Got a Hot Stock Tip? United States v. Newman Clarifies the Law of Insider Trading

Update 10/5/15:  Today the U.S. Supreme Court denied the government’s petition for certiorari, meaning the Second Circuit’s decision will stand.

Update 7/30/15:  Today the government filed for certiorari, asking the U.S. Supreme Court to review the Second Circuit’s decision.

Update 4/3/15:  The Second Circuit today denied the motion for rehearing and for rehearing en banc, which means the original decision stands.

Update 1/26/15:  On Friday, January 23, the U.S. Attorney asked the Second Circuit to reconsider its decision, either through the original three-judge panel or through the entire court sitting en banc.

Suppose your brother-in-law has too much eggnog at Christmas dinner and starts blabbing about confidential inside information concerning the company where he works. If you trade the company’s stock based on that information, do you risk finding a subpoena from the SEC in your stocking?

The U.S. Court of Appeals for the Second Circuit recently decided United States v. Newman, a significant case clarifying and narrowing the law of criminal insider trading. (The Second Circuit includes New York, the site of most insider trading prosecutions.) As with many white collar crimes, however, even in the wake of the new decision a lot of gray areas remain.

The Classic White Collar Crime

Insider trading is a textbook example of a white collar crime. One reason is the breadth and vagueness of the statutes involved. There actually is no law defining insider trading as a crime. It is prosecuted under the Securities Exchange Act of 1934, which prohibits the use of any “manipulative or deceptive device” in contravention of the rules of the SEC. SEC Rule 10b-5, in turn, prohibits any “device, scheme, or artifice to defraud” in connection with the purchase or sale of any security.

The SEC has long considered insider trading to be a violation of Rule 10b-5, and the Supreme Court has agreed. Absent a statutory definition of “insider trading,” however, defining and fleshing out the parameters of the offense has been left to the SEC, prosecutors, and the federal courts – a not uncommon issue with white collar statutes.

Another common white collar characteristic featured in insider trading is the prominence of parallel proceedings – enforcement by multiple parties or agencies. Insider trading may be investigated by the SEC and punished by administrative sanctions or civil fines. Shareholders and other private individuals may file a civil lawsuit over the same conduct. And in the most serious cases, the SEC may make a criminal referral to the Department of Justice for prosecution.

Wall_Street_Sign

The Law of Insider Trading

Insider trading is defined as buying or selling securities based on material, non-public information, in violation of a duty of trust and confidence. Trading on the basis of inside information alone is not a crime. In order to constitute fraud, there must be an accompanying breach of a legal duty in connection with the trading.

“Classical” insider trading involves a corporate officer or employee who knows confidential information about something going on at the company and trades in the company stock based on that information. In such a case, the insider is deemed to have violated the fiduciary duty that she owes to the company’s shareholders to act only in their best interests and not to appropriate confidential company information for her own personal gain.

The second type of insider trading is the “misappropriation theory.” In a misappropriation theory case, a company’s stock is traded based on information used in violation of a duty owed not to the shareholders but to the source of the information. For example, outside counsel for a corporation may gain confidential information about an upcoming deal and trade stocks based on that information. The attorney, as an outsider to the corporation, owes no fiduciary duty to the corporation’s shareholders so the classical theory would not apply. Under the misappropriation theory, the trade is unlawful because the attorney violated a duty to the client by using the client’s confidential information for the attorney’s own benefit.

The ban on insider trading would be rather easy to circumvent if a corporate insider could refrain from trading himself but simply give the information to a corporate outsider, such as a spouse or a child, and have them do the trading. Accordingly, the Supreme Court has long recognized that insider trading liability also may be based on the receipt of a “tip” of inside information.

The leading Supreme Court case on “tippee liability” is Dirks v. SEC. Under Dirks, in a tip case the government is required to prove two things: 1) the insider who leaked the information did so in violation of a duty owed to the company or the source of information; and 2) the recipient of the tip who trades on the stock knew or had reason to know that the breach of duty occurred. The Court also held that an insider who provides a tip violates his duty to the company when he does so in exchange for some monetary or other personal benefit.

The Second Circuit Decision: U.S. v. Newman and Chiasson

The recent Second Circuit case involved a question of tippee liability. The defendants, Todd Newman and Anthony Chiasson, were portfolio managers at two hedge funds. They and others were charged as part of a scheme in which various analysts and investment firms received and traded on inside information about the upcoming earnings of two companies, Dell and NVIDIA. Insiders at the companies leaked the information to other investment analysts, who then passed the word along. In each case, Newman and Chiasson were several steps removed from the original leak, receiving the inside information only after it had been first relayed between at least two or three other people.

At trial, Newman and Chiasson made two principal arguments. First, they claimed there was insufficient evidence that the original leakers within Dell and NVIDIA had leaked the information in exchange for some personal benefit, as required by Dirks. Second, they argued that even if there were sufficient evidence of such a benefit, the government had failed to prove that Newman and Chiasson personally knew that the corporate insiders had received the benefit.

Relying on somewhat conflicting Second Circuit precedents, the trial judge ruled against them. The judge found there was sufficient evidence that the insiders had received a personal benefit in exchange for leaking the information. The judge also agreed with the government that it was required to show only that the defendants knew that insiders had leaked the information in violation of their duties to the company – the government did not have to prove the defendants actually knew the insiders had received a personal benefit in exchange.

The jury ultimately found both defendants guilty. Newman was sentenced to 54 months in prison and nearly $2 million in fines and forfeiture; Chiasson was sentenced to 78 months and nearly $7 million.

The Second Circuit reversed the convictions. The court first addressed what the defendants must know in order to be convicted. The court agreed with the defendants that the law requires the government to prove the defendants knew not only that the tippers had breached a duty in leaking the inside information, but also that the tippers had received a personal benefit in exchange for doing so.

As the court recognized, the reasoning of Dirks compels this conclusion. The Supreme Court ruled that to be liable a tippee must know that the insider leaked the information in breach of a duty. The Court in Dirks also held that breach of a duty was established if the insider received some personal benefit in exchange for the leak. Logically, therefore, proof the tippee knew there was a breach of duty means proof the tippee knew that the insider received some personal benefit.

The Second Circuit went on to address what kind of “personal benefit” would suffice to establish an insider’s breach of duty. The government argued it had presented sufficient evidence that the tippers from Dell and NVIDIA had received a personal benefit in exchange for the inside information. One had received occasional career advice from an analyst to whom he leaked information (although apparently much of that took place prior to the leaks). The other insider was a family friend of one of the analysts; they went to the same church and occasionally socialized together.

The Court agreed that “personal benefit” is not limited to monetary gain and includes things like reputational benefits that may translate into future earnings or the intangible benefit one receives from making a gift to a relative or very close friend. But this does not mean, the court continued, that the government could prove this element simply by establishing that the tipper and tippee are friends. If that were sufficient this requirement would practically disappear, for at a minimum a casual friendship between tipper and tippee probably exists in almost all such cases.

Accordingly, the court held, proof of a personal benefit requires evidence of a “meaningfully close relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”   The evidence of a casual friendship and other slight potential benefits in Newman did not meet that standard. Because the evidence produced was insufficient to establish insider trading, the court reversed the convictions and directed that the indictments be dismissed with prejudice – meaning the defendants cannot be retried.

wall st bull

Implications of the Second Circuit’s Decision

The court in Newman was clearly unhappy with the government’s expansive view of insider trading and moved to scale it back. In an unusual rebuke, it criticized the “doctrinal novelty” of the government’s recent insider trading prosecutions, which the court said have been “increasingly targeted at remote tippees many levels removed from corporate insiders.” The court noted it had not found a single case in which tippees as remote as Newman and Chiasson had been found criminally liable for insider trading.

The decision in Newman has two primary implications for future prosecutions. The first is simply that the legal standard is now clear concerning what the government must prove concerning a tippee’s knowledge. It is not enough to prove the tippee knows that the inside information was leaked in violation of a duty. The prosecution will also be required to establish that the defendant knew the tipper did so in exchange for a personal benefit.

Presumably knowledge of the benefit received by the tipper may be established either directly or through willful blindness – proof that the defendant deliberately closed his or her eyes to what was going on. But as tippees – such as Newman and Chiasson – become further removed from the original tip and knowledge of the tipper’s circumstances, this proof obviously becomes more difficult. As a result, cases against what the court termed “remote tippees” likely will be less frequent.

The more interesting question may be what sort of “benefit” to the tipper will qualify. The easy case is when a corporate insider leaks information to the tippee in exchange for some direct and tangible benefit, whether a cash payment, share in the trading proceeds, or some other direct reward. This transaction is akin to bribery and a quid pro quo relationship, with intent on the part of the tippee to benefit the tipper in exchange for the information.

The potential gray area for future cases involves tips to family, friends, or casual acquaintances. If the relationship is sufficiently close that the tip is basically equivalent to the insider trading on the information and then giving the profits to the tippee – think a spouse, child or sibling – a personal benefit to the tipper will almost certainly be found. On the other hand, the Newman decision suggests that any intangible benefit resulting from a tip to a more casual acquaintance or golfing buddy may not suffice. Where exactly the line gets drawn will be a very fact-specific question, with the standards to be hammered out in future cases.

In the meantime, as for that tip from your brother-in-law, the safest course is simply to pour him some more eggnog and pretend you didn’t hear a thing.

To receive e-mail notifications of new posts, click on the “Follow” button on the upper right.

Bob McDonnell, Bribery, and “Official Acts” – Part II

Whether Bob McDonnell performed “official acts” in exchange for the extravagant gifts he received from Jonnie Williams has been a central issue in his corruption case. A few weeks back I wrote about how this is the wrong legal standard because the definition of “official acts” in the federal bribery statute does not apply to honest services fraud and extortion under color of official right, the crimes for which McDonnell was convicted. That post dealt primarily with the proper definition of bribery for those two crimes, and I promised to return to a more thorough discussion of “official acts.”

So what exactly is the story behind the detailed and somewhat convoluted definition of “official act” that became so central to McDonnell’s case? It appears in the federal bribery and gratuities statute, 18 U.S.C. §201. Section 201(a)(3) defines an official act as:

Any decision or action on any question, matter, cause, suit, proceeding, or controversy, which may at any time be pending, or which may by law be brought before any public official, in such official’s official capacity, or in such official’s place of trust or profit.

McDonnell’s lawyers seized on this definition and made it the centerpiece of their defense. Whatever the Governor did, they argued, it did not constitute a “decision” or “action” on a “question, matter, cause, suit, proceeding or controversy,” and so could not form the basis for a bribery conviction.

This argument was possible because the federal definition of bribery involving such “official acts” is unusually narrow, creating potential loopholes. Virginia state law, for example, defines bribery as accepting a pecuniary benefit “to obtain or influence the recipient’s decision, opinion, recommendation, vote or other exercise of discretion as a public servant or party official.” VA Code §18.2-447(2). There is no requirement that the bribe relate to a specific “question, matter, cause, suit, proceeding or controversy” that may be “brought before” the public official – a payment to influence any official decision or exercise of discretion will suffice.

Why does the federal statute contain this apparently narrower focus on “official acts?” The answer may have to do with the role that the definition of “official act” plays in the overall statutory scheme of 18 U.S.C. §201.

Bribery vs. Gratuities: Please and Thank You

Section 201 actually describes two distinct offenses: bribery and the far less serious crime of gratuities. Bribery, defined in §201(b), is punishable by up to fifteen years in prison. The key to bribery is influence, or a quid pro quo: in exchange for a thing of value, the public official agrees to act a certain way. The political system is corrupted because the official is acting not in the best interests of all but in order to benefit the person who paid him or her off.

Gratuities, defined in §201(c), carry a maximum penalty of only two years. A gratuity is just what it sounds like: a payment or “tip” for services rendered. There is no requirement that the public official was influenced in any way. A gratuity may be a pure after-the-fact reward for an action already taken or for something the official has already committed to do. The official’s behavior is not being altered.

A good shorthand way to remember the distinction: a bribe says “please,” while a gratuity says “thank you.”

The definition of “official act” in §201 plays a role in defining both offenses, but is actually far more important to the crime of gratuities than it is to bribery. A gratuity under §201 always requires that the gift be linked to an “official act.” Bribery, on the other hand, is defined three different ways, only one of which involves “official acts.” A bribe may be a payment to influence a public official in the performance of an “official act,” OR to induce the public official to do something in violation of his/her official duty, OR to induce the public official to aid in committing a fraud against the United States.

vineyard

United States v. Sun-Diamond Growers

The leading Supreme Court discussion of §201 is the 1999 case of United States v. Sun-Diamond Growers of California. Sun-Diamond, a large agricultural cooperative, was indicted for providing illegal gratuities to Mike Espy, the Secretary of Agriculture under President Clinton. The indictment charged that Sun-Diamond had given Espy gifts worth about $5,900, including tickets to the U.S. Open, luggage, and a crystal bowl.

The indictment also alleged that, at the time of the gifts, there were several matters pending before Secretary Espy in which Sun-Diamond’s members had an interest, but it did not link any particular gift to any particular matter on Espy’s plate. The prosecution argued it was enough that Sun-Diamond had given Espy the gifts because of his official status. Espy was in a position to take future actions that would benefit Sun-Diamond. The gifts were an attempt to curry favor and generate good will and that, the prosecution argued, should be sufficient to make them gratuities.

In a unanimous decision the Supreme Court disagreed. Noting that the gratuity statute requires a thing of value to be given “for or because of any official act,” the Court held this language means the prosecution must identify a particular “official act” to which the gratuity is linked. It was not enough to say simply that the gifts were to generate good will or because of a public official’s position.

The Court noted that, were it to accept the government’s theory of a gratuity based simply on an official’s status, it would lead to some odd results. For example, suppose the President received a sports jersey from a championship team visiting the White House. The President, simply by nature of his office, will always be in a position to take some future action that could in some way benefit college or professional sports. If the prosecution’s “status gratuity” theory were correct, giving the President a jersey would become an illegal gratuity punishable by two years in jail – an absurd outcome Congress could not have intended.

In the discussion most relevant to the McDonnell case, the Court recognized some might argue that, even in the sports jersey example, the jersey was given “for or because of” the “official act” of receiving the team at the White House and thus the statute was still violated. The answer, the Court said, is that although receiving the team may be an official act in some sense, it is not an “official act” as defined in the statute because it does not involve any “decision” or “action” on a “question, matter or controversy” brought before the President.

The U.S. Court of Appeals for the D.C. Circuit picked up on this theme in another important case on “official acts” in 2007, Valdes v. United States. Valdes, a D.C. police officer, agreed with a man he met at a nightclub to look up some vehicle license plate records in a police database in exchange for a few hundred dollars. Although originally charged with bribery, Valdes was ultimately convicted only for gratuities, for accepting money for the “official act” of looking up the records.

The D.C. Circuit, relying heavily on Sun-Diamond, reversed Valdes’ convictions because looking up the records did not constitute an “official act.” Although Valdes was using police resources, there was no pending “matter” or “controversy” that he had to decide within the meaning of the statute. An “official act,” the court held, requires that there was some kind of question before the official, in his or her official capacity, which the official had to resolve. Officer Valdes was simply moonlighting, not performing “official acts” as defined.

McDonnell2

The brief discussion of “official acts” in Sun-Diamond has spawned a lot of litigation, and formed the backbone of McDonnell’s defense. Sun-Diamond features prominently in the briefs in the McDonnell case. His lawyers have repeatedly argued that any actions McDonnell may have taken in exchange for the gifts he received, such as hosting a product launch event at the Governor’s mansion, were not “official acts” but were mere ceremonial or routine events, akin to the White House ceremony where the President receives the jersey.

As I argued in my earlier post, I don’t think the “official acts” definition applies to the charges in the McDonnell case. But even if it did, the defense argument would be flawed. Although the focus on the statutory definition of “official act” may serve to avoid absurd results in gratuities cases, it does not play the same role when it comes to a bribery case such as that involving the former Governor.

In a gratuities case, the focus is on the nature of the official action being rewarded: was this particular gift “for or because of” an exercise of discretion involving an identifiable decision or action on a matter, proceeding or controversy. Sun-Diamond and Valdes conclude that an “official act” as defined in the statute requires this kind of discretionary action, the public official’s resolving of a question before him or her. This avoids the criminalization of token gifts for routine or ceremonial actions.

In a bribery case, by contrast, the focus is not so much on the nature of the act but on the question of influence, or quid pro quo. Of the three ways to violate the bribery statute, only one requires an “official act” — but all three require the government to show that the public official was “influenced” or “induced” to act a certain way. Whatever the nature of the action taken, the key question is: was it taken in exchange for the thing of value that was given? Did the public official agree to sell the powers of his/her office?

Take the sports team hypothetical from Sun-Diamond. In a gratuities case, the court focuses on the event itself, and concludes it is not an “official act” because hosting the team does not involve any kind of decision, resolution, or answering of a question by the President.

In a bribery case, however, the focus shifts from the event itself to whether the public official has agreed to be influenced in connection with that event. For example, if the team’s coach offers to give the President $100,000 if he will host the team at the White House and the President accepts, there’s no question that’s a bribe. The key is not the nature of what the President is agreeing to do – it’s still the same White House recognition ceremony. The key is the fact that now he is selling his office, agreeing to be influenced in the exercise of his discretion in exchange for the money.

Within the terminology of the “official act” definition, the President is making a “decision” on a “question” that has come before him in his official capacity – namely, “should I host this team at the White House?” – and has agreed to be influenced in deciding that question in exchange for the money. That’s a bribe.

McDonnell is a bribery case; Sun-Diamond and Valdes were not. As the McDonnell judge has noted, the Court in Sun-Diamond did not purport to examine the full scope of the “official acts” definition for purposes of the crime of bribery. And even for gratuities cases, the discussion about the sports team at the White House was dicta not essential to the decision.

McDonnell’s case is not about whether hosting a product launch luncheon or otherwise promoting Jonnie Williams’ product fits the precise definition of “official acts” in §201. All the talk about “official acts” is primarily smoke and mirrors. The jury, by its verdict, found that McDonnell agreed to be influenced in the exercise of his official powers in exchange for the gifts that he received.

That’s the essence of bribery. And that’s why Bob McDonnell has a problem.

Two important updates this week:  News reports indicate that the Department of Justice will not compel New York Times reporter James Risen to reveal his source, although he may still be asked more limited questions.  See my posts about Risen and the reporter’s privilege here and here.  Also, there are reports the probation department has recommended that Bob McDonnell be sentenced to a minimum of 121 months.  See my discussion of the McDonnell sentencing and how that number may have been calculated here.

Sign up to receive e-mail notifications of future posts by clicking on the “Follow” button on the upper right.

Will McAvoy Goes to Jail: Reporter’s Privilege and “The Newsroom”

I’ve enjoyed watching The Newsroom, Aaron Sorkin’s HBO series that will soon end its third and final season. If you’re not a fan, the show chronicles the behind-the-scenes action at a fictional cable news network, ACN, as the staff confronts the many thorny issues facing the modern media. Jeff Daniels stars as Will McAvoy, the anchor of ACN’s hourly news broadcast, “News Night.”

The last few episodes have featured a storyline in which McAvoy is jailed for contempt after refusing to reveal a confidential source’s identity to a federal grand jury. The source illegally leaked 37,000 classified documents to ACN. The documents detail a failed U.S. covert operation against a foreign government in which dozens of people were killed. The government believes the disclosure has compromised intelligence operations and endangered lives, and wants to prosecute the leaker.

The federal prosecutor investigating the leak subpoenas Will to testify in the grand jury and name the source. Will refuses, despite an order from a federal judge that he comply. Although Will is confident that he is “too big to jail” and the government would never seek to lock him up, that confidence turns out to be misplaced and he is jailed for contempt of court.

The story is no doubt inspired in part by the recent events involving James Risen, the reporter for the New York Times who has been subpoenaed to testify at the criminal trial of former CIA employee Jeffrey Sterling. The government believes Sterling illegally leaked classified information to Risen and wants Risen to confirm that fact. Risen has refused and has said he will go to jail rather than reveal his source. As of this writing, Sterling’s trial is set to begin soon and there is no reported resolution of the standoff between Risen and the government.

I’ve done a lot of work over the past decade on the issues surrounding the reporter’s privilege, and have written about the Risen case on this blog here and here. In brief, I think the privilege is a bad idea. There’s no evidence that confidential sources are deterred from coming forward by the lack of a privilege — after all, investigative journalism has thrived for more than 200 years without one. The privilege would effectively immunize leakers of classified material, making it almost impossible to protect even the most sensitive national security information. And in today’s digital world, any government effort to define who is a “real” journalist worthy of a special legal privilege presents huge First Amendment issues of its own. (Anyone interested in reading a more in-depth critique of the reporter’s privilege can find a law review article I wrote in 2008 here.)

old newsroom

Reporters Privilege and The Newsroom

It’s been interesting to watch The Newsroom’s dramatization of the reporter’s privilege issues. The show has done a good job of acknowledging that the Supreme Court’s 1972 decision in Branzburg v. Hayes holds there is no constitutional privilege for a reporter to refuse to identify a source in a grand jury investigation. Legally, Will doesn’t have much of a leg to stand on.

The show also highlights some of the anomalies surrounding leaks of classified information to reporters. For example, in one scene a producer is in a conference room with stacks of the leaked documents and his girlfriend – also a journalist – walks in. He says, “There’s classified documents in here, you can’t be in here,” and walks her out of the room. The irony, of course, is that the producer himself has no more legal right to be looking at classified materials than does his girlfriend.

Journalists often think of themselves as self-appointed monitors to review classified information, but some characters in The Newsroom rightly question this notion. How exactly are journalists, who have no formal training in national security or counter-espionage, qualified to make decisions about what is a “good” leak or a bad leak, whether government covert operatives have done a good job, or whether publishing certain information might damage our country’s interests? Journalists are unelected and unaccountable to the public, and work in an intensely competitive industry where professional accolades accrue to the first to reveal new information. It’s not at all clear why we should feel comfortable entrusting them with potential life and death decisions about national security.

Trusting journalists to protect information that truly needs to be kept secret also assumes that any leaks will be made to a “mainstream media” organization that will behave responsibly and listen to government concerns about disclosing the information. This is no longer necessarily true. At one point in The Newsroom the source, who feels the story is not being aired quickly enough by ACN, threatens simply to dump all the documents on the Internet.

This highlights another fact of life about leaking in the digital age. Sources no longer require the “mainstream media” in order to get their classified information out to the public – all they need is an Internet connection. If the information is compelling enough, they can depend on the mainstream media to pick up the story and publicize it widely. There’s no real need to leak information to a reporter anymore, and no guarantee that an established media organization will carefully vet the information before disclosing it.

Art Doesn’t Always Imitate Life

Of course, real life doesn’t always make for riveting TV drama, and you can’t quarrel with the need to take a little artistic license. But lest anyone think that McAvoy’s experience is an accurate depiction of what would happen in a real-world case, let’s examine just three points:

1) Get subpoenaed on Monday, go to jail on Friday – McAvoy and ACN have a great legal malpractice claim against their lawyer, Rebecca Halliday. In the show, McAvoy is subpoenaed, goes before the grand jury twice and refuses to reveal his source, appears before the judge twice, gets held in contempt, and gets hauled off to jail – all in the space of a week. Halliday pretty much just sits back and lets it all happen.

In real life, once McAvoy received a subpoena, Halliday would have filed a motion to quash the subpoena based on a claim of reporter’s privilege. (Although the Supreme Court in Branzburg made such a claim very difficult, a reporter is free to try to convince a court to recognize the privilege in their particular case.) If she lost before the district court judge, she could appeal to the U.S. Court of Appeals. If she lost again, she could petition to have the entire Court of Appeals rehear the case en banc, and if that was denied, she could file a petition for certiorari to the U.S. Supreme Court. Each of these stages would involve months of briefing by both sides, oral arguments, and waiting for the court’s decision.

All of this would likely consume at least 18 months to two years, during which the subpoena would be on hold. McAvoy would not have to appear before the grand jury and would not be held in contempt for refusing to testify. This is exactly what has happened in the Risen case, where these types of legal battles have delayed the trial of Jeffrey Sterling for more than two years while Risen has yet to face a single question under oath.

This is one very practical reason that a prosecutor will subpoena a reporter only as a last resort. If you do so, you are almost certainly wading into a huge legal battle against top-notch media lawyers that will delay your case for at least a couple of years. Delay is bad for the prosecution: memories fade, witnesses become unavailable, circumstances change, and the case generally gets more difficult to prove.

In The Newsroom, for example, McAvoy’s source ends up taking her own life about two months after he is held in contempt and the government drops the subpoena because it no longer needs his testimony. In real life, after only sixty days the briefing at the District Court level alone would probably not be complete. If Halliday had done her job properly, Will would never have seen the inside of a grand jury room, much less a prison cell.

2) Going for the reporter first – On The Newsroom it appears the government learns about the leak and goes straight to ACN and McAvoy to seek to compel them to reveal their source. There’s no indication that the prosecutors did any investigation within the government to see if they could independently identify the leaker without needing to talk to the press.

In real life, federal prosecutors are governed by strict Department of Justice guidelines concerning when they may seek to compel information from the press. Among many other things, those guidelines require prosecutors to demonstrate they have exhausted every other potential option and that they are seeking information from the press only as a last resort and only because it is absolutely necessary.

Before even thinking about going to the reporter, prosecutors would do an exhaustive investigation into the possible source of the leak. This could include examining government computer and phone records, interviewing any possible witnesses or sources, examining phone and other records of possible suspects, perhaps conducting lie detector tests or having witnesses swear out affidavits denying they were the source, and taking other investigative steps.

Both the Department of Justice guidelines and any judge reviewing a motion to quash a subpoena of a journalist would require the prosecution to demonstrate that it has exhausted every other possible investigative avenue and that it is coming to the journalist only as a last resort. Again, that could take months or years. Rule #1 in any leak investigation is that you can’t begin with the press – you have to try everything else first.

3) The raid on the newsroom – Here the show crosses over into real fantasy.  The FBI shows up at the ACN offices with a squad of agents and a warrant to seize not only documents but every computer hard drive in the room, to search for evidence of the leaker’s identity. Presumably they plan to comb through all the documents and computers looking for evidence, in the process examining every aspect of ACN’s First Amendment activities.

I’m not aware that something like this has ever happened, and I can’t imagine that it would. No Justice Department in its right mind would request such a sweeping warrant allowing the government to seize everything on every computer of a news organization, and no judge in his or her right mind would approve it.

This incident may be (very loosely) based on the case last year where the Department of Justice subpoenaed records for a number of phone lines from the Associated Press. Prosecutors were investigating a leak to the AP about a CIA operation to foil an al-Qaeda bomb plot in Yemen. The disclosure compromised an ongoing CIA terrorism investigation. After hundreds of interviews and the review of thousands of documents failed to identify the leaker (again, proving they had exhausted every other option), the Department of Justice subpoenaed the phone records.

The AP phone records were just lists of numbers that connected to a specific group of phones during a specific limited time period. They revealed nothing about the content of any conversation or even the identity of the parties to the conversation. That’s a very far cry from the sweeping seizure of computer hard drives and documents to comb through the contents. Nevertheless, there was such an outcry over even the more modest AP subpoena that the Department of Justice ultimately revised its guidelines on media subpoenas to make them even stricter.

Having the FBI swoop down on a news organization and seize everything in sight makes for good drama, but it has nothing to do with reality.

prison cell

 Will McAvoy Goes to Jail

There is one more feature of the story on The Newsroom that is very different from real life: McAvoy’s reaction to the subpoena. When the judge asks McAvoy what he thinks the court should do, he replies that he understands the government’s position and is sympathetic to it. He says he understands how much more damage leaks of classified information can do in the Internet age, and how rapidly. He recognizes that the government needs to try to protect certain secrets in the interest of national security and that the prosecutor is just doing his job.

McAvoy doesn’t go on a rant about how the subpoena proves that the current administration hates the press, or that the administration is the greatest threat to press freedom in a generation or is trying to punish him for his reporting. He doesn’t act as though his case means the end of the First Amendment as we know it. McAvoy would recognize such claims for the overwrought histrionics that they are and would mock them mercilessly. He acknowledges the legitimate government interests involved in seeking the information. But he believes that, as a journalist, he simply can’t comply with the subpoena.

I think Will makes the wrong decision, but you’ve got to respect the way he handles it.

Update 12/13/14:  News today is that Attorney General Holder has decided the Department of Justice will not seek to compel James Risen to identify his source in the Sterling trial.  Looks like Risen, unlike McAvoy, will avoid going to jail.

Like this post? Click here to join the Sidebars mailing list 

“You can’t say that on Facebook!” — The Supreme Court Evaluates On-line Threats in Elonis v. United States

Update 6/1/15:  Today the Supreme Court reversed Elonis’ conviction in a 7-2 decision.  I’ll have an analysis of the opinion in next week’s post.

If a man posts violent threats on his own Facebook wall, could he be convicted of a crime even if he didn’t mean it? That’s the question the Supreme Court took up this week in the “Facebook threats” case, Elonis v. United States. It’s a fascinating look at what happens when old legal doctrines bump up against the modern on-line world.

The Facebook Posts at Issue

Facebook_logo_(square)

The defendant Anthony Elonis was convicted for a series of posts he made on his own Facebook wall in October and November 2010, when he was 27 years old. Elonis had been having an emotionally turbulent year: in May his wife left him, taking their two children with her, and in October he lost his job.

Elonis was active on Facebook; he had hundreds of “friends” and posted about a wide variety of topics. After his wife left him, he began posting some compositions of his own. These were often in the form of rap lyrics, and were frequently crude, graphic and violent.

Along with the violent posts, Elonis frequently posted disclaimers, saying his posts were merely “fictitious lyrics,” were for “entertainment purposes only,” or that he was simply exercising his First Amendment rights. He also regularly linked to things such as the Wikipedia entry on freedom of speech and other articles about the First Amendment.

In the fall of 2010, Elonis’s Facebook posts about his wife became increasingly graphic and violent. One post read in part:

There’s one way to love ya but a thousand ways to kill ya

And I’m not gonna rest until your body is a mess,

Soaked in blood and dying from all the little cuts . . .

In November 2010, based on the threatening posts, Elonis’s wife obtained a protection from abuse (“PFA”) order against him. A few days later, Elonis posted an almost word-for-word adaptation of a comedy sketch that he and his wife had watched together, in which comedian Trevor Moore explains that it’s illegal to say you want to kill the President, but not illegal to explain that it’s illegal to say that. The post read in part:

Did you know that it’s illegal for me to say I want to kill my wife?

It’s illegal.

It’s indirect criminal contempt.

It’s one of the only sentences that I’m not allowed to say.

Now it was okay for me to say it right then because I was just telling you that it’s illegal for me to say I want to kill my wife.

I’m not actually saying it. . . .

Elonis followed up this post with a statement that “Art is about pushing limits. I’m willing to go to jail for my constitutional rights. Are you?” He also provided a hyperlink to the original sketch upon which the post was based.

In another post in November 2010, Elonis referred to the PFA order his wife had obtained:

Fold up your PFA and put it in your pocket.

Is it thick enough to stop a bullet?

. . .

I’ve got enough explosives

To take care of the state police and the sheriff’s department . . .

 Elonis’s wife testified at his trial that she took the Facebook threats seriously and that they made her very afraid for herself and her children. She also testified that she had never known Elonis to listen to rap music.

On November 16, Elonis posted the following:

That’s it, I’ve had enough.

I’m checking out and making a name for myself.

Enough elementary schools in a ten mile radius

To initiate the most heinous school shooting ever imagined.

And hell hath no fury like a crazy man in a kindergarten class.

The only question is . . . which one?

Elonis testified that this post was based on a rap song by Eminem, I’m Back, in which the rapper fantasizes about participating in the Columbine school shooting.

The post about the elementary school led to a visit by the FBI, during which Elonis declined to be interviewed.   After the agent left, Elonis posted another item on Facebook he titled “Little Agent Lady” in which he falsely claimed he had been wearing a bomb when the agent came to his door and fantasized about killing her:

Took all the strength I had not to turn the bitch ghost

Pull my knife, flick my wrist, and slit her throat . . .

These and other posts ultimately led to Elonis being convicted on four counts of threats, one each for threatening his wife, the police, a school, and the FBI agent. He was sentenced to 44 months in prison.

The Threats Statute

Elonis was convicted under Title 18, U.S. Code, section 875(c), which provides:

Whoever transmits in interstate or foreign commerce any communication containing any threat to kidnap any person or any threat to injure the person of another, shall be fined under this title or imprisoned not more than five years, or both.

Elonis’s defense was that he never intended to threaten anyone. He claimed his posts were therapeutic and a form of artistic expression, similar to the rap artists he professed to admire. He argued that the proper interpretation of 875(c) requires the government to prove that he subjectively intended to put the targets of his alleged threats in fear, and that to prosecute him for anything less violates the First Amendment.

The lower courts rejected his argument and upheld his convictions, applying the majority rule that the intent of the person making the threats does not matter. The government needs to prove only that the defendant made a statement under circumstances or in a context where a reasonable person would foresee that the statement would be interpreted as a serious expression of an intent to do harm – even if the defendant didn’t really mean it or know it would be interpreted that way. The rationale is that the fear and disruption caused by an apparent threat takes place regardless of the speaker’s personal intent, and Congress is free to punish those who cause that fear.

The Supreme Court Argument – Chief Justice Roberts Channels Eminem

Supreme Court

This issue in this case is not whether threats on Facebook can ever be prosecuted. It’s settled that “true threats” fall into the narrow category of speech that is not protected by the First Amendment, along with obscenity,defamation, and “fighting words” that incite violence. The issue is what does the government have to prove about the defendant’s state of mind in order to establish that the statements at issue were indeed “true threats.” During the Supreme Court argument four different possible standards emerged (in decreasing order of the level of proof required):

1) The defendant subjectively and specifically intended that the statements would place the target of his threats in fear of being harmed. (This is the standard argued for by Elonis, at least initially.)

2) The defendant knew that a reasonable person, looking at the statements, would be placed in fear of being harmed. (The “knowledge” standard.)

3) The defendant knowingly made the statements with a reckless disregard for whether the recipient would be placed in fear of being harmed. (The “recklessness” standard.)

4) The defendant knowingly made the statements, and regardless of what the defendant personally knew or intended about their effect, a reasonable person looking at those statements would think they were a serious expression of an intent to harm another. (The standard adopted by the lower courts and most other courts, and argued for by the government.)

The Supreme Court case essentially boils down to this: which of these standards should be the law?

At the oral arguments on Monday, the Court immediately honed in on this issue. The lawyer for Elonis seemed to get in trouble early, giving varied and conflicting responses on what the correct standard should be. Throughout the litigation Elonis had consistently argued that the government should have to prove he subjectively intended to cause fear (#1 above), but during the argument his lawyer seemed to back away from that standard and suggest it would be enough if the government had to prove only that the defendant knew a reasonable person would consider the statements to be true threats (#2 above). His inconsistent responses finally led Justice Scalia to comment, “You really have me confused at this point.”

At the same time, most of the Justices did not appear to be buying the government’s argument that it doesn’t matter at all what the defendant intended or knew, only that the statements looked threatening to a reasonable person. Justice Kagan observed that the government essentially was arguing for criminal liability based on negligent speech, and “that’s not the kind of standard that we typically use in the First Amendment.”

In what may be a Supreme Court first, Chief Justice Roberts quoted rap lyrics by Eminem about drowning his ex-wife, and asked the government attorney whether that could be prosecuted. The response was no, because in the context of a musical rap performance, no reasonable person would perceive Eminem reciting those lyrics as an actual threat – it’s just a performance.

 The Context is the Key

Facebook_like_thumb

As the exchange with the Chief Justice about Eminem highlighted, when it comes to threats, context is everything. Violent rap lyrics that no one would perceive as a threat in the context of a stage performance could most definitely be a threat if those same words were whispered menacingly into the ear of another person. Similarly, if Elonis had used the same language from some of his Facebook posts in a phone call or written letter to his wife, there’s little doubt they would be considered threats.

But what exactly is the proper context when talking about Facebook? Even within Facebook itself, you can imagine a number of different scenarios. For example: Elonis posted only on his own wall; was not Facebook friends with his wife, the FBI agent, or others who were the subjects of his posts; and he did not tag them. Writing on your own wall is somewhat akin to a public event. The posts can be seen by all of your friends, commented on, forwarded, and “liked” by a  potentially unlimited number people.  Is this more like a rap concert performance or more like whispering in someone’s ear?

Suppose Elonis had tagged his wife, or wrote on her wall instead of his own, or sent her a private message through Facebook? Would each of these lead to a different result? And what does a “reasonable person” mean when it comes to interpreting what one sees on Facebook – is it the reasonable, Internet-savvy teenager, or the reasonable septuagenarian Supreme Court Justice?

On-line communication suffers from an inability to convey nuance, tone, inflection, facial expression, body language – all things that can be critical to determining the speaker’s true meaning in face-to-face communication. Probably everyone has had the experience of sending an e-mail or posting something that was intended to be sarcastic or funny but was perceived as serious, or vice-versa. Indeed, a whole world of emoticons has sprung up to help us try to convey emotions or attitudes along with the digital written word.

This makes it particularly important to have legal standards that ensure protected speech does not end up being prosecuted. When it comes to Elonis’s posts, as Justice Scalia repeatedly pointed out, it’s hard to argue that there’s a lot of redeeming social value there.  Nevertheless, the heart of the First Amendment is the protection of even speech that many find vile or offensive, whether it be violent rap lyrics, flag burning, or Ku Klux Klan rallies. And the standard the Court adopts will, of course, affect not merely Elonis but all future speakers (and potential defendants).

The Consequences of a Higher Standard of Proof

I expect the Supreme Court will adopt some kind of a middle ground (#2 or #3 above), not requiring subjective intent as Elonis argued but also not accepting the broad rule requested by the government. Justice Breyer seemed to be suggesting during the argument that #2 was effectively already the law: the defendant has to know that he is making statements that are true threats, which means by definition he has to know that a reasonable person would be put in fear by the statements. The Court may conclude that requiring at least this kind of knowledge is a reasonable middle ground.

This doesn’t mean someone like Elonis could never be prosecuted. As with so many criminal appeals, this case is all about the jury instructions: what should the jury have been told it had to find concerning the defendant’s state of mind? If the Court rules that the Elonis jury should have been told it had to find knowledge or intent by Elonis, his own convictions will be reversed, but for future cases the jury instructions will simply be modified.  Elonis himself could even be re-tried, if the government chose to do so, and I wouldn’t be surprised if he were convicted again.

Proving intent or knowledge is not some kind of insurmountable hurdle. Prosecutors do it all the time. As a prosecutor, I wouldn’t hesitate to take a case like Elonis to a jury and argue that the evidence established he knew or intended that his posts would place his wife in fear. And if a defendant tried to fabricate a “rap lyric” defense, the prosecution could present evidence to establish it was merely a ruse – again, disproving an alleged defense is nothing unusual. If the Court rules for Elonis, it’s not going to be some kind of “get out of jail free” card for future stalkers and harassers.

Imposing a higher proof requirement isn’t about condoning Elonis’s reprehensible conduct, it’s simply about strictly interpreting statutes that criminalize speech. A higher standard of proof will make threats prosecutions somewhat more difficult, but that’s not necessarily a bad thing. The government has to tread very lightly when it seeks to turn written words into a federal felony. Given our First Amendment heritage and devotion to free expression, it’s not too much to ask that the government prove some level of intent or knowledge when seeking to send someone to jail solely for what they wrote. I hope the Court agrees.

What standard should the Court adopt?  Leave a comment below.

Sign up for free e-mail updates of future posts by clicking on the “Follow” button on the upper right.