A federal appeals court Thursday lashed out at government misconduct and reversed the 2009 conspiracy convictions of six men, including three Long Islanders, for using brokerage "squawk boxes" to let outsiders exploit confidential client information.
The U.S. Second Circuit Court of Appeals said that Brooklyn federal prosecutors and Securities and Exchange Commission lawyers improperly hid from the defendants potentially exculpatory evidence, raising questions about whether the information on large client orders that they exploited was in fact confidential.
In a rebuke, the appeals court noted that the six men were convicted on a retrial after an earlier jury had acquitted them on more than 30 counts and deadlocked only on the conspiracy charge, and said that at both trials the playing field was "unfairly skewed" by prosecutors' misbehavior.
"In light of the government's mishandling of material exculpatory and impeaching material, we wonder whether the government will choose to subject the defendants to yet a third trial," the three-judge panel wrote.
Ex-brokers Kenneth Mahaffy of Huntington, and Timothy O'Connell of Carle Place, who both worked at Merrill Lynch's Garden City office, and Lehman Brothers' David Ghysels of West Palm Beach, Fla., were cleared, as were three officials of the day-trading firm A.B. Watley -- Linus Nwaigwe of Valley Stream, Rob Malin of New York City and Keevin Leonard of Montvale, N.J.
The brokers had been convicted of leaving their phones off the hook so that the Watley firm could listen in on large block orders from major brokerage clients that were announced over speakers, and profit by quickly placing trades before the block orders moved the price.
The government claimed the information coming over the so-called "squawk boxes" was confidential. But the appeals court said prosecutors failed to disclose depositions in which some brokerage executives had said it wasn't confidential and they didn't train brokers to keep it secret.
None of the defendants did jail time while the appeal was pending. Defense lawyers repeated claims that broadcasting internal announcements was not criminal, and urged the government to drop the case.
"The way to reform Wall Street is to reform its real problems, not prosecute people who happen to work there for a benign practice historically condoned and encouraged by the industry," said Andy Frisch, Mahaffy's lawyer.
"Given the embarrassment that this opinion represents for the U.S. attorney and the great power of the evidence that was withheld, I think the likelihood that there would be a retrial is small," said Roland Rioppelle, the lawyer for Malin.
A spokesman for U.S. Attorney Loretta Lynch said prosecutors were "considering our options."