959 F.3d 442
1st Cir.2020Background
- Ross McLellan, former global head of State Street’s Portfolio Solutions Group, directed an agency-model transition-management scheme that added undisclosed commissions to U.S. securities trades for several overseas institutional clients.
- Six institutional clients (KIA, Dutch Doctors, NTMA, Sainsbury’s, Eircom, Royal Mail) were the focus of seven transitions in which State Street bid low or flat fees but implemented hidden markups during execution; Boston-based traders carried out U.S. trades per McLellan’s directions.
- Indicted on conspiracy (18 U.S.C. §371), two securities-fraud counts under §78j(b)/Rule 10b-5, and wire-fraud counts under 18 U.S.C. §1343; jury convicted on Counts 1–5 and acquitted Count 6; sentenced to 18 months.
- McLellan appealed: (1) sufficiency of evidence and jury instruction on Rule 10b-5 ("in connection with"/materiality); (2) alleged extraterritorial application of §1343 and absence of a domestic-application jury instruction; (3) district court’s refusal to compel the government to invoke MLATs to obtain foreign evidence.
- The First Circuit affirmed: (a) misrepresentations by an agency-model transition manager about commissions were sufficiently "in connection with" securities trades to support Rule 10b-5 convictions; (b) any overbroad jury instruction was harmless; (c) wire-fraud convictions rested on domestic use of wires; (d) courts lack authority to compel the Executive to make MLAT requests for a private defendant.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1) Sufficiency — Rule 10b‑5 "in connection with" | Government: false no‑commission promises induced clients to entrust micro trading decisions to State Street, materially affecting buy/sell decisions for covered securities. | McLellan: misstatements only affected selection of transition manager (macro decision), not statutory buy/sell decisions — so not 10b‑5 fraud. | Held: Agency‑model delegation converts micro trading decisions into protected buy/sell decisions; misrepresenting per‑trade costs satisfies "in connection with" and was sufficient. |
| 2) Jury instruction on "in connection with"/materiality | Government: instruction conveyed applicable law and matched evidence about hidden commissions. | McLellan: instruction was overbroad; should have required that misrepresentation be material to a decision to buy/sell covered securities. | Held: Instruction arguably overbroad but any error was harmless beyond a reasonable doubt given the evidence focusing on per‑trade misrepresentations. |
| 3) Wire fraud extraterritoriality / domestic‑application instruction | Government: wire‑fraud counts rested on domestic wires (emails) used to further scheme; §1343 can be applied here as a domestic use of instrumentality. | McLellan: §1343 does not apply extraterritorially and court should have required jury to find a domestic application. | Held: Court need not resolve extraterritoriality; jury was instructed to find domestic wires sent/caused by McLellan and evidence supported domestic application — no error. |
| 4) MLATs / compelling Executive to request foreign evidence | Government: lodging MLAT requests is Executive discretion; courts cannot compel the Executive to act on behalf of private defendants. | McLellan: due process and compulsory‑process rights require courts be able to order the government to use MLATs to obtain potentially exculpatory evidence. | Held: District court correctly held it lacks authority to compel the Executive to make MLAT requests for a private defendant; no constitutional violation shown (no plausible showing documents would be favorable). |
Key Cases Cited
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) ("in connection with" requires fraud to coincide with securities transaction; transactional nexus test)
- Troice v. Chadbourne & Parke LLP, 571 U.S. 377 (2014) (fraud must be material to a decision by one or more individuals to buy or sell a covered security)
- SEC v. Zandford, 535 U.S. 813 (2002) (broker’s misappropriation of proceeds violates §10(b); nexus can exist without misrepresenting security value)
- United States v. O'Hagan, 521 U.S. 642 (1997) (Rule 10b‑5 and misappropriation/transactional nexus principles)
- United States v. Litvak, 808 F.3d 160 (2d Cir. 2015) (broker misrepresenting purchase price can inflate buyer’s negotiated price; supports liability for hidden markups)
- Hidalgo‑Vélez v. San Juan Asset Mgmt., Inc., 758 F.3d 98 (1st Cir. 2014) (materiality/"in connection with" analysis in circuit precedent)
- Pasquantino v. United States, 544 U.S. 349 (2005) (analyzing focus of wire/mail statutes and domestic use of instrumentality)
- RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090 (2016) (framework for presumption against extraterritoriality)
- WesternGeco LLC v. Ion Geophysical Corp., 138 S. Ct. 2129 (2018) (identify statute's focus to determine domestic application)
- In re Price, 685 F.3d 1 (1st Cir. 2012) (treaties generally do not create privately enforceable rights; MLATs and judicial role)
- United States v. Theresius Filippi, 918 F.2d 244 (1st Cir. 1990) (compulsory‑process analysis where government action prevented witness testimony; limits on extraterritorial compulsory process)