between Ferguson's lack-of-scienter defense and the good-faith defense mounted by Graham, and that severance was therefore warranted. Ferguson claims additional prejudice from his inability — without infringing Graham's rights — to place before the jury an exculpatory statement from Graham's proffer session.
"Motions to sever under Rule 14 are committed to the sound discretion of the trial judge"; to compel reversal, the
It was well within the district court's discretion to conclude that any tension between defenses was insufficient to warrant severance. If the jury concluded that both Graham and Ferguson feared reputational risk because the LPT was objectionable but non-fraudulent — like, for example, an aggressive (but defensible) offshore tax position — it could have credited both defense theories.
Nor was severance necessary to permit Ferguson to introduce evidence from Graham's proffer session, in which Graham denied personally informing Ferguson about the reputational risk of the transaction. Ferguson argues that in a joint trial, he was hamstrung: He could not introduce the government's notes containing the statement, because Graham was given limited-use immunity; nor could he compel Graham to testify, because of Graham's Fifth Amendment right against self-incrimination.
We have identified several factors for determining whether to grant severance based on a defendant's need to call a co-defendant as a witness:
United States v. Finkelstein, 526 F.2d 517, 523-24 (2d Cir. 1975) (internal citations omitted). Although the district court did not recite or explicitly apply these factors,
In any event, the factors weigh in favor of the district court's ruling. Only the second factor favors Ferguson: Graham's testimony about the email would not have been cumulative, because there is no adequate substitute for further clarification from the drafter himself. But the other factors favor the government: first, Ferguson merely assumes Graham would testify, and it is unclear whether the conflicting statement from the proffer session would even be admissible if he did not;
At bottom, "Rule 14 does not require severance even if prejudice is shown"; instead, "the tailoring of the relief to be granted, if any, [is in] the district court's sound discretion." Zafiro v. United States, 506 U.S. 534, 538-39, 113 S.Ct. 933, 122 L.Ed.2d 317 (1993). Ferguson and Graham have not made a showing that justifies upending the district court's exercise of its discretion.
The government's closing statement juxtaposes Napier's comment that the LPT is Ferguson's deal with a description from Graham's email that Ferguson was advised of the potential reputational risk. Ferguson argues that this sequence (and a similar one in the government's opening statement) amounted to prosecutorial misconduct, because it advanced the inference that Graham had personally discussed reputational risk with Ferguson, which the government knew to be false.
Prosecutors are well advised to tread carefully when it comes to arguing for inferences that are fair in terms of evidence but are doubtful (if not foreclosed) based on what they were told in proffer sessions. However, any inference arose from the structure of the government's argument, rather than its substance. Although it is possible that the misleading structure of a prosecutor's argument could amount to misconduct, the misconduct here (if any) was insufficient to create the "substantial prejudice" necessary to warrant vacatur. United States v. Valentine, 820 F.2d 565, 570 (2d Cir.1987).
The government insists that the deal was tainted from the very first call between Ferguson and Greenberg, when AIG asked to rent a specific amount of reserves for a defined period. Yet it also theorized that the idea of a no-risk deal did not surface until Garand suggested it in mid-November. Ferguson claims that this is a contradiction that renders untenable the district court's finding that the conspiracy began with the Greenberg-Ferguson call on October 31, a ruling that allowed the government to introduce co-conspirator statements made starting on October 31 (rather than starting from mid-November).
The government's theories are not irreconcilable. Although the details of the plan were not settled during the October 31 call, Greenberg and Ferguson agreed to a highly unusual deal: The transaction was prompted predominately by stock market concerns; it inverted their customary commercial roles as cedant and reinsurer, even though there was no evidence that Gen Re wanted reinsurance; and AIG requested a specific dollar range of loss reserves for a specific term.
Even if Greenberg and Ferguson had hoped to accomplish their objectives legally, execution of a no-risk transaction was not unforeseeable. These very senior executives agreed to pursue specific parameters. And their objective predictably exerted pressure on their subordinates on the deal team to get the transaction done that way no matter what.
The defense of Robert Graham, in-house lawyer for Gen Re and the only attorney among the defendants, is that he acted in good faith throughout, was unaware of the true nature of the deal, and vetted his ethical concern with Gen Re's General Counsel, Timothy McCaffrey. Graham argues that (1) his requests for certain jury instructions were improperly denied, and (2) government conduct rendering McCaffrey unavailable was a hindrance to Graham's good-faith defense.
Graham claims that the district court improperly denied his request for jury instructions about professional responsibility rules for attorneys, and non-contractual understandings (i.e., handshake deals). Although a criminal defendant is entitled to a jury instruction when there is "any foundation in the evidence" for it, an instruction that "divert[s] the attention of the jury to questions of little significance" and that would "have confused, if not misled, the jury" are properly rejected. United States v. Russo, 74 F.3d 1383, 1393-94 (2d Cir.1996) (internal quotation marks omitted).
Graham sought a jury instruction explaining that an attorney confronted with "an arguable question of professional duty" may discharge his ethical responsibilities by consulting with a supervisory lawyer and relying on his resolution of the matter. Joint Appendix at 2844-45. He argues that his email to his boss,
Joint Appendix at 2192 (emphasis added).
The professional responsibility rules shed no light, however: A memo reporting on what is being done, without more, is not the kind of consultation contemplated by the rules. See Conn. Rules of Prof'l Conduct 5.2. Nor was there a foundation for the instruction in the record, because Graham presented no evidence implicating the rules. (He evidently decided not to call the ethics expert witness he had considered. See United States v. Ferguson, No. 06-cr-137, 2007 WL 4539646, at *2 (D.Conn. Dec. 14, 2007).)
The government emphasized that Graham drafted the contracts to omit the $15 million in payments to Gen Re. Graham countered that the payments were non-contractual "handshake" deals and thus needed not be included in a written contract. He sought a jury instruction about handshake deals to bolster this argument.
There was no foundation for the instruction; and the instruction only would have created confusion about an unimportant collateral issue. The testimony on handshake deals was that they are "agreement[s] over many years, often decades" in which "one party may or may not make up losses to the other party if they do particularly well," Trial Tr. at 3435, and that such arrangements are common in the insurance industry. But numerous comments in the record confirm that the $15 million payment was not a handshake. (The only comment to the contrary was a stray remark by Houldsworth that appears to have been a misstatement). Moreover, the money trail does not suggest that the parties were dealing on the trustful basis of a handshake: Gen Re withheld the payment it was contractually obligated to make until AIG had routed the $15 million from the side deal (premium repayment and fee) to Gen Re.
In a government interview, Graham's boss, Tim McCaffrey, recalled that when he received Graham's email, he saw nothing that warranted questioning or follow up, and presumed that Graham would have been more explicit if truly concerned about legal or ethical issues. Graham subpoenaed McCaffrey to testify about these matters (and Graham's good character), but McCaffrey, who was changed to an "unindicted co-conspirator" in the superseding indictment,
United States v. Burns, 684 F.2d 1066, 1077 (2d Cir.1982). We review the court's factual findings about government actions and motive for clear error, but its ultimate balancing for abuse of discretion. United States v. Ebbers, 458 F.3d 110, 118 (2d Cir.2006).
Graham's claim fails on two grounds. As to the first part, a prosecutor does not overreach by refusing to immunize a legitimate target of an ongoing investigation, and the district court's finding that McCaffrey was a target was not clearly erroneous: He failed to act following Graham's remark that "[h]ow AIG books [the LPT] is between them, their accountants and God," and he annotated a list of transactions in his personal files to indicate a hidden letter for the LPT.
As for the second part, McCaffrey's interpretation of Graham's email was not material because it was non-contemporaneous and self-serving: It would have been disadvantageous for McCaffrey to concede that the email had raised red flags that he subsequently ignored. Moreover, McCaffrey's assumption, that Graham would have been more explicit if he had a qualm, was conjectural.
Similarly, the district court did not abuse its discretion by omitting a missing witness instruction. Such an instruction need not be given "in the absence of circumstances that indicate the government has failed to immunize an exculpatory witness." United States v. Myerson, 18 F.3d 153, 160 (2d Cir.1994). For the reasons discussed above, it was within the court's discretion to conclude that McCaffrey's potential testimony was insufficiently exculpatory to warrant the instruction.
Christian Milton, a Vice President of Reinsurance at AIG, was the only AIG employee who was indicted in this case. His primary defense is that the trial was a vilification of AIG, and he was convicted by association.
Milton argues that the court abused its discretion by admitting comments from the recordings of the Gen Re defendants that impugned AIG generally.
Trial Tr. at 4766-67. The instruction is easy to follow, and "juries are presumed to follow their instructions."
Under these circumstances, we cannot say that the district court abused its discretion in admitting the statements.
The recordings denigrating AIG did not require that Milton's trial be severed.
There was substantial other evidence to convict Milton besides the recordings denigrating AIG. He spoke frequently with Napier — sometimes a couple of times a day, and other times "almost daily" — to "keep the pressure" on Gen Re to get the deal done. Joint Appendix at 789. He also spoke candidly with Napier about the no-risk nature of the deal, and their discussions are memorialized in at least one email. He orchestrated the circulation of deal documents within AIG to avoid the customary actuarial and underwriting due diligence. He signed the final contracts on behalf of AIG, which omitted the $15 million fee, and then helped effect (and disguise) the payment of the fee, including by signing the relevant paperwork on AIG's behalf.
Even if the recordings were likely inadmissible had Milton been tried alone (they were admitted for the limited purpose of showing scienter of the Gen Re defendants), we cannot say — in view of the line-by-line redaction of the recordings, the court's steps to minimize each recording's effect on Milton,
Elizabeth Monrad, the Chief Financial Officer of Gen Re, argues principally the prosecutorial misconduct and other issues discussed above. In addition, she argues that testimony by Houldsworth and Napier about what others (sometimes she herself) meant by certain statements was equivalent to asking what she knew, which improperly prejudiced the jury as to her scienter.
Monrad relies heavily upon United States v. Kaplan, 490 F.3d 110 (2d Cir. 2007). In Kaplan, conspirators from a medical office and a law firm set up auto
Those concerns are absent here. Napier and Houldsworth testified only about calls or emails they were involved with, and their testimony was rationally based on the perceptions that they formed from those communications and as key players in the LPT deal. The testimony was helpful to the jury because of the jargon,
Although this Court has "suspect[ed] that in most instances a proffered lay opinion will not meet the requirements of Rule 701" when the issue is a party's knowledge, we have advised that, like here, "[l]ay opinion testimony will probably be more helpful when the inference of knowledge is ... from such factors as the defendant's history or job experience." United States v. Rea, 958 F.2d 1206, 1216 (2d Cir.1992). The district court therefore did not abuse its discretion in admitting the testimony about these statements.
All of the arguments raised by Chris Garand, a Senior VP and Chief Underwriter of Gen Re's finite reinsurance operation in the U.S., are raised by other defendants and are discussed above.
For the foregoing reasons, the defendants' convictions are vacated and the case is remanded to the district court for a retrial.
All defendants were charged with one count of conspiracy under 18 U.S.C. § 371 and three counts of mail fraud under 18 U.S.C. § 1341. All defendants except Garand were also charged with seven counts of securities fraud, 15 U.S.C. §§ 78j(b) & 78ff, and five counts of making false statements to the SEC, 15 U.S.C. §§ 78m(a) & 78ff; Garand was also charged with three counts of securities fraud and three counts of making false statements.
After the verdict, the defendants moved for a new trial under Rule 33 only if the court granted their Rule 29(a) motions for any of the counts. They submitted skeletal memos without substantive argument, declined to file Rule 29(c) motions, and declined oral argument despite the court's request. (Ferguson initially requested oral argument on his motions, but then withdrew his request.)
The district court denied the defendants' pre-verdict motions for severance (Rule 14) and acquittal (Rule 29(a)), thus mooting their conditional motions for a new trial (Rule 33). United States v. Ferguson, 553 F.Supp.2d 145, 163-64 (D.Conn.2008).
Joint Appendix at 300 (emphasis added).
Joint Appendix at 556 (emphases added).
The potential personal knowledge issue was waived, however, because double-hearsay is what was argued and there was no ruling on personal knowledge in the first place. See Norton v. Sam's Club, 145 F.3d 114, 117 (2d Cir.1998).
The court conditionally admitted the statements during the government's case, but admitted the statements only after conducting a hearing after the government rested; the court found that the government satisfied its burden of proving the necessary Rule 801(d)(2)(E) elements by a preponderance. See United States v. Geaney, 417 F.2d 1116, 1120 (2d Cir.1969).
Although the first recording was permitted to be played in the government's opening, the court did not allow the government to bring it out in Houldsworth's testimony.
The second passage is not inflammatory, but in any event, the court instructed the jury that it "may not consider this statement at all as to any of the other defendants" besides Monrad, the speaker.
The court offered to give a limiting instructions to the jury for the third recording "if requested by Milton," 246 F.R.D. at 120, but Milton did not request one.
Milton expressly requested that the court not give a limiting instruction for the fourth recording.
