White Collar Watch: Bail After Federal Convictions Tell Prosecutors ‘It Ain’t Over’

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Yogi Berra once famously said, “It ain’t over till it’s over.” Federal prosecutors learned the truth of that statement last month.

Twice the United States Court of Appeals for the Second Circuit in Manhattan ordered bail for defendants convicted of white-collar crimes, a good sign that they have a chance of winning their appeals. The court ordered the release of Sean Stewart, who was convicted in August 2016 of insider trading and sentenced to a three-year prison term. Mark Johnson, a former foreign exchange trader at HSBC, was convicted of wire fraud for trading ahead of a bank client. He received a two-year prison sentence in April but was released at the end of June before his appeal is heard.

While bond is routinely granted to white-collar defendants before trial, once convicted they are typically incarcerated while awaiting the outcome of the appeal. Judges often give a defendant a few weeks after sentencing before reporting to prison, but that is not required — as Mr. Johnson learned when he was taken into custody after his sentencing because of concern that he posed a flight risk.

In Mr. Stewart’s case, the crucial evidence at his trial was a recording of his father speaking with a cooperating trader who had earlier pleaded guilty. In the conversation, the father recounted that Mr. Stewart had once said to him, “I handed you this on a silver platter, and you didn’t invest in this.” The government portrayed this statement as evidence of Mr. Stewart’s apparently berating his father for not taking advantage of the inside information, which was crucial to showing that there was an unlawful tip rather than just mistaken disclosure of confidential information.

At the oral argument of the appeal in February, the Second Circuit was troubled by the admission of that statement. The trial judge did not allow Mr. Stewart to introduce evidence that his father had meant to say only that he could have profited from the information but did not, not that there was illegal tipping. Moreover, prosecutors refused to grant the father immunity to permit him to testify on his son’s behalf, so that all the jury heard was the “silver platter” comment — evidence prosecutors highlighted in their closing argument.

The appeals court asked for additional briefing on the issue of whether the trial judge improperly admitted the recording by not allowing Mr. Stewart to try to undermine that evidence. Ordering his release from prison is a strong indication that the court will reverse the conviction and order a new trial.

Whether prosecutors would seek to retry remains to be seen. He has already served over a year in prison, and his three-year sentence was one of the longest for a defendant who did not personally profit from the trading. The Justice Department may try to work out a deal, such as a deferred prosecution agreement, that would not require another trial or additional time in prison.

Mr. Johnson’s case has not been argued before the Second Circuit court yet, so the issue under federal law is whether the appeal “raises a substantial question of law or fact likely to result in” reversal of the conviction or a new trial.

His case involved trading ahead of a large foreign exchange transaction that HSBC conducted for Cairn Energy to convert $3.5 billion into British pounds. A trade of that size would most likely push up the value of the pound, and Mr. Johnson was convicted of using the confidential client information to trade profitably in the days ahead of the transaction.

The defense sought bail on the ground that the prosecution was “completely unprecedented.” The government claimed Mr. Johnson had misappropriated client information to defraud it. But the defense argued that HSBC had been acting only under a contract, and that Cairn had received the full benefit of the trade it negotiated. That the bank made a small profit of about $7 million was largely irrelevant, the defense claims.

That type of argument was successful in United States v. Litvak, in which a defendant was convicted of misstating the price of residential mortgage-backed securities. The Second Circuit court reversed the conviction in May because Jesse C. Litvak’s customers were all sophisticated investors, so his statements about prices may not have been material to the transaction.

The Cairn trade also involved a sophisticated client, and Mr. Johnson argues that the company knew HSBC would have to trade ahead of it to be able to amass enough pounds to complete the deal and would profit off its trades. Even if he was not entirely aboveboard with the company, that might not rise to the level of wire fraud if the client got the benefit of the agreement it negotiated.

Unlike Mr. Stewart’s case, Mr. Johnson’s release signals only that the appeals court views his argument as having enough substance to allow him to go free until a final decision. But the Second Circuit court has questioned recently whether aggressive fraud prosecutions involving sophisticated parties are pushing the limits of the law too far by turning sharp business practices into federal crimes.

Granting bail during an appeal is uncommon. It shows that the appeals court is taking the case seriously and giving at least some credence to the defendant’s argument. If nothing else, that provides a ray of hope in a system in which the vast majority of criminal appeals are rejected.

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