US v. Schulman, Second Circuit Court of Appeals, Filed January 10, 2019: King for a Day or Securities Fraud?
In US v. Schulman, the Second Circuit Court of Appeals affirmed an attorney’s convictions for securities fraud and conspiracy to commit securities fraud.
The attorney, Schulman, testified that the only statement he made to his financial advisor (Klein) about inside information that he gained from representation of a client (King Pharmaceuticals) was that “it would be nice to be king for a day.” Schulman argued that statement was nothing more than “bragging” about his inside information, but the jury and the Second Circuit disagreed.
The Second Circuit found that there was enough circumstantial evidence for the jurors to infer that Schulman had, in fact, said more to Klein and intended Klein to use that information to commit securities fraud.
What is securities fraud?
And, if the only testimony was that Schulman had said “it would be nice to be king for a day,” how could the jurors convict Schulman of securities fraud?
What is Securities Fraud?
Securities fraud, or insider trading, is when an “insider” uses non-public information to trade in securities.
When a defendant provides a “tip” to another person who uses the information to improperly trade in securities, the government must prove that the insider would have personally benefitted from the information disclosed in the tip.
According to the Second Circuit, “The critical question regards the tipper’s purpose: did the tipper share the material non-public information with the tippee intending that the tippee use the information to improperly trade in securities?”
If a person discloses important, non-public information “with the expectation that the tippee will trade on it,” the tippee (the defendant) can be found guilty of securities fraud.
Conspiracy to Commit Securities Fraud
In its simplest form, a conspiracy is an agreement between two or more persons to commit a crime. It doesn’t have to be a formal agreement or even spelled out in detail.
For example, if a person provides inside information with the expectation that another person will use that information, they can be found guilty of both securities fraud (because they used non-public information to trade in securities) and conspiracy to commit securities fraud (by definition, a person who tips off another person with the expectation that the other person will use that information to commit a crime is guilty of conspiracy).
It Would be Nice to be King for a Day
So, what happened in Schulman’s case? If all he said was, “it would nice to be king for a day,” how the heck is that securities fraud?
Schulman was friends with his financial advisor, Klein, and they met regularly at his house for dinner and to discuss Klein’s portfolio. The relevant facts introduced at the trial, according to the Second Circuit opinion, are:
- Through the course of his representation of King Pharmaceuticals, Schulman learned that King was in merger discussions with Pfizer;
- During a visit at Schulman’s house, Schulman said to Klein, “it would be nice to be king for a day;”
- Klein then told another individual, Shectman, that Pfizer was merging with King Pharmaceuticals;
- Shectman and Klein both then purchased King Pharmaceuticals stock and options;
- Klein purchased King stock and options for himself and his clients – including Shulman and Shulman’s friends;
- A few weeks later, Pfizer acquired King;
- Immediately after the acquisition, Shectman and Klein sold all the King stock at a substantial profit for themselves and Klein’s clients, including Schulman.
It looks like insider trading.
But, how did the government prove that Schulman provided information about the merger to Klein, intending Klein to trade on that information, if the only evidence was that Schulman boastfully said, “it would be nice to be king for a day?”
Sufficiency of the Evidence
Schulman argued that there was insufficient evidence to support the jurors’ verdict because the only evidence introduced at trial regarding his statements to Klein was, “it would be nice to be king for a day.”
The Second Circuit disagreed and based their decision on the reasonable inferences that the jurors could have drawn from the testimony they heard. Although the only direct evidence of Schulman’s statements or intent was the “king for a day” quip, there was plenty of circumstantial evidence that Schulman said more to Klein.
Although the jurors could have believed that Schulman made the one statement to Klein and that it was simply a bit of braggadocio with no intent for Klein to commit securities fraud, there was enough circumstantial evidence that the jurors could have reasonably believed that more was said.
The Second Circuit found that, as a matter of common sense, Schulman must have said more to Klein, noting that the government argued this at trial and the jurors apparently agreed:
- Schulman conceded to the SEC that his “king for a day” comment was in fact a reference to King Pharmaceuticals;
- Klein obviously recognized that by “king” Schulman meant “King;” and
- After speaking to Shulman, Klein immediately called Shectman and both began buying King stock – something that is not likely if Schulman had only made the offhand comment, “it would be nice to be king for a day.”
Other evidence supported the inference that Schulman intended Klein to trade on the information, including:
- Klein was Schulman’s investment manager and the comment (and likely additional information) was relayed to Klein during a meeting about Schulman’s investment portfolio;
- After his meeting with Schulman, Klein immediately bought hundreds of thousands of dollars of King stock; and
- Klein had purchased stock in one of Schulman’s clients before – on behalf of Schulman (although no insider trading was alleged or proven, it was a clear conflict of interest and Schulman later sold the stock).
The Second Circuit is saying that the government proved their case by circumstantial evidence, even if the only direct evidence of Schulman’s intent was the “king for a day” comment.
What does that mean?
If John testifies at trial that he walked into Jack’s house and discovered Jack standing over Jill’s dead body with a bloody knife in his hand, that is probably going to be enough evidence for jurors to infer that Jack killed Jill.
No one saw Jack kill Jill. There is no video of the deed. There is no confession. But the jurors can reasonably infer from John’s testimony, combined with other circumstantial evidence, that Jack is the killer and convict him of murder.
Similarly, the Second Circuit found that it was reasonable for the jurors to infer, based on the circumstantial evidence at trial, that Schulman did, in fact, say more than “it would be nice to be king for a day” and that he intended Klein to buy King stock based on whatever information Schulman provided to him.
Federal White Collar and Criminal Appeals Attorney in Columbia, SC
Elizabeth Franklin-Best is a federal criminal defense and federal appellate lawyer in Columbia, SC who defends white-collar criminal cases.
For more information, call us at (803) 331-3421 or contact us online to set up a consultation about your case.