Arbitration under FINRA
BOTTOM LINE: A FINRA rule that allows “customers” of financial institutions to invoke mandatory arbitration did not cover individuals who purchased bonds indirectly, through a third-party broker, rather than directly from the financial institution during an initial public offering; the individuals were not “customers” of the financial institution because they did not purchase commodities or services from the financial institution in the course of its business activities regulated by FINRA.
CASE: Morgan Keegan & Company v. Silverman, No. 12-1208 (decided Feb. 4, 2013) (Judges Niemeyer, KEENAN & Diaz). RecordFax No. 13-0204-61, 11 pages.
COUNSEL: Adam Gana, Napoli, Bern, Ripka, Shkolnik LLP, New York, NY, for Appellants. George Freeman, Barrasso, Usdin, Kupperman, Freeman & Sarver, LLC, New Orleans, LA, for Appellee.
FACTS: This case considered the question of whether Morgan Keegan & Company, Inc., a member of the Financial Industry Regulatory Authority (“FINRA”) was subject to FINRA arbitration proceedings initiated by the defendants, Louise Silverman, Max Silverman and the Louise Silverman Trust.
FINRA, a registered, self-regulatory organization authorized under the Securities Exchange Act of 1934, has the authority to create and enforce rules for its members. The FINRA “Customer Code” establishes the conditions for an arbitration proceeding between FINRA “members” and their “customers” before a FINRA arbitration panel. Relevant to this appeal, FINRA Rule 12200 requires that under certain circumstances, including where arbitration is requested by a “customer,” parties must arbitrate a dispute.
Morgan Keegan engaged in business services that included the brokerage and dealing of securities, as well as providing investment advice. Morgan Keegan was the principal distributor and underwriter of certain bond funds, known as the Regions Morgan Keegan Funds, which were traded on the New York Stock Exchange. The defendants did not invest in the funds during their initial public offering, which occurred before the end of 2006. Instead, in 2007, the defendants purchased shares of the funds from a third party, through the defendants’ securities broker at Legg Mason Investor Services, LLC, a firm unaffiliated with Morgan Keegan.
In late 2007, the defendants suffered financial losses when the value of the funds dropped dramatically. The defendants asserted that their losses resulted, in part, because Morgan Keegan failed to disclose critical information about the high-risk nature of the funds and falsely inflated the funds’ asset values. To resolve their claim, the defendants initiated FINRA arbitration proceedings against Morgan Keegan, asserting that they were entitled to do so as “customers” of Morgan Keegan. Although the defendants acknowledged that they never held a brokerage account with Morgan Keegan, they nonetheless claimed a customer relationship with Morgan Keegan as a result of their brokerage dealings with Legg Mason, another FINRA member.
Morgan Keegan filed suit in the district court seeking an injunction prohibiting the defendants from pursuing their FINRA arbitration claim. The district court granted the request, permanently enjoining the arbitration proceedings.
The defendants appealed to the 4th Circuit, which affirmed.
LAW: The sole question on appeal was whether the defendants were “customers” of Morgan Keegan entitled to invoke FINRA’s mandatory arbitration provision. FINRA Rule 12100(i) provides that, unless otherwise defined in the Code, a “customer shall not include a broker or dealer.” According to the defendants, this broad definition of “customer” applied to Rule 12200, because that Rule does not provide an alternate definition of the term. Therefore, because they were not brokers or dealers, the defendants contended that they were “customers” of Morgan Keegan under the description of the term provided in Rule 12100(i).
After the parties presented oral argument in this case, the 4th Circuit issued an opinion in UBS Financial Services, Inc. v. Carilion Clinic, which addressed the meaning of the term “customer” as used in Rule 12200. In that case, the 4th Circuit considered whether an issuer of bonds was a “customer” of two FINRA members, who had entered into agreements with the bond issuer to assist in the structuring and financing of those bonds. Carilion Clinic, slip op. at 2-5. The Carilon Clinic Court determined that an entity requesting arbitration “must be a customer with respect to a FINRA member’s business activities.” Id.
Rule 12100(r) suggests that “business activities” involve the investment banking or securities business, and that such entities are the subject of FINRA’s regulatory mission. Carilion Clinic, at 9-10. Therefore, the term “business activities” under Rule 12200 refers to investment banking and the securities business. Id. Also relevant is the ordinary meaning of the term “customer,” as being “one that purchases a commodity or service.” Id. at 10. Thus, the term “customer” in Rule 12200 refers to an entity that is not a broker or dealer, who purchases commodities or services from a FINRA member in the course of the member’s business activities (namely, the activities of investment banking and the securities business). Id.
Here, the defendants did not have a contractual relationship with Morgan Keegan, and did not purchase from Morgan Keegan services or commodities, related to investment banking or the securities business. Instead, the defendants purchased shares of the funds from a third party, through the defendants’ brokerage firm, Legg Mason, which was not an “associated person” of Morgan Keegan. The defendants did not achieve “customer” status with Morgan Keegan as a result of either their Legg Mason broker’s interaction with representatives of Morgan Keegan, or that broker’s review of Morgan Keegan’s written materials describing the funds. As such, the defendants could not satisfy the common understanding of the term “customer.”
Thus, under the facts presented, the defendants were not “customers” of Morgan Keegan as contemplated by Rule 12200, because the defendants did not purchase commodities or services from Morgan Keegan in the course of its business activities regulated by FINRA. See Carilion Clinic, at 14. As such, the defendants were not entitled to initiate arbitration proceedings under the mandatory arbitration provision contained in that Rule.
Accordingly, the district court’s judgment permanently enjoining the defendants from pursuing their FINRA arbitration claim against Morgan Keegan was affirmed.
Coram nobis relief
BOTTOM LINE: A defendant who was convicted under two mail fraud statutes, with no indication of whether his conviction was based on the pecuniary fraud statute or the “intangible right of honest services” statute, was not entitled to coram nobis relief because any error was harmless; although the Supreme Court recently excluded false billing schemes from the ambit of the “honest services” law, no reasonable jury could have simultaneously acquitted defendant of pecuniary fraud while convicting him of honest services fraud for the same scheme.
CASE: Bereano v. U.S., No. 12-6417 (decided Feb. 8, 2013) (Judges Motz, KING & Diaz). RecordFax No. 13-0208-60, 20 pages.
COUNSEL: Timothy Maloney, Joseph, Greenwald & Laake, PA, Greenbelt, MD, for Appellant. Leo Wise, U.S. Attorney’s Office, Baltimore, for Appellee.
FACTS: On May 26, 1994, a grand jury indicted Bruce Bereano, then a Maryland lawyer and lobbyist, charging him with eight counts of mail fraud. The indictment alleged that Bereano had devised a scheme and artifice to defraud his lobbying clients of money and property by submitting bills which included false statements of expenses incurred, in violation of 18 U.S.C. §1341 (the “pecuniary fraud theory”), and to defraud his lobbying clients of their right to his loyal, faithful, honest, and unbiased service and performance of his duties in his capacity as agent of said lobbying clients, free from willful omission, deceit, dishonesty, misconduct, fraud, self-dealing and conflict of interest, in violation of 18 U.S.C.§1346 (the “honest services fraud theory”). All counts in the indictment relied on the same fraud scheme.
During pretrial proceedings, Bereano sought dismissal of the indictment, contending that the “intangible right of honest services” provision of 18 U.S.C. §1346 was unconstitutionally vague and thus in violation of the Due Process Clause. The court denied Bereano’s motion to dismiss, and the case proceeded to trial, where the jury found Bereano guilty on all eight Counts.
The jury returned a “general verdict” on each count. Neither the instructions nor the verdict form requested a specification of whether Bereano was convicted under the pecuniary fraud theory, the honest services fraud theory, or both.
Bereano filed a petition for a writ of coram nobis pursuant to the All Writs Act, 28 U.S.C. §1651(a), alleging that the Supreme Court’s decision in Skilling v. United States, 130 S. Ct. 2896 (2010), which limited application of the statutory term “intangible right of honest services” found in 18 U.S.C. §1346 solely to those mail fraud prosecutions involving bribery or kickbacks, required vacatur of Bereano’s mail fraud convictions in the district court, as Bereano’s alleged acts did not involve bribery or kickbacks. The district court denied the petition.
Bereano appealed to the 4th Circuit, which affirmed.
LAW: As noted, Bereano was prosecuted under both the pecuniary fraud theory and the honest services fraud theory. The honest services fraud theory derives from 18 U.S.C. §1346, which provides that the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services. In Skilling v. United States, however, the Supreme Court circumscribed the prosecution’s use of §1346 in mail fraud prosecutions, limiting it to those cases involving actual bribery or kickbacks. Skilling v. United States, 130 S. Ct. at 2931. In reliance on Skilling, Bereano sought coram nobis relief to vacate his mail fraud convictions on the basis that because his fraud scheme undisputedly did not involve bribery or kickbacks, application of §1346 to him violated constitutional bounds.
The Government conceded that, under Skilling, error a constitutional error occurred in Bereano’s trial when the district court erroneously instructed the jury that it could convict Bereano on the honest services fraud theory. However, the mere existence of error does not justify the “extraordinary” relief of coram nobis. In order for a district court to grant coram nobis relief, a petitioner must satisfy four essential prerequisites: (1) a more usual remedy must be unavailable; (2) there must be a valid basis for the petitioner having not earlier attacked his convictions; (3) the consequences flowing to the petitioner from his convictions must be sufficiently adverse to satisfy Article III’s case or controversy requirement; and (4) the error that is shown must be “of the most fundamental character.” United States v. Akinsade, 686 F.3d 248, 252 (4th Cir. 2012). In the present case, at issue was solely the fourth prerequisite: whether the Skilling error conceded by the Government was “of the most fundamental character.”
An error “of the most fundamental character” is one that has rendered the proceeding itself irregular and invalid. United States v. Mayer, 235 U.S. 55, 69 (1914). When a general verdict of guilty rests on two alternative theories of prosecution, one valid and the other invalid, the verdict should be set aside if it is impossible to tell which ground the jury selected. Yates v. United States, 354 U.S. 298, 312 (1957). An alternative-theory error is nevertheless subject to harmless error review. United States v. Hastings, 134 F.3d 235, 241-42 (4th Cir. 1998). The Skilling decision endorsed the harmless-error precedent. Skilling, 130 S. Ct. at 2934.
Here, the core of the Government’s case was Bereano’s fraudulent billing scheme, which was primarily to do with money. At Bereano’s trial, the prosecution presented overwhelming evidence that Bereano schemed to commit pecuniary fraud by mailing false bills to his lobbying clients and receiving payments in satisfaction thereof. The jury could not have found Bereano guilty of mail fraud under either the honest services fraud theory or the pecuniary fraud theory without concluding that these alleged mailings were an integral part of the fraud scheme. In other words, no reasonable jury could have acquitted Bereano of pecuniary fraud for falsely billing his clients, but convicted him of honest services fraud for the same false billing scheme.
Because Bereano would not be entitled to relief on direct appeal under Skilling, the fourth prerequisite for coram nobis relief, identification of “an error of the most fundamental character” was not satisfied. Therefore, an award of the “extraordinary” remedy of coram nobis relief was therefore unwarranted.
Accordingly, the judgment of the district court was affirmed.
BOTTOM LINE: Since the Sixth Amendment right to counsel is offense-specific, no violation of that right by the state during a murder investigation would compromise a later prosecution of the same defendant on federal charges; and, while the state’s alleged use of the defendant’s cellmate to elicit evidence might have violated the defendant’s Fifth Amendment right against self-incrimination — which is not offense-specific — any error in failing to suppress that evidence in the federal prosecution was harmless beyond a reasonable doubt, given the other evidence against the defendant.
CASE: U.S. v. Holness, No. 11-4631 (decided Feb. 11, 2013) (Judges KING, Keenan & Thacker). RecordFax No. 13-0211-60, 35 pages.
COUNSEL: Jonathan Alan Gladstone, Annapolis, for Appellant. John Francis Purcell, Jr., Office of the United States Attorney, Baltimore, for Appellee.
FACTS: Ryan Holness and his wife were driving on Maryland’s Eastern Shore when, according to Holness, they were carjacked. Holness was found wet and bloody and his wife had been stabbed to death and disposed of in a nearby field. Since police were suspicious of Holness’ carjacking story, Holness was arrested and charged with murder.
While Holness was in custody, his cellmate, Stephen McGrath, informed police that Holness had asked him to write a letter to the Washington Post pretending to be the carjacker, in order to divert suspicion from Holness. McGrath was given a recording device to wear while assisting Holness in writing the letter. The letter was never sent. However, Holness suspected McGrath was a “snitch” and posted as much on his cell wall, including McGrath’s home address and telephone number.
The state later opted to drop the charges and transfer the case for federal prosecution. A federal grand jury indicted Holness for interstate domestic violence and attempted witness intimidation.
Before trial in federal court, Holness moved to suppress any statements he made to McGrath and any evidence obtained as a result of those statements. The motion was denied and McGrath testified at trial that Holness told him he had disposed of the murder weapon in the river.
Holness was convicted of the domestic violence and witness intimidation charges and sentenced to life in prison.
Holness appealed to the 4th Circuit, which affirmed.
LAW: Holness argued that McGrath had become an agent of the police as a result of speaking with the police, and that their use of McGrath to gather information on him was done after he had been appointed counsel on the state murder charge and therefore in violation of his Sixth Amendment right to counsel.
In Massiah v. United States, 377 U.S. 201 (1964), the Supreme Court held that the defendant “was denied the basic protections” of his Sixth Amendment right to counsel by the admission of uncounseled post-indictment statements obtained from a listening device supplied by the police to a cooperating codefendant. Id. at 206. This has been extended to the prison environment. Henry v. United States, 590 F.2d 544 (4th Cir. 1978).
Here, no Sixth Amendment issue was found in the federal prosecution because, at the time of the statements, Holness had only been charged in state court. The federal charges were different from the state charges, and the Sixth Amendment right to counsel is “offense specific.”
However, it was possible that Holness’ Fifth Amendment’s protection against self-incrimination may have been violated. Although the Sixth Amendment right to counsel is offense specific, the Fifth Amendment protections are not.
Even assuming Holness’ Fifth Amendment rights were violated, failure to suppress the evidence obtained after McGrath began cooperating with police would be harmless error beyond a reasonable doubt. The only evidence at issue concerned Holness’ aborted attempts to draft a letter to the Washington Post. Evidence of Holness’ threats against McGrath for being a ‘rat snitch’ would still have been admissible. So, too, would statements Holness made to McGrath before McGrath began cooperating with police, including Holness’ admission about disposing of the murder weapon.
Given the entirety of the circumstances, the judgment could not have been substantially swayed by the evidence that may have been admitted in violation of the Fifth Amendment.
BOTTOM LINE: Where defendant had already been indicted at the time his incriminating statements were recorded by police, any possible violation of his right to counsel was not plain error because, given the overwhelming unrecorded evidence presented at trial against him, he could not show the error affected the outcome of his trial.
CASE: U.S. v. Williamson, No. 08-4055 (decided Feb. 4, 2013) (Judges WILSON, Gregory & Duncan). RecordFax No. 13-0204-60, 20 pages.
COUNSEL: J. David James, Smith, James, Rowlett & Cohen, LLP, Greensboro, NC, for Appellant. Sandra Jane Hairston, Office of the United States Attorney, Greensboro, NC, for Appellee.
FACTS: On December 18, 2006, a grand jury returned a one-count sealed indictment against Rodney Williamson and several others charging conspiracy to distribute five kilograms or more of a mixture containing a detectable amount of cocaine, in violation of 21 U.S.C. §§841 and 846. A warrant for Williamson’s arrest was issued the following day.
Within weeks, one of Williamson’s associates, Edison Alberty, contacted federal authorities to offer his cooperation. Federal agents fit Alberty with an audio recording device and had him meet with Williamson at a restaurant for lunch. According to Alberty, officers gave him no instructions other than to “put the body wire on and go have lunch as planned.” During lunch, Williamson and Alberty discussed Williamson’s drug organization and made plans for an upcoming drug transaction. Police subsequently arrested Williamson based on the recorded statements.
At trial, the government called eight witnesses who testified about Williamson’s participation in the conspiracy. The government also played the recorded conversation between Williamson and Alberty. The judge, concerned that the audio was of poor quality and difficult to understand, gave Williamson and his counsel an opportunity to redact its less intelligible portions. However, after conferring with Williamson, defense counsel allowed the court to play the entire recording.
The jury found Williamson guilty and the court sentenced him to life in prison, partly due to his two prior felony drug convictions.
Williamson appealed to the 4th Circuit, which affirmed.
LAW: Williamson argued that he had a Sixth Amendment right to counsel when the recording was made because he had already been indicted and that its admission at trial was therefore plain error. Since Williamson did not object to the admission of the recording at trial, review was for plain error.
Under Federal Rule of Criminal Procedure 52(b), an appellate court may correct a forfeited error when: “(1) there is an error; (2) the error is plain; (3) the error affects substantial rights; and (4) the court determines, after examining the particulars of the case, that the error `seriously affect[s] the fairness, integrity, or public reputation of judicial proceedings.’“ United States v. Wilkinson, 137 F.3d 214, 223 (4th Cir. 1998) (quoting United States v. Olano, 507 U.S. 725, 732 (1993)).
“[A]n error is plain when the law at the time is settled.” United States v. Godwin, 272 F.3d 659, 679 (4th Cir. 2001). To show that a plain error affected his substantial rights, the accused must demonstrate that “the error actually affected the outcome of the proceedings.” Id. at 679-80. “It is the defendant rather than the Government who bears the burden of persuasion with respect to prejudice.” Olano, 507 U.S. at 734. Even if the accused establishes the first three prongs, he must also demonstrate the error’s serious effect on the fairness, integrity, or public reputation of judicial proceedings. “Where the evidence is overwhelming and a perfect trial would reach the same result, a substantial right is not affected.” Godwin, 272 F.3d at 680.
Here, the government conceded that it was plain error to admit the recordings at trial; however, this plain error did not affect Williamson’s substantive rights because he did not show the error affected the outcome of his trial. That is, Williamson did not establish “that the jury actually convicted [him] based upon the trial error.” Godwin, 272 F.3d at 680.
The government presented extensive evidence of Williamson’s guilt, independent of the taped recording. One witness testified to his own extensive dealings with Williamson, which involved increasing quantities of cocaine. Another witness testified that he had sold Williamson many kilos of cocaine on several occasions. The trial transcripts are overflowing with similar evidence. Thus, while the taped conversation was surely damaging, Williamson could not show that its absence would have altered the outcome of his trial.
Accordingly, the judgment of the district court was affirmed.