Sunday, September 11, 2011

Tipper Gored

United States v. Gansman, No. 10–0731-cr (2d Cir. September 9, 2011) (Cabranes, Chin, CJJ, Keenan, DJ)

From 2005 to 2007, James Gansman, an attorney at Ernst and Young, was having an affair with one Donna Murdoch. Perhaps as part of their “pillow talk,” Gansman - the “tipper” - would pass Murdoch material, non-public information, on which Murdoch - the “tippee” - traded profitably. Gansman was ultimately prosecuted for securities fraud under the “misappropriation” theory - as described by the Supreme Court, this occurs when a defendant misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.Liability can attach even if the defendant does not trade on it himself.

Gansman, whose defense was that he did not intend to commit securities fraud, sought a jury instruction under SEC Rule 10b5-2, asking the court to instruct that Gansman shared information with Murdoch as part of a relationship of trust and confidence in which they had a pattern of sharing personal confidences - the aforementioned “pillow talk” - such that Gansman reasonably expected that Murdoch would keep the confidences to herself and not trade on them.

The district court gave a version of the charge that was only slightly different in wording contained in Gansman’s request. The court instructed that Gansman contended that he did not provide Murdoch with insider information with the understanding that she would use it to buy and sell securities, because he shared the information with her as part of a relationship in which they shared work and personal confidences.

Both sides took issue with this in the circuit. Gansman complained that the district court should have used his own wording, but the circuit held that the charge adequately conveyed his theory of defense - many facts in the record contradicted that theory, however - and that the charge was not error.

More importantly, the court rejected the government’s argument that the charge should not have been given at all. In prosecuting a “tipper” under the misappropriation theory of insider trading, the government must prove as an element of the offense that the tipper conveyed material non-public information to his “tippee” with the understanding that it would be used for securities trading. Otherwise, at least where the tippee owes a duty of trust or confidence to the tipper, and the tipper conveys confidential information without intending that the tippee trade on it, only the tippee is liable on a misappropriation theory. And here, it was “perfectly appropriate” for Gansman to defend against the charge by arguing that his relationship with Murdoch exemplified those circumstances. Indeed, there have been cases where a tipper was not liable even though the tippee was. If the jury here had agreed with this theory - it did not, of course, - Gansman would have been acquitted.

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Porn Free

United States v. Aumais, No. 10-3160-cr (2d Cir. September 8, 2011) (Jacobs, Winter, McLaughlin, CJJ)

In this interesting opinion, the court weighs in on a subject of national controversy: whether a defendant convicted of possessing or receiving child pornography should be ordered to pay restitution to those depicted in the images. On the facts here the court, largely bucking the national trend, concluded that restitution was not appropriate.

This case involves images of a woman who uses the pseudonym Amy. Her uncle abused her for years when she was a child; he photographed the abuse and the images made their way to the internet. The uncle went to prison, but the images are still widely circulated. The effects of this on Amy have been devastating, and far transcend the harm caused by the abuse itself. She is so fearful of being identified in public from one of the images that she can barely function, and faces years of therapy to help her cope. Her restitution claim totals about $3.3 million, and she seeks to collect it from every person convicted of possessing one of her images.

The defendant here pled guilty to possessing a large collection of child pornography, including pictures of Amy. The district court, after a lengthy hearing in which a therapist who evaluated Amy testified, ordered more than $48,000 in restitution. But the circuit reversed.

To get there, the court first had to engage in some statutory interpretation and, in doing so, the court deepened an existing circuit split.

Title 18 U.S.C. § 2559, the restitution statute for victims of sex crimes involving children, provides for mandatory restitution of a victim’s full losses, and enumerates a number of specific costs, such as medical and psychiatric treatment, rehabilitation, and associated transportation costs. The last subsection on the list, § 2559(b)(3)(F), covers “any other losses suffered by the victim as a proximate result of the offense.” Most circuits have held that this proximate causation requirement applies to those losses enumerated in subsections that precede § (b)(3)(F). But one, the Fifth Circuit, has held that the proximate causation requirement is limited to the “catch-all” subsection. In that circuit, any causation is sufficient to trigger restitution under the others.

The circuit here joined the majority, holding that “under § 2559, a victim’s losses must be proximately caused by the defendant’s offense.” Proximate cause is a “deeply rooted principle in both tort and criminal law” that Congress did not intend to “abrogate when it drafted § 2259.”

Here, the district likewise held that proximate causation was required, and went on to hold that the standard was met. But the circuit disagreed. Amy had no direct contact with Aumais, or even know of his existence. Her victim impact statement did not mention him and, since she was evaluated before Aumais was even arrested, the doctor could not speak to the impact that Aumais caused her. Thus, “in the absence of evidence linking Aumais’ possession to any loss suffered by Amy,” his conduct was not a proximate cause those losses.

The court also noted, in dicta, the “baffling and intractable issue that this case would otherwise present in terms of damages and joint and several liability.” The district court held that Amy’s harm was the result of both the uncle’s abuse and others’ possession of the images and that the resulting counseling costs could not be separated. But, if her future counseling costs are partly the result of her uncle’s abuse, then “Aumais cannot be responsible for all of those losses,” even though § 2259 requires full restitution. Moreover, a restitution award to Amy would “raise issues as to joint and several liability.” Amy has sought restitution in hundreds of cases. In a 2010 case, her attorney estimated that she had received $170,000 in payments. But, since the law prohibits recovery of more than the victim’s actual losses the need for national monitoring to police this “would pose significant practical difficulties.” There does not even seem to be be a government body that would be responsible for, or even able to, track “payments that may involve defendants in numerous jurisdictions across the country.”

That said, however, the court did not intend to “categorically foreclose payment of restitution to victims of child pornography from a defendant who possesses their pornographic images. But, where the victim impact statement and the psychological evaluation were drafted before the defendant was even arrested “or might as well have been,” emphasis added, “as a matter of law,” the defendant’s possession of the victim’s image was not a proximate cause of the victim’s loss.

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