UNITED STATES of America, Plaintiff-Appellee,
v.
Brаdley S. ASHMAN, John Ryan, Joel J. Fetchenhier, Thomas P.
Kenney, William A. Barcal, III, Sheldon Schneider, Edward A.
Cox, III, John A. Vercillo, Martin J. Dempsey, and Charles
Bergstrom, Defendants-Appellants.
Nos. 91-2390, 91-2406, 91-2462, 91-2488, 91-2524, 91-2590,
91-2676, 91-2677, 91-2708 and 91-2709.
United States Court of Appeals,
Seventh Circuit.
Argued June 11, 1992.
Decided Oct. 30, 1992.
Rehearing and Rehearing En Banc
Denied Jan. 6, 1993.
Joel D. Bertocchi, Asst. U.S. Atty. (argued), Crim. Div., Barry R. Elden, Asst. U.S. Atty., Crim. Receiving, Appellate Div., Chicago, Ill., for plaintiff-appellee U.S.
Nan R. Nolan, Robinson, Curley & Clayton, Donald C. Shine, Michael J. Daley, Nisen & Elliott, Chicago, Ill., for defendant-appellant Charles W. Bergstrom.
Garrett B. Johnson, Mark D. Young, Kirkland & Ellis, Scott E. Early, Chicago, Ill., Robert H. Bork (argued), Washington, D.C., Ann E. Barlow, New York City, for amicus curiae Bd. of Trade of City of Chicago.
C. Steven Tomashefsky, Barry A. Miller, Malcolm C. Rich, Chicago Council of Lawyers, Chicago, Ill., for amicus curiae Chicago Council of Lawyers.
James R. Epstein (argued), Jerry A. Esrig, Chicago, Ill., for defendant-appellant Martin J. Dempsey.
Michael D. Monico, Barry A. Spevack (argued), Monico, Pavich & Spevack, Chicago, Ill., for defendant-appellant John A. Vercillo.
Matthias A. Lydon, Jayne Carr Thompson (argued), Lydon & Griffin, Chicago, Ill., for defendant-appellant Edward A. Cox, III.
Matthew F. Kennelly, Margaret L. Paris, Robert M. Stephenson, Cotsirilos, Stephenson, Tighe & Streicker, Chicago, Ill., for defendants-appellants Sheldon Schneider, Thomas P. Kenney and Joel J. Fetchenhier.
Nicholas F. Maniscalco, Chicago, Ill., for defendant-appellant William A. Barcal, III.
Gordon B. Nash, Jr., Gardner, Carton & Douglas, Matthew F. Kennelly, James R. Streicker, Cotsirilos, Stephenson, Tighe & Streicker, Patrick S. Coffey, Federal Public Defender, Office of Federal Public Defender, Chicago, Ill., for defendant-appellant John C. Ryan.
Nathan Z. Dershowitz, Amy Adelson, Dershowitz & Eiger, New York City, Alan M. Dershowitz (argued), Cambridge, Mass., for defendant-appellant Bradley S. Ashman.
Before BAUER, Chief Judge, CUDAHY and KANNE, Circuit Judges.
BAUER, Chief Judge.
In this rather complex appeal, we review the claims of ten defendants, traders and brokers of soybean futures contracts at the Chicago Board of Trade ("CBOT"), who were convicted of various offenses including conspiracy to violate the Racketeer Influenced and Corrupt Organizations Act ("RICO") (18 U.S.C. § 1962(c)), substantive RICO offenses (18 U.S.C. § 1962(d)), mail and wire fraud (18 U.S.C. §§ 1341 and 1343), and sundry infractions of the Commodity Exchange Act ("CEA") (7 U.S.C. §§ 6b, 6c, and 13c(a)). The final indictment included 320 counts; the trial lasted almost three months, with an additional month of jury deliberations. All defendants were convicted of some charges; all save two were convicted of conspiring to violate RICO. On appеal, the defendants as a group raise fifteen separate claims of error in their consolidated brief. Moreover, each defendant raises individual claims, totalling 34 additional challenges to their convictions and sentences. For the most part, we are not persuaded by these claims. Nevertheless, on six counts, we determine that no fraud existed. On one additional count, we uncover a failure of proof. Thus, we affirm in part and reverse in part.
Due to the complexity of the issues involved in this appeal, some background information regarding the business of trading at the CBOT is necessary. The defendants consist of two types of floor traders: "locals," who trade on their own accounts, and brokers who execute orders from customers who may be CBOT members, but usually are members of the public trading through brokerage firms. The defendants, as well as numerous other traders, both indicted and unindicted, traded contracts for soybeans futures. A futures contract is an agreement between two parties to buy or sell a specified quantity of a given commodity--in this case soybeans--at a future date but with the price for the commodity established now. In the instant case, the jury found that these ten defendants fraudulently manipulated customer orders to buy and sell soybean futures.
Soybean trading, like the trading of other commodities, takes place in certain areas of the trading floor known as pits. Pits, as the name implies, are essentially round, tiered areas where traders and brokers in a given commodity face each other to trade contracts through open outcry. To the uninitiated, this system may appear to be nothing more than a collection of people in brightly colored jackets shouting and waving at one another. Under federal laws and regulations, as well as CBOT rules, all trades must be conducted, and all customer orders executed, in the competitive marketplace of the pit by open outcry. This means that a trader seeking to buy or sell, for himself or a customer, must bid (i.e. ask to buy) or offer (i.e. prоpose to sell) audibly and openly so that all other traders in the pit may accept that bid or offer.
After a trade is executed, the parties to the trade record the relevant details on trading cards, or in the case of a broker trading for a customer, on order forms. If a broker cannot fill an order in the market, he may return it as "unable." The relevant elements of the trade include the identity of the opposing trader, the amount of the commodity traded, the time at which the trade took place, and the price. "Runners" return cards and orders throughout the day to clearing firms which handle the necessary accounting of the trade. The CBOT also receives a copy of the cards and orders to ensure that both sides of the trade match or "clear."
When the details of a trade do not match in the clearing process, an error or "out-trade" occurs. Most out-trades are the result of some misunderstanding between the two parties to the trade involving price, quantity, or the identity of the opposing trader. An out-trade that is left unresolved means that one trader is left with a position in the market--i.e. an unfilled order to buy or an unaccepted offer to sell. This unresolved position can result in a loss or a gain depending upon how the market moves before the mistake is corrected.
When an out-trade occurs, the traders involved attempt to determine who made the error. The trader responsible for the mistake must cover any loss that results. In this situation, the trader who made the mistake issues the other trader an "out-trade check" to cover all or part of the loss. If the traders are unable to determine who made the mistake, CBOT's custom suggests that the two traders involved split the resulting loss evenly. Where an out-trade involves the execution of a customer order, however, the customer bears no loss: the broker accepts any negative financial consequences and, if necessary, makes up the difference to the customer. But where the out-trade ends profitаbly for the customer, the customer keeps that windfall.
Those traders who act as brokers often act independently, filling orders for customers of several different firms and earning commissions for each contract they execute. CBOT rules provide for several types of customer orders. A "market order" directs the broker to execute as soon as possible at the best available price (i.e. highest-priced sell or lowest-priced buy) in the pit. A "market on close" (hereinafter "MOC") or "market on open" (hereinafter "MOO") order directs the broker to execute just before the close or after the opening of trading. These MOO and MOC orders request execution at a specific time, rather than at a specific price, but still require the broker to obtain the best available price. "Price orders," as you might guess, instruct the broker to buy or sell a commodity at a specific price. Nevertheless, price orders also require the broker to fill at a better price if possible. A "stop order" contains a specific price for a buy or a sell; once that price is bid or offered, then the stop order immediately converts to a market order to be filled at the best available price.
Shortly after the opening and then again following the close of trading, the CBOT posts the opening and closing ranges. These ranges consist of the highest and lowest prices actually traded in the market during the period just after the opening of trading and immediately before the close. Thus, these ranges reflect what already has occurred in the pit--they do not exist until competitive trading establishes the high and low prices for the relevant period.
At trial, the government presented hundreds of allegedly fraudulent trades executed by the various defendants. The core of the charged crimes involved brokers surreptitiously avoiding the competitive nature of the pit to arrange trades with locals at selected prices. These arranged trades, determined without the usual open оutcry bid or offer in the market, guaranteed profits to the local. The local would then do one of three things (or some combination) with these profits: he might keep the profits as repayment for a loss assumed by the local from an out-trade with the broker; he might hold the profits from the arranged trade as a credit against future errors or out-trades; or he might pass the profits back to the broker who had arranged the trade in the first place (i.e. a kickback) or to another trader to whom the broker owed money from other out-trades. Locals who took losses and profits from brokers in this way were referred to in the pit as "bagmen." See Transcript of Proceedings at Trial ("Trans.") at 528-29, 2214, 4263-64.
The government charged that defendants Charles Bergstrom, Sheldon Schneider, John Ryan, John Vercillo, and Joel Fetchenhier, as well as FBI Special Agent Richard Ostrom who traded undercover in the soybean pit, were local traders who acted as "bagmen." See Trans. at 528-29. Defendants Martin Dempsey, Thomas Kenney, Edward A. Cox III, William Barcal, James Nowak, and John Eggum were brokers who manipulated customer orders to create guaranteed profits for the locals. Defendants Bradley Ashman and David Skrodzki functioned as brokers or locals at different times. Prior to trial, defendants Nowak, Eggum, and Skrodzki pleaded guilty and testified as government witnesses.
For their crimes, the ten defendants received a varying combination of prison terms, fines, restitution levies, and forfeitures. See United States v. Dempsey,
A. Consolidated Claims
As a group, the defendants first challenge three basic elements of their convictions: (1) that their mail fraud and wire fraud convictions must be reversed because there was neither a deprivation of any property right nor any specific intent to defraud; (2) that the mailing and wiring of information (necessary to sustain mail and wire fraud convictions) were not in furtherance of the alleged scheme; and (3) that all RICO convictions should be overturned because that statute is unconstitutional as applied to these defendants, and because the district court inadequately instructed the jury on one of RICO's critical elements. We will consider each in turn.
The defendants first contend that the mail and wire fraud convictions based on "matching trades" should be reversed because "matching" does not involve the deprivation of a property right. See Defendants' Consolidated Brief at 20. The mail and wire fraud statutes require that the scheme to defraud seek to obtain "money or property." 18 U.S.C. §§ 1341, 1343. In a "match" (the most recurrent type of fraud charged in the indictment), a broker traded buy and sell orders in equal quantity with a cooperating local. The two traders simply agreed on the price of the trade rather than bidding or offering the customer order in the open market and securing the best price available. The broker thereby filled the customers' orders by selection and not on the market.
The great majority of matched trades involved MOC orders in which the defendant brokers filled orders after legitimate trading had ended for the day by selecting prices within the just-posted closing range. See Trans. 541-44, 551-52. The outcome of these matched trades depended on the prices the broker selected: if the local bought from and sold to a broker at the same price, they matched "at a scratch." Trading at a scratch meant that the local would neither make nor lose money. The evidence demonstrated, however, that, far more commonly, matches between the defendants resulted in profits for the local. The broker sold a customer's sell order to the local at a lower price than the price at which he bought a different customer's buy order from the same local. The local thereby would buy low and sell high with the customer orders from the broker, guaranteeing that the local made money. See id. at 3993, 4082-84.
An example may help illustrate how matched trading operated. After Schneider, a local, agreed to take a loss from broker Eggum caused by Eggum's mistake in recording a trade, Eggum repaid him by selling him 30,000 bushels of soybeans (known as a "30-lot") from customers' sell orders and then buying back an equal amount with buy orders from other customers. Prices were selected from the closing range without bidding or offering in the market so that Schneider was able to sell the soybeans for a higher price than he paid and thus garnered a sure $300 profit. See id. at 3332-41. The record is replete with similar instances of matching.
Citing McNally v. United States,
We disagree. We do not dispute the defendants' assertion that McNally rejected the use of the mail fraud statute to criminalize schemes involving the deprivation of intangible rights. See Defendants' Consolidated Brief at 21. As the defendants accurately note, McNally made it clear that the mail and wire fraud statutes protect property rights only and "that a scheme to defraud must involve the deprivation of something of value by trick, deceit, chicanery or overreaching." Id. (quoting McNally,
The instant convictions, however, are not inconsistent with this principle. By picking customer prices and opposing traders, the defendants removed their customers from the pit's competitive marketplace and forced the customers to accept the results they selected, guaranteeing profits to the local and denying the customer the opportunity to obtain a better price. In previоus cases, we have held that shifting or altering of economic risk or opportunity to affect a person's financial position adversely deprives that person of money or property. In United States v. Dial,
[I]t [is] fraud to fail to "level" with one to whom one owes fiduciary duties. The essence of a fiduciary relationship is that the fiduciary agrees to act as his principal's alter ego rather than to assume the standard arm's length stance of traders in a market. As a broker, and therefore ... a fiduciary of his customers, Dial, when he solicited his customers to participate in block orders, implicitly represented to them that he would try to get the best possible price. He could have gotten a better price by putting their orders in ahead of the orders he placed for his own accounts and those of his friends. In trading ahead of his customers without telling them what he was doing, he was misleading them for his own profit, and conduct of this type has long been considered fraudulent.
Id. at 168.
Similarly, in Lombardo v. United States,
The evidence ... supports the conclusion that the defendants engaged in a scheme to obtain money or property by fraudulent means. The essence of the conduct in which the defendants engaged was the attempted sale of the Wonderworld property ... for $1,400,000 in spite of existence of higher bids. Such a scheme clearly contemрlated depriving the Pension Fund of the highest price for the Wonderworld property.
Lombardo,
Dial and Lombardo demonstrate that the deliberate deprivation of a clear financial opportunity violate the mail fraud statute. The selection of prices without competition deprived customers in the instant case of a clear market opportunity to obtain the best price for their orders. It does not matter if the defendants' customers were not harmed financially because of the scheme. In United States v. Cosentino,
With this guidance, we have no difficulty concluding that the defendants' scheme to deprive CBOT customers of orders filled by the competitive market falls within the purview of the mail and wire fraud statutes. We reject the defendants' assertion that the instant scheme did not rob any customer of a tangible interest. Our case law makes clear that even though the customers may not be entitled to any specific price, deliberate refusal to pursue the best price the broker could obtain can constitute a scheme to defraud. See also Ranke v. United States,
Our conclusion that matching constitutes fraud because customers are denied the opportunity to obtain a better price from the market implies that where customers have nо opportunity to obtain a better price, matching does not violate the mail fraud statute. The defendants contend that in certain types of market situations--so-called "limit days"--when the price of a given commodity was fixed and no other price was being traded in the pit, fraud was impossible because there was no chance for the customer to obtain a better price. Limit days are the result of CBOT rules that attempt to curb dramatic and potentially dangerous swings in prices. The CBOT simply limits the amount that a commodity price may rise or fall on any given day. When the price of the commodity reaches its limit, the price is not allowed to continue climbing (or falling, as the case may be) during that trading session, and therefore, all trading is executed at the limit price. When the price of a commodity is limit-up (or limit-down), it is generally true that the commodity's price will rise again (or fall again) at the start of the next trading session. See Government's Brief at 9-10.
During the summer of 1988, when drought conditions led to several "limit-up" days in the soybean pit, the defendant brokers executed scarce orders (e.g. a sell order when the price was limit-up) with selected locals, again without offering those orders in the open market. The government charged some defendants with mail and wire fraud based on their arranged trades when the soybean market was set at a limit price. While the defendants concede that they failed to execute their limit-day trades by open outcry, they submit that, because there was no price competition in the market on those trades, they did not deprive the customers of any money or property. See Defendants' Consolidated Brief at 31-32. We agree. Merely denying a customer the opportunity to obtain the limit price by open outcry rather than by arranged trades strikes us as the kind of intangible deprivation that McNally held could not constitute mail or wire fraud. See McNally,
The government concedes that no customer lost money on the defendants' limit-day trading. Instead, the government argues that the defendants violated the mail and wire fraud statutes by depriving other traders in the pit--those that were not quietly selected by the defendant brokers--of money or property: "By keeping valuable orders to themselves, defendants deprived other traders and customers of other brokers the opportunities for profits from trading on them." Government's Brief at 33. We are not persuaded. As the defendants accurately point out, the government's argument boils down to an assertion that open outcry trading by itself constitutes a property right protected under the mail and wire fraud statutes. See Defendants' Consolidated Brief at 32. We hold that the failure to execute trades by open outcry does not constitute a deprivation of money or property under the fraud statutes. The customer would have received the same price--the limit price--whether or not the trade was offered openly in the pit. See, e.g., Toulabi v. United States,
The defendants next argue that the jury's finding that they intended to defraud is unsupported. See Defendants' Consolidated Brief at 32. They suggest that they acted only in good faith without the requisite specific intent necessary to violate the mail fraud statute. The defendants argue:[T]he totality of the evidence established that the brokers and traders in the soybean pit often engaged in 'matches' as an expedient way of filling orders that, in a hectic market, would otherwise be left unfilled, and that they firmly believed that customers who had orders filled within the opening or closing range, even if the prices were determined by arrangement, benefitted from the trades.
Defendants' Consolidated Brief at 34. This good faith, the defendants conclude, is a complete defense to the charge of mail fraud. See United States v. Martin-Trigona,
We do not dispute that good faith is a complete defense to mail fraud; we simply question whether the evidence supporting the defendants' intent to deprive customers of money or property is as thin as defendants claim. In order to convict defendants of mail fraud, the jury had to find that they had a specific intent to defraud. United States v. Johnson,
The ample evidence in this case refutes the defendants' claim that they lacked the specific intent to commit mail and wire fraud. Defendants emphasize that on cross-examination, Eggum, Nowak and Skrodzki, who pleaded guilty, testified that at the time they traded, they did not intend to cheat or defraud anyone. We have two responses to this claim: first, the jury did not have to believe this testimony; and second, while the defendants may not have had the terms "cheat" or "defraud" precisely in mind as they arranged trades, that intent may be inferred "when the scheme has such effect as a necessary result of carrying it out." United States v. London,
Perhaps the most compelling proof of the defendants' desire to make profits at the customers' expense lies in the fact that the matched trades which formed the basis of the fraud counts were arranged so as to generate profits to the traders. As we explained at the outset of this opinion, these profits were used to cover personal losses from the traders' own errors. Each matched trade could have been executed at a scratch--that is, by picking the same price for buying and selling customers. See Trans. at 541-42. But matches at a scratch generated no profits to the defendants. Instead, the defendants matched their trades with the buy orders lower and the sell orders higher--permitting the traders to make profits at the customers' expense. See Trans. at 541-44, 3993, 4082-84.
The record is replete with examples: after Schneider agreed to take a loss from broker Eggum caused by Eggum's mistake in recording a trade, Eggum repaid him by selling him a total 30-lot (i.e. 30,000 bushels) on customer orders and buying back an equal amount on orders from other customers. Eggum and Schneider picked prices without bidding or offering in the market, which permitted Schneider to sell for more than he paid, guaranteeing Schneider a $300 profit. See id. at 3332-41. Broker Dempsey dictated to Agent Ostrom a series of customer buys and equal quantity of sells, all at prices selected by Dempsey to give the selling customers lower prices than buying customers, generating a $1,600 profit to Ostrom. This was Dempsey's first step in repaying the undercover agent for accepting a $34,000 loss caused by Dempsey's mishandling of a customer order. See id. at 1448-53, 1460-67, 2954-57.
Similarly, brokers Kenney and Eggum matched customer orders to buy and sell a 65-lot on each side. Ashman acted as the local trader; Kenney dictated the buys from Ashman first, and then told Eggum to execute the sell orders with Ashman, which Eggum did at lower prices that bestowed a $650 profit on Ashman. See id. at 3156-66. Nowak arranged a sale on an order of a 100-lot to Ostrom at a picked price and told Ostrom to "work it out" with Bergstrom, from whom Nowak already had bought a 100-lot at a higher price. After Nowak's sale, Bergstrom and Ostrom arranged a trade together at a price in the middle of Nowak's buy and sell prices and then split the profits, about $500 apiece. See id. at 1429-34. Broker Cox used the same procedure on closing orders with defendant Skrodzki and trader Jim O'Brien, who traded together to split $1,600 profit. See id. at 4945-47. Fetchenhier too deliberately participated in the scheme. Nowak testified that he selected certain prices that generated profits for Fetchenhier because Nowak owed him for accepting losses. See e.g. id. at 4126-38. These few examples demonstrate that the jury had ample basis to conclude that the defendants manipulated orders with the intent to deprive customers of better prices so that they could generate profits for themselves. Viewing the evidence in the light most favorable to the government, we reject the defendants' claim that the evidence was insufficient to support the jury's finding that they intended to defraud.
In their second set of consolidated claims, the defendants argue that their mail and wire fraud convictions must be reversed because the requisite mailing and wiring was not in furtherance of the scheme to defraud. For these claims, the defendants largely adopt the arguments of the amicus curiae, the CBOT. Specifically, the CBOT claims that the jury could not rationally have found that the mailing and wiring of statements confirming the execution of trades to customers furthered the defendants' scheme to defraud. We disagree. The evidence establishes that, through mailing and wiring, the defendants advised customers of the results of their orders, helping to conceal the fraudulent trading and thereby furthering the scheme. Again we note that when reviewing the sufficiency of the evidence that the mailing and wiring furthered the scheme, we consider the record in the light most favorable to the government and uphold the jury's decision if any rational trier of fact could have so found beyond a reasonable doubt. Biesiadecki,
The mailings and wires in this case comprised various transmissions by clearing firms to customers confirming the execution of orders, including the date of execution, the quantity traded, and the price obtained. CBOT rules require these confirmations. See CBOT Regulation 421.00. Although these statements directly communicated the results of the defendants' transactions (but, of course, not how the trades were conducted), the CBOT contends that the transmissions did not further the scheme because (1) the mailings occurred after the alleged fraud had been completed; (2) they were not material to the fraud; (3) the mailings were required by law; and (4) the information provided by the mailings was entirely accurate. See CBOT Brief at 5.
The CBOT relies on three cases, United States v. Maze,
In Parr, several defendants were charged with fraudulently obtaining gasoline and other items through the unauthorized use of a credit card issued to the school district that employed them. The mailing element of the mail fraud charges occurred when the oil company that issued the credit card mailed invoices to the school district for payment, and when the district mailed payment in the form of a check. Relying on Kann, the Supreme Court held that the mailings were not in execution of the scheme as required in the mail fraud statute because it was immaterial to the defendants how the oil company collected its payment. Parr,
Finally, in Maze, the defendant allegedly stole his roommate's credit card, headed south, and obtained food and lodging at motels аlong the route by placing the charges on the stolen card. The mailing element was supplied by the defendant's knowledge that each motel proprietor would mail an invoice to the bank that issued the credit card, which in turn would mail a bill to the card owner for payment. The Court determined that these mailings could not support the mail fraud charges because the defendant's scheme reached fruition when he checked out of each motel. As the Court observed, the success of his scheme in no way depended on the mailings; they merely determined which of his victims ultimately would bear the loss. Maze,
Yet, these cases are contrasted with the Court's more recent holding in Schmuck v. United States,
Given these circumstances, the Court held that a rational jury could have found that the title-registration mailings were part of the executions of the scheme, "a scheme which did not reach fruition until the retail dealers resold the cars and effected transfers of title." Id. Schmuck makes clear that the challenged mailings must be understood in the context of the full scheme to defraud. CBOT's claim, then, that the mailings did not further the scheme because the fraud was complete when the confirmations were mailed and because the information contained in the transmissions was accurate must be rejected. That the mailings were accurate--that is, that they listed the prices obtained for the customers--and that the fraud already was complete does not undermine our belief that the confirmations in the instant case furthered the scheme by lulling customers into believing that nothing was wrong with the execution of their orders. Indeed, in an important sense, the confirmations were far from accurate. They served as representations that the trades had been executed in the open market. As the district court appropriately observed, the confirmations "told the truth, but not the whole truth." U.S. v. Dempsey,
Moreover, like the scheme in Schmuck--and unlike the schemes in Kann, Parr, and Maze --the fraudulent activities of the defendants in the instant case depended upon a smooth flow of executed orders from traders on the CBOT floor to the public customers. As the Schmuck court observed, the mailings in Kann and the credit card invoice mailings in Parr and Maze involved little more than post-fraud accounting. Schmuck,
Nor are we persuaded that, because the confirmations in this case were required by law, they did not further the scheme. Both the Supreme Court and this court have rejected the claim that Parr holds categorically that required mailings cannot further fraud. Schmuck noted that while the mailings in Parr were solely the product of a legal duty and would have been made regardless of the defendants' fraudulent scheme, the mailings in Schmuck derived from Schmuck's scheme to sell modified cars. The Schmuck mailings would not have occurred but for the scheme.
The defendants raise an additional challenge to the mailing/wiring element: they claim that the wired confirmations to a particular customer, Broadcort Capital Corporation, did not further the fraudulent scheme. Broadcort Capital, a firm in New York, is a wholly-owned subsidiary of Merrill Lynch & Co. ("Merrill"). Merrill Lynch Futures, Inc., which has representatives on the CBOT floor, is another wholly-owned subsidiary of Merrill. The defendants claim that, because representatives of Merrill Lynch Futures were informed of the details of Broadcort trades right on the CBOT floor, the subsequent wire transmissions to Broadcort in New York were superfluous. The defendants argue, "[The wired transmissions to Broadcort were] nothing more than an internal Merrill Lynch communication for record generating purposes. Long before the wire was made, Broadcort was informed of its fill." Defendants' Consolidated Brief at 37-38.
We are not persuaded. In Lane, the defendants obtained insurance on various buildings, torched them, and then collected the insurance proceeds. The mailing element was supplied by the forms the claims adjustor sent to his company's home office after the defendants had been paid.
In the instant case, we do not believe that awareness of the Broadcort trades by the representatives of Merrill Futures, Inc., Broadcort's "sister" company, see Defendants' Consolidated Brief at 37, renders the subsequent transmission of confirmations to Broadcort unrelated to the fraudulent scheme. If that were true, then the claims adjustor's knowledge of the Lanes' alleged loss would have rendered the later mailings in Lane insufficient to satisfy the requirements of the mail fraud statute. As Lane determines, delayed mailings still may advance the рurposes of the fraudulent scheme. Lane,
In their third set of consolidated claims, the defendants attack the application of RICO to their scheme to defraud CBOT customers.2 The defendants challenge two fundamental elements of RICO's application in this case: that the government failed to prove a single conspiracy and that RICO, as applied here, is unconstitutionally vague.3 The defendants first contend that the government, "if it proved anything at all, did not prove the common purpose of a single enterprise, but, at most, ... numerous separate adventures of like character." Defendants' Consolidated Brief at 42 (quotations omitted). We note that, even if the evidence arguably established multiple conspiracies, we will not disturb the jury's finding so long as a reasonable juror could have found the existence of the single conspiracy as charged in the indictment. United States v. Townsend,
The jury convicted eight of the defendants (i.e. Ryan was not charged with RICO conspiracy and Barcal was acquitted on that count) of "conspir[ing] and agree[ing] with each other ... to conduct and participate in the conduct of the affairs of the CBOT, directly and indirectly, through a pattern of racketeering activity...." Count 1, Second Superseding Indictment at 3. The indictment alleged that that pattern consisted of multiple acts of mail and wire fraud. To prove a single conspiracy, the government need only have shown that any particular defendant аgreed to conduct the affairs of the enterprise (i.e. the CBOT) through the commission of two predicate acts of mail or wire fraud. See United States v. Neapolitan,
The evidence in this case demonstrates that the jury had sufficient reason to find the existence of a single conspiracy. Indeed, the ample evidence revealed a single agreement among defendants and others to operate a system of fraudulent trading that was designed to eliminate the risk of competition. As the government aptly notes, the defendants formed a kind of anti-market that operated in the same place as the legitimate market, but with very different rules. See Government's Brief at 55. The legitimate market fostered independence and competition; the defendants' anti-market relied on fraudulent interdependence and a resulting mutual benefit at the expense of customers--characteristics typical of a conspiracy.
Section 1962(d) (RICO conspiracy) was enacted "against the backdrop of hornbook conspiracy law." Neapolitan,
Defendant Kenney conducted most of his fraudulent trading with defendants Eggum, Schneider, and Barcal, but under the broader agreement could use Bergstrom and Ostrom to obtain orders for his own account, picking prices to secure guaranteed profits. See id. at 623-35, 2865-76. Eggum could pay off a debt to Bergstrom the same way he usually repaid Schneider, that is, by matching orders with Schneider and Bergstrom in the same transaction. See id. at 1258-60, 3175-86, 3239-42. Nowak and another broker orchestrated another series of trades to create profits in defendant Fetchenhier's account. See id. at 991-92, 1002-05, 4126, 38, 4484-90. Also, when defendant Skrodzki left his position as a broker (where he commonly matched his customers' orders with Nowak, Bergstrom, and Ryan), he crossed the pit and assumed the role of bagman for defendant Cox. These examples demonstrate the flexibility created by the overarching agreement.
But perhaps the best evidence of a single conspiracy involved the scratch tradersthose who acted solely to launder transactions by concealing the real parties to the fraudulent trade. As we have discussed, the scratch trader would buy from one party and sell to the other at the same price, thus "scratching" his trades with no profit or loss to himself. As the government asserts, scratch trades served to disguise the real nature of the arranged transaсtion. See id. at 495, 2964-68, 4004, 4644, 6267. See also Government Brief at 14. For example, Bergstrom passed $1,000 he held for Nowak from customer order trades to another trader of Nowak's choice, with Nowak serving as the scratch between Bergstrom and the other trader. See id. at 4100-02. Another time Dempsey directed Ostrom to pass $4,125, which Ostrom held for Dempsey as a result of profitable customer trades, to another trader whom Dempsey owed money from an earlier trade. Dempsey had Kenney act as the scratch trader between Ostrom and the trader to whom the money was passed. See id. at 842-44, 860-65, 2905-06.
Similarly, Nowak directed Ostrom to pass $4,000 that Ostrom was holding for him back to Nowak in two sets of prearranged trades. Nowak recruited Fetchenhier to trade between them so that it would not, in Nowak's words, "look terrible"--that is, "look like a prearranged trade." See id. at 1672-74, 4258-59. Another time Ostrom passed $1,000 of Dempsey's money to Bergstrom, with Nowak as the scratch trader between them. See id. at 937-40. In addition, defendant Cox, who regularly had Skrodzki pass back about half of the profits generated from their matching of customer orders, used several others as scratch traders between them. See, e.g., id. at 4839-44, 4850-54, 4847-49, 4854-4860, 4864-72.
These examples demonstrate that the defendants freely served as scratch traders for one another, often without any direct economic reward for themselves, and support the jury's finding of an overarching cooperative agreement among defendants to create risk-free profits by avoiding competition. More conspirators meant that the fraudulent scheme would be more difficult to detect, just as having more than one bagman permitted a broker to make a number of fraudulent trades without running up an inordinately high volume of trades with any single trading partner. In Townsend, comparing a conspiracy to a corporation, we described this kind of conspiratorial cooperation:
"[B]usiness combinations--whether corporations, partnerships, joint ventures, or other variations--exist because they lower thе transaction costs of legitimate profit-seeking endeavors. Conspiracies exist for the same reason--to lower the transaction costs of committing crimes. Rather than having to discover who it is that one wishes to deal with, to inform people that one wishes to deal and on what terms, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed and so on, in order to accomplish a goal--whether legitimate or illegitimate--corporations and conspiracies will emerge to organize what would otherwise be market transactions...."
Id. at 1394 (quotations omitted). This excerpt summarizes precisely the nature of the defendants' association.
Townsend makes clear that, in a challenge to the existence of a single conspiracy, "the critical question is whether the jury may reasonably infer a single agreement among the defendants from the evidence ... presented by the government." Id. at 1390 (emphasis in original). In the instant case, the district court specifically instructed the jury to consider whether the evidence established a single conspiracy:
The government has charged all of the defendants in Count 1 of the Indictment with a single conspiracy to violate the RICO statute. You are instructed that proof of several separate conspiracies is not proof of the single, overall conspiracy alleged in Count 1, unless one of the several conspiracies which is charged is the single conspiracy which Count 1 of the Indictment charges. What you must do is to determine whether the single conspiracy charged in the Indictment existed between two or more conspirators. If you find that no such conspiracy existed, then you must acquit the defendants as to that charge. However, if you are satisfied that such a conspiracy existed, you must determine who were the members of that conspiracy.... In other words, to find a defendant guilty, you must find he was a member оf the conspiracy charged in the Indictment and not some other, separate conspiracy.
Trans. at 7335-36. In light of our review of the record and the district court's careful instructions, we cannot say that the jury could not reasonably infer that the defendants joined a single conspiracy. There is sufficient evidence to withstand the defendants' challenge.
Nor do we believe that RICO, as applied in this case, is unconstitutionally vague. Both the defendants and the CBOT claim that the statute's "pattern" requirement--i.e. that the defendants' illegal acts constitute a "pattern of racketeering activity," see 18 U.S.C. § 1962(c)--is "so lacking in clarity as to be unconstitutional." See Defendants' Consolidated Brief at 46. We disagree. We have repeatedly rejected that suggestion, including in cases in which the enterprise was a legitimate entity. See United States v. Sanders,
We similarly reject the defendants' remaining consolidated claims. The defendants argue that the district court erred in its instructions regarding their creation of false records and accommodation trading; that the trading-by-offset provision is unconstitutionally vague; that the court wrongly admitted prejudicial hearsay declarations that were not in furtherance of the conspiracy; and that the court erred in sentencing. Each of these claims runs against clear precedent and ample record evidence. For instance, when challenging their convictions for making false records under 7 U.S.C. § 6b(B), the defendants claim error in the court's refusal to instruct that false entries had to be material. These false record charges were premised upon the prosecution's assertion that the defendants falsely used a "K" time bracket designation for transactions conducted after the closing bell.5 The defendants argue that the "K" designation was not material and that materiality was a necessary element of the offense.
The district court disagreed. It determined as a matter of law the elements of § 6b:
When you're talking about Section (B), to me, ... I don't know what is plainer than to say it is unlawful ... to, quote, "willfully make or cause to be made a false report." [quoting 7 U.S.C. § 6b(B) ]. What that means to me is a simple thing. If you're making a report and you know that it is false, you are willfully making a false report, and it doesn't make any difference whether you are intending to cheat or defraud anybody or not.
Trans. at 6193. We believe that the district court correctly stated the dispositive principle of law. See United States v. Jackson,
The defendants' claim regarding accommodation trading suffers the same fate. They claim that the district court erred in refusing to instruct the jury that the misdemeanor offense of accommodation trading, see 7 U.S.C. § 6c(a)(3)(A), is a lesser included offense of filling by offset under § 6b(D). This claim represents an attempt to apply a test that has been explicitly rejected by the Supreme Court. In Schmuck,
The charged felony, filling by offset under § 6b(D), requires proof that a member of a contract market filled an order from one customer by offsetting it against the order of another customer, and that he did so knowingly. To aid and abet that crime requires willful aiding, abetting, counselling, commanding, inducing, or procuring another to do so. 7 U.S.C. § 13c(a). Nevertheless, violation of the misdemeanor offense (§ 6c(a)(3)(A)) requires that a defendant conduct аn "accommodation trade," which the district court defined as a transaction in which one trader cooperatively and non-competitively trades with another to avoid market risk "while giving the appearance that the trade has been executed in the competitive market." Trans. at 7359. When the statutes are compared, it is clear that the lesser offense requires proof of an element--a trade with a cooperating opposing trader--which is not required under the felony statute. Filling by offset, as defined in § 6b(D), does not require that any other trader cooperate with a broker in the deliberate offset of orders, while aiding and abetting offsetting does not require that the aider do so by conducting a cooperative trade. Thus, because "accommodation trading" requires an element not required in filling by offset, the former is not necessarily included in the latter. The district court properly denied the defendants' requested instruction.
The defendants further assert that the trading by offset prohibition is unconstitutionally vague as applied to the conduct described in the instant case.7 The defendants cite Nichols & Co. v. Secretary of Agriculture,
The defendants also challenge the admission of three conversations, claiming that they were not coconspirators' statements under Federal Rule of Evidence 801(d)(2)(E).8 We previously have determined that we review only for clear error a district court's finding that a particular statement was made in furtherance of the conspiracy. United States v. Doerr,
In the first challenged conversation, Agent Ostrom and an unindicted trader were discussing a proposed CBOT rule change that would bar local traders from trading on "limit up" and "limit down" days. Ostrom said that because they were members, locals had an unfair advantage over customers. See Trans. at 1504. Defendant Vercillo interrupted the conversation and said, "F--- the customer." Id. In the second challenged conversation, Ostrom and defendant Ashman were discussing an out-trade, and Ashman said that he would pay the error by check. Ostrom responded, "We'll let John Q. Public pay me." See id. at 1736-37. Another unindicted coconspirator made the third challenged statement. The coconspirator interrupted Ostrom and defendant Nowak during illegal trades, and, pretending to tape them, said, "Can you speak up? The prosecuting attorney can't hear you." Id. at 1075.
The district court admitted these statements as furthering the conspiracy and demonstrating both the breadth of its membership and the defendants' knowledge of its criminal nature. The defendants argue that these conversations were not in furtherance of the conspiracy and, thus, should not have been admitted. We disagree. The district court had a reasonable basis to conclude that one conspirator's statements describing the purpose, method, or criminality of the conspiracy was not idle and furthered the scheme. The defendants' claims that the statements were taken out of context was a question for the jury to resolve, and is therefore lost on appeal. We hold that the district court's admission of the coconspirator statements was not clear error.
The defendants also claim that the district court erred in sentencing. Specifically, they argue that Sentencing Guideline 2E1.1, under which eight of the defendants (all save Ryan and Barcal) were sentenced for RICO conspiracy, conflicts with the Guidelines' enabling legislation (i.e. that, in promulgating 2E1.1, the Sentencing Commission failed to follow Congressional direction to maintain flexibility for individualized mitigating or aggravating factors), and that the district court erred by adding a two-level enhancement to the base offense levels of the local defendants (Barcal, Bergstrom, Fetchenhier, Schneider, and Vercillo) for the use of a special skill under Guideline 3B1.3. Neither claim has merit. First, the defendants' contention that Guideline 2E1.1 unfairly provides a high minimum base offense level and then fails to set forth specific aggravating or mitigating factors runs against the express intent of Congress in making RICO a weighty offense. As the district court observed, the very structure of the statute demonstrates that Congress has decided that a RICO conspiracy is a specific, identifiable crime apart from any underlying predicates. See United States v. Dempsey,
Second, the defendants' claim that the ability to trade at the CBOT is not a "special skill" is similarly rejected. The Commentary to Guideline 3B1.3 defines a "special skill" as one "not possessed by members of the general public and usually requiring substantial education, training or licensing." The defendants, as CBOT traders, were subject to both training and testing, including a three-day set of seminars complete with examination and registration by the National Futures Association. See Trans. at 452-53. We have no difficulty concluding that the defendants possessed a special skill under Guideline 3B1.3. See United States v. Connell,
The defendants' only remaining consolidated claim that merits discussion asserts that the district court erroneously denied their motion for mistrial because the government failed to call witnesses whose testimony it had described in its opening statement. Here's what happened: at the beginning of the trial, the prosecutor told the jury that four others who had pleaded guilty (traders Bruce Mittelstadt, Kenneth Gillen, Harry Patten, and clerk Michael Weiser) would testify for the government. The prosecutor then described what he expected those witnesses to say during the trial.9 Nevertheless, the government never called these four witnesses to the stand. At the close of all the evidence, the defendants' moved for mistrial. The district court denied the motion. See Trans. at 6414.
During their closing arguments, the defendants repeatedly pointed to the missing witnesses to support their contention that the government failed to prove its case. See, e.g., Trans. at 6773, 6861, 6864, 6911-12. In rebuttal, the government responded:
[Defense counsel] want to know where are Mittelstadt, Patten and Weiser. What would they add to this case except more time.... We have the burden of proof at all times. We welcome that burden. But if the questions were so important, they could ask them. If the documents were so telling, they could produce them. And if a witness is so helpful, they could call him.
Trans. at 7278. On appeal, the defendants contend that, given the prosecutor's statements in his opening and during rebuttal, the district court erred in denying their motion for mistrial. We disagree. Over the course of a three-month trial, this slight variance between the government's opening argument and its proofs do not amount to reversible error, and therefore, we cannot say that the district court abused its discretion in denying the defendants' motion. See United States v. Novak,
Put simply, we do not beliеve that the prosecutor's statements "undermined the fairness of the trial or contributed to a miscarriage of justice." United States v. Obregon,
B. Individual Claims
We now turn to consider the individual claims of each defendant. Because several defendants essentially argue identical positions, we will group similar claims whenever possible.
Defendants Vercillo, Ashman, and Fetchenhier claim that the evidence was insufficient to support their convictions for RICO conspiracy. Again, we view the evidence, with all reasonable inferences, in the light most favorable to the government, and will uphold the jury's verdict if any rational juror could have found guilt beyond a reasonable doubt. United States v. Aguilar,
As we made clear when we discussed the existence of a single conspiracy, see supra at 484-87, the record provides ample evidence that each defendant, including Vercillo, Ashman, and Fetchenhier, agreed to commit a pattern of racketeering activity. Their convictions on two or more predicate fraud counts, while not necessary to show conspiracy, support the jury's finding that the defendants conspired to violate the law. See United States v. Melton,
For example, when Nowak had trouble picking a price for a trade with Agent Ostrom, it was Vercillo who suggested that the prices be set to give Ostrom the maximum available profit (i.e. the highest buy price or lowest sell price). See Trans. 1586, 4208-13, 4236-37, 4505-10. Vercillo was one of Nowak's "bagmen," as were Bergstrom, Fetchenhier, and Agent Ostrom. The record even describes instances in which both Vercillo and Nowak acted as bagmen for another unindicted trader. See id. 1663-64, 4498-99. Similarly, Fetchenhier accepted losses from Nowak under the same conditions, and with same method of repayment, that is, from customers' orders. See id. at 935-36, 962-64, 985-88. Ashman followed the same procedures: he had locals absorb losses from broker errors and then matched customer orders profitably to cover them.12 See id. 1107-14, 1560-61, 3139-42. From this evidence, a rational juror could indeed have inferred that Vercillo, Ashman, and Fetchenhier agreed to commit a pattern of racketeering activity.
Defendant Cox claims that the district court erred in admitting records that showed non-indicted instances where he profitably matched orders with local traders and then received about half the profits through prearranged trades. See id. 6270-6368. Cox argues that these transactions were not admissible under Federal Rule of Evidence 404(b) ("Evidence of other crimes, wrongs, or acts is not admissible to prove the character of a person in order to show action in conformity therewith."). The government contends that these additional transactions were not Rule 404(b) evidence, but instead were used to impeach Cox's assertion that the pattern of charged acts (i.e. profitable matches followed by a return of profits) was merely a coincidence. See Government's Brief at 98. In Glecier,
Defendants Barcal and Ryan argue that the district court improperly declined to sever their trials. Barcal claims that the testimony of his co-defendants, specifically Ashman and Cox, was "diametrically opposed and antagonistic to [his] defenses." Barcal's Brief at 8. The nature of this antagonism lies in Barcal's denial of any wrongdoing, including аfter-hours trading (known as "trading on the curb") and other violations of CBOT rules. Ashman and Cox, however, testified that violations of CBOT rules were a common occurrence. For instance, Cox acknowledged curb trading thirty to forty times, and stated that he daily observed others trade on the curb. See Trans. at 6017; Cox's Brief at 4. Ashman testified to the existence of a "curb market." See Trans. at 5388; Barcal's Brief at 8. Ryan's claim for severance rests upon the fact that he was the only defendant not charged under RICO. Ryan contends that he was only a "bit player" in this tragedy and that, due to the lengthy presentation of evidence against his co-defendants, he would not be able to differentiate himself in the minds of the jurors. See Ryan's Brief at 5.
Nevertheless, the burden these defendants carry on appeal when challenging a denial of severance is heavy. As we previously have declared,
[Federal Rule of Criminal Procedure] 14 permits the trial court in the exercise of its discretion to grant separate trials when the interests of justice so require. A district court's ruling on a Rule 14 severance motion will be overturned only upon a showing of abuse of discretion. Because the balancing of the cost of conducting separate trials and the possible prejudice inherent in a single trial is best conducted by the trial court, the defendant bears an extremely difficult burden of showing on appeal the district court abused its discretion.
United States v. Moya-Gomez,
Neither Barcal nor Ryan can satisfy their burdens. Surely it is obvious that this case involved complex factual situations; the parties spent significant time educating the jury about trading futures contracts at the CBOT. The district court did not abuse its discretion by deciding to try Ryan with his co-defendants rather than select and train a separate jury for him. Nor do we find that Barcal's defense was antagonistic to the testimony of fellow defendants, specifically Ashman and Cox. Neither Ashman nor Cox admitted to fraud, nor did they accuse Barcal of any crime. Essentially both Ryan and Barcal claim that they were unfairly victimized by "spillover effects" resulting from the evidence amassed against their co-defendants. The individualized jury verdicts belie this suggestion. Of four mail and wire fraud counts, Ryan was convicted on one and acquitted on three. Similarly, Barcal was acquitted of RICO conspiracy despite convictions on nine predicate mail fraud counts. He was also acquitted on three of seven false record charges, one of ten fill-by-offset charges, and his only accommodation trading count. The jury would not have rendered these verdicts if Ryan and Barcal had been lost in the crowd of co-defendants.13
Defendant Dempsey claims that the district court erred in denying his motion to call the prosecutor as a witness at the trial. According to Dempsey, the government tried to prove his intent to defraud through an oral statement made during his initial interview by prosecutors and FBI agents, in which he allegedly admitted that he knew that his actions were illegal. See Dempsey's Brief at 3. During the government's case, when Dempsey's counsel cross-examined Nowak about his interview with agents and prosecutors, Nowak stated that the lead prosecutor in the case along with FBI agents Ostrom and Jeffrey Frank had told him that his lifestyle, his family's welfare, and the ownership of his CBOT membership "could be dramatically affected by what [he] chose to do." See Trans. 4283-86. Agent Frank testified that no threats were made. See id. 5265. During the defense case, Dempsey, whose initial interview also was conducted by the lead prosecutor as well as Agents Ostrom and Frank, did not call Ostrom to the stand, but instead asked to call the lead prosecutor to testify about what occurred at Nowak's initial interview. See id. 6315-18. Dempsey claims that the lead prosecutor's testimony was necessary to resolve the issue of whether threats were made at these initial interviews.14
A decision denying a motion to call a prosecutor as a witness falls within the district court's discretion. United States v. Watson,
Of the defendants' remaining claims, only three deserve specific attention. First, Bergstrom challenges the sufficiency of the evidence supporting his conviction for aiding and abetting broker Middelstadt to cheat and defraud a customer in violation of 7 U.S.C. §§ 6b(A) and 13c(a).16 Section 6b(A) provides:
It shall be unlawful ... for any member of a contract market ... in connection with any order to make, or the making of, any contract of sale of any commodity in interstate commerce, made, or to be made, on or subject to the rules of any contract market, for or on behalf of any person
(A) to cheat or defraud or attempt to cheat or defraud such other pеrson.
7 U.S.C. § 6b(A). Bergstrom argues that the evidence of his guilt under this statute fails because it consisted entirely of Agent Ostrom's observations. We disagree. As we have reiterated, we only will reverse a jury's verdict if no rational juror could have found guilt beyond a reasonable doubt. Aguilar,
Second, both Barcal and Schneider claim that the district court improperly quashed Barcal's subpoena of John Eggum's attorney. Eggum pleaded guilty and testified at trial for the government. See Barcal's Brief at 12-13; Schneider's Brief at 14-15. The subpoena sought to obtain counsel's notes and memoranda regarding meetings between Eggum and the attorneys for the government. See Trans. at 3015. Schneider argues that, because Eggum's testimony at trial was based upon his reconstruction of records rather than on his own recollections, Eggum's counsel's notes of his meetings with prosecutors "might have assisted in refreshing his recollection and disclosing the process by [which] his 'memory' was reconstructed." Schneider's Brief at 14-15. Counsel moved to quash, asserting attorney-client and work-product privileges. The district court granted counsel's motion and declined in camera review. The court accepted counsel's representation that her materials did not record Eggum's statements and contained only her analyses, thoughts, and strategies. See Trans. at 3015-22.
In United States v. Valona,
Finally, all the defendants claim that this court's April 29, 1992 order, see United States v. Ashman,
By order of June 26, 1991, we consolidated the appeals and "encouraged" the appellants "to avoid unnecessary duplication by filing a joint brief or a joint appendix or by adopting parts of a co-appellant's brief." And lest the meaning of "encouragement" be misunderstood we added: "Duplicative briefing will be stricken and may result in disciplinary sanctions against counsel." ... The briefs [originally] filed by the appellants are replete with duplication. The consolidated introductory brief contains no argument section at all. Rather than consolidate and streamline their presentation, the appellants have inundated the court with redundant and uncoordinated filings.
Ashman,
The defendants now argue that the April 29 order establishing page limits for the consolidated and individual briefs deprived them of effective representation on appeal. We disagree. The submitted briefs competently presented the claims and arguments of each party without unnecessary duplication. In appeals like this, where a multi-defendant conspiracy challenges their convictions, it is inevitable that some defendants will raise identical claims. The instant case is no exception. We hold that our April 29 order did not deprive the defendants of a meaningful appeal.
The defendants' remaining claims--most of which challenge the sufficiency of the evidence supporting convictions on certain counts--are without merit. As we declared in United States v. Teague,
faces a nearly insurmountable hurdle when attacking the sufficiency of evidence on appeal, even if we were to give the claim full consideration, for the standard of review is extremely deferential. Only when the record contains no evidence, regardless of how it is weighed, from which the jury could find guilt beyond a reasonable doubt, may an appellate court overturn the verdict.
Id. at 1433 (quotations omitted). In each of the defendants' challenges--save one--there was sufficient evidence for the jury to convict. On count 141, however, the government wisely concedes that the record does not reflect any evidence demonstrating that defendant Kenney improperly offset a particular sell order with a corresponding buy order. See Trans. at 1292, 1294-96. See also Kenney's Brief at 14; Government's Brief at 84 n. 52. Therefore, both Kenney's and Dempsey's convictions on that count are reversed.
For all the foregoing reasons, we AFFIRM IN PART and REVERSE IN PART. Specifically, we reverse the relevant defendants' convictions on all limit-up or limit-down transactions because of the absence of any deprivation of customers' property. We also reverse convictions under count 141 due to a failure of proof. We affirm all remaining convictions and reject the defendants' challenges to their sentences. We remand this case to the district court to enter the appropriate orders and changes in sentences made necessary by our opinion.17
CUDAHY, Circuit Judge, concurring in part and dissenting in part:
My differences with Chief Judge Bauer's incisive opinion for the majority are narrow and I write separately only to make a few essential points. The majority opinion deals admirably with the principles that should define fraud in arranged transactions on the trading floor. As to the broad concepts, therefore, I have no quarrel with the majority, but in application a more precise analysis seems to be required.
The majority has correctly rejected the argument that trading in a mode other than open outcry is fraudulent per se (although, of course, it is a violation of the rules of the Chicago Board of Trade and of the Commodities Exchange Act). It is reasonably clear, however, that, when an arranged trade has generated a "surplus" to be passed on to another party, to be credited against past losses or to be retained for use against future losses, there is sufficient evidence to support a jury verdict of guilt. Nonetheless, the government bears the burden of proving beyond a rеasonable doubt that each individual defendant specifically intended to perpetrate a fraud. The majority, I think, errs by failing to consider the specific evidence against each defendant.
As the majority opinion indicates, the trades involved here were not made at "scratch" and hence presumably involved some profit to the trader. In ordinary course, one may assume that a profit as such is not necessarily an indicator of fraud since in general some profit is required to cover transaction costs. The existence of transaction costs is the reason all trading, whether by open outcry, by matching or otherwise must, in the long run, generate a profit. But beyond the profit ordinarily generated by trading, there is in the case of fraudulent transactions, what I would call an identifiable "surplus" available to be kicked back to compensate for losses or otherwise to be applied for the benefit of someone other than the customer. It is to the generation and application of such a surplus that I would look for evidence of fraud.
As to the mail fraud counts, I find the majority's theory of culpability to be most clearly stated as follows: "By picking customer prices and opposing traders, the defendants removed their customers from the pit's competitive marketplace and forced the customers to accept the results they selected, guaranteeing profits to the local and denying the customer the opportunity to obtain a better price." Ante at 477-78. Although this general statement may accurately describe the operations of most of the defendants, the majority's formulation fails to differentiate those trades in which an identifiable surplus was applied for a trader's benefit, from trades where there is no evidence of such a surplus. Of course, in both circumstances there was a violation of CBOT rules and of the CEA; however, fraudulent intent may be inferred from the first-described circumstances but not from the second.
In this connection, the Government's own witnesses testified that customers placed MOO and MOC orders for purposes other than obtaining the most favorable price. For example, Charlotte Ohlmiller testified that an MOC order is typically made by customers "looking for a fill," e.g., by customers desiring to have a sell order executed at the closing price, usually to close out their market position, but not by those seeking a particular (high) price. Tr. vol. 15, p. 65 (Ohlmiller direct); Tr. vol. 13, p. 294 (Ohlmiller, cross by Shine). See also Tr. vol. 21, p. 3243 (Eggum direct) ("Q: Mr. Eggum, when a customer puts in a request for an order to fill a market on close, is that customer specifying a price that he wishes? A: No. Q: What is the customer's specified request on an MOC order? A: He's specifying the time that he wants the order filled."). Consequently, when executing MOC orders, traders are trying to carry out their customers' instructions, usually to reduce the customers' market exposure. It was this wish by customers to reduce risk that led some of the appellants to "trade on the curb," i.e., after authorized trading hours. Some traders, however, including many of those convicted here, may have engaged in such trading to generate excess profits--as well as to serve their customers' timing requirements. Therefore, curb trading on MOC and MOO orders can reasonably be explained on the basis of fraudulent as well as honest intent. Hence, the issue is what kind of evidence is sufficient to entitle a jury to reject honesty as an explanation and to accept fraud.
Many of the trades cited by the majority as examples of presumptively fraudulent transactions involve evidence of identifiable surpluses applied for the benefit of a party other than the customer. I quite agree that, as to these trades, the evidence is sufficient. But there are some trades where there is no evidence of (1) a price deviating from the auction market in a direction adverse to the customer or (2) an identifiable surplus applied for the benefit of someone other than the customer. For example, appellant Ashman was convicted of "matching" MOO and MOC orders on the curb.1 Ashman рresumably made a profit on these transactions, but there is no evidence that he realized more than he could have had the trades been made by open outcry. There is also no evidence that any of the other participants in the transaction owed Ashman anything and that the trade was intended to reduce their indebtedness. This evidence is in contrast to that against, for example, appellant Schneider. In Schneider's case, there is clear evidence that a portion of the profits was kicked back to other transaction participants. The existence of this identifiable "surplus," which was kicked back, supports an inference of fraud. Many more traders here resemble Schneider's situation than resemble Ashman's.
It is not enough that failure to trade by open outcry deprives a customer of an opportunity to receive the best price, for such a failure may just as well relieve the customer of the risk of getting the worst price. Many of the examples given by the majority involve money applied for the benefit of someone other than the customer. But from these examples, we should not extrapolate to the conclusion that "the jury had ample basis to conclude that [all] the defendants manipulated orders with the intent to deprive customers of better prices so that they could generate profits for themselves." Ante at 481. Therefore, I would require a showing of an identifiable surplus, as to each appellant, applied for a purpose other than the customer's benefit. The vast majority of these convictions meet this criterion, but a few do not and I think that the difference must be accounted for.
Accordingly, I respectfully dissent on this point to the extent indicated.
With respect to the adequacy of the mailings here to support mail fraud convictions, Judge Wood's opinion in United States v. Biesiadecki,
I do not think one can say that the confirmations were deficient in failing to disclose that the trades were not carried on by open outcry. A confirmation says nothing about the method of trading, and no one looks to it to disclose information on this subject. If anything, by reporting the prices at which the trades were actually made--prices somewhat adverse to the customers' interests--the confirmations might have had some tendency to alert customers to the trading improprieties. This would be precisely the reverse of the lulling effect that the majority thinks is dispositive.
As I have indicated, I think Biesiadecki controls and supports the majority opinion. But there seems to be no limitation at this point on a "lulling effect" theory. Any routine mailing in any way connected with the fraudulent activity seems to be "lulling." Not to mail confirmations here would suggest to the customers that the trades had not been made, not that they were made but at phony prices. The "lulling" rationale thus knows no real limits, but after United States v. Biesiadecki, this may be inevitable.
Notes
The fraud counts challenged by the defendants predate November 18, 1988, the effective date of 18 U.S.C. § 1346, which reinstated the "intangible rights" theory rejected in McNally. See Defendants' Consolidated Brief at 22
The relevant RICO statutes provide:
(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.
(d) It shall be unlawful for any person to conspire to violate any of the provisions of subsection (c) of this section.
18 U.S.C. § 1962(c) and (d).
The defendants raised a third claim involving RICO: that their RICO conspiracy convictions must be reversed if we overturn their mail fraud convictions. See Defendants' Consolidated Brief at 39. Because we largely affirm the defendants' mail fraud convictions (the only exception is the set of convictions involving limit-up or limit-down trades), we deny this additional claim
The CBOT also suggests that the district court's instructions failed to apprise the jury that the pattern element of 18 U.S.C. § 1962 requires more than just two instances of fraud; it demands "continuity plus relationship." See H.J., Inc.,
While two acts of racketeering activity are necessary, a finding of two such acts, in and of itself, may not be sufficient to constitute a pattern of racketeering activity. To find a pattern of racketeering, you must find that there is a relationship between the agreed-upon racketeering acts and that there is a continuity with respect to those acts.
Trans. at 7337.
CBOT Rule 310.00 explicitly limits trading to the hours during which the exchange is open, specifically 9:30 a.m. to 1:15 p.m. Traders record the time at which a specific trade took place on their trading cards or order forms by listing one of the time brackets into which the CBOT divides the entire day. CBOT Rule 320.15 assigns each half-hour segment of the day a particular letter. The letter "K" indicates the time period 1:00 p.m. to 1:30 p.m
The defendants also argue that the evidence was insufficient to support their convictions for creating false records. We disagree. That customer confirmation statements do not include time bracket information and that trades may clear without brackets being listed on the cards or orders does not undermine the significance of the traders' use of false brackets to avoid scrutiny. As the district court observed (see Trans. at 5631-32, 5639), even if a trade may clear with no time bracket listed, it would not clear if the traders had indicatеd that the trade occurred after the closing bell
The filling by offset prohibition reads,
It shall be unlawful ... to fill such order by offset against the order or orders of any other person, or willfully and knowingly and without the prior consent of such person to become the buyer in respect to any selling order of such person, or become the seller in respect to any buying order of such person.
7 U.S.C. § 6b(D).
Rule 801(d)(2)(E) provides:
(d) Statements which are not hearsay. A statement is not hearsay if--
(2) Admission by party-opponent. The statement is offered against a party and is
(E) a statement by a coconspirator of a party during the course and in furtherance of the conspiracy.
For example, the prosecutor told the jury that Michael Weiser had pleaded guilty and that he had seen certain defendants keep "cheat cards" on which they "ke[pt] track of the illegal money gained from rip offs of customers...." Trans. at 669-70. The prosecutor then explained arranged trading and stated, "That, Ladies and Gentlemen, is pre-arrangement and ripping off customers. And that was one of the ways that Nowak and Bergstrom cheated customers. And Weiser will testify about that." Id. at 672
Among his individual claims, defendant Vercillo argues that he was unfairly prejudiced by the prosecutor's remarks during rebuttal. For instance, he challenges the "improper hyperbole" the prosecutor employed when he told the jury that the federal undercover agents investigating the case previously had fought against terrorists (see Trans. at 7247, 7282) and when he compared the defendants' crimes to public corruption (see id. at 7240). We see nothing improper in the prosecutor's remarks. References to the agents' prior work were brief and were made in response to suggestions that the agents had lied under oath. Moreover, the prosecutor accused no defendant of anything beyond what was charged in the indictment. Vercillo's claim, then, is rejected
We note, however, that the government easily can avoid this type of mistake in the future by adhering to the following trial procedure: if the government wishes to end its сase-in-chief without calling all the witnesses mentioned in its opening argument, then the prosecutor should request a sidebar before resting, and inform the judge and defense counsel of his intention to end the government's case-in-chief before calling all witnesses. The prosecutor should tell the judge that if the defense intends to comment on the missing witnesses, then the government will produce those witnesses and extend the length of the trial; but if the defense will agree not to comment on the missing witnesses, then the government happily will rest upon the evidence already presented. If this procedure had been followed, then neither the government nor this court would be faced with a claim for mistrial due to prosecutorial misconduct
Ashman also claims that the evidence was insufficient for the jury to find that orders were matched in the two mail fraud counts on which he was convicted. Ashman attacks as deficient the testimony of co-defendant Eggum, the broker in both transactions. Suffice it to say that the jury was entitled to believe Eggum's testimony. Moreover, on cross-examination, Eggum rejected the contention that he had no memory of the trades and was simply interpreting the records. See Trans. at 3444-45. We see no reason the disturb the jury's decision
Barcal also argues that the prosecution violated his due process guarantees by vindictively charging him with RICO conspiracy in superseding indictments after he pleaded not guilty to the original indictment which did not include the conspiracy charge. Defense counsel asserts, "Perhaps, the Government was vindictive ... because [Barcal] was the only trader who knew that Richard Carlson was, in fact, an undercover FBI agent (named Richard Ostrom)." Barcal's Brief at 5. Barcal offers nothing to support his contention. Moreover, Barcal was acquitted of RICO conspiracy. His claim is moot
Dempsey states that Nowak admitted that the lead prosecutor and the agents "threatened" him (i.e. Nowak) during the initial interview. See Dempsey's Brief at 6. From our review of the record, we observe that Nowak never admitted tо being "threatened." That particular word was not used. Nevertheless, Nowak did portray a rather frightful first meeting between the prosecutors, the FBI agents, and the defendants. Thus, the conflict on which Dempsey bases his need for the prosecutor's testimony is between Frank's claim that no threats were made and Nowak's description of a particularly intimidating interview
The court also acted within its discretion when it held that the prosecutor's brief discussion of the conflicting testimonies during rebuttal did not cause a mistrial. Dempsey argues that by mentioning the incident, the prosecutor became an unsworn witness who was not available to be cross-examined. We disagree. The prosecutor followed the district court's admonition to restrict his comments only to matters on the record. Because the prosecutor made no reference to his presence at the interview or his personal knowledge of the incident, the district court did not abuse its discretion
Because Mittelstadt's customer was a CBOT member who did not receive his confirmation statement by mail or wire, the government charged him under § 6b rather than with mail or wire fraud
As our opinion explains, we reverse the relevant defendants' mail and wire fraud convictions on those counts that involve limit-day orders. The defendants' consolidated brief at Appendix A sets out the three particular traders, Kenney, Dempsey, and Bergstrom, who were convicted for limit-day transactions. The Appendix also identifies the particular counts: 140, 142, 158, 176, 185, 186. The government appears not to challenge this list of relevant traders and counts. We also reverse the convictions under count 141. The defendants' Appendix lists Kenney and Dempsey as the traders convicted under count 141. The government agrees. See Government's Brief at 84 n. 52
In the context of this litigation, "matching" occurred when two brokers, one holding buy orders and the other holding sell orders (or a single broker holding both), fill both the buy and sell orders with a single local in equal quantities at prices the broker had dictated, rather than by open outcry. Matching typically occurred on the curb