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One of the regrettable byproducts of the federal sentencingguidelines (U.S. Sentencing Commission Guidelines) has been that thedevelopment of substantive federal criminal law, in large part, has beenarrested. Analysis of circuit court opinions reveals that they are lopsided indealing predominately with guideline issues. The dearth of trials and theiraccompanying pretrial motions has contributed to this phenomena. Thus, it ispleasant to be able to write about several recent non-guideline opinions: thefirst two involving the increasingly important area of joint defense agreementsand the other helping to define the parameters of the court-created insidertrading misappropriation theory. JOINT DEFENSE AGREEMENTS Joint defense agreements provide some, although by no meansironclad, assurance that if one party to such an agreement defects and becomesa government witness, information shared under the umbrella of the jointdefense agreement will not fall into the government’s hands, or, at least willnot be overtly used against the non-cooperating defendants. [FOOTNOTE 1]Far less clear is whether counsel for a noncooperating defendant facesany limitations in cross-examining a witness who has abandoned a joint-defenseagreement with his client and is cooperating with the government. Does thedefense attorney owe the former member of the joint defense arrangement a dutyof loyalty or confidentiality that would restrict cross-examination? In a recent decision issued in United States v. Almeida, [FOOTNOTE 2]the 11th U.S. Circuit Court of Appeals answered this questionin the negative, vacating the conviction of a defendant whose attorneys wereprevented from effectively cross-examining a cooperating defendant whopreviously had been party to a joint defense agreement with their client. Inexchange for his testimony against defendant Almeida, the government agreedto drop 29 out of 30 counts against the cooperator. The prosecutor, apparentlyacting as counsel for the cooperating witness, successfully sought to curtailhis cross-examination by Almeida’s attorneys, asserting that theattorney-client privilege extended to any communications between thecooperating witness and Almeida’s attorneys. The government contended thatwhen the witness spoke to Almeida’s attorney “it was just as if [he]was talking to his own attorney.” The prosecutor argued thatcross-examination of the witness thus presented a classic case of divided loyalties,and sought an order preventing Almeida’s attorneys from using anyconfidential information they had obtained from the witness during the twoyears of the joint defense agreement’s operation. [FOOTNOTE 3] The district court rejected the argument that Almeida’sattorney was laboring under a conflict of interest. It did, however, accept theprosecution’s argument that eliciting or using confidential informationobtained during the joint defense agreement during cross-examination of thecooperating witness would be improper and, accordingly, precluded defensecounsel from using such information during cross-examination. After Almeida was convicted, the cooperating witnessdecided to waive any privileges, recanted his testimony against Almeida, andgave a sworn statement that Almeida was in fact not guilty. He also statedthat he had told this to Almeida’s attorneys during a joint defensemeeting, and that he had changed his story in order to obtain leniency from thegovernment. He revealed that two of the other principal witnesses against Almeida had concocted and coordinated their stories against him in an effort tohave their sentences reduced. When the defendant moved for new trial, the trialcourt acknowledged that it had erred in limiting the cross-examination of thecooperating witness, reasoning that once he defected to the prosecution’s camp,he had no privilege with respect to Almeida’s counsel. The courtnevertheless determined that the error was harmless and denied the motion for anew trial. The 11th Circuit reversed, finding that the districtcourt had abused its discretion in precluding Almeida’s attorneys fromusing joint defense communications in cross-examining the cooperator. The courtobserved at the outset, that “[w]hen a defendant conveys information tothe lawyer of his co-defendant, as opposed to his own lawyer, the justificationfor protecting the confidentiality of the information is weak.” Itobserved that the strongest rationale for keeping joint-defense informationconfidential is to provide co-defendants the opportunity to counter the”vast resources of the government” by collaborating in a confidentialfashion without forcing them to hire the same attorney — a situation, it noted”that is almost always ripe with real conflicts of interest.” The appellate court went on to discuss two longstandingexceptions to the attorney-client privilege. The first recognizes that where anattorney represents two parties sharing a common interest, neither party mayassert the privilege against the other in a subsequent dispute. The second isbased on the “ancient rule” that when an accomplice testifies for theprosecution against co-defendants, he waives the attorney-client privilege aswell as the privilege against self-incrimination. Recognizing that both ofthese exceptions are open to criticism for eroding confidence inattorney-client confidentiality, the court stopped short of holding thataccomplices always waive the privilege when they testify on behalf of thegovernment, or that jointly represented individuals always waive the privilegewhen one decides to testify for the prosecution against the other. But, in thecontext of a joint defense agreement, the court held that the rationale forwaiver outweighs the minimal benefit of the attorney-client privilege. Itconcluded that “when a party to a joint defense agreement is representedby his own attorney, [communications made by one defendant to the other'sattorney] do not get the benefit of the attorney-client privilege in the eventthat the co-defendant decides to testify on behalf of the government.” The joint defense agreement at issue in Almeidawasan oral agreement. The defendant in that case benefitted from the fact thatneither the government, nor the former member of the agreement disputed itsexistence or scope, and that the court of appeals adopted a rule that washighly protective of the non-defecting member of the joint-defense agreementeven in the absence of a written waiver. Earlier this year, the U.S. District Court for the NorthernDistrict of California took an unusual and more proactive approach in amulti-defendant case, requiring the defendants, at the outset of a prosecution,to submit any proposed joint defense agreements for its approval “out ofconcern for the Sixth Amendment rights of the defendants and the integrity ofthe proceedings.” The court believed that it had inherent supervisorypower to regulate these agreements, even over the objection of defense counsel.The court in United States v. Stepney, [FOOTNOTE 4]ordered that joint defense agreements in that case must: (1) explicitlydisclaim that they create any type of attorney-client relationship between anydefendant and counsel for another defendant in the case; (2) provide thatattorneys will owe a duty of confidentiality to those who are not theirclients, but that no concomitant duty of loyalty exists between the lawyer andthose members of a joint-defense agreement the lawyer does not actuallyrepresent; (3) contain a conditional waiver of confidentiality permitting asignatory attorney to cross-examine any defendant who testifies at anyproceeding using any material contributed by the witness during thejoint-defense; and (4) expressly allow any defendant to withdraw from the agreementupon notice to the other defendants. The court held that to impose on attorneys a duty ofloyalty to their clients’ co-defendant would “create a minefield ofpotential conflicts” that would require withdrawal of counsel required tocross-examine another member of a joint defense agreement, or even where adefendant pursued a defense that conflicted with the defenses of the otherparticipants in the joint defense agreement. The court went on to note that”[d]isqualification of attorneys late in the proceedings benefits no one– it deprives defendants of counsel whom they know and trust and perhaps evenchose; it forces delays while new counsel become acquainted with the case,which harm defendants, the prosecution, and the court.” DISMISSAL OF FRAUD CHARGE The second noteworthy defendant’s victory was in UnitedStates v. Cassese, [FOOTNOTE 5]in which Southern District Judge Robert W. Sweet dismissed, as legallyinsufficient, one of two criminal securities fraud charges in an indictmentalleging that the defendant had traded based on material, nonpublicinformation. As charged in the indictment, the defendant, Cassese,was the chairman and president of Computer Horizons, a firm that providedtemporary computer and information technology personnel. During the spring of1999, he participated in discussions with Compuware Corp., another company inthe same industry that had expressed an interest in acquiring Horizons. In thecourse of those negotiations, Compuware sent the defendant a letter of intentsetting forth the proposed terms of the transaction, as well as aconfidentiality agreement, which sought to prohibit any employee of Horizonsfrom trading on any material, nonpublic information learned during the courseof the merger discussions. Nobody from Horizons ever executed that agreement.At that time, Compuware was simultaneously engaged in merger discussions with asecond company, Data Processing Resources Corp., and in early June 1999 reachedan agreement to purchase that company instead. On June 21, 1999, Compuware’sCEO informed the defendant that the contemplated transaction between Compuwareand Horizons would not take place because Compuware would be acquiring DataProcessing Resources. The indictment charged that at the time of thisconversation, Cassese was aware that the proposed acquisition of DataProcessing Resources had not been announced. It further alleged that thefollowing day, he placed orders to purchase 15,000 shares of Data ProcessingResources stock, which he sold two days later, at a profit of more that$150,000, following board approval of the proposed tender offer and the pressrelease publicly announcing the acquisition. The defendant was charged in atwo-count indictment with securities fraud in connection with a tender offer inviolation of � 14(e) of the Securities Exchange Act of 1934 and Rule 14e-1thereunder, and with securities fraud under � 10(b) of the Securities ExchangeAct of 1934, and Rule 10b-5 thereunder. On motion of astute defense counsel, Judge Sweet dismissedthe � 10(b) count, holding that even if all the allegations in the indictmentwere proved, they would not establish securities fraud in violation of thatsection. [FOOTNOTE 6]He observed that � 10(b) and Rule 10b-5 support two general theories ofliability for trading on material non-public information. The first,traditional insider trading, requires that the defendant be a corporate insiderwho trades in his own company’s stock or received a tip from a corporateinsider who was himself violating a fiduciary duty in disclosing theinformation. The indictment did not allege that Cassese was a corporateinsider, or that the Compuware CEO breached any legal duty by disclosing itsintention to acquire Data Processing Resources to Cassese. The government chose instead to proceed against Casseseunder the misappropriation theory, which imposes liability under � 10(b) when aperson “misappropriates confidential information for securities tradingpurposes, in breach of a duty owed to the source of the information.” [FOOTNOTE 7]Judge Sweet noted that misappropriation turns, not simply on whether adefendant has traded based on material, non-public information, but on whetherhe has done so in violation of a “fiduciary duty or similar relationshipof trust and confidence” owed to the source of the information. Relying onthe 2nd Circuit’s earlier decision in United States v. Chestman, [FOOTNOTE 8]he stressed that such a duty “cannot be imposed unilaterally byentrusting a person with confidential information.” Chestmancautionedthat “[t]ethered to the field of shareholder relations, fiduciaryobligations arise within a narrow, principled sphere,” where one party hasreposed confidence in the other, resulting in some dominance, superiority orinfluence. Judge Sweet noted that the types of associations that have been heldto be inherently fiduciary include attorney and client, executor and heir,trustee and beneficiary, and senior corporate official and shareholder. Judge Sweet went on to examine the relationship between Cassese and the Compuware CEO against this backdrop. He concluded that theirstatus as business competitors engaged in negotiations for a possible mergercast them in the roles of potential arm’s-length business partners rather thanfiduciaries. In reliance on Chestman,Judge Sweet noted that a duty ofconfidentiality may be implied in certain instances, but only from apre-existing fiduciary-like relationship between the parties. In this case, thedefendant’s position was undoubtedly strengthened by the fact that the confidentialityagreement proposed by Compuware never was executed — a fact that Judge Sweetsuggested might be seen as an actual rejection of any duty of confidentiality.Because the information on which Cassese traded was obtained through arelationship “best characterized as an equal relationship betweenpeers,” rather than one “involving a degree of dominance,” JudgeSweet concluded that the � 10(b) charge contained in the indictment failed as amatter of law. One other recent case from the Northern District ofCalifornia dealt with an unusual theory in the context of inside informationobtained at a business club for which membership was predicated on compliancewith a written confidentiality commitment. [FOOTNOTE 9]The court dismissed these charges holding that “even if the membersof [the club] were bound by an express confidentiality agreement, thatagreement appealed only to the members’ ethics and morality; it did not giverise to any legal duties.” The amorphous state of insider trading law, as prosecutorscontinue to try to expand it, raises the question anew as to whether Congresswill ever intervene to bring clarity and cohesion to this aspect of the law. Robert G. Morvillo and Robert J. Anello are partnersat Morvillo, Abramowitz, Grand, Iason & Silberberg ( www.magislaw.com ). Judith L. Mogul, anattorney, assisted in the preparation of this article. If you are interested in submitting an article to law.com, please click here for our submission guidelines. ::::FOOTNOTES:::: FN1 See United States v. Schwimmer, 892 F2d 237 (2d Cir.1989); United States v. Aulicino, 44 F3d 1102 (2d Cir. 1995). FN22003 WL 21957162 (11th Cir. Aug. 18, 2003). FN3The prosecutor also sought, but did not obtain, ahearing pursuant to Rule 44(c) so that the court could obtain a waiver of thisconflict from Almeida or require his counsel to withdraw for the purposesof cross-examining the cooperating witness. FN4246 FSupp2d 1069 (NDCal 2003). FN52003 WL 21710765 (SDNY July 23, 2003). FN6The defendants did not seek to have the �14(e) countdismissed. Trial on that count ended in a hung jury on Sept. 22. FN7 United States v. O’Hagan, 521 US 642 (1997). FN8947 F2d 551 (2d Cir. 1991). FN9 See United States v. Kim, 184 FSupp2d 1006 (N.D. Cal.2002).

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