'Squawk Box' Convicts Given Bail Pending Appeal; Brady Violation?

[WSJ Law Blog]

There’s been much recent discussion on this blog about real and alleged violations by prosecutors to turn over evidence that could substantially aid the defense, as required by law. (See posts here, here and here.)

While many defendants often accuse the government of not complying with its so-called “Brady” obligations (named after an old Supreme Court case), rarely are they able to convince judges that such conduct occurred.

All this having been said, we turn our attention to Brooklyn, where after a retrial, federal prosecutors last year convicted six financial brokers and managers of conspiring to misuse information announced over brokerage-firm “squawk” boxes.

But yesterday, the men got a big shot in the arm when a judge granted them bail pending the appeal of their convictions.

There’s a reason we took notice of that fact. The judge’s decision came after a lawyer for one of the defendants, Kenneth Mahaffy (pictured), a former Smith Barney and Merrill Lynch broker, submitted two letters (here and here) to the judge, claiming to have found newly discovered evidence that should have been produced to the defense in advance of the first trial. According to Mahaffy’s lawyer, Andrew Frisch, the evidence includes depositions taken years ago by the SEC, which investigated the case alongside the U.S. attorney’s office, that he says bolsters the defense’s theory that the defendants didn’t know their conduct was forbidden, among other things.

For now, a little background. The case concerns announcements at many Wall Street firms that disclose when customers are about to buy or sell big blocks of stock. Prosecutors claimed that brokers at Merrill Lynch, Smith Barney and the old Lehman Brothers were paid to leave open telephone lines next to the internal speaker systems at their firms so that traders at the now-defunct A.B. Watley Inc. could secretly eavesdrop on block orders by institutional clients. Prosecutors said the squawk broadcasts were confidential and that Watley traders profited by trading ahead of, or front-running, the orders that were broadcast.

However, the defendants argued that the brokerage firms didn’t have clear rules against the practice.

Prosecutors originally brought the criminal case way back in 2005. After the first trial, in 2007, a jury acquitted the men of securities fraud and other alleged crimes but deadlocked on the conspiracy count.

After their 2009 conviction, the men received sentences in December ranging from probation to four years in prison. Then the SEC moved to bar Mahaffy, who received two years in prison, from working at a brokerage firm. As part of that proceeding, it provided Frisch all of its investigative files.

In Frisch’s December letters to the judge who oversaw the latest trial, John Gleeson, he wrote that the SEC deposed employees at the brokerage firms who were allegedly defrauded by Mahaffy and others. Testimony by those employees, including supervisors, show that they told investigators that squawk box broadcasts weren’t confidential, that there were no policies or procedures regarding the use of squawk box information, and that disseminating squawk broadcasts to other clients or day traders was permitted, Frisch wrote.

Before the defendants were granted bail, prosecutors wrote in a response to the court: “Much of this supposed new evidence is either irrelevant or cumulative and nothing about it could have led to an acquittal.”

We asked Dickstein Shapiro’s Mauro Wolfe, a former federal prosecutor who isn’t involved in the Squawk Box case, for his opinion on these events. He told us the granting of bail was “significant” because it means the judge “has seen something in the case that could lead to a reversal” on appeal. Wolfe also said it was “troubling” that the SEC “had 27 witness transcripts, some of whom contradicted the government’s theory, and failed to turn that over.”

We’ve reached out to the SEC for comment and will let you know when we hear back. The U.S. attorney’s office declined to comment on the judge’s granting of bail.