A former broker at Merrill Lynch & Co. and
Citigroup Inc. lost a bid to throw out his conviction for selling access to his brokerages' internal “squawk boxes” after arguing prosecutors hid evidence of his innocence.
Kenneth Mahaffy Jr., and five co-defendants found guilty last year, asked U.S. District Judge John Gleeson in Brooklyn, New York, to cancel their convictions, dismiss the indictment or grant them a new trial. Gleeson denied their request in an order today.
Lawyers for the men claim federal prosecutors withheld 27 transcripts of testimony from witnesses in a related civil lawsuit brought by the U.S. Securities and Exchange Commission. Mahaffy's lawyer, Andrew Frisch, said he discovered the documents in December, four days after the ex-broker was sentenced to two years in prison.
“None of the testimony on which the motion relies even remotely supports the proposition that it would be permissible to sell squawk-box information to day traders so they could try to trade ahead of block orders,” Gleeson wrote in his order.
Frisch said in a phone interview, “We're very optimistic about our appeal.”
Pending Trades
Mahaffy was one of three brokers convicted in April 2009 of conspiring to sell day traders access to internal squawk boxes used to discuss pending trades. Three former day-trading executives at New York-based A.B. Watley Group Inc. were also convicted.
Gleeson has allowed the defendants, who were sentenced in December, to remain free during an appeal.
Defense lawyers argued that the government withheld documents showing that more than 10 brokerage employees said in depositions that what was said on the squawk boxes wasn't confidential.
Prosecutors said the transcripts wouldn't have altered the verdict. The SEC testimony wasn't favorable to the defendants, was immaterial and wouldn't have cleared them of wrongdoing, the government said.
The day traders were accused of using information overheard on the intercoms to trade shares ahead of larger institutional transactions, prosecutors said at trial.
Witness Tampering
The defendants, who were indicted in 2005, were tried twice. The first trial in 2007 ended with a deadlocked jury on a conspiracy count and acquittals of multiple securities-fraud charges for all the defendants. One defendant, Timothy O'Connell, was convicted of witness tampering. The federal appeals court in New York upheld that conviction.
Prosecutors told jurors during both trials that the brokers placed their telephones next to the squawk boxes each morning, allowing the day traders unlimited, all-day access to discussions about trades. The brokers received commissions while Watley's business was revived through the practice, the U.S. said.
Convicted in the 2009 retrial of conspiracy to commit securities fraud were brokers Mahaffy, who worked at Merrill Lynch & Co., now a
Bank of America unit, and at
Citigroup; David Ghysels Jr., formerly of now-bankrupt Lehman Brothers Holdings Inc., who was sentenced to six months' home detention; and O'Connell, formerly of Merrill Lynch, who was ordered to serve four years' probation and four months of home detention.
Prison Sentences
From Watley, those convicted were Robert Malin, former president, sentenced to four years in prison; Keevin Leonard, a former supervisor of proprietary trading, sentenced to 34 months; and Linus Nwaigwe, a former compliance director, sentenced to one year and one day plus six months' home detention.
“The decision was not unexpected,” Marc Fernich, a lawyer for Malin, said in a phone interview. “We respectfully disagree with his ruling, and we look forward to vindicating Mr. Malin's rights on appeal.”
Mildred Whalen, a lawyer for O'Connell; Jeffrey C. Hoffman, a lawyer for Ghysels; Thomas F.X. Dunn, a lawyer for Leonard; and Donna Newman, a lawyer for Nwaigwe, didn't immediately return calls for comment left after New York business hours.
