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A divided federal appeals court has upheld a judge’s decision throwing out a guilty verdict against a computer company executive who was convicted of insider trading in connection with a tender offer. Judges Barrington D. Parker and Guido Calabresi of the 2nd U.S. Circuit Court of Appeals agreed that the government had failed to meet its burden in the 2003 trial of John Cassese, the former chairman and president of the New Jersey-based Computer Horizons Corp. In United States v. Cassese, 03-1710, the two-judge majority, in an opinion written by Judge Parker, found that Southern District of New York Judge Robert Sweet correctly overrode the jury’s guilty verdict because the evidence was insufficient. But Judge Reena Raggi dissented, disagreeing with Judges Parker and Calabresi on the sufficiency of the evidence and also taking issue with the lower court over the government’s burden in showing “willfulness” under �14(e) of the Securities Exchange Act of 1934 (and Rule 14e-3, passed pursuant to the statute), which criminalizes fraud in connection with a tender offer. The majority found that the government, “giving it all the presumptions to which it is entitled — failed to prove beyond a reasonable doubt that Cassese willfully violated Rule 14e-3 even under the more relaxed definition of willfulness it proposes.” Cassese entered merger discussions with another company, Compuware, in 1999. But Computer Horizons’ board rejected a proposal from Compuware that would have paid $22.50 per share to buy out Computer Horizons, a price that would have netted Cassese $33 million in cash. A few months later, Compuware Chief Executive Peter Karmanos Jr. called Cassese and informed him that Compuware was not interested in buying Computer Horizons at the present time. He also told Cassese that Compuware was about to acquire another company, DPRC. Cassese promptly bought 15,000 shares of DPRC and quickly sold them following the public announcement that Compuware was seeking to acquire DPRC by tender offer. The sale netted him a profit of $149,000. The SEC filed an insider trading complaint against Cassese in 2002 and Cassese consented to an order of judgment against him. He wound up disgorging his profits from the sale and paying $170,000 in penalties and interest. He was also indicted for insider trading. After his first trial in 2003 ended in a mistrial, a jury in the second trial took four days to convict Cassese under �14(e). JURY VERDICT OVERTURNED Judge Sweet found that, in criminal cases under �14(e) and Rule 14e-3, where no other securities laws have been broken, the government must prove willfulness — that the defendant believed that the information he traded on “related to, or most likely related to, a tender offer.” Sweet went on to find that the evidence was insufficient to support a jury’s finding that Cassese acted with criminal intent. At the 2nd Circuit, Judge Parker said the evidence was insufficient under any standard, and so the court “need not reach the difficult question of whether the Government must prove that a defendant believed a transaction related to a tender offer where only a violation of Section 14(e) is charged.” The government had argued that it was not required to show that Cassese knew he was violating a particular law or a particular rule “that governed trading related specifically to a tender offer,” Parker said. “Instead, the Government contends, all that was needed was proof beyond a reasonable doubt that Cassese realized that he was committing a wrongful act.” Among that evidence, prosecutors argued, was that Cassese used two brokerage accounts to buy the DPRC shares, the timing of his purchase was suspicious, he later tried to cancel the trades, he told a Compuware investment banker he “had made a stupid mistake,” and the confidentiality agreement sent to him when his own company was in talks with Compuware specifically warned him about trading on information received during merger negotiations. NO BREACH OF DUTY Before breaking down this evidence and rejecting it as insufficient, Judge Parker said that in “purchasing DPRC shares, Cassese did not breach any duty, nor did he misappropriate any confidential information.” He continued, “The information Cassese received was not related to Computer Horizons or to any company in which he could be considered an insider by virtue of a directorship or otherwise. Accordingly, he was under no legal duty to refrain from trading on the information by virtue of being an insider, or to keep it confidential.” And it was significant, the judge said, that the government did not prove that Cassese knew that DPRC would be obtained by tender offer. As for the evidence, he said, “viewed singly, each of the areas of proof by the Government was characterized by modest evidentiary showings, equivocal or attenuated evidence of guilt or a combination of the three.” DISSENTING OPINION Judge Raggi had a different view of the evidence, saying that both the lower court and the majority were obligated to draw all permissible inferences in favor of the government. “[U]nless a court determines that no rational jury could draw an inference favorable to the government from particular evidence, the court must assume that such an inference was drawn,” she said. “And if the totality of the evidence, including all permissible inferences favorable to the government, would allow a rational jury to find the elements of the charged crime proved beyond a reasonable doubt, the court cannot set aside a guilty verdict.” And as for the standard on willfulness, Raggi said 2nd Circuit precedent makes it clear that “the only proof of knowledge required to establish a willful violation of the Exchange Act is the defendant’s awareness of the general unlawfulness of his conduct.” Assistant U.S. Attorneys Steven R. Glaser, Deirdre A. McEvoy, Adam Siegel and Gary Stein represented the government. Alexandra A.E. Shapiro, David M. Brodsky, Noreen A. Kelly-Najah and Jennifer Herring of Latham & Watkins represented Cassese.

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