by | Aug 3, 2021 | Ed Sapone’s Decisions of the Week

This was a quiet July week in during a lazy summer in the Second Circuit with only a single precedential decision and a single summary order in a criminal case. Khorchevsky is an interesting read more for the audacity of the criminal conspiracy than any of the legal issues raised and considered by CA2.

The New York State courts were relatively quiet as well, with an exception: the rock star Second Department published reversals in Melendez and Mortel/Parker.

Second Circuit

In United States v. Khorchevsky, CA2 affirmed defendant’s EDNY conspiracy to commit wire fraud, conspiracy to commit securities fraud and computer intrusions, securities fraud, and conspiracy to commit money laundering convictions, following a jury trial before Judge Raymond J. Dearie. CA2 rejected defendant’s contentions that the evidence was insufficient, venue was improper on the securities fraud counts, the government’s proof at trial constructively amended the indictment, the district court erred by instructing the jury on conscious avoidance, and the district court erred in how it responded to a jury note.

Defendants Khalupsky and Korchevsky used information from stolen, pre-publication press releases to execute advantageous securities trades. Their trading was facilitated by intermediaries who paid Ukranian hackers for the stolen press releases, provided the releases to Khalupsky and

Korchevsky, and funded brokerage accounts for them to use in trades. The defendants’ illicit trades netted profits in excess of $18 million.

Defendant Korchevsky’s principal argument was that the evidence was insufficient to prove that he participated in the conspiracy with Khalupsky. To challenge his conspiracy convictions, Korchevsky argued that co-conspirators must know one another, but the evidence established that he did not know Khalupsky, so the evidence could not support his participation in a conspiracy with Khalupsky.

CA2 rejected Korchevsky’s legal premise, holding that Korchevsky and Khalupsky need not have known one another to be co-conspirators. CA2 held that it was clear that Korchevsky not only “agreed to participate in what he knew to be a collective venture directed toward a common goal,” but also “had reason to know that in dealing with” intermediaries he “w[as] involved with a larger organization.”

Korchevsky also challenged the sufficiency of the proof of securities fraud, arguing that the government did not prove that he engaged in a “scheme or artifice to defraud” within the meaning of Rule 10(b)-5, because he did not owe a fiduciary duty to investors or potential investors in the companies whose press releases were stolen, and because any deception employed to obtain the releases did not target the investors.

CA2 held that, although a fiduciary duty is relevant to other securities violations—e.g., insider trading—it need not be shown to prove the securities fraud charged here: fraudulent trading in securities by an outsider. CA2 also found that the hacking of systems containing prepublication data was a “deceptive device or contrivance” under Rule 10(b). The hackers initially accessed the systems using a technique known as SQL injection. This enabled them to glean the architecture of the hacked computer system, identify vulnerabilities, and extract data. Then, having gained initial access, the hackers extracted employee login credentials and used those credentials to intrude into the system’s more secure areas. Regardless of how one might characterize the initial SQL injection technique, the subsequent use of stolen employee login credentials to gain further system access was deceptive. Every time the hackers attempted to access parts of the system by entering stolen credentials, they misrepresented themselves to be authorized users. “[M]isrepresenting one’s identity in order to gain access to information that is otherwise off limits, and then stealing that information is plainly ‘deceptive’ within the ordinary meaning of the word.”

CA2 rejected defendants contentions that venue in EDNY was improper for the securities fraud counts, because it was foreseeable to defendants that acts constituting the securities fraud violations would take place in EDNY. The Securities and Exchange Act provides that, for securities fraud, the “criminal proceeding may be brought in the district wherein any act or transaction constituting the violation occurred.” That test is satisfied in any district where “the defendant intentionally or knowingly causes an act in furtherance of the charged offense to occur,” or where “it is foreseeable to the defendant that such an act would occur . . . and that act does in fact occur.”

The evidence suggested that the defendants foresaw that some of their trades would be consummated in the EDNY. The government also introduced evidence that one of Korchevsky’s brokerage accounts used J.P. Morgan Clearing Corporation, located in the EDNY, as its clearing agent. The account opening forms Korchevsky signed listed the J.P. Morgan Clearing Corporation’s address. So did the account’s monthly statements. The jury, thus, was entitled to infer that Korchevsky knowingly used an EDNY-based clearing agent for the illicit trades from that account. This evidence also established venue as to Khalupsky by virtue of the aiding and abetting charges.

CA2 rejected defendants’ constructive amendment claims. At trial, the government proved additional trades involving target companies that were not identified in the indictment, trades involving hacked press releases that were not charged in their own securities fraud count, and trades taking place in 2015, even though much of the activity alleged in the indictment took place in 2011–2014. CA2 found that this evidence was permissible additional proof, not an amendment of the indictment. Although not specifically pleaded in the indictment, the trades were plainly within “the charged core of criminality.” None of it was proof of a different kind, setting forth “an additional basis . . . not considered by the grand jury” for conviction.

CA2 rejected Korchevsky’s argument that the district court’s response to a jury note during deliberations caused the jury to resolve a disputed factual question against him. In response to two somewhat ambiguous notes requesting evidence, the court decided to send a particular report as a response. CA2 found no abuse of discretion, concluding that the court’s response was a reasonable interpretation of the note, and that district courts are well-situated to interpret cryptic jury notes, and “enjoy[] considerable discretion in construing the scope of a jury inquiry and in framing a response tailored to the inquiry.”

CA2 found that it was appropriate to give a conscious-avoidance instruction. A conscious avoidance charge is appropriate: (i) when a defendant asserts the lack of some specific aspect of knowledge required for conviction, and (ii) the appropriate factual predicate for the charge exists, i.e., the evidence is such that a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact. Even where the government’s primary theory is that the defendant has actual knowledge, a conscious avoidance charge can be properly given in the alternative.

CA2 concluded that there was ample evidence from which a jury could reasonably infer that defendants were aware of a high probability of the fact in dispute and consciously avoided confirming it. For example, the government presented evidence that defendant Khalupsky had received passwords to access the press releases on which his employees were trading. The jury would have been entitled to infer that the need for password-protection signaled to Khalupsky that the press releases—documents usually publicly disseminated without need for security—had been illicitly obtained, and that he chose not to confirm that suspicion.

CA2’s decision can be found here.

In United States v. Boodie, in a summary order, CA2 affirmed EDNY Judge Frederic Block’s order that denied defendant’s pro se motion for a sentence reduction pursuant to the First Step Act finding defendant ineligible.

Although defendant entered his guilty plea in 2004, before the Fair Sentencing Act was enacted, he was sentenced in 2013, after its effective date. At sentencing, the district court applied the statutory minimum and maximum sentence—as amended by the Fair Sentencing Act—to defendant’s drug offense. Although defendant’s Guidelines range included life imprisonment, the district court sentenced him to a term of 360 months of imprisonment on his drug conspiracy count—that is, well below the 40-year statutory maximum set by the Fair Sentencing Act. CA2 concluded that because defendant’s sentence was imposed in accordance with the Fair Sentencing Act he was ineligible for a sentence reduction under the First Step Act.

CA2’s decision can be found here.

Appellate Division, Second Department

In People v. Melendez, AD2 reversed defendant’s Richmond County criminal sex act conviction, finding that supreme court abused its discretion when it admitted into evidence an audio recording of a controlled meeting.

By AD2’s description, the first approximately 25 minutes of the conversation between the defendant and the complainant on the subject recording is almost completely inaudible, as all that can be heard are the background noises of a restaurant. Some of the remaining portions of the subject recording were “so inaudible and indistinct” that the jury would have had to speculate as to their contents. The error was compounded when the jury was given what purported to be a transcript of portions of the largely inaudible recording. Because the proof of the defendant’s guilt was not overwhelming, and the error not harmless, reversal was required.

AD2’s decision can be found here.

In People v. Mortel, and its companion case People v. Parker, AD2 reversed defendants’ Rockland County first-degree possession of a controlled substance conviction, finding that county court erred when it refused to suppress cocaine recovered following a traffic stop.

In an extremely lengthy decision, with two justices dissenting, AD2 discussed the multiple conflicting theories for whether the cocaine should have been suppressed.

Troopers learned that a certain 2001 Ford Explorer would be transporting a quantity of narcotics through a certain location on a particular night. The Troopers assigned were briefed at the beginning of their shift about the situation and directed to stop and search the vehicle if they encountered it. The Troopers drove on a highway and waited for the vehicle to appear. Approximately six hours after their shift began, the Troopers observed the subject vehicle on the highway. The vehicle was stopped by the Troopers, the defendant and her codefendant were arrested, and a large quantity of cocaine was recovered from the vehicle.

Although the Troopers were directed to stop and search the vehicle, they were not provided with a warrant. The People later asserted a series of exceptions to the constitutional warrant requirements to justify the actions of law enforcement. County court accepted and adopted all of the People’s inconsistent factual theories, and ultimately upheld the warrantless search.

The AD2 majority found that the pretext stop of the Explorer was lawful, because a Trooper testified that they’d observed the Explorer commit VTL infractions while they were following it, but the search of the vehicle was not.

AD2 rejected county court’s conclusion that the Troopers performed a valid inventory search, because the People failed to establish a valid basis for impounding the Explorer. The People claimed that an officer advised the Troopers that the Explorer’s registration had been suspended, but AD2 concluded that the People failed to prove that fact at the suppression hearing.

AD2’s decision in Mortel can be found here, and Parker here.