i    

No. 16-066

IN THE

Supreme Court of the United States ______

MARVIN SKRELLY, Petitioner,

v.

UNITED STATES OF AMERICA, Respondent.

______

On Writ of Certiorari to the United States Court of Appeals

for the Thirteenth Circuit ______

BRIEF FOR THE RESPONDENT

______

TEAM 22 2016 Julius H. Miner Moot Court Competition

ii  

QUESTIONS PRESENTED

1. Whether police, without obtaining a search warrant, may read e-mails that are stored in folders already examined by a private searcher and surrounded by other e-mails related to criminal activity.

2. Whether evidence of a close personal relationship between a tipper and a tippee

permits an inference of the personal benefit required to convict a tippee for insider trading under the gift theory of liability in Dirks v. SEC, 463 U.S. 646 (1983).

iii  

TABLE OF CONTENTS

QUESTIONS PRESENTED  ........................................................................................................................  ii  

TABLE OF CONTENTS  .............................................................................................................................  iii  

TABLE OF AUTHORITIES  .......................................................................................................................  iv  

OPINIONS BELOW  ...................................................................................................................................  vi  

STATEMENT OF THE CASE  ....................................................................................................................  1  

SUMMARY OF THE ARGUMENT  ..........................................................................................................  3  

ARGUMENT  ...............................................................................................................................................  5  

I.   THE THIRTEENTH CIRCUIT APPROPRIATELY DENIED MOTIONS TO SUPRESS AND FOR A JUDGMENT OF ACQUITTAL RELATED TO A SEARCH OF SKRELLY’S E-MAIL BECAUSE THE EVIDENCE WAS EXEMPT FROM FOURTH AMENDMENT PROTECTION BY THE PRIVATE SEARCH DOCTRINE  ..................................................................................................  5  

A.   The “challenged e-mails” are exempt from Fourth Amendment protection because law enforcement found them in containers that had been previously searched and opened by a private party.  ....................................................................................................................................................  7  

B.   Alternatively, the “CPP e-mail” is exempt from Fourth Amendment protection because law enforcement was substantially certain of the information it contained before their examination.  .....  10  

II.   SKRELLY’S INSIDER TRADING CONVICTION MUST BE AFFIRMED BECAUSE THE GIFT THEORY OF LIABILITY IS NECESSARY TO GIVE ADEQUATE WEIGHT TO SECTION 10(b) OF THE SECURITIES AND EXCHANGE ACT OF 1934 AND THE NATURE OF THE RELATIONSHIP BETWEEN SKRELLY AND STUMP IS SUFFICIENT TO GIVE RISE TO LIABILITY UNDER THE GIFT THEORY.  ........................................................................................  13  

B.   The relationship between Skrelly and Stump is sufficient to establish personal benefit under the gift theory due to the evidence surrounding their relationship as individuals and, alternatively, due to the nature of the industry and the network to which hey both belong.  ...............................................  16  

i.   There is enough evidence surrounding the relationship to indicate a personal benefit for Stump.  ............................................................................................................................................  16  

ii.   Alternatively, the nature of the finance industry and the fraternity among traders raises policy concerns that give weight to these types of network relationships.  ................................................  17  

CONCLUSION  ..........................................................................................................................................  19  

iv  

TABLE OF AUTHORITIES

Cases

Chiarella v. United States, 445 U.S. 222 (1980) .......................................................................... 13

Dirks v. SEC, 463 U.S. 646 (1983) ................................................................................... 13, 14, 15

Ex parte Jackson 96 U.S. 727 (1877) ............................................................................................. 9

Illinois v. Caballes, 543 U.S. 405 (2005) ....................................................................................... 6

Katz v. United States, 389 U.S. 347 (1967) .................................................................................... 6

Riley v. California, 134 S. Ct. 2473 (2014) .................................................................................. 10

SEC v. Maio, 51 F.3d 623 (7th Cir. 1995) .................................................................................... 16

SEC v. Maxwell, 341 F. Supp. 2d 941 (S.D. Ohio 2004) .............................................................. 17

SEC v. Payton, 97 F. Supp. 3d 558 (S.D.N.Y. 2015) ................................................................... 16

SEC v. Sekhri, No. 98 CIV. 2320 (RPP), 2002 WL 31654969 (S.D.N.Y. Nov. 22, 2002) .......... 16

United States v. Bowers, 594 F.3d 522 (6th Cir. 2010) .......................................................... 6, 8, 9

United States v. Bowman, 907 F.2d 63 (8th Cir. 1990) ................................................................ 11

United States v. Donnes, 947 F.2d 1430 (10th Cir. 1991) .............................................................. 8

United States v. Frankenberry, 387 F.2d 337 (2d Cir. 1967) ......................................................... 9

United States v. Jacobsen, 466 U.S. 109 (1984) .................................................................... passim

United States v. Jiau, 734 F.3d 147 (2d Cir. 2013) ...................................................................... 14

United States v. Lichtenberger, 786 F.3d 478 (6th Cir. 2015) ........................................................ 6

United States v. Newman, 773 F.3d 438 (2d Cir. 2014) ......................................................... 14, 15

United States v. O’Hagan, 531 U.S. 642 (1997) .......................................................................... 13

United States v. Richards, 301 Fed.Appx. 480 (6th Cir. 2008) ...................................................... 8

United States v. Ross, 456 U.S. 798 (1982) .................................................................................... 7

v    

United States v. Runyan, 275 F.3d 449 (5th Cir. 2001) ........................................................ 6, 7, 11

United States v. Salman, 792 F.3d 1087 (9th Cir. 2015) ................................................... 14, 15, 16

United States v. Skrelly, No. 15-3902 (13th Cir. 2015) ......................................................... passim

United States v. Tosti, 733 F.3d 816 (9th Cir. 2013) .................................................................. 6, 8

United States v. Wicks, 73 M.J. 93 (C.A.A.F. 2014) ................................................................ 8, 10

Walter v. United States 447 U.S. 649 (1980) ............................................................................ 7, 12

Statutes

15 U.S.C. § 78(j)(b) (2012) ........................................................................................................... 13

vi  

OPINIONS BELOW

The opinion of the United States District Court for the District of Wigmore is reported at

United States v. Skrelly, No. 2015-CM-0713 (D. Wig. May 15, 2015);

The opinion of the Thirteenth Circuit is reported at United States v. Skrelly, No. 15-3902

(13th Cir. 2015).

1    

STATEMENT OF THE CASE

Marvin Skrelly, a professional investor working for WUTANG Financial, owned a

diversified investment portfolio, including substantial holdings in Sodreckso, an American

company. R. at 2. Outside of work, Skrelly joined the Silver Spoon Country Club to build his

network with other professionals. Id.

On March 12, 2013, Skrelly met both Michael Meneghini, a Silver Spoon board member

and entrepreneur, and Barrington Stump, founder, CEO, and chairman of Sodreckso, near the

golf course. Id. Skrelly was familiar with Stump based on his social prominence and the three

enjoyed conversing and spent several hours golfing eighteen holes. Following the round, the men

asked Skrelly to join them in the sauna, and he accepted. Id. As Meneghini stepped away on a

phone call, Skrelly and Stump entered the sauna and had a half hour conversation ending in

Skrelly saying, “Thanks,” and Stump stating, “I’m always happy to do a favor for a friend.” R. at

2-3. The rest of the conversation is unknown because Strump and Skrelly invoked their Fifth

Amendment protections. R. at 3.

Later that day, Strump sent two e-mails to Skrelly’s work address. Id. The first (the

“Sodreckso e-mail”) contained non-public information that Sodreckso was on the verge of

financial collapse and could not pay its short-term debts. Id. The second (the “CPP e-mail”)

contained non-public information showing that Sodreckso’s competitor, CPP, was about to

announce a new product line. Id. These e-mails together are the “challenged e-mails” in this case.

Id.

The next day, Skrelly sold all of his Sodreckso stock and bought a large holding in CPP.

Id. As expected, Sodreckso filed for bankruptcy protection two weeks later, and CPP’s stock

soared as their biggest competitor fell into financial trouble and their new product flourished. Id.

2    

This sale and purchase of stock did not immediately attract any attention from law enforcement.

Id.

In September 2013, Deborah Rainden, a WUTANG assistant, developed a plan to search

Skrelly’s computer for embarrassing material after he gave her a bad review. Rainden entered

Skrelly’s unlocked office and used a company password to access his work laptop. R. at 3-4. She

opened his e-mail program and guessed Skrelly’s password, giving her access to his e-mail

accounts. R. at 4. In addition to the password, Skrelly had configured his computer to only sync

his e-mails when he was connected to WUTANG’s DSL line and he stored all of his business e-

mails on a server in DocDurr, a nation that never cooperates with U.S. criminal investigations.

Id.

Once in Outlook, Rainden opened fifty of five hundred e-mails in the “General Inbox.”

Id. This folder held all e-mails that were not assigned to another folder. Id. Most of the e-mails

were business-related, although some were personal. Id. One e-mail she opened was encrypted

and she was unable to read it. Id.

After searching the General Inbox, Rainden opened the “Stock Tips” folder, which

included ten e-mails. Id. She read the most recent five, which were all written by public company

insiders who had prior contact with Skrelly. Id. Each of the e-mails had information that

appeared non-public and material. Id.

Rainden immediately took the computer to a Wigmore State police station and spoke to

Detective Whitney Woodward. Id. Detective Woodward has special training to recognize

evidence of federal financial crimes, including insider trading, and previously worked on the

financial crimes and contract enforcement task force. Id. Rainden swore out a statement

describing each e-mail she opened during her search. R. at 5. Detective Woodward then opened

3    

and read every e-mail in the General Inbox and Stock Tips folders. Id. She discovered both the

Sodreckso e-mail and the CPP e-mail sent by Strump. Id. Detective Woodward then forwarded

the matter to the U.S. Attorney, who charged Skrelly with two counts of insider trading. Id.

The charges went to a jury; before trial, Skrelly made a motion in limine to suppress the

challenged e-mails as a violation of his Fourth Amendment rights. Id. The district court denied

this motion. Id. Skrelly renewed his objection in trial and was again denied. Id. At the close of

evidence, Skrelly moved for judgment of acquittal on Count One (related to the Sodreckso tip)

and was denied. Id. The jury found Skrelly guilty of both counts. Skrelly renewed his motion for

a judgment of acquittal on Count One and was again denied. Id.

Skrelly appealed these decisions to the Thirteenth Circuit, asking them to order a

judgment of acquittal (or in the alternate, vacate his conviction) on Count One, and to vacate his

conviction on Count Two. Id. The Thirteenth Circuit denied both of these motions and affirmed

the conviction in the district court on both counts. Id.

On January 15, 2016, this Court granted a writ of certiorari and stayed the Thirteenth

Circuit’s mandate pending the outcome of this appeal. R. at ii.

SUMMARY OF THE ARGUMENT The Thirteenth Circuit appropriately denied Petitioner’s motion to suppress as well as his

motion for a judgment of acquittal related to a search of Skrelly’s e-mail because the evidence

was exempt from Fourth Amendment protection by the private search doctrine. Additionally, the

Thirteenth Circuit properly applied the “gift theory” of insider trading liability as required by

Section 10(b) of the Securities and Exchange Act of 1934, and correctly found that the nature of

the relationship between Skrelly and Stump was sufficient to give rise to liability under the

theory.

4    

Skrelly’s e-mails were not subject to Fourth Amendment protections because his

expectation of privacy was destroyed by Rainden’s search of his e-mail folders. Under the

private search doctrine, law enforcement can view evidence previously searched by a private

party without a warrant if: (1) they search a container previously opened by the private

individual, or; (2) the government is substantially certain of what is within the container. Both

exceptions apply here. The “challenged e-mails” were in containers previously searched by

Rainden and, therefore, are exempt from Fourth Amendment protection. Additionally, the “CPP

e-mail” was in a folder where law enforcement was substantially certain of what they would find.

Skrelly labeled the folder “Stock Tips,” which included within several emails that Rainden had

read that contained insider information. Based on this information, the detective was

substantially certain that the other e-mails in the folder, including the CPP email, would contain

insider stock information. For these reasons, no warrant was necessary for the search of Skrelly’s

e-mails and the Thirteenth Circuit appropriately denied his motions.

Furthermore, the Thirteenth Circuit correctly convicted Mr. Skrelly of insider trading by

rejecting incompatible precedent, properly treating the gift theory as distinct from the exchange

theory, and by finding the relationship between Skrelly and Stump as sufficient to give rise to

liability under the gift theory. In order to establish insider trading liability for a tippee, the insider

tipper must have received or expected to receive some personal benefit. In order to give

appropriate weight to the prohibition of insider trading, the gift theory of liability cannot be read

to require the same pecuniary gain required to establish a personal benefit under the separate

exchange theory. Instead, under the gift theory, the personal benefit can be established through

the analysis of a personal relationship between the tippee and tipper.

5    

In completing this analysis, the Thirteenth Circuit correctly considers not only bareface

interactions between Skrelly and Strump, but also the overall nature of their relationship and the

industry in which they operate. By doing so, the court closes loopholes and gaps that would

otherwise frustrate the purpose of the prohibition. Not only do the direct interactions between

Skrelly and Strump evince a beneficial relationship, but their positions within the larger network

of traders and insiders furthers the conclusion that Strump benefited from his interactions with

Skrelly. For these reasons, the Thirteenth Circuit correctly affirmed Skrelly’s conviction.

ARGUMENT I. THE THIRTEENTH CIRCUIT APPROPRIATELY DENIED MOTIONS TO SUPRESS AND FOR A JUDGMENT OF ACQUITTAL RELATED TO A SEARCH OF SKRELLY’S E-MAIL BECAUSE THE EVIDENCE WAS EXEMPT FROM FOURTH AMENDMENT PROTECTION BY THE PRIVATE SEARCH DOCTRINE Law enforcement could legally search Skrelly’s General Inbox and Stock Tips folder

within his e-mail program without a warrant because a previous private search of these folders

by Rainden vitiated Skrelly’s Fourth Amendment protections against search. Once Skrelly’s

expectation of privacy was destroyed by Rainden’s breach into his e-mail folders, Skrelly could

no longer legally expect his e-mails to stay hidden from the eye of law enforcement.

In general, the private search doctrine states that Fourth Amendment protections apply

only if “the expectation of privacy has not already been frustrated.” United States v. Jacobsen,

466 U.S. 109, 117 (1984). The Fourth Amendment does not prohibit governmental use of

information conveyed from a third party to a government authority because the Constitution does

not protect a citizen from searches completed by a private party, only by the government. Id. In

situations where a private party has already conducted a search, the search target can no longer

expect privacy surrounding whatever was searched.

6    

This Court has previously opined on the issue of container searches following a private

search. See Illinois v. Caballes, 543 U.S. 405 (2005) (clarifying Katz applies only when owners

assert the protection by concealing items from the public); Jacobsen, 466 U.S. 109; Katz v.

United States, 389 U.S. 347 (1967) (finding that contents within containers are protected under

the Fourth Amendment when there is a reasonable expectation of privacy). However, this Court

has not defined how this law must be applied in specific electronic searches, such as the instant

case. The Fifth Circuit’s application of the law in Runyan is the appropriate method for

addressing such Fourth Amendment issues. United States v. Runyan, 275 F.3d 449 (5th Cir.

2001). Several circuits have applied a form of the Runyan test to determine whether privacy

expectations are extinguished by a private search such that the government can search those

containers without requiring a warrant. See United States v. Lichtenberger, 786 F.3d 478 (6th

Cir. 2015) (finding that a search of a laptop computer by law enforcement is appropriate under

the private search doctrine only if there is virtual certainty the inspection would not uncover

anything the private search did not); United States v. Tosti, 733 F.3d 816 (9th Cir. 2013) (holding

that police could view full-sized images without a warrant if thumbnails had been previously

viewed by a private party); Lichtenberger, 786 F.3d 478 (finding that a search of a laptop

computer by law enforcement is appropriate under the private search doctrine only if there is

virtual certainty the inspection would not uncover anything the private search did not); United

States v. Bowers, 594 F.3d 522 (6th Cir. 2010) (holding that police could view an entire photo

album under the private search doctrine, even if the private searcher did not view each image).

Each case shares two main points with Runyan. Law enforcement can view evidence that was

previously searched by a private citizen without a warrant if they: (1) search a container that was

previously opened by the private searcher, or; (2) a container could not support a reasonable

7    

expectation of privacy because the government is already substantially certain of what it

contains. Runyan, 275 F.3d at 463.

This test is consistent with this Court’s doctrine in Jacobsen, which allowed inspection of

evidence by the government if further inspection “enabled [an] agent to learn nothing that had

not previously been learned during the private search.” Jacobsen, 466 U.S. at 120. Further, the

test follows the standard for considering governmental invasion of privacy in search established

in Walter v. United States and followed in Jacobson which requires the Court to examine an

invasion of privacy by examining the degree to which the government exceeded the scope of a

private search. See Jacobsen, 466 U.S. at 130; Walter v. United States 447 U.S. 649, 656-57

(1980). Adopting the Runyan test is appropriate because it balances individual’s needs for

privacy with law enforcement needs. It protects citizen’s privacy by allowing law enforcement to

verify wrongdoings (and preventing false accusations) in areas where privacy has already been

lost, due to a private search of a container, instead of requiring a warrant that would, possibly,

cover an even more intrusive search.

A. The “challenged e-mails” are exempt from Fourth Amendment protection because

law enforcement found them in containers that had been previously opened and searched by a private party.

Because Rainden searched the General Inbox folder and the Stock Tips folder prior to

providing Skrelly’s computer to law enforcement, Skrelly no longer had a reasonable expectation

of privacy to those electronic containers, and a warrant was not required to search further e-mails

within the folders. In general, courts have applied the Ross definition of a container, stating that

it is anything that encloses an object and conceals it from view. See United States v. Ross, 456

U.S. 798, 822 (1982). Most Fourth Amendment cases involving containers have dealt with

physical containers such as briefcases, packages, and other enclosed objects. See Jacobsen, 466

8    

U.S. at 114 (considering a wrapped parcel a container); United States v. Donnes, 947 F.2d 1430,

1434 (10th Cir. 1991) (considering a camera lens case a container). In a digital world, the Court

must rework their definition of a container to account for complex differences in digital

containers such as the operation of computer software file indexing.

In Wicks, the Court found that “every federal court of appeals that has considered the

question of cell phone privacy has held there is nothing intrinsic about cell phones that place

them outside the scope of ordinary Fourth Amendment analysis.” United States v. Wicks, 73 M.J.

93, 99 (C.A.A.F. 2014). The Court in Wicks found a cell phone itself was not considered a single

container because files and folders within could be protected in a variety of ways from snooping

individuals. Id. at 102-03.

This view does not preclude a court from allowing the private search doctrine to cover

law enforcement viewing files that were not specifically viewed by a private party. In Tosti, the

Court allowed law enforcement to open images of child pornography even though the private

search had only examined the thumbnails of the images. United States v. Tosti, 733 F.3d 816,

822-23. In Bowers, a roommate found an album with some instances of child pornography, and

the Court found that a full police examination of the album, even if all the pictures were not

viewed by the private party, was appropriate because there was no longer an expectation of

privacy in the album. United States v. Bowers, 594 F.3d 522, 525-26 (6th Cir. 2010). The Court

found similarly in Richards when the police were able to search a full storage unit after being

told that a private search had uncovered some child pornography inside. United States v.

Richards, 301 Fed.Appx. 480, 483-84 (6th Cir. 2008). In all of these cases, the Courts expanded

the scope of the right of law enforcement to view what had already been searched because the

expectation of privacy was no longer reasonable. Skrelly’s e-mail folders are similar to the photo

9    

album or folder of thumbnail images. Once someone has accessed the place where all of the

information lies, one can no longer expect privacy for what is inside.

Judge Poliwrath writes in his dissent that the Court should instead find that an individual

e-mail should constitute a container on its own. United States v. Skrelly, No. 15-3902 at 21 (13th

Cir. 2015) (Poliwrath, dissenting). He likens e-mail to a sealed letter long protected under this

Court’s finding in Ex parte Jackson, stating that had Rainden found a briefcase filled with letters

in sealed envelopes, they would be protected from further search, even if a private party had

already found the envelopes. Id. at 22 (quoting Ex parte Jackson 96 U.S. 727, 733 (1877)). Only

if the letters were opened, said Judge Poliwrath, would the private search doctrine apply. Id.

While this analysis is correct, the analogy is not. E-mail, unopened, still shows a

significant amount of information to the viewer, including the sender, addressee, subject, and the

beginning few lines of the e-mail. Id. at 9. A better analogy for this would be if Rainden had

found all of Skrelly’s letters in a briefcase, not in envelopes, but tri-folded. Certainly, the folds

cover up what was written in the lower part of the letter, but you would be able to see the

heading, dates, addressees, and first line or two of the letter – just like an e-mail. Had law

enforcement found a stack of folded letters in a briefcase that had been previously opened by a

private party, they would surely have the ability to read these letters without a warrant, even if

the private searcher did not read each letter. See Bowers, 594 F.3d at 525-26; United States v.

Frankenberry, 387 F.2d 337, 339 (2d Cir. 1967) (allowing police to examine the entire contents

of a man’s diary). Further, e-mail programs allow extra protection that would be akin to

“sealing” the letter from prying eyes, such as encryption. In fact, Skrelly used encryption

methods for at least one of his e-mails. Skrelly, No. 15-3902 at 4. This shows that Skrelly has a

10  

greater expectation of privacy for some e-mails over others, and that once a reader got into his

General Inbox or folders, he would no longer expect any non-encrypted e-mails to be private.

The dissent in the Thirteenth Circuit is also concerned that following this test will violate

the standards set forth in Riley v. California by this Court. Id. at 23. In this case, the Court found

that cell phones should be excluded from the scope of searches incident to arrest because they

wanted to balance the respect of the vast amount of personal information and significance of

privacy with the small possibility that something illegal might be found throughout an entire

phone. See Riley v. California, 134 S. Ct. 2473, 2488-89 (2014).

The dissent is certainly correct that a full search of an entire phone after a portion of it

was searched by a private party would not balance the protections of a citizen’s right to privacy.

The Court applied this in Wicks. 73 M.J. at 102-03. But a private search of one folder within a

computer, and subsequent search of the same folder by law enforcement, is not analogous. Once

the folder has been viewed, the computer’s owner no longer has an expectation of privacy within

that folder, and further, the chances of uncovering irrelevant data, like GPS data, would be slim,

as data is often kept separate in different parts of a phone or computer. Allowing this to occur

without a warrant also protects the citizen’s privacy, by preventing the officer from having to

request a general warrant for the entire computer, if he doesn’t know where exactly he would

need to search.

Because both the General Inbox and Stock Tips folders were searched by Rainden, these

containers should be considered searched under the scope of the private search doctrine and

allow law enforcement to view what is inside, including other e-mails, without a warrant.

B. Alternatively, the “CPP e-mail” is exempt from Fourth Amendment protection because law enforcement was substantially certain of the information it contained before their examination.

11  

The second part of the Runyan test allows law enforcement to search a container without

a warrant if they are substantially certain of what they will find inside the container. 275 F.3d at

463; see Jacobsen, 466 U.S. 119-20.

The two best examples of an application of this test are United States v. Bowman and

Runyan. In the former, airline employees searched luggage left behind and found five bricks,

opening the first to find cocaine. United States v. Bowman, 907 F.2d 63, 64 (8th Cir. 1990). The

other bricks looked identical to the first. Id. The court found that a law enforcement officer

trained in drug enforcement and investigation could be substantially certain of what the other

bricks contained, and could open those containers without a warrant, even though they had not

directly been searched by a private party. Id. at 65. In Runyan, a wife searched through several

floppy disks, CDs, and zip drives, finding child pornography on some of them. 275 F.3d at 452-

454. She provided all of the electronic media to the police. Id. at 453. The Court found that the

police could not search the disks that were not previously examined by the wife without a

warrant, because they could not be substantially certain of what was on them based simply on

their location nearby disks that contained child pornography. Id. at 463-64.

In the instant case, the e-mails within a labeled folder (“Stock Tips”) are closer to

Bowman than Runyan. The Runyan court focused on the fact that nothing indicated what might

be on the other disks that were not examined, and that the wife did not examine some of the

disks. Id. On the contrary in Skrelly’s case, Rainden had opened and examined several of the e-

mails in the Stock Tips folder. The title of the folder and the small number of e-mails within

suggested the specific type of information that was likely to be in the folder. Detective

Woodward, with her vast experience investigating financial crimes, would have been in a similar

position to the Bowers detectives such that through the addressees, subject headings, first lines,

12  

and information gained from reading the e-mails that Rainden had already read, she could be

substantially certain of the type of information that would have been included in the remainder of

the e-mails, including the CPP e-mail.

The dissent in the Thirteenth Circuit briefly pointed to Walter as an alternative way to

look at the situation. Skrelly, No. 15-3902 at 26. There, a private party opened a package of

obscene videos to examine their labels, but did not further open or view the labels. Walter v.

United States, 447 U.S. 649, 654 (1980). The court found that law enforcement could not view

the videos themselves just because the labels pointed out that there could be obscene images on

the videos. Id. at 658-59. The instant case is different, however, because some of the e-mails in

the folder were actually viewed by the private searcher and were found to be associated with the

label on the folder. Had several of the videos been viewed by the private searcher in Walter and

all of them had the same label, it is much more likely that the court would have allowed the

search by law enforcement without a warrant. Based on Detective Woodward’s experience, she

had enough information to make her substantially certain of what she would find in the

remaining e-mails in the Stock Tips folder.

Applying the Runyan test to the CPP e-mail, Detective Woodward was substantially

certain of the information in the CPP e-mail, and other e-mails within the Stock Tips folder,

contained, based on information in the e-mails that had been read in the private search, their

label, the number of e-mails within the folder, the subject headings, the addressees, and the first

line of the e-mails as shown within the e-mail client. Because of this certainty, she was able to

search the CPP e-mail without a warrant, even though Rainden did not read the CPP e-mail

specifically.

13  

II. SKRELLY’S INSIDER TRADING CONVICTION MUST BE AFFIRMED BECAUSE THE GIFT THEORY OF LIABILITY IS NECESSARY TO GIVE ADEQUATE WEIGHT TO SECTION 10(b) OF THE SECURITIES AND EXCHANGE ACT OF 1934 AND THE NATURE OF THE RELATIONSHIP BETWEEN SKRELLY AND STUMP IS SUFFICIENT TO GIVE RISE TO LIABILITY UNDER THE GIFT THEORY.

The Thirteenth Circuit correctly convicted Skrelly of insider trading for two reasons: (1)

the exchange theory and the gift theory are two distinct analyses that separately give rise to

tippee liability, and (2) the relationship between Skrelly and Stump is of the nature contemplated

by the gift theory of liability in Dirks v. SEC, 463 U.S. 646 (1983).

The purpose of Section 10(b) of the Securities and Exchange Act of 1934 (“the Act”) is

to empower the Securities and Exchange Commission (SEC) to enact rules prohibiting deceptive

conduct. 15 U.S.C. § 78(j)(b) (2012); United States v. O’Hagan, 531 U.S. 642, 651–52 (1997).

While the Act itself does not define deceptive conduct, courts have concluded that trading on

insider information constitutes utilizing a prohibited “deceptive device.” Chiarella v. United

States, 445 U.S. 222, 226–30 (1980); O’Hagan, 521 U.S. at 651–52. However, not all trades

using insider information are illegal. Dirks classifies trades on mistakenly disclosed information

or information not disclosed for improper purposes as lawful, while trades on information

disclosed for personal benefit are unlawful. Dirks, 463 U.S. at 658–59. Thus, the relevant inquiry

is whether the tipper will “directly or indirectly” benefit from the disclosure. Id. at 662. This

benefit is required to create derivative liability in the tippee. Id.

A. Newman incorrectly conflates the gift theory and the exchange theory of liability, leaving a gaping hole in insider trading liability that is incompatible with the intent of the Act and, therefore, must be rejected.

The courts have developed two theories of what constitutes personal benefit. The first is

the “exchange theory” of liability under which a personal benefit is “a pecuniary gain or a

reputational benefit that will translate into future earnings.” Id. at 663. The most basic example

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of a benefit under this theory would be exchanging a tip for money. See United States v. Jiau,

734 F.3d 147, 150 (2d Cir. 2013). The second theory is less straightforward and is what is at

issue in this case. The Dirks opinion also lays out an understanding of personal benefit that has

come to be called the “gift theory.” Dirks, 462 U.S. at 664. Specifically, under the gift theory,

“[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an

insider makes a gift of confidential information to a trading relative or friend.” Id. The word

“gift” indicates some inherent benefit arising from the nature of the relationship between the

tipper and the tippee. See id.; see also United States v. Salman, 792 F.3d 1087, 1092 (9th Cir.

2015) (holding that the fraternal relationship of two brothers was sufficient to give rise to

liability even without an exchange).

Mr. Skrelly is asking this Court to ignore the gift theory as laid out in Dirks and to adopt

the Second Circuit’s decision in United States v. Newman, 773 F.3d 438, 445 (2d Cir. 2014),

cert. denied, 136 S. Ct. 242 (2015), which effectively guts the gift theory of liability and leaves

the Act vulnerable to evasion. The Second Circuit in Newman first held that the prosecution must

prove that the tippee was aware of the benefit the tipper was receiving. Id. at 448. This holding is

not contested here. The Second Circuit then held that a personal benefit mandates an “exchange

that is objective [and] consequential.” Id. at 452. This second holding recharacterizes what

constitutes a “personal benefit,” essentially it does away with the Dirks understanding of the gift

theory.

Newman reversed the insider trading conviction of two investment bankers who were

several steps removed from the initial tipper. 773 F.3d at 455. Since the investors were far

removed from the insider tipper, the government could not show that the two traders had

knowledge that the tipper benefitted. Id. at 447. As the Thirteenth Circuit’s decision rightly

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points out, this is where the analysis should have ended. The Second Circuit then goes on to

evaluate the potential liability of the insider tipper. Id. at 451. The court describes the benefit to

the tipper as a simple exchange of “career advice and assistance” between old business school

classmates, which the court found insufficient to constitute a “personal benefit.” Id. at 451.

Newman ignores the distinction between the two theories, effectively conflating them, by

requiring the same type of pecuniary gain or reputational benefit, as required by the exchange

theory, as evidence of a personal benefit under the gift theory, rather than inferring the personal

benefit from the nature of the relationship. See id. at 451. Such a reading of the gift theory is

incompatible with the import of Dirks and the Act and, therefore, cannot be permitted. If Dirks

had intended to require the same evidentiary showing of “a pecuniary gain or a reputational

benefit that will translate into future earnings” regardless of a relationship between the tipper and

the tippee, either the court would not have separately acknowledged the gift theory or would

have included similar language when the court did acknowledge it. 462 U.S. at 663. As neither is

true, the Thirteenth Circuit was correct in quickly rejecting this argument; “A gift could not be

more different from a ‘pecuniary gain.’” United States v. Skrelly, No. 15-3902 at 18 (13th Cir.

2015).

Additionally, such an understanding of the gift theory would severely undermine a

prosecutor’s ability to find liability and uphold the purpose of the Act. As the Thirteenth Circuit

said, asking for such a standard is equivalent to “asking [the court] to say that corporate insiders

are free to trade information that they know full well will result in insider trading, as long as they

do so with a wink and a nudge but no other immediate, tangible compensation.” Id. at 17. Such a

loophole would be all too easily arranged in the case of family and friends. This is the exact

concern that the Ninth Circuit had in United States v. Salman, 792 F.3d 1087 (9th Cir. 2015),

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when it rejected the narrow reasoning in Newman and found that the nature of the sibling

relationship at issue did not require an obvious benefit in order to find liability. Id. at 1093.

For these reasons, evidence sufficient to find or infer a close relationship between the

tipper and the tippee must be found adequate under the gift theory of liability and Newman

should be rejected, as it was by the Thirteenth Circuit.

B. The relationship between Skrelly and Stump is sufficient to establish personal benefit under the gift theory due to the evidence surrounding their relationship as individuals and, alternatively, due to the nature of the industry and the network to which they both belong.

Given that the gift theory does not require a pecuniary exchange, the remaining inquiry is

whether the relationship between Skrelly and Stump is enough to show or infer a personal

benefit for Stump and create derivative liability for Skrelly.

i. There is enough evidence surrounding the relationship to indicate a personal benefit for Stump.

Skrelly and Judge Poliwrath in his dissenting opinion point to the close relationships in

precedent to indicate the inadequacy of Skrelly’s and Stump’s relationship. Skrelly, No. 15-3902

at 30 (13th Cir. 2015) (Poliwrath, dissenting); see, e.g. SEC v. Payton, 97 F. Supp. 3d 558, 564

(S.D.N.Y. 2015) (husband and wife and roommates); Salman, 792 F.3d at 1093 (roommates);

SEC v. Maio, 51 F.3d 623, 627 (7th Cir. 1995) (close friends who recommended jobs and offered

loans); SEC v. Sekhri, No. 98 CIV. 2320 (RPP), 2002 WL 31654969, at *2 (S.D.N.Y. Nov. 22,

2002) (father-in-law).

While the relationship currently at issue is arguably dissimilar to all those above, there is

no familial or time requirement on whether a personal, beneficial relationship exists. Those

factors simply make it easier to spot. Here, Stump and Skrelly had never interacted before the

round of golf on the day the tip was given. They did not have mutual friends prior to their

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meeting and did not even work in the same city. However, as the Thirteenth Circuit points out,

they “were not so obviously unconnected either,” like the executive and his barber in SEC v.

Maxwell, 341 F. Supp. 2d 941, 948 (S.D. Ohio 2004). Skrelly, No. 15-3902 at 19 (13th Cir.

2015).

In Maxwell, the court held the company executive did not stand to benefit from disclosing

information to his barber and therefore neither was liable for insider trading. Maxwell, 341 F.

Supp. 2d at 950. The same cannot be said in the current situation. Stump was in a vulnerable

position since he was about to become the director of a failing company and Skrelly was a

valuable connection for him to make quickly. Stump might now have reason to call upon Skrelly

for a new position, funding, or further connections. Essentially, Skrelly had more to offer Strump

than would, say, a barber, and this context is important when considering the nature of the

relationship.

Judge Poliwrath argues in the dissent that the evidence is not sufficient to infer a benefit

to Stump. Skrelly, No. 15-3902 at 32 (13th Cir. 2015) (Poliwrath, dissenting). However, when

considering the thirty minute sauna conversation, Strump’s statement that he is “always happy to

do a favor for a friend,” and the follow-up e-mails between the two men in light of their relative

positions and circumstances, it is hard to imagine that this relationship was anything but

beneficial to both parties involved. Skrelly, No. 15-3902 at 3 (13th Cir. 2015). Given the context

of this relationship, as the majority argued below, it would be counterintuitive to require the

government to wait for Stump to formally call in his reciprocal favor before prosecuting Skrelly,

especially since the harm—insider trading—had already occurred.

ii. Alternatively, the nature of the finance industry and the fraternity among traders raises policy concerns that give weight to these types of network relationships.

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It is clear that fraternity exists among traders and insiders. The structure of the market

mandates the flow of public information from company heads to traders and this baseline

relationship is essential to the efficiency of the market. However, such relationships can easily

devolve into exchanges of insider information. This is troubling considering that individuals like

Stump and Skrelly trade information with the intent of keeping an asymmetry between insiders

like themselves and the general public. For these reasons the financial markets are at risk of

being unfairly manipulated by networks of “trading buddies.”

The Thirteenth Circuit dissent admits that insiders and financial analysts build strong

relationships of trust and confidence as an inherent aspect of the structure of the market.

However, Judge Poliwrath argues that using this inherent market aspect to infer beneficial

relationships without concrete evidence will deter the exchange of information altogether and

cripple an essential function of the market. Skrelly, No. 15-3902 at 31–2 (13th Cir. 2015)

(Poliwrath, dissenting). This argument, however, incorrectly supposes that the market structure

analysis is in lieu of evidence when it simply provides context for and strengthens the evidence

in the record. The conversation in the sauna, the exchange of a “favor,” and the e-mail

correspondence immediately following are all evidence of the relationship between Skrelly and

Stump. These facts, once understood within the context of the industry in which both men

operate, allow the inference of a beneficial relationship.

Unless industry structure and tendencies can be considered under the gift theory, traders

and insiders can simply meet at exclusive country clubs and divulge insider information in

exchange for long-term beneficial agreements. The personal benefit to the tipper will be so far

temporally removed from the insider trading that both parties will escape liability. Additionally,

Skrelly is not a one-time offender. His inbox indicates that on many other occasions he has paid

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for insider information about his competition. It follows that Stump would expect nothing less

than a reciprocal favor, given the give and take nature of the industry. Skrelly’s email history

reveals precisely the pattern of behavior that the prohibition on insider trading is meant to

prevent. Skrelly has created just the type of network discussed above and illustrates the problems

that arise when such networks go unchecked. This is just the type of relationship Dirks intended

to regulate and, for the reasons above, Skrelly’s conviction should be affirmed.

CONCLUSION   For the foregoing reasons, this Court should affirm the Thirteenth Circuit’s decision

denying Skrelly’s request for a judgment of acquittal and affirming his conviction.