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Megalli v. United States

United States District Court, N.D. Georgia, Atlanta Division

September 25, 2017

MARK MEGALLI, Movant,
v.
UNITED STATES OF AMERICA, Respondent. Civil No. 1:15-CV-1433-RWS-AJB

         MOTION TO VACATE 28 U.S.C. § 2255

          ORDER ADOPTING MAGISTRATE JUDGE'S FINAL REPORT AND RECOMMENDATION

          RICHARD W. STORY UNITED STATES DISTRICT JUDGE

         The matter is before the Court on Magistrate Judge Alan J. Baverman's Final Report and Recommendation ("R&R") [64], which recommends that Movant's counseled 28 U.S.C. § 2255 motion [40] and a certificate of appealability (COA) be denied. Movant has filed objections [67] to the R&R.

         In reviewing a Magistrate Judge's Report and Recommendation, the district court "shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made." 28 U.S.C. § 636(b)(1). Absent objection, the district judge "may accept, reject, or modify, in whole or in part, the findings and recommendations made by the magistrate judge, " 28 U.S.C. § 636(b)(1), and "need only satisfy itself that there is no clear error on the face of the record in order to accept the recommendation, " Fed.R.Civ.P. 72, advisory committee note, 1983 Addition, Subdivision (b).

         I. Discussion

         A. Background [1]

         This action involves a violation of securities law by a remote tippee. A tippee may not trade on material nonpublic information from an insider "when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach." Dirks v. SEC, 463 U.S. 646, 660 (1983). In determining tippee liability,

the initial inquiry is whether there has been a breach of duty by the insider. This requires courts to focus on objective criteria, i.e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings. . . . There are objective facts and circumstances that often justify such an inference. For example, there may be a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.

Id. at 663-64. "Dirks specifies that when a tipper gives inside information to 'a trading relative or friend, ' the jury can infer that the tipper meant to provide the equivalent of a cash gift." Salman v. United States, U.S.,, 137 S.Ct. 420, 428 (2016) (hereinafter Salman).[2] A tipper breaches his fiduciary duty "when the tipper discloses the inside information for a personal benefit. And, . . . a jury can infer a personal benefit - and thus a breach of the tipper's duty - where the tipper receives something of value in exchange for the tip or 'makes a gift of confidential information to a trading relative or friend.'" 14, U.S. at, 137 S.Ct. at 423 (quoting Dirks, 463 U.S. at 664)). The issue raised by Movant in this action is whether, based on the Second Circuit decision in Newman, an insider/tipper's personal benefit can be inferred (or a tippee's knowledge thereof can be based on conscious avoidance) absent a familial or close relationship between tipper and tippees. See United States v.Newman, 773 F.3d438 (2d Cir. 2014), cert, denied, U.S., 136 S.Ct. 242 (2015), and abrogated, Salman, U.S. at, 137 S.Ct. at 428.

         Movant was charged by information with one count of conspiracy to commit securities fraud by, among other things, causing the purchase and sale of "Carter's securities on the basis of. . . certain Inside Information provided to him by Eric T. Martin, knowing and consciously avoiding the knowledge that the Inside Information had been obtained by Martin from a Carter's insider[, Richard T. Posey, ] in violation of the insider's duties of trust and confidence to Carter's, " in violation of 15 U.S.C. §§ 78j(b) and 78ff and 17 C.F.R. § 240.10b-5. (Information at 1, 4, 6, ECF No. 1 (tracking the language of § 240.10b-5.) Movant pleaded guilty to count one as charged. (Guilty Plea and Plea Agreement, ECF No. 3-1 .)[3]

At the plea hearing, the government set forth the following -
[T]he Government would be required to prove beyond a reasonable doubt, first, in connection with the purchase or sale of securities, the Defendant employed a device, scheme or artifice to defraud, or engaged in an act, practice or course of business that operated, or would operate, as a fraud or deceit upon persons; second, the Defendant acted willfully, knowingly and with the intent to defraud; and third, the Defendant used or caused to be used any means or instrumentalities of transportation or communication in interstate commerce or use of the mails in furtherance of the scheme.
.... In order to satisfy the first two elements of that test that I just described in an insider trading case, the Government is required to prove, first, that the original tipper, in this case Richard Posey, possessed material nonpublic information regarding a publicly traded company; second, the original tipper, Rick Posey, disclosed this information to the intermediate tippee, in this case Eric Martin, who disclosed it to the remote tippee, in this case [Movant]; third, the remote tippee, [Movant], traded in securities on the basis of the information; and fourth, the original tipper, Rick Posey, breached a fiduciary duty to the source of the information by disclosing it to the intermediate tippee, and the remote tippee, [Movant], knew that the original tipper had violated a fiduciary duty by providing the information to the intermediate tippee.
Now, in the Second Circuit there's currently an issue percolating[4] that's related to some of the insider trading prosecutions up there as to whether there is a fifth element that the remote tippee in [Movant's] position must also know that the original tipper received a personal benefit in exchange for disclosing the information to the intermediate tippee. The Government's position is that this element is not required. Nevertheless, the parties have discussed it; and the Government's position is that as a factual matter - first, as a legal matter, it's not required. As a factual matter, if it was required, the Government could prove it based on circumstantial evidence that [Movant] knew or consciously avoided the knowledge that Martin was meeting with friends and contacts at Carter's and had friendships with one or more persons at Carter's, his former employer. Finally, just so the Court is aware, conscious avoidance or deliberate ignorance is sufficient to articulate the knowledge and intent elements under this, under the securities fraud statutes that we're discussing.

(Plea Hr'g Tr. at 11-14, ECF No. 9.) Movant stated that he understood. (Id. at 14.)

         The government stated that if the case went to trial the evidence would show the following: (1) Mr. Posey disclosed insider information to Mr. Martin in exchange for reciprocal stock tips on other public companies, future networking opportunities, friendship, and other tangible and intangible benefits and (2) Mr. Martin provided the insider information to Movant, who used the information to sell and short Carter's common stock - knowing that Mr. Martin had recently left Carter's and was meeting, speaking, and socially interacting with a Carter's insider[5] and knowing or consciously avoiding that Mr. Martin was obtaining the information from the Carter's insider in breach of the insider's duties. (Id. at 17-19.) Movant presented no significant disagreement on the facts, [6] and the Court accepted his guilty plea. (Id. at 22-25, 31.)

         In his sentencing memorandum, Movant referred to the then ongoing litigation in Newman and pointed out that he, Movant, had waived the possibility of requiring the government to prove (1) a breach/personal-benefit in regard to the insider and (2) Movant's knowledge of that breach/personal-benefit. (Mov't Sentencing Mem. at 57-60, ECF No. 26.) Movant explained that he had not improperly waived a legal defense but that the government's ability to prove knowledge of benefit "is hardly a foregone conclusion, which means it should factor as a mitigating circumstance in the Court's assessment of a reasonable sentence in this case." (Id at 60.)

         At sentencing, the government requested a sentence at the low end of the forty-one to fifty-one month guidelines range, stating, among other things that Movant had made a "tremendous demonstration of acceptance of responsibility." (Sentencing Tr. at 4, ECF No. 31.) Movant, through counsel, admitted - "[c]onscious avoidance . . . is equally as culpable as actual knowledge but I'm here to tell you that we also have actual knowledge in this case" - and then asked the Court to consider that jail time was not the end-all of deterrence as he was facing significant liability in the SEC action ($3.17 million in disgorgement) then pending before the Honorable Judge Amy Totenberg.[7] (14 at 7-9.) Movant took responsibility for his actions as wrong and life-altering - "I knew it was wrong and I should not have traded on it----We're paying a tremendous price .. . financially, emotionally, psychologically-----[W]e're paying a tremendous amount for my mistakes and I want to apologize to my family in particular for putting them into this position." (Id. at 22.) The Court imposed a twelve month and one day term of imprisonment. (Id. at 28.) The record does not show that Movant appealed.

         B. Motion to Vacate

         In his motion to vacate, Movant argues that his conviction is subject to collateral attack because, after he was sentenced, the Second Circuit Court of Appeals in Newman modified the law so that the facts underlying Movant's guilty plea no longer establish the crime for which he was charged. (Mov't Mem. at 2-4 (sealed un-redacted version), ECF No. 44.)[8] Movant states that under Newman, (1) the personal benefit to the insider/tipper must be a tangible economic benefit and (2) the remote tippee (Movant) must actually know that the insider disclosed confidential information in exchange for such benefit. (Id. at 3-4.) Movant contends that under Newman -which he asserts is binding on this Court as an extension of Dirks - the guilty plea colloquy and factual proffer were deficient and his guilty plea is invalid (1) because he was not subjectively aware that Mr. Martin was providing him with information obtained from a Carter's insider who had provided confidential information in exchange for a personal benefit, an essential element under Newman, and (2) because the insider's benefit was not '"a potential gain of a pecuniary or similarly valuable nature.'" (Mov't Mem. at 3, 5, 16-27 (quoting Newman. 773 F.3d at 452).)

         Movant asserts that his challenge to his guilty plea is not barred by procedural default (1) because Newman is so unprecedented as to provide cause for failure to raise his claim earlier, which resulted in prejudice as he was deprived of a voluntary and intelligent plea, and (2) because he shows actual innocence under the standard announced in Newman. (Mov't Mem. at 30-41.)

         The government argues, among other things, that Movant's claims are barred by procedural default, which he fails to overcome, and additionally comments that, in his sentencing memorandum, Movant presented as a mitigating consideration the fact that ...


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