949 F.3d 157
3rd Cir.2020Background
- Steven Fishoff was an experienced full-time trader who operated Featherwood Capital and executed large-volume trades without formal securities licensing or compliance staff.
- Fishoff received confidential “over the wall” (OTW) tips about impending secondary offerings from associates who had been solicited by underwriters; he short-sold Synergy stock on that information and profited when the offering was announced.
- Fishoff pled guilty to securities fraud under Rule 10b-5 for the Synergy trades and stipulated to millions in illicit profits and willfulness.
- At sentencing Fishoff invoked Section 32 of the Securities Exchange Act, seeking the statutory non-imprisonment defense on the ground he lacked knowledge of the SEC rule he violated; the District Court denied the defense and sentenced him to 30 months’ imprisonment.
- Fishoff appealed, raising (1) Rule 32 procedural errors at sentencing, (2) that the government should be precluded from opposing the defense on appeal due to its silence below, and (3) that the District Court clearly erred in finding he failed to prove lack of knowledge of the rule.
- The Third Circuit held the Section 32 defense requires a preponderance showing that the defendant did not know the substance of the SEC rule he violated, and affirmed the sentence because Fishoff failed to meet that burden.
Issues
| Issue | Plaintiff's Argument (Fishoff) | Defendant's Argument (Gov't) | Held |
|---|---|---|---|
| Proper standard for Section 32 non-imprisonment defense | Defense requires only lack of awareness that the rule applied to his conduct | Defense requires showing he did not know the substance of the SEC rule | A defendant must prove by a preponderance that he did not know the substance of the rule he violated |
| Whether District Court violated Fed. R. Crim. P. 32 by not making factual findings and curtailing argument | Court failed to rule on controverted matters and denied oral argument on the defense | Court ruled on the Section 32 objection and gave opportunity to allocute; any limitation was within discretion | No Rule 32 violation; any error was harmless because the court sufficiently ruled and further argument would not have changed outcome |
| Whether government is precluded on appeal because it was silent at sentencing | Government’s failure to address the affirmative defense at sentencing should bar it from opposing on appeal | Government’s request for a Guidelines sentence opposed non-imprisonment; government may defend the judgment on appeal | Government may oppose on appeal; its prior silence does not preclude appellate argument |
| Whether District Court clearly erred in finding Fishoff failed to prove lack of knowledge | Fishoff lacked formal training, licenses, and hadn’t been told Rule 10b-5 applied; confidentiality emails didn’t cite the rule | Fishoff’s professional trading experience, coded communications, concealment, and post-facto compliance steps support inference he knew trading on confidential info was prohibited | No clear error: record supports District Court’s finding that Fishoff failed to show, by preponderance, he did not know the substance of Rule 10b-5 |
Key Cases Cited
- United States v. Behrens, 713 F.3d 926 (8th Cir. 2013) (holds Section 32 requires proof by preponderance that defendant lacked knowledge of the substance of the SEC rule)
- United States v. Laurienti, 731 F.3d 967 (9th Cir. 2013) (district court’s rejection of affirmative defense implies finding of knowledge)
- United States v. Electrodyne Sys. Corp., 147 F.3d 250 (3d Cir. 1998) (requirement that district court rule on controverted sentencing matters)
- Cheek v. United States, 498 U.S. 192 (1991) (discusses limits on mistake-of-law defenses and mental state requirements)
- United States v. Reyes, 577 F.3d 1069 (9th Cir. 2009) (concealment supports inference of knowledge of wrongdoing)
- United States v. Griswold, 57 F.3d 291 (3d Cir. 1995) (government may defend district court’s factual findings on appeal)