United States v. David Sklena , 692 F.3d 725 ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-2589
U NITED S TATES OF A MERICA,
Plaintiff-Appellee,
v.
D AVID G. S KLENA,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 09 CR 302-2—Samuel Der-Yeghiayan, Judge.
A RGUED JANUARY 13, 2012—D ECIDED A UGUST 23, 2012
Before P OSNER, W OOD , and H AMILTON, Circuit Judges.
W OOD , Circuit Judge. In March 2009, David Sklena and
his co-defendant Edward Sarvey were charged with
seven counts of wire and commodity fraud, as well as
two counts of noncompetitive futures contract trading.
Sarvey died before the start of his trial, but Sklena went
to trial. There he sought to use Sarvey’s deposition
before the U.S. Commodity Futures Trading Commis-
sion (CFTC) as evidence of his innocence, but the district
2 No. 11-2589
court excluded it as inadmissible hearsay and eventually
convicted Sklena of seven of the nine charged counts.
Sklena now appeals. He argues that the government’s
evidence was insufficient to support his convictions,
and in the alternative, that the district court abused its
discretion by excluding Sarvey’s deposition testimony.
Although we are satisfied that the government’s evi-
dence was sufficient, we conclude that the district
court erred by excluding Sarvey’s previous testimony.
We therefore reverse Sklena’s convictions and remand
for further proceedings.
I
In April 2004, Sklena and Sarvey were floor traders in
the Five-Year Treasury Note futures pit at the Chicago
Board of Trade (CBOT). At that time, Sklena was just a
“local,” which means that he was authorized to trade
only on his own behalf, whereas Sarvey was a “broker”
and could therefore trade for himself as well as for
his customers.
April 2, 2004, turned out to be a busy day at the CBOT:
the price of the Five-Year Note futures fluctuated wildly,
resulting in what was, in Sklena’s opinion, “the busiest
day in the history of the [CBOT].” It was on this day
that Sarvey and Sklena executed the series of transac-
tions that form the basis of this criminal prosecution.
Everything happened between 7:31 and 7:38 in the morn-
ing; even seconds counted, and so we include them
in this account. At 7:31:35 the market price for Five-Year
Note futures fell to 111.050, apparently in response to
No. 11-2589 3
unemployment statistics that had just been released.
This was a price that triggered a series of sell stop orders,
which obligated Sarvey to sell 2,474 of his customers’
contracts at the best available price. Over the course of
the next few minutes, the price began to rise again. This
was when, according to the government, Sklena and
Sarvey conspired to sell Sarvey’s customers’ contracts
noncompetitively. At about 7:37, other traders noticed
that Sklena and Sarvey were engaged in a private con-
versation while the rest of the pit was reacting to the
volatile market conditions. Then, at 7:37:27, Sarvey sold
2,274 contracts to Sklena at a price of 111.065 each, and
Sklena immediately sold 485 of those contracts back
to Sarvey at 111.070. Both of these prices were well
below the prevailing market price, and so when Sklena
and Sarvey resold these contracts openly in the pit over
the course of the next seven minutes, they were able to
reap a healthy profit. Sklena’s sales of his remaining 1,789
contracts netted him over $1.6 million, while Sarvey
earned at least $350,000 from the sale of his 485 contracts.
In January 2008, the CFTC filed a civil complaint
against Sarvey and Sklena, alleging that the two
“engaged in a series of non-competitive trades” that
defrauded customers out of over $2 million. During
discovery, the CFTC took lengthy depositions from
both Sarvey and Sklena regarding these trades, but its
civil enforcement action was temporarily stayed during
the pendency of the criminal proceedings that underlie
this appeal. (The civil charges against Sarvey were dis-
missed after his death, and the District Court for the
Northern District of Illinois granted the CFTC’s motion
4 No. 11-2589
for summary judgment against Sklena in February 2012.
See CFTC v. Sarvey & Sklena, No. 08 C 192, 2012 WL 426746(N.D. Ill. Feb. 10, 2012). No appeal was taken from
that judgment.)
On March 31, 2009, a grand jury indicted Sklena on six
counts of wire fraud, one count of commodity fraud, and
two counts of noncompetitive futures contract trading.
Sarvey was charged with the same offenses, as well as
with two additional counts of noncompetitive futures
trading, but as we said, he passed away before his trial
could begin. The Department of Justice proceeded with
its prosecution of Sklena and, after a bench trial in
October 2010, the district court convicted Sklena on
seven counts. He now appeals.
II
We begin with Sklena’s contention that the govern-
ment’s evidence is insufficient to sustain his convictions
for wire and commodities fraud. We review this de novo,
drawing all inferences in favor of the prosecution. United
States v. Speed, 656 F.3d 714, 717 (7th Cir. 2011). Sklena
argues that the government failed to prove that he knew
he was purchasing contracts that belonged to Sarvey’s
customers, thereby defrauding those customers, as op-
posed to purchasing contracts from Sarvey’s own
account and thus merely engaging in noncompetitive
trades. The government, however, contends that it has
made its case by at least one of three ways. First, it con-
tends that it has proved that Sklena actually knew that
he was trading in customer contracts. Second, it argues
No. 11-2589 5
that even if Sklena did not actually “know” Sarvey had
sold him customer contracts, he is nevertheless liable
because he consciously avoided such knowledge.
Finally, it argues that Sklena may be liable for Sarvey’s
fraud under Pinkerton v. United States, 328 U.S. 640 (1946).
Although the evidence supporting the contention
that Sklena had actual or constructive knowledge of the
owner of the futures contracts at issue is thin, we are
satisfied that his conviction may be sustained under
Pinkerton.
A
The district court’s finding that Sklena actually knew
that Sarvey was selling him customer contracts stands
or falls on the following evidence. First, in response
to a question at his CFTC deposition about Sarvey’s
customers, Sklena noted that Sarvey did not receive any
complaints from his customers about the sale price that
they received. Because “Sklena did not answer the
question by stating that there w[ere] no customers in-
volved,” the district court inferred that Sklena must have
known that the opposite was true—that is, that he was
buying customer contracts. Second, because Sklena oc-
casionally referred to Sarvey as “the broker next to him,”
the district court concluded that Sklena knew that Sarvey
was selling on behalf of his customers (emphasis added).
(As noted above, brokers may sell on behalf of either
themselves or customers, while locals may trade only
on behalf of themselves).
If this were all the government had, we would probably
say that it is not enough. An inference based on what
6 No. 11-2589
Sklena did not say, together with Sklena’s accurate short-
hand reference to Sarvey as a “broker,”does not prove
beyond a reasonable doubt that Sklena knew who
Sarvey was acting for, especially given the fact that the
CFTC itself has blurred the distinction between brokers
and locals. See Press Release, U.S. Commodity Futures
Trading Commission, CFTC Charges Two Chicago Board
of Trade Floor Brokers with Defrauding Customers Out of
More Than $2 Million (Jan. 10, 2008), available at
http://www.cftc.gov/PressRoom/ PressReleases/pr5434-08
(referring to both Sklena and Sarvey as “brokers”).
B
The evidence supporting the contention that Sklena
consciously avoided knowledge about the true owners
of the contracts sold is similarly thin. When asked if he
knew that Sarvey had done a trade for Mitsubishi on
April 2, Sklena responded, “I did not know, no. I don’t
care who he does ‘em for.” The district court found
that this statement “indicates a deliberate avoidance
on Sklena’s part.” But the simple fact that Sklena did not
care who Sarvey’s customers were tells us nothing
about the distinct question whether Sklena consciously
avoided knowing that Sarvey was trading on behalf
his customers at all.
The court also credited the government’s argument
that Sarvey’s trading activity was so irrational that
Sklena must have known that Sarvey was acting illegally.
This argument falls short for two reasons. First, it is not
inevitable that Sklena must have viewed Sarvey’s decision
No. 11-2589 7
to sell 2,274 contracts and then buy back 485 at a
higher price as completely irrational. Sarvey sold these
contracts at a price of 111.065, but bought them back at
111.070. If Sarvey was looking to reduce his exposure in
a volatile market, then the total loss sustained might
equally be seen as a reasonable cost to reduce his risk.
Even if we agreed that Sarvey’s activity was irrational,
that is still a far cry from illegal. We would not want to
hold that floor traders must constantly inquire into
the state of mind of their trading partner. Such a rule
would have substantial impact on the costs of trading
and might risk imposing liability on traders who had
no knowledge of any possible fraud. Without something
more, such “irrational” trading activity cannot form
the basis of knowledge of fraud.
C
That leaves the Pinkerton theory, under which a con-
spirator may be liable for foreseeable crimes committed
in furtherance of a conspiracy. 328 U.S. at 647. “Before
Pinkerton can be applied, it is of course necessary to
show that a conspiracy existed, that the defendant joined
the conspiracy, that the other actor was also part of the
conspiracy, and that the overt act was both foreseeable
and in furtherance of the conspiracy.” United States v.
Smith, 223 F.3d 554, 573 (7th Cir. 2000). We address each
of these elements in turn.
In this case, the evidence can support a finding that
Sklena and Sarvey entered into a conspiracy to engage
in noncompetitive trades. Sklena’s willingness to join
8 No. 11-2589
such an “illegal venture” subjects him not only to con-
viction on the counts directly based on the conspiracy’s
underlying agreement, but also on counts based on fore-
seeable overt acts that furthered the pair’s illicit scheme
to make money. Smith v. Bray, 681 F.3d 888, 905 (7th Cir.
2012); United States v. Smith, 223 F.3d at 573.
The question is thus whether the court was entitled
to conclude that Sklena could have foreseen that the
contracts that Sarvey sold belonged to his customers,
rather than (the only other option) to Sarvey himself.
Looking at the record favorably to the government, we
conclude that it was. The government put evidence
before the court that supported a finding that Sklena
knew that Sarvey was not just another “local,” but was
instead a broker who represented other clients. Sklena
admitted as much on several occasions, and on other
occasions referred explicitly to Sarvey’s customers. The
fact that Sarvey sold his customers’ contracts was thus
foreseeable, and whether Sklena knew that the precise
contracts that Sarvey sold to him belonged to those cus-
tomers is of no moment. The required “criminal intent . . .
[wa]s established by the formation of the conspiracy.”
Pinkerton, 328 U.S. at 647.
Furthermore, this transaction “was in execution of the
enterprise.” Id. At the moment the two transactions (the
sale to Sklena and the kickback to Sarvey) took place,
the market price was going up: Sarvey sold the 2,274
contracts at 111.065 at a time when the market was
trading above 112. This was, consistent with their agree-
ment, a “win-win” situation for them: They had allocated
No. 11-2589 9
the contracts between themselves noncompetitively, and
now they stood to make a significant profit in the open
pit. In all, the government proved that Sklena and Sarvey
were parties to a conspiracy to engage in illicit trading
practices, and that Sarvey’s sale of 2,274 of his customers’
contracts below market price and his subsequent re-
purchase of 485 of those contracts (also below market)
were overt acts in furtherance of that conspiracy.
III
Even if the government’s evidence is sufficient to
support his conviction, Sklena argues that he is never-
theless entitled to a new trial because the district court
erred by excluding critical evidence. We agree. Sklena
sought to introduce Sarvey’s prior deposition testi-
mony into evidence under Federal Rule of Evidence
804(b)(1), but the district court denied Sklena’s motions
under Rule 804 and, in a post-trial ruling, under Rule 403.
The parties (and we) agree that Sarvey’s testimony is
hearsay. Sklena contends, however, that the testimony
is nonetheless admissible under Federal Rule of
Evidence 804(b)(1), which provides that
[t]estimony that [(A)] was given as a witness at a . . .
lawful deposition, whether given during the current
proceeding or a different one; and [(B)] is now offered
against a party who had . . . an opportunity and similar
motive to develop it by direct, cross-, or redirect
examination
may be admitted where the witness has since become
unavailable. F ED. R. E VID. 804(b)(1). (The Evidence Rules
10 No. 11-2589
were restyled on December 1, 2011, for readability, but
there is no substantive difference between the current
version, quoted here, and the previous version. See F ED.
R. E VID. 804(b)(1), 2011 amends.)
Even though Sarvey was unavailable as a witness
at Sklena’s trial, the district court found that this
exception did not apply because (1) the CFTC and the
U.S. Department of Justice may not be considered the
same party, and (2) the CFTC and the Justice Depart-
ment did not share “similar motive[s]” to develop Sarvey’s
testimony. We review the district court’s evidentiary
ruling for an abuse of discretion and will reverse if the
court made an error of law. United States v. Reed, 227
F.3d 763, 766 (7th Cir. 2000); see also FTC v. Trudeau,
579 F.3d 754, 762-63 (7th Cir. 2009).
A
In order for Rule 804(b)(1)’s exception to apply, the
hearsay testimony at issue must meet the criteria spelled
out in the rule. That is, the party against whom the evi-
dence is being offered must have been involved in the
earlier “trial, hearing, or lawful deposition,” and that
party must have had an opportunity as well as a similar
motive to develop the testimony at the prior proceeding.
30C Michael H. Graham, F EDERAL P RACTICE AND P ROCE-
DURE § 7073 at 382-84 (2011 interim ed.). Thus, the first
question is whether the CFTC (which ran the first deposi-
tion) and the United States, now represented by the U.S.
Department of Justice, are the same party. If so, we must
also consider whether the CFTC had in the earlier case
No. 11-2589 11
both the opportunity and a similar motive to develop
Sarvey’s testimony.
There is very little law on the question whether two
government agencies, or as in this case the United
States and a subsidiary agency, should be considered as
different parties for litigation purposes, or if they are both
merely agents of the United States. One case from the
District of Columbia Circuit that seems to support the
proposition that the United States is not a monolith is
United States v. North, 910 F.2d 843, 906 (D.C. Cir. 1990),
in which that court ruled that the Congress and an inde-
pendent counsel in the executive branch were not the
“same party,” in part because the independent counsel
“has no powers of control over the Congress.” See also
FDIC v. Glickman, 450 F.2d 416, 418 (9th Cir. 1971) (FDIC
and United States not the same party when the FDIC
“stands in the shoes of the insolvent bank”).
In contrast, the CFTC is an executive branch agency
that, although possessing its own litigating authority, is
required by statute to report on its litigation activities
directly to the Justice Department (which as we said acts
as the attorney for the United States). See 7 U.S.C.
§ 13a-1(a), (f)-(g). This statutory control mechanism
suggests to us that, had the Department wished, it
could have ensured that the CFTC lawyers included
questions of interest to the United States when they
deposed Sarvey. See H.R. Conf. Rep. 93-1383 (1974)
(noting that the provision adopted was a compromise in
conference between the Senate, which proposed giving
the CFTC autonomous litigation authority, and the
12 No. 11-2589
House of Representatives, which would have followed
the normal rule under which the Department of Justice
represents agencies in court); cf. Jody Freeman & Jim
Rossi, Agency Coordination in Shared Regulatory Space, 125
H ARV . L. R EV. 1131, 1202 (2012). There is some precedent
in other contexts for treating an agency and the United
States as the same party. See United States v. Maxwell,
157 F.3d 1099, 1102 (7th Cir. 1998) (SBA and the U.S.
Navy, for purposes of setting off debts in bankruptcy).
For purposes of res judicata, “[t]he general rule is that
litigation by one agency is binding on other agencies of
the same government,” though there are exceptions.
18A Charles Alan Wright et al., F EDERAL P RACTICE AND
P ROCEDURE § 4458 at 560 (2d ed. 2002), citing Sunshine
Anthracite Coal Co. v. Adkins, 310 U.S. 381, 402-03 (1940).
See also United States v. Stauffer Chemical Co., 464 U.S.
165, 169 (1984) (mutual defensive collateral estoppel is
applicable against the government to preclude relitiga-
tion of same issue already litigated against same party
in earlier case); Montana v. United States, 440 U.S. 147, 154-
155 (1979) (issue preclusion found when United States
directed and financed earlier case brought by private
contractor and then appeared in its own name in later
case). Although the Supreme Court has also found that
nonmutual offensive issue preclusion does not apply to
the United States, see United States v. Mendoza, 464 U.S.
154, 158 (1984), the reasoning of that case has nothing
to do with the evidentiary issue now before us.
Our case is not one that involves the differing interests
of two separate constitutional branches of government,
as North did, nor does it involve an agency acting in
No. 11-2589 13
the capacity of a representative of a non-governmental
party, as FDIC v. Glickman did. Instead, the CFTC and the
Department of Justice play closely coordinated roles on
behalf of the United States in the overall enforcement
of a single statutory scheme. Their interdependence
is memorialized in the statute. Perhaps the point
would be even more clear if the Department had
litigating authority for the agency, as it often does, but
we decline to hold that this is the sine qua non for
finding that the United States and one of its agencies are
in substance the same party. Functionally, the United
States is acting in the present case through both its at-
torneys in the Department and one of its agencies, and
we find this to be enough to satisfy the “same party”
requirement of Rule 804(b)(1).
B
There is no question that Sarvey’s first deposition
presented the United States (acting through the CFTC)
with an adequate “opportunity” to develop his testimony.
Such an opportunity, however, is not enough to satisfy
Rule 804(b)(1)’s standard. The United States must also
have had a similar (although not necessarily identical)
motive then as now for doing so. United States v. Miles,
290 F.3d 1341, 1353 (11th Cir. 2002). Whether the motive
of the United States, acting through a civil enforcement
agency, is similar enough to its interests when it engages
in criminal enforcement depends on a number of
factors, including the substantive law that each is en-
forcing, the factual overlap between the two proceedings,
14 No. 11-2589
the type of proceeding, the potential associated penalties,
and any differences in the number of issues and parties.
See, e.g., United States v. Feldman, 761 F.2d 380, 385 (7th
Cir. 1985).
In our view, these factors support the conclusion that
the CFTC and the Justice Department here had similar
motives to develop Sarvey’s deposition testimony. See
United States v. McClellan, 868 F.2d 210, 214-15 (7th Cir.
1989). Both were investigating the same underlying
conduct with an eye to taking enforcement action, and
so they shared the same motive to find out what went
on. In fact, aside from the Department’s need to prove
the jurisdictional fact of the use of the wires, the
agency and the Department alleged and needed to
prove the same allegations, as a comparison of the
CFTC’s civil complaint and the indictment demonstrates.
Furthermore, although the CFTC proceeding was civil
in nature and the present prosecution criminal, the deter-
rent effect of a large civil penalty (like the one that the
court ultimately imposed against Sklena) can be similar
to that of a criminal sentence. See, e.g., Hudson v. United
States, 522 U.S. 93, 105 (1997); Richard A. Posner, An
Economic Theory of Criminal Law, 85 C OLUM . L. R EV. 1193,
1204-05 (1985). We do not mean to suggest that Sklena’s
civil penalty was so severe that it was in reality a
criminal sanction, see Hudson, 522 U.S. at 104; rather,
we note only that deterrence is often a goal of both civil
and criminal penalties. In this case, in order to enforce
the laws regulating commodities markets, the CFTC and
the United States (acting through the Department)
had essentially the same incentive to develop Sarvey’s
No. 11-2589 15
factual testimony about the events of April 2, 2004.
We therefore conclude that Sarvey’s deposition was
admissible under Federal Rule of Evidence 804(b)(1).
C
In most cases, we would be ready at this point to con-
sider whether the district court’s mistaken decision
amounts to harmless error or if it warrants reversal. This
case, however, includes one more wrinkle. In a post-trial
decision on a motion for a new trial, the district court
reaffirmed its decision that Sarvey’s testimony was
excludable as hearsay, but it went on to rule for the
first time that the testimony was also properly kept out
under Federal Rule of Evidence 403. We have observed
before that it is “unusual” for a “district court [to exclude]
evidence under one theory of law during trial and then
advance an alternative rationale . . . after trial.” United
States v. Albiola, 624 F.3d 431, 438 (7th Cir. 2010). But
the district court was entitled to bring up this alternate
rationale, and so we proceed to consider whether
the exclusion of Sarvey’s deposition can be justified
under Rule 403.
In its post-trial ruling, the court stated that Sarvey’s
testimony was “cumulative.” It also concluded that
the testimony was “not trustworthy” because it was
“self-serving,” because Sarvey “was not available for
proper cross-examination,” and because the testimony
was not preserved on videotape. Even though a
videotape would have been useful, however, the ab-
sence of one and hence the need to rely on a written
16 No. 11-2589
transcript is not reason enough to exclude the evidence.
The characterization of Sarvey’s statements as “self-
serving” is also unhelpful. To say that evidence is “self-
serving” tells us practically nothing: a great deal of per-
fectly admissible testimony fits this description. See
Payne v. Pauley, 337 F.3d 767, 773 (7th Cir. 2003). As for
the cross-examination point, even though the criminal
prosecutors obviously could not cross-examine the de-
ceased Sarvey, the CFTC’s lawyers (who, as we have
already explained, had an almost identical motive to
that of the Department of Justice’s prosecutors) did. And
our examination of the trial record convinces us that
Sarvey’s deposition was not cumulative. To the con-
trary, Sarvey’s testimony would have added an im-
portant fresh perspective to the evidence. Although it is
true that Sarvey’s testimony may not have been the “the
only way that Sklena could present his case,” it was a
permissible way, and Sklena was entitled to make his case
with the evidence of his own choosing. Old Chief v.
United States, 519 U.S. 172, 186-89 (1997); Blue v. Int’l
Brotherhood of Elec. Workers Local Union 159, 676 F.3d 579,
585 (7th Cir. 2012). The district court should have
allowed Sklena to admit Sarvey’s deposition testimony
into evidence.
D
Now we are ready to decide whether the district
court’s error was harmless. See F ED. R. C RIM. P. 52(a). It was
not. Sarvey’s testimony corroborates Sklena’s account of
the timing of the trades at the CBOT. It also impugns
No. 11-2589 17
the credibility of the government witnesses who sug-
gested a time line for the trading activity in question.
Sarvey’s testimony provides additional insight into
Sarvey’s and Sklena’s private conversation on the
trading floor—the conversation, recall, that others could
not overhear, but that the government portrays as the
basis for the Sarvey-Sklena conspiracy to engage in non-
competitive trades. It will be up to the new trier of fact,
of course, to decide how much weight to give to Sarvey’s
account, and if the trier of fact rejects it or discounts it
heavily, Sklena might find himself convicted again. On
the other hand, if the trier of fact credits Sarvey’s state-
ments, it may change its assessment of the remainder of
the evidence. As in United States v. Loughry, 660 F.3d 965,
975 (7th Cir. 2011), the evidence against Sklena, while
sufficient, was far from overwhelming. The judgment
of the district court is R EVERSED and the case is
R EMANDED for further proceedings consistent with
this opinion.
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