When the Supreme Court announces a decision in a white-collar case, its statements about the law are not necessarily pellucid descriptions of what is permissible.
That leaves it to the lower courts to sort things out, and of late the 2nd U.S. Circuit Court of Appeals in Manhattan has grappled with the impact of two cases to determine whether defendants should receive new trials.
Public corruption and insider trading prosecutions show how difficult it can be to translate Supreme Court decisions to different factual situations as the appeals court weighs whether to provide any remedy for errors caused by changes in the law.
The challenge is that under a well-known principle called the harmless error rule, appellate judges must decide not only whether there was a mistake in a trial, but more important, also whether it requires a second proceeding to determine a defendant’s guilt.
In McDonnell v. United States, the Supreme Court restricted the meaning of an “official act” in corruption prosecutions, which is described in the statute as “any decision or action on any question, matter, cause, suit, proceeding or controversy.” According to the court, conduct involving “setting up a meeting, talking to another official, or organizing an event (or agreeing to do so) — without more — does not fit” within those exercises of authority that can be the subject of a bribery or illegal gift prosecution.
The problem with McDonnell’s analysis is that it offered only what is known as a “negative definition,” meaning that what was found insufficient “without more” did not provide much useful guidance about what acts do come within the statutory term. That puts the onus on judges to sort through the facts of a case to say whether there was enough to violate the law.
On July 13, the 2nd Circuit overturned the conviction of former New York Assembly speaker Sheldon Silver in one of the most important corruption cases in the state in recent years. The jury convicted him of receiving almost $4 million in referral fees from law firms in two schemes that involved giving grants to a doctor purportedly conducting cancer research who then steered patients to the firm, along with helping out two real estate developers.
Members of the New York Legislature are allowed to maintain outside businesses, although this was certainly the type of back-scratching that gives politicians a bad name. The question in his appeal was whether Silver traded any official acts in exchange for the referral fees that fell within the narrower approach outlined by the Supreme Court in the McDonnell decision.
The 2nd Circuit essentially punted on that issue, finding that although there was sufficient evidence to convict Silver, the jury verdict had to be reversed and the case sent back for a new trial. The appeals court concluded that the error in not properly describing what is an “official act” in light of McDonnell was not harmless because a jury could have found some of his actions, such as meeting with lobbyists or having his staff contact a judge to hire the doctor’s daughter as an intern, might not be enough to prove a bribe.
The Justice Department announced almost immediately after the decision that it would retry Silver. This gives him another chance to avoid conviction by forcing the government to show that his acts involved the use of his authority as a member of the Legislature in exchange for funneling referral fees through the law firms, not simply that he used the prestige of his position for personal enrichment — something the appeals court noted would be viewed “with distaste” but did not necessarily violate the law.
The ink had barely dried on the Silver decision when a defendant in another signature corruption case, Dean G. Skelos, the former Republican majority leader in the New York Senate, asked the 2nd Circuit to apply that analysis to vacate his convictions. Prosecutors responded immediately that the cases are different, an issue the appeals court no doubt has been pondering since the arguments on May 18.
Not every corruption case has resulted in a reversal for a new trial since the McDonnell decision. On July 10, the 2nd Circuit upheld the conviction of William F. Boyland Jr., a former New York assemblyman from Brooklyn, rejecting his argument that flawed jury instructions on what is an official act required a new trial.
The appeals court found that Boyland took money in exchange for arranging city licenses and permits, along with approvals for grants, that constituted “the formal exercise of government power.” Thus, unlike the conduct in Silver’s case that falls into a gray area, the 2nd Circuit concluded that a jury instructed correctly would return the same verdict of guilty, so there was no need for a second trial.
The harmless error analysis is fraught with uncertainty because it requires appeals courts to ponder what a hypothetical jury would have done, requiring it to weigh the evidence to see if there was enough presented to convince the judges there was not a miscarriage of justice. That standard is unpredictable, especially in white-collar cases that can turn on the smallest piece of evidence to show what was in a defendant’s mind or how the use of political power might rise to the level of an “official act.”
A second case in the 2nd Circuit that appears to be causing similar consternation about whether an error was harmless is the insider trading conviction of Mathew Martoma, a former portfolio manager at SAC Capital Advisors.
The Supreme Court’s decision in Salman v. United States in December upheld a conviction for tipping inside information, finding that a gift between friends or family can be sufficient to show the benefit conferred on the source of the information by the recipient, called the “tippee,” required to establish a violation.
The problem is that the court was cryptic when it rejected the 2nd Circuit’s holding in an earlier case, United States v. Newman, which required the government to show “a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” The justices only explicitly rejected the second part of that statement about a valuable benefit, saying nothing about the first part regarding the nature of the personal relationship.
In Martoma’s case, he received confidential information from Dr. Sidney Gilman about problems in an experimental Alzheimer’s drug trial that resulted in gains and losses avoided of over $250 million for SAC when it traded the shares of the pharmaceutical companies involved. Martoma received a nine-year prison sentence that he began serving in November 2014 when the judge refused to let him remain free on bail pending the appeal.
His appeal was first argued in the 2nd Circuit in October 2015, then reargued on May 9, 2017, after the Salman decision. Even with the Supreme Court’s intervening analysis of what is required to prove tipping, that is a long time for a defendant to wait in prison to learn his fate.
The issues before the 2nd Circuit are figuring out whether the requirement of a “meaningfully close personal relationship” remains viable, and if so then whether the failure to instruct the jury on that element was only a harmless error.
At the trial, Gilman testified that Martoma told him several times that “he wanted to be friends,” and whether that is sufficient remains to be seen.
If the appeals court orders a retrial, that will present the U.S. attorney’s office in Manhattan with a significant challenge because Gilman, its key witness, is now 85 and has been in poor health. The case once seemed like an easy win for the government, but since the conviction in early 2014 the law of tipping inside information has gotten much more complicated, reflected by the 2nd Circuit’s extended review of the case.
We often view the Supreme Court as providing the decisive word on the law. Yet, it is often the case that its decisions are only the start, and lower courts must decide whether any error from a change in the law had enough of an impact to require another trial that gives a defendant a second chance for an acquittal.