UNITED STATES OF AMERICA, Appellee, v. ROSS MCLELLAN, Defendant, Appellant.
No. 18-2032
United States Court of Appeals For the First Circuit
May 20, 2020
Before Howard, Chief Judge, Torruella, and Thompson, Circuit Judges.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Leo T. Sorokin, U.S. District Judge]
Martin Weinberg, with whom Kimberly Homan were on brief, for appellant.
Stephen E. Frank, Assistant United States Attorney, with whom Andrew E. Lelling, United States Attorney, was on brief, for appellee.
Because we hold that the relevant securities law covers misrepresentations of the commissions to be applied to securities trades by transition managers under the agency model, we find that the evidence was sufficient to sustain McLellan‘s convictions and that to the extent that the jury instructions may have been overbroad, any error was harmless. Moreover, we need not address whether
I. Factual Background
A. State Street‘s Transition Management Services
Because McLellan challenges the sufficiency of the evidence, we summarize the evidence in the light most favorable to the verdict. See United States v. Kanodia, 943 F.3d 499, 501 (1st Cir. 2019).
McLellan, a former executive vice president of State Street Bank (“State Street“), a Boston-based corporation, was charged with committing securities and wire fraud for his part in a scheme intended to defraud six institutional investors.
In his position, McLellan was the global head of State Street‘s Portfolio Solutions Group (“PSG“), which included its transition management services, until October 2011. During McLellan‘s tenure, State Street was one of numerous firms that competed to provide transition management services to institutional clientele. When large institutional investors, such as pension funds, transition from one asset manager to another, they typically hire a transition manager to restructure their portfolios so as to minimize the “implementation shortfall.” Transition management firms specialize in buying and selling securities on the open market on behalf of their clientele so as to reduce as much as possible the monetary losses that the supply and demand pressures of securities markets can cause during transitions.
Two models dominate the transition services market: the “principal” model and the “agency” model. Under the principal model, the firm directly buys securities from and sells securities to its client. While a transition manager in the principal model assumes the risk that it will have to make unprofitable trades to complete the
As overseer of State Street‘s transition management services, McLellan engaged Boston-based traders to buy and sell U.S. securities for State Street clients. State Street‘s clients in Europe, the Middle East, and Africa contracted with State Street through the London-based State Street Bank Europe Ltd. (“SSBEL“). Edward Pennings (“Pennings“), a critical government witness at trial, headed SSBEL‘s transition management group first as vice president and then as senior managing director; he reported directly to McLellan. Pennings spoke with McLellan daily about State Street‘s clients and trades as the transactions at issue progressed. Rick Boomgaardt (“Boomgaardt“) headed SSBEL‘S transition management desk in London. Although he reported directly to Pennings, Boomgaardt periodically communicated with McLellan about ongoing negotiations and transitions.
In the aftermath of the 2008 economic recession in the United States, McLellan, Pennings, and Boomgaardt devised a scheme to promise low commissions, or a flat fee, to potential clients with the intention of embedding large hidden commissions in the price of the securities as reported to the clients during the transition. McLellan directed Pennings and Boomgaardt to pursue this scheme for large bond-based deals because those securities were reported to clients on a “net” basis, which incorporated the commissions into the price of the security as it was represented to the client at the end of the transaction. This reporting practice would make it difficult for clients to notice the hiked-up charge. Conversely, commissions on stocks are typically reported separately from the price of the stock, allowing the client to see the precise purchase or sale price and the commission that the firm took from the transaction. On occasion, Pennings, while in his position at SSBEL, would represent to other State Street employees that the commissions were approved by the European management and were legal. At times, Pennings also relayed to other members of the team that the contracts were sufficiently vague to allow the taking of undisclosed markups despite having made affirmative representations to the contrary.
B. The Relevant Transitions
The government‘s case against McLellan hinged on seven discrete transitions that State Street handled for six clients. Those clients were: Kuwait-based Kuwait Investment Authority (“KIA“); Netherlands-based Dutch Doctors; Ireland-based National Treasury Management Agency (“NTMA“); U.K.-based Sainsbury‘s; Ireland-based Eircom; and U.K.-based Royal Mail. Each of those six clients had a master transition management agreement (“TMA“) with State Street that governed the terms of all subsequent transactions.
Institutional investors, such as these six clients, solicit bids from transition management firms through a request for proposals
1. First KIA Transition
In March 2010, KIA, a Kuwaiti sovereign wealth fund, selected State Street to manage a transition involving $2 billion in bonds. Pennings negotiated the deal with a KIA representative named Das. During the negotiations, Pennings represented to Das that State Street would conduct the transition without taking any commissions whatsoever even though Pennings always intended otherwise. Boomgaardt testified that he and McLellan decided to make a zero-commission quote in order to compete with other banks bidding on the KIA transition. After submitting the bid, Pennings represented to KIA that State Street would make money on “the other side of the transaction.” At trial, Pennings testified that this explanation to KIA was “nonsense” and meaningless because there was no way to make money on “the other side of the transactions.” Pennings did tell Das that, absent a commission, State Street would take a “spread,” but he never explained how it would be applied or how the spread would impact KIA. Pennings and Boomgaardt both testified that they were not sure if Das understood how State Street was going to make money on the deal. After the negotiations were completed, Pennings sent a periodic notice to Das with the terms of the transition agreement. This document represented in a footnote that all bonds would be priced “net” per market convention. The periodic notice, however, did not disclose that a commission would be charged on each trade. Ultimately, KIA commissioned State Street to handle half the transition and commissioned a competitor, Nomura, to handle the other half of the transition.
McLellan played an active behind-the-scenes role throughout the KIA transition. Pennings and Boomgaardt testified that the decision to submit the “zero commission” bid to KIA was not only “discussed” with McLellan but also “came from” him. Pennings told McLellan through email that McLellan was “[g]onna have to be creative,” which Pennings testified meant that McLellan, as the lead State Street executive in Boston, was going to have to apply hidden commissions on the securities transactions in the United States. After KIA accepted the bid, McLellan -- who happened to be in London at the time -- contacted Stephen Finocchi, a Boston-based trader, and asked for a report of the highest daily prices at which the bonds in question were traded. According to Boomgaardt, McLellan sought this information to ensure that the price charged with the added commissions was below the daily high to avoid tipping KIA off to the hidden commissions. Boomgaardt further testified that he and McLellan looked at the data together and decided how much commission to add to each of the bonds in the KIA transition. Despite McLellan‘s precautions, State Street still charged KIA above the reported daily high on some of the bonds, which KIA did not question. In total, State Street skimmed off $2.6 million in undisclosed commissions across the entire transition.
2. Dutch Doctors Transition
In June 2010, Dutch Doctors, a Netherlands-based pension fund for doctors, hired State Street to transition $1.6 billion in European bonds. Pennings told Dutch Doctors that State Street would conduct the transition for a commission of 1 basis point, or 0.01 percent of the aggregate value of the assets traded. After securing the contract, McLellan and Pennings learned that Dutch Doctors was contractually obligated to reserve all rights to futures trading to its asset manager, JP Morgan, which meant that the deal would yield less profit for State Street in the long run. To cover the expected losses, Pennings secretly raised the charge to 1.5 basis points, which ultimately translated to a total profit to State Street of several million dollars, including $1 million in hidden commissions.
Again, although McLellan did not communicate directly with Dutch Doctors, he was intimately involved in the scheme and the transition. On June 10, 2010, Pennings informed McLellan via email that he was going to bid on a Dutch Doctors contract, which Pennings claimed was necessary to enlist McLellan in a “push in the U.S. . . . to make sure that [State Street Global Advisors, an asset management affiliate of State Street,] would help us win this deal.” In response, McLellan encouraged Pennings to “[j]ust win, baby,” implying that Pennings should secure the contract and a good deal for State Street by any means necessary. To that end, McLellan was in the loop about and encouraged Pennings‘s plan to secretly raise the basis point for commissions to compensate State Street for the loss that it would incur in futures trading.
3. Second KIA Transition
In October 2010, KIA opened bidding for a second transition involving $4 billion in assets. State Street, through Pennings, again submitted a zero-commission bid to KIA and won the transition contract. Once again, Pennings intended to take undisclosed commissions on the transactions involved in the trading. Pennings testified that he believed that Das knew how State Street would make money on the deal.
For his part, McLellan approved Pennings‘s zero-commission bid before it was submitted to KIA. After landing the deal, McLellan requested that Pennings forward him a copy of the TMA and the periodic notice. McLellan communicated with various players throughout the transition about the commissions to be taken in the United States. He personally approved a London-based trader‘s instruction to take 18 basis points on the buy side and 2 basis points on the sell side of each of the transactions for KIA in the United States.
During the second KIA transition, State Street‘s newly established “rates desk,” an office within State Street that would directly buy and sell bonds for clients, sought permission to participate in the transition. McLellan and Pennings opposed their inclusion because of the risk that their scheme would be uncovered by others within State Street. McLellan asked Pennings if “legal” had looked at the TMA with KIA, to which Pennings responded: “[A]bsolutely not. Nor did they look at the periodic notice. This can of worms stays closed.” McLellan agreed with Pennings that they could not disclose the spread to others within State Street. Ultimately, however, McLellan did share the agreement
4. NTMA Transition
In December 2010, NTMA, an Irish government employee pension fund, sought to transition $4 billion in assets through the sale of a combination of stocks and bonds because Irish banks needed a cash injection at the time. Pennings submitted a bid for the transition with a management fee of 1.25 basis points and no commissions despite his intention to apply hidden commissions. According to Boomgaardt, he did so to beat competitors for the bid. NTMA ultimately selected State Street to handle half of the transition. With the negotiations for the contract completed, Pennings instructed Boomgaardt not to inform NTMA transition managers of the hidden commissions.
Pennings eventually renegotiated the fee to 1.65 basis points based on complications associated with the trades that NTMA sought to make. An NTMA official testified that the pension fund believed that 1.65 basis points would be the only cost of the transition and that additional commissions would not be applied. In later communications, Pennings informed McLellan of his intention to secretly increase the markup. At the conclusion of trading, the transition came in below the estimated shortfall that Pennings provided to NTMA. However, NTMA‘s representative testified that it would not have selected State Street if it had known that additional hidden commissions were going to be applied because a competitor, Citibank, would have been less expensive.
Once again, McLellan oversaw the transition from the United States. While McLellan never communicated directly with NTMA, he did approve the bid with no commission and told Pennings that the price charged to the client would have to include a hidden commission in order for State Street to make a profit, and he spoke directly with Pennings about the implementation of the scheme. McLellan reviewed the TMA and periodic notice and determined that nothing in the documents affirmatively prevented a broker-dealer from taking commissions on the trades. He then agreed to Pennings‘s proposed commissions on the transition -- 10 to 12 basis points on fixed income trades and 3 basis points on U.S. equities -- and directed traders to use a rarely-consulted stock trading account to evade State Street‘s automated systems for reporting equities trades, which would have broken down the trade by market price and commission charge in the documents given to the client. He further oversaw the trading in Boston and told traders what markdowns and markups to take on each of the transactions. At the end of the transition, State Street had taken millions in undisclosed commissions on trades for NTMA.
5. Sainsbury‘s Transition
In January 2011, Boomgaardt received an RFP from Sainsbury‘s, a pension-fund for a large supermarket chain in the United Kingdom, which he forwarded to Pennings. Boomgaardt sent Sainsbury‘s a proposal that offered to conduct the multimillion-dollar transition for a flat fee of £350,000. Boomgaardt submitted this bid
6. Eircom Transition
In March 2011, Eircom, a telecommunications company in Ireland, sought bids for transitioning approximately $1 billion in assets. Boomgaardt proposed to conduct a transition for a flat fee of €400,000, and Eircom awarded State Street the contract. Pennings indicated to Boomgaardt that the contract did not prohibit commissions and directed him to apply additional hidden commissions on trades. Pennings testified that McLellan personally approved the scheme to apply hidden commissions, which Boomgaardt understood as well. In an email to Boomgaardt in May 2011, McLellan mentioned the prospect of $1 million in revenue, which could only be achieved through the application of hidden commissions.
7. Royal Mail Transition
In March 2011, Boomgaardt and Pennings proposed a flat fee of 1.75 basis points to Royal Mail, a pension fund for postal workers in the United Kingdom, for its transition of $3.2 billion in assets. Again, Pennings intended to take undisclosed commissions of roughly 1 basis point on U.S. trades and 2 basis points on European trades. Pennings, however, forwarded a periodic notice to Royal Mail that only outlined a flat management fee for the entire transition and did not inform Royal Mail of his intention to take commissions. In an email to Royal Mail representatives, Pennings confirmed that the flat fee was the total cost for the transition. Royal Mail testified that it would not have hired State Street if it had known that hidden commissions were going to be charged.
McLellan, once again, was operating behind the scenes on the transition. Before bidding on the contract, Pennings told McLellan of the opportunity, to which McLellan emailed in response: “thin to win.” Pennings understood this email to be an endorsement of a low bid with hidden commissions to beat competitors in the market and earn substantial profits. Pennings, however, never communicated to McLellan that he had made a representation regarding the flat fee as equating the total costs. Pennings nevertheless did notify McLellan of his intent to take commissions of 1.5 to 2 basis points beyond the flat fee that he proposed. McLellan coordinated trades in the United States and instructed U.S. traders to place hidden commissions on the trades. A Boston-based trader understood that the instruction was
After receiving the final financial report on the transition in June 2011, Royal Mail contacted Pennings and inquired into State Street‘s charges because it appeared that additional commissions had been applied to the transition. Pennings initially denied that commissions had been applied but agreed to investigate the matter and then discussed the issue with McLellan. McLellan and Pennings decided to disclose only the commissions taken on trades in the United States and not those in the European market to Royal Mail. Pennings then carried out this plan and disclosed to Royal Mail that the commissions were only an issue in the United States. Boomgaardt testified that McLellan independently told him to use the term “fat-finger trading error” when discussing the commissions issue with Royal Mail. In an email, McLellan stated that those in State Street should describe the commissions as an “inadvertent commissions applied” error. Subsequently, McLellan authorized Pennings and Boomgaardt to refund the commissions on U.S. trades, totaling $1 million.
After receiving these disclosures, Royal Mail hired an independent auditor, Inalytics, to investigate the transition. McLellan and Pennings instructed Boomgaardt not to forward information to Inalytics that would disclose the European markups. Absent this information, Inalytics requested that State Street sign off on the propriety of the transition, and McLellan asked Pennings to draft a compliance letter that omitted the commissions on European securities. McLellan reviewed the letter, which provided that only $1 million had been taken in commissions and directed Boomgaardt to send it to Royal Mail. Boomgaardt, however, refused and told a London-based State Street executive about the commissions and the scheme.
In August, McLellan sought all information from Boomgaardt pertaining to Royal Mail including the RFP, the TMA, and the periodic notice. On a subsequent phone call between McLellan, Boomgaardt, and Pennings, McLellan discussed how to “message” a Royal Mail consultant “that we may have the same booking issue in the U.K. as we do in the States.” At that time, Pennings and McLellan suggested taking the position that the agreements permitted them to take hidden commissions on trades. After this phone call, McLellan, however, decided that all commissions would be refunded to Royal Mail. McLellan then directed Pennings to inform Inalytics of the European commissions and that Pennings should “come clean for everything.”
II. Procedural Background
McLellan was indicted on one count of federal conspiracy under
During the pre-trial phase, McLellan requested that the district court issue letters rogatory to the United Kingdom and Ireland to obtain documents from NTMA and Eircom. He sought internal communications from those firms pertaining to: (1) TMA compensation terms with State Street and the victims’ understanding of those terms; (2) the victims’ perception of the fees; (3) all competing bids; and (4) the victims’ perception of State Street‘s overcharges. The district court granted the
In January 2018, the Judicial Authority of Ireland notified the district court that it declined to enforce the letters and determined that an MLAT request was the only means of producing the materials. McLellan then moved for the district court to order the Executive Branch to make a request pursuant to the U.S.-Ireland MLAT. McLellan further requested that the district court order the government to exercise its MLAT powers to request documents from U.K. entities when the production of evidence was stalled within the U.K. police department.1 If the district court declined, McLellan requested that the court exclude all evidence
on NTMA and Eircom. The government opposed McLellan‘s request to compel it to exercise its treaty powers.
The district court denied McLellan‘s motion to compel on the ground that it lacked authority to do so. Additionally, it found no valid basis to grant McLellan‘s request to exclude the government‘s evidence solely because of his inability to procure additional evidence. However, the district court did note that “the more limited power available to McLellan to compel production of witnesses or documents from outside the United States as compared to within the United States potentially raise[d] fairness or due process considerations.”
At trial, McLellan objected to the district court‘s jury instructions regarding the “in connection with” and “materiality” elements of the securities fraud charge on the ground that they were overly broad. Specifically, he argued that the jury should have been instructed that the “in connection with” element was only met if the fraud was “material to a decision by one or more individuals to buy or to sell a covered security.” On the wire fraud counts, the district court held that
At sentencing, the district court was “not persuaded” that “there was an intent to defraud” on the first KIA transition and thus did not include it in the loss calculation.
On appeal, McLellan challenges each of his convictions on the same grounds that he raised below. He asserts that the district court erred in its interpretation of both the securities fraud and wire fraud statutes as well as when it refused to compel the government to exercise its powers under the U.S.-U.K. and U.S.-Ireland MLATS. We take each of these challenges in turn.
III. Securities Fraud
A. Sufficiency of the Evidence
On appeal, McLellan challenges the sufficiency of the evidence supporting his securities fraud convictions. Specifically, he argues that Security Exchange Commission (“SEC“)
We review challenges to the sufficiency of evidence de novo. See United States v. Mehanna, 735 F.3d 32, 42 (1st Cir. 2013). “This review eschews credibility judgments and requires us to take the facts and all reasonable inferences therefrom in the light most favorable to the jury‘s verdict.” Id. After reviewing the record, “a guilty verdict need not be an inevitable outcome; rather, ‘it is enough that the finding of guilt draws its essence from a plausible reading of the record.‘” Id. (quoting United States v. Sepúlveda, 15 F.3d 1161, 1173 (1st Cir. 1993)). Importantly, McLellan‘s sufficiency challenge does not take aim at the factual record itself. Instead, he challenges whether the facts in the record are sufficient to sustain a conviction for securities fraud premised on a
1.
The
To make out a criminal case of securities fraud under
The “in connection with” element requires the government to prove that the alleged misrepresentation was “material to a decision by one or more individuals (other than the fraudster) to buy or to sell a ‘covered security.‘” Hidalgo-Vélez, 758 F.3d at 106 (quoting Troice, 571 U.S. at 387). This is “satisfied only ‘where the misrepresentation [would make] a significant difference to someone‘s decision to purchase or to sell a covered security.‘” Id. (quoting Troice, 571 U.S. at 387).3 We have at times referred to the “in connection with” element as the “transactional nexus” inquiry, and under this framework, we determine whether the alleged scheme to defraud and the security transaction are sufficiently close to warrant application of
In Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, the Supreme Court interpreted parallel “in connection with” language in the Securities Litigation Uniform Standards Act (“SLUSA“), which gave it occasion to explain that
In an attempt to dissolve the nexus between his fraud and the discrete purchases and sales of securities, McLellan urges us to find that his up-front misrepresentations to clients that State Street would not be charging commissions were only material to those clients’ decisions to select State Street as a transition manager and not to their decisions to buy or sell particular securities. At its core, this argument is twofold. On the law, McLellan argues that under Troice, a misrepresentation which goes only to the selection of a transition manager is insufficient to establish securities fraud. On the facts, McLellan maintains that there is no evidence that State Street‘s zero-commissions misrepresentations would have affected a reasonable investor‘s decision about whether to buy or sell a statutorily covered security. Neither assertion persuades us. After careful review, we hold that a broker-agent who misrepresents to his prospective clients how much they will pay, or what value they will receive, for each securities trade that he makes on their behalf, commits securities fraud within the meaning of
2.
On a global level, McLellan mistakenly treats this case as if there is only one investment decision at issue for each transition: the client‘s macro-level decision that, over some period of time, it would like to transition its investment in Asset X to an investment in Asset Y. While McLellan‘s misrepresentations may not have influenced that one macro-level decision for any of the transitions, we do not understand an investor‘s choice between transition managers to be the legal equivalent of choosing between brokers to execute a purchase of a single share of stock at the prevailing price at any given time. To the contrary, as the record demonstrates, the idiosyncrasies of transition management services (as compared to run-of-the-mill brokerage services) belie McLellan‘s attempt to escape liability for his fraudulent misrepresentations.
Investors that hire transition managers are preparing to transition sizeable investment portfolios (often valued in the hundreds of millions if not billions of dollars) from one set of assets to another. Under the agency model, when the investor hires a transition manager to handle a transition, the investor turns over its portfolio to the transition manager, who enters an extended series of individual securities transactions on behalf of the investor. That the clients did not actually make those micro-level decisions themselves, instead entrusting them to State Street, does not relieve McLellan of securities fraud liability. In our view, even if a client had already made a macro-level decision about the securities it wished to buy or sell before hiring State Street, the micro-level trading decisions that the client delegates to State Street as the transition manager under the
It follows that McLellan‘s up-front misrepresentations that he would not charge commissions were “material” to those when-and-how decisions because they reasonably induced the clients to delegate those decisions to State Street as their transition manager. See Hidalgo-Vélez, 758 F.3d at 106. Moreover, while McLellan‘s after-the-fact price reports themselves may not be material to (i.e., not reasonably capable of influencing) any of the micro-level decisions that State Street made on its clients’ behalf, McLellan‘s up-front no-commission lies understated the total price that clients would ultimately pay or receive for the securities that State Street bought and sold on their behalf. In other words, those lies also translated into back-end price inflation, which was necessary to conceal and complete the fraud. And it is well-settled that the price of a security is material to a reasonable investor‘s buy-sell decision. See Rayner v. E*Trade Fin. Corp., 899 F.3d 117, 122 (2d Cir. 2018) (“It is frivolous to suggest that negatively influencing the price and quantity at which clients may buy and sell securities would not ‘make[] a significant difference to someone‘s decision to purchase or to sell a covered security.‘” (alteration in original) (quoting Troice, 571 U.S. at 387)).
Together, this is enough to satisfy
3.
We find clear support for this position in several lines of precedent. First, we look to SEC v. Zandford, where the client gave the defendant-broker control over his investment account, and the broker then “sold the [client‘s] securities while secretly intending from the very beginning to keep the proceeds.” 535 U.S. 813, 824 (2002). There, the Supreme Court held that the fraud satisfied the “in connection with” requirement because a broker “who sells customer securities with intent to misappropriate the proceeds, violates
And that is just what happened here; McLellan induced clients to delegate to him a whole set of investment decisions -- i.e., the micro-level decisions about when
The Second Circuit‘s decision in United States v. Litvak is also consistent with our conclusion. 808 F.3d 160, 167-68 (2d Cir. 2015) (Litvak I). To lay out the facts, Litvak was a residential mortgage-backed securities (“RMBS“) broker-dealer who acted as a principal, buying and reselling RMBS to investor-buyers (the victims). In one of his schemes, he bought RMBS from third-party sellers for one price, then lied to the investor-buyers by saying that he had paid a higher price, effectively hiding an undisclosed markup. See Litvak I, 808 F.3d at 167-68. The Second Circuit held that there was enough evidence for a securities fraud conviction because, in the opaque market for RMBS (where investors have to rely on brokers to tell them what prices the securities are selling for), a broker-dealer‘s misrepresentations to investor-buyers about the price he paid for the RMBS can inflate the price at which the investor-buyer ultimately agrees to pay for it. See id. at 167-68 nn.5-7, 175-76. Therefore, although the buyer-victims in Litvak did not pay Litvak any more than the price they negotiated to pay him, they would have negotiated a lower price if they had known Litvak had bought cheaper than he let on (or so a jury could find). Id.; see also United States v. Litvak, 889 F.3d 56, 67 (2d Cir. 2018) (Litvak II). As here, the broker fraudulently induced the victims to pay more per trade (in the amount of a hidden markup) than they would have paid otherwise.
Along those lines, McLellan cites a pair of Eleventh Circuit decisions to support his contention that, legally, a misrepresentation which goes only to the selection of a transition manager is insufficient to establish securities fraud: Brink v. Raymond James & Assocs., Inc., 892 F.3d 1142 (11th Cir. 2018); and SEC v. Goble, 682 F.3d 934 (11th Cir. 2012). However, a closer inspection leads to the conclusion that McLellan‘s case is actually even clearer than Litvak, and distinct from Goble and Brink, because State Street‘s clients, unlike the victims in the Eleventh Circuit cases, did not know “how much [they were] being
In Goble, the owner of a brokerage firm directed an employee to record a fake transaction in the company‘s books in order to avoid SEC regulations requiring businesses to set aside a certain amount of funds. 682 F.3d at 939-40. The Eleventh Circuit determined that this activity was a “misrepresentation that would only influence an individual‘s choice of broker-dealers,” and it was therefore not material to an investment decision to purchase or sell securities. Id. at 944. In Brink, a broker misrepresented to clients the purpose of a “processing fee” by indicating that the fee was used to facilitate securities trades but then also built a commission into the fee. 892 F.3d at 1144-45. The Eleventh Circuit held that a misrepresentation that only goes to “the choice of a type of investment account . . . is not intrinsic to the investment decision itself.” Id. at 1148-49. However, the Eleventh Circuit emphasized in Brink that the defendant “did not ‘mislead [its] customers as to what portion of the total transaction cost was going toward purchasing securities versus the cost of the broker‘s involvement.‘” Id. at 1149 (quoting Litvak I, 808 F.3d at 176) (alteration in original). Thus, because the fee was fully disclosed prior to the transaction, the Eleventh Circuit could conclude that “a reasonable investor would [not] have made different investment decisions.” Id.
These factual distinctions between McLellan‘s fraud (i.e., that of a transition manager under the agency model) and the misrepresentations at issue in Brink and Goble are critical. While the fraud in Brink and Goble may have been relevant to an investor when deciding whether to do business with the broker generally, the Eleventh Circuit determined that it did not influence the narrower decision to purchase or sell the securities through that transaction, and thus it lacked the close nexus required to prove
These types of misrepresentations could be fairly regulated by competition in the marketplace (as opposed to the
By contrast, McLellan‘s misrepresentations concerned the costs of the trades themselves and required McLellan to distort the prices of the securities that his firm traded on the back end to conceal (and complete) the fraud. That is precisely why, under the agency model of transition management services, McLellan‘s no-commission lies have a tight-enough nexus to the relevant securities transactions to fit “comfortably within the confines of the ‘in connection with’ requirement.” Hidalgo-Vélez, 758 F.3d at 107. For the foregoing reasons, misrepresentations that influence the choice of a transition manager under the agency model, unlike the choice of a run-of-the-mill broker-dealer, necessarily affect who makes the micro-level trading decisions, and therefore, the statutorily relevant investment decisions themselves.
Circling back to Litvak, McLellan also tries to distinguish the case on its facts because there, he suggests, the fraud influenced the victims’ decisions about whether to buy or sell the covered securities at all, not just what price to pay or when to trade. But from Zandford, we
Moreover, from Dabit, we know that the choice of when to buy or sell a security, which itself often affects how much you pay or receive from the sale, is itself a significant investment decision that the
4.
Our conclusion that McLellan‘s up-front misrepresentations satisfy the “in connection with” requirement is also bolstered by the long line of cases finding that the taking of undisclosed markups constitutes securities fraud. See Grandon v. Merrill Lynch & Co., 147 F.3d 184, 193 (2d Cir. 1998) (finding that undisclosed excessive markups violated
First, to be sure, McLellan is right that there is no finding that the commissions were “excessive” in some abstract sense. There is no allegation here that State Street‘s markups were not “reasonably related to prices charged in an open and competitive market.” Grandon, 147 F.3d at 189. However, the rationale underlying the undisclosed markup cases is that broker-dealers make an “implied representation
Second, there are reasons to be skeptical that Troice had such a major impact on what conduct is prosecutable as securities fraud. For instance, in Troice, the Supreme Court “specif[ies] at the outset that [the] holding does not limit the Federal Government‘s authority to prosecute frauds like the one here,” or otherwise “limit[] the Federal Government‘s prosecution power in any significant way.” 571 U.S. at 381 (internal quotation marks omitted). McLellan essentially asks that we ignore that language and apply Troice to limit the Federal Government‘s ability to prosecute anyway. We decline the invitation.
5.
Finally, we note that McLellan‘s behavior is the type of fraudulent behavior which was meant to be forbidden by the
it purports to be.” Chem. Bank v. Arthur Andersen & Co., 726 F.2d 930, 943 (2d Cir. 1984). And in Troice, the Supreme Court was clear that brokers, accountants, investment advisors, and others who “give advice, counsel, and assistance in investing in the securities markets” remain subject to the federal securities laws unless they “do not sell or participate in selling securities traded on U.S. national exchanges.” Troice, 571 U.S. at 390. Transition management services are important to institutional investors restructuring huge portfolios, and if those investors cannot trust transition managers to tell them how much the transition will cost, their services lose much of their value to the national securities markets and their participants, potentially influencing investors’ decisions about whether to move at all. See Zandford, 535 U.S. at 823 (noting that if investors “cannot rely on a broker to exercise [its] discretion for their benefit, then the [brokerage] account loses its added value“).
So by our lights, a broker-agent‘s misrepresentation is material to statutorily relevant investment decisions if it would reasonably influence an investor‘s choice to entrust the agent with the decisions of when, at what price, and in what
We therefore conclude that the Troice standard is satisfied, and we decline to find that misrepresentations that only affect the selection of a transition manager necessarily lack a tight-enough nexus to qualify as securities fraud within the meaning of
B. Instructional Error
Relatedly, McLellan takes issue with the district court‘s instruction to the jury regarding the “in connection with” element of
As to
This requirement is satisfied if you find that Mr. McLellan‘s alleged conduct in some way touched upon or coincided with a securities transaction; that is, that the alleged fraud or deceit had some relationship to the individual sales or purchases.
(emphasis added). The court further instructed the jury that it could find the materiality component of the “in connection with” element satisfied if there was a “substantial likelihood that a reasonable investor engaging a transition manager would view the statement as significantly altering the total mix of information available.” McLellan objected to both instructions as overbroad because they could have enabled the jury to convict him based on a theory of misrepresentations that do not satisfy the updated and narrower “in connection with” requirement. Instead, McLellan requested to have the jury instructed that the “in connection with” element was only met if the fraud was “material to a decision by one or more individuals to buy or to sell a covered security.” He further requested that “material” be defined as “meaningfully affect[ing] a reasonable investor‘s consideration about whether to buy or sell a security, and at what price.”
On its face, the framing used by the district court in its “in connection with” jury instructions displays some degree of overbreadth. We have indeed interpreted Troice to cabin the “in connection with” requirement, such that the fraud (as we have explained above) must be one that would make a significant difference to a reasonable investor‘s decision to purchase or sell securities rather than merely touch upon or coincide with a discrete securities transaction. See Hidalgo-Vélez, 758 F.3d at 106. In other words, the government must establish that the misrepresentation would make “a significant difference to someone‘s decision to purchase or to sell a covered security,” not merely that it was, in some sense, related to that decision. Id. (quoting Troice, 571 U.S. at 386-87). Nevertheless, it is not clear either that Troice should be read to require a narrower jury instruction. For one, the instructional language here is drawn in part from Dabit, which Troice explicitly indicated that it did not modify. Plus, Dabit rejected the proposition that the “in connection with” element is satisfied “only when the plaintiff himself was defrauded into purchasing or selling particular securities” and holds that to find securities fraud, “it is enough that the fraud alleged ‘coincide’ with a securities transaction.” Dabit, 547 U.S. at 85.
However, even assuming the instructions were overbroad, such a finding would not warrant overturning the conviction if the potential error in the jury instruction were harmless. Where a potentially erroneous instruction deals with an “essential element of the crime,” United States v. Doherty, 867 F.2d 47, 58 (1st Cir. 1989), it is harmless if “it appears beyond a reasonable doubt that the error complained of did not contribute to the verdict obtained.” United States v. Wright, 937 F.3d 8, 30 (1st Cir. 2019) (internal quotation marks omitted). “An erroneous instruction on an element of the offense can be harmless beyond a reasonable doubt, if, given the factual circumstances of the case, the jury could not have found the defendant guilty without making the proper factual finding as to that element.” Doherty, 867 F.2d at 58; see also Pope v. Illinois, 481 U.S. 497, 503 (1987). The government bears the burden of proving “that an instruction that is constitutionally flawed is harmless.” Wright, 937 F.3d at 30. In order to engage in this inquiry, we must “review[] the entire record” and “consider[] the likely impact of the error on the minds of the jurors.” Doherty, 867 F.2d at 58; see also Neder v. United States, 527 U.S. 1, 19 (1999).
After doing so, we having little difficulty concluding that, even assuming the “in connection with” jury instructions were overboard, any potential error was harmless beyond a reasonable doubt. The government‘s case was premised on McLellan‘s up-front misrepresentations that State Street would not take commissions from the securities trades it made on behalf of its clients as part of their transition, which as a matter of law, satisfy the transactional nexus requirement under
Therefore, to the extent that the jury instruction as to the “in connection with” element of
IV. Wire Fraud
Next, McLellan challenges his conviction for wire fraud. He argues that the federal wire fraud statute,
“A district court‘s refusal to give a requested instruction is reviewed de novo.” United States v. Figueroa-Lugo, 793 F.3d 179, 191 (1st Cir. 2015) (emphasis added). The defendant must present evidence sufficient to show “that he was entitled to the instruction.” Id. “The initial threshold determination we must make is whether the evidence, viewed in the light most favorable to the defense, ‘can plausibly support the theory of the defense.‘” Id. (quoting United States v. Gamache, 156 F.3d 1, 9 (1st Cir. 1998)). If the evidence is sufficient, we then move onto a three-part test where the district court is reversed only if the proffered instruction was “(1) substantively correct as a matter of law, (2) not substantially covered by the charge as rendered, and (3) integral to an important point in the case so that the omission of the instruction seriously impaired the defendant‘s ability to present his defense.” United States v. Baird, 712 F.3d 623, 628 (1st Cir. 2013).
McLellan‘s argument that he is entitled to the domestic application instruction he seeks is only plausible if the wire fraud statute does not apply extraterritorially. Otherwise he may properly be convicted based on foreign conduct, “barring some other limitation.” RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 2101 (2016) (quoting Morrison v. Nat‘l Aus. Bank Ltd., 561 U.S. 247, 267 n.9 (2010)).
A. Extraterritorial Reach of § 1343
We review the extraterritorial application of a statute in two steps. First,
second step we determine whether the case involves a domestic application of the statute.” RJR Nabisco, 136 S. Ct. at 2101.
While it is “usually . . . preferable for courts to proceed in [this] sequence,” we may “start[] at step two in appropriate cases.” Id. at 2101 n.5. We do so when it is “plain” that a domestic application is present but the statute itself gives rise to complex questions of congressional intent. Cf. Pearson v. Callahan, 555 U.S. 223, 236-37 (2009) (noting efficiency benefits of skipping to second step of qualified immunity analysis). “One reason to exercise that discretion is if addressing step one would require resolving ‘difficult questions’ that do not change ‘the outcome of the case,’ but could have far-reaching effects in future cases.” WesternGeco LLC v. Ion Geophysical Corp., 138 S. Ct. 2129, 2136 (2018) (quoting Pearson, 555 U.S. at 236-37).
Because
B. Domestic Application of § 1343
We determine whether the wire fraud statute applies domestically based on the facts at hand “by identifying the statute‘s focus and asking whether the conduct relevant to that focus occurred in United States territory.” WesternGeco LLC, 138 S. Ct. at 2136 (internal quotation marks omitted). A statute‘s “focus” is the “object of its solicitude.” Id. at 2137 (noting that the “focus” includes the “conduct it seeks to regulate, as well as the parties and interests it seeks to protect or vindicate” (alternations and internal quotation marks omitted)).
To be convicted of wire fraud, the government must establish (1) “a scheme to defraud“; (2) “knowing and willful participation in the scheme with the intent to defraud“; and (3) “the use of interstate or foreign wire communications to further that scheme.” United States v. Valdés-Ayala, 900 F.3d 20, 33 (1st Cir. 2018) (internal quotation marks omitted). As we have previously found, the structure, elements, and purpose of the wire fraud statute indicate that its focus is not the fraud itself but the abuse of the instrumentality in furtherance of a fraud. See United States v. Gordon, 875 F.3d 26, 37 (1st Cir. 2017) (“[I]n enacting the mail and wire fraud statutes, Congress took aim at the means of conducting a substantive offense, not at the substantive offense itself.“); see also Pasquantino v. United States, 544 U.S. 349, 358 (2005) (“[T]he wire fraud statute punishes fraudulent use of domestic wires.“); Bascuñán v. Elsaca, 927 F.3d 108, 122 (2d Cir. 2019) (analyzing the elements of
A statute is applied domestically “[i]f domestic conduct satisfies every essential element to prove a violation . . . even if some further conduct contributing to the violation occurred outside the United States.” European Cmty., 764 F.3d at 142; see also RJR Nabisco, 136 S. Ct. at 2101 (“If the conduct relevant to the statute‘s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad.“).
This framework is easily met in this case. The district court instructed the jury that it could only convict McLellan if a “wire communication” was sent by him or was caused to have been sent by him. The district court defined “wire communication” to include only “a telephone communication or email from one state to another or between the United States and another country.” It finally instructed the jury that the wire communication need not be “essential to the scheme” but “must have been made for the purpose of carrying out the scheme.”
While McLellan argues that he could have been convicted for one stray domestic wire, this glosses over the indictment and the district court‘s instructions. The
Given the instructions, the jury was required to find (1) that the emails were sent or caused to be sent to, from, or
As we deal with an instance where a domestic defendant sent or received communications on behalf of a domestic corporation through domestic wires in a scheme that was in part implemented domestically, we need not at this stage determine where the precise line is between domestic and foreign activity “because wherever that line should be drawn, the conduct alleged here clearly states a domestic cause of action.” European Cmty., 764 F.3d at 142.7
However, we make clear what is implied in the Second Circuit decisions. Where a defendant is charged with wire fraud based on having sent or received wire communications while in the United States for the purpose of carrying out a scheme to defraud, the wire fraud statute has been applied domestically even if the victim is located outside of the United States. See European Cmty., 764 F.3d at 139 (rejecting conclusion that the presumption against extraterritoriality “insulat[es] purely domestic conduct from liability simply because the defendant has acted in concert with a foreign enterprise“); see also Elbaz, 332 F. Supp. 3d at 974 (“[I]t does not matter if the bulk of the scheme to defraud involves foreign activity[] [b]ecause the focus of the wire fraud statute is misuse of U.S. wires to further a fraudulent scheme.“). That the fraud is ultimately conducted through foreign wires does not mitigate this finding; the jury was required to find that McLellan‘s use of domestic wires was in furtherance of the fraud against the foreign victim. See Pasquantino, 544 U.S. at 371
(finding domestic application where domestic wires were used to organize a scheme to defraud a foreign sovereign in that foreign sovereign‘s territory). It is McLellan‘s domestic conduct through domestic wires that spurred his prosecution. See id.
Not only was the instruction in effect tailored to require a domestic application, the evidence was more than sufficient to find a domestic application. On the large scale, the jury heard substantial evidence
V. Mutual Legal Assistance Treaties
Finally, McLellan asserts that the Due Process Clause of the
We review the district court‘s determination that it lacked the power to order the government to make an MLAT request de novo because it “turn[s] on an interpretation of law.” Obiora, 910 F.3d at 560. The district court determined that it lacked the authority “to compel the government to exercise its rights under any of the relevant MLATs on behalf of, or for the benefit of, a private person.” First, to support its ruling, it quoted our decision in United States v. McIntyre (In re Price), 685 F.3d 1, 11 (1st Cir. 2012) (internal quotation marks omitted) (hereinafter “Price I“) for the proposition that “treaties do not generally create rights that are privately enforceable in the federal courts.” Second, it referenced United States v. Rosen, 240 F.R.D. 204, 214-15 (E.D. Va. 2007), which “not[ed] that no court has held that a defendant‘s compulsory process rights are violated when the executive branch declines to exercise a treaty power to compel testimony of a non-American in another country.” McLellan challenges both rationales.
Our opinion in Price I is the lodestar for the MLAT origin story and the appropriate law to apply when private individuals seek MLAT relief. As the district court noted, “treaties do not generally create rights that are privately enforceable in the federal courts.” United States v. Li, 206 F.3d 56, 60 (1st Cir. 2000) (en banc).9
the part of any private person to obtain, suppress, or exclude any evidence, or to impede the execution of a request.” U.S.-U.K. MLAT, art. 1, ¶ 3. In relevant part, the U.S.-Ireland MLAT is a carbon copy. See U.S.-Ireland MLAT, art. 1, ¶ 4.
However, we recognize that McLellan seeks relief under the Constitution and only indirectly invokes the MLATs. By asking the district court for an order to compel the government to exercise its treaty powers to request potentially favorable evidence to his case from foreign countries, McLellan seeks to protect his due process rights rather than “to vindicate a private treaty right.”10 It is well-settled law that “no agreement with a foreign nation can confer power on the Congress, or on any other branch of Government, which is free from the restraints of the Constitution.” Boos v. Barry, 485 U.S. 312, 324 (1988) (quoting Reid v. Covert, 354 U.S. 1, 16 (1957) (plurality opinion)). As the Ninth Circuit has noted, those restraints certainly include “the separation of powers and the guarantee of due process.” In re Premises Located at 840 140th Ave. NE, Bellevue, Wash., 634 F.3d 557, 571-72 (9th Cir. 2011) (citing Am. Ins. Ass‘n v. Garamendi, 539 U.S. 396, 416 n.9 (2003) (holding that treaties are
“[s]ubject . . . to the Constitution‘s guarantees of individual rights“)). McLellan submits that because MLATs create an “evidence-gathering imbalance” in criminal cases where the charges include conduct occurring abroad, the related guarantees of the Due Process Clause of the
As McLellan notes, we have held that district courts possess the authority to quash a subpoena issued by the government pursuant to a U.S.-U.K. MLAT request. United States v. Trs. of Bos. Coll. (In re Price), 718 F.3d 13, 23 (1st Cir. 2013) (hereinafter “Price II“). Our reasoning was based on the observation that “[n]othing in the text of the U.S.-U.K. MLAT, or its legislative history . . . lead[s] us to conclude that the courts of the United States have been divested of an inherent judicial role that is basic to our function as judges.” Id.11 Relying on Price II, McLellan contends that if separation of powers
justifies a trial court‘s retention of
First, our line of cases involving MLAT subpoenas is readily distinguishable from the predicament that McLellan faces. In Price I and Price II, the Executive Branch exercised its diplomatic discretion to comply with the United Kingdom‘s MLAT request for information related to an ongoing investigation into a casualty from the conflict in Northern Ireland. See Price II, 718 F.3d at 16-17. Accordingly, the U.S. government issued two subpoenas through an appointed commissioner, see
Since the U.S. government has not exercised its discretion to pursue evidence through the relevant MLATs, McLellan effectively urges the Court to find that the MLATs have expanded the role of the judiciary to include the ability to compel the government to seek the type of evidence he requests. Separation of powers surely cannot be stretched so far in this direction as to provide an avenue for a district court to compel a co-equal branch to take certain action on behalf of a private individual without textual or statutory direction.12 Quite the opposite of Price II, here, it would offend separation of powers principles to permit the Judiciary to “impair” the Executive “in the performance
of its constitutional duties.” Price II, 718 F.3d at 22 (quoting Clinton v. Jones, 520 U.S. 681, 701 (1997)). The Constitution may protect individuals in the United States from subpoenas to comply with foreign MLAT requests, but it generally does not vest criminal defendants with the power to compel the government to lodge diplomatic requests on their behalf. See United States v. Sedaghaty, 728 F.3d 885, 917 (9th Cir. 2013) (“[T]he district court had no authority to order the Executive Branch to invoke the treaty process to obtain evidence abroad for a private citizen.“).13 A contrary finding could potentially open
trial as other countries respond to those requests. Id. (noting distinctions between immunity context and international treaties).14
Second, despite McLellan‘s protestations, our holding in United States v. Theresius Filippi, 918 F.2d 244 (1st Cir. 1990), does not dictate otherwise. The
Theresius Filippi featured a criminal defendant facing drug trafficking charges who was unable to secure the presence of a key corroborating witness located in Ecuador due to government inaction. 918 F.2d at 245-46. Since the district court judge determined that the witness was material and that his testimony would have been favorable to the defense, our analysis concerned the attributability and causation prongs of the Hoffman test. Id. at 247. We recognized that “the right of compulsory process does not ordinarily extend beyond the boundaries of the United States.” Id. However, we determined that the government‘s subpoena power abroad was not at issue because the witness was willing -- and indeed intended -- to testify at trial but for his inability to “overcome the immigration hurdles blocking his entry into the United States.” Id. In our view, the “onus” was therefore on the government “merely to make it possible” for the witness to
McLellan‘s case is readily distinguishable on the causation and favorability prongs of the Hoffman test. First, McLellan has not established that the U.S. government actually or proximately caused the absence of the evidence he seeks. The omission in this case is the government‘s discretionary decision not to initiate MLAT requests for evidence on McLellan‘s behalf when the letters rogatory failed to achieve the desired result. However, while the government may request evidence through the MLAT process, it cannot guarantee compliance. See United States v. Mejía, 448 F.3d 436, 444 (D.C. Cir. 2006) (“Having the authority ‘to seek’ tapes or transcripts through a treaty is not the same thing as having ‘the power to secure’ them.“); United Kingdom v. United States, 238 F.3d 1312, 1317 n.5 (11th Cir. 2001) (“[C]ompliance with an MLAT request is not mandatory with respect to records held by governmental agencies.“). The Judicial Authority of Ireland‘s reply to the district court‘s letters rogatory statement that it understands the U.S.-Ireland MLAT to be the appropriate avenue for requesting evidence refers to a protocol, but it does not promise results.
McLellan‘s claim also stumbles on the favorability element. Although the district court acknowledged that the evidence McLellan sought was material to his case (specifically to the materiality component of securities fraud), McLellan failed to provide a plausible showing that the evidence would be favorable to his defense. See Hoffman, 832 F.2d at 1303 (“There must be a plausible showing that the testimony was both material and favorable to the defense.“). McLellan sought information from Ireland-based Eircom and NTMA pertaining to (1) internal communications related to the firms understanding of the offer from State Street, (2) communications regarding the fees, (3) competing bids, and (4) communications related to overcharges. While McLellan argues strenuously that the evidence was necessary to cross-examine witnesses on the securities fraud counts, he presented no plausible basis for the district court to determine that the evidence in the possession of those firms contained information that could have led to an acquittal, and he concedes that he does not know the contents of the documents that he seeks. See id.15 His arguments only demonstrate that the evidence was
material, but he has not demonstrated that the evidence would have been favorable. A showing of materiality, alone, is insufficient to show favorability. Id.; see also United States v. Combs, 555 F.3d 60, 63-64 (1st Cir. 2009) (rejecting criminal defendant‘s claim that “it [was]
We conclude, therefore, that the district court does not have the authority to compel the government to issue MLAT requests. Nor is the “onus” on the government in this case to “make it possible” for the defendant to obtain, via an MLAT request, evidence that he cannot establish is favorable to his case. Theresius Filippi, 918 F.2d at 247. Thus, we find no reversible error. However, we believe it important to note that we do not disagree that the text of the MLATs at issue do not explicitly preclude the government from using its discretion to lodge requests on behalf of criminal defendants. Prosecutors have a duty to “act in accordance with the obligations imposed on [them] as . . . agent[s] of justice,” id. at 246, and where practicable, deploying the government‘s MLAT capabilities in such a manner would be a just way of fulfilling those obligations.16 However, where,
as here, a criminal defendant makes no plausible showing that the government could have secured evidence that is both material and favorable to his defense, we have little difficulty concluding that the prosecutors did not violate this duty.
VI. Conclusion
Accordingly, we affirm McLellan‘s convictions on all counts.
Affirmed.
Notes
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both.