Category: Criminal Procedure

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. Continue reading