The recent conviction of Michael Steinberg, a former senior trader at SAC, highlights the power of the government to obtain a conviction when armed with the ability to have a jury charged on a conscious avoidance theory of fraud. The case proceeded without any direct evidence establishing that Mr. Steinberg explicitly knew that the information provided to him was improper inside information. Sure, there was testimony that Mr. Steinberg wanted his assistant Jon Horvath to obtain “edgy” or “proprietary” information, but Horvath did not testify that Mr. Steinberg expressly directed him to improperly obtain confidential information nor was their evidence that demonstrated that Mr. Steinberg actually knew where and how Horvath obtained the information. Indeed, Horvath conceded that Mr. Steinberg never told him to break the law in obtaining his trading information. And, Mr. Steinberg was not the direct recipient of the information—he was five people removed from the source of the confidential information.
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But, the government’s ability to argue that Mr. Steinberg “knew” that the information he obtained was inside information because he “consciously avoided”—or turned a blind eye to the source of the information—provides the government with a serious advantage at trial, particularly in the post-bailout era, where the public opinion against white-collar defendants is so toxic. Effectively, under a conscious avoidance theory, the government has the ability to argue that Mr. Steinberg committed insider trading on a quasi-negligence basis; that his role in “not-knowing” that the information was inside information—that he didn’t do enough to determine the source of the information—was a sufficient basis to infer his knowledge. Applying a conscious avoidance theory to the life of a busy trader—who is responsible for making hundreds or thousands of decisions in a typical day and may not have the wherewithal, time, or suspicion to ask the foundational questions regarding the source of the information for every single trade executed—seems particularly prejudicial.
Remarkably, in interviews with members of the Steinberg jury shortly after the conviction, the jurors actually acknowledged that their verdict—which at first was hotly disputed in the jury room—ultimately was secured on a conscious avoidance basis. The jurors concluded that Mr. Steinberg should have known where the information came from even without direct evidence showing that he did.
The government’s ability to obtain a conviction on a conscious avoidance theory has been a long held legally viable theory of fraud, so, as a practical matter, the doctrine will continue to apply to fraud cases. But what, if anything, can defendants do to guard against the government’s reliance on conscious avoidance theory of prosecution as a lethal sword in insider trading cases? How, if at all, can defendants side-step this “should have known” theory that may have jurors convicting defendants on a theory more akin to negligence, instead of actual knowledge?
One option, albeit one fraught with risks, is to have the particular defendant testify and, if supported by the facts, disavow knowledge or conscious avoidance of the conducting constituting insider trading. But there could be many valid reasons for not having a defendant testify, and sometimes, if there is significant fodder for cross-examination, a defendant’s testimony may only dismantle a delicately constructed defense.
Second, given the lower conscious avoidance standard, defendants facing criminal charges may, in the future, want to give thought to having their cases tried before judges instead of juries. At least as it relates to the series of insider trading cases emanating from the Southern District of New York post-2009, the government has obtained a conviction before a jury in every single case it has prosecuted, and many of those have involved conscious avoidance theories as centerpieces of the prosecution. Would it be more helpful, if judges, many of whom have sat through multiple complex financial frauds and might be more equipped to understand whether or not a defendant should or should not have known of particular conduct, were the ultimate factfinders in these cases? It’s hard to say with certainty whether trying a case before a judge would neutralize the government’s conscious avoidance powers, but it may be worth exploring given jurors’ recent tendency to side with the government in these cases.
Third, even in a case where a defendant does not testify, defendants should do their best to present evidence of the day-to-day circumstances of a particular defendant’s job, and whether those circumstances would demonstrate the inapplicability of a conscious avoidance theory. For example, if a defendant can show, through evidence regarding his general employment responsibilities, that an examination of the source of the information was not his particular responsibility, such evidence may neutralize a conscious avoidance prosecution. But, frequently, that kind of evidence is difficult to present without a defendant’s testimony.
Securities industry professionals should be aware that prosecutors have the ability to pursue cases on this basis.
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