On March 1, 2017, Judge P. Kevin Castel of the United States District Court for the Southern District of New York denied professional gambler William “Billy” Walters’ motion to dismiss his indictment on charges of insider trading. Walters’ motion came after the U.S. Attorney’s Office for the Southern District of New York (“USAO”) disclosed that one of the lead case agents from the Federal Bureau of Investigation (“FBI”) had leaked sensitive information to the press during the course of the investigation. Walters claimed that those leaks were part of a calculated effort to prejudice his case by jumpstarting a dormant investigation and that they were part of a broader pattern of outrageous government conduct by the USAO and the FBI playing “fast and loose” with obligations of grand jury secrecy in an effort to prejudice defendants. While being highly critical of the FBI agent who leaked the information in question, Judge Castel nevertheless ruled that Walters could not demonstrate substantial prejudice, or that the government’s conduct reached a “demonstrable level of outrageousness” that warranted dismissal of the indictment. Accordingly, Walters must now face trial. United States v. Walters, No. 16-cr-00338-PKC, slip op. at 18 (S.D.N.Y. Mar. 1, 2017).
The government indicted Walters on May 17, 2016. The indictment alleged that from 2008 through 2012, then-CEO and board member of Dean Foods, Thomas Davis, repeatedly disclosed inside information to Walters before corporate announcements at Dean Foods, including the results of quarterly earnings releases and the spin-off of a subsidiary. Walters allegedly loaned Davis $1 million in exchange for the tips and reaped approximately $40 million in profits from the illicit trades.
On September 23, 2016, Walters moved for an evidentiary hearing into potential government misconduct, including potential grand jury leaks that may have led to the series of stunningly detailed newspaper articles that appeared between April 2013 and June 2014 about the investigation of Walters and others involved in the case, including golfer Phil Mickelson (who was later named as a relief defendant in a parallel civil complaint), investor Carl Icahn, and Davis, who was a friend of Walters. Although the USAO argued that no hearing was necessary (because, among other things, the prosecutor and FBI case agent denied being aware of any leaks), Judge Castel disagreed and ordered a hearing to be held in December. In preparation for the hearing, the USAO discovered that, in fact, an FBI Supervisory Special Agent had repeatedly passed confidential information regarding the case to reporters at the New York Times and the Wall Street Journal—potentially including information protected by grand jury secrecy rules.
After the USAO acknowledged the leaks, Walters moved to dismiss the indictment on the grounds that the FBI Agent’s leaks to the media constituted outrageous government misconduct that had been designed to prejudice him, and which reflected a broader practice of leaks by the USAO and FBI that had previously gone unsanctioned. Specifically, he contended that the FBI Agent had leaked materials protected by Rule 6(e) of the Federal Rules of Criminal Procedure in an effort to spark the FBI to take more aggressive investigative measures and that the articles led Davis to take certain steps that ultimately prejudiced Walters.
Notwithstanding the plainly improper nature of the leaks—which have now led to a criminal investigation of the FBI Agent—Judge Castel concluded that dismissal of the indictment was unjustified because Walters could not show substantial prejudice. Specifically, Judge Castel found that Walters failed to demonstrate that the articles containing confidential information had an effect that would not have resulted from the issuance of subpoenas shortly after the articles were published. Similarly, Judge Castel concluded that the wrongful conduct was not “so systematic and pervasive as to raise a substantial and serious question about the fundamental fairness of the process which resulted in the indictment,” and did not “shock the conscience” such that it would violate due process. In short, the Court held that Walters failed to demonstrate that the FBI’s conduct was sufficiently egregious to warrant dismissal of the indictment, and that the pending criminal investigation into the FBI Agent’s conduct would serve as a sufficient deterrent, and potential penalty, for similar conduct in the future. In so holding, Judge Castel made clear that “[t]he proper remedy here is to investigate and, if appropriate, prosecute the offender, rather than dismiss the indictment based on the grand jury investigation that was the subject of the leaks” and that “the outing of the leaker may serve to deter other faithless federal agents.” Walters slip op. at 19.
Even though Billy Walters secured no relief, his motion—and the discovery of the leaks—should have lasting ramifications on the ways in which law enforcement handles the press. Both the USAO and FBI often use and cultivate the press to inform the public of criminal cases, thereby maximizing their deterrent value, especially in white collar cases in recent years. However, extensive exposure in the media can lead—and has led—to colorable pre-trial motion practice to dismiss indictments. Recently, the USAO’s press strategy was placed under close scrutiny in a pre-trial challenge by defendant Sheldon Silver, who claimed that the USAO’s press releases and on-the-record statements warranted dismissal of his indictment. While Judge Caproni denied this claim, the Judge concluded that the USAO’s pre-trial statements “strayed so close to the edge of the rules . . . that Defendant Sheldon Silver has a non-frivolous argument that [they] fell over the edge to the Defendant’s prejudice.” United States v. Silver, No. 15-cr-00093-VEC, slip op. at 1 (S.D.N.Y. Apr. 10, 2015).
While neither Walters nor Silver obtained dismissal of their indictments, both cases left open the possibility for such an outcome under the appropriate circumstances. The discovery of these leaks and the related judicial criticism should make the USAO and FBI carefully scrutinize their press strategy, and consider whether contacts with the press could cross the line and lead to a terrain where dismissal is a real possibility.
Click here to view United States v. Walters (MTD)
Click here to view United States v. Walters (Indictment)
Click here to view United States v. Silver