Monday, July 16, 2018

You and Your Tracking Device (aka cell phone): U.S. Supreme Court Issues a Narrow Win for Privacy






Introduction

Last month, the Supreme Court of the United States issued a monumental, long-awaited decision on privacy rights, Fourth Amendment, and digital data. In United States v. Carpenter, the Court ruled that to access an individual’s historical cell phone data, law enforcement needs a warrant supported by probable cause. This applies to the “396 million cell phone service account” in the U.S., as identified by the Court. To hear the figure is overwhelming - 396 million cell phone accounts for a nation of 326 million! The 5-4 split decision displayed the complexities of applying Fourth Amendment law to evolving and invasive technology which has become a natural part of American lives.

What is Historical Cell Phone Data?

Cell phones operate by connecting to a set of radio antennas called “cell sites” which are typically mounted on towers. These cell sites have directional antennas that divide the covered area into sectors (see figures below). The cell phones then scan the environment for the best signal. This does not have to be the closest signal, as I recently uncovered during a federal RICO trial when cross-examining a government’s cell site expert. However, for the most part, when a cell phone “pings” off of a given sector of a tower, the presumption is that the cell phone is within range of that particular tower.


Example of a carrier’s sector
When evaluating urban areas with small city blocks, the location can be more difficult to pin down, because as mentioned, the cell phone does not necessarily connect to the closest tower and it is not the same thing as a GPS. But when comparing areas with fewer towers (such as rural areas), or a location across counties or states, then of course, the location of a cell phone can be extremely useful and potentially incriminating.   



Example of a Sector in San Francisco in relation to a “crime scene.”

Each time a phone connects to a cell site, it generates a time-stamped record called “cell-site location information” or CSLI. Wireless carriers collect and store this CSLI for their own purposes, including for the purpose of improving their service. As one can imagine, law enforcement is keen to obtain CSLI as an investigative tool.

The Carpenter Decision

Which brings us to Carpenter. In April of 2011, four men were arrested in connection with a string of Radio Shack and T-Mobile armed robberies that occurred over a two-year period in the Detroit area. One of the arrested individuals confessed and surrendered his phone to the FBI and provided the government with the phone numbers of the other conspirators (including Carpenter). The government proceeded to apply for court orders for the cell-site records associated with the numbers they were given.

In accordance with the Stored Communications Act (SCA), a magistrate judge granted the FBI’s request to obtain “cell site information for the target telephones at call origination and at call termination for incoming and outgoing calls” from various wireless carriers. The order granted by the judge was not a warrant but did satisfy the requirements of the SCA. While a warrant requires probable cause, the SCA only requires “reasonable grounds to believe that the contents of a wire or electronic communication, or the records or other information sought, are relevant and material to an ongoing criminal investigation.” Using the historical cell-site records, the government presented evidence at trial that Carpenter’s cell phone was within a two-mile radius of four robberies. Carpenter was convicted by a jury and sentenced to over 100 years in federal prison.

Carpenter, with the backing of the American Civil Liberties Union (ACLU), appealed on the basis that the government’s seizure of his cell site records was a violation of the 4th Amendment. The Sixth Circuit affirmed his conviction, finding that Carpenter lacked a reasonable expectation of privacy in the location information because the cell user voluntary conveyed the cell-site data to the carrier.

The Supreme Court disagreed. The Court cited to its 2014 decision in Riley v. California, which held that police officers must generally obtain a warrant before searching the contents of a phone due to the “immense storage” capacity of modern cell phones. Taking a step further, the Court recognized that the sort of digital data at issue – personal location information maintained by a third party – did not fit neatly under existing precedents. In reaching its conclusion, the Court addressed two sets of cases involving privacy interests: a person’s expectation of privacy in (1) his physical location and movements and GPS tracking; and (2) information voluntarily turned over to third parties. The Court’s decision expanded upon these privacy interests and principles.

Individuals “have a reasonable expectation of privacy in the whole of their physical movements,” Justice Roberts wrote in the majority opinion.

The Court further recognized that CSLI is a completely new phenomenon, as the data at issue tracks a person’s past movements through cell phone signals. The information is “detailed, encyclopedic, and effortlessly complied.” And ultimately, the Court decided that just because the information is held by a third party (the carriers), it does not by itself “overcome the user’s claim to Fourth Amendment protection.” And although the records are generated for commercial purposes, the Court reasoned, that distinction doesn’t negate Carpenter’s anticipation of privacy in his physical location.

As with GPS information, the time- stamped data provides an intimate window into a person’s life, revealing not only his particular movements, but through them his ‘familial, political, professional, religious, and sexual associations.’”

Justice Kennedy’s Dissent

In one of his last opinions on the bench, Justice Kennedy dissents, primarily on the third-party doctrine, declining to distinguish CSLI from other business records. Kennedy concludes that no search occurred, and that Carpenter lacked a privacy interest in the records, which were controlled by the third party wireless provider. Kennedy also describes instances in which a subpoena has been found to be sufficient to obtain a variety of records such as credit cards, vehicle registration records, hotel records and employment records as examples. Finally, Kennedy criticizes the majority opinion by emphasizing that CSLI is an important investigative tool that can be used to “apprehend some of the Nation’s most dangerous criminals.”

Conclusion

The Supreme Court thus held that (generally) will need a warrant supported by probable cause to access CSLI (leaving open the possibility of exceptions for exigency and the like).

Notably, Justice Sonia Sotomayor, who has been a champion of defending property rights and personal privacy, was thus arguably more sympathetic to Carpenter and she reminded the Court of the stakes in the case. “Although this case is only about the historical cell-site records, which indicate where a cellphone connected with a tower,” she stressed, “technology is now far more advanced than it was even a few years ago, when Carpenter was arrested. A provider could someday turn on my cellphone and listen to my conversations,” she said.

This case is a sobering reminder of the multitude of ways in which we risk our privacy rights every single day when we activate our smart phones. Many are starting to reconsider: is it worth it or are we took hooked? Or do we trust the Supreme Court to continue to advocate for and respect individual privacy rights?

Opinion delivered by: Roberts, Ginsburg, Breyer, Sotomayor, Kagan. Dissent by Thomas, Alito and Gorsuch and Kennedy.

Tuesday, October 18, 2016

Election Update: Your Guide to California’s Criminal Justice Ballot Measures Fall 2016


The nation is abuzz with all things Donald and Hillary, and the anticipated outcome of the presidential election. However, there are other important issues at stake this November. State propositions that affect not only you, but also the criminal justice system – like sentencing, marijuana use, gun control, and the death penalty – are up for vote in a few weeks.

And with four ballot cards to get through by November 8th, this Quarterly Update is dedicated to identifying and simplifying the criminal-justice related measures on the ballot. Below is a rough, cliff-notes-like version of the Propositions and Measures certain to affect California’s criminal justice system. Your California vote is important and it is even more important that you know what you are voting for.

California Ballot Measures

Proposition 57: Sentencing and Juvenile Filings

Proposition 57 supports increasing parole and good behavior opportunities for those convicted of nonviolent crimes. This proposition would also give the judge, not the prosecutors, the ability to decide whether to try juveniles as adults in court, eliminating what is known as “direct file.”

The measure is intended to focus resources towards rehabilitation, rather than additional imprisonment, purports to save money by reducing prison expenditures, and is being promoted by Gov. Jerry Brown.

How would the inmate early release work? Inmates convicted of nonviolent crimes who have served the full sentence for their primary offense as well as passed a screening for public security, would become eligible for parole and early release. The individual would be eligible for parole consideration after completing the full term for his or her primary offense. Additionally, the Department of Corrections would have the authority to award credits for good behavior and approved rehabilitative or educational achievements. As of early 2016, over 25,000 convicted, nonviolent felons would be eligible to seek parole and early release under proposition 57. Gov. Brown estimates that under Prop. 57, about 1,300 new inmates would qualify for earlier parole each year.

The second part of Prop. 57 involves the decision-making authority when charging juveniles as adults. Presently, prosecutors make this decision in a process called “direct file.” If this proposition is passed, that decision would instead fall on the judge in deciding whether to try a juvenile as young as 14 years old as an adult. Supporters believe that fewer children will be tried in adult courts.

The measure is opposed by most district attorneys and other law enforcement officials, who argue that it would apply to prisoners convicted of many felonies that are actually “violent” but are not included in the state’s official definition of a violent crime. Opponents also worry that too much power would be given to prison officials and parole boards, while reducing prosecutors’ leverage to reach plea deals with defendants.

Death Penalty: Proposition 62 and Proposition 66

Since the death penalty law was enacted in 1978, 930 convicted felons have been sentenced to death in California. However, only 13 have been killed and the last execution occurred in 2006, over ten years ago. As a result, supporters and opponents of capital punishment agree that the system is broken. Thus, these two competing propositions aim to either repeal the death penalty & replace it with life without the possibility of parole (Prop. 62) or to shorten the time period of legal challenges to those facing the death penalty (Prop. 66).

            Proposition 62: Repealing the Death Penalty

Proposition 62 would repeal the death penalty in California. This proposition would replace the death penalty with a life sentence without the opportunity for parole. If passed it would apply retroactively to those already on death row.

Proposition 62 would also require all persons convicted of murder to work while in prison in order to gain funds and pay debts to the victims of their crimes. Up to 60% of inmates' earnings would be deducted from their wages in order to pay this debt.

Financial analysts for the state say that if Proposition 62 passes, it would save California about $150 million per year from the $122 billion state general fund budget. The savings would come primarily from reduced costs for trials and legal appeals.

Proposition 66: Quickening the Legal Process of the Death Penalty

Proposition 66’s goal is to speed up the appeals process for death penalty cases by requiring habeas corpus petitions to be completed within five years. This would be done by expanding which courts and attorneys work on the cases – putting trial courts in charge of habeas corpus petitions instead of the Supreme Court.

Proposition 66 also changes the qualifications required to represent convicted inmates, requiring attorneys who take any criminal appeals to also take death penalty appeals. Given the possibility of ineffective assistance of counsel if this is passed, it is unclear how this portion of the proposition would be enforced.

Similar to Proposition 62, Proposition 66 would also require all persons convicted of murder to work while in prison in order to gain funds and pay debts to the victims of their crimes. However, up to 70% of inmates' earnings would be deducted from their wages in order to pay this debt.

Finally, the measure would allow death row inmates to be kept at any state prison. Currently, all male inmates are housed in segregated single cells at San Quentin State Prison. Proposition 66 proponents argue that this level of security costs too much and is not necessary.

Opponents of the measure express concern that speeding up appeals increases the risk of executing an innocent person. They also argue that capital punishment is unethical and the legal injection process is broken and unreliable.

Compatibility

Proposition 62 and proposition 66 are not compatible with each other. If they are both voted through, the proposition with the most yes votes will supersede the other.

Proposition 63: Gun Control

In a nutshell, Proposition 63 creates stricter checks on the sale and purchase of ammunition and includes other components regarding firearms.

First, the measure would require individuals who wish to purchase ammunition to pass a background check through the Department of Justice (DOJ) and buy a 4-year permit which could cost up to a maximum of $50. Large capacity magazines (more than 10 rounds) would be banned. Prop 63 also removes the ownership exemption for pre-2000 owners of large-capacity magazines, and owners must dispose of them. Failure to comply would lead to an infraction charge.

The measure would also create a process for newly convicted felons to turn in their guns.

Also, a court process would be set up to ensure the removal of guns from prohibited individuals who have failed background checks and/or failed to comply with ammunition regulations. The measure would require courts to assign probation officers to report on what offenders have done with their firearms.

Additionally, under this proposition, ammunition dealers would have to obtain licenses to sell ammunition and would be required to check with DOJ that individuals seeking to buy ammunition are not prohibited persons. Ammunition sales will need to take place through a licensed ammunition dealer. Furthermore, Prop. 63 would still require online and out-of-state purchases to be delivered in state and picked up in person, and would move the date of effect forward from July 2019 to January 2018.

Finally, Proposition 63 would change the penalty for theft of firearms from a misdemeanor to a felony. And, individuals previously convicted of a misdemeanor for the theft of a firearm would be prohibited from owning firearms for ten years. The new law would also increase penalties for people who fail to report lost or stolen guns.

Proposition 64: Marijuana

Proposition 64 would make it legal in California for adults over age 21 to possess up to an ounce of marijuana and grow up to six marijuana plants in their homes. It would also regulate recreational marijuana businesses and impose taxes.  

What will be legal: smoking would be permitted in private homes and businesses licensed for on-sight marijuana consumption; the possession of up 28.5 grams of marijuana and 8 grams of concentrated marijuana; the growing of up to six plants in private homes – as long as the area is locked and not visible from a public place.

What won’t be legal: smoking while operating any type of vehicle; smoking anywhere tobacco is prohibited and in all public places; possession on school grounds, in day care centers and youth centers when children are present.

How will it be regulated? The Bureau of Medical Cannabis Regulation would be renamed the Bureau of Marijuana Control and would be held responsible for regulating and licensing any and all marijuana businesses

How will it be taxed? Two new taxes would be created – one levied on cultivation and the other on retail price. Tax revenue would be spent on drug research, drug rehabilitation treatment, enforcement, education, youth programs, and preventing environmental damage resulting from illegal marijuana production.

What are the penalties? Anyone one under the age of 18 convicted of use or possession will be sentenced to drug education or a counseling program and given community service. Selling marijuana without a license will be punishable by up to 6 months in prison and/or a fine of $500.

Individuals serving sentences for activities made legal under Proposition 64 will become eligible for resentencing.

Fact to take note of: as of 2016, both recreational and medical uses of marijuana are still illegal under federal law.

San Francisco Propositions

This year, San Francisco voters also have two criminal-justice related propositions to consider. They are described below.

Proposition G: Charter Amendment Concerning Police Oversight

Proposition G supports the renaming of the Office of Citizen Complaints (OCC) to the Department of Police Accountability (DPA), and would give DPA the authority to access certain records and documents in order to review police policies and incidents involving use of force. Proposition G also allows the DPA to submit their budget directly to the mayor, surpassing the police commission.

Proposition R: Neighborhood Crime Unit

Proposition R supports the creation of Neighborhood Crime Units in major city police departments. These units would dedicate their efforts to preventing crimes that are harmful to neighborhood safety and consist of 3% of all sworn officers, provided there is a minimum of 1,971 sworn police officers working in the city (a prerequisite). The measure would force police to create this special Neighborhood Crime Unit that would respond to both 911 and 311 calls, while focusing on offenses including robberies, break-ins, bike thefts, vandalism, aggressive panhandling and blocking sidewalks with tents.

A vote against Proposition R supports leaving the efforts toward neighborhood crime as a responsibility shared equally among all police officers in the district, with no dedicated task force.

Conclusion

In order for a proposition to pass in California, a simple majority is required - more Yes votes than No votes. There is no priority based on location or size of location.  

A proposition is locked in once it is passed – the legislature cannot repeal a passed proposition without another vote by the voters of California.

This is why it is important to stay up to date on these issues and be well informed on voter-initiated ballot measures. Your vote makes a difference and the outcome of these measures will affect you and your community directly.

For more information on how these laws may affect you, contact Jayne Law Group.




Friday, January 15, 2016

What are we going to do about cash bail? It is unfair and discriminatory.

Monetary bonds are a disgrace in our criminal justice system. 

Here's a community taking action: http://chicagoreporter.com/a-community-solution-to-cash-bail/

Sunday, November 1, 2015

More Stinging News Regarding Stingray Devices

#Stingrays can apparently record calls as well? According to documents obtained by the ACLU, indeed they can:

http://www.wired.com/2015/10/stingray-government-spy-tools-can-record-calls-new-documents-confirm/

This is the world we live in! 

In better news, Jayne Law Group has some great case results.

Wednesday, September 9, 2015

California Supreme Court Rules that Conduct Alone is Insufficient to Support Finding of Ties between Subsets of Criminal Street Gang


The California Supreme Court held last month in People v. Prunty, S210234, that when the prosecution seeks to prove the street gang enhancement (Pen. Code, sec. 186.22(b))by showing a defendant committed a felony to benefit a given gang, but establishes the commission of the required predicate offenses with evidence of crimes committed by members of the gang’s alleged subsets, it must prove a connection between the gang and the subsets. This is a good decision when dealing with gang subsets and the STEP Act and sets forth what the prosecution must show to establish a defendant acted for the benefit of a gang.  

The case is at: 
http://www.courts.ca.gov/opinions/documents/S210234.PDF

Monday, August 31, 2015

Criminal Justice Reform: A New Hope?

Introduction

The public, legislators, prison officials, judges, and historians alike are all waking up to the fact that the United States’ criminal justice system is clearly in dire need of reform. And finally, it appears that the words criminal justice + reform are gaining momentum to reveal that the status quo of an inefficient and expensive system is unacceptable in this country.

As it stands, with about 5% of the world’s total population, the U.S. houses almost a quarter of the world’s total prisoners, which is equivalent to 2.23 million behind bars, four times as many incarcerated than four decades ago. However, the difference in incarceration rates is not due to the U.S. having a considerably higher rate of crime in comparison to the rest of the world. In the 1980s, incarceration rates began their sharp rise, coinciding with the advent of the war on drugs, mandatory minimum sentences, and three-strikes laws. 

Today, one can find numerous federal prisoners serving life sentences without parole for nonviolent offenses, resulting in a de facto death sentence. The United States’ reliance on excessive punitive sentencing over the past three decades has destroyed individual lives, families, and communities as well as put an enormous strain on federal spending and prison population capacities. The criminal justice system has blatantly forgotten that “how much time prisoners spend behind bars is no less important than that of whether only the guilty are being locked up.” (Honorable Alex Kozinski, Criminal Law 2.0.

However, major changes are finally in motion to address this costly and outdated federal sentencing and corrections system. For example, on June 25, 2015, Representatives Jim Sensenbrenner (R-WI) and Bobby Scott (D-VA), backed by the American Civil Liberties Union and Koch Industries, unveiled the bipartisan Safe, Accountable, Fair and Effective (SAFE) Justice Act (H.R. 2944). Arguably one of the most significant bills on the table, its provisions would reserve drug trafficking life sentences and other major penalties for high-level drug bosses rather than low-level dealers, provide sentencing flexibility to judges, and focus federal resources away from drug possession enforcement. The act is aimed at addressing over-criminalization in the federal criminal justice system and to bring it into greater alignment with state-level sentencing. The SAFE Justice Act would also create specialized courts for drug crimes and the mentally ill, and put a much greater emphasis on prison programming. Just weeks later on July 16, 2015, President Obama became first sitting president to tour a federal prison, meeting with six El Reno inmates, in their medium-security Oklahoma Federal Prison. With numerous politicians eager to leave their mark on historical reform, what was once a bleak outlook for those convicted of federal drug offenses, now potentially face a more just legal system.

History of Legislation

The current prison crisis is the result of two important legislative and historical events leading up to their implementation. The first was the Comprehensive Crime Control Act of 1984, signed into law by President Ronald Reagan, the first comprehensive revision to the U.S. criminal code since the early 1900s. Among its integral provisions was the Sentencing Reform Act, which established the United States Sentencing Commission, an independent agency of the judicial branch responsible for articulating Federal Sentencing Guidelines for all U.S. federal courts. The Guidelines determine sentences based on two primarily factors: the conduct associated with the offense and the offender’s criminal history. The Guidelines rely on a rigid sentencing table that is broken into four sentencing zones. These Guidelines were modified in 2010 as part of the Fair Sentencing Act signed into law by President Obama. The Fair Sentencing Act was an effort to reduce the disparity between the amount of crack cocaine and powder cocaine possessed by an individual needed to trigger certain U.S. federal criminal penalties, from a 100:1 weight ratio to an 18:1 weight ratio and eliminated the five-year mandatory minimum sentence for simple possession of crack cocaine, among other provisions.
           
The second, and most influential act, was the Violent Crime Control and Law Enforcement Act of 1994 (“1994 Act”), representing the largest crime bill in the history of the United States. Driven into law by public sentiment following the 101 California Street shootings, the 1993 Waco siege, and other high-profile instances of violent crime, the 1994 Act expanded federal law in several ways. First, the Act created a variety of new crimes relating to immigration law, hate crimes, sex crimes, and gang-related crime, simultaneously increasing penalties for many of these newly defined crimes. The 1994 Act also increased the number of federal crimes punishable by death and established procedures whereby the death penalty might be enforced. It contained a “three strikes” provision requiring a sentence of life imprisonment for violent three-time federal offenders. Finally, the Act imposed tough mandatory criminal penalties on defendants, incentivized states to build more jails and prisons, and barred inmates from being awarded grants to pursue education. (H.R.3355 - Violent Crime Control and Law Enforcement Act of 1994 - 103rd Congress (1993-1994))

Impact

As a result of these two Acts and other measures, the U.S. prison and jail population has reached an all-time high, with over 2.23 million individuals behind bars, a 795% increase and the highest rate of prisoners per population in the world. The number of people on probation and parole has also doubled. (International Centre for Prison Studies.) 

In addition to changes in mandatory sentencing, crimes themselves have been wholly created where there previously were none. Between 1980 and 2013, the federal criminal code added approximately 2,000 additional crimes, often written in vague and sweeping language. The result has been a legal environment that tolerates over-criminalization and often disproportionately lengthy sentences. Since the passage of the above legislation, courts have routinely sentenced defendants to severe prison terms which arguably do not fit to the crime. For example, an individual convicted of burglary in the U.S. serves on average of 16 months in prison, compared to five months in Canada and seven months in England. Similar discrepancies exist for assault charges, with an average sentence of 60 months in the US compared to just less than 20 months in England. (U.S. Prison Population Dwarfs That of Other Nations, N.Y. Times April 23,
2008)
           
Not only has this resulted in strained prison capacities, but incarceration is enormously expensive for taxpayers as well. The average cost of housing a single prisoner for one year is approximately $30,000, with longer terms, such as a 20 year sentence, averaging around $600,000.  Federal spending on prisons has soared from $970 million to more than $6.7 billion in the past three decades, mostly due to the mandatory sentencing of nonviolent, low-level drug offenders. A closer look at which communities are most heavily impacted by mass incarceration reveals stark racial and ethnic disparities in U.S. incarceration rates in every region of the country. African Americans have a 1 in 3 chance of spending some time in jail, those of Latino decent have a 1 in 6 chance, while those of Caucasian decent have a 1 in 17 chance. (E. Ann Carson, Ph.D., Bureau of Justice Statistics.)  Eliminating the racial disparities inherent to the U.S. criminal justice policies and practices must also be part of criminal justice reform.

Conclusion
           
The current administration, with bipartisan support, appears to be embracing criminal justice reform. On July 13, 2015, the President commuted the sentences of 46 nonviolent drug offenders, marking the most commutations a president has issued on a single day in the last four decades. Also, the Clemency Project 2014 is assisting prisoners in seeking commutation and is eligible to those who have already served 10 years, have demonstrated good conduct, have no history of violence prior to or during their term of imprisonment, among other criteria. See https://www.clemencyproject2014.org/

The U.S. Sentencing Commission also held a public meeting on August 7, 2015 to discuss an amendment to the Sentencing Guidelines that would eliminate the residual clause from the Career Offender guideline and address other issues that will take priority in the 2015-2016 amendment cycle. And the “Drugs Minus Two” reform (an Act passed in April 2014) has enabled thousands of prisoners to reduce their prison sentences by petitioning the court the past year. 

In a town where there is rarely a gathering of bipartisan support, it appears that criminal justice reform may be the one issue uniting the nation’s capital. Even last month’s Bipartisan Summit on Fair Justice drew politicians from all sides of the aisle. The goals of criminal justice reform include fair and appropriate treatment of juveniles, reforming mandatory minimum sentences, expanding alternatives to incarceration while reducing recidivism, and enabling prisons to offer programs that allow smoother transitions back into society. Undoubtedly, it will take years to transform a broken criminal justice system, but it appears that the tipping point for reform has finally been reached and it’s a start, as the public, press, and lawmakers are waking up to the long overdue and necessary changes. 

Wednesday, April 1, 2015

Fourth Amendment Update

Fourth Amendment Update: US Supreme Court Rules GPS Trackers are a Form of Search & Seizure: http://www.theatlantic.com/…/supreme-court-if-youre…/389114/

Thursday, February 26, 2015

Latest Developments in Insider Trading


In a landmark decision, the United States Court of Appeals for the Second Circuit, an influential court in securities litigation, provided clarity on the elements required to hold a tippee liable for insider trading. The decision by the Second Circuit on December 10, 2014 to reverse the charges, with prejudice, in United States v. Todd Newman, Anthony Chiasson sets a new definition for who can be held liable for insider trading. Before Newman, insider trading was broadly defined. This decision narrows the scope. The Government now must tangibly prove whether an investment professional knew that information had been disclosed in breach of a fiduciary duty in exchange for a personal benefit. The Government’s impending efforts to combat and thwart those tippees who are alleged to be involved in insider trading activities now must first determine, and later prove, whether the material nonpublic information was obtained from a friend with benefits.

Background

Todd Newman and Anthony Chiasson, hedge-fund portfolio managers, were accused of involvement in the exchange and disclosure of material non-public information. The Government in the 2012 six-week trial presented evidence that company insiders at Dell and NVIDIA had disclosed non-public earnings numbers with a group of financial analysts, who then allegedly passed the inside information on to their portfolio managers, which included Todd Newman and Anthony Chaisson. Those portfolio managers subsequently executed equity trades in Dell and NVIDIA, earning millions of dollars in profits. As a result of these trades, Todd Newman and Anthony Chiasson were convicted on December 17, 2012 of securities fraud in violation of sections 10(b) and 32 of the Securities Exchange Act of 1934, Securities and Exchange Commission (SEC) Rules 10(b)(5) and 10(b)(5)(2), and conspiracy to commit securities fraud in violation of 18 U.S.C. § 371. 

The Second Circuit, however, overturned the convictions on December 10, 2014. The Court ruled that in order to convict these portfolio managers, or tippees, there had to be proof beyond a reasonable doubt that an insider breached his or her fiduciary duty to shareholders by disclosing material nonpublic information in exchange for a “personal benefit.”  Providing further clarification, the Court stated that “personal benefit” must be “objective, consequential, and represent[ing] at least a potential gain of pecuniary or similarly valuable nature” eliminating the mere “fact of a friendship, particularly of a casual or social nature.” Specifically, the Court of Appeals held that the government must prove each of the following elements beyond a reasonable doubt to convict a tippee of insider trading: “that (1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper’s breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.”

Newman and Chiasson, as it stood, were several steps removed from the corporate insiders who initially disclosed the information. Thus, the Government failed to present evidence that either defendant was aware of the source of the inside information or that they received a personal benefit, as defined by the Second Circuit.

Prior Rulings and Historical Background

Three Supreme Court decisions, as well as recent SEC rules, precisely influenced and shaped insider trading law and the Newman decision. The first was Chiarella v. United States, which gave the “classical theory” of insider trading liability, limiting the scope of liability to corporate insiders or those who work directly for a company, such as its lawyers and investment bankers. Defendants only violate that law if they violate their duty of trust and confidence to the company whose shares were traded by misusing information material non-public information. Expanding the definitions of liability and giving us the “misappropriation theory,” the Court in United States v. O’Hagan ruled anyone who obtains information from their employer and trades the information in any stock, can be found guilty of insider trading, so long as they have been entrusted with the information in confidence. Finally, the Supreme Court affirmed in its ruling in Dirks v. Securities Exchange Commission that a tippee holds a fiduciary duty to the shareholders. That duty arises “when a insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know there has been a breach.” Dirks, 463 U.S. at 660. The Courts are left with the discretion to determine whether the tipper received a personal benefit to determine if the tipper breached a fiduciary duty, and if the tippee knew of this breach of fiduciary duty.

The SEC also adopted three new rules in October of 2000: 1.) Regulation Fair Disclosure addressing the selective disclosure by issuers of material nonpublic information; 2.) Rule 10(b)(5)(1) regarding when insider trading liability arises in connection with a trader’s “use” or “knowing possession” of material nonpublic information; and most importantly in Newman, 3.) Rule 10(b)(5)(2), when the breach of a family or other non-business relationship may give rise to liability under the misappropriation theory of insider trading. These were important in the effort to help set the standard for those who could be found guilty of illegal insider trading.

The Court ruled in United States v. Todd Newman, Anthony Chiasson, based on the holding in Dirks, that “the exchange of confidential information for personal benefit is not separate from an insider’s fiduciary breach; it is the fiduciary breach that triggers liability for securities fraud under Rule 10(b)(5). For purposes of insider trading liability, the insider’s disclosure of confidential information, standing alone, is not a breach.” 

Conclusion

This redefining of what terms the Government can hold tippees liable for illegal insider trading will have a vast impact on many of the recent prosecutions which have been brought against investment professions removed from the source of the information. Though only time will tell the magnitude this decision will have on prosecuting those involved in securities fraud, the decision could have an immediate impact on both the Department of Justice and the Securities and Exchange Commission (SEC). Last month in California, however, a federal judge denied a motion to dismiss insider trading charges based on Newman. James Mazzo, the CEO and Chairman of the Board of a medical device company, was accused of having provided material non-public information about potential mergers to a friend, former Baltimore Orioles player Doug DeCinces, who traded on the information. Central District Court Judge Andrew Guilford denied the motion to dismiss.

On the other hand, following Newman, four guilty pleas in the Southern District of New York were vacated in United States v. Durant. In that case, the judge ruled that the Newman decision and its heightened standard for tippee liability applies to insider trading cases based on misappropriation cases in addition to cases based on the classical theory of insider trading. Because the defendants, in their guilty pleas, had not admitted to knowledge that the tipper received a personal benefit, the court vacated the pleas.

We will likely continue to see in the near future the Courts with pending litigation involving illegal insider trading reevaluate whether an investment professional knew that information had been disclosed in breach of a fiduciary duty in exchange for a personal benefit, and of course, prosecutors reconsider whether to bring charges against certain tippees.

Though only time can fully reveal the impacts the Newman holding will have on the securities trade industry, the grounds are already shifting. Most likely in future litigation, the Government will have more difficultly convicting those removed from the source of the information unless there is proof of knowledge of a specific personal benefit to the tipper. If the tippees, those individuals such as Todd Newman and Anthony Chiasson, had no prior knowledge of the personal benefit gained from the leaked information, then similarly situated tippees should not be held to a standard to act solely in the shareholder’s interest.  Newman narrowed the scope of liability for those who can be held accountable for insider trading, making it more difficult to convict those without proof that the tippee was involved in a situation of friends with benefits.


Monday, December 8, 2014

California Court of Appeal Strikes Down Law Requiring DNA Collection from Anyone Arrested for a Felony

The California First District Court of Appeal last week struck down a state law that required the collection of DNA from anyone arrested on suspicion of committing a felony. The Court concluded that the state Constitution’s ban on unreasonable search and seizure prohibited the DNA collection (by use of a cheek swab). The law was initially approved by voters in 2004 and allows for the collection of DNA upon an arrest - even before criminal charges are filed. The ruling could still be appealed and therefore, it is unclear whether law enforcement will immediately stop the collection of DNA from anyone arrested for a felony, particularly since the Court did not issue an immediate order stopping police.  The court's ruling also recognizes that DNA is fundamentally different and more invasive than the collection of fingerprints.

Thursday, October 2, 2014

New Holder Memo on Drug Sentencing and Policies

September 24, 2014 Holder Memo on § 851 Enhancements in Plea Negotiations. Notable lines: "An § 851 enhancement should not be used in plea negotiations for the sole or predominant purpose of inducing a defendant to plead guilty." Holder is making sure his message on drug policies is heard loud & clear before he departs!  
http://sentencing.typepad.com/files/ag-letter-regarding-enhancements-in-plea-negotiations.pdf

Friday, September 26, 2014

The New DOJ Policy for Recording Federal Custodial Interrogations

On July 11, 2014 a new federal policy governing custodial interrogations by federal law enforcement agencies went into effect. That policy, documented in a May 12, 2014 Memo from Deputy Attorney General James M. Cole and supplemented by a videotaped statement by U.S. Attorney Eric Holder (apparently setting the example) established a presumption that the following agencies will electronically record statements made by individuals in their custody in specified circumstances: the Federal Bureau of Investigations (FBI), the Drug Enforcement Administration (DEA), the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF), and the United States Marshals Service (USMS).

The new policy “strongly encourages” the use of video recording in circumstances where an individual is in a place of detention following arrest, but prior to an initial appearance before a judicial officer. Interviews in non-custodial settings are excluded from the presumption. The policy describes “places of detention” fairly broadly, but excludes the necessity to record while a person is waiting for transportation, or is en route, to a place of detention.

Each agency is directed to establish its own policies governing the placement, maintenance and upkeep of such equipment, as well as policies for preservation and transfer of recorded content. Notably, this new standard replaces many of these agencies’ current practices, in which agents interview suspects without recording them, take handwritten notes, and then produce a formal report “summarizing” the conversation. Clearly, the Department of Justice has recognized the flaws in criminal prosecutions and allegations of police misconduct which lack recorded interrogations.

"Creating an electronic record will ensure that we have an objective account of key investigations and interactions with people who are held in federal custody," Holder said in a video message announcing the change. "It will allow us to document that detained individuals are afforded their constitutionally-protected rights." He added that it would provide federal law enforcement officials with a "backstop" so that "they have clear and indisputable records of important statements and confessions made by individuals who have been detained."

The Cole memo also notes that the recording may be overt or covert and to the extent the suspect does not wish to be recorded, then a recording need not take place (though the refusal must be documented). 

Other exceptions include a “Public Safety and National Security Exception” wherein there is no recording presumption when the questioning is done for the purpose of gathering public safety information or when it is undertaken to gather national security-related intelligence.  

Finally, the directive leaves open an exception for non-recording in circumstances where it is not reasonably practical or outside of the United States.

While this policy applies exclusively to the federal agencies noted herein, 21 states and the District of Columbia require recording statewide of custodial questioning in a variety of criminal investigations, as depicted in the table below:

STATE
YEAR
SOURCE
COVERAGE
Alaska
1985
Court ruling
All crimes
Arkansas
2012
Court rule
All crimes
California 
2013
Statute
Juveniles - homicide
Connecticut
2011
Statute
Specified felonies
D.C.
2006
Statute
Crimes of violence
Hawaii
Various
Dept. policies
Serious crimes
Illinois
2003
2013
Statutes
Homicides
Specified felonies
Indiana
2009
Court rule
Felonies
Maine
2007
Statute
Serious Crimes
Maryland
2008
Statute
Specified felonies
Michigan
2012
Statute
Specified felonies
Minnesota
1994
Court ruling
All crimes
Missouri
2009
Statute
Specified felonies
Montana
2009
Statute
All crimes
Nebraska
2008
Statute
Specified felonies
New Jersey
2005
Court rule
All crimes
New Mexico
2006
Statute
Felonies
N. Carolina
2007
2011
Statutes
Specified felonies
Juveniles – all crimes
Oregon
2010
Statute
Specified felonies
Rhode Island
2013
Police Chiefs Assn
Capital offense crimes
Vermont
2014
Statute
Homicides, sexual assaults
Wisconsin
2005
Statutes
Felonies
Juveniles- all crimes

Hopefully, this reform of federal agency custodial interrogations will inspire other states and state agencies to adopt similar policies and laws. Justice is better served by all with greater transparency.