Second Circuit Upholds Securities Fraud Indictment and Conviction Despite a Senior FBI Official’s Extensive Leaks to the Press During the Investigation

Case Name: United States v. Walters

Date of Opinion: December 4, 2018

Opinion By: Judge Chin

Summary:

In April 2017, defendant-appellant William T. Walters, a professional gambler, was convicted of securities fraud and related crimes following a jury trial in the United States District Court for the Southern District of New York.  Walters was sentenced to 60 months imprisonment and a fine of $10, and was ordered to forfeit $25,352,490 and pay restitution of $8,890,969.33.  On appeal to the Second Circuit, Walters argued that his indictment should be dismissed because a Federal Bureau of Investigation (FBI) Special Agent’s repeated leaks about the investigation to The Wall Street Journal (WSJ) and The New York Times (NYT) violated the grand jury secrecy provision of Federal Rule of Criminal Procedure 6(e) and the Fifth Amendment’s Due Process Clause. Walters also challenged the district court’s orders on forfeiture and restitution.

The FBI and United States Attorney’s Office (USAO) began investigating Walters for suspicious trading activities in 2011.  FBI Special Agent Chaves served as the supervising agent for the FBI’s investigation.  In 2013, following a referral by the Financial Industry Regulatory Authority (FINRA), the investigation expanded to Walters’s and others’ trading related to a Dallas Company, Dean Foods, and Walters’s close relationship with Thomas Davis, a member of the Dean Foods Board of Directors.  Beginning a year later, in mid-2014, the WSJ and NYT published a series articles revealing confidential and highly detailed information about the ongoing insider trading investigation of Walters, including that Walters may have received tips from an insider about Dean Foods. One WSJ article published in August 2015 named Davis as a target of the investigation.  In early 2016, Davis agreed to cooperate with the government.  That May, following the presentation of evidence including Davis’s testimony, the grand jury issued a multi-count indictment against Walters for securities fraud and related charges related to insider trading in Dean Foods and a second company.

Late in 2016, the district court granted Walters’s motion for an evidentiary hearing on whether the news leaks constituted a violation of FRCP 6(e), but shortly before the scheduled hearing, the government acknowledged a likely FRCP 6(e) violation, informing the court that it had learned that Agent Chaves was the source of the confidential leaks to reporters.  The government noted that Chaves had been referred to appropriate authorities within the FBI and USAO for investigation for his professional misconduct and the district court cancelled the hearing. Walters then moved to dismiss the indictment on the basis that he was prejudiced by the leaks and, in the alternative, that they constituted “’systematic and pervasive’ prosecutorial misconduct . . .  and a violation of the Due Process Clause.” The district court denied that motion.  Following a three-week jury trial, Walters was convicted on all counts in April 2017.  Walters’s motion for a new trial was denied and he appealed.  His appeal renewed the arguments raised in his prior motions to dismiss the indictment.

The Second Circuit upheld Walters’s conviction, rejecting his argument that dismissal was warranted under Rule 6(e) or on due process grounds. The court acknowledged the gravity of Chaves’s “serious misconduct,” noting that criminal sanctions may follow” for his actions in leaking confidential law enforcement information.  Nevertheless, the court held that Walters could not demonstrate prejudice warranting a dismissal because the leaks did not influence the grand jury’s decision to indict. The court called Walters’s allegations that WSJ and NYT articles containing the leaks prompted Davis to cooperate “sheer speculation and contravened by the record.”  The court also rejected Walters’s contention that the leaks were designed to “bring life into a flagging investigation,” instead concluding that the investigation was active and ongoing at the time of the leaks. In further rejecting allegations of a due process violation, the Second Circuit repeatedly emphasized the sizable amount of evidence implicating Walters and stated that the proper remedy for the leaks is to punish the offender, in this case Chaves, rather than to dismiss the indictment. Dismissing the indictment, the court said, “would result in a windfall” to Walters, who, according to the Court, was convicted on sufficient evidence after a fair and lengthy trial.

The Second Circuit also held the district court did not abuse its discretion in denying Walters’s request for an evidentiary hearing to generate a more thorough record on the leaks. The Court noted the record was sufficient, and the FBI special agent stated he would exercise his Fifth Amendment rights and refuse to testify, so a hearing would not have brought any additional material information to light. The Second Circuit did, however, remand the question of restitution to the district court based upon a recent Supreme Court decision, Lagos v. United States, 138 S. Ct. 1684 (2018), which addressed the categories of fees available under the Mandatory Victim Restitution Act, 18 U.S.C. § 3663A.

In a half-page concurring opinion, Judge Jacobs juxtaposed Walters’s conviction – involving a leak of confidential information – and the illegal leak of confidential information by the FBI supervisor, finding the latter “in some respects more egregious.”  Emphasizing how critical public, juror and judicial confidence in the FBI is to the FBI’s mission, Judge Jacobs’s concluded that “this kind of thing is very bad for business.”

To read the full opinion, visit: http://www.ca2.uscourts.gov/decisions/isysquery/54e488c3-6a7c-4020-a2d6-b82c70b4d075/1/doc/17-2373_complete_opn.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/54e488c3-6a7c-4020-a2d6-b82c70b4d075/1/hilite/

Summary Prepared By:  Ian Curry

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