United States v. Stewart

907 F.3d 677

UNITED STATES of America, Appellee,

v.Sean STEWART, Defendant-Appellant,Richard Cunniffe, Robert Stewart, aka Bob, Defendants.

Docket No. 17-593

August Term, 2017

United States Court of Appeals, Second Circuit.

Argued: February 26, 2018

Decided: November 5, 2018

Brooke E. Cucinella (Sarah K. Eddy, Brian Blais, and Margaret Garnett, on the brief), Assistant United States Attorneys, for Geoffrey S. Berman, United States Attorney for the Southern District of New York, New York, NY.

Alexandra A.E. Shapiro, (Sean Nuttall, on the brief), Shapiro Arato LLP, New York, NY, for Sean Stewart.

Before: Katzmann, Chief Judge, Leval, Circuit Judge, and Berman, District Judge.^*

Judge Berman dissents in a separate opinion.

Per Curiam:

This is an unusual insider trading case, in that defendant-appellant Sean Stewart does not contest that he provided material, nonpublic information to his father, Robert Stewart. Rather, Sean readily acknowledges that "he was very close to his father, routinely confided in him, and even occasionally mentioned potential deals," and that his father and others then invested based upon that information. Def. Br. 1. The key question facing the jury was whether to believe Sean when he denied that he knew that his father would trade on the information that Sean had provided. Evidently they did not, as Sean was convicted on all counts brought against him.

The government’s case largely hinged on the so-called "silver platter statement," in which Sean purportedly told Robert that he expected Robert to invest based upon information to which Sean had access through his work as an investment banker. In this matter, a silver platter proved to be the government’s silver bullet. Because we agree that Sean should not have been precluded from impeaching the silver platter statement, however, we VACATE the conviction and REMAND this matter to the district court for further proceedings.¹

BACKGROUND

Sean Stewart testified that he was "very close" to his parents growing up and that he had an "excellent" relationship with his father, Robert Stewart, in particular. Tr. 1129-30. Into adulthood, Sean would regularly speak with his parents several times per week by phone and would see them in person once or twice per month. Among the topics that they often discussed were Sean’s career and what he was working on.

Although Sean knew that company policy forbade him from discussing confidential information with anyone other than his colleagues, he did not abide by that rule. Rather, he admitted that he "spoke very freely" with his family, explaining that he "grew up in a household where there were no secrets, and [his family] shared everything about [their] lives." Id. at 1189.

Sean began working as an analyst at JP Morgan Chase in 2003. Among the matters that Sean worked on while at JP Morgan was the sale of a pharmaceutical research company, Kendle International, Inc. Robert began purchasing Kendle common stock on February 7, 2011, shortly after Sean had attended a kick-off meeting for the Kendle project. In addition, Robert asked a colleague, Mark Boccia, to make further investments in Kendle on Robert’s behalf. Boccia began doing so in mid-February, with some of the investments made on his own behalf and some on behalf of Robert. Kendle’s acquisition was publicly announced on May 4, 2011. The following day, Robert sold his Kendle securities, and, acting on Robert’s advice, Boccia did the same. Boccia then paid Robert a share of his trading profits in cash.

At around the same time, JP Morgan was also involved in the sale of Kinetic Concepts, Inc., a medical device company known as "KCI." Although Sean did not work on the KCI transaction directly, he was involved with ensuring that it was properly staffed. Boccia began purchasing KCI call options on behalf of both himself and Robert on April 5, 2011, with Robert this time telling Boccia that Sean "knew that [KCI was] going to merge." Id. at 371. Robert also asked another colleague, Richard Cunniffe, to purchase KCI call options on his behalf, explaining that he could not do so directly because "he was too close to the source." Id. at 623. Cunniffe began purchasing KCI call options on April 21, 2011. In addition, Robert began personally purchasing KCI common stock on May 5, 2011, the same day on which he had sold his Kendle shares. The KCI transaction was publicly announced on July 13, 2011, generating significant profits for Cunniffe and Robert, though Boccia’s options had already expired by that time.

Meanwhile, on May 25, 2011, Sean was made aware that the Financial Industry Regulatory Authority ("FINRA") was investigating suspicious trading in Kendle securities. In connection with that investigation, Sean was asked whether he knew any of the individuals whose names appeared on a list circulated by FINRA. Although Robert appeared on the list, Sean initially denied recognizing any of the listed names. JP Morgan requested that Sean review the list again after FINRA inquired further, at which time Sean acknowledged that the list included his father’s name. JP Morgan’s legal and compliance staff subsequently arranged to meet with Sean on August 26, 2011.

The night before that meeting, Sean and Robert met at the Yale Club. According to Sean, he told Robert about the upcoming meeting and said that Robert’s name had appeared on FINRA’s list. Sean testified that he confronted his father about the Kendle trades because he was "confused, ashamed, [and] taken aback," and he "wanted to know why [Robert] would do something so foolish, so stupid," as Sean knew Robert might have learned of the Kendle transaction from their conversations. Id. at 1235. Sean described Robert as "embarrassed" and "nervous" upon being asked about Kendle, claiming to have invested based upon public information, though Sean did not believe him. Id.

The following day, Sean told JP Morgan compliance and legal personnel that he had not discussed Kendle with his father. Sean has admitted that he "lied," explaining that he "was nervous about [Robert] getting in trouble" and recognized that his father’s investments "would be potentially damaging for [his] prospects" professionally. Id. at 1236. Sean claimed that a few days after his meeting at JP Morgan, he told Robert "to never do that again, and [Robert] promised that he would not." Id. at 1237. Sean believed Robert, who Sean described as having been "pretty shaken up" by the experience. Id. at 1251.

Although neither FINRA nor JP Morgan took any disciplinary measures against Sean, FINRA nevertheless referred the matter to the Securities and Exchange Commission, which conducted its own investigation. The SEC spoke with Robert, who acknowledged that Sean worked at JP Morgan but denied having discussed Kendle with Sean either before or after he had purchased the company’s stock. The SEC subsequently closed its investigation without taking any enforcement action.

Sean left JP Morgan for Perella Weinberg Partners, a boutique investment bank, in September 2011. While at Perella Weinberg, Sean worked on the acquisitions of Gen-Probe, Inc., and CareFusion, both medical device companies, and learned of the planned acquisition of Lincare Holdings, Inc., a home healthcare company. Cunniffe purchased the securities of each of these companies in advance of the acquisitions, doing so at the suggestion of Robert in each instance, and sold the securities after each acquisition was publicly announced. Each time, Cunniffe shared the investment proceeds with Robert.

The profits from these five investments totaled $1.15 million. In approximate terms, Cunniffe received $1 million; Robert received $150,000; and Boccia lost money as a result of the expiration of his KCI call options. There is no evidence that Sean directly profited from the investments.

Unbeknownst to Robert, the Federal Bureau of Investigation approached Cunniffe sometime in the spring of 2015, after all of the investments at issue. Cunniffe decided to cooperate with the FBI, and subsequently recorded several conversations with Robert. Most relevant to this litigation is a conversation between Robert and Cunniffe that occurred on March 24, 2015, during which they had the following exchange regarding Robert’s Kendle investments:

Robert : And then like about a year later I get a call from the SEC questioning me on that transaction. [Indiscernible] 5,000 dollar transaction. What are they gonna do? And then nothing happened. I don’t know what they’re doing now. I figure it’s a 3 year statute, 4 year, 5 year whatever it it’s way way over that. But it pretty much put a fear in me that a [indiscernible].

Cunniffe : Would scare the shit out of me [indiscernible] that’s for sure.

Robert : Yeah. I mean I still, I still remember being [indiscernible] years ago. Sean would always say, ah I can’t believe you [indiscernible]. Said I can’t believe it. I handed you this on a silver platter and you didn’t invest in this , and you know. I said, Sean, did you ever get a call from the SEC, like I’m gonna actually do this [indiscernible], and he says [indiscernible]. I mean [Laughter]. Yeah, that is something.

Supp. App. 143-44 (alterations in original, emphasis added). The district court referred to the italicized portion of this conversation as the "silver platter statement," nomenclature which we hereby adopt.²

Robert was arrested and interviewed by the FBI shortly thereafter. During the attendant questioning, Robert claimed that Sean only learned of the Kendle trades "after the fact," at which point Sean became "[s]urprised and ang[ry]," prompting Robert to acknowledge that "it was stupid" for him to have invested. S.D.N.Y. Dkt. No. 120-2 at 11, 16. When asked why Sean told Robert about other deals that he was working on following the Kendle episode, Robert speculated that Sean "figured I probably wouldn’t do it again—you know—in his eyes, y’know—I’m his father—I’m—y’know—on a pedestal." Id. at 16. Robert repeatedly denied that Sean was...