Argued: March 11, 2013
Errata Filed: July 25, 2013
Defendants Zvi Goffer, Michael Kimelman, and Craig Drimal appeal from convictions of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff and sentences entered in the Southern District of New York (Richard J. Sullivan, Judge). Defendants allege that (1) wiretap evidence is inadmissible in prosecutions of securities fraud; (2) the jury lacked sufficient evidence to prove Defendants' knowledge of the insider source; (3) the jury instructions on conscious avoidance were improper after the Supreme Court's decision in Global-Tech Appliances, Inc. v. SEB S.A., -- U.S. --, 131 S.Ct. 2060 (2011); (4) the district court improperly excluded a rejected plea bargain; and (5) the sentences were higher than other white-collar defendants receive for comparable thefts. We hold that (1) wiretap evidence is admissible where the wiretap was lawfully obtained, and wire fraud remains a predicate offense to obtain a wiretap; (2) there was sufficient evidence from which a jury could reasonably infer Defendants' mens rea; (3) conscious avoidance law was not altered by Global-Tech; (4) the district court properly excluded evidence of a rejected plea bargain; and (5) Defendants' sentences were reasonable in light of the magnitude of their theft and the 18 U.S.C. § 3553(a) factors. The judgment of the district court is accordingly.
ALEXANDER MARTIN DUDELSON, Law Office of Alexander M. Dudelson, Brooklyn, NY, for Appellant Zvi Goffer.
MICHAEL S. SOMMER (Morris J. Fodeman, Scott D. Tenley, on the brief), Wilson Sonsini Goodrich & Rosati, P.C., New York, NY, for Appellant Michael Kimelman.
ARLENE VILLAMIA-DRIMAL, Weston, CT, for Appellant Craig Drimal.
ANDREW L. FISH, Assistant United States Attorney (Richard C. Tarlowe, Assistant United States Attorney, on the brief), for Preet Bharara, United States Attorney for the Southern District of New York, New York, NY, for Appellee United States of America.
Before: Walker, Sack, and Wesley, Circuit Judges.
Wesley, Circuit Judge.
Defendants Zvi Goffer, Michael Kimelman, and Craig Drimal were convicted in the United States District Court for the Southern District of New York (Richard J. Sullivan, Judge) of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371 and securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. §§ 240.10b-5 and 240.10b-5-2, and 18 U.S.C. § 2. Goffer and Kimelman were convicted after a 13-day jury trial; Drimal pled guilty. Goffer was convicted of two counts of conspiracy to commit securities fraud and twelve counts of securities fraud; Kimelman was convicted of conspiracy to commit securities fraud and two counts of securities fraud; and Drimal pled guilty to conspiracy to commit securities fraud and five counts of securities fraud. Drimal and Goffer appeal their sentences and Kimelman and Drimal challenge their convictions based on evidentiary rulings, jury instructions, and sufficiency of the evidence.
Goffer, Kimelman, and Drimal, along with non-party defendants, conducted a double-blind, high-volume insider trading network that led the participants to acquire over $10 million in profits. Goffer, who worked as a proprietary trader at the Schottenfeld Group, LLC ("Schottenfeld"), spearheaded the conspiracy.
In 2007, Drimal traded from the offices of the Galleon Group ("Galleon"), a firm led by Raj Rajaratnam. Kimelman, previously an attorney at a New York law firm, traded for Quad Capital ("Quad"), a proprietary trading firm. In late 2007, Kimelman, Goffer, and Goffer's brother Emanuel established a new trading firm, Incremental Capital ("Incremental"), though they retained their other positions. In early 2008, Kimelman left Quad to trade with Emanuel, and Goffer began trading at Galleon. Kimelman and Goffer spoke often and shared information that led them to trade in the same stocks. In 2007 and 2008, Kimelman and Goffer traded 151 stocks within five days of each other, including 88 stocks that they both traded on the same day.
I. The Conspiracy
In the summer of 2007, Arthur Cutillo and Brian Santarlas, attorneys at Ropes & Gray LLP, met with Jason Goldfarb, a workers' compensation attorney who had attended law school with Cutillo. Goldfarb indicated to the Ropes & Gray attorneys that he had a friend who traded stocks and would pay for information about corporate acquisitions. The Government showed at trial that Goffer was this friend. What followed was a series of "tips" in which Cutillo and/or Santarlas would obtain material non-public information and pass it to Goldfarb, who, in turn, would pass it to Goffer. Goffer distributed these "tips, " which frequently related to impending takeovers, to friends and partners. Based on these tips, Goffer and his co-conspirators would acquire positions in the targeted companies and profit from the takeover's effect on the share price.
Goffer's network used prepaid cellular telephones to avoid detection; these phones – used by the attorneys and the traders – were destroyed after each successful tip. See, e.g., Tr. 429-31, 436-37; Gov't Ex. 114, 127. Throughout the relevant time period, Goffer spoke with co-conspirators, especially Kimelman, guardedly when on the phone. For instance, he described the P.F. Chang's tip as "a good thing" but "nothing I'm going to talk about on the telephone." Gov't Ex. 145. Goffer often asked Kimelman to meet in person or "in the street" when conveying sensitive information. They also discussed countermeasures and ways to avoid detection, suspecting that high-volume trades in little-traded companies immediately prior to their acquisition could raise regulatory eyebrows. Goffer relied on Kimelman to provide him with insights into the meaning of legal documents associated with the acquisitions, including revised merger agreements, settlement agreements, signature pages, and limited guarantees, inter alia.
II. The 3Com Tip
The first tip presented at trial related to Bain Capital's bid to acquire 3Com. When Cutillo and Santarlas learned about the progress of the deal – for example, by finding documents entitled "closing agenda" or "signature papers" on Ropes & Gray's document management system or on a communal printer - they reported this progress to Goldfarb, who passed it on to Goffer. Goffer shared information relating to the takeover bid with some of his co-conspirators. Goffer frequently convened a group of co- conspirator traders (typically including Emanuel, Kimelman, and David Plate, another Schottenfeld trader) at a bar where the group would discuss the progress of the takeover bid and any new information that Goffer had received regarding the plans.
On August 7, 2007, Goffer, Drimal, Emanuel, and Plate began acquiring 3Com stock based on the material nonpublic information that Goffer received from Goldfarb. Gov't Ex. 10. That evening, Goffer had a 25-minute phone conversation with Kimelman. The next day, Kimelman purchased 94, 200 shares of 3Com stock. That week, forbidden from purchasing more 3Com stock by Quad's risk management team, Kimelman sent an otherwise wordless email to Goffer into which he had pasted an instant message conversation with Quad's risk management expert.
Goffer also provided details about the acquisition and the sources of his information to Drimal; Drimal passed both on to David Slaine, a cooperating witness. Drimal explained that the information came from an attorney from "Ropeson" who risked "his whole . . . career and maybe going to jail" by sharing these tips. Gov't Ex. 206, 208.
On September 27, 2007, Goffer told Plate and other co-conspirators that the acquisition of 3Com would happen the next day. Goffer had learned that the signature papers were prepared and he confirmed with Kimelman, who verified, based on his background as an attorney, that signature papers "were what they sounded like; they were something that took place at the end of a deal." Tr. 831-32, 1067. Kimelman was either present or was consulted over the phone. Bain announced its acquisition of 3Com the next day; the co-conspirators all profited. Goffer told Plate that he needed to pay his source, and identified those who were contributing (including Drimal); the co-conspirators paid Santarlas, Cutillo, and Goldfarb $25, 000 each.
III. Other Tips
In November 2007, Santarlas overheard other Ropes & Gray associates discussing a client's upcoming acquisition of Axcan. Santarlas, who did not work on mergers and acquisitions, accessed at least four documents on the Ropes & Gray document management system relating to the acquisition; he and Cutillo shared the tip with Goldfarb. Goldfarb passed the attorneys' information to Goffer, who disseminated it (at a minimum) to Drimal and Slaine. Drimal shared the information with Michael Cardillo, a Galleon trader, though he again attributed the tip to "Ropeson" attorneys. Tr. 1106. Drimal and Plate purchased Axcan stock and benefitted from the Axcan acquisition announced on November 29, 2007; Drimal gained $1, 984, 867. Goffer did not trade Axcan because it was a small, rarely-traded stock and he did not want to attract regulatory attention. Tr. 657-58.
In February 2008, Santarlas learned about a possible takeover of P.F. Chang's China Bistro, Inc. ("P.F. Chang's") from a colleague; he conveyed this information to Goldfarb, who shared it with Goffer. Tr. 131-34, Gov't Ex. 2. A few days later Goffer called Kimelman to seek his advice, but noted that it was "nothing I'm going to talk about on the telephone." Gov't Ex. 145. Kimelman agreed to come into Manhattan to "figure out our plan of attack." Id. Goffer, Emanuel, and Kimelman decided to purchase P.F. Chang's stock as part of an acquisition of a broad restaurant portfolio to disguise their use of the inside information. Tr. 849-50. Goffer instructed the group that "everything's got to be printed out" to help them "go about . . . justifying a trade." Gov't Ex. 149. No P.F. Chang's acquisition was announced in 2008.
In March 2008, Cutillo and Santarlas observed that deal documents for Bain Capital's acquisition of Clear Channel Communications, Inc. ("Clear Channel") were laid out in a "closing room" at the law firm, apparently ready for execution, and reported that closing was imminent. Unbeknownst to these tippers, neither of whom worked on the deal, the Clear Channel acquisition was staged so that the lenders could be sued for specific performance. When the deal did not close as anticipated, Goffer, Kimelman, and Drimal all suffered losses on their Clear Channel investments.
In May, there was more Clear Channel activity at the Ropes & Gray offices. Cutillo passed the information to Goldfarb, who told Goffer. Tr. 494-95, Gov't Ex. 198. Goffer summoned Kimelman for an "urgent meeting;" immediately afterwards, he called another trader and told him to purchase Clear Channel call options for "everybody." Gov't Ex. 199, 201. Over the next two business days, Clear Channel publicly announced that it was in settlement talks with the lenders and that an amended merger agreement had been reached. The market reacted favorably to this news and Goffer earned over $1 million in profits in his Galleon account trading on this tip.
Schottenfeld trader Gautham Shankar provided several tips to Goffer, including acquisitions of Kronos, Inc. and Hilton Hotels Corp. ("Hilton"). Tr. 650-51. Goffer, Kimelman, Drimal, and Emanuel benefitted from trading on this inside information. Profits from these illegal trades were included in calculating the loss amount for sentencing purposes, but the trades were not charged at trial.
IV. Recruitment of David Slaine
In the fall of 2007, Goffer and Kimelman recruited David Slaine to join Incremental Capital. The co-conspirators hoped that Slaine, who unbeknownst to them was working as a cooperating witness after his own arrest for insider trading, would provide them with the financial backing to get their insider trading-fueled business off the ground. Kimelman urged Goffer to tell Slaine that he would "get great information" by investing with Incremental. Gov't Ex. 114A. Goffer mentioned that he had received tips about certain acquisitions before they happened, including 3Com, Axcan, and Hilton. Gov't Ex. 212. Goffer jokingly told Slaine that the information came from a construction worker, but when pushed he elaborated "you [are] probably better off not knowing where they were coming ...