UNITED STATES of America, Appellee, v. Raj RAJARATNAM, Defendant-Appellant.
Docket No. 11-4416-cr.
United States Court of Appeals, Second Circuit.
June 24, 2013
Argued: Oct. 25, 2012.
At any rate, we need not decide whether implementing a policy that categorically distinguishes between leaves of absence for mental illness and for other health-related needs might, on a different record, pose a risk of harm sufficiently obvious as to establish a defendant‘s subjective awareness of it. For on the record here, Spavone has failed to raise a genuine issue that Fischer or Joy knew that such a policy would cause him serious harm, much less harm so serious that it would be objectively unreаsonable for them to believe that the policy was consistent with Spavone‘s right to be free of cruel and unusual punishment. This entitles Fischer and Joy to qualified immunity. See McKenna v. Wright, 386 F.3d 432, 437 (2d Cir. 2004).
CONCLUSION
For the foregoing reasons, we reverse the judgment of the district court, direct dismissal of the § 1983 claims against the individual Defendants-Appellants, and remand for further proceedings.
Andrew L. Fish (Reed Brodsky, on the brief), Assistant United States Attorneys, for Preet Bharara, United States Attorney for the Southern District of New York, New York, NY, for the United States of America.
Lawrence S. Lustberg, Alicia L. Bannon, Gibbons P.C., Newark, NJ, for Amici Curiae Retired Federal Judges.
Vinoo P. Varghese, Varghese & Associates, P.C., New York, NY, for Amici Curiae National Legal Aid & Defender Association and the Bronx Defenders.
Tai H. Park, Park & Jensen LLP, New York, NY; G. Robert Blakey, Notre Dame Law School, Notre Dame, IN, for Amicus Curiae Professor G. Robert Blakey.
Before: CABRANES, SACK, and CARNEY, Circuit Judges.
JOSÉ A. CABRANES, Circuit Judge:
In this “insider information” securities fraud case, we consider two issues on appeal raised by defendant-appellant Raj Rajaratnam. The first issue is whether the United States District Court for the Southern District of New York (Richard J. Holwell, Judge) should have suppressed the evidence obtained by the government‘s wiretap of Rajaratnam‘s cell phone. Specifically, Rajaratnam argues that the District Court erred by applying the analytical framework set forth in Franks v. Delaware, 438 U.S. 154 (1978), to determine whether suppression was warranted, and by concluding that the alleged misstatements and omissions in the government‘s wiretap application did not require suppression.1
The second issue concerns the District Court‘s instruction to the jury that it could convict Rajaratnam of securities fraud if the “material non-public information given to the defendant was a factor, however small, in the defendant‘s decision to purchase or sell stock.” Rajaratnam contends that this instruction was in error and requires us to vacate the substantive counts of conviction for securities fraud (Counts 6 through 14).
Rajaratnam‘s arguments are not persuasive. In affirming the judgment of conviction, we conclude that: (1) the District Court properly analyzed the alleged misstatements and omissions in the government‘s wiretap application under the analytical framework prescribed by the Supreme Court in Franks; (2) the alleged misstatements and omissions in the wiretap application did not require suppression, both because, contrary to the Distriсt Court‘s conclusion, the government did not omit information about the SEC investigation of Rajaratnam with “reckless disregard for the truth,” and because, as the District Court correctly concluded, all
BACKGROUND
Rajaratnam founded and managed the Galleon Group (“Galleon“), a family of hedge funds. When Galleon was at its pinnacle, the fund employed dozens of portfolio managers, analysts, and traders, and invested billions of dollars of client funds.
In 2011, Rajaratnam was indicted on five counts of conspiracy to commit securities fraud, in violation of
A. The Wiretap Application
Beginning in 2007, the United States Attorney‘s Office for the Southern District of New York (“USAO“) and the Federal Bureau of Investigation (“FBI“) began investigating Rajaratnam based on suspicions that he was using inside information in executing certain securities transactions. On March 7, 2008, the government sought authorization to wiretap Rajaratnam‘s cell phone. The wiretap application was submitted to then-United States District Judge Gerard E. Lynch and sworn to by then-Assistant United States Attorney (“AUSA“) Lauren Goldberg. It included a 53-page affidavit sworn to by FBI Special Agent B.J. Kang.2 The wiretap application stated that its purpose was to identify Rajaratnam‘s network of alleged inside sources, to learn how the asserted conspirators operated, and to provide admissible evidence for possible criminal prosecutions. See id. at 72.
Title III of the Omnibus Crime Control and Safe Streets Act of 1968 (“Title III“),
To establish “probable cause,” the wiretap application set forth, inter alia, statements made by Rajaratnam to Roomy Khan (identified as “CS-1“), as well as summaries of conversations between Khan and Rajaratnam that Khan had recorded, which indicated that Rajaratnam and Khan were exchanging material, non-public information used to trade securities. See Joint App‘x 77-81. To establish “necessity,” the wiretap application stated, inter alia, that “normal investigative techniques,” such as physical surveillance, federal grand jury subpoenas for witness testimony, review of trading records, witness interviews, use of confidential informants, and placement of undercover agents, had been tried and had “failed or reasonably appear[ed] unlikely to succeed if tried.” Id. at 58, 102-12.
On the basis of these representations, Judge Lynch authorized the wiretap of Rajaratnam‘s cell phone on March 7, 2008. Seven subsequent wiretap applications were also approved. See note 1, ante. On October 16, 2009, based in large part on evidence obtained from the wiretap of Rajaratnam‘s cell phone, Rajaratnam was arrested and charged with multiple counts of securities fraud. He was indicted two months later. A Superseding Indictment was returned on February 9, 2010, and a Second Superseding Indictment was returned on January 20, 2011.
B. Rajaratnam‘s Suppression Motion
On May 7, 2010, Rajaratnam filed a motion to suppress the evidence obtained through the wiretap of his cell phone, claiming that the wiretap application contained certain misstatements and omissions. As relevant here, Rajaratnam took issue with the statements supplied on the government‘s wiretap application regarding both “probable cause” and “necessity.”
On the question of “probable cause,” Rajaratnam argued that the government made misstatements and omissions regarding the reliability of Roomy Khan. In particular, he observed that the wiretap application stated that Khan “ha[d] not yet been charged with any crimes,” Joint App‘x 77, and “ha[d] been cooperating with the FBI since approximately November 2007,” id. at 77 n. 4. In fact, in 2001, Khan was indicted and pleaded guilty to felony wire fraud and, in 2002, she began cooperating with the government in an earlier investigation involving Rajaratnam. Rajaratnam also asserted that the wiretap application included two paraphrased summaries of recorded conversations between Khan and Rajaratnam that mischaracterized the actual recorded conversations, as we describe in detail below. See Background Part C.ii.a., post.
On the question of “necessity,” Rajaratnam argued that the wiretap application improperly omitted the fact that Rajaratnam and Galleon had been the subject of an ongoing SEC investigation, which led
C. The Franks Hearing
i. The Analytical Framework of Franks v. Delaware
The District Court then decided whether to hold a hearing for the purpose of considering Rajaratnam‘s suppression motion. In doing so, it noted that “[w]here a defendant makes a preliminary showing that the government‘s affidavit misstated or omitted material information, Franks instructs a district court to hold a hearing to determine” whether the alleged misstatements or omissions in the warrant or wiretap application were made intentionally or with “reckless disregard for the truth” and, if so, whether any such misstatements or omissions were “material.” United States v. Rajaratnam, No. 09 Cr. 1184(RJH), 2010 WL 4867402, at *7-8 (S.D.N.Y. Nov. 24, 2010); see United States v. Falso, 544 F.3d 110, 125 (2d Cir. 2008). In other words, “[t]o suppress evidence obtained pursuant to an affidavit containing erroneous information, the defendant must show that: (1) the claimed inaccuracies or omissions are the result of the affiant‘s deliberate falsehood or reckless disregard for the truth; and (2) the alleged falsehoods or omissions were necessary to the [issuing] judge‘s probable cause [or necessity] finding.” United States v. Canfield, 212 F.3d 713, 717-18 (2d Cir. 2000) (internal quotation marks omitted); see also United States v. Awadallah, 349 F.3d 42, 64 (2d Cir. 2003) (noting that “[i]n order to invoke the Franks doctrine, [a defendant] must show that there were intentional and material misrepresentations or omissions in [the] warrant affidavit.” (emphases supplied)).
To determine whether misstatemеnts are “material,” a court must “set[] aside the falsehoods” in the application, United States v. Coreas, 419 F.3d 151, 155 (2d Cir. 2005), and determine “[w]hether the untainted portions [of the application] suffice to support a probable cause [or necessity] finding,” United States v. Nanni, 59 F.3d 1425, 1433 (2d Cir. 1995). If the untainted portions of the application are sufficient to support the probable cause or necessity findings, then the misstatements are not “material” and suppression is not required.
Although omissions “are governed by the same rules” as misstatements, United States v. Ferguson, 758 F.2d 843, 848 (2d Cir. 1985), “the literal Franks approach [does not] seem[] adequate because, by their nature, omissions cannot be deleted“; therefore “[a] better approach would be to . . . insert the omitted truths revealed at the suppression hearing,” United States v. Ippolito, 774 F.2d 1482, 1487 n. 1 (9th Cir. 1985). Accordingly, we have held that “[t]he ultimate inquiry is whether, after putting aside erroneous information and [correcting] material omissions, there remains a residue of independent and lawful information sufficient to support [a finding of] probable cause [or necessity].” Canfield, 212 F.3d at 718 (internal quotation marks omitted); see also United States v. Martin, 615 F.2d 318, 328 (5th Cir. 1980) (“[W]e [are] required to determine whether, if the omitted material had been included in the affidavit, the affidavit would still establish probable cause [or necessity]. . . . If it would not, we would be required to void the warrant and suppress the evidence seized pursuant to it.“).
ii. The Hearing
On August 12, 2010, the District Court found that Rajaratnam had “made a sub-
At the Franks hearing, which began on October 4, 2010, the District Court heard testimony from (1) Linda Beaudreault, counsel to Galleon and Rajaratnam; (2) Andrew Michaelson, an SEC staff attorney who, after the wiretap was authorized, became a Special United States Attorney in order to participate in the investigation by the USAO; (3) FBI Special Agent Kang, the wiretap application affiant; and (4) former AUSA Goldberg, who filed the March 7, 2008 wiretap application.
The Franks hearing focused on the alleged misstatements and omissions in the wiretap application. Accordingly, we briefly describe those asserted misstatements and omissions as well as the evidence about the states of the mind of the government agents who filed the wiretap application.5
a. Misstatements аnd Omissions Involving Roomy Khan (CS-1): “Probable Cause”
As noted, Khan served as a cooperating witness for the government and recorded various phone conversations with Rajaratnam, some of which were summarized in the wiretap application and cited as evidence of probable cause.
The District Court determined that the government‘s wiretap application made two misstatements with regard to Khan‘s background. First, the wiretap application stated that Khan “has not yet been charged with any crimes,” Joint App‘x 77, when, in fact, she had a prior felony fraud conviction, see Rajaratnam, 2010 WL 4867402, at *10. Second, the application stated that Khan “has been cooperating with the FBI since approximately November 2007,” Joint App‘x 77 n.4, when, in fact, she had cooperated in an earlier insider trading investigation of Rajaratnam which began in the late 1990s, see Rajaratnam, 2010 WL 4867402, at *10.
Moreover, the District Court found to be misleading two statements that the government had paraphrased from recorded conversations between Khan and Rajaratnam. With regard to the first paraphrased conversation, the wiretap application stated that, when Khan asked Rajarаtnam whether he was “getting anything on Intel,” Rajaratnam said “that In-
During this call, CS-1 [i.e., Khan] asked whether RAJARATNAM had heard anything on Xilinx. RAJARATNAM responded that he thought this quarter would be okay, but next quarter would not be so good. . . . RAJARATNAM then said that he expected Xilinx to be “below the street.” CS-1 asked whether he got “it” from someone at the company and RAJARATNAM said yes, somebody who knows.
Joint App‘x 80-81 (emphasis supplied). This paraphrase, however, differed from Rajaratnam‘s actual answer to Khan‘s question; instead of saying “somebody who knows,” Rajaratnam had in fact said, “Yeah I mean, somebody who knows his stuff.” Rajaratnam, 2010 WL 4867402, at *11. The District Court found this actual response to be “more equivocal than the government‘s paraphrase. . . .” Id.
b. Omissions Involving the Earlier SEC Investigation: “Necessity”
In addition to the misstatements and omissions involving Khan, the wiretap application also omitted certain information, which was relevant to the issue of “necessity,” regarding the ongoing investigation of Rajaratnam being conducted by the SEC.7 Judge Holwell noted that the Franks hearing established that the wiretap application did not disclose “that the SEC had for several years been conducting an extensive investigation into the very same activity the wiretap was intended to expose[,] using many of the same techniques the affidavit casually affirmed had been or were unlikely to be successful.” Id. at *15. Judge Holwell called this a “glaring omission,” and stated that he was “at a loss to understand how the government could have ever believed that Judge Lynch could determine whether a wiretap was necessary . . . without knowing about the most important part of th[e] investigation—the millions of documents, witness interviews, and the actual deposition of Rajaratnam himself. . . .” Id.
Specifically, the SEC investigation had consisted of the following. In September 2006, the SEC began an investigation of Sedna Capital Management LLC, a hedge fund managed by Rajaratnam‘s brother. As a result of that investigation, the SEC began focusing on Galleon and Rajaratnam. Beginning in early 2007, the SEC started an on-site investigation of Galleon, through which the SEC: (1) received four
The District Court was troubled not only by the fact that the wiretap application did not disclose the existence of the SEC investigation, but also by the apparent consequence that this omission made other statements in the application misleading. See id. at *17-18. For example, the wiretap application asserted that interviewing or arresting Rajaratnam or other target subjects “is too risky at the present time,” Joint App‘x 108-09, despite the fact that the SEC had already interviewed and deposed Rajaratnam. Similarly, the application asserted that requesting additional trading records “would jeopardize the investigation” because “clearing firms . . . sometimes alert the traders to the requests,” id. at 108,8 even though the SEC had obtained more than four million documents from Galleon.9
c. The States of Mind of the Wiretap Applicants
Finally, at the Franks hearing, the government presented testimony designed to demonstrate that the alleged “omission” in the wiretap application regarding the SEC investigation, such as it may have been, was not made with “reckless disregard for the truth.” In particular, former AUSA Goldberg testified that “[n]obody tried to hide” the existence of the SEC investigation. Franks Tr. 773. Goldberg also expressed her view that “it would be obvious to anyone reading the affidavit that the SEC was” giving certain information to prosecutors and agents investigating criminal charges. Id.; see also Gov‘t‘s Br. 23 (noting that “Special Agent Kang‘s affidavit referenced” in seven different places the USAO‘s and FBI‘s “reliance on documents collected or information provided by the SEC“). Moreover, the government asserts that, because of recent court decisions arising out of the improper use of civil SEC investigations for criminal prosecutions, the USAO “took pains not to direct the SEC‘s investigative actions” and, in a similar vein, “did not view the SEC Staff investigation as an alternative law enforcement means to investigate Rajaratnam and his associates.” Id. at 24 (citations omitted).
iii. The District Court‘s Decision on Rajaratnam‘s Suppression Motion
On November 24, 2010, the District Court denied Rajaratnam‘s suppression motion. See Rajaratnam, 2010 WL 4867402, at *28. In analyzing the government‘s wiretap application under Franks, the District Court made three central findings.
First, on the issue of “probable cause,” the District Court held that a Franks hearing was unnecessary because the alleged misstatements and omissions in the wiretap application regarding Khan‘s prior conviction and cooperation as well as the assertedly misleading paraphrased conversations between Khan and Rajaratnam
Second, on the issue of “necessity,” the District Court held that the omission of the SEC‘s investigation of Rajaratnam was made with “reckless disregard for the truth.”12 See id. at *19. The District Court summarized its standard for determining whether “reckless disregard” existed as follows: “Rajaratnam must prove that the drafters of the affidavit either intentionally omitted the information or that the omitted information was clearly critical to the affidavit, thereby raising an inference of recklessness.” Id. at *9 (relying on United States v. Reilly, 76 F.3d 1271, 1280 (2d Cir. 1996) (noting that recklessness “may be inferred when omitted information was clearly critical to assessing the legality of the search” (internal quotation marks omitted))).
Third, although the District Court dеtermined that information regarding the SEC investigation was omitted with “reckless disregard for the truth,” it concluded that suppression was not warranted because Rajaratnam had failed to show that the omission was “material” to the Court‘s determination of “necessity.” In particular, the District Court held that,
while the SEC investigation . . . was the bedrock of the prosecutor‘s own criminal investigation, the SEC investigation had nevertheless failed to fully uncover the scope of Rajaratnam‘s alleged insider trading ring and was reasonably unlikely to do so because evidence suggested that Rajaratnam and others conducted their scheme by telephone. Accordingly, disclosure of all the details of the SEC‘s investigation . . . would ultimately have shown that a wiretap was necessary and appropriate.
Id. at *1.
D. Other Procedural History
Rajaratnam‘s trial began on March 8, 2011. On May 11, 2011—after a seven-week trial and twelve days of deliberation—the jury returned a verdict convicting Rajaratnam on all nine counts of securities fraud and all five counts of conspiracy to commit securities fraud. On October 13, 2011, Judge Holwell sentenced Rajaratnam to a term of 132
This appeal followed.
DISCUSSION
I. Applying the Analytical Framework of Franks to a Title III Wiretap Application
Rajaratnam first argues that the District Court erred by using the analytical framework set forth in Franks v. Delaware, 438 U.S. 154 (1978)—which involved a warrant application for a physical search, not a wiretap—to determine whether the alleged misstatements and omissions in the government‘s wiretap application required suppression. In particular, he takes issue with the “post hoc factual justification,” Rajaratnam‘s Br. 30, that the Franks framework allows—i.e., (1) removing misstatements from the application, see Coreas, 419 F.3d at 155; and (2) “insert[ing] the omitted truths revealed at the suppression hearing” after the fact, Ippolito, 774 F.2d at 1487 n. 1, to determine whether the application would have been granted in any event. Simply put, he asserts that the statute authorizing Title III wiretaps requires suppression because the government‘s wiretap application did not provide the “full and complete statement” regarding probable cause and necessity, as required by
Rajaratnam‘s argument is foreclosed by settled precedent. In United States v. Bianco, 998 F.2d 1112 (2d Cir. 1993), abrogated on other grounds by Groh v. Ramirez, 540 U.S. 551 (2004), we noted our agreement “with the district court‘s application of Franks and with its findings” where the government submitted a Title III applicаtion for a “roving bug”14 but omitted information concerning the location where the communications were to be intercepted, as required under Title III.15 Id. at 1126. Like Rajaratnam, the defendant in Bianco specifically asserted that Franks was inapplicable and that its application would vitiate Title III‘s “full and complete” statement requirement. Id. at 1125-26. Despite this argument, we held that the “[u]se of the Franks standard is consistent with the purposes of [Title III],” and “[i]f anything, Franks enhances the protection of . . . defendants, by applying to the wiretap statute an important constitutional principle that has been accepted by all courts.” Id. at 1126. And in United States v. Miller, 116 F.3d 641 (2d Cir. 1997), we applied the analytical framework of Franks to a Title III wiretap application that “omitted material information that had been provided by informants who were cooperating with the State.” Id. at 664. In particular, we held that “[a] challenge to the veracity of such an affida-
Finally, we note that the cases relied on by Rajaratnam—United States v. Giordano, 416 U.S. 505 (1974), and United States v. Gigante, 538 F.2d 502 (2d Cir. 1976)—are not to the contrary. Both cases were decided before the Supreme Court‘s decision in Franks and “[a]t that time there was no good-faith or other exception to the judiсially crafted exclusionary rule for violations of the fourth amendment.” Bianco, 998 F.2d at 1126. When Title III was enacted, it was not intended “generally to press the scope of the suppression role beyond [then current] search and seizure law.” S.Rep. No. 90-1097, at 96 (1968), reprinted in 1968 U.S.C.C.A.N. 2112, 2185. But thereafter, Franks and other cases, including United States v. Leon, 468 U.S. 897 (1984), “narrowed the circumstances in which . . . [courts] apply the exclusionary rule.” Bianco, 998 F.2d at 1126. Although courts were once thought to face a “dilemma of whether [or not] to apply the Franks standard to Title III cases,” id., that supposed dilemma has been definitively resolved, and every Court of Appeals to consider the issue has concluded that the analytical framework of Franks is an appropriate standard against which to review allegedly deficient Title III wiretap applications.17
In light of these precedents of our Court and our sister Circuits, we hold that the District Court did not err by applying the analytical framework of Franks to determine whether the government‘s wiretap application required suppression.
II. Applying Franks to the Government‘s Wiretap Application
As noted, Title III requires government agents who file a wiretap application to
A. Standards of Review
It is an axiom of appellate procedure that we review legal questions de novo and questions of fact for clear error. See Pierce v. Underwood, 487 U.S. 552, 558 (1988). That axiom holds true in the context of Franks hearings, see Awadallah, 349 F.3d at 65; United States v. Moore, 968 F.2d 216, 220-21 (2d Cir. 1992), and therefore our review is similar for each of the issues in this appeal. For instance, whether a person acted with “reckless disregard for the truth” is “a factual question of intent, and we therefore review the court‘s decision for clear error,” United States v. Trzaska, 111 F.3d 1019, 1028 (2d Cir. 1997), but a district court‘s understanding of the “reckless disregard” standard is reviewed de novo. Similarly, we review for “clear error” the factual findings that underpin a district court‘s assessment of probable cause, but we review de novo whether a set of facts satisfies the probable cause standard. See Ornelas v. United States, 517 U.S. 690, 699 (1996). Along the same lines, whether a misstatement or omission is “material“—i.e., “[w]hether the untainted portions [of the affidavit] suffice to support a probable cause [or necessity] finding,” Canfield, 212 F.3d at 717 (citation omitted)—is a mixed question of law and fact reviewed de novo, see Awadallah, 349 F.3d at 65, but any underlying factual findings are reviewed for “clear error.” An appellate court recognizes “clear error” only when it “is left with a definite and firm conviction that a mistake has been committed.” Brown v. Plata, — U.S. —, 131 S.Ct. 1910, 1930 (2011) (internal quotation marks omitted).
B. “Necessity“: Did the District Court Err in Concluding that the Wiretap Application Omitted Information About the SEC Investigation with “Reckless Disregard for the Truth“?
Rajaratnam maintains that the District Court correctly concluded that government agents omitted information about the SEC investigation of Rajaratnam from the wiretap application with “reckless disregard for the truth.” In turn, the government argues that the District Court incorrectly applied the “reckless disregard” standard.
The Supreme Court in Franks held that misstatements or omissions caused by “negligence or innocent mistake[s]” do not warrant suppression. 438 U.S. at 171. This inquiry, which looks to the mental states of mind of government officials, is said to be a “subjective” test rather than an “objective” one. See, e.g., Farmer v. Brennan, 511 U.S. 825, 838-40 (1994) (discussing the difference between “subjective” and “objective” tests). Whether an individual had a particular mental state “is a question of fact subject to demonstration in the usual ways, including inference from circumstantial evidence,” id. at 842, but courts must not “confus[e] a mental state with the proof of its existence,” id. (quotation marks omitted).
A wiretap applicant does not necessarily act with “reckless disregard for the truth” simply because he or she omits certain evidence that a reviewing court, in its judgment, considers to be “clearly critical.” Rather, the reviewing court must be presented with credible and probative evidence that the omission of information in a wiretap application was “designed to mislead” or was “made in reckless disregard of whether [it] would mislead.” Awadallah, 349 F.3d at 68 (emphasis and internal quotation marks omitted). As we have said:
“An affiant cannot be expected to include in an affidavit every piece of information gathered in the course of an investigation. However, every decision not to include certain information in the affidavit is ‘intentional’ insofar as it is made knowingly. If this type of ‘intentional’ omission is all that Franks requires, the Franks intent prerequisite would be satisfied in almost every case . . . . [Rather,] Franks protects against omissions that are designed to mislead, or that are made in reckless disregard of whether they would mislead, the magistrate.”
Id. at 67-68 (quoting United States v. Colkley, 899 F.2d 297, 300-01 (4th Cir. 1990) (alterations in Awadallah; emphases in Colkley)). In a similar vein, the Seventh Circuit has explained:
To prove reckless disregard for the truth, the defendants [must] prove that the affiant in fact entertained serious doubts as to the truth of his allegations. Because states of mind must be proved circumstantially, a factfinder may infer reckless disregard from circumstances evincing obvious reasons to doubt the veracity of the allegations.
United States v. Whitley, 249 F.3d 614, 621 (7th Cir. 2001) (internal quotation marks and alterations omitted); see also United States v. Williams, 718 F.3d 644, 649-50 (7th Cir. 2013) (applying the subjective standard for recklessness to omissions from an affidavit). But see Wilson v. Russo, 212 F.3d 781, 788 (3d Cir. 2000) (“[O]missions are made with reckless disregard if an officer withholds a fact in his ken that ‘[a]ny reasonable person would have known . . . was the kind of thing the judge would wish to know.‘” (quoting United States v. Jacobs, 986 F.2d 1231, 1235 (8th Cir. 1993))).
Of course, the “reckless disregard” aspect of a Franks inquiry can sometimes be inferrеd from the omission of critical information in a wiretap application. See Rivera v. United States, 928 F.2d 592, 604 (2d Cir. 1991) (“Recklessness may be inferred where the omitted information was clearly critical to the probable cause determination.” (emphasis supplied) (internal quotation marks omitted)). Subjective intent, after all, is often demonstrated with objective evidence. But such an inference is not to be automatically drawn simply because a reasonable person would have included the omitted information, cf. Farmer, 511 U.S. at 842,
In this case, Judge Holwell‘s view that the SEC investigation was “clearly critical” is the only basis for his conclusion that the government omitted certain information about that investigation with “reckless disregard for the truth.” But as we now review all of the evidence presented at the Franks hearing, it points in the opposite direction. And, despite the inferences that Judge Holwell drew from the omitted “clearly critical” information, when discussing the subjective state of mind of each affiant, he too “comfortably conclude[d] that no one acted with the deliberate intent to mislead Judge Lynch.” Rajaratnam, 2010 WL 4867402, at *19.
The evidence presented at the Franks hearing showed that no one in the USAO acted with “reckless disregard for the truth” by not detailing the SEC investigation of Rajaratnam. Former AUSA Goldberg testified that, when she “was drafting the affidavit, it never occurred to [her], never crossed [her] mind to put a section in [the wiretap application] that [discussed the] SEC investigation [because] [she] didn‘t think about the SEC investigation as an alternative technique that was available to FBI agents, because [the USAO] can‘t direct them what to do.” Franks Tr. 819. Similarly, FBI Special Agent Kang testified that he “didn‘t think about including [the SEC investigation] in a criminal affidavit. . . . We just didn‘t really think about it.” Although the District Court believed that this civil investigation by the SEC was relevant to the issue of necessity, the evidence presented at the Franks hearing in no way suggested that omitting certain information about SEC investigation was “designed to mislead” or was made with “reckless disregard of whether [it] would mislead.” Awadallah, 349 F.3d at 68 (internal quotation marks and emphasis omitted). Indeed, the evidence indicates that the wiretap application was reviewed by supervisors at the USAO, none of whom thought that additional information about the SEC‘s civil investigation needed to be included.
On a more fundamental level, we cannot conclude that the government omitted certain information about the SEC investigation with “reckless disregard for the truth” when it is clear that fully disclosing the details of that investigation would only have strengthened the wiretap application‘s “necessity” showing.18 The District Court tacitly recognized this fact, stating that “[m]any of the same documents that were used to compile the SEC chronologies strongly suggested that Rajaratnam had been careful to exchange nearly all of his inside information by telephone.” Rajaratnam, 2010 WL 4867402, at *21; cf. United States v. Young, 822 F.2d 1234, 1237 (2d Cir. 1987) (“[W]iretapping is particularly appropriate when the telephone is routinely relied on to conduct the criminal enterprise under investigation.” (quotation marks omitted)). The District Court made the point explicitly in discussing whether the government should have pursued additional “normal investigative procedures” before seeking a Title III wiretap:
Rajaratnam, 2010 WL 4867402, at *22 (emphasis supplied). In other words, the evidence does not support the inference that the government omitted information from a wiretap application with “reckless disregard for the truth,” and such an inference seems ever more inappropriate where the information omitted would only have further supported the government‘s position.
After reviewing the evidence in the record—especially the Franks hearing testimony regarding the states of mind of the government agents—and applying the correct understanding of reckless disregard, we conclude that the record does not support the finding that the omission of the SEC investigation in the Titlе III wiretap application was made with “reckless disregard for the truth.”
In any event, even if we were to assume, arguendo, the opposite conclusion—that government officials omitted information about the SEC investigation with “reckless disregard for the truth“—we are persuaded that this omission was not material, substantially for the reasons stated in the District Court‘s analysis on that issue. Rajaratnam, 2010 WL 4867402, at *21-24 (holding that the wiretap application, as corrected, was sufficient to support a finding of “necessity“).
C. “Probable Cause“: Did the District Court Correctly Determine that the Wiretap Application‘s Misstatements About Khan and “Paraphrasings” Did Not Require Suppression?
Rajaratnam argues that the District Court also erred by concluding that the alleged deficiencies in the wiretap application regarding probable cause were not “material,” and therefore that suppression was not required.19 Specifically, he argues that the “probable-cause determination comes up short when the materially false and misleading allegations of probable cause are eliminated, because the government‘s recklessly false and misleading claims about Roomy Khan and her conversations with [Rajaratnam] were the heart of its probable cause allegations.” Rajaratnam‘s Br. 50.
III. Were the Jury Instructions on the Use of Inside Information Erroneous?
Finally, Rajaratnam argues that his convictions on the substantive securities fraud counts (Counts 6 through 14) should be vacated because the District Court instructed the jury that it could convict Rajaratnam if the “material nonpublic information given to the defendant was a factor, however small, in the defendant‘s decision to purchase or sell stock.” Joint App‘x 433 (emphasis supplied). In particular, he asserts that the emphasized fragment of the jury instructions allowed the jury to convict him without finding the necessary causal conneсtion between the inside information he possessed and the trades he executed. On appeal, our review of jury instructions for legal error is de novo. See United States v. Robinson, 702 F.3d 22, 30 (2d Cir. 2012).
“Insider trading—unlawful trading in securities based on material non-public information—is well established as a violation of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.”22 SEC v. Obus, 693 F.3d 276, 284 (2d Cir. 2012). There are two theories of insider trading: (1) a “classical theory” involving corporate insiders, and (2) a “misappropriation theory” involving “persons who are not corporate insiders but to whom material non-public information has been entrusted in confidence and who breach a fiduciary duty to the source of the information to gain personal profit in the securities market.” Id. The second of these theories is at issue in this case. As relevant here, it “holds that a person commits fraud ‘in connection with’ a securities transaction, and thereby violates
In United States v. Teicher, 987 F.2d 112 (2d Cir. 1993), we stated, in dicta, that a “knowing possession” standard satisfied the “in connection with” requirement of
Fifteen years later, in United States v. Royer, 549 F.3d 886 (2d Cir. 2008), we elevated the dicta of Teicher to the law of the
Like the jury instructions in Royer,25 the phrase deployed by Judge Holwell (“was a factor, however small“) was “if anything more favorable,” id. at 899 n. 12 (emphasis supplied), to Rajaratnam than the “knowing possession” standard that is the law of this Circuit. Instead of instructing the jury that “[i]t is suffiсient if the government proves that the defendant[] purchased or sold securities while knowingly in possession of the material nonpublic information,” Teicher, 987 F.2d at 119, the instructions given by Judge Holwell, if anything, went beyond the “knowing possession” standard because they required that the inside information be “a factor, however small, in the defendant‘s decision to purchase or sell stock,” Joint App‘x 433.26
Undeterred by these precedents, Rajaratnam argues that the Supreme Court‘s recent decision in CSX Transportation, Inc. v. McBride, — U.S. —, 131 S.Ct. 2630 (2011), casts doubt on the law of our Circuit. We are not persuaded. In CSX Transportation, the Supreme Court held that, under the Federal Employers’ Liability Act (“FELA“), a railroad worker need only demonstrate that the railroad‘s negligence “played a part—no matter how small—in bringing about the injury.” Id. at 2644. Rajaratnam relies on CSX Transportation because the Court noted that the statutory causation requirement in the FELA—that the injury “result[] in whole or in part from [the defendant‘s] negligence“—was “as broad as could be framed,” id. at 2636, and it contrasted the FELA causation requirement with “traditional notions of proximate causation under the RICO, antitrust, and securities fraud statutes,” id. at 2644 n. 14 (emphasis supplied). In substance, Rajaratnam contends that the Supreme Court‘s reasoning in CSX Transportation implies that securities fraud cases require some causation element greater than the formulation that the inside information “played a part—no matter how small.”
To the contrary, the Supreme Court‘s statements about the FELA causation requirement and the causation requirement in “securities fraud statutes,” do not call into question our decisions in Royer and Teicher. Indeed, the Supreme Court‘s reference to “securities fraud statutes” in
CONCLUSION
To summarize, we hold that:
(1) The District Court properly analyzed the misstatements and omissions in the government‘s Title III wiretap application under the analytical framework prescribed by the Supreme Court in Franks v. Delaware, 438 U.S. 154 (1978);
(2) The alleged misstatements and omissions in the wiretap application did not require suppression, because (a) contrary to the District Court‘s conclusion, the government did not omit information about the SEC investigation of Rajaratnam with “reckless disregard for the truth,” and (b) as the District Court correctly concluded, all of the alleged misstatements and omissions in the wiretap application were not “material“;
(3) The District Court‘s jury instructions on the use of inside information—which instructed the jury that it could convict Rajaratnam if the “material nonpublic information given to the defendant was a factor, however small, in the defendant‘s decision to purchase or sell stock“—satisfied the “knowing possession” standard that is the law of this Circuit.
For the reasons stated, we AFFIRM the District Court‘s October 25, 2011 judgment of conviction.
No. 11-2000.
United States Court of Appeals, Third Circuit.
Argued on Oct. 10, 2012. Opinion Filed: June 05, 2013. As Amended June 14, 2013.