United States v. Nacchio
Opinion
FILED United States Court of Appeals Tenth Circuit
March 17, 2008 PUBLISH Elisabeth A. Shumaker Clerk of Court UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellee, v. No. 07-1311 JOSEPH P. NACCHIO,
Defendant-Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO (D.C. NO. 05-CR-00545-EWN)
Maureen E. Mahoney, Latham & Watkins LLP, Washington, D.C. (Alexandra A.E. Shapiro, J. Scott Ballenger, Nathan H. Seltzer, Latham & Watkins, Washington, D.C.; and Herbert J. Stern and Jeffrey Speiser, Stern & Kilcullen, Roseland, New Jersey, with her on the briefs), for Defendant-Appellant.
Stephan E. Oestreicher, Jr., U.S. Department of Justice, Criminal Division – Appellate Section, Washington, D.C. (Troy A. Eid, United States Attorney, and James O. Hearty and Kevin T. Traskos, Assistant United States Attorneys, District of Colorado; and Leo J. Wise, U.S. Department of Justice, Criminal Division – Fraud Section, with him on the brief), for Plaintiff-Appellee.
Andrew H. Schapiro, Mayer Brown LLP, New York, New York, and Evan P. Schultz, Mayer Brown LLP, Washington D.C.; Barbara E. Bergman, National Ass’n of Criminal Defense Lawyers, Albuquerque, New Mexico; David B. Smith, English & Smith, Alexandria, Virginia, for National Ass’n of Criminal Defense Lawyers as Amicus Curiae in support of Defendant-Appellant.
Daniel J. Popeo and Paul D. Kamenar, Washington Legal Foundation, Washington, D.C.; Andrew J. Levander, David S. Hoffner, Jason O. Billy and David P. Staubitz, Dechert LLP, New York, New York; and Michael L. Kichline, Dechert LLP, Philadelphia, Pennsylvania, for Washington Legal Foundation as Amicus Curiae in support of Defendant-Appellant.
Before KELLY, McCONNELL, and HOLMES, Circuit Judges.
McCONNELL, Circuit Judge.
A Denver jury convicted Joseph Nacchio, the former CEO of Qwest
Communications International, Inc., of nineteen counts of insider trading. Mr.
Nacchio appeals, arguing that the evidence was insufficient to convict him, that
the jury was improperly instructed, and that the trial judge incorrectly excluded
evidence—expert testimony and classified information—important to his defense.
We agree that the improper exclusion of his expert witness merits a new trial, but
we conclude that the evidence before the district court was sufficient for the
government to try him again without violating the Double Jeopardy Clause.
I. BACKGROUND
A. Qwest’s Revenue Projections
In July 2000, Qwest completed a merger with U.S. West, another (larger)
telecommunications company. Mr. Nacchio told employees upon completion of
the merger that “the five-year business plan is . . . grow, die, or sell.” Aplee.’s
Supp. App., exh. 514A. In September 2000, he laid out new revenue, earnings,
and growth targets for Qwest’s next year. He announced a public prediction, or
“guidance,” of $21.3 to $21.7 billion in expected revenue in 2001. Qwest also
-2- prepared a separate set of internal revenue targets, higher than the public
guidance. Internal targets were typically set higher than public targets to
encourage employees to exceed public targets. In addition, performance bonuses
were paid to employees who met or exceeded internal targets. During most of the
time relevant to this litigation, the 2001 year-end internal target was $21.8 billion,
which was $500 million more than the bottom of the public guidance.
At the time, some Qwest employees expressed concern that the guidance
and targets were too high. That September, for example, Robin Szeliga, Qwest’s
vice-president of financial planning, received a memo from two financial analysts
who worked for her. The memo, called a “risk estimate,” forecast problems with
Qwest’s revenue guidance. Ms. Szeliga shared the contents of the memo with
Qwest’s Chief Financial Officer, Robert Woodruff, and later with Mr. Nacchio.
The memo suggested that Qwest could make as little as $20.4 billion, a shortfall
of $900 million from its public target.
One particular problem was that Qwest had traditionally relied on revenues
from long-term leases, known as indefeasible rights of use (IRUs), to use space
on Qwest’s fiber optic network. Because Qwest collected money for the entire
lease up front, IRU sales generated one-time revenue rather than a stream of
recurring income. Therefore, to meet its 2001 public target, Qwest executives
determined that Qwest had to make an “aggressive pivot” or “shift” from its
reliance on the sale of IRUs to recurring revenue streams, such as standard
-3- consumer phone service. App. 2177, 2600. In fact, even though Qwest had a
poor track record in growing recurring revenue, the 2001 budget required Qwest
to double its 2000 growth rate for recurring revenue.
As early as December 2000, Qwest executives told Mr. Nacchio that this
shift from IRUs to recurring revenue had to occur by April 2001 and he agreed.
If Qwest failed to sign up enough new customers early in the year, it would not
later benefit from sufficient compounding to close its third and fourth quarter
budget gaps and would be forced to revise its public guidance downward. 1 Mr.
Nacchio understood that a slow start in obtaining new recurring revenue would
have a “snowball effect” which would doom Qwest’s year-end target for 2001.
App. 2494. In January 2001, Mr. Nacchio acknowledged the importance of this
when he told his sales staff that “something big” had to happen “by April” and
that the first half of 2001 was “absolutely critical.” App. 2178; Aplee.’s Supp.
App. exh. 551A, 559B. Although Qwest insiders clearly appreciated the risk
inherent in the public guidance, it was not Qwest’s policy to disclose the portion
of its income attributable to IRU sales, and thus the public was unaware of the
degree of this risk.
1 Recurring revenue that begins early in the year increases annual earnings more than recurring revenue that begins later. For example, subscribers who begin service in January pay for 12 months of service while those who begin in December only pay for 1 month.
-4- Qwest’s revenues met internal targets during the first two quarters of 2001,
largely due to IRU sales. However, there was ominous news. In early April, Mr.
Nacchio had conversations with Greg Casey, Qwest’s executive vice-president of
wholesale markets, about the company’s sales of domestic IRUs. Mr. Casey told
him:
[T]he IRU market was drying up, that after the second quarter—in the second quarter, we felt like we were draining the pond in terms of the IRU deals that were out there, and that we couldn’t rely on IRUs—I couldn’t see—have any visibility to what IRUs would be doing after the second quarter.
App. 2496.
Similarly, Ms. Szeliga testified that on April 9:
[T]he plans that we had at this point to cover estimated gaps were IRUs, and we had spoken with Mr. Nacchio . . . about the fact that the IRU market was worsening, in other words, there wasn’t as much demand for this product. So . . . the plan was very risky if we were just going to rely on IRUs.
App. 2210–11. Mr. Nacchio also learned on April 9 that recurring revenue was
off by 19%, indicating that the company was well short of increasing its recurring
revenue in time to reduce its third and fourth quarter budget gaps. At the same
time, however, Mr. Nacchio was told at a company meeting that even “with all of
the debates . . .
Free access — add to your briefcase to read the full text and ask questions with AI
FILED United States Court of Appeals Tenth Circuit
March 17, 2008 PUBLISH Elisabeth A. Shumaker Clerk of Court UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellee, v. No. 07-1311 JOSEPH P. NACCHIO,
Defendant-Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO (D.C. NO. 05-CR-00545-EWN)
Maureen E. Mahoney, Latham & Watkins LLP, Washington, D.C. (Alexandra A.E. Shapiro, J. Scott Ballenger, Nathan H. Seltzer, Latham & Watkins, Washington, D.C.; and Herbert J. Stern and Jeffrey Speiser, Stern & Kilcullen, Roseland, New Jersey, with her on the briefs), for Defendant-Appellant.
Stephan E. Oestreicher, Jr., U.S. Department of Justice, Criminal Division – Appellate Section, Washington, D.C. (Troy A. Eid, United States Attorney, and James O. Hearty and Kevin T. Traskos, Assistant United States Attorneys, District of Colorado; and Leo J. Wise, U.S. Department of Justice, Criminal Division – Fraud Section, with him on the brief), for Plaintiff-Appellee.
Andrew H. Schapiro, Mayer Brown LLP, New York, New York, and Evan P. Schultz, Mayer Brown LLP, Washington D.C.; Barbara E. Bergman, National Ass’n of Criminal Defense Lawyers, Albuquerque, New Mexico; David B. Smith, English & Smith, Alexandria, Virginia, for National Ass’n of Criminal Defense Lawyers as Amicus Curiae in support of Defendant-Appellant.
Daniel J. Popeo and Paul D. Kamenar, Washington Legal Foundation, Washington, D.C.; Andrew J. Levander, David S. Hoffner, Jason O. Billy and David P. Staubitz, Dechert LLP, New York, New York; and Michael L. Kichline, Dechert LLP, Philadelphia, Pennsylvania, for Washington Legal Foundation as Amicus Curiae in support of Defendant-Appellant.
Before KELLY, McCONNELL, and HOLMES, Circuit Judges.
McCONNELL, Circuit Judge.
A Denver jury convicted Joseph Nacchio, the former CEO of Qwest
Communications International, Inc., of nineteen counts of insider trading. Mr.
Nacchio appeals, arguing that the evidence was insufficient to convict him, that
the jury was improperly instructed, and that the trial judge incorrectly excluded
evidence—expert testimony and classified information—important to his defense.
We agree that the improper exclusion of his expert witness merits a new trial, but
we conclude that the evidence before the district court was sufficient for the
government to try him again without violating the Double Jeopardy Clause.
I. BACKGROUND
A. Qwest’s Revenue Projections
In July 2000, Qwest completed a merger with U.S. West, another (larger)
telecommunications company. Mr. Nacchio told employees upon completion of
the merger that “the five-year business plan is . . . grow, die, or sell.” Aplee.’s
Supp. App., exh. 514A. In September 2000, he laid out new revenue, earnings,
and growth targets for Qwest’s next year. He announced a public prediction, or
“guidance,” of $21.3 to $21.7 billion in expected revenue in 2001. Qwest also
-2- prepared a separate set of internal revenue targets, higher than the public
guidance. Internal targets were typically set higher than public targets to
encourage employees to exceed public targets. In addition, performance bonuses
were paid to employees who met or exceeded internal targets. During most of the
time relevant to this litigation, the 2001 year-end internal target was $21.8 billion,
which was $500 million more than the bottom of the public guidance.
At the time, some Qwest employees expressed concern that the guidance
and targets were too high. That September, for example, Robin Szeliga, Qwest’s
vice-president of financial planning, received a memo from two financial analysts
who worked for her. The memo, called a “risk estimate,” forecast problems with
Qwest’s revenue guidance. Ms. Szeliga shared the contents of the memo with
Qwest’s Chief Financial Officer, Robert Woodruff, and later with Mr. Nacchio.
The memo suggested that Qwest could make as little as $20.4 billion, a shortfall
of $900 million from its public target.
One particular problem was that Qwest had traditionally relied on revenues
from long-term leases, known as indefeasible rights of use (IRUs), to use space
on Qwest’s fiber optic network. Because Qwest collected money for the entire
lease up front, IRU sales generated one-time revenue rather than a stream of
recurring income. Therefore, to meet its 2001 public target, Qwest executives
determined that Qwest had to make an “aggressive pivot” or “shift” from its
reliance on the sale of IRUs to recurring revenue streams, such as standard
-3- consumer phone service. App. 2177, 2600. In fact, even though Qwest had a
poor track record in growing recurring revenue, the 2001 budget required Qwest
to double its 2000 growth rate for recurring revenue.
As early as December 2000, Qwest executives told Mr. Nacchio that this
shift from IRUs to recurring revenue had to occur by April 2001 and he agreed.
If Qwest failed to sign up enough new customers early in the year, it would not
later benefit from sufficient compounding to close its third and fourth quarter
budget gaps and would be forced to revise its public guidance downward. 1 Mr.
Nacchio understood that a slow start in obtaining new recurring revenue would
have a “snowball effect” which would doom Qwest’s year-end target for 2001.
App. 2494. In January 2001, Mr. Nacchio acknowledged the importance of this
when he told his sales staff that “something big” had to happen “by April” and
that the first half of 2001 was “absolutely critical.” App. 2178; Aplee.’s Supp.
App. exh. 551A, 559B. Although Qwest insiders clearly appreciated the risk
inherent in the public guidance, it was not Qwest’s policy to disclose the portion
of its income attributable to IRU sales, and thus the public was unaware of the
degree of this risk.
1 Recurring revenue that begins early in the year increases annual earnings more than recurring revenue that begins later. For example, subscribers who begin service in January pay for 12 months of service while those who begin in December only pay for 1 month.
-4- Qwest’s revenues met internal targets during the first two quarters of 2001,
largely due to IRU sales. However, there was ominous news. In early April, Mr.
Nacchio had conversations with Greg Casey, Qwest’s executive vice-president of
wholesale markets, about the company’s sales of domestic IRUs. Mr. Casey told
him:
[T]he IRU market was drying up, that after the second quarter—in the second quarter, we felt like we were draining the pond in terms of the IRU deals that were out there, and that we couldn’t rely on IRUs—I couldn’t see—have any visibility to what IRUs would be doing after the second quarter.
App. 2496.
Similarly, Ms. Szeliga testified that on April 9:
[T]he plans that we had at this point to cover estimated gaps were IRUs, and we had spoken with Mr. Nacchio . . . about the fact that the IRU market was worsening, in other words, there wasn’t as much demand for this product. So . . . the plan was very risky if we were just going to rely on IRUs.
App. 2210–11. Mr. Nacchio also learned on April 9 that recurring revenue was
off by 19%, indicating that the company was well short of increasing its recurring
revenue in time to reduce its third and fourth quarter budget gaps. At the same
time, however, Mr. Nacchio was told at a company meeting that even “with all of
the debates . . . the internal current view of Qwest was that they would reach
$21.5 billion by December 31st, 2001,” still meeting the public projections. App.
2323.
-5- On April 24, Qwest announced its first quarter earnings in a press release,
and Mr. Nacchio conducted a conference call to investors. In that call, Mr.
Nacchio announced that the company was “still confirming” its previous guidance
regarding long-term growth. App. 1598. He did not break down Qwest’s
earnings into IRUs and recurring revenue. Later that day, Mr. Nacchio met with
investors in Los Angeles, who pointed out that other telecommunications
companies had lowered their guidance. One of them asked Mr. Nacchio how
Qwest was going to meet its growth targets, saying “now was the time for
[Qwest] to take [its] numbers to believability.” App. 1599. Mr. Nacchio
responded that Qwest had better products and better management, and stressed its
strong revenue growth in the category of “data and IP.” App. 1605. One-time
transactions made up a portion of this revenue, but Mr. Nacchio did not mention
this. Lee Wolfe, Qwest’s vice-president of investor relations, testified that
investors asked, “[m]any times,” for “the makeup of data and IP,” but that Mr.
Nacchio refused to tell them. App. 1600. In fact, as analysts and investors
repeatedly requested a breakdown of Qwest’s revenue during the first quarter of
2001, insiders such as Mark Schumacher, the company’s controller, advocated
disclosing the information. However, Mr. Nacchio, who retained the final say
over Qwest’s public disclosures, declined to do so.
B. The Defendant’s Stock Sales
-6- At approximately the time Mr. Nacchio was receiving these internal reports
regarding IRU sales and recurring revenue and assuring investors that the
company was on track to meet its public guidance, he was selling over a million
shares of Qwest stock. This occurred a few months before the company was
forced to lower its guidance by a billion dollars, the amount previously estimated
by Qwest’s financial officers, and the stock lost half its value. These sales are the
basis of the government’s charge that Mr. Nacchio was trading on inside
information. Mr. Nacchio claims, however, that a full understanding of the
context of his sales proves otherwise.
Like many highly-paid CEOs at the time, Mr. Nacchio received a
substantial portion of his compensation in stock options rather than in cash.
Options are a common part of CEO salaries because they provide incentives to
perform. Option compensation also provides cash-flow advantages to the
company, because a company expends no cash when it grants them, and, at one
time, a company did not need to account for the cost until the option was
exercised. See Share-Based Payment, Statement of Fin. Accounting Standards
No. 123 (Fin. Accounting Standards Bd. 2004); Kevin J. Murphy, Explaining
Executive Compensation: Managerial Power versus the Perceived Cost of Stock
Options, 69 U. Chi. L. Rev. 847, 859–60 (2002); Fischer Black & Myron Scholes,
The Pricing of Options and Corporate Liabilities, 81 J. Pol. Econ. 637 (1973).
-7- Among Mr. Nacchio’s holdings as of October 2000 were options for $7.4 million
in Qwest stock, with an expiration date of June 2003.
One way that a corporate official can dispose of stock without liability for
insider trading is to do so pursuant to a fixed sales plan. Under SEC rules, if a
person has no material inside information when he “[a]dopt[s] a written plan for
trading securities,” and that plan sets fixed rules for when he will buy and sell
shares in the future, then his trades are not “on the basis of” inside information
even if he later does acquire inside information. 17 C.F.R. § 240.10b5-1(c).
Qwest’s general counsel, Drake Tempest, was required to approve each stock
sales plan entered into by each Qwest officer; doing so required a determination
that the officer was not in possession of material nonpublic information at the
time he entered into the plan. Except for sales according to a fixed sales plan,
Qwest policy only permitted officers to sell stock during short “trading windows”
each quarter immediately after quarterly earnings were announced. App. 1879.
In October 2000, Mr. Nacchio announced that he would exercise options
and sell approximately one million shares each quarter. This would enable him to
exercise his $7.4 million in options before their expiration date, while spreading
his sales out over time to avoid the risk of a stock drop that comes when too many
shares are sold at once. Mr. Nacchio did not actually enter into a formal trading
plan in October, but he did so—briefly—in February 2001, which was approved
by Tempest. He cancelled the plan less than a month later, when Qwest’s stock
-8- fell below $38 per share. At that time, he stated, “I would expect to return to my
prior practice of making sales in quarterly trading windows, or, in, appropriate
circumstances consider entering into a new daily sales program if I believe the
stock price is more realistic.” App. 4803. He now points to this decision as
evidence that, rather than having knowledge of an impending revenue shortfall
with attendant decline in stock price, he believed the stock price would remain
above $38.
The second-quarter trading window began on April 26, 2001, with Qwest’s
stock at $39 per share. Between then and May 15, Nacchio sold 1,255,000 shares
of Qwest as the share price hovered between $37 and $42. His rate of sales in
those weeks was about four times his average rate from 1998 to 2000, but only
slightly more than the million shares per quarter he had declared his intention to
sell in his October 2000 announcement. At the end of the May trading window,
Mr. Nacchio entered into a second automatic sales plan, approved by Tempest, to
sell 10,000 shares a day as long as the stock price was at least $38 per share.
On May 29, 2001, Qwest’s stock price dropped below $38, where it has
remained since. Mr. Nacchio sold no more shares after that, and finished the year
with more vested options than he had owned at the beginning. He made no
attempt to sell any of the Qwest stock (other than options) he held in his personal
account, nor that owned by his family.
C. The Collapse of Qwest Stock
-9- During the next few months, the internal warnings regarding overreliance
on a dwindling pool of IRU sales were increasingly confirmed. On August 15,
Qwest disclosed its IRU sales in a filing with the SEC. App. 1672. The
immediate effect on Qwest’s stock price was negligible, but it had been in decline
both before and after. Lee Wolfe testified that “there had been . . . some
disclosure after the first quarter,” that some of Qwest’s revenue was one-time
rather than recurring, “[b]ut they were not—the magnitude was not known,” until
August. App. 1673. On September 10, 2001, Mr. Nacchio lowered Qwest’s
public guidance by one billion dollars. Mr. Wolfe testified that Mr. Nacchio and
Drake Tempest had sought to put enough time between the disclosure regarding
reliance on IRU sales and the change in guidance that it would not seem as if Mr.
Nacchio had been concealing information. By September 21, Qwest’s stock had
fallen 60% from its January level. During the same period, the Dow Jones
Industrial Average dropped approximately 24% and the NASDAQ composite
index dropped 46%. 2
D. Prosecution and Trial
In December 2003, Mr. Nacchio was indicted and charged with 42 counts
of insider trading. The government alleged that Mr. Nacchio’s sales from January
to May 2001 were on the basis of inside information, because he had material
2 See http://money.cnn.com/quote/historical/historical.html?symb=INDU; http://money.cnn.com/quote/historical/historical.html?symb=COMP .
-10- nonpublic information about Qwest—specifically that the company was relying
heavily on IRU sales, a non-recurring source of revenue to meet its first and
second quarter public guidance, and that the company had not made the needed
shift to recurring revenue which placed the company at substantial risk of not
meeting its year-end guidance. After a sixteen-day jury trial, the jury deliberated
for six days and convicted Mr. Nacchio on the nineteen counts of insider trading
covering his trades in April and May 2001. It acquitted him of the counts
covering the trades from January to March. The district court then sentenced Mr.
Nacchio to six years’ imprisonment on each count, to run concurrently, two years’
supervised release on each count, to run concurrently, fined him $19 million, and
ordered him to forfeit over $52 million more. Challenging his conviction, his
sentence, and the forfeiture, Mr. Nacchio appeals to this Court.
We reverse his conviction and remand the case for a new trial. In Section
II, we discuss the evidence that Mr. Nacchio was prevented from using at trial,
and explain why the district court’s error entitles him to a new trial. We cannot
stop there, however, because the government is entitled to try the defendant a
second time only if its evidence at the first trial was legally sufficient. In Section
III, therefore, we explain the government’s theory of the case and discuss the
sufficiency of the evidence in light of the jury instructions, concluding that a
properly-instructed jury could have found the Defendant guilty of insider trading.
Finally, in Section IV we discuss the nature of the remand.
-11- II. EVIDENTIARY ISSUES
The defense strategy relied heavily on the proposed testimony of an expert
witness, Professor Daniel Fischel, and classified information relevant to Qwest’s
business prospects and the defendant’s state of mind. The district court excluded
both, and on appeal the defendant asserts that these decisions are reversible error.
We agree that the district court’s exclusion of Professor Fischel’s testimony was
an error that requires a new trial. There was no error in excluding the classified
information.
A. Expert Testimony
The Federal Rules of Criminal Procedure require a defendant under certain
circumstances to provide to the government, upon request, “a written summary of
any testimony that the defendant intends to use [at trial] under Rules 702, 703, or
705 of the Federal Rules of Evidence.” Fed. R. Crim. P. 16(b)(1)(C). This
includes expert testimony. “The summary must describe the witness’s opinions,
the bases and reasons for these opinions, and the witness’s qualifications.” Id.
The parties do not dispute that Rule 16 disclosure was required in this case.
On March 16, 2007, the defense disclosed its intention to call Professor
Daniel Fischel to provide economic analysis of Mr. Nacchio’s trading patterns,
and to testify about the economic importance of the allegedly material inside
information. The government objected that this notice was insufficient under
Rule 16. The district court agreed, holding that the notice was in “plain violation
-12- of the Rules,” because the defense had “offer[ed] no bases or reasons whatsoever
for Professor Fischel’s opinions contained in the summary.” App. 352. The judge
instructed the defense to file a revised disclosure, “bringing his submission into
compliance with Rule 16,” by March 26. Id.
In court on March 22, in the course of granting the defense three extra days
to prepare a revised disclosure, the district judge commented that he was
“flabbergasted, frankly, that [the defense] could think th[e first disclosure] was an
adequate expert disclosure,” and said: “I think [Rule 16] is pretty clear, and . . .
it’s pretty close to what is required in the civil area.” App. 2038, 2041. The
government’s lawyer then added, “[I]t’s my concern at least based on the way the
disclosure is raised [sic] right now, there could be Daubert issues that arise with
respect to certain parts of the testimony.” Id. at 2041–42. “Daubert” is legal
shorthand for the district court’s obligation to test a proposed expert’s
methodology in advance of his testimony. 3 Defense counsel responded: “In
Latin, forewarned is forearmed.” Id. The court then recessed.
On March 29, the defendant filed a revised, ten-page Rule 16 disclosure
describing Professor Fischel’s qualifications as an academic, his research and
teaching in law and finance, and his previous experience consulting and
3 See Daubert v. Merrell Dow Pharms., 509 U.S. 579 (1993) (requiring expert testimony to be pursuant to a reliable methodology). As the district judge noted, Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999), may actually be the governing case. The parties used “Daubert” as shorthand for these doctrines and so will we.
-13- testifying. It gave a “Summary of Opinions and Bases for Opinions,” explained
that Fischel had conducted a “study of the Questioned Sales in relation to various
benchmarks,” and provided his consequent opinion that Mr. Nacchio’s sales were
inconsistent with what one would expect them to be if the government’s claims
were true. App. 427–30. It recounted that Professor Fischel had studied stock
data and assorted public information and stock analysis and had concluded that
Qwest’s stock price was not significantly affected when the allegedly material
information was released.
On April 3, the government filed a 63-page motion to exclude Professor
Fischel’s testimony. The government’s main argument was that the Rule 16
disclosure was still inadequate. It also argued, however, that “[e]ven if the Court
determines that the disclosure was adequate, the Court should rule that Defendant
has not established its admissibility” under, among other things, Daubert. App.
420. The next day, April 4, the defendant filed a seven-page response. He argued
that the disclosure was adequate for Rule 16 purposes, that Professor Fischel’s
opinions would “assist the trier of fact,” as Rule 702 requires, and that Professor
Fischel’s qualifications in “the economics of financial markets” were adequate.
App. 466, 468. The response made no mention of Professor Fischel’s
methodology, or of Daubert.
The next day, April 5, trial resumed and the defense called Daniel Fischel
to the stand. Without either party saying anything, the judge interjected, “All
-14- right. Members of the jury, I need to make some legal rulings at this time,” and
dismissed the jury. App. 3913. Without hearing from counsel for either party,
the judge then ruled that Professor Fischel’s expert testimony was inadmissible,
explaining himself at length. The judge said that “the deficiencies under Daubert
and Kumho Tire in these disclosures are so egregious that they hardly warrant the
63 pages of ink the Government has spilled in opposing the testimony.” App.
3914. The judge noted that Professor Fischel’s “methodology [was] absolutely
undisclosed in this expert disclosure.” App. 3917. After criticizing the Rule 16
disclosure’s failure to address methodology, the Court also separately concluded
that the testimony would not be helpful to the jury under Federal Rule of
Evidence 403 or 702, because expert economic analysis would “invit[e] the jurors
to abandon their own common sense and common experience and succumb to this
expert’s credentials,” App. 3920, and concluded that “the bulk of [Fischel’s]
testimony is simply a recitation of facts which is improper under Rule 602.” Id.
He then asked the defense to call a new witness. After the judge’s ruling, the
defense spoke for the first time since attempting to call Professor Fischel:
MR. SPEISER: Your Honor, may I be heard?
THE COURT: No. You know, in this court, we follow, the rule, generally, that we have argument and ruling. Not, the Court rules, and then it’s an interactive process where you get to argue later on. I have your motion, I have the Government’s motion, I have your response. Any argument that you wish to make could have been put in the response.
-15- MR. SPEISER: We were under tremendous time pressure.
THE COURT: So what? You could have put it in the response. You have made your record. You have made your argument. I’ve ruled. This habit that the defense has of questioning every ruling by argument later on is not going to be tolerated in this court.
App. 3921. The government had not spoken at all. The defense then called
Professor Fischel as a non-expert witness. He was permitted to give summary
testimony about the facts of Mr. Nacchio’s trades, without any economic analysis.
We conclude that on the record before him the district judge was wrong to
prevent Professor Fischel from providing expert analysis, and that this error was
not harmless.
1. Rule 16
The defendant’s disclosures did not have the “egregious” “deficiencies”
that the district court described. App. 3914. Rule 16 requires a defendant
wishing to call an expert witness to disclose, in some circumstances, “the
witness’s opinions, the bases and reasons for those opinions, and the witness’s
qualifications.” Fed. R. Crim. P. 16(b)(1)(C)(i). The district court’s belief that
Rule 16 also requires extensive discussion of a witness’s methodology was
incorrect, and its exclusion of the evidence an abuse of discretion. 4
4 At oral argument, the defendant appeared to argue that the Rule 16 disclosure did substantially discuss Professor Fischel’s methodology. We agree with the district court’s conclusion that it did not.
-16- Rule 16 is designed to give opposing counsel notice that expert testimony
will be presented, permitting “more complete pretrial preparation” by the
opposing side, Fed. R. Crim. P. 16, 1993 Advisory Comm.’s Notes, such as lining
up an opposing expert, preparing for cross-examination, or challenging
admissibility on Daubert or other grounds. Rule 16 disclosure is not designed to
allow the district court to move immediately to a Daubert determination without
briefs, a hearing, or other appropriate means of testing the proposed expert’s
methodology. See Margaret A. Berger, Procedural Paradigms for Applying the
Daubert Test, 78 Minn. L. Rev. 1345, 1360 (1994)(“Although the summary
required by Rule 16 provides the defense with some notice, the requirement of
setting forth ‘the bases and reasons for’ the witnesses’ opinions does not track the
methodological factors set forth by the Daubert Court.”). Indeed, a Rule 16
disclosure need not be filed with the court, 5 but only with opposing counsel,
which makes clear that it is not intended to serve as the basis for a judicial
determination regarding admissibility. It also bears mention that a defendant is
not required to file a Rule 16 disclosure unless the defendant has made a similar
request of the government under Rule 16(a)(1)(G) and the government has
5 Rule 16 requires only that the written summary be given “to the government,” Fed. R. Crim. P. 16(b)(1)(C), and criminal discovery can generally “proceed without the district court’s intervention” unless there is a dispute. United States v. Mentz, 840 F.2d 315, 328 (6th Cir. 1988). The defendant’s disclosure in this case was not filed with the court, but was attached to the government’s subsequent motion to exclude the testimony.
-17- complied. Obviously, this scenario does not preclude the government from
challenging the defendant’s proffered expert under Daubert. It is therefore a
mistake to regard the Rule 16 disclosure as a substitute for a Daubert hearing.
The defendant’s disclosure did exactly what the law required. Rule 16
requires, first, disclosure of “the witness’s opinions.” Fed. R. Crim. P.
16(b)(1)(C)(i). The government does not contest that the disclosure listed
Professor Fischel’s opinions on several topics, including whether Mr. Nacchio’s
trading pattern was suspicious, how Qwest stock prices related to the September
2000 guidance, and the magnitude and importance of the information Qwest had
about its IRU revenue. Rule 16 requires next “the bases and reasons for those
opinions.” Id. The disclosure explained that the opinion was “based on” analysis
of Mr. Nacchio’s trades, data on stock prices, executive options, and stock sales;
as well as on analysis of press reports, analysts’ reports and forecasts, and SEC
filings. It also contained the reasons for Professor Fischel’s ultimate opinions.
For example, he would have testified that principles of risk reduction and the
pattern of Mr. Nacchio’s sales were inconsistent with reliance on adverse material
inside information, and that the September 2000 guidance was not misleading
because Qwest’s stock price fell after it was announced but not when that
guidance was reduced in September 2001. Finally, Rule 16 requires disclosure of
“the witness’s qualifications.” The defense disclosed Professor Fischel’s work at
Lexecon (a law-and-economics consulting firm), his academic positions, his
-18- academic research, his previous experience as an economic consultant and
adviser, and his 25-page curriculum vitae. On multiple occasions, Professor
Fischel had testified as an expert witness for the Department of Justice in finance
cases.
We do not doubt that, in response to a Rule 16 disclosure statement, the
district court could order a party to make a written proffer in support of
admissibility under Rule 702. See United States v. Rodriguez-Felix, 450 F.3d
1117, 1122 (10th Cir. 2006); United States v. Rodriguez-Felix, No. 04-CR-665
(D. N.M. filed Mar. 25, 2004), docket no. 76; United States v. Sourlis, 953 F.
Supp. 568, 581 (D. N.J. 1996). It does not much matter whether such additional
detail is regarded as part of the Rule 16 “duty” to disclose, see Sourlis, 953 F.
Supp. at 581, or as an exercise of the court’s discretion in “deciding . . . what
procedures to utilize in making” the Rule 702 determination, as our precedent
implies, Rodriguez-Felix, 450 F.3d at 1122. We have found no case—and the
government has cited none—where a defendant’s proffered expert was excluded
under Daubert solely on the basis of a Rule 16 deficiency, without any further
opportunity of briefing or hearing.
The district court’s error may have proceeded from confusion between the
civil and criminal rules. Unlike under the civil rules, an expert in a criminal case
is not required to present and disclose an expert report in advance of testimony.
A Rule 16 disclosure must contain only “a written summary of any testimony”
-19- and “describe the witness’s opinions, the bases and reasons for those opinions,
and the witness’s qualifications.” Fed. R. Crim. P. 16(b)(1)(C). In contrast, an
expert’s written report in a civil case must include not only “a complete statement
of all opinions the witness will express and the basis and reasons for them,” Fed.
R. Civ. P. 26(a)(2)(B)(i), and his qualifications, R. 26(a)(2)(B)(iv), but also all of
the data or other information considered in forming the opinion, all summary or
supporting exhibits, and the compensation he was paid. Id. R.
26(a)(2)(B)(ii)–(iii), (vi). Thus, the judge’s comment that the criminal expert
disclosure requirement is “pretty close to what is required in the civil area,” App.
2041, was not correct—one need only look at the text of the two rules to
recognize the broader requirements of the civil rule. See United States v. Mehta,
236 F. Supp. 2d 150, 155–56 (D. Mass. 2002) (Gertner, J.) (“One way to decipher
the meaning of the criminal expert discovery rules is to compare them to the civil
discovery rules, which are much broader. While Fed. R. Civ. P. 26(a)(2) requires
a ‘complete statement’ of the expert's opinion, the criminal rule requires only a
‘summary of testimony.’ Civil Rule 26(a)(2) additionally requires the disclosure
of: ‘all opinions to be expressed and the basis and reasons therefor’ . . . . ”).
The government argues that a Rule 16 disclosure should include sufficient
information to meet the proponent’s burden under Daubert because the goal of
Rule 16 is “‘to provide the opponent with a fair opportunity to test the merit of
the expert’s testimony through focused cross-examination,’” Aplee’s Br. 54
-20- (quoting Fed. R. Crim. P. 16, 1993 Advisory Comm.’s Notes) and “[t]he
prosecution could hardly test an undisclosed methodology.” Id. at. 55. However,
it is not true that the prosecution had no way to test Fischel’s methodology if it
did not appear in a Rule 16 disclosure, just as it could have tested his
methodology if there had been no disclosure at all (as Rule 16 contemplates in
some cases). The prosecution had every right to demand a Daubert hearing to test
his methodology. The court also may have had discretion to order a Daubert
proffer in advance of any such hearing. Other courts have sometimes relied on
this purpose of the rule to excuse disclosing less than Rule 16 requires. E.g.,
United States v. Cuellar, 478 F.3d 282, 294 (5th Cir. 2007) (“Although the notice
provided by the government did not contain all the detail required by the rule . . .
[t]he purposes of Rule 16 were not frustrated.”), cert. granted on other grounds,
128 S. Ct. 436 (2007). We have found no case requiring more. The defense
complied with Rule 16, and that gave the government all the “fair opportunity”
for cross-examination that the rule contemplates.
2. Daubert
Even if there was no Rule 16 violation, the government contends, the
district court properly excluded the testimony under Daubert and Rule 702. We
cannot agree.
Most importantly, the district court made no genuine determination of any
sort under Daubert. The most straightforward reading of the transcript is that the
-21- judge excluded the evidence on Rule 16 grounds alone. It was “the deficiencies
under Daubert and Kumho Tire in these disclosures” that the district court found
“egregious.” App. 3914 (emphasis added). At the conclusion of its discussion of
Daubert, the court repeated that it was “concerned . . . with the methodology,
which is absolutely undisclosed in this expert disclosure.” App. 3917 (emphasis
added). It is true that the court repeatedly discussed what Daubert requires of an
expert, but only in explaining what was missing from the Rule 16 disclosures. As
we have discussed, a Rule 16 disclosure need not provide a full explanation of the
witness’s methodology, so it is wrong to demand that such a disclosure satisfy
Daubert.
Even reading the district court’s ruling as a freestanding Daubert ruling
rather than a finding that the Rule 16 disclosure was inadequate, 6 such a ruling
would have been an abuse of discretion on this record, which is devoid of any
factual basis on which a Daubert ruling could be made. In a criminal trial the
proponent of expert testimony is not under any obligation to provide a “a
complete statement” of the reasons for the expert’s opinion, compare Fed. R. Civ.
P. 26(a)(2)(B)(i), or an explanation of the expert’s methodology. In the absence
6 See Sprint/United Management Co. v. Mendelsohn, 552 U.S. ___, No. 06- 1221, 2008 WL 495370, at *5 (Feb. 26, 2008) (“An appellate court should not presume that a district court intended an incorrect legal result when the order is equally susceptible of a correct reading.”). We do not believe the district court’s ruling is “equally susceptible” to the alternative reading, but we do not entirely rule it out.
-22- of a court ruling that the Daubert issue be addressed and resolved in some other
way, the first order of business upon presenting the expert in court would be to
establish his qualifications and the admissibility of his testimony, either through
written submissions or by asking the necessary questions and allowing the other
side to cross-examine or introduce evidence challenging the basis for his
testimony. This could take place outside the presence of the jury. The district
court could not make an informed Daubert determination without hearing such
testimony or receiving submissions on the issue in some other form.
When district judges admit testimony under Daubert we require them to
make “specific findings on the record” rather than rule “off-the-cuff.” Dodge v.
Cotter Corp., 328 F.3d 1212, 1223 (10th Cir. 2003) (quoting Goebel v. Denver &
Rio Grande W.R.R., 215 F.3d 1083, 1088 (10th Cir. 2000)) (internal quotation
marks and emphasis omitted). We also require the court to create “a sufficiently
developed record in order to allow a determination [on appeal] of whether the
district court properly applied the relevant law.” Goebel, 215 F.3d at 1088
(quoting United States v. Nichols, 169 F.3d 1255, 1262 (10th Cir. 1999)) (internal
quotation marks and further citation omitted). Although “rejection of expert
testimony is the exception rather than the rule,” Fed. R. Evid. 702, 2000 Advisory
Comm.’s Notes, we have not had occasion to decide whether the same procedural
requirements apply before a judge excludes an expert. We need not resolve that
issue here, because we conclude that at a minimum it is an abuse of discretion to
-23- exclude an expert witness because his methodology is unreliable without allowing
the proponent to present any evidence of what the methodology would be. The
proponent bears the burden of establishing the admissibility of the evidence under
Rule 702, but it must be given an opportunity to do so before the testimony may
be ruled inadmissible.
Finally, the government argues that we should affirm Professor Fischel’s
exclusion because the defense failed to respond to the Daubert issue in its April 4
response, and thus waived the right to do so. We do not agree. The defense had
only one day to respond to the government's 63-page motion, and did not have
clear notice that it had to present its Daubert defense at that time. The judge’s
ruling on the first Rule 16 disclosure, which set the exchange of motions and
replies going, mentioned “Federal Rules of Evidence 401, 403, 602, 702, and
704,” but held that “[t]he matter may be settled through analysis under Rule 16.”
It made no mention of Daubert. The defendant complied by providing an analysis
under Rule 16. App. 351. Only then did the government file its lengthy motion,
which combined an argument that Rule 16 requires disclosure of methodology
with an attack on the witness’s methodology under Daubert. The defendant may
reasonably have interpreted the references to Daubert as arguments about Rule
16, as a request for a Daubert hearing, or perhaps as notice that the government
intended to move for such a hearing. The defendant had no reason to think that
the Daubert issue would be resolved on the basis of memoranda of law addressed
-24- to the Rule 16 issue, which is not the usual procedure. We give district judges
“broad discretion . . . in deciding . . . what procedures to utilize” to assess
reliability, Dodge, 328 F.3d at 1223, but it is for this reason that parties cannot be
held to guess the procedural rules in advance. Courts should not punish parties
for guessing wrong, especially with the extreme sanction of excluding evidence
central to the defense.
Finally, the defense was never permitted to speak to the issue in court.
When Professor Fischel was called, the district judge immediately announced that
he was excluding the testimony. A defense lawyer asked to speak. The judge
silenced him immediately, saying that once the court had ruled, the trial was
“[n]ot . . . an interactive process where you get to argue later on.” App. 3921.
When the court does not allow a lawyer to present arguments, we will not
penalize him for failing to present them.
A judge does not necessarily have to let lawyers “argue later on,” but he
has to let them argue sometime. Our decision in United States v. Rodriguez-Felix,
450 F.3d 1117 (10th Cir. 2006), illustrates the point. In Rodriguez-Felix, the
defendant wished to call an expert to testify about the reliability of eyewitness
testimony. Because the Rule 16 notice (naturally) did not disclose the expert’s
methodology, the district court scheduled a Daubert hearing, and also ordered the
defendant to submit a specific proffer on the Daubert issue. United States v.
Rodriguez-Felix, No. 04-CR-665 (D. N.M. filed Mar. 25, 2004), docket nos. 75,
-25- 76. When the expert did not attend the hearing, the district court then considered
the Daubert proffer alone, and excluded the testimony because the proffer was
insufficient. See Rodriguez-Felix, 450 F.3d at 1125–27. In Mr. Nacchio’s case,
the defense was given no similar opportunity to present evidence.
As the judge explained later that morning, the trial was on track to finish
“way ahead of time.” App. 3942. The jury was out of the room. Indeed, the jury
was soon dismissed for the rest of the day because the surprising exclusion of
Professor Fischel threw the parties’ lawyers into disarray. The judge could have
put Professor Fischel on the stand to ask him about his methodology, allowed the
government to do so, asked Mr. Nacchio’s lawyers if they would like to address
the issue for the first time, or even simply let them speak to see if they had a
meritorious objection. Having permitted none of those things, however, it would
have been an abuse of discretion to make a Daubert finding of unreliability.
3. Rules 403 and 602
While the district judge excluded Professor Fischel “primarily [for] the
gross defect” in the Rule 16 disclosure, App. 3921, he also excluded the expert
testimony because he thought it would not be helpful to the jury, was more
prejudicial than probative, and consisted of impermissible facts rather than
opinions. See Fed. R. Evid. 403, 602, 702. We reverse these alternative
conclusions as well.
-26- Professor Fischel’s testimony was to include a discussion of the economic
incentives that inside information would have given Mr. Nacchio, the statistical
significance of the differences in his trading patterns, and the likelihood that
economic diversification better explained the challenged sales than inside
information. The judge concluded that all of these things were “within the
common knowledge of the jury” and that “[t]he jury simply d[id]n’t need this so-
called expert witness to testify that diversification is an issue in this case.” App.
3918–19. This misunderstands the nature of economic expertise. An economic
expert is permitted not only to tell the jury that an economic concept “is an issue”
but to analyze the concept and offer informed opinions. In other words, expert
testimony may “assist the trier of fact to understand the facts already in the
record, even if all it does is put those facts in context.” 4 Jack B. Weinstein &
Margaret A. Berger, Weinstein’s Federal Evidence § 702.03[1] (2d ed. 2006)
(footnote omitted). That is why expert economic testimony is routine when a
materiality determination requires the jury to decide the effect of information on
the market. See, e.g., 3 Alan R. Bromberg & Lewis D. Lowenfels, Bromberg and
Lowenfels on Securities Fraud & Commodities Fraud § 6:153 (2d ed. 2007).
While economic analysis sometimes asks jurors to “abandon their own common
sense,” App. 3920, that is not a reason to deem expert testimony inadmissible.
Armchair economics is not the way to decide complex securities cases.
-27- The district court’s holding that the testimony was inadmissible under Rule
403 suffers from the same problem. The court’s analysis on the point was very
brief, and mostly dependent on the conclusions we have already rejected.
Finally, the district court was wrong to conclude that it was “perfectly
obvious” that Professor Fischel did not have personal knowledge of the facts that
formed the basis for his opinions. App. 3921. The judge said that Professor
Fischel did not have personal knowledge of Qwest’s stock price, of the contents
of analysts’ reports, or of the guidance issued by other telecommunications
companies. But Professor Fischel’s expert disclosure—which is all the court
consulted—said that he and his staff “ha[d] reviewed” Qwest’s stock prices, the
analysts’ reports, and so on. App. 433. This is personal knowledge; it is not
clear what more the district judge demanded. In Bryant v. Farmers Ins. Exch.,
432 F.3d 1114 (10th Cir. 2005), we held that Rule 602 permitted a lay witness to
testify about the contents of a list of audit reports. As we explained, “[s]ince [the
witness] personally examined these audit reports, she had personal knowledge of
their content.” Id. at 1123. Apart from potential hearsay objections, Professor
Fischel would have been perfectly entitled to testify about facts in the reports,
even as a lay witness.
Moreover, we have also held that “[t]he standards [of personal knowledge]
applied to lay and expert witnesses differ.” Durflinger v. Artiles, 727 F.2d 888,
892 (10th Cir. 1984). In particular, Rule 703 “permits an expert to base an
-28- opinion on any facts or data, admissible or not, which are of a type reasonably
relied on by experts in the particular field . . . .” Id. (emphasis added) (internal
quotation marks and citation omitted). Because using stock prices and
information issued by various companies is a common and reasonable way for an
economist to analyze the impact of that information on the stock prices, there was
no basis for excluding his testimony about stock price.
4. Prejudice
The government contends that even if the exclusion of Professor Fischel
was error, it was harmless. We disagree.
The right of a defendant to call witnesses is crucial for testing the
prosecution’s case and defeating the charges against him. Indeed, the “right to
present a defense . . . is a fundamental element of due process of law.”
Washington v. Texas, 388 U.S. 14, 19 (1967). Even if the exclusion does not rise
to the level of a constitutional violation, the burden is on the government to prove
that the error did not have “a ‘substantial influence’ on the outcome.” United
States v. Rivera, 900 F.2d 1462, 1469 (10th Cir. 1990) (en banc) (quoting
Kotteakos v. United States, 328 U.S. 750, 765 (1946)).
We are persuaded that the exclusion of Professor Fischel was not
inconsequential under any standard. The theory of Mr. Nacchio’s defense was
that the stock price was not affected by his disclosures, that his conduct had an
innocent explanation, and that a reasonable investor would not have found his
-29- inside information very important. Professor Fischel’s testimony, as described in
the disclosure, could have addressed each of these issues, and if credited by the
jury, might have changed the jury’s mind. The record does not otherwise contain
“overwhelming evidence of guilt,” United States v. Montelongo, 420 F.3d 1169,
1176 (10th Cir. 2005), and so we cannot say the exclusion was harmless.
B. Classified Information
Mr. Nacchio also argues that the district court was wrong to prevent him
from presenting certain classified information as evidence at trial. He claims that
the evidence would have shown that he personally had reason to believe that
Qwest’s economic prospects were much better than others realized. Thus, he
says, this evidence should have been permitted both to show that he did not have
material information and to negate scienter. We affirm the district court’s
decision, because even if the classified information were presented and
established what he said it would, it could not exonerate Mr. Nacchio as he
claims.
Essentially, Mr. Nacchio argues that undisclosed positive information can
be used as a defense to a charge of trading on undisclosed negative information.
We disagree. If an insider has material information that he cannot disclose
because it is confidential or proprietary, then he must abstain from trading. That
is the lesson of In re Cady, Roberts & Co., Exchange Act Release No. 6,668, 40
S.E.C. 907, 911 (1961), later applied in SEC v. Texas Gulf Sulphur Co., 401 F.2d
-30- 833, 848, 850 n.12 (2d Cir. 1968), and Chiarella v. United States, 445 U.S. 222,
226–29 (1980). It is black-letter law that insiders must disclose their material
information or else abstain.
It is true that in cases like Texas Gulf Sulphur, insiders were trading in
bullish positions ahead of the disclosure of the company’s proprietary discovery,
and thus their trading correlated with the inside information, while here Mr.
Nacchio argues that his possession of classified information neutralizes his
possession of other inside information. However, the general rule applies. If an
insider trades on the basis of his perception of the net effect of two bits of
material undisclosed information, he has violated the law in two respects, not
none.
III. SUFFICIENCY OF THE EVIDENCE
Although we have concluded that Mr. Nacchio’s conviction must be
reversed on account of trial error, we cannot leave it at that. He also claims that
the government failed to introduce evidence sufficient for him to be convicted. If
he is right, he was entitled to a judgment of acquittal and cannot be retried
without violating the Double Jeopardy Clause. See Anderson v. Mullin, 327 F.3d
1148, 1155 (10th Cir. 2007). An analysis of sufficiency of the evidence is not
merely a technical matter, but can require resolution of important questions
regarding the elements of the offense. Under one interpretation of a penal statute
the evidence may be sufficient, while under a different interpretation it may fall
-31- short. We must therefore examine the government’s theory of the case and
determine what is needed to support a conviction for insider trading in this
context.
Mr. Nacchio also challenges certain of the jury instructions, which
presented the government’s theory of the case to the jury and framed its
considerations of the evidence. If he is right regarding those challenges, and if
the error is not harmless, this would constitute an additional ground for reversal,
though it would not preclude retrial. But if the evidence introduced at trial is
insufficient to support conviction under a correct theory of the case, he is entitled
to a judgment of acquittal. The jury instructions question and the sufficiency-of-
the-evidence question are interrelated: when asking what facts the jury had to
find in order to convict, we look to the elements of the crime as defined by law,
except that if the government did not object to jury instructions containing
additional requirements, it is required to prove those too. See United States v.
Romero, 136 F.3d 1268, 1271–73 (10th Cir. 1998).
Our review is narrow in scope. With respect to jury instructions, we can
consider only objections to the accuracy of instructions that were raised before
the trial court (or constitute plain error—which we do not find here) and with
respect to the refusal of the district court to issue other instructions, we are
limited to those actually requested by a party. United States v. Crockett, 435 F.3d
1305, 1314 (10th Cir. 2006). Moreover, on a sufficiency challenge, we must view
-32- the evidence in the light most favorable to the government, and reverse only if no
rational jury could have found the evidence sufficient to convict beyond a
reasonable doubt. United States v. Brown, 200 F.3d 700, 704–05 (10th Cir.
1999). This is a highly deferential standard.
Mr. Nacchio was convicted under 15 U.S.C. §§ 78j, 78ff, and 17 C.F.R. §§
240.10b-5, and 240.10b5-1. These statutes delegate the power to define criminal
liability to the Securities and Exchange Commission by forbidding anyone from
willfully using, “in connection with the purchase or sale of any security, . . . any
manipulative or deceptive device or contrivance in contravention of such rules
and regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b). Those rules
and regulations in turn prohibit trading a security “on the basis of material
nonpublic information about that security . . . in breach of a duty of trust or
confidence.” 17 C.F.R. § 240.10b5-1(a). In other words, it is a crime for a
corporate insider to “trade[] in the securities of his corporation on the basis of
material, nonpublic information.” United States v. O’Hagan, 521 U.S. 642,
651–52 (1997).
Mr. Nacchio challenges his conviction in three different respects. First, he
argues that the undisclosed information on which he was alleged to have traded
was not material. Second, he argues that he did not act with willful intent. Third,
he argues that, as a matter of law, even if the information he had was material it
was not a factor in his decision to trade. In explaining why these challenges fail,
-33- we will first examine the instructions the jury was given on each legal
issue—materiality, scienter, and the connection of the inside information to the
trades—and provide our interpretation of the governing law. Then we will
explain why the government’s evidence was enough that a properly-instructed
jury could have found Mr. Nacchio guilty.
A. Materiality
The prohibition against insider trading applies only to those who trade on
the basis of material undisclosed information. The parties do not contest that the
basic test for the materiality of inside information is whether there is “a
substantial likelihood that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly altered the ‘total mix’
of information made available.” TSC Indus. v. Northway, Inc., 426 U.S. 438, 449
(1976). The Supreme Court has stated that this inquiry is “fact-specific” and
“depends on the significance the reasonable investor would place on the withheld
. . . information.” Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988). Essentially,
“materiality will depend at any given time upon a balancing of both the indicated
probability that the event will occur and the anticipated magnitude of the event in
light of the totality of the company activity.” Id. at 238 (internal quotation marks
omitted). That is, information about future events is material if—taking into
account both the probability of those events and their potential importance—a
reasonable investor would regard the information as “significantly” different from
-34- the information already made public. 7 Corporate insiders must disclose what
material nonpublic information they possess or else to abstain from trading. See
Chiarella v. United States, 445 U.S. 222, 226–29 (1980).
1. Jury Instructions
We review “‘the instructions as a whole de novo to determine whether they
accurately informed the jury of the governing law.’” United States v.
McClatchey, 217 F.3d 823, 834 (10th Cir. 2000) (quoting United States v.
Cerrato-Reyes, 176 F.3d 1253, 1262 (10th Cir. 1999)). We then review any
instructions offered by the defendant and rejected by the court. “A defendant is
entitled to an instruction on his theory of the case if the instruction is a correct
statement of the law, and if he has offered sufficient evidence for the jury to find
in his favor.” Crockett, 435 F.3d at 1314. We review a district judge’s refusal to
issue a requested instruction under this standard for abuse of discretion. Id.
Unopposed instructions are reviewed only for plain error. Medlock v. Ortho
Biotech, Inc., 164 F.3d 545, 553 (10th Cir. 1999).
In light of the fact-specific nature of the materiality determination it is
important to give a jury enough guidance to sort out material information from
noise. It is difficult for untrained jurors to judge ex post what would have been
important to reasonable investors ex ante. After the fact, whenever anybody has
7 Both Basic Inc. and TSC Industries were civil cases, but the Court refused to “vary[] the standard of materiality depending on who brings the action or whether insiders are alleged to have profited.” Basic Inc., 485 U.S. at 240 n.18.
-35- made money trading stock it is easy to say that one would have wanted to know
whatever the trader knew.
Here, the district court orally instructed the jury as follows:
“Material,” in order to—for you to find a material matter or a material omission, the Government must prove beyond a reasonable doubt that the matter misstated or the matter omitted was of such importance that it could reasonably be expected to cause a person to act or not to act with respect to the securities transaction at issue. Information may be material even if it relates not to past events, but to forecasts and forward-looking statements, so long as a reasonable investor would consider it important in deciding to act or not to act with respect to the securities transaction at issue. The securities fraud statute under which these charges are brought is concerned only with such material misstatements or such material omissions and does not cover minor or meaningless or unimportant matters or omissions. So the test is whether the matter misstated or the matter omitted was of such importance that it could reasonably be expected to cause a person to act or not to act with respect to the securities transaction at issue.
App. 4558–59.
We recognize that these instructions were adapted from a pattern
instruction, see Kevin O’Malley, Jay Grenig & William Lee, Federal Jury
Practice & Instructions, § 62.14 (5th ed. 2000), but they are not particularly
informative. On appeal, the defendant suggests that the instructions should have
incorporated the concepts of probability and magnitude, see Basic, Inc., 485 U.S.
at 238, and “total mix,” TSC Indus., 426 U.S. at 449, to further illuminate the
concept of materiality, but he did not request such instructions when he had a
chance in trial court to do so. Nor did he request any instruction informing the
-36- jury of the SEC’s regulatory guideposts regarding materiality. The question
before us is therefore whether the instructions Mr. Nacchio did receive misstated
the law. They did not. The Supreme Court has said that the “significance the
reasonable investor would place on the withheld . . . information,” is the test for
materiality, Basic Inc., 485 U.S. at 240, and that is what the jury was instructed.
The defendant did request two instructions about materiality, but they were
not “correct statement[s] of the law.” Crockett, 435 F.3d at 1314. First, he
requested an instruction about materially misleading forward-looking statements,
based on the requirements of a different rule, Rule 10b-5. This Rule makes it a
crime “[t]o make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made . . . not misleading .
. . in connection with the purchase or sale of any security.” 17 C.F.R.
240.10b-5(b). The defendant proposed a jury instruction based on the theory that
if the nondisclosure of information regarding the IRU sales did not render
Qwest’s public projections affirmatively misleading under Rule 10b-5, that
information must not have been material for purposes of insider trading
regulations.
Much of the instruction Mr. Nacchio proposed is simply confusing. For
example, it would have provided: “A forward-looking statement of the type
conveyed to the public by Qwest and Mr. Nacchio on or about September 7, 2000,
cannot be considered by you to be ‘material’ under the law unless it is shown that
-37- the statement was made or reaffirmed without a reasonable basis or was disclosed
other than in good faith.” App. 755–56. But the materiality issue in the case was
whether the inside information was material; nobody had attempted to deny that
the public guidance was material, and it is not clear what that would mean.
Moreover, when public guidance is “made or reaffirmed without a reasonable
basis” that does not mean the guidance is “material.” Id. at 756. It means that
the guidance is misleading. This nonsensical syntax alone would have been a
valid reason to reject Mr. Nacchio’s instruction.
The proposed instruction went on to state: “Even if some of [Qwest’s]
internal projections conflicted with its publicly-issued projections or guidance
that information would not be considered material, and Qwest and Mr. Nacchio
would only be required to disclose such tentative internal projections that
conflicted with the published projections if the internal figures were so certain
that they show the published figures to have been without a reasonable basis.” Id.
at 757. In support of this instruction, the defendant relies on a number of cases
limiting liability for false statements of material fact to cases where those
statements were made without a reasonable basis or in bad faith. We do not think
those cases apply in this context.
The SEC has promulgated a rule, called Rule 175, specifically designed to
provide a safe harbor for “forward-looking statement[s] . . . filed with the [SEC].”
Such a statement will “be deemed not to be a fraudulent statement. . . unless it is
-38- shown that such statement was made or reaffirmed without a reasonable basis or
was disclosed other than in good faith.” 17 C.F.R. § 230.175. 8 Until the adoption
of Rule 175, the SEC had discouraged firms from making future projections at all,
and encouraged them to comment only on hard data about the present and past.
Rule 175 was adopted to encourage companies to make estimates. Without it, as
Judge Easterbrook has asked, “What’s in it for them? If all estimates are made
carefully and honestly, half will turn out too favorable to the firm and the other
half too pessimistic. In either case the difference may disappoint investors, who
can say later that they bought for too much . . . or sold for too little . . . .”
Wielgos v. Commonwealth Edison Co. 892 F.2d 509, 514 (7th Cir. 1989).
Mr. Nacchio is being prosecuted for concealing true information while
trading, not for making misleading statements. Nonetheless, he argues that a
similar safe harbor rule must extend to his actions. However, Rule 175 and the
insider trading rules are conceptually distinct. The insider trading duty is to
disclose or abstain. The “or” in this formulation implies there are cases where
corporate officials are permitted not to disclose, so long as they refrain from
buying or selling stock. The defendant’s theory collapses the two: only when it
would be affirmatively misleading not to disclose, he argues, may liability attach
8 Rule 175 applies to liability under the Securities Act of 1933; a second rule, 17 C.F.R. § 240.3b-6, provides identical protection from liability for misleading statements under the Securities Exchange Act of 1934, the statute that also criminalizes insider trading.
-39- for failing to abstain. That is not the law. After all, Rule 10b-5 makes it a crime
“to omit to state a material fact” only if that fact is “necessary in order to make
the statements made . . . not misleading.” 17 C.F.R. 240.10b-5(b). This
presupposes that it is possible for omitted facts to be material even though the
public statements do not mislead. 9
The purpose of the reasonable basis principle reinforces our conclusion that
it does not necessarily apply to insider trading cases, as opposed to false-
statements cases. The rule exists to encourage companies to disclose estimates
regarding future performance by protecting companies and their officers from
liability so long as their estimates had a reasonable basis. But in an insider
trading case, the reason to create a safe harbor for public statements—to
encourage companies to make predictions—does not apply. Decreeing this
information immaterial would mean that insiders could trade without disclosing it.
This would turn the purpose of Rules 175 and 3b-6 on its head by sheltering those
who keep predictions quiet, rather than rewarding them for disclosure. We are
therefore not persuaded that the reasonable basis principle should apply to guard
undisclosed information rather than disclosed projections.
The defendant also requested an instruction that if his public predictions
and disclosures were “accompanied by warnings and cautionary language which
9 For this reason, Wielgos, on which the defendant relies, is distinguishable: the defendant in Wielgos was charged with making false statements in its prospectus, not with insider trading.
-40- provide the investing public with sufficiently specific risk disclosures,” he could
not be convicted. App. 758. This is known as the “bespeaks caution” doctrine,
also borrowed from false-statements cases. See Grossman v. Novell, Inc., 120
F.3d 1112, 1120 (10th Cir. 1997). The defendant’s argument to apply this
doctrine to insider trading fails for the same reason as his reliance on the
reasonable-basis doctrine: it confuses the relationship of misleading public
projections and material inside information.
The “bespeaks caution” rule is an application of the common-sense
principle that the more a speaker qualifies a statement, the less people will be
misled if the statement turns out to be false. Or as we put it in Grossman, “[a]t
bottom, the ‘bespeaks caution’ doctrine stands for the ‘unremarkable proposition
that statements must be analyzed in context’ when determining whether or not
they are materially misleading.” 120 F.3d at 1120 (quoting Rubinstein v. Collins,
20 F.3d 160, 167 (5th Cir. 1994)). This rule does not apply here. First, there is
no indication in the record that Qwest’s public guidance and Mr. Nacchio’s April
2001 reaffirmation of it to investors was so shrouded in cautionary language that
the doctrine is applicable. Second, even if the public guidance were sufficiently
hedged by cautionary language that the public knew to be wary of relying on it,
this does not mean that the inside information on which Mr. Nacchio is alleged to
have traded is immaterial. Certain and sure information that a company will
experience a revenue shortfall might be material even if initial revenue
-41- projections had been expressed in cautious tones. Information is material if it
adds materially to the mix of information already available to investors. TSC
Indus. v. Northway, 426 U.S. 438, 449 (1976). That the information already made
available was couched in warnings does not make new information (such as that
IRUs constitute a dangerously high part of revenues and that opportunities for
new IRU sales were drying up) immaterial. The issue in this case is not whether
Qwest’s public guidance was materially misleading, but whether the undisclosed
information on which Mr. Nacchio allegedly traded was material.
Whatever improvements might have been made in the instructions, the
defendant was not entitled to the instructions that he asked for, and the
instructions he ultimately received were not legally incorrect.
2. Sufficiency of the Evidence
Even if his legal theory of materiality is rejected, the defendant argues that
the government failed to provide sufficient evidence that his information was
“significan[t to] the reasonable investor.” Basic Inc., 485 U.S. at 240. As the
government tells it, Mr. Nacchio knew in late 2000 that there were risks
associated with his projections. If certain things went wrong, Qwest would not
meet its public projections. By April 2001, Mr. Nacchio had learned that those
things had gone wrong or at least were much more likely to. Mr. Nacchio
responds that even if all of this is true, the total effect on Qwest’s stock price
would be too small to be significant as a matter of law.
-42- Courts regularly look to the magnitude of a potential loss in determining
whether knowledge of it is material. See, e.g., City of Phila. v. Fleming Cos., 264
F.3d 1245, 1268 (10th Cir. 2001) (refusing to allow a suit for failing to disclose a
lawsuit whose threatened damages “totaled only 2.4%–3.5% of Fleming’s total
assets and approximately 10% of Fleming’s total net worth”); In re Apple
Computer, Inc., 127 F. App’x 296, 304 (9th Cir. 2005) (unpublished) (“[Revenue]
projections which are missed by 10% or less are not generally actionable.”). But
we have found no case that adheres rigidly to a mathematical threshold.
We take our cue from the SEC’s guidelines for the materiality of errors in
reported revenues. See Staff Accounting Bulletin No. 99, 64 Fed. Reg. 45,150
(1999). In that bulletin, the accounting staff applied the principles of TSC
Industries and Basic, Inc., to assess the common “rule of thumb” among
accountants “that the misstatement or omission of an item that falls under a 5%
threshold is not material in the absence of particularly egregious circumstances.”
Id. at 45,151 (footnote omitted). The staff blessed the rule of thumb so long as it
was not used too rigidly:
The use of a percentage as a numerical threshold, such as 5%, may provide the basis for a preliminary assumption that—without considering all relevant circumstances—a deviation of less than the specified percentage with respect to a particular item on the registrant’s financial statements is unlikely to be material. The staff has no objection to such a “rule of thumb” as an initial step in assessing materiality. But quantifying, in percentage terms, the magnitude of a misstatement is only the beginning of an analysis of
-43- materiality; it cannot appropriately be used as a substitute for a full analysis of all relevant considerations.
Id. Thus, a 5% numerical threshold is a sensible starting place for assessing the
materiality of Mr. Nacchio’s information about risks to Qwest’s revenue
guidance, but it does not end the inquiry. Special factors might make a smaller
miss material. See Ganino v. Citizens Utils. Co., 228 F.3d 154, 162–64 (2d Cir.
2000) (holding on the basis of Staff Accounting Bulletin No. 99 that “numerical
benchmark[s]” are informative but not the “exclusive” test).
The parties dispute the size of the potential shortfall predicted to Mr.
Nacchio by Qwest staff in April, 2001. The defendant claims this figure is $300
million, or 1.4% of total revenues (as measured by the bottom of the range
presented in the public guidance). The government contends the figure is $900
million, or 4.2% of total revenues. The dispute revolves around interpreting
testimony given by Qwest’s vice-president of financial planning, Robin Szeliga.
She is the official who told Mr. Nacchio about the risks to the public projections.
On direct examination, when she first discussed her December/January meeting
with Nacchio, Ms. Szeliga testified that “we aggregated all the risk they were
identifying, we were still at this time coming to a billion dollars of risk as it
related to the target that we had set.” App. 2134. This testimony was ambiguous
because there were both public projections and internal targets, as mentioned
above. Furthermore, in September when Ms. Szeliga had received the memo she
-44- was telling Mr. Nacchio about, the memo used estimates for the public guidance
and internal targets that were different from the ones the company eventually set.
In the memo, the internal target was predicted to be $22 billion (rather than 21.8)
and the “street” target was to be $21.6 billion (rather than 21.3).
On cross-examination, Ms. Szeliga appeared to testify that she meant one
billion dollars less than the internal target of $22 billion:
Q. Okay. Now when you were talking about a billion dollar risk that all of these folks were debating and discussing, that was a billion dollar risk in their view at the time to the internal budget which was $21,991,000,000. That’s true, isn’t it?
A. In the—yes, in the original, we showed that as it rounded up to $22 billion.
App. 2268. That testimony would support the defendant’s $300 million figure,
because $21 billion is $300 million less than the bottom of the public guidance.
However, on re-direct examination, Ms. Szeliga corrected herself (without saying
so), stating that the risk was closer to $1.2 billion and that it was against the
public target at the time, not the private one:
Q. [I]f you can highlight the 1,192,000,000, what does Mr. Bickley describe that as?
A. Grand total risk in street disclosures, 1,192,000,000.
Q. I’m going to round that to 1.2 billion; is that fair?
A. Yes.
Q. And I’m going to call that risk. So when I take the street, according to this memo, minus the risks, what do I come to?
-45- A. 20 billion .4.
Q. 20.4 billion, all right. Street minus the risk is 20.4 billion. And I want to compare that to the guidance that Mr. Nacchio gave to the street two days after this, okay.
A. Okay.
. . .
Q. And how does this number, 20.4 billion, compare to the low end of the guidance that Mr. Nacchio disclosed to the street?
A. About $900 million lower.
App. 2423–24.
For two reasons, we conclude that $900 million—the figure the government
stressed in closing argument—is the one we must consider on appellate review.
First, the memo itself explicitly refers to the $1.2 billion as a risk “in street
disclosures,” consistent with Ms. Szeliga’s re-direct testimony. App. 4936. It is
true that Ms. Szeliga testified that Mr. Nacchio never saw the memo, but she was
talking to him about its contents, so it is helpful to compare her testimony to the
document she was describing. Second, we are required to interpret the evidence
in the light most favorable to the government. Given Ms. Szeliga’s clarification
on re-direct, the jury was entitled to believe that the higher figure was accurate.
Thus, we are asked to decide whether a risk that a company’s revenue will
fall $900 million short of its public guidance—a 4.2% shortfall—is necessarily
immaterial to investors. Although it is a close question, we conclude that the
-46- answer is “no.” The 4.2% shortfall is close to the 5% rule of thumb embraced by
the SEC, and there was enough evidence of additional factors that we cannot
reject the possibility of materiality as a matter of law. See Ganino, 228 F.3d at
162–64; Staff Accounting Bulletin No. 99, 64 Fed. Reg. 45,150 (1999). The
government argued that the shortfall had particular salience given the state of the
economy and the industry. Mr. Nacchio himself had said in January that the
“skittish market” was so “mercurial” that even a $50 million shortfall could create
a 15–20% drop in stock price. Aplee.’s Supp. App. exh. 559A. We think that if
the evidence is viewed in the light most favorable to the government, a reasonable
and properly-instructed jury could have concluded that information about a 4.2%
shortfall, in the special circumstances of this case, was material. 10
Finally, Mr. Nacchio also points out that there is no evidence that Qwest’s
stock fell at the time when he released information about the IRUs. Ordinarily,
that would be powerful evidence that the information was not significant to
investors. But the government argues that this is because Mr. Nacchio “trickled
out” the information so as to avoid a major market shock. Aplee’s Br. 31.
According to Lee Wolfe’s testimony, before August some investors were already
10 We do not disregard the other component of materiality analysis with respect to foreward-looking statements, which is the probability that the event will occur. See Basic, Inc., 485 U.S. at 238. But in this case the parties have focused solely on the magnitude of the shortfall, should it occur. See Aplt’s Br. at 24 (arguing that the risk was too small to be material “[e]ven if the jury thought that ‘risk’ was a certainty”).
-47- skeptical of Qwest’s revenue because of the company’s refusal to disclose
information about IRUs. Then on August 7, Mr. Nacchio told investors in Boston
that a disclosure about IRUs would be forthcoming. A week later, Qwest filed an
SEC disclosure reporting how much of its revenue for the first two quarters came
from one-time sources, and Mr. Wolfe testified that “investors were very
surprised by the magnitude,” notwithstanding that there had been “some
disclosure after the first quarter.” App. 1673. It also bears noting that Mr.
Nacchio’s million dollars in sales may have warned alert investors that prospects
for the company were not as bullish as he was saying. From all of this, the jury
could have concluded that Qwest’s stock price incorporated the information in
phases.
Thus, the evidence the government produced at trial was enough for a
reasonable jury, properly instructed, to find Mr. Nacchio’s information to be
material.
B. Scienter
In addition to arguing that the information he possessed was not material,
Mr. Nacchio argues that he traded in good faith and did not “willfully” violate the
law, as the statute requires. 15 U.S.C. 78ff(a).
The district judge charged that:
-48- [T]he defendant must have committed these acts willfully, knowingly and with the intent to defraud. I will now define what I mean by these terms. An intent to defraud or an intent to deceive, manipulate or defraud is established if the Government proves beyond a reasonable doubt that the defendant acted knowingly with the intention or purpose to deceive or cheat. To act willfully means to act voluntarily and purposefully with the specific intent to do something which the law forbids. That is to say, with bad purpose, to disobey, or disregard the law. The term “knowingly” as used in these instructions to describe the alleged state of mind of the defendant means that he was conscious and aware of his action, realized what he was doing or what was happening around him, and did not act because of ignorance or mistake or accident or carelessness. The good faith of the defendant is a complete defense to the charge of securities fraud contained in each count of this Indictment because good faith on the part of the defendant, if it is found by the jury, is simply inconsistent with the intent to defraud alleged in each charge of the Indictment. A person who acts on a belief or an opinion honestly held is not punishable under this statute merely because the belief or opinion turns out to be inaccurate, incorrect or wrong. An honest mistake in judgment does not rise to the level of criminal conduct. A defendant does not act in good faith if even though he honestly holds a certain opinion or belief if he also knowingly employs a device, scheme or artifice to defraud. The law is written to subject criminal punishment only those [sic] people who knowingly defraud or attempt to defraud. While the term “good faith” has no precise definition, it encompasses among other things a belief or opinion honestly held, an absence of an intention to defraud, and an intention to avoid taking unfair advantage of another. The burden of proof is not on Mr. Nacchio to prove his good faith since the defendant has no burden to prove anything. Rather, the Government must establish beyond a reasonable doubt the opposite of bad [sic] faith. That is, he acted with the intent to defraud charged in the Indictment. If the evidence in the case leaves you with a reasonable doubt as to whether Mr. Nacchio acted with the intent to defraud or in good faith, then you must acquit him.
-49- App. 4560–62.
This instruction defines the word “willfully” as “the specific intent to do
something which the law forbids. That is to say, with bad purpose, to disobey, or
disregard the law.” Id. at 4560. The government objected that this instruction was
too generous to Mr. Nacchio, arguing that the court should apply the standard
used by the Supreme Court in interpreting a firearm licensing statute: “As a
general matter, in the criminal context, a ‘willful’ act is one undertaken with a
‘bad purpose.’ In other words, in order to establish a ‘willful’ violation of a
statute, the Government must prove that the defendant acted with knowledge that
his conduct was unlawful.” Bryan v. United States, 524 U.S. 184, 191–92 (1998)
(internal quotation marks and footnote omitted). We need not decide which
version of this instruction is a more accurate interpretation of 15 U.S.C. §78ff,
because Mr. Nacchio does not challenge the instruction and the evidence was
sufficient to convict him under either version.
Mr. Nacchio does challenge the portion of the instruction that discusses
good faith, however. The instruction states that having good faith makes one
innocent of insider trading, but that knowingly engaging in insider trading negates
good faith. This may sound circular, but it expresses an important point. If the
defendant was simply too bullish about Qwest’s prospects, this does not make him
guilty of insider trading; however, if he knew that he was more optimistic than
-50- the market, and that the market would devalue Qwest stock if it knew what he
knew, he is not exonerated by his bullishness.
The defendant complains that the jury was misled by this sentence of the
good-faith instruction: “A defendant does not act in good faith if even though he
honestly holds a certain opinion or belief if he also knowingly employs a device,
scheme or artifice to defraud.” App. 4561. He claims that the instruction allowed
the jury to conclude that Mr. Nacchio acted in bad faith on the basis of dishonesty
totally unrelated to the crime he was charged with. But the judge also charged the
jury that “[a]n intent to defraud or an intent to deceive, manipulate or defraud”
discussed in the good-faith instruction was relevant because “the defendant must
have committed these acts willfully, knowingly and with the intent to defraud.”
Id. (emphasis added). Therefore, while they might have been clearer, the bad-
faith instructions were limited to the crimes charged and did not allow the jury to
hold Mr. Nacchio accountable for irrelevant conduct.
The evidence at trial was enough for the jury to infer that Mr. Nacchio
acted with the purpose to disobey the law or the knowledge that he was doing so.
Lee Wolfe testified about a conversation he had with Mr. Nacchio regarding “the
impact of disclosure of the use of one-timers” on the market. App. 1653. He
testified that he and Mr. Nacchio discussed that “[t]he likely reaction was that . . .
[analysts] would be surprised at the magnitude of the transactions, and that the
-51- stock price would go down some amount.” Id. In addition, Mr. Wolfe testified
that when Qwest ultimately decided to lower its public guidance, Mr. Nacchio and
Drake Tempest agreed that “there needed to be enough time” between the
lowering of the guidance and the IRU disclosures Mr. Nacchio had made in
August. Id. at 1677. This was “to give the sense that this was something new
that caused the lowering of the targets . . . so that investors would accept the
notion that lowering the targets was something that . . . Mr. Nacchio would not
have reasonably known when he made the statements in Boston.” Id. at 1677–78.
This can be interpreted as an effort to conceal the importance of the IRU
information. Finally, the jury heard this testimony from Mr. Wolfe on cross-
examination:
Q. Now, what did Mr. Nacchio tell you in response to your concerns that were raised by the analysts about these one-time transactions? What was his response to you?
A. Well, as I testified earlier, there were different responses in terms of what the impact on the stock price would be. A couple of other times he would say, you know, why do they need to know? And I would say, to make an informed decision whether to buy or sell the stock. And basically, he responded, screw them, go tell them to buy.
App. 1798–99. The jury was entitled to believe Mr. Wolfe and to conclude from
his testimony that Mr. Nacchio knew that the information he had was material to
the market.
As general counsel, Mr. Tempest approved Mr. Nacchio’s sales plans in
February and May of 2001, and determined that they were consistent with the
-52- company’s insider trading policy. The jury convicted Mr. Nacchio of his trades
executed pursuant to the May but not the February plan. Mr. Nacchio argues that
he should have also been acquitted of his trades under the May plan because Mr.
Tempest’s approval of the plan constituted evidence that Mr. Nacchio did not
willfully break the law. However, based on the evidence that Tempest and
Nacchio discussed concealing the importance of the IRUs, the government argued
that the jury should discredit his approval. Mr. Tempest did not testify. A
reasonable jury could believe that Mr. Tempest’s signature was not conclusive
evidence of Mr. Nacchio’s good faith. The defense was permitted to put its
argument regarding Tempest’s approval to the jury; it was not entitled to
judgment as a matter of law. Further, a reasonable jury could believe that by the
time Mr. Nacchio entered into the May plan, his scheme to defraud investors had
already begun and Mr. Nacchio’s use of the May plan, notwithstanding Mr.
Tempest’s approval of it, was thus part of an attempt to conceal that scheme.
C. Trading on the Basis of Inside Information
Finally, Mr. Nacchio also argues that because he had an innocent
explanation for his trades, the jury could not have concluded that his trades were
“on the basis of” inside information. 17 C.F.R. § 240.10b5-1(a).
Over the government’s objection, the judge charged the jury:
-53- A person trades on the basis of inside information if the Government proves beyond a reasonable doubt that the person actually used material non-public information in deciding to trade. It is not sufficient for an insider merely to have possessed the material non-public information when he traded. The inside—the test here is really one of cause. The inside information need not have been the sole cause of the trade. There may be other causes for the trade as well. It is sufficient that the inside information was a significant factor in an insider’s decision to sell stock. A significant factor.
App. 4559.
This instruction was arguably incorrect because it was too favorable to Mr.
Nacchio. Since 2000, Rule 10b5-1 has provided that an insider trades “on the
basis of” information so long as he is “aware” of it, 17 C.F.R. §240.10b5-1(b),
unless he falls into one of the rule’s safe-harbors—the creation of an automatic
trading plan or some other binding contract or election to sell stock in advance of
acquiring the information. Id. § 240.10b5-1(c). This would make Mr. Nacchio
liable even if he could prove that he had unrelated reasons for his sales (such as
the need to dispose of options before their expiration date) and thus that he did
not trade “on the basis of” the information. In overruling the government’s
objection to the “significant factor” and “actually used” requirements, the district
judge relied on the Ninth Circuit’s decision in United States v. Smith, 155 F.3d
1051, 1067 (9th Cir. 1998), which was decided before Rule 10b5-1 was enacted.
When the government pointed out that Smith did not apply because “it precedes
the rule in issue in this case,” the judge responded, “I don’t think it makes any
-54- difference. I think it’s still good law,” providing no further explanation. App.
4165–66.
By so ruling, the district court may have implicitly held that Rule 10b5-1 is
not a lawful interpretation of the securities laws, at least if it means, as it appears
to say, that the affirmative defenses it gives to awareness liability are exclusive.
The statute under which insider trading is prosecuted is limited to “manipulative
or deceptive” conduct. 15 U.S.C. § 78j(b). Some commentators maintain that the
Rule (the authority of which has not been resolved by any circuit) is unlawful
because it effectively eliminates fraud from the liability standard. See Carol B.
Swanson, Insider Trading Madness: Rule 10b5-1 and the Death of Scienter, 52 U.
Kan. L. Rev. 147 (2003). However, on appeal, Mr. Nacchio has not attempted to
defend the judge’s instruction on this unarticulated ground, so we assume, without
deciding, that Rule 10b5-1 is lawful. 11 If so, then the district court’s instruction
was more generous than Rule 10b5-1 provides.
Thus, the government’s objection below to the court’s instruction is
significant for our analysis of the sufficiency of the evidence. When conducting
such analysis, we normally look to what the law actually requires rather than what
the jury was instructed so long as the government objected to the instruction
11 Mr. Nacchio submitted a proposed jury instruction more favorable than the one he received. In a footnote to that submission, he suggested that Rule 10b5-1 was invalid by citing Stuart Sinai, A Challenge to the Validity of Rule 10b5-1, 30 Sec. Reg. L.J. 261 (2002). However, in this appeal he does not argue that his instruction was improperly denied, or that Rule 10b5-1 is invalid.
-55- below. United States v. Williams, 376 F.3d 1048, 1051–52 (10th Cir. 2004). In
this case, however, the government’s proffered instruction said that the jury must
find that the information was “a factor, however small, in the insider’s decision to
buy or sell.” App. 743. Mr. Nacchio argues that because the government
proffered this instruction, it must be held to no less stringent a standard on review
of sufficiency of the evidence. It is not clear to us that the government must be
held to its rejected jury instructions. 12 We do not need to resolve the conundrum
here, because the evidence was sufficient to establish both that Mr. Nacchio was
aware of the information, and that it was “a factor, however small,” in his
decision to trade. Because Rule 10b5-1 is unchallenged here, we do not decide
whether the evidence is sufficient to demonstrate that Mr. Nacchio actually used
inside information, or that it was “a significant factor,” as the judge instructed.
The defendant urges that his April and May 2001 sales could not have been
“on the basis of” his inside knowledge because he had an entirely innocent
explanation: he had to exercise his stock options before they expired in June
12 We have described our rule about the role of uncontested jury instructions in sufficiency-of-the-evidence review both as an application of “the doctrine of law of the case” and as “an equitable remedy whose purpose is to prevent the government from arguing on appeal a position which it abandoned below.” Williams, 376 F.3d at 1051. On one hand, law of the case normally applies only to issues “[a]ctual[ly] deci[ded],” 18B Charles Alan Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice and Procedure § 4478, at 649 (2d ed. 2002), not to arguments that are rejected. On the other, the equitable theory might apply to proffered as well as accepted instructions.
-56- 2003. But this is not enough to exclude as a matter of law the possibility that
inside information was a factor. The fact that his options were expiring means
that he had to exercise them, but after exercising an option and receiving a share
one can either sell that share or hold it. When announcing his intention to start
redeeming his stock options in October, Mr. Nacchio said, “I can’t just exercise
and hold,” explaining that because he would be taxed upon exercising his options,
he had to sell them to pay the tax. Aplee.’s Supp. App. exh. 1560. That is a
plausible explanation, but the jury did not have to believe it. Mr. Nacchio could
have paid the tax out of other assets, or sold only some of the shares, using the
proceeds to pay the tax due on the options. Mr. Nacchio also argues that,
customarily, CEOs sell stock as soon as they exercise an option. These are
powerful arguments for the jury, but they do not establish his innocence as a
matter of law.
Mr. Nacchio also argues that his pattern of sales exonerates him and
requires us to overturn the jury’s verdict. He cancelled his February automatic
sales plan in March because Qwest’s share price went below $38, and his May
plan included a $38 floor. He never sold any more stock after May, and ended the
year with more vested options than he owned at the beginning. On its face, this is
curious behavior for somebody with inside knowledge that the stock price was
likely to plummet. However, the law does not require a defendant to sell most of
his stock to be convicted of insider trading. The government argued that Mr.
-57- Nacchio stopped selling in May “to avoid detection,” Aplee’s Br. at 25, and a
reasonable jury could have believed this.
In any event, the jury convicted Mr. Nacchio only on trades beginning
April 26, acquitting him on trades from January 2 through March 1 (he did not
trade between March 1 and April 26), suggesting that the jury acknowledged his
legitimate reasons for exercising his options prior to April. By convicting Mr.
Nacchio for his April and May trades, it appears the jury was convinced that he
sold stock in April and May because he knew at that time that Qwest had not
made the necessary shift to recurring revenue. Mr. Nacchio knew the 2001
budget required Qwest to double its 2000 growth rate for recurring revenue, he
knew and agreed that such growth had to happen as early as possible in 2001 to
benefit from sufficient compounding, and he knew Qwest’s 2001 budget relied on
such compounding to generate increased revenue in the third and fourth quarters.
Further, as of April 9—after he had abandoned his February trading plan—Mr.
Nacchio knew that this needed shift had not occurred, as recurring revenue was
off its target by 19%. A reasonable jury could infer from these facts that,
notwithstanding Ms. Szeliga’s report that the company was on track to make its
year-end public target, Mr. Nacchio knew in April that the company’s earnings
were in jeopardy, and that he acted upon this nonpublic information when
deciding to trade in April and May.
IV. RETRIAL
-58- The improper exclusion of Professor Fischel’s testimony prejudiced Mr.
Nacchio’s defense, so we must reverse his conviction. However, because the
evidence the government presented was sufficient, the government may try him a
second time. Because he will have to be sentenced anew if he is convicted again,
we do not need to reach the challenges Mr. Nacchio raises to the forfeiture of his
assets or his sentencing enhancement.
Finally, the defendant asks us to assign any new trial to a new district
judge. In this Circuit, we exercise our power to do so only where we find either
that the judge harbored “personal bias” or on the basis of circumstances laid out
in a three-part test:
(1) whether the original judge would reasonably be expected upon remand to have substantial difficulty in putting out of his or her mind previously-expressed views or findings determined to be erroneous or based on evidence that must be rejected, (2) whether reassignment is advisable to preserve the appearance of justice, and (3) whether reassignment would entail waste and duplication out of proportion to any gain in preserving the appearance of fairness.
Mitchell v. Maynard, 80 F.3d 1433, 1448–50 (10th Cir. 1996) (quoting United
States v. Sears, Roebuck & Co., 785 F.2d 777, 780 (9th Cir. 1986)). We do not
suggest that the assigned district judge harbored personal bias against Mr.
Nacchio, but we do conclude that the factors outlined in Mitchell militate in favor
of retrial before a different judge. After reading the trial transcript, we have
concluded that it would be unreasonably difficult to expect this judge to retry the
case with a fresh mind. Because the government will have to retry the case from
-59- scratch either way, there is no unnecessary “waste [or] duplication” in reassigning
it.
V. CONCLUSION
The judgment of the district court is REVERSED and the case is
REMANDED for a new trial before a different district judge.
-60- 07-1311, United States v. Nacchio
HOLMES, Circuit Judge, dissenting in part and concurring in part.
The majority elevates form over substance in concluding that Rule 16 was
the foundation for the district court’s exclusion of Professor Fischel’s expert
testimony. Daubert was at the heart of the district court’s decision, and Mr.
Nacchio was on clear notice of this fact. The court did not abuse its discretion in
finding that Mr. Nacchio did not carry his burden under Daubert of establishing
the admissibility of Professor Fischel’s testimony. Accordingly, I respectfully
dissent from Section II(A) of the majority’s opinion. I concur with the majority’s
conclusion that Mr. Nacchio failed to establish grounds for reversal in the district
court’s exclusion of classified information and in its instructions to the jury. I
also believe the evidence was legally sufficient to support the jury’s verdict.
Therefore, I would affirm the district court and uphold Mr. Nacchio’s conviction. 1
The district court’s exclusion of Professor Fischel’s testimony was about
Daubert. True, the government first framed its challenge to Professor Fischel’s
proffered expert testimony as an objection to the sufficiency of Mr. Nacchio’s
Rule 16 disclosure. However, by the time the district court ruled to exclude
1 In addition to challenging his conviction, Mr. Nacchio raised certain challenges to his sentence. I offer no views regarding the merits of those sentencing challenges. Professor Fischel’s testimony, it was clear that the court was asking about
The district court had repeatedly questioned Professor Fischel’s
methodology—an issue that it must examine under Daubert, not Rule 16. Thus,
Mr. Nacchio should have known that he had to either make the requested showing
or request a Daubert hearing. 2 Furthermore, it was incumbent upon Mr. Nacchio,
who was offering Professor Fischel as an expert witness, to demonstrate that his
proffered expert was qualified to render an expert opinion. Thus, when the district
court was asking about methodology, Mr. Nacchio was required to rise to meet his
burden of demonstrating that the expert testimony was admissible.
Mr. Nacchio is attempting to take an unexceptional issue and craft it into a
tale of an invidious district court ruling. However, it is clear that at best his
argument is nothing more than a run-of-the-mill claim of unfair surprise clothed
in Rule 16. We have dismissed similar claims when, as here, the record belies
them. See Ralston v. Smith & Nephew Richards, Inc., 275 F.3d 965, 970 n.4 (10th
Cir. 2001) (rejecting the contention that a party was not informed that her
expert’s qualifications would be at issue when, inter alia, a section of a motion in
opposition to the expert raised the issue of the expert’s qualifications); see also
2 I agree with the majority that Daubert is “legal shorthand for the district court’s obligation to test a proposed expert’s methodology in advance of his testimony.” Maj. Op. at 13. Logically, it should follow, then, that a district court’s repeated probing as to the sufficiency of an expert’s methodology, as here, would put an expert witness’s proponent on notice that Daubert was at issue.
-2- Solorio v. United States, 85 F. App’x 705, 707-10 (10th Cir. 2004) (rejecting
“essentially a claim of unfair surprise arising from the district court’s exclusion
of [] expert[] testimony” when, inter alia, “[t]he government’s reply brief
mounted an explicit Daubert attack” on the expert’s reliability).
Mr. Nacchio was on notice that Professor Fischel’s qualifications were at
issue. As early as the government’s first motion regarding Professor Fischel, the
government argued that Rule 702 was implicated. Supp. App. at 39. At a March
22, 2007 hearing, both the government and the court raised the concern that there
could be issues arising from the Daubert line of cases. Mr. Nacchio’s counsel
responded, “forewarned is forearmed.” App. at 2042.
One week following this exchange, Mr. Nacchio provided his revised
expert disclosure, and again, the government responded by raising Daubert
concerns. The government filed a 63-page motion to exclude Professor Fischel’s
expert testimony based on deficiencies in the Rule 16 disclosure and based on Mr.
Nacchio’s failure to meet his burden to demonstrate that Professor Fischel’s
testimony was admissible. See App. at 363. The government argued that, in
addition to Rule 16, there were numerous grounds for excluding Professor
Fischel’s testimony, including Rules 401, 403, 602, 702, and 703 of the Federal
Rules of Evidence.
When Mr. Nacchio responded to this motion the next day, in substance, he
addressed Daubert issues in discussing Rule 702 and Professor Fischel’s
-3- qualifications. 3 See App. at 463-68. Thus, as of his response on April 4, Mr.
Nacchio was not only on notice that Daubert was in play, but he also had
responded to the Daubert issues.
The following day (April 5), when Mr. Nacchio called Professor Fischel to
the stand, he still had not met his burden of demonstrating that Professor
Fischel’s testimony was admissible. In particular, Mr. Nacchio had not even
mentioned yet the possibility of a Daubert hearing. As the party offering the
expert, Mr. Nacchio “bore the burden of demonstrating to the district court that
[his proffered expert] was qualified to render an expert opinion.” Ralston, 275
F.3d at 970 n.4. See also Fed. R. Evid. 702 advisory committee’s note (“[T]he
proponent has the burden of establishing that the pertinent admissibility
requirements are met by a preponderance of the evidence.”).
3 The majority states that Mr. Nacchio made no mention of Daubert or Professor Fischel’s methodology in this filing. Maj. Op. at 14. Although technically correct that the word “Daubert” is not included, this is one example of how the majority elevates form over substance. Mr. Nacchio’s filing contains a section with the heading: “Professor’s Opinions Are Proper Under Rule 702.” App. at 466. In that section, Mr. Nacchio discusses the “specialized knowledge” that Professor Fischel will purportedly bring to the jury and the analytic approach toward the stock and “other financial data” he has taken to “formulate opinions” (i.e., his methodology). Id. Thus, contrary to the majority’s assertion, Mr. Nacchio’s filing did address Daubert and Professor Fischel’s methodology. See Daubert v. Merrell Dow Pharms., 509 U.S. 579, 588 (1993) (“Here there is a specific Rule that speaks to the contested issue. Rule 702, governing expert testimony, . . . .”). In short, the substance of this filing underscores Mr. Nacchio’s awareness that Daubert was in play.
-4- The district court made a ruling excluding that testimony because Mr.
Nacchio had not met his burden of demonstrating admissibility. The Majority’s
contrary reading of the transcript misses the mark: The district court cannot
reasonably be said to have “excluded the evidence on Rule 16 grounds alone.”
Maj. Op. at 22. This conclusion is particularly problematic in light of the
Supreme Court’s recent ruling in Sprint/United Management Co. v. Mendelsohn,
No. 06-1221, 552 U.S. , 2008 WL 495370 (Feb. 26, 2008). There, the Court
instructed: “An appellate court should not presume that a district court intended
an incorrect legal result when the order is equally susceptible of a correct reading,
particularly when the applicable standard of review is deferential.” Sprint/United
Mgmt. Co., 552 U.S. , 2008 WL 495370, at *5. Here, we have a deferential
standard of review, see id. at *4 (noting that there is broad discretion granted to a
district court’s evidentiary rulings), and a district court ruling that can be
-5- interpreted as coming to a correct legal result. 4 Accordingly, we should not
presume that the district court erred in this way.
A fair reading of the district court’s ruling indicates that Daubert was the
driving force behind that decision. At that time, Mr. Nacchio had not
demonstrated the admissibility of Professor Fischel’s testimony. Because Mr.
4 For example, after stating that Professor Fischel’s testimony could be excluded on a number of grounds, the district court said: “Most convincingly, the defendant has made no attempt to comply with Rule 702 or Daubert and establish that Fischel’s testimony is the product of reliable principles and methods or that Fischel applied some principles and methods reliably in this case.” App. at 3915. The district court then stated: “Rule 702 governs this issue.” Id. This indicates that Rule 702 was the main rationale for the district court’s decision.
As support for its interpretation of the record, the majority cites to two parts of the district court’s ruling. Maj. Op. at 15. In the first instance, the district court only refers generically to “disclosures” after outlining the contents of the government’s motion and indicating it had also read both Mr. Nacchio’s Rule 16 disclosure and his reply to the government’s motion. App. at 3914. In the second instance, the district court stated that methodology was undisclosed “in this expert disclosure.” App. at 3917 (emphasis added). However, the district court’s previous discussion did not refer to the Rule 16 disclosures. Instead, the district court had just quoted Mr. Nacchio’s argument—made in his reply to the government’s motion to exclude the testimony—that Professor Fischel’s opinions were proper under Rule 702. Compare App. at 3916 with App. at 466.
At best, the majority has pointed out two ambiguous references to a “disclosure” that arise in the context of the district court’s assessment of the sufficiency of Mr. Nacchio’s Daubert arguments. “When a district court’s language is ambiguous, as it was here, it is improper for the court of appeals to presume that the lower court reached an incorrect legal conclusion.” Sprint/United Mgmt. Co., 552 U.S. , 2008 WL 495370, at *5. Although a fair reading of the district court’s decision demonstrates that the basis for the ruling was Daubert, the Supreme Court’s recent guidance further compels the conclusion that it is not proper for us to assume that the district court was basing this ruling on Rule 16.
-6- Nacchio bore that burden, he “cannot now complain that []he was unprepared to
attend to h[is] burden.” Ralston, 275 F.3d at 970 n.4. Yet, this is essentially what
Mr. Nacchio’s argument boils down to. 5
On April 9, the date that Professor Fischel—Mr. Nacchio’s last
witness—finished testifying as a summary witness, Mr. Nacchio requested a
Daubert hearing for the first time. In a footnote of a motion to permit Professor
Fischel to provide expert testimony to rebut two government witnesses, Mr.
Nacchio asked the court to reconsider its ruling excluding Professor Fischel’s
expert testimony and noted that “[a]n evidentiary hearing is particularly
appropriate” in situations where the court finds a report to be insufficiently
detailed. App. at 481 n.4. Even here, Mr. Nacchio failed to address the key
concern that the district court had previously highlighted in excluding Professor
Fischel’s testimony—his methodology for this particular case.
5 The majority states that we should not “penalize” a party for failing to present an argument “[w]hen the court does not allow the lawyer” to present it. Maj. Op. at 25. However, this contention is based on one exchange between Mr. Nacchio’s counsel and the district court following the court’s ruling to exclude Professor Fischel’s testimony and ignores the ample opportunities that Mr. Nacchio previously had to respond. Indeed, it ignores the written response that Mr. Nacchio had already made discussing Rule 702 and Professor Fischel’s qualifications. Although Mr. Nacchio may have been on a tight deadline, he never requested a continuance or even a Daubert hearing before he called Professor Fischel to the stand. Both of these requests would have been rather simple and certainly would not have required much time at all. Yet, Mr. Nacchio failed to make either request.
-7- Neither the government nor the district court was under any obligation to
call for a hearing or to prod Mr. Nacchio to supplement his filings. The majority
suggests that the district court should have ordered Mr. Nacchio to make a
Daubert proffer. Maj. Op. at 19, 21. However, we have never required a district
court to inquire about Daubert issues. 6 Rather, as the proponent of the expert
testimony, the admissibility burden of proof rested solely on Mr. Nacchio, and he
had a multitude of opportunities to provide more information or even simply to
request a hearing. He failed to do any of this. Furthermore, the district court
clearly indicated on numerous occasions that it was concerned about Professor
Fischel’s methodology. Although the court did not specifically order a Daubert
proffer, through its repeated questions on methodology, it effectively invited Mr.
Nacchio to make one. The district court, which has great discretion in deciding
what procedures to use in acting as gatekeeper, see Rodriguez-Felix, 450 F.3d at
1122, should not now be held to have erred because Mr. Nacchio failed to accept
its invitation to alleviate its Daubert concerns.
6 The majority also states: “The prosecution had every right to demand a Daubert hearing to test his methodology. ” Maj. Op. at 21. Although it is true that the prosecution could have demanded a hearing, it was likewise under no obligation to do so. In a proffer of expert testimony, the burden is on the party offering the testimony. In this case, that burden was on Mr. Nacchio. Accordingly, when it became apparent that the district court was not convinced that Professor Fischel’s testimony was admissible, Mr. Nacchio—not the prosecution—should have requested a Daubert hearing.
-8- Mr. Nacchio’s attempt to focus this court’s attention on Rule 16, which
certainly did not require him to demonstrate admissibility, should be unavailing.
Daubert was the issue, and Mr. Nacchio failed in his Daubert obligation to
establish the admissibility of Professor Fischel’s testimony.
A district court’s application of the Daubert standard is reviewed for abuse
of discretion. United States v. Rodriguez-Felix, 450 F.3d 1117, 1122, 1125 (10th
Cir.), cert. denied, 127 S. Ct. 420 (2006). The party offering the expert “must
show that the method employed by the expert . . . is scientifically sound and that
the opinion is based on facts which satisfy Rule 702’s reliability requirements.”
Dodge v. Cotter Corp., 328 F.3d 1212, 1222 (10th Cir. 2003). See also Ralston,
275 F.3d at 970 n.4; Fed. R. Evid. 702 advisory committee’s note. The district
court has broad discretion in determining how to assess an expert’s credibility.
E.g., Rodriguez-Felix, 450 F.3d at 1122. The exclusion of an expert is not
overturned “unless it is arbitrary, capricious, whimsical or manifestly
unreasonable or when we are convinced that the district court made a clear error
of judgment or exceeded the bounds of permissible choice in the circumstances.”
Champagne Metals v. Ken-Mac Metals, Inc., 458 F.3d 1073, 1079 (10th Cir.
2006) (quoting United States v. Gabaldon, 389 F.3d 1090, 1098 (10th Cir. 2004)).
Before allowing expert testimony, the district court must satisfy itself that
the proffered testimony is both relevant and reliable. See, e.g., Rodriguez-Felix,
450 F.3d at 1122; United States v. Fredette, 315 F.3d 1235, 1239 (10th Cir.
-9- 2003). “The touchstone for relevance, in this context, is whether ‘the evidence or
testimony [will] assist the trier of fact to understand the evidence or to determine
a fact in issue.’” Gabaldon, 389 F.3d at 1098 (quoting Daubert, 509 U.S. at 591).
In making a reliability determination, “[g]enerally, the district court should focus
on an expert’s methodology rather than the conclusions it generates.” Dodge, 328
F.3d at 1222.
As to relevance, the district court stated that much of Professor Fischel’s
testimony was nothing but argument based on factual matters before the court, a
summary of stock sales and prices, and issues within the common knowledge of
the jury. Such reasons for excluding expert testimony are perfectly reasonable
and, indeed, have been upheld by this court. See Gabaldon, 389 F.3d at 1099
(upholding the exclusion of expert testimony when it was “not something for
which expert testimony is needed”); Fredette, 315 F.3d at 1240 (upholding the
exclusion of expert testimony when it “did not deal with matters outside the
everyday knowledge of a typical juror”). Furthermore, the district court noted that
some evidence was completely irrelevant. For example, Professor Fischel was set
to testify regarding what Michael Eisner and Michael Dell were doing with stock
in their companies when Mr. Nacchio was selling his stock. In sum, the district
court’s conclusions are not so unreasonable that they exceeded permissible
choice. It was certainly permissible for the district court to conclude that this
evidence was not relevant.
-10- The district court could have excluded Professor Fischel’s testimony on
grounds of relevance alone, but the court also noted concerns regarding Professor
Fischel’s methodology. The majority “conclude[s] that at a minimum it is an
abuse of discretion to exclude an expert witness because his methodology is
unreliable without allowing the proponent to present any evidence of what the
methodology would be.” Maj. Op. at 23-24. However, the record clearly
establishes that Mr. Nacchio proffered information concerning Professor Fischel’s
methodology. 7 Indeed, Mr. Nacchio’s counsel admitted as much. Oral Arg. at
47:19-47:48 (responding to a question about what methodology had been
7 Without any legal support, the majority suggests that a district court cannot make a Daubert ruling without hearing testimony or receiving submissions. Maj. Op. at 22-23. However, we have never required a district court to sua sponte request either a hearing or more submissions and certainly no obligation of that sort would appear to exist in the Daubert context. Indeed, we have repeatedly held that “[t]he district court retains broad discretion in deciding how to assess an expert’s reliability, including what procedures to utilize in making that assessment, as well as in making the ultimate determination of reliability.” Rodriguez-Felix, 450 F.3d at 1122 (emphasis added) (citing Dodge, 328 F.3d at 1223). Contrary to the majority’s contention, there was information before the district court on the question for decision—whether Professor Fischel’s proferred expert testimony satisfied Daubert. Mr. Nacchio had submitted filings regarding Rule 702 and at least ten pages of methodology that the district court did review before excluding Professor Fischel’s testimony. Furthermore, we place the burden on the party offering the expert testimony to demonstrate admissibility. Ralston, 275 F.3d at 970 n.4. See also Fed. R. Evid. 702 advisory committee’s note. Accordingly, it was incumbent upon Mr. Nacchio to make the appropriate submissions, through a requested Daubert hearing or otherwise—particularly given that the district court had been drawing his attention to its concern over methodology. In other words, insofar as there were any gaps in the record before the district court when it made its Daubert ruling, Mr. Nacchio must be held responsible for them and should bear the adverse consequences of not filling them.
-11- provided, Mr. Nacchio’s attorney indicated: “He described in detail—at least ten
pages of detail . . . . There’s ten pages that’s nothing but that.”). Accordingly, by
Mr. Nacchio’s own admission, the district court had information about
methodology in front of it when ruling on the issue.
In the “ten pages” of methodology offered by Mr. Nacchio, it is indicated
that Professor Fischel was basing his opinion on his analysis of, inter alia, market
and stock-related information. This indicates that Professor Fischel was applying
his experience to material that he reviewed to formulate an opinion. A witness’s
testimony can rely solely on experience. However, when that is the case, “the
witness must explain how that experience leads to the conclusion reached, why
that experience is a sufficient basis for the opinion, and how that experience is
reliably applied to the facts.” Fed. R. Evid. 702 advisory committee’s note. Mr.
Nacchio did not offer any of that additional information. “The trial court’s
gatekeeping function requires more than simply taking the expert’s word for it.”
Id. (internal quotation marks and citation omitted). “[N]othing in either Daubert
or the Federal Rules of Evidence requires a district court to admit opinion
evidence that is connected to existing data only by the ipse dixit of the expert.”
Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997).
Mr. Nacchio seems to rely on Professor Fischel’s qualifications to tip the
balance in favor of the admissibility of his testimony. In doing so, he ignores that
when assessing expert testimony, “the question before the trial court [i]s specific,
-12- not general.” Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 156 (1999).
Although Professor Fischel generally has been allowed to testify in the past and a
district court might well respect his credentials, it has an obligation to assess the
methodology that Professor Fischel has employed in the case at hand and whether
he has specialized knowledge that can assist the jurors in that case. See id. at 153-
56; Rodriguez-Felix, 450 F.3d at 1122; Fredette, 315 F.3d at 1239-40. Mr.
Nacchio could not just assume that his expert would be admitted because his
testimony was allowed in other cases; he had to meet his burden of demonstrating
admissibility in this particular case. As the district court noted, Mr. Nacchio
“made no attempt” to do this. App. at 3915.
Mr. Nacchio failed to satisfy the district court that Professor Fischel’s
testimony would be either reliable or relevant. The district court was well within
its discretion in excluding Professor Fischel’s expert testimony. See Rodriguez-
Felix, 450 F.3d at 1125 (finding no abuse of discretion when the district court
excluded testimony based on the “woefully inadequate” report regarding proffered
testimony).
Of course, I would find it troubling if a district court unilaterally used a
ruling regarding the propriety of a Rule 16 disclosure to effectively exclude an
expert witness on Daubert grounds—without any notice to the party offering the
expert. But that is not what happened here. Mr. Nacchio had ample notice that
the methodology underlying Professor Fischel’s opinion (i.e., a Daubert question)
-13- was at issue and bore the burden of demonstrating that the testimony was
admissible. He easily could have requested a hearing or fully addressed the issue
in briefing. Mr. Nacchio failed to do so. Consequently, there is no foundation to
his claim for a new trial.
I respectfully dissent and would affirm Mr. Nacchio’s conviction.
-14-
United States v. Nacchio (United States v. Nacchio) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.