The Supreme Court reversed a Second Circuit decision which held that the pre-emption provision of the Securities Litigation Uniform Standards Act of 1998 only encompassed those actions in which the purchaser-seller requirement of Blue Chip Stamps is met. The court noted that the Blue Chip Stamps purchaser-seller requirement was not based on the statutory language of Section 10(b) and Rule 10b-5 but rather on policy considerations. Accordingly, the case does not represent a construction of the “in connection with” language of the Section and Rule. That statutory language, consistent with Superintendent of Ins. of N.Y v. Bankers Life & Casualty, 404 U.S. 6 (1971) and SEC v. Zandford, 535 U.S. 813 (2002), makes it clear that the Section and rule prohibit any fraud alleged to “coincide” with a securities transaction whether by the plaintiff or by someone else. The plaintiff’s state law securities class action was pre-empted by the SLUSA. Merrill Lynch, Pierce, Fenner & Smith, Inc., v. Dabit, No. 04-1371 (March 21, 2006).
On March 20, 2006, the Second Circuit held unanimously that the trial judge’s instructions to the jury were deficient and that Frank Quattrone, former Credit Suisse First Boston LLC banker, did not receive a fair trial on charges that he instructed subordinates to destroy documents subject to a grand jury subpoena. The court also reassigned the case to a new trial judge, stating that comments made by U.S. District Judge Richard Owen “could be viewed as rising beyond mere impatience and annoyance.”
The Second Circuit panel found that Judge Owen’s jury instructions failed to find a “nexus” between Quattrone’s “clean-up” e-mail and a grand jury probe into the way Credit Suisse disseminated shares in initial public offerings, and also found that the jury instructions improperly failed to make clear that the jury need to find that Quattrone knew that grand jury and SEC subpoenas specifically called for the documents that would be destroyed.
Prior to his conviction being thrown out, Quattrone faced an 18-month prison sentence but was free pending appeal. The Second Circuit’s decision, however, does not completely vindicate Quattrone. In fact, Judge Wesley’s 61 page opinion emphasizes the strength of the evidence against Quattrone, and held that it was more than sufficient for conviction on charges of obstruction and attempted witness-tampering. Quattrone may possibly face a third trial at this point since his first trial ended in a hung jury and his 2004 conviction was overturned.
The reversal of Quattrone’s conviction marks the second instance in less than one year that a major white-collar obstruction case has been overturned due to deficient jury instructions. Similarly, in May 2005, the Supreme Court reversed the guilty verdict against Arthur Andersen and held that the jury should have been required to find that Andersen acted with criminal intent.