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An appeals court delivered an embarrassing blow to government prosecutors yesterday by tossing the convictions of six traders and brokers in the long-running “squawk box” case.
In a scathing 38-page ruling, the US Second Circuit Court of Appeals in Manhattan slammed prosecutors for withholding evidence. The three-judge panel found that the government wrongfully withheld as many as 30 transcripts from the defense that might have swayed the jury.
The appeals court also gave the defendants hope that the win was more than temporary when it warned prosecutors against trying the case for a third time. The six defendants were convicted in 2009, following a mistrial in 2007.
“I am elated to say the least,” said David Ghysels, a former Lehman broker who was convicted in 2009 of scheming with day traders at the now-defunct A.B. Watley.
In 2005, prosecutors charged Ghysels and fellow brokers Kenneth Mahaffy, formerly of Merrill Lynch and Citigroup, and Timothy O’Connell, formerly of Merrill, with giving traders access to their brokerage “squawk boxes,” which let brokerages communicate trade orders and other business to brokers.
Three former Watley officials, Keevin Leonard, Robert Malin and Linus Nwaigwe, were also convicted.
The brokers indisputably placed open phone lines next to the boxes so the traders could listen and make trades based on what they had heard. But their convictions for conspiring to commit securities fraud rested largely on the jury’s belief that the information was confidential.
The 30 or so transcripts that were suppressed might have cast doubt on that argument as they showed some brokerage executives interviewed early on weren’t convinced the data was inside info, according to yesterday’s ruling.
“We are reviewing the decision by the Second Circuit Court of Appeals and considering our options,” said Robert Nardoza, spokesman for the Brooklyn US Attorney’s Office, which tried the case.
Benton Campbell, the top prosecutor of that office at the time of the alleged misconduct, didn’t return a request for comment.
“I think it goes to this over-zealousness problem,” said Susan Carle, a law professor at American University.
“Somehow the Justice Department prosecutors are becoming so intent on winning cases that they are overlooking their obligations,” she said, citing the bungled corruption conviction of US Sen. Ted Stevens (R-Alaska) in 2009.
Carle thinks the case will be referred to the ethics office at the Justice Department because it is “so embarrassing.” The appeals court said that a Securities and Exchange Commission lawyer on the case warned prosecutors in an e-mail that earlier depositions might best be turned over to the defense.
Andy Frisch, the attorney for Mahaffy, said his client is “ecstatic,” saying, “I called him and I asked him what his wife’s favorite restaurant was, and I told him to take her there tonight.”