Merrill Lynch branch manager Joe Lauricella worried when he read that the government was prosecuting brokers for letting day traders listen to live action from Merrill's trading desk.
The brokers he supervised had been doing the same thing, unaware there might be something wrong with it, he would later say.
So Lauricella contacted a Merrill compliance officer, who assured him that his folks were violating no law or firm policy. Just to be sure, the officer “triple checked” and came back with the same conclusion, Lauricella later told the U.S. Securities and Exchange Commission.
How, then, could a jury convict three ex-traders for selling, and three former executives of a day-trading firm for buying, real-time access to the firm's squawk boxes, or internal intercoms?
The government said the three brokers conspired to sell access to proprietary information. Through the audio feeds, day- traders could learn of large pending trades.
But if this was common practice, if the broadcasts weren't confidential and the brokers and executives didn't think they were doing wrong, where is the crime?
And shouldn't the jury hear that evidence?
Jurors never heard Lauricella testify because the prosecution never let the defense know about him. Also not disclosed by prosecutors were 11 others who gave SEC testimony that defense lawyers say might have helped their clients. So the jury didn't know that a dozen people had given sworn statements that could have influenced the verdict.
It isn't as if the U.S. attorney's office in Brooklyn, which prosecuted the case, didn't know about the transcripts. An SEC lawyer who conducted the interviews was part of the prosecution team.
The withholding of the SEC testimony might eventually prompt a reversal of the convictions. At a hearing last week, the trial judge didn't sound like he would grant a defense request to toss out the convictions. Rather, he signaled he agrees with the government that, when read in full, the testimony wouldn't have helped the defense and could have strengthened the prosecution.
An appeals court could see it differently, and should. The time to sort out the evidence was before trial, and the defense never had that chance.
Every rookie criminal lawyer knows that prosecutors must disclose to the defense any admissible and material evidence of innocence. The Supreme Court said so in 1963 in Brady v. Maryland, giving rise to what is called Brady material.
It's Prosecution 101. Attorney General Eric Holder last April ordered retraining on the point after learning that key information had been withheld from former Senator Ted Stevens, convicted on corruption charges. A judge threw out the conviction at Holder's request.
The three traders in the squawk box case are Kenneth Mahaffy Jr., who worked at Merrill and then at
Citigroup; David Ghysels Jr., formerly of the now-bankrupt Lehman Brothers Holdings Inc., and former Merrill trader Timothy O'Connell.
Convicted along with them were A.B. Watley Group Inc. executives Robert Malin, Keevin Leonard and Linus Nwaigwe. The sentences ranged from home detention to, in Malin's case, four years in prison.
OK, there is something fishy-sounding about a broker keeping a phone line open to a day-trading firm so that institutional trades announced over the squawk box could be heard.
The legitimate point of the live feed is to help find clients who will trade on the other side of big orders, not to give a heads-up to smaller customers so they can trade ahead of potentially market-moving orders.
The latter would be front-running, and that would be illegal. But these men were found not guilty of front-running at an earlier trial. That jury tossed out 37 counts and couldn't reach a verdict on a conspiracy charge, which is why the accused were retried last year.
This would be amusing if it weren't serious. The defense says that the government team that prosecuted the Squawk Box Six for cheating won convictions by, well, cheating.
The government says none of those transcripts constituted Brady material that had to be disclosed, that some of it was irrelevant to whether the defendants knew what they were doing was wrong, and that much of it would have been inadmissible as hearsay
And yet, we are talking about a dozen people the SEC interviewed under oath as part of its investigation. Testimony the SEC gathered seems to directly contradict key prosecution claims.
“This is something that should have been turned over,” U.S. District Judge John Gleeson told prosecutors last week. “I'm mystified by this. I can't fathom it.”
Assistant U.S. Attorney James McMahon, who oversees the office's securities fraud unit, told the judge it was a mistake, and an embarrassing one at that.
But it wasn't intentional, and none of the information would have changed the verdict, he argued.
Intentional or not, the government deprived the defense and therefore the jury of evidence that just might have tipped the verdict the other way. It's especially maddening, given that the prosecution lost 37 of 40 counts during the first trial even while sitting on the SEC testimony.
The Justice Department admitted it denied Stevens, the former Alaska senator, a fair trial by withholding key evidence. It should do so in this case, too.
[Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.]
