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For the second time in one week, the 9th U.S. Circuit Court of Appeals on Aug. 25 reversed Northern California U.S. District Judge Vaughn Walker. This time, however, the U.S. attorney’s office isn’t smiling about the decision. Two executives from Milpitas, Calif.-based California Micro Devices will get a new trial after the circuit court ruled, in an unsigned opinion, that Walker should have allowed defense attorneys to withdraw from the securities fraud case after one of the defendants struck a deal with the U.S. attorney in exchange for testimony. The case was one of the first criminal prosecutions won by the Northern District U.S. attorney’s office in a stock-drop suit. The office had no comment on Friday’s decision. United States v. Henke may complicate government attempts to strike deals in multi-defendant cases. Cal Micro’s former president, Surendra Gupta, had participated in joint defense meetings with the co-defendants, former chairman of the board Chan Desaigoudar and former chief financial officer Steven Henke. When Gupta decided to testify for the government, defense attorneys argued, they were unable to cross-examine him when they felt he was being false or misleading without violating the prior attorney-client privilege pact. “If they even touched on the issue, [defense lawyers] would have been out of bounds,” said Milberg Weiss Bershad Hynes & Lerach partner Sanford Svetcov, who was hired for the appeal by the defendants while with San Francisco’s Landels Ripley & Diamond, which has since closed its doors. In fact, in a letter dated June 26, 1998, Gupta’s lawyer threatened the defense with “appropriate legal action” if the attorney-client privilege was violated. The defense moved for a mistrial and to withdraw from the case. Walker ordered a mistrial but did not allow the attorneys to withdraw from the retrial. The 9th Circuit ruled he should have, but also warned that the ruling does not disqualify all defense lawyers faced with similar circumstances. “There may be cases in which defense counsel’s possession of information about a former co-defendant/government witness learned through joint defense meetings will not impair the defense counsel’s ability to represent the defendant or breach the duty of confidentiality to the former co-defendant,” the opinion states. “Here, however, counsel told the district court that this was not a situation where they could avoid reliance on privileged information and still fully uphold their ethical duty to represent their clients. “By choosing to convert Gupta into a prospective witness shortly before the trial was scheduled to start, the government — which may not have anticipated this complication when it made the deal with Gupta — caused this problem, and should now be heard to complain.” The opinion is unsigned, but the panel consisted of Judge Mary Schroeder, Senior Judge Robert Beezer and Judge Stephen Trott. Beezer is not the author, as he concurred in the decision. “I’m very pleased that the 9th Circuit sees, in light of all the errors, that the defendants did not have the kind of fair trial that our system expects,” Svetcov said. The case was brought over allegedly misleading statements that made it appear the company was meeting its financial goals. The U.S. attorney’s office accused the defendants of false revenue reporting and insider trading. Despite the reversals, Walker was hardly pro-government during trial. At the sentencing phase he granted the defendants reduced sentences, to the consternation of the government. Although no decision has been announced, retrying the case will be difficult for the U.S. attorney’s office. Securities fraud cases are both complicated, expensive and — in light of recent trends against plaintiffs in such suits — a risky proposition. Several key lawyers involved in the government’s case have since departed. The 9th Circuit also slapped the prosecutor on the wrist for eliciting testimony from Desaigoudar that required him to comment on the truth of the testimony of several government witnesses — testimony Walker allowed. “The prosecutor repeatedly forced him to say that several of the government’s witnesses lied on the stand. After the judgments were entered in this case, we made clear that forcing a defendant to comment on the veracity of another witness’s testimony is improper,” the court said. For the U.S. attorney’s office, Friday’s opinion is a shift from a decision issued two days earlier, when a different 9th Circuit panel vindicated Assistant U.S. Attorney Robin Harris for ex parte communications with a defense witness who claimed employers were pressuring her to lie on the stand. Walker had said the talk violated ethical standards. Despite the fact that it sided with defendants in a securities fraud case (albeit for reasons grounded in criminal law), Milberg Weiss has to be happy with the 9th Circuit’s decision. In general, the law in securities cases has swung in the defense bar’s favor. Milberg Weiss recently hired Svetcov to win appeals at the 9th Circuit. In this case, he delivered, and the controversial plaintiffs’ firm no doubt hopes he does so in the future. “I’m briefing several [cases] now, but they’re not up at the plate yet,” Svetcov said.

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