Saturday, January 17th, 2009

Lies My Broker Told Me

United States v. Kelley, No. 06-5536-cr (2d Cir. January 5, 2009) (per curiam)

Kevin Kelley, a stock broker, was convicted of securities and wire fraud based on his fraudulent activities with respect to four separate securities. For each of them he would either (1) purchase stocks for his clients without their authorization (2) do so without disclosing his own interest in the company or (3) misappropriate client funds for his own use. Kelley subsequently deceived his clients about the value of their investments by sending them false account statements.

Over his objection, those account statements were admitted into evidence on the securities fraud counts. On appeal, he pursued that claim, again without success. Kelley’s specific argument was that under 15 U.S.C. § 78j – section 10(b) of the Securities Exchange Act of 1934 – it is a crime to “employ, in connection with the purchase or sale of any security … any manipulative or deceptive device or contrivance.” His point was that since the deception must be made “in connection with” the purchase or sale of the stock, statements like those at issue here, which he created and disseminated up to four years later, did not fall under the statute.

The court agreed with Kelley in principle, but not in application. The 10(b) violations here arose from Kelley’s broader scheme to induce his clients to buy the stocks, or his use of client funds to buy them without authorization, and not from the statements themselves. Rather, the statements were properly introduced at trial as evidence of Kelley’s intent to defraud and of the scope of his scheme. They also showed that his actions were not “simple mistakes but were instead part of a large, intentional scheme to defraud.”

The court disposed of Kelley’s other arguments in a summary order bearing the same docket number, in which there is one holding of note. The trial court permitted the government to introduce into evidence tax returns of one of the companies involved in the scheme as a “statement by the party’s agent or servant” under Fed.R.Evid. 801(d)(2)(D). On appeal, while the court rejected a Crawford argument with respect to those returns, it agreed that it was error – albeit harmless – to admit an unsigned tax form under this rule.

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