U.S. v. Stewart, Second Circuit Court of Appeals, Filed November 5, 2018: Insider Trading Conviction Reversed

In U.S. v. Stewart, the Second Circuit Court of Appeals reversed a conviction for insider trading because the trial court excluded hearsay statements that should have been admissible under Rule 806.

When a hearsay statement is admitted into evidence, the defense is then allowed to introduce further hearsay statements into evidence to impeach the credibility of the declarant (the absent witness who made the statements).

In this case, the trial court’s failure to allow the defendant to impeach the credibility of the out of court witness was prejudicial and it was not harmless error – the insider trading conviction is reversed, and Stewart’s case is remanded for a new trial…

What is Insider Trading?

Stewart was charged in federal court with insider trading – when a person with access to non-public information about a company takes advantage of that information to trade stocks or securities.

Insider trading is a breach of fiduciary duty, and it is also a federal crime.

In some cases, as in Stewart’s case, the government will also prosecute friends or family who act on confidential information they receive from the fiduciary…

“I handed this to you on a Silver Platter…”

During the FBI’s investigation, a friend (who also charged with insider trading) of Stewart’s father recorded conversations with the father. The recordings included the father recounting a conversation with Stewart where the father says that Stewart said “I can’t believe it. I handed this to you on a silver platter and you didn’t invest in this.”

That’s pretty strong evidence of intent – remember, the government must prove that a defendant intentionally engaged in insider trading… Later, in his own FBI interviews, the father explained what he meant by the silver platter statement.

At trial, the Court allowed the father to plead the Fifth and refuse to testify. The Court allowed the father’s hearsay “silver platter” statement into evidence but excluded the father’s later hearsay statements explaining it.

Reversal Where Defendant was Not Allowed to Impeach Key Witness

The Second Circuit reversed on appeal because Stewart should have been allowed to impeach the father’s hearsay testimony with the father’s later hearsay testimony under Federal Rule of Evidence 806, the evidence that was excluded was critical and prejudiced Stewart’s case, and it was not harmless error.

When Can a Witness Plead the Fifth Amendment?

The Court allowed Stewart’s father to plead the Fifth Amendment and declined to offer immunity to the father in order to compel his testimony, which had the effect of leaving the “silver platter” statement unchallenged and preventing the father (presumably) from explaining the silver platter statement in Stewart’s defense.

The Second Circuit agreed that the father should have been permitted to plead the Fifth, finding that the questions were related to his trading activities and whether he had previously lied to the FBI and the SEC (Securities and Exchange Commission) about his trading and Stewart’s involvement – both matters that could subject the father to further criminal prosecution.

The Second Circuit explained that the Fifth Amendment privilege extends not only to questions that would directly lead to a person’s conviction for a crime but also to questions that could simply become “links in the chain of evidence” needed to prosecute a person:

The privilege afforded not only extends to answers that would in themselves support a conviction under a . . . criminal statute but likewise embraces those which would furnish a link in the chain of evidence needed to prosecute the claimant for a . . . crime.” Hoffman v. United States, 341 U.S. 479, 486 (1951).

Can a Defendant Force the Government to Grant Immunity to a Witness?

The government can grant immunity to a witness, forcing them to testify because there is no longer a danger of criminal prosecution.

As in this case, however, the government can choose to grant immunity to their own witnesses (they did for another witness against Stewart) but declined to grant immunity to the defendant’s witnesses.

The Second Circuit acknowledges that they will always side with the government on this issue, pointing out that they have never required the government to give immunity to a defense witness:

[T]he situations in which conferring immunity would be required are “[s]o few and exceptional” that “we have yet to reverse a failure to immunize.” United States v. Ferguson, 676 F.3d 260, 291 (2d Cir. 2011).

The standard to force the government to give immunity to a defense witness, which the Second Circuit points out has never been met by any defendant, is that the defendant must prove:

• That the government has used immunity in a discriminatory way, forced a witness to plead the Fifth Amendment through overreaching, or has deliberately denied immunity to hide exculpatory information; and
• The evidence would be material, exculpatory, not cumulative, and could not be obtained from any other source.

Hearsay Can Be Impeached by Hearsay

After Stewart’s father was arrested, he made statements to the FBI that explained and qualified the “silver platter” statement from the audiotapes.

But, if the father is not testifying, that’s hearsay, right?

Rule 806 of the Federal Rules of Evidence says that, if a hearsay statement is admitted into evidence, then the declarant’s credibility can be impeached as if they had testified. In other words, you can impeach hearsay with more hearsay:

Rule 806. Attacking and Supporting the Declarant

When a hearsay statement — or a statement described in Rule 801(d)(2)(C), (D), or (E) — has been admitted in evidence, the declarant’s credibility may be attacked, and then supported, by any evidence that would be admissible for those purposes if the declarant had testified as a witness. The court may admit evidence of the declarant’s inconsistent statement or conduct, regardless of when it occurred or whether the declarant had an opportunity to explain or deny it. If the party against whom the statement was admitted calls the declarant as a witness, the party may examine the declarant on the statement as if on cross-examination.

The trial court admitted the “silver platter” statement, even though it was hearsay and the father was not testifying because it was a “statement against penal interest” – an exception to the hearsay rule.

Once that hearsay statement was admitted, however, the defendant should have been permitted to impeach the out of court witness with other inconsistent statements – in this case, the father’s later statements to the FBI explaining the “silver platter” language.

The Second Circuit found that the excluded statements could have affected the jury’s decision because the “silver platter” statement was a focus of the government’s case – the prosecutor argued that the statement was “devastating” during their closing argument. The jurors deliberated for five days following an eight-day trial, and the case was clearly not a slam dunk for the prosecution.

Because the trial court did not allow Stewart to impeach the credibility of the declarant (his father) with the later statements his father made clarifying the “silver platter” statement, the Second Circuit reversed the convictions and sent the case back for a new trial.

Insider Trading and Federal Appeals Attorney in Columbia, SC

Elizabeth Franklin-Best is a federal criminal defense and federal appellate lawyer in Columbia, SC. who defends white-collar criminal cases including insider trading charges.

For more information, call us at (803) 331-3421 or send us a message through our website to set up a consultation about your case.