Insider Trading and the Sufficiency of the Evidence
The courts have issued numerous opinions debating the elements an insider trading claim as well as the definitions of each While the elements sometimes vary, and the definitions can be debated, in the end the key question is always the evidence – what happened? In U.S. v Klein, Docket No. 17-3355 (2nd Cir. Jan. 10, 2019) the Court had little trouble concluding that the statement “it would be nice to be king-for-a-day” to a long-time friend and financial adviser by an attorney whose firm represented King Pharmaceutical, Inc. in a merger made was an illegal tip of inside information.
Defendant Robert Schulman was a D.C. based partner at Hutton and William in the patent group. Tibor Klein was the principal of Klein Financial Services, a registered investment adviser based in Long Island, New York. Mr. Klein had served as the financial adviser to Attorney Schulman since 2000. The adviser had discretionary authority.
Over the years the attorney and adviser developed a routine of meeting about three times per year on a Friday afternoon to review the performance of the portfolio and advisory. Mr. Klein traveled to Washington, met with the attorney and his wife at their home in Virginia, and then stayed over-night following dinner.
The couple was generally pleased with Mr. Klein’s services although they had some concern that he had become to “bearish” in the wake of the great financial crisis. There had also been some concern in 2010 when the adviser purchased shares of Enzo Pharmaceuticals for the Schulman IRA account. Hutton represented Enzo at the time of the purchase.
In July 2010 the Shulmans met with the adviser. At the time Mr. Schulman knew firm client King Pharmaceutical was in merger discussions with Pfizer – the attorney learned about the deal while conducting patent litigation for the client. During the course of the evening Mr. Schulman stated that “boy, it would be nice to be king-for-a-day.” The attorney claimed the statement was a joke and that he never mentioned the merger or any discussions, according to the testimony he provided to the SEC. Essentially the same statement was made to the U.S. Attorney’s Office in a 2015 interview. Mrs. Schulman – the only person to testify at trial who was present at the time of the statement – did not remember anything being said about King.
The following morning – a Sunday – adviser Klein called long time friend and Ameriprise Financial adviser Shechtman but failed to reach him until Monday. During the Monday conversation Mr. Klein asked his friend what he would do if he had inside information – noting that “Pfizer’s buying King Pharmaceuticals.”
Mr. Shechtman subsequently spent $15,000 to acquire King options. Some were scheduled to expire in mid-September; others would expire in mid-October. He also invested $45,000 in King stock for himself and his wife. Mr. Klein spent $585,217 to acquire King stock in a number of his accounts as well as those of the Schulmans and forty-eight clients which included friends of the Schulmans and his parents.
The Pfizer-King deal was announced on October 12, 2010. Subsequently, all of the shares were sold. Mr. & Mrs. Schulman had profits of about $15,500 – about 50% in two months.
The SEC investigated and charged Mr. Shechtman. The adviser admitted liability, agreed to cooperate, and pleaded guilty in a parallel criminal case. Mr. Klien was also charged. The Schulmans fired him. Following trial, the jury deliberated for about one day. They returned a verdict of guilty on two counts – one based on conspiracy and a second for securities fraud. Following the denial of a Rule 29 motion for acquittal, the Court sentenced Mr. Schulman to serve three years of probation, pay a $50,000 fine, forfeit the trading profits and perform 2,000 hours of community service.
The key question on appeal was the sufficiency of the evidence. Mr. Schulman argued that the only evidence against him – the “king-for-a-day”– was insufficient to support his conviction on two criminal counts. In rejecting this claim the Second Circuit began by noting that an Appellant such as Mr. Schulman has a “heavy burden.” The reviewing court must “credit every inference that could have been drawn in the government’s favor.” If, from the reasonably drawn inferences, the “jury might fairy have concluded guilt beyond a reasonable doubt” the conviction must be affirmed.
In assessing the evidence, it is essential that it be viewed in its totality, not piecemeal or bits in isolation. The lynchpin to the Court’s conclusion is two statements by attorney Schulman, the inferences drawn from them and the trading. Initially, Mr. Schulman admits making the statement about being “a king-for-a-day,” although his wife did not recall it. Indeed, she testified that if she had heard it, the comment would have sounded silly.
Second, Mr. Schulman admitted that the “king-for-a-day” comment referred to King Pharmaceuticals, although there is no reference to the company in the statement. From these facts the Court inferred that “Klein apparently recognized that by ‘king’ Schulman meant ‘King.’” Further, “[c]ommon sense also would lead a rational juror to conclude that Schulman had to have communicated additional information to Klein for Klein to have promptly called Shechtman, cited ‘inside information’ about King and Pfizer . . and begun buying King stock. Indeed, this precise issue was argued to the jury . . .and was resolved by the jury against Schulman.”
Other evidence supports similar inferences – the record is “replete” with such evidence, according to the Court:
· A “reasonable jury could infer that Schulman intended Klein to trade from the evidence” because the trading followed immediately after the discussions of the two men;
· The immediacy of the stock purchases and their size supports the inference that the adviser was acting in accord with the directive of his client; and
· The fact that the adviser had once traded in the shares of a Hutton client – Enzo – supports the inference that he might again; while Mr. Schulman had been upset about the Enzo purchase as the adviser knew, that was because he believed the President of the firm was a “lunatic” but the context here of the “king-for-a-day” statement suggests approval.
When read in its totality, the evidence supports the determination of the jury, the Court concluded.