Sunday, June 20, 2010

Case o' The Week: Graber and Waiver - Laurienti and 10b-5

In a new rule for white collar defense, Judge Graber (left) holds that brokers can be criminally liable for failure to disclose commissions - if they owe a fiduciary duty to their clients. United States v. Laurienti,__ F.3d __, 2010 WL 2266986 (9th Cir. June 16, 2010), decision available here.

Before you write-off Laurienti as irrelevant to indigent defense, note that a PD had part of this case, and that the decision is thick with holdings that apply outside of the white collar context.

Decision by Judge Graber. Hard-fought case by, among others, SF appellate attorney Dennis Riordan, CD Cal AFPD Jonathan Libby, and Oakland appellate attorney Karen Landau.

Facts: Laurienti and his co-defendants were senior brokers in a firm charged with having a “pump and dump” scheme – pushing select “house” stocks on clients and getting secret “bonus” commissions for the sales. Id. at *1. They were charged with, among other things, securities fraud conspiracy under the conspiracy statute (§ 371) and securities violations (including 17 CFR § 240.10b-5).

A key legal theory was that the brokers failed to disclose these bonus commissions. Id. at *4-*5. Although the government asked for one, the trial court rejected an instruction requiring the jury to find the brokers owed their clients a fiduciary duty. Id. at *11. All were convicted at trial.

Issue(s): “[W]hether, and (if so) in what circumstances, a broker’s failure to disclose bonus commissions can give rise to criminal liability.” Id. at *5.

Held: “[W]hen a relationship of trust and confidence exists between a broker and client, a broker must disclose all facts material to that relationship.” Id. at *7 (emphasis added). . . [W]e reject Defendant’s argument that a broker never has a duty to disclose bonus commissions.” Id.

Of Note: This is a long, dense, and complex decision with many holdings important to indigent defense beyond the core 10b-5, white collar analysis. Here’s one of concern – the central holding of the case, on 10b-5 liability, is probably irrelevant because a defendant can conspire to commit securities fraud even if the underlying act isn’t a crime. Id. at *4-*5 (“In short, even if the failure to disclose was perfectly legal in all circumstances, the government still met its burden to establish a conspiracy.”) It is a troubling and expansive theory of criminal liability, reminiscent of a similar holding in the recent United States v. Judy Green decision. See blog here.

Another unwelcome holding is that the government can use “guilt-assuming hypotheticals” when asking questions of its own fact witnesses. Id. at *16. On a brighter note, the Court found the district court erred by limiting the testimony of a defense securities expert. Id. at *15 - *16 (though, sadly, it was harmless error).

How to Use: Because there was no instruction requiring the jury find a fiduciary relationship for these defendants, there was error in this trial. A big question for the Ninth was how to review this error – was it waived by the defense, given Laurienti’s opposition to the government’s proposed “fiduciary” instruction? Id. at *11-*12. Judge Graber concludes that the legal issue was waived by Laurienti and – of greater interest – found it was waived by other the defendants as well. Why? Because, in a familiar practice, the trial judge had held that an objection raised by one defendant would be deemed to have been raised by all. Id. at *12. Judge Graber explained that the co-defendants’ silence, in the context of Laurienti’s fight about the jury instructions, could constitute waiver of the legal argument. Id.

It is a worrisome holding for multiple defendant cases, and a reminder to keep a sharp eye out for legal arguments or objections raised by co-counsel that can be imputed against you on appeal (even if you remain silent).

For Further Reading: Quon? Gone. The Ninth Circuit, dragging the nation into the 21st century, gave us the great Quon decision on the Fourth Amendment search of a text pager. 529 F.3d 892 (9th Cir. 2008).

But, what the Ninth giveth, the Supremes taketh away. Ontario v. Quon, 2010 WL 2400087 (June 17, 2010).

In Quon, SCOTUS dodged the Fourth Amendment issues presented by new technologies. It issued a narrow holding that in the context of a workplace search, the review of the texts was not an unreasonable Fourth Amendment search. Id. at *14.

What does Quon mean for the future of the recent jewel of the Ninth’s Fourth Amendment law, Comprehensive Drug Testing? Justice Scalia, for one, seems ready to tackle the case: “Applying the Fourth Amendment to new technologies may sometimes be difficult, but when it is necessary to decide a case we have no choice . . . The-times-they-are-a-changin' is a feeble excuse for disregard of duty.." Id. at *15 (Scalia, J. concurring).

Image of the Hon. Susan Graber from

Steven Kalar, Senior Litigator N.D. Cal. FPD. Website at


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