Second Circuit affirms insider trading conviction without the use of “an expert to explain whether the insider information she provided was actually material to a reasonable investor”; in United States v. Jiau, _ F.3d _ (2d Cir. Oct. 23, 2013) (No. 11-4167); in contrast, other insider trading cases have involved expert testimony to establish the materiality element, including in SEC v. Cuban, _ F.Supp.2d _ (NDTX July 23, 2013) (No. 08-cv-02050)
Trial attorneys may consider the strategy in establishing an element of proof before a jury. One consideration may include whether to use lay testimony or expert testimony to demonstrate a point. Under FRE 701, lay opinion testimony may be admitted which is: "(a) rationally based on the witness’s perception; (b) helpful to clearly understanding the witness’s testimony or to determining a fact in issue; and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702." In contrast, under FRE 702, expert opinion may be provided by a witness with "knowledge, skill, experience, training, or education" if "(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (b) the testimony is based on sufficient facts or data; (c) the testimony is the product of reliable principles and methods; and (d) the expert has reliably applied the principles and methods to the facts of the case." The issue of whether lay or expert testimony was required recently arose in an insider trading case in the Second Circuit.
In the case, defendant Jiau was prosecuted for conspiracy to commit securities fraud and wire fraud, and insider trading. To establish insider trading under 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. § 240.10b-5, “the government had to prove each of the following elements beyond a reasonable doubt: (1) the insider-tippers (Nguyen and Ng) were entrusted the duty to protect confidential information, which (2) they breached by disclosing to their tippee (Jiau), who (3) knew of their duty and (4) still used the information to trade a security or further tip the information for her benefit, and finally (5) the insider-tippers benefited in some way from their disclosure.” Jiau, _ F.3d at _ (citing Dirks v. SEC, 463 U.S. 646, 659-64 (1983); SEC v. Obus, 693 F.3d 276, 289 (2d Cir. 2012)). Following his jury trial conviction, on appeal the defendant contended that the evidence was insufficient to support the conviction because the government failed to call “an expert to explain whether the insider information she provided was actually material to a reasonable investor.” Jiau, _ F.3d at _.
The Second Circuit concluded that an expert was not required in the jury trial:
[E]xpert testimony that seeks to address “lay matters which [the] jury is capable of understanding and deciding without the expert’s help” is not relevant and is therefore inadmissible, Andrews v. Metro N. Commuter R.R. Co., 882 F.2d 705, 708 (2d Cir. 1989). In this case, no expert testimony was necessary to help the jury interpret the materiality of the insider information [defendant] Jiau provided to her tippees. The surprise professed by BCM analysts in reaction to her information regarding Marvell and the trades they made to exploit that information could have conclusively demonstrated materiality. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (defining materiality as whether a reasonable investor would have viewed the undisclosed information as having “significantly altered the total mix of information made available” (quotation marks omitted)). The jurors did not need an expert to tell them that the information Jiau revealed made a noticeable difference in the investors’ thinking that was manifested in the reaction of the BCM analysts and their subsequent trading.
Jiau, _ F.3d at _.
Constrast Recent NDTX Case
There are occasions in which the government may seek to offer expert testimony on the issue of materiality. One recent example comes from the recently concluded insider trading case of SEC v. Cuban, (NDTX July 23, 2013) (No. 08-cv-02050). The owner of the NBA's Dallas Mavericks was alleged to have "sold his entire stake" 600,000 shares of stock in Mamma.com Inc. based on "material, non-public information about an impending stock offering" before "the public announcement of the offering" allowing him to "avoid losses in excess of $750,000." See Complaint, ¶ 1 (Nov. 17, 2008). The case was based on a misappropriation theory of insider trading which had been upheld in United States v. O’Hagan, 521 U.S. 642, 652 (1997) ("The 'misappropriation theory' holds that a person commits fraud 'in connection with' a securities transaction, and thereby violates § 10(b) and Rule 10b—5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information.") (citation omitted). Before trial, the defendant moved to exclude government expert testimony on the materiality element. The trial court denied the motion and allowed the expert to testify. As the trial court concluded:
The [expert] opinion relates to the significance of the information—a component of the materiality inquiry—not to the materiality inquiry in all its dimensions. As the SEC recognizes, the opinion “is one aspect of the total mix of information for the jury to consider in making a determination.” P.
Opposition to Mot. to Exclude Sialm Br. 10. “Cuban is free to identify other relevant facts for the jury, if any, that he believes should be considered when assessing any alteration of the total mix of information.” Id. Cuban’s objection therefore goes to the weight, not the admissibility, of the evidence.
The SEC has demonstrated by a preponderance of the evidence that [expert] Dr. Sialm’s opinion is reliable and relevant. His calculations are not challenged, and Cuban has not pointed to any authority that supports barring an expert from opining about the importance of particular information that can assist the jury in determining materiality.
SEC v. Cuban, _ F.Supp.2d _ (NDTX July 23, 2013) (No. 08-cv-02050) (footnotes omitted).
The SEC also moved to exclude a defendant expert to show that the "offering information Cuban received was immaterial and had
become public by the time he sold his shares." While the trial court excluded the defense expert testimony on one basis for which it was offered (concerning "the increased volume of short sales the day before the PIPE offering was announced"), the court found it was admissible for other reasons:
The second ground—that hedge funds likely discussed the PIPE offering information with market participants beyond those informed by Merriman or Mamma.com—has an evidentiary basis and is within his expertise concerning equity markets. [Defense expert] Dr. Sirri is a professor of finance and has held positions with the SEC, such as Chief Economist and Director of the Division of Trading and Markets. The SEC does not challenge his asserted expertise in topics such as equity markets and insider trading.
Combined with this experience and specialty knowledge, Dr. Sirri relies on evidence showing that the hedge funds whom Merriman informed of the PIPE offering were not given confidentiality agreements, and that one hedge fund told another hedge fund about the offering. Evidence that the PIPE offering information was discussed with market participants not covered by confidentiality agreements is reliable support for Dr. Sirri, with his experience, to opine that the information was likely incorporated into the stock price.
The court also declines to exclude Dr. Sirri’s testimony regarding the first and third bases, even though they do not of themselves provide sufficient support for his ultimate opinion. Dr. Sirri avers that his ultimate opinion is based on all four reasons “[t]aken together,” P. Mot. to Exclude Sirri App. 12, and the first and third reasons have reliable sources and do provide some support. Form 20-F neither specifies that a PIPE offering will occur nor identifies when, but it does publicly disclose the possibility of a PIPE offering.
Similarly, Dr. Sirri does not explain how the reduction in shares caused by pre-borrowing arrangements indicates specifically that a PIPE offering is about to occur, but it does indicate that investors are preparing to engage in short selling, which could be motivated by animpending PIPE offering. These bases, while not specific indications of an impending PIPE offering, are based in fact and offer some support for Dr. Sirri’s ultimate opinion.
SEC v. Cuban, _ F.Supp.2d _ (NDTX July 23, 2013) (No. 08-cv-02050) (footnotes omitted). Ultimately, the jury acquitted defendant Cuban of the civil complaint charges on October 16, 2013.
The Jiau and Cuban cases demonstrate different ways to establish materiality in an insider trading case. While these examples arose in the insider trading context, the principle applies in other contexts. Trial attorneys get to make the strategic decision on what evidence should be offered to establish an element at trial.
Photo Description: The Thurgood Marshall United States Courthouse, Second Circuit Court of Appeals, New York City, NY.
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