United States v. Elgindy ( 2008 )

06-4081-cr(Lead), 06-5165(con), 06-4087-cr(con)
USA v. Elgindy
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
-------------
August Term, 2008
(Argued: September 3, 2008 Decided: December 17, 2008)
Docket Nos. 06-4081-cr(Lead), 06-5165(con), 06-4087-cr(con)
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UNITED STATES OF AMERICA,
Appellee,
- against -
JEFFREY ROYER and AMR I ELGINDY, also known as ANTHONY PACIFIC,
also known as ANTHONY ELGINDY, also known as HERBERT MANNY
VELASCO, also known as HERIBERTO MANNY VELAZCO, also known as
TONY ELGINDY,
Defendants-Appellants.
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Before: SACK and KATZMANN, Circuit Judges, and
RAKOFF, District Judge.*
Amr Elgindy and Jeffrey Royer appeal from their criminal
convictions in the Eastern District of New York (Dearie, J.),
raising, as their principal points, challenges to venue, to the
Government’s theories of securities and wire fraud, to the
admission of certain evidence relating to “9/11,” and to the
calculation of their sentences. We affirm.
*
The Honorable Jed S. Rakoff, United States District Judge
for the Southern District of New York, sitting by designation.
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JOSHUA L. DRATEL (Meredith Heller, on the
brief), Law Office of Joshua L. Dratel,
New York, NY, for Defendant-Appellant
Elgindy.
LAWRENCE D. GERZOG, New York, NY, for
Defendant-Appellant Royer.
JOHN A. NATHANSON, Assistant United States
Attorney (David C. James and Michael J.
Goldberger, Assistant United States
Attorneys, on the brief) for Roslynn R.
Mauskopf, United States Attorney for the
Eastern District of New York, Brooklyn, NY,
for Appellee.
RAKOFF, District Judge:
Amr I. Elgindy and Jeffrey Royer appeal from judgments of
conviction entered in the United States District Court for the
Eastern District of New York (Dearie, J.) following a twelve-week
jury trial.
Elgindy was convicted by the jury of racketeering conspiracy
in violation of 18 U.S.C. § 1962(c), securities fraud conspiracy
in violation of 18 U.S.C. § 371, five substantive counts of
securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff,
one count of conspiracy to commit extortion and one substantive
count of extortion, both in violation of 18 U.S.C. § 1951(a), and
two counts of wire fraud in violation of 18 U.S.C. § 1343.1 In
addition, Elgindy pleaded guilty to a separate indictment
1
The jury acquitted Elgindy of eight substantive counts of
securities fraud, one count of extortion, one count of conspiracy
to obstruct justice, one count of obstruction of justice, and
seven counts of wire fraud.
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(combined with the jury verdict for purposes of sentencing and
entry of the judgment here appealed), which charged him with
making false statements to representatives of the Transportation
Safety Authority in violation of 18 U.S.C. § 1001 and with
committing an offense while on pretrial release in violation of
18 U.S.C. § 3147. Elgindy was sentenced principally to a term of
135 months’ imprisonment.
Royer was convicted by the jury of racketeering conspiracy
in violation of 18 U.S.C. § 1962(c), securities fraud conspiracy
in violation of 18 U.S.C. § 371, four substantive counts of
securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff,
conspiracy to obstruct justice in violation of 18 U.S.C. § 371,
obstruction of justice in violation of 18 U.S.C. § 1503, and
witness tampering in violation of 18 U.S.C. § 1512(b)(3).2 Royer
was sentenced principally to a term of 72 months’ imprisonment.
On appeal, Elgindy and Royer jointly and severally raise a
host of issues, but the only ones that merit discussion relate to
venue, the adequacy of the jury instructions and legal theories
underlying the securities fraud and wire fraud counts, the
admission of evidence related to the events of September 11, 2001
(“9/11"), and the calculation of the sentences. We construe the
facts most favorably to the Government.
2
The jury acquitted Royer of ten substantive counts of
securities fraud, two counts of extortion, one count of
conspiracy to commit extortion, and ten counts of wire fraud.
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In 1998, Elgindy founded a company called Pacific Equity
Investigations that administered two websites, one that was
publicly accessible with the address “www.InsideTruth.com” (“the
InsideTruth site”) and one that was available only to paying
subscribers with the address “www.AnthonyPacific.com” (“the AP
site”).3 The InsideTruth site presented itself as a research
tool that sought to uncover and reveal negative information about
publicly-traded companies. The AP site sought to profit from
these revelations by providing its subscribers with
recommendations about which stocks to “short.”4
In 2000, through a co-conspirator named Derrick Cleveland
(who testified for the Government at trial), Elgindy began
receiving misappropriated information from co-defendant Jeffrey
Royer, who was then a Special Agent of the Federal Bureau of
Investigation (“FBI”) in Oklahoma City. In the early summer of
2000, Royer informed Cleveland of the existence of an ongoing
government investigation of a company called Broadband Wireless
(“BBAN”). Cleveland passed the information on to Elgindy, who
then profited by shorting shares of BBAN. As a result of this
3
Subscribers paid between $200 and $600 per month for
membership.
4
In “short-selling,” or “shorting,” the seller typically
sells at the prevailing market price stock that he does not yet
own but has arranged to purchase later at the subsequent market
price, so that, if the price drops in the interim, he realizes a
profit. Put another way, a short-seller is betting on a short-
term decline in the market price of a given security.
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success, Elgindy solicited Cleveland to relay further such
confidential law enforcement information from Royer. Eventually,
Royer began passing information directly to Elgindy, as well as
passing information through Cleveland.
As the scheme evolved, Royer, who was assigned to the FBI’s
“white collar crime” unit, would obtain confidential information
by performing searches in the FBI’s Automated Case Support
computer database and in the criminal history database maintained
by the National Crime Information Center, as well as by
contacting personnel of the Securities and Exchange Commission
(“SEC”) and asking them to perform searches in the SEC’s
confidential Name Relationship Search Index database. Royer
would convey the misappropriated information to Elgindy, who
would in turn convey the gist of it to subscribers to the AP site
and instruct the AP site members to short the stock but not yet
release the information to the public. Then, when Elgindy gave
the signal, the AP site members would use the InsideTruth site
and other media to disseminate the misappropriated information to
the general public, and thereby profit from the resulting drop in
the stock’s price. Elgindy kept close control over his AP site
subscribers and even threatened to exclude them from the site if
they failed to follow his trading instructions.
In addition, Elgindy himself traded on the misappropriated
information, sometimes even in advance of when he released it to
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the AP members or when he directed them to trade on its basis (a
practice called “front running”). Elgindy and Royer also
manipulated prices in the relevant securities by orchestrating
trades by AP site subscribers in thinly traded stocks.
In January 2002, both Royer and Cleveland began working for
Elgindy at his San Diego office. Even though Royer had now left
the FBI, he continued to unlawfully obtain confidential law
enforcement information from his girlfriend, Lynn Wingate, who
still worked for the FBI, and from a friend named Michael
Mitchell, who was a police officer in Gallup, New Mexico.
Elgindy also used the unlawfully obtained information for
the purpose of extortion. Specifically, after Royer provided
Elgindy with information that Paul Brown, the CEO of a company
called Nuclear Solutions (“NSOL”), had previously been convicted
of a felony drug charge but that the conviction had been
expunged, Elgindy posted the information on the AP site,
describing Brown, inaccurately, as a “three time felon.” Elgindy
and the AP site members then heavily shorted NSOL stock, causing
its price to decline. Thereupon, Elgindy informed Brown that he
and the AP site members would leave Brown alone only on the
condition that Brown give Elgindy a discounted block of NSOL
stock to cover their short positions. Brown signed an agreement
with Troy Peters (one of Elgindy’s accomplices who pled guilty to
participation in the extortion conspiracy), pursuant to which
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Peters’ company would purportedly provide investment banking
services to NSOL in exchange for stock in the company. No such
services were ever provided, however, and the agreement merely
served as a cover to transfer shares to Elgindy and others.5
Elgindy further used his connection with Royer to learn
whether he himself was under investigation. On several occasions
prior to September 11, 2001, Elgindy requested, both directly and
through Cleveland, that Royer find out whether Elgindy was the
target of any ongoing investigation. Thereafter, in late
September 2001, Royer learned that Elgindy was a subject of a
government investigation in the Eastern District of New York into
individuals who had made significant securities trades
immediately prior to 9/11. Elgindy drew the investigators’
attention because he had made contributions to a charity called
“Mercy USA” that the investigators believed had links to
terrorist organizations and because, on September 10, 2001, he
had attempted to liquidate his children’s investment accounts.
Royer passed at least some of this information on to Elgindy.
The government also introduced evidence that Elgindy
subsequently traveled to Lebanon without the permission of his
5
Elgindy was acquitted of another extortion charge
involving a company called Flor Decor (“FLOR”) and its CEO, A.J.
Nassar. Royer was acquitted of all extortion counts.
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probation officer in November 2001,6 arranged to buy an apartment
there, and transferred money to a Lebanese bank account. He also
asked Royer to write a letter to the District Court of the
Northern District of Texas recommending that Elgindy’s term of
supervised release be terminated early.
Shortly before Royer left the FBI in late 2001, he was
interviewed about Elgindy. In the course of this interview, he
falsely stated that, although Elgindy had offered him a job, he
did not plan to work for Elgindy until the FBI investigation had
been concluded. He also falsely stated that he had never
provided confidential law enforcement information to Elgindy.
As mentioned, Royer, after leaving the FBI, continued to
obtain confidential information from, among others, Michael
Mitchell, whom Royer asked to run searches in law enforcement
databases. Royer falsely told Mitchell that the searches were
relevant to work on continuing FBI investigations. After Royer
was arrested, he contacted Mitchell and told him repeatedly that
he had told the FBI that he had only asked Mitchell to run one
search. Mitchell understood Royer to be asking him to lie to the
FBI if he was interviewed about the multiple searches he had
performed for Royer.
6
In 2000, Elgindy, after completing a term of imprisonment
on unrelated federal charges, had begun serving a term of
supervised release.
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A grand jury in the Eastern District of New York returned an
indictment against Elgindy, Royer, and others in May 2002, and a
second superseding indictment in September 2004. On April 17,
2004, after he had been arrested and released on bail, Elgindy
went to MacArthur Airport on Long Island and tried to board a
plane with false identification. He was traveling under the name
“Herbert Manny Velasco” and had with him several pieces of
identification bearing variants of that fictitious name, as well
as approximately $25,000 in cash, more than $30,000 worth of
jewelry, blank checks for a bank account belonging to his mother,
and blank checks for an account created in his own name and
listing his country of residence as Lebanon. Elgindy falsely
told the arresting authorities that his name was Manny Velasco,
that he was a jewelry dealer, and that Amr Elgindy, whose name
appeared on several documents and prescriptions in his
possession, was his lawyer. He finally admitted his true
identity when the officers found his California driver’s license.
Against this background, we turn to the principal points
raised by defendants on this appeal.
Venue
As to each count of which one or both defendants was
convicted at trial, the jury found, by a preponderance of the
evidence, that venue was proper in the Eastern District of New
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York. Both defendants challenge the sufficiency of the evidence
supporting these findings.7
Venue raises both constitutional and statutory concerns.
Article III of the Constitution states that "[t]he Trial of all
Crimes . . . shall be held in the State where the said Crimes
shall have been committed." U.S. Const. art. III, § 2, cl. 3.
The Sixth Amendment declares that "[i]n all criminal
prosecutions, the accused shall enjoy the right to a speedy and
public trial, by an impartial jury of the State and district
wherein the crime shall have been committed, which district shall
have been previously ascertained by law." U.S. Const. amend.
VI.8 In the Second Circuit,
there is no single defined policy or mechanical test to
determine constitutional venue. Rather, the test is best
described as a substantial contacts rule that takes into
account a number of factors -- the site of the defendant’s
acts, the elements and nature of the crime, the locus of the
effect of the criminal conduct, and the suitability of each
district for accurate factfinding . . . .
United States v. Reed, 773 F.2d 477, 481 (2d Cir. 1985).
7
Elgindy also argues that, under his reading of Apprendi v.
New Jersey, 530 U.S. 466 (2000), and various other cases, the
Government was required to prove venue by proof beyond a
reasonable doubt. This argument is foreclosed in this Circuit.
See, e.g., United States v. Rommy, 506 F.3d 108, 119 (2d Cir.
2007); United States v. Chen, 378 F.3d 151, 159 (2d Cir. 2004);
United States v. Svoboda, 347 F.3d 471, 485 (2d Cir. 2003).
8
Technically, Article III specifies “venue” and the Sixth
Amendment specifies “vicinage,” but that refined distinction is
no longer of practical importance. See 2 Charles Alan Wright,
Federal Practice and Procedure § 301 (3d ed. 2000); see also
Brian C. Kalt, Essay, The Perfect Crime, 93 Geo. L. J. 675 (2005)
(discussing perhaps the only circumstance in which the
distinction between venue and vicinage might bear any
significance).
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By rule, venue lies “in a district where the offense was
committed.” Fed. R. Crim. P. 18. Congress, however, has
provided that, absent an express statutory provision to the
contrary, “any offense against the United States begun in one
district and completed in another, or committed in more than one
district, may be inquired of and prosecuted in any district in
which such offense was begun, continued, or completed.” 18
U.S.C. § 3237(a). See United States v. Johnson, 323 U.S. 273,
275 (1944) (noting that venue for the prosecution of “continuing
offenses” is proper in any district “through which force
propelled by an offender operates”). This statute has particular
applicability where, as here, the use of modern communications
facilities to execute a sophisticated criminal scheme inherently
contemplates activities throughout many parts of the country.
See United States v. Rowe, 414 F.3d 271, 279 (2d Cir. 2005)
(“Section 3237(a)’s language is broad, and Rowe’s act of
publishing an internet advertisement to trade child pornography
can readily be described as an ‘offense involving . . .
transportation in interstate . . . commerce.’”).
Where multiple crimes are charged in a single indictment,
the Second Circuit has held that “venue must be laid in a
district where all the counts may be tried.” United States v.
Saavedra, 223 F.3d 85, 89 (2d Cir. 2000). Accordingly, we must
consider the appropriateness of venue with regard to each of the
counts of which the defendants were convicted.
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We begin with the counts of substantive securities fraud.
The Securities Exchange Act of 1934 provides that “[a]ny criminal
proceeding may be brought in the district wherein any act or
transaction constituting the violation occurred.” 15 U.S.C. §
78aa. See United States v. Geibel, 369 F.3d 682, 696 (2d Cir.
2004). To justify venue in the Eastern District of New York, the
Government relies, first, on evidence that seven of the limited
number of subscribers to the AP site were located in the Eastern
District of New York and that Elgindy sent hundreds of messages
to AP site subscribers conveying the information misappropriated
by Royer, including information relating to the specific stocks
involved in the securities fraud counts of which defendants were
convicted. In addition, trades in the securities affected by the
defendants’ manipulative activities were made during the relevant
time frame by investors residing in the Eastern District of New
York, and market makers who made markets in many of those stocks
were located in the Eastern District of New York.9
9
There were also certain venue-related events that
pertained to individual securities fraud counts. For example,
Research Frontiers (“REFR”), one of the companies about which
Royer misappropriated and disseminated confidential information,
was located in the Eastern District of New York. A co-
conspirator of Elgindy who posted material on the AP site
arranged to have a picture taken of REFR’s headquarters on Long
Island. Also, an AP site subscriber with the screen name
“WhoLovesYa,” who resided in the Eastern District of New York,
participated in preparing a report for Elgindy’s InsideTruth
website on Seaview Underwater Research (“SEVU”), one of the
companies named in a securities fraud, which report was intended
to drive down the price of SEVU stock.
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We have stated that “venue is proper in a district where (1)
the defendant intentionally or knowingly causes an act in
furtherance of the charged offense to occur in the district of
venue or (2) it is foreseeable that such an act would occur in
the district of venue [and it does].” United States v. Svoboda,
347 F.3d 471, 483 (2d Cir. 2003). In the instant case, no fewer
than seven AP site subscribers resided in the Eastern District of
New York during the period of the various securities fraud
schemes of which the defendants were convicted, and all but one
was an AP subscriber throughout this period. Although no direct
evidence of their trades was presented to the jury, that is of no
moment to our analysis. Venue need only be proved by a
preponderance of the evidence, and the jury could reasonably
infer that it was more likely than not that one or more of these
subscribers traded in the applicable securities, since there were
at most some 300 AP subscribers in total, such trading was the
very purpose of subscribing (at a price) to the AP site, and
Elgindy exercised tight control over the AP site subscribers.
Moreover, quite aside from any trading, a jury could
reasonably infer that it was more likely than not that, with
respect to each security, one or more of the subscribers, in
accordance with Elgindy’s strict instructions, disseminated
Royer’s misappropriated information so as to put artificial
downward pressure on the market. This manipulation, in turn,
impacted not only the documented purchases of relevant securities
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made by non-AP investors resident in the Eastern District of New
York but also the market makers in these stocks, whose role
depended on the market operating free of manipulation.
Here, by contrast with such cases as United States v.
Geibel, 369 F.3d 682 (2d Cir. 2004) (holding venue improper where
actions taken in the Southern District of New York were “anterior
and remote to” the criminal conduct), the actions of the AP site
subscribers, the market makers, and the investors were crucial to
the success of the scheme. And at a minimum, the jury could
infer by a preponderance that the subscribers in the Eastern
District of New York received information about these stocks from
Elgindy. Receipt of electronic transmissions in a district is
sufficient to establish venue activity there. See, e.g., Rowe,
414 F.3d at 279 (holding venue in Southern District of New York
proper for conviction of advertising to receive, exchange or
distribute child pornography when defendant posted an
advertisement on the Internet, which a law enforcement official
viewed in the district).
As noted, in this Circuit, venue must not only involve some
activity in the situs district but also satisfy the “substantial
contacts” test of Reed, which requires consideration of such
factors as “the site of the defendant’s acts, the elements and
nature of the crime, the locus of the effect of the criminal
conduct, and the suitability of the [venue] for accurate
factfinding.” Reed, 773 F.2d at 481. But here, as discussed
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above, the first three factors are plainly satisfied, for the
defendants orchestrated activity in the Eastern District of New
York that was intended to, and did, effectuate their scheme.
Nor, as to the fourth factor, is the Eastern District any less
suitable for accurate factfinding than any other district
involved in the scheme’s implementation. Indeed, the defendants,
having concocted a scheme that relied so heavily on the actions
of the AP site subscribers for its success and that defrauded
investors throughout the country, can hardly complain that their
very modus operandi subjected them to prosecution in numerous
districts, including the Eastern District of New York.
Elgindy also challenges the jury’s finding that venue was
proper with respect to the substantive extortion count and
extortion conspiracy count of which he was convicted. He argues
once again that the Government has failed to show that he or, in
the case of the conspiracy charge, a co-conspirator took an
action in furtherance of the extortion scheme in the Eastern
District of New York. The Government, in turn, makes a similar
argument to the one it made about the securities fraud counts:
that Elgindy’s extortionate acts were dependent on the
communication of information to AP site subscribers and the
control exercised over their further dissemination of that
information and that the presence of seven of the subscribers in
the Eastern District establishes sufficient contacts for venue
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purposes.10 They also point to specific evidence documenting
that “WhoLovesYa,” a resident of the Eastern District, was an
active participant in communications concerning Paul Brown, CEO
of NSOL, who was the target of the extortion scheme of which
Elgindy was ultimately convicted.
It is useful on this point to recall the nature of the
extortion scheme in which Elgindy was engaged. After
misappropriating, with Royer’s help, information about the
publicly expunged criminal record of Brown, Elgindy informed the
AP site subscribers that Brown was a “three time felon” and
directed them to short NSOL stock. This downward pressure on
NSOL’s stock price, in turn, provided Elgindy with the ammunition
to extort Brown into transferring a block of NSOL stock to
Elgindy, and it had the intended effect. In other words, a
critical component of creating the requisite fear in Brown so
that the extortion would succeed was the concerted trading
activity of the AP site subscribers, led by Elgindy.
The record below documents that WhoLovesYa, who resided in
the Eastern District of New York, was an active participant in
these events. In one chat session, after Elgindy gave his
subscribers the go-ahead to short NSOL stock (apparently because
10
The fact that the AP site subscribers were not expressly
named as co-conspirators is irrelevant. Their actions were
either caused by Elgindy and Royer or, at a minimum, were a
foreseeable result of the defendants’ actions. Svoboda, 347 F.3d
at 483.
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Brown was not providing the demanded block of stock rapidly
enough), WhoLovesYa commented “Brown[’]s gone, all bets are off.”
“Anthony” -- Elgindy’s screen name -- then wrote, “NSOL e short
15% at $1.15. Don’t forget the CEO is now worm food and they
have no product or revenues.” WhoLovesYa also offered to
investigate whether Brown possessed a license to carry concealed
weapons so as to independently verify the information Royer had
obtained about his criminal record and discussed having placed a
phone call to an Idaho weapons agency to this end.
It is thus evident that venue for the substantive extortion
count and the extortion conspiracy count properly lay in the
Eastern District of New York.
Although defendants also challenge venue with respect to the
securities fraud conspiracy and the RICO conspiracy counts, their
challenge need not long detain us. In a conspiracy prosecution,
venue is proper in any district in which “an overt act in
furtherance of the conspiracy was committed.” United States v.
Naranjo, 14 F.3d 145, 147 (2d Cir. 1994). This includes not just
acts by co-conspirators but also acts that the conspirators
caused others to take that materially furthered the ends of the
conspiracy. See Svoboda, 347 F.3d at 483 (stating that venue is
proper in a district where the defendant intentionally or
knowingly causes an act in furtherance of the charged offense to
occur). The defendants’ transmission of confidential information
to the AP site subscribers in the Eastern District of New York,
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as well as the acts that a reasonable jury could find were more
likely than not taken by the AP site subscribers in the Eastern
District of New York, are sufficient in themselves to meet this
standard for both the securities fraud and RICO conspiracies (as
were the acts of WhoLovesYa for the extortion conspiracy).
Moreover, Royer’s obstruction of justice conviction also
connects the securities fraud conspiracy to the Eastern District
of New York. Royer alerted Elgindy to the fact that he was under
investigation after September 11, 2001, and he continued to
monitor the progress of that investigation and to pass on the
information he obtained to Cleveland and Elgindy. Shortly before
leaving the FBI, he also falsely told FBI investigators that he
had never provided confidential law enforcement information to
Elgindy. These actions were taken in furtherance of the
securities fraud conspiracy: their purpose was to allow the
scheme to continue by protecting Elgindy from law enforcement
authorities and to conceal the fact of the information-sharing
arrangement among Royer, Cleveland, and Elgindy. Because these
actions were taken to impede a grand jury investigation in the
Eastern District of New York, they establish the requisite
contacts with that district for the securities fraud conspiracy
charge as well.
The RICO conspiracy does not call for a fundamentally
different analysis. To be sure, we expressed some concern in
Saavedra that RICO, given its breadth, not be interpreted to
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permit venue to lie automatically in every district where a
member of the enterprise has conducted some criminal activity.
223 F.3d at 93-94. But we also explained in Saavedra that the
application of the Reed factors in every case will ensure that
venue is only found where there are enough substantial contacts
to ensure that prosecution is fair to the defendant. Id. at 94.
In this case, Elgindy was convicted under 18 U.S.C. §
1962(c), which makes it “unlawful for any person employed by or
associated with any enterprise engaged in . . . interstate or
foreign commerce, to conduct or participate, directly or
indirectly, in the conduct of such enterprise’s affairs through a
pattern of racketeering activity.” Among the acts that make up
the pattern of racketeering activity are Elgindy’s direction of
communications to the AP site subscribers located in the Eastern
District and Royer’s obstruction of the grand jury investigation
in the Eastern District. The former establishes substantial
contacts in light of Reed’s directive to consider the elements
and nature of the crime, as the communications were central to
the fraudulent scheme that gave the enterprise its primary
purpose. The latter establishes substantial contacts when viewed
in light of Reed’s directive to consider the place where the
effect of the criminal conduct occurs, as the repercussions of
Royer’s actions were felt by the Eastern District grand jury
whose investigation he impeded.
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We have considered defendants’ other arguments regarding
venue and find them to be without merit.
Securities Fraud and Wire Fraud
The defendants challenge their securities fraud and wire
fraud convictions on numerous grounds, the most colorable of
which are here addressed. The securities fraud counts went to
the jury on two alternative theories: first, that the defendants
unlawfully traded in various securities on the basis of material
confidential information that Royer had misappropriated and then
shared with Elgindy for the purpose of securities trading, see
United States v. O’Hagan, 521 U.S. 642, 651-52 (1997), and,
second, a market manipulation theory involving the defendants’
orchestration of trading by themselves and the AP site members in
order to artificially affect the market prices of various thinly
traded securities, see Gurary v. Winehouse, 190 F.3d 37, 44-46
(2d Cir. 1999).
With regard to the first theory, the defendants argue that
even if Royer improperly obtained the law enforcement information
here at issue from confidential law enforcement reports, much of
the information reflected in those reports was also publicly
available and therefore any related trading was not trading on
“nonpublic” confidential information. See SEC v. Mayhew, 121
F.3d 44, 50 (2d Cir. 1997). The Government does not dispute that
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someone who knew where to look could have lawfully discovered
some of the information that Royer obtained improperly from
nonpublic law enforcement reports, but it argues that, as the
district court instructed the jury, the fact that information may
be found publicly if one knows where to look does not make the
information “public” for securities trading purposes unless it is
readily available, broadly disseminated, or the like.
In so concluding, the district court relied on the Supreme
Court’s decision in United States Department of Justice v.
Reporters Committee for Freedom of the Press, 489 U.S. 749, 751
(1989), in which the Court considered whether the disclosure of
criminal histories compiled by the FBI could reasonably be
expected to constitute an unwarranted invasion of personal
privacy within the meaning of the “privacy” exemption from
disclosure under the Freedom of Information Act. In upholding
the application of that exemption, the Court distinguished
criminal history information that a member of the public could
obtain only with difficulty from information that was “freely
available.”
The very fact that federal funds have been spent to prepare,
index, and maintain these criminal-history files
demonstrates that the individual items of information in the
summaries would not otherwise be “freely available” either
to the officials who have access to the underlying files or
to the general public. Indeed, if the summaries were
“freely available,” there would be no reason to invoke the
FOIA to obtain access to the information they contain.
Id. at 764. Although the Supreme Court’s interpretation of FOIA
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is not directly applicable to the issue presented in the instant
case, its logic is highly instructive. The law enforcement
reports that Royer misappropriated were not themselves public in
any practical sense, even if some of the sources from which they
were compiled could be accessed by the public. Moreover, the
manner in which law enforcement information was combined in the
reports was itself nonpublic and helped inform its relevance for
trading purposes. See United States v. Winans, 612 F. Supp. 827,
832 (S.D.N.Y. 1985) (although all the information in reporter’s
published columns was public, the “timing, subject and tenor” of
the misappropriated columns was not public prior to publication),
aff’d in relevant part sub nom. United States v. Carpenter, 791
F.2d 1024, 1031-32 (2d Cir. 1986), aff’d, 484 U.S. 19 (1987) .
While the trial court’s instruction here given might not be
universally appropriate, in the factual context of this case it
correctly stated the relevant principles the jury needed to
apply.11
11
Although Royer also objects to the district court’s
instruction that “[t]o constitute non-public information,
information must be specific and more private than general
rumor,” the language the district court used was drawn almost
verbatim from our decision in United States v. Mylett. See 97
F.3d 663, 666 (2d Cir. 1996) (“To constitute non-public
information under the act, information must be specific and more
private than general rumor.”). Contrary to defendants’
assertions, the evidence presented to the jury readily
established that the information obtained by Royer with regard to
each of the securities here in question was obtained from
confidential reports that combined information that could be
obtained publicly, albeit with difficulty, and information that
was entirely private.
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Alternatively, defendants argue that their actions cannot be
the basis of a securities fraud conviction because they disclosed
both the information and its source to the AP site subscribers.
However, as the district court correctly instructed the jury,
when someone misappropriates material nonpublic information, he
is obligated, under the law, either to disclose the
information to make it public, or to abstain from trading.
When an investor with such information chooses to
disclose it, the non-public information remains non-public
for purposes of the insider trading laws until it has been
disseminated in a manner sufficient to insure its
availability to the investing public or to insure that the
market has had an opportunity to “absorb” the disclosed
information such that the company’s stock price has already
adjusted to reflect that information.
Tr. at 8839. See Mayhew, 121 F.3d at 50. Elgindy’s disclosure
of the confidential law enforcement information he obtained from
Royer to the AP site subscribers did not accomplish the necessary
public dissemination.
Finally, defendants also argue that it was error to instruct
the jury that it could convict the defendants if the defendants
traded while in “knowing possession” of nonpublic information
material to those trades, as oppposed to requiring proof that the
defendants “used” such information in making the trades. But we
previously resolved this issue in favor of the “knowing
possession” standard in United States v. Teicher, 987 F.2d 112,
119-21 (2d Cir. 1993) and while this resolution was arguably
dictum, it was the product of sustained and detailed
consideration as set forth in the opinion. Nothing that has
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developed since persuades us of any different resolution. On the
contrary, the SEC subsequently enacted Rule 10b5-1, adopting a
knowing possession standard, and that determination is itself
entitled to deference. See Chevron U.S.A., Inc. v. Natural Res.
Def. Council, Inc., 467 U.S. 837, 843-44 (1984); Roth ex rel.
Beacon Power Corp. v. Perseus L.L.C., 522 F.3d 242, 249 (2d Cir.
2008) (holding that SEC rules are entitled to Chevron deference).
We consequently adhere to the knowing possession standard
articulated in Teicher.12
With respect to the Government’s alternative theory of
liability -- market manipulation -- the district court instructed
the jury as follows:
The essential element of manipulation is the deception of
investors into believing that prices at which they purchase
and sell securities are determined by the natural interplay
12
Moreover, the jury instruction actually given by the
district court here was, if anything, more favorable to the
defendants than a “knowing possession” standard requires. The
district court’s instruction read:
A purchase or sale of a security is “on the basis of”
material non-public information about that security, if the
person making the purchase or sale was aware of the material
non-public information when the person made the purchase or
sale, and the information in some way informed the
investment decision.
Tr. at 8841-42 (emphasis supplied). The emphasized language
appears to require more of a causal connection between the
possession of the information and the trade in the security
concerned than would be demanded under a knowing possession
standard.
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of supply and demand.13 Consequently, any conduct that is
designed to deceive or defraud investors by controlling or
artificially affecting the price of securities is
prohibited. Congress intended that Section 10(b) prevent
fraud, whether it is a garden variety fraud, or a unique,
novel or atypical form of deception.
Market manipulation may be accomplished through a
variety of means or ways undertaken either alone or in
combination. The government alleges that the defendants
engaged in a variety of conduct designed to impact
artificially the price of stocks, including by making
materially false and misleading public statements on the
InsideTruth.com website and on the Internet and by
coordinating their trading of the stocks of certain
companies for the purpose of impacting the price of the
stock. I instruct you, however, that group trading by
itself without the intent to deceive and defraud is not
market manipulation. Similarly, the dissemination of
truthful information, negative or not, into the marketplace
by itself is not market manipulation.
Tr. at 8844-45 (emphases supplied). Defendants argue that this
instruction was erroneous because it arguably allowed for
conviction without a finding that the defendants disseminated
false information to the marketplace. However, the statute here
in issue, § 10(b) of the Securities Exchange Act of 1934, simply
prohibits the use of “any manipulative or deceptive device or
contrivance” in contravention of SEC rule. 15 U.S.C. § 78j(b).
This broad language, on its face, extends to manipulation of all
kinds, whether by making false statements or otherwise. Rule
10b-5, in turn, prohibits not only conventional frauds brought
about by making materially false or misleading statements, see
Chiarella v. United States, 445 U.S. 222, 227-28 (1980), but also
13
The language of this first sentence is drawn directly
from our decision in Gurary, 190 F.3d at 45.
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so-called “constructive frauds,” i.e., other forms of misconduct
that have the same practical effect as a conventional fraud.
Specifically, the third alternative prong of Rule 10b-5 prohibits
any person from “engag[ing] in any act, practice, or course of
business which operates or would operate as a fraud or deceit
upon any person.” 17 CFR § 240.10b-5(c). As the Supreme Court
recently confirmed, “[c]onduct itself can be deceptive,” and so
liability under § 10(b) and Rule 10b-5 does not require “a
specific oral or written statement.” Stoneridge Inv. Partners,
LLC v. Scientific-Atlanta, Inc., 552 U.S. _, 128 S. Ct. 761, 769
(2008); see United States v. Finnerty, 533 F.3d 143, 148 (2d Cir.
2008).
Accordingly, in United States v. Regan, 937 F.2d 823, 829
(2d Cir. 1991), we sustained a conviction under Rule 10b-5 of the
underwriter of a convertible bond offering who attempted to
depress the stock price of the issuer by arranging for artificial
short sales to a broker-dealer. Similarly, in Crane Co. v.
Westinghouse Air Brake Co., 419 F.2d 787, 792-98 (2d Cir. 1969),
we held that Rule 10b-5 was violated when the defendant sought to
thwart a tender offer by purchasing the target company’s stock on
the open market at increasingly higher prices while
simultaneously secretly selling the stock in off-market sales.
In the present case, the defendants sought to artificially affect
the prices of various securities by directing the AP site
subscribers to trade and to disclose the negative information at
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times and in manners orchestrated by the defendants that were
dictated not by market forces, but by defendants’ desire to
manipulate the market for their own benefit. It would be hard to
imagine conduct that more squarely meets the ordinary meaning of
“manipulation.”
Defendant Elgindy also challenges the legal basis of the two
wire fraud counts of which he was convicted. These counts
concern Elgindy’s practices of trading against his advice to his
AP site subscribers and his related practice of “front running,”
i.e., making his own trades before advising the site subscribers
to trade in a security and thus guaranteeing himself increased
profits. Both of these alleged practices were presented to the
jury as violations of the prong of the wire fraud statute that
prohibits use of interstate or international wire communications
in execution of a scheme “to deprive another of the intangible
right of honest services.” 18 U.S.C. §§ 1343, 1346.
Specifically, the Government alleged that Elgindy, by trading
against his advice to the AP site subscribers and trading in
advance of the trades he directed them to make, cheated his AP
site subscribers of the honest services he owed them. Elgindy,
however, contends that no such duty was owed.
We have explained that
the term “scheme or artifice to deprive another of the
intangible right to honest services” in section 1346, when
applied to private actors, means a scheme or artifice to use
the mails or wires to enable an officer or employee of a
private entity (or a person in a relationship that gives
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rise to a duty of loyalty comparable to that owed by
employees to employers) purporting to act for and in the
interests of his or her employer (or of the other person to
whom the duty of loyalty is owed) secretly to act in his or
her or the defendant's own interests instead, accompanied by
a material misrepresentation made or omission of information
disclosed to the employer or other person.
United States v. Rybicki, 354 F.3d 124, 141-42 (2d Cir. 2003) (en
banc) (footnote omitted). Applying this standard to the facts of
this case, we find that Elgindy owed the requisite duty of honest
services to the AP site subscribers. Elgindy charged his
subscribers fees of $200 to $600 per month; he specifically
warranted on his website that he would not front run or trade
against advice; and he not only offered investment advice to his
subscribers, he specifically directed their trading activities
and threatened to remove them from the site if they did not
follow his instructions. While an investment advisor does not
automatically owe a duty of honest services to those who rely on
her advice, in this case Elgindy took numerous affirmative steps
to create a relationship in which, for a price, his subscribers
agreed to let him, in effect, dictate their trades, secure in his
promise that he would not undercut their trades for his own
benefit. This was more than enough to create a duty of honest
services, which Elgindy then blatantly breached.14
14
Although Elgindy contends that the Government failed to
show any detriment to his subscribers, this is plainly untrue,
since they paid him $200-$600 for his honest services and
received dishonest services instead.
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9/11 Evidence
Elgindy and Royer argue on appeal that evidence admitted by
the district court concerning the FBI’s post-9/11 investigation
of Elgindy’s possible ties to the 9/11 terrorist attacks was
unfairly prejudicial, that the district court abused its
discretion in admitting the evidence, and that as a result they
were denied a fair trial.
Federal Rule of Evidence 403 allows relevant evidence to be
excluded by the trial court if “its probative value is
substantially outweighed by” such dangers as “unfair prejudice.”
Fed. R. Evid. 403. On appeal, our review of the district court’s
Rule 403 rulings is tightly limited in recognition of a trial
court’s superior position to assess both the probative value and
the prejudicial potential of evidence presented at trial; those
rulings must stand absent an abuse of discretion. United States
v. Birney, 686 F.2d 102, 106 (2d Cir. 1982); United States v.
Figueroa, 618 F.2d 934, 943 (2d Cir. 1980). While “evidence
linking a defendant to terrorism in a trial in which he is not
charged with terrorism is likely to cause undue prejudice,”
United States v. Elfgeeh, 515 F.3d 100, 127 (2d Cir. 2008), the
potential for prejudice is only part of the equation, see, e.g.,
United States v. Salameh, 152 F.3d 88, 123 (2d Cir. 1998) (per
curiam) (holding that, in the trial of the participants in the
1993 World Trade Center bombing, victim testimony and photographs
-29-
of the scene of the bombing were not improperly admitted into
evidence). Indeed, in Elfgeeh, we held that, despite the fact
that a witness’s testimony had suggested that defendant was
suspected of funding terrorism, defendant was not entitled to a
new trial, in part because the district court gave timely
cautionary instructions, as the district court did here, and thus
reduced the potential for prejudice. 515 F.3d at 127.
Here, Royer’s illicit efforts to find out whether Elgindy
was under investigation and his discovery, unlawfully conveyed to
Elgindy, that Elgindy was suspected (wrongly, as it turned out)
of having advance knowledge of the 9/11 attacks, was directly
relevant to the obstruction and racketeering charges, among
others.15 Nevertheless, the district court was at pains to limit
the amount and impact of such evidence because of the risk of
prejudice. Before Cleveland testified about the information that
Royer passed on to him about the investigation into Elgindy’s
supposed 9/11 connections, the court limited the testimony he
could offer, prohibiting, for example, any reference to al Qaeda
and any attempt to elicit testimony suggesting that Elgindy’s
brother, who worked at the Pentagon, left just before the attack.
15
The district court observed at one point that “if that
prong of this case were not about 911 and were about some other
conduct . . . the whole case would have come in, not for the
truth, but to tell the jury about the nature, depth and
seriousness of the investigation because it’s directly relevant
to the crime of obstruction. I’ve hamstrung the government, for
good reason, and at [defense counsel’s] urging . . . .”
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Later, after Cleveland testified that Royer had informed him that
Elgindy was under investigation and that the topic of the
investigation was “terrorism,” the district court instructed the
jury that “[t]his case has nothing to do with terrorism. I want
to make that point very strongly to you. There are no such
charges in this case . . . and you will not hear any evidence
that Mr. Elgindy or anyone else was involved in or aided the
events of September 11th. Please understand this.” The
testimony throughout the rest of the Government’s case included
only a few general references to the fact that Elgindy was under
investigation by the FBI in late 2001 and a handful of specific
statements indicating that the investigation explored possible
ties between Elgindy and 9/11 or terrorism.
However, when defendant Royer took the stand, he testified
that at various times he had worked first to prevent and then
investigate the 9/11 terrorist attacks, and this was a subject of
cross-examination by the Government, though the scope of the
cross was again limited by the court. Specifically, in his
direct testimony, Royer portrayed himself as having worked in
cooperation with Elgindy and Cleveland in the wake of 9/11 to try
to track down leads relating to the attacks, dismissed the
suggestion that there was any basis to believe at the time that
Elgindy was involved in 9/11, and denied sharing with Elgindy the
fact that he was under investigation. The district court
notified the government that, although Royer’s testimony did open
-31-
the door to further questioning about the post-9/11 terrorism-
related investigation into Elgindy, it would keep “a very short
tether on this.” Royer was then cross-examined about the nature
of the investigation and the contents of FBI reports suggesting
that Elgindy may have been involved in terrorism. The district
court instructed the jury that the statements contained in the
reports were hearsay.
Finally, a rebuttal witness, Agent James Fitzgerald of the
FBI, testified briefly about the Zacharias Moussaoui case,
testimony that was allowed in order to rebut Royer’s claim that
he had possessed information that could have led to the
interception of the 9/11 hijackers if only his superiors at the
FBI had heeded his urging to act on it. Additionally, the
Government asked Michael Mitchell to confirm that Royer had told
him that Elgindy was under investigation for terrorism-related
matters involving a Middle Eastern charity. This testimony was
allowed only after the district court had considered the
Government’s arguments for its necessity and the defense’s
arguments against admitting it; offered to give a limiting
instruction to the jury; and then decided, at the defense’s
request, not to give such an instruction because it would draw
too much attention to the testimony.16
16
Additionally, Elgindy’s own counsel put questions to
Royer regarding an alleged link between one of the stocks Elgindy
shorted (Genesisintermedia.com, or “GENI”) and Osama Bin Laden, a
line of questioning that was apparently meant to suggest that
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The record thus demonstrates that, far from abusing its
discretion, the district court engaged in precisely the sort of
“conscientious assessment” that our precedents require. See
Birney, 686 F.2d at 106; Figueroa, 618 F.2d at 943. It carefully
weighed the probative value of the 9/11-related evidence the
Government wished to offer, excluded that evidence that was more
potentially prejudicial than probative (such as references to Al
Qaeda), issued limiting instructions to the jury on several
occasions, and continued to keep tight control over the
introduction of such evidence even after defendant Royer’s
testimony explicitly addressed the topic of 9/11.
It remains only to add that Elgindy was, in the end,
acquitted of the obstruction of justice charges, which were the
charges most directly linked to the 9/11-related evidence. This
only serves to reconfirm that the district court’s careful
efforts to remove any unfair prejudice from the introduction of
9/11-related evidence were extremely successful.17
Elgindy was a source rather than a target in a 9/11-related FBI
investigation.
17
For the same reasons, we reject defendants’ arguments
that the district court abused its discretion in refusing to
sever their trials in light of the potential for prejudice from
9/11-related evidence.
As for Elgindy’s claim that the district court erred in
failing to question jurors about possible 9/11-related prejudice
during voir dire, the fact is that Elgindy’s counsel expressly
declined to request such questions.
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Sentencing
Both Elgindy and Royer challenge the sentences the district
court imposed on them.
The central dispute concerning Elgindy’s sentence is the
calculation of the gain amount used to determine both his offense
level under the Guidelines and his forfeiture amount. The
district court decided, after considering all of the relevant
conduct, that the appropriate provision of the Sentencing
Guidelines to apply in Elgindy’s case was § 2B1.4, the insider
trading provision. (The Government had urged the court to use §
2B1.1, which applies to market manipulation and specifies a
higher offense level.) Under § 2B1.4, the base offense level is
8 and points are then added depending on the amount of gain
resulting from the offense according to the scale established in
§ 2B1.1.
The district court determined that the gain amount was
$1,568,000. Elgindy asserts that the calculations made to reach
this figure were improper and that the correct figure is $64,000.
Specifically, Elgindy argues that only the gains made on four of
the stocks as to which he was convicted of securities fraud
involving the public market18 should be included in the
18
More precisely, these were the four stocks as to which
Elgindy was convicted of securities fraud on a misappropriation
and/or market manipulation theory. The fifth count of securities
fraud of which he was convicted was for misleading his
subscribers.
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calculation (as opposed to gains on all 32 stocks as to which
Elgindy acquired material nonpublic information); that the only
relevant trader for the purpose of calculating profits is himself
(as opposed to including AP site members as well); and that only
gains made within three days from the date on which the inside
information was disseminated should be included in the
calculation (as opposed to gains from all trades made by relevant
traders after the dissemination of the nonpublic information).
The district court ultimately determined that all 32 stocks as to
which Elgindy possessed misappropriated information should be
considered, and that trades made by all AP site members following
the dissemination of material nonpublic information should also
be considered, but that the three-day period advocated by Elgindy
should be applied.
In making this decision, the district court noted first
that, given the fact that the insider trading scheme was clearly
a joint endeavor among Elgindy and the AP site subscribers, it
was appropriate to take into account the subscribers’ trades.
See U.S. Sentencing Guidelines Manual § 2B1.4 cmt. background
(2007) (“Because the victims [of insider trading] and their
losses are difficult if not impossible to identify, the gain,
i.e., the total increase in value realized through trading in
securities by the defendant and persons acting in concert with
the defendant or to whom the defendant provided inside
information, is employed instead of the victims’ losses.”
(emphasis added)). Although this meant including gains
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associated with stocks with respect to which Elgindy was
acquitted of securities fraud, the district court found that
“clear and convincing” evidence evinced the larger pattern of
trading. See United States v. Gigante, 94 F.3d 53, 55-57 (2d
Cir. 1996) (holding that acquitted conduct may be considered in
determining the appropriate sentence under the Sentencing
Guidelines when it is established by a preponderance of the
evidence). These findings of fact were not clearly erroneous.19
Given its determination that the appropriate gain amount was
$1,568,000, and after taking into account other relevant factors
(obstruction of justice, leadership, and extortion), the district
court arrived at a total offense level of 31, which, given
Elgindy’s criminal history, translated into a Guidelines
sentencing range of 135 to 168 months. The forfeiture amount of
$1,568,000 (which Elgindy also challenges) was based on the same
calculations, and we similarly find that the district court’s
determination of this amount was not erroneous.
19
Elgindy points to several specific points of fact that he
claims were not established by sufficient evidence to be taken
into account by the district court at sentencing. But our review
of the record shows otherwise. Specifically, Elgindy alleges
that trades in the stock of BGI Industries (“BGII”) should not
have been included; but there is testimony in the record that
Cleveland learned through Royer that the company was under
investigation and that the information was disseminated through
the AP site. He also alleges that the trading profits of three
traders were improperly included in the calculation because they
did not receive their information directly from Elgindy; but
there was evidence that they did receive material nonpublic
information that originated with Elgindy and Royer.
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Elgindy also argues that there was an “unwarranted
disparity” between his sentence and that of his co-conspirator,
Peter Daws, who received probation and a $50,000 fine. The
district court, however, specifically noted that Daws was a
passive recipient of the information obtained by Elgindy and that
Elgindy, unlike Daws, was convicted of extortion and of
committing a crime while on pre-trial release. In light of these
considerations, we do not find the disparity to be unreasonable.
Finally, Elgindy challenges the district court’s
determination of his sentence for making false statements to the
Transportation Safety Authority and committing an offense while
on bail, which were the charges contained in the second
indictment (to which he pleaded guilty). He argues that the
district court failed to adequately explain the basis of its
sentence of 60 months for the two counts of making false
statements and 27 months for the commission of an offense while
released on bail. However, any error in calculating the 60 month
sentence for the false statement counts was harmless, as that
sentence is to be served concurrently with Elgindy’s 108 month
sentence for his other convictions. As to the 27-month
consecutive sentence, while the district court did not parse out
the steps through which it arrived at this figure, the sentence
is consistent with U.S.S.G. § 3C1.3. That section provides that
when 18 U.S.C. § 3147, which stipulates that a sentence for a
crime committed on pretrial release shall be imposed
consecutively to any other sentence imposed, applies in a given
-37-
case, the offense level for the underlying offense is increased
by three levels. The application note explains,
the court . . . should divide the sentence on the judgment
form between the sentence attributable to the underlying
offense and the sentence attributable to the enhancement.
The court will have to ensure that the “total punishment” .
. . is in accord with the guideline range for the offense
committed while on release, as adjusted by the enhancement
in this section. For example, if the applicable adjusted
guideline range is 30-37 months and the court determines a
“total punishment” of 36 months is appropriate, a sentence
of 30 months for the underlying offense plus 6 months under
18 U.S.C. § 3147 would satisfy this requirement.
The district court appears to have done just what this note
requires. Having properly determined that the combined sentence
for all the crimes of which Elgindy was convicted in both
indictments was to be 135 months (the low end of the Guidelines
range), it allocated that sentence between the underlying
offenses and the enhancement under § 3147. Accordingly, we
decline to vacate any portion of Elgindy’s sentence.
As for Royer, he challenges his sentence primarily on the
ground that the gain amount applied in his case by the district
court -- which was $1,568,000, the same amount applied in
Elgindy’s case -- was improper. He contends that this amount
includes losses related to securities fraud counts as to which he
was found not guilty and that it was error to attribute acts
committed by Elgindy to Royer for the purposes of sentencing
because those acts were not reasonably foreseeable by him. See
United States v. Studley, 47 F.3d 569, 574 (2d Cir. 1995)
(holding that in the case of jointly undertaken criminal
activity, the acts of one participant may be attributed to
-38-
another for sentencing purposes if they were reasonably
foreseeable). The district court, however, explicitly found that
the nature of Elgindy’s enterprise was evident to Royer from his
earliest involvement in it, and given the facts in the record we
find that this was not clear error.
We have considered defendants’ numerous other points on
appeal and find them to be entirely without merit. Accordingly,
defendants’ convictions and sentences are in all respects
AFFIRMED.
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