This past month, the United States Court of Appeals for the Second Circuit overturned the convictions of six brokers and traders who were charged and later convicted in an insider trading scheme in which day traders were allowed to eavesdrop on confidential communications via broker “squawk boxes.”  A primary basis for the appeal court’s ruling was the failure of federal prosecutors to produce as “Brady” material transcripts of depositions taken by an attorney for the Securities and Exchange Commission in a related matter. * Portions of these withheld transcripts contradicted the testimony of key government witnesses at trial, hence triggering the reversal.

The brokers and traders were first charged in 2005.  The basis of the criminal case was the allegation that between 2002 and 2004, the traders had been allowed to listen into the brokerage firms’ internal speaker system or “squawk boxes” through open telephone lines and hence were able to overhear the details of pending orders by institutional clients. 

There was a trial in 2007, in which the defendants were all acquitted of securities fraud, one defendant was convicted of witness tampering and the jury deadlocked on certain other charges.  A second trial took place in 2009, on a modified government “honest services” theory and other charges.  This trial ended in convictions.

It is these convictions that were overturned this past August, based upon the Second Circuit’s finding both that there were defects in the judge’s charge to the jury, and more interesting, that a Brady violation had occurred.

It turns out, that while the criminal cases had been proceeding, there had also been a civil matter being pursued by the Securities and Exchange Commission.  In this matter, the SEC had deposed other employees and supervisors at the brokerage firms who testified, among other things, that the “squawk box” broadcasts were not considered confidential, that there were no policies and procedures in place regarding squawk box information and that dissemination of this information was permitted.

These transcripts were in the possession of prosecutors, but were never produced to the defense.  As Judge Barrington Parker wrote: “On multiple occasions, the prosecution team either actively decided not to disclose the SEC deposition transcripts or consciously avoided its’ responsibilities to comply with Brady.” The Circuit concluded that these violations “skewed” the trial, as the defendants were “… forced to mount their defenses without benefit of material exculpatory and impeaching sworn testimony.”  This finding clearly drove the appeal court’s action.

There is no doubt that most federal prosecutors take their Brady obligations seriously and act in good faith.  There is also no doubt that from time to time injustices occur, either through government misfeasance or malfeasance.  This is one of those times--or would have been--, absent the Second Circuit’s action.

There is some sentiment in the bar for Brady reform.  There has, as yet, been no Congressional action, nor is there likely to be any soon.  But some change may need to come.  For those who believe that change is overdue, the “squawk box” decision will be further grist for the mill.