U.S. Attorney’s Office Actively Decided or Consciously Avoided Compliance with Brady

By: Houston Criminal Lawyer John Floyd and Paralegal Billy Sinclair


A.B. Watley is a day trading brokerage firm. Kenneth Mahaffy, Timothy O’Connell, and David Ghysels (“Broker defendants”) were employed by Merrill Lynch, Smith Barney and Lehman Brothers as “stockholders to private clients.” The three men, along with Robert Malin, Linus Nwaigwe and Keevin Leonard (“Watley defendants) were indicted on 39 counts of various securities fraud violations. Specifically, the indictment charged that the Broker defendants provided “confidential information” belonging to their employers to the Watley defendants. Along with other family members, Malin owned A.B. Watley and was responsible for its day-to-day operations. Nwaigwe was Watley’s compliance officer and Leonard recruited and supervised the firm’s day traders. The Watley defendants were “proprietary traders,” meaning they executed trades on behalf of Watley with the firm’s funds.


All the defendants were put to trial in 2007 in the United States District Court for the Eastern District of New York on the laundry list of criminal charges. The jury acquitted five of the defendants on 38 of the 39 counts charged in the indictment, and deadlocked on the remaining count prompting the trial court to declare a mistrial. O’Connell was convicted of one count of witness tampering and making a false statement.


Clearly, the jury was not impressed with the Government’s case or its presentation of the evidence. Reasonable, fair-minded prosecutors would have walked away from the case, saving the Government (and thus the taxpayers) valuable resources which could have been directed at more winnable cases. Not these prosecutors. They elected to pursue the remaining conspiracy count related to the securities fraud, and once again a second jury deadlocked on this charge, prompting Judge John Gleeson to give the jury a “supplemental charge” which resulted in a conviction.


It was disclosed by the Second Circuit Court of Appeals on August 2, 2012 in United States v. Mahaffy that the Government and the SEC conducted cooperative joint investigations in this case and had failed to turn over evidence that could have help the defendants argue their innocence. In December 2009 and January 2010, after the defendants were sentenced, the SEC disclosed 30 transcripts of “investigative depositions” that had been compiled during the investigation of the case, some of which had been taken as early as December 2004.  These documents were not previously disclosed to the defendants.



After the attorneys for the six defendants gained access to these transcripts, they immediately filed a motion for a new trial, contending twelve of the transcripts contained Brady material that should have been disclosed prior to the two trials in the case. Specifically, the attorneys charged that the transcripts contained information that either contradicted or undermined “the testimony of key government witnesses on the central question at trial, namely, whether the allegedly misappropriated information was confidential” under Supreme Court precedent defining confidential information.


The familiar picture begins to take focus. Government prosecutors withheld critical Brady material which probably could have resulted in a complete acquittal on all counts. And despite the withholding of the Brady material, the jury who heard the first case delivered a sound message to the Government: “we do not believe your charges that these defendants did something illegal—at least not the way you said they did.” Thus, the duty of the Government to disclose the Brady transcripts before the second trial should have been even more compelling. But what did the Government do? It did what has become accepted unethical prosecutorial misconduct among federal prosecutors: it continued to withhold, to actually conceal the SEC transcripts. To properly understand the nature of the misconduct, we must give you the background facts of the case as laid out by the Second Circuit who reversed the convictions of the defendants:


“Merrill, Smith Barney, and Lehman each had an internal communications system with devices colloquially known as ‘squawk boxes’ or ‘hoots’ located throughout the firm. During the day, firm personnel transmitted internal communications (‘squawks’) concerning a variety of securities trading matters. A small portion of that information related to pending client orders for specific blocks of particular securities, though clients’ identities were never disclosed over the squawk boxes. According to brokerage firm representatives who testified at trial, squawks concerning block orders were transmitted in order to allow each firm’s traders to find a client to take the other side of the squawked trade. If the firms could thereby keep both sides of trades in house, they could earn commissions on both sides while avoiding exposing the trades to external market fluctuations.


“The indictment alleged a scheme in which the Broker Defendants placed phone receivers up to their respective squawk boxes and transmitted squawks over open phone lines directly to Watley, where traders then placed trades in the squawked securities before the brokerage firms executed the squawked customer orders. The government alleged that by engaging in that behavior, sometimes referred to as ‘frontrunning,’ Watley hoped to buy or sell shares at a more attractive price than would have been available once the squawked customer orders were executed. The government contended that, in exchange for providing access to the direct feeds of squawks, Watley placed ‘wash trades’ with the Broker Defendants in which Watley traders simultaneously bought and sold the same security at the same price through different accounts. These trades presented no real economic risk or upside and served only to generate commissions for the Broker Defendants. Those commissions were allegedly bribes meant to compensate the Broker Defendants for the squawk feeds they transmitted, as was a $500 cash payment that a Watley trader made to Mahaffy.


“The government’s theory was that the Broker Defendants defrauded their employers of confidential information by directly transmitting squawks to Watley. The viability of that theory depended on, among other things, the government proving beyond a reasonable doubt that the squawked information was confidential.


“There is no real dispute that each of the Broker Defendants used open phone lines to transmit squawk box feeds directly to Watley, or that Watley sought to take advantage of that information by frontrunning. In early 2002, Malin hired day trader Jay Amore, first as a consultant to Watley and later as the firm’s Chief Executive Officer. Amore brought former co-workers with him, including Leonard, along with access to Mahaffy’s Merrill squawk box and Ghysels’ box at Lehman. According to Amore, he had used that access to frontrun at his prior day trading firm and he planned to do the same at Watley.


“After Amore demonstrated his frontrunning strategy to Malin and others, Leonard hired more than a hundred day traders to implement the strategy. The brokerage firms’ squawks were transmitted over speakers throughout Watley, apparently loudly enough to be heard on Watley’s trading floor and in individual offices, including Malin’s and Nwaigwe’s. Watley’s traders listened to the squawks and bought or sold in front of squawked trades whenever possible. They never took the other side of one of the brokerage firms’ squawked trades.


“The first trial had proceeded on one count of conspiracy to commit securities fraud, twenty substantive securities fraud counts, one count of conspiracy to violate the Travel Act, eleven substantive Travel Act counts, and several counts charging substantive witness tampering, conspiracy to commit witness tampering, and making false statements. After two months of trial including a week of jury deliberations, the jury hung on Count One, the securities fraud conspiracy count. Aside from convicting O’Connell of one count each of witness tampering and making a false statement, the jury acquitted the defendants on all other charges. The district court declared a mistrial on Count One.


“After the government indicated its intention to retry the defendants on Count One, the defendants moved to bar the retrial on double jeopardy and collateral estoppel grounds, contending that their acquittal on Count Twenty-Two, the Travel Act conspiracy count, precluded retrial. The district court denied the motion. After an interlocutory appeal we affirmed, holding that because it was not possible to determine the reasons underlying the Count Twenty-Two acquittal, it was not possible to determine whether the verdict necessarily decided facts that would bar a new trial.


“In the retrial, the defendants were each charged with one count of conspiracy to commit securities fraud under 18 U.S. §§ 1348 and 1349 on two theories: (1) that the Broker Defendants deprived their employer firms of their honest services (‘honest services fraud’) under 18 U.S.C. § 1346 (‘honest services fraud’); and (2) that, when they transmitted squawks directly to Watley, the Broker Defendants deprived their employer firms of confidential information, which qualified as property (‘property fraud’) under Carpenter v. United States. A critical issue was whether portions of the squawked information actually were confidential. There is no dispute that the majority of squawked information was not confidential, instead consisting of publicly available information including research, indications of interest, advertising, general ‘market color,’ and other items that did not include actual block order information.


“The evidence at the retrial, which lasted roughly three weeks, focused in large part on the manner in which the Broker Defendants’ respective employer firms treated squawks and squawked information, and the consideration that flowed between the defendants in respect of the squawked information. To make its case, the government called a representative from each of the employer firms to testify that his firm regarded the client order information as confidential information that brokers should not have disseminated to Watley. On cross-examination, defense counsel elicited testimony that the firms did not train brokers on proper use of squawks or squawk boxes and that, although each firm had a written policy concerning the confidentiality of client order information generally, throughout the relevant period none of the firms had a policy that specifically addressed how employees should treat squawks or squawk boxes or that expressly delineated squawked information as confidential. The defendants also introduced evidence that squawks were broadcast and freely available through firm offices, including to non-employee visitors; that brokers were expected to share clients’ block orders with certain other clients; and that firm supervisors were aware of the Broker Defendants’ direct transmission of squawks. Based on that evidence, defense counsel argued during summations that squawked information was not confidential.


“After two days of deliberation, the jury declared itself deadlocked. The next day, the jury asked to have the court’s instructions read back, and then requested a ‘plain English’ definition of conspiracy to defraud the brokerage firms of honest services and conspiracy to defraud the brokerage firms of property. Over defense objection, the district court drafted and delivered a supplemental charge. The jury returned a guilty verdict approximately thirty minutes later.”


As noted above, this case involved “close collaboration” between the Government and the SEC. In fact, as the Second Circuit pointed out, “the government’s trial teams each consisted of ostensibly experienced attorneys from both offices.” The Second Circuit then set forth the disturbing facts which demonstrate the coarse nature of the prosecutorial misconduct at the federal level:


“ … Several weeks prior to the first trial, Sandeep Satwalekar — the primary SEC staff attorney investigating the case who conducted almost all of the SEC depositions, who was cross-designated as a Special AUSA, and who sat at counsel table during the trial — emailed two of his colleagues on the trial team, AUSAs Michael Asaro, the lead prosecutor, and Sean Casey, the Deputy Chief of the Business and Securities Fraud Unit. He specifically cautioned them that portions of at least one of the deposition transcripts contained possible Brady material:
‘This is the last time I will bring this possible Brady issue up, but look over this excerpt when you get a chance. Tell me whether this requires some disclosure to defense counsel. . . . ‘


There is no question that the government knew about the transcript that Satwalekar attached, along with the other twenty-nine transcripts, prior to the first trial. Satwalekar conducted the majority of the depositions. Nine of the twelve on which the defendants based their Brady motion below took place after the initial indictment. The government possessed all thirty transcripts within its electronic database. Ultimately, however, neither the excerpt that Satwalekar sent to his colleagues nor any other portion of the SEC depositions was disclosed in connection with the first trial.

“The second trial team also failed to disclose any of the transcripts. Although it was aware of the transcripts and had read some of them prior to the retrial, the second team elected not to revisit disclosure decisions, relying instead on the first team’s decisions.


The Government’s “property fraud theory” at the seconds trial required the Government to prove beyond a reasonable doubt that the “brokerage firms had exclusive use of the squawked information, considered that information to be confidential, and they treated it as such.” To carry this burden, the Government elicited testimony from “brokerage firm representatives” concerning each firm’s confidentiality policy. And that’s where the proverbial rubber hit the road for defense attorneys: had the SEC deposition transcripts been disclosed, defense attorneys would have learned that several of “brokerage firm representatives” who testified before the SEC (including “senior personnel” from Merrill, Lehman and Smith Barney) that the “squawked information” was not confidential and that “no firm policies prohibited the direct transmittal of squawks outside each representative firm.”


Put simply, the Government put witnesses on the stand knowing they would give contradictory testimony about the confidentiality of the squawked information. It appears to have been borderline suborning perjury. While the Second Circuit did not draw this conclusion, or intimate as much, the court did find the Government had committed a serious Brady violation, saying:
“The government’s failures to comply with Brady were entirely preventable. On multiple occasions, the prosecution team either actively decided not to disclose the SEC deposition transcripts or consciously avoided its responsibilities to comply with Brady. According to the government, the second prosecution team made an affirmative decision not to review disclosure decisions made by the first trial team, and specifically decided not to disclose the transcript of Romero’s testimony, on the ground that the first team consisted of experienced prosecutors. That decision not to review or revisit disclosure decisions compounded the government’s failures to turn over the SEC transcripts prior to the first trial.

“The government’s Brady violations have negatively impacted this case in two distinct but related ways. First, the two trials were both unfairly skewed against the defendants, who were forced to mount their defenses without the benefit of material exculpatory and impeaching sworn testimony. Second, the costs of this litigation — in terms of personal, financial and judicial resources and time — have ballooned as a result of the two trials, post-verdict litigation, and two appeals to this court.


“Our Court and others have long recognized that Brady violations obscure a trial’s truth-seeking function and, in so doing, place criminal defendants at an unfair disadvantage. When the government impermissibly withholds Brady material, ‘its case [i]s much stronger, and the defense case much weaker, than the full facts would . . . suggest[].” Where, as here, ‘the government suppressed evidence in its possession which was both exculpatory and impeaching, . . . there is a reasonable probability that if the evidence had been disclosed, the outcome of the proceeding would have been different.’ Even if ‘[i]t is by no means certain that’ arguments based on wrongfully withheld evidence ‘would have swayed the jury, . . . it is a real enough possibility to undermine confidence in the verdict.’ As close as the trials were, the defendants’ assertion, that there is a reasonable probability that they would not have been convicted had the transcripts been disclosed, strikes with particular force. Accordingly, we vacate the property fraud component of the defendants’ convictions. In light of the government’s mishandling of material exculpatory and impeaching material, we wonder whether the government will choose to subject the defendants to yet a third trial.”


It would not surprise us one bit if the Government elected to proceed with a third trial. The Government could care less about the harm the two trials have done to the defendants’ professional reputations, their personal finances, and their personal lives. Some Government prosecutors, armed with unlimited resources (provided by taxpayers), have no compunction about squandering those resources trying to convict criminal defendants they know are innocent.  Especially when deciding not to retry the case would suggest the government’s culpability in mishandling favorable evidence.


By: Houston Criminal Attorney John Floyd and Paralegal Billy Sinclair
John Floyd is Board Certified in Criminal Law by the Texas Board of Legal Specialization