[BreachExchange] Southern District Of New York Finds That Government Leaks Do Not Warrant Dismissal Of Insider Trading Charges Against Billy Walters

[Audrey McNeil]

http://www.jdsupra.com/legalnews/southern-district-of-new-york-finds-65080/

On March 1, 2017, Judge P. Kevin Castel of the United States District Court
for the Southern District of New York denied professional gambler William
“Billy” Walters’ motion to dismiss his indictment on charges of insider
trading.  Walters’ motion came after the U.S. Attorney’s Office for the
Southern District of New York (“USAO”) disclosed that one of the lead case
agents from the Federal Bureau of Investigation (“FBI”) had leaked
sensitive information to the press during the course of the investigation.
Walters claimed that those leaks were part of a calculated effort to
prejudice his case by jumpstarting a dormant investigation and that they
were part of a broader pattern of outrageous government conduct by the USAO
and the FBI playing “fast and loose” with obligations of grand jury secrecy
in an effort to prejudice defendants.  While being highly critical of the
FBI agent who leaked the information in question, Judge Castel nevertheless
ruled that Walters could not demonstrate substantial prejudice, or that the
government’s conduct reached a “demonstrable level of outrageousness” that
warranted dismissal of the indictment.  Accordingly, Walters must now face
trial.  United States v. Walters, No. 16-cr-00338-PKC, slip op. at 18
(S.D.N.Y. Mar. 1, 2017).

The government indicted Walters on May 17, 2016.  The indictment alleged
that from 2008 through 2012, then-CEO and board member of Dean Foods,
Thomas Davis, repeatedly disclosed inside information to Walters before
corporate announcements at Dean Foods, including the results of quarterly
earnings releases and the spin-off of a subsidiary.  Walters allegedly
loaned Davis $1 million in exchange for the tips and reaped approximately
$40 million in profits from the illicit trades.

On September 23, 2016, Walters moved for an evidentiary hearing into
potential government misconduct, including potential grand jury leaks that
may have led to the series of stunningly detailed newspaper articles that
appeared between April 2013 and June 2014 about the investigation of
Walters and others involved in the case, including golfer Phil Mickelson
(who was later named as a relief defendant in a parallel civil complaint),
investor Carl Icahn, and Davis, who was a friend of Walters.  Although the
USAO argued that no hearing was necessary (because, among other things, the
prosecutor and FBI case agent denied being aware of any leaks), Judge
Castel disagreed and ordered a hearing to be held in December.  In
preparation for the hearing, the USAO discovered that, in fact, an FBI
Supervisory Special Agent had repeatedly passed confidential information
regarding the case to reporters at the New York Times and the Wall Street
Journal—potentially including information protected by grand jury secrecy
rules.

After the USAO acknowledged the leaks, Walters moved to dismiss the
indictment on the grounds that the FBI Agent’s leaks to the media
constituted outrageous government misconduct that had been designed to
prejudice him, and which reflected a broader practice of leaks by the USAO
and FBI that had previously gone unsanctioned.  Specifically, he contended
that the FBI Agent had leaked materials protected by Rule 6(e) of the
Federal Rules of Criminal Procedure in an effort to spark the FBI to take
more aggressive investigative measures and that the articles led Davis to
take certain steps that ultimately prejudiced Walters.

Notwithstanding the plainly improper nature of the leaks—which have now led
to a criminal investigation of the FBI Agent—Judge Castel concluded that
dismissal of the indictment was unjustified because Walters could not show
substantial prejudice.  Specifically, Judge Castel found that Walters
failed to demonstrate that the articles containing confidential information
had an effect that would not have resulted from the issuance of subpoenas
shortly after the articles were published.  Similarly, Judge Castel
concluded that the wrongful conduct was not “so systematic and pervasive as
to raise a substantial and serious question about the fundamental fairness
of the process which resulted in the indictment,” and did not “shock the
conscience” such that it would violate due process.  In short, the Court
held that Walters failed to demonstrate that the FBI’s conduct was
sufficiently egregious to warrant dismissal of the indictment, and that the
pending criminal investigation into the FBI Agent’s conduct would serve as
a sufficient deterrent, and potential penalty, for similar conduct in the
future.  In so holding, Judge Castel made clear that “[t]he proper remedy
here is to investigate and, if appropriate, prosecute the offender, rather
than dismiss the indictment based on the grand jury investigation that was
the subject of the leaks” and that “the outing of the leaker may serve to
deter other faithless federal agents.”  Walters slip op. at 19.

Even though Billy Walters secured no relief, his motion—and the discovery
of the leaks—should have lasting ramifications on the ways in which law
enforcement handles the press.  Both the USAO and FBI often use and
cultivate the press to inform the public of criminal cases, thereby
maximizing their deterrent value, especially in white collar cases in
recent years.  However, extensive exposure in the media can lead—and has
led—to colorable pre-trial motion practice to dismiss indictments.
Recently, the USAO’s press strategy was placed under close scrutiny in a
pre-trial challenge by defendant Sheldon Silver, who claimed that the
USAO’s press releases and on-the-record statements warranted dismissal of
his indictment.  While Judge Caproni denied this claim, the Judge concluded
that the USAO’s pre-trial statements “strayed so close to the edge of the
rules . . . that Defendant Sheldon Silver has a non-frivolous argument that
[they] fell over the edge to the Defendant’s prejudice.”  United States v.
Silver, No. 15-cr-00093-VEC, slip op. at 1 (S.D.N.Y. Apr. 10, 2015).

While neither Walters nor Silver obtained dismissal of their indictments,
both cases left open the possibility for such an outcome under the
appropriate circumstances.  The discovery of these leaks and the related
judicial criticism should make the USAO and FBI carefully scrutinize their
press strategy, and consider whether contacts with the press could cross
the line and lead to a terrain where dismissal is a real possibility.
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