FINRA Referral Letter Cited In Federal Insider Trading Appeal

March 30, 2022

After a guilty verdict is rendered in a criminal trial, the convicted defendant often battles on via appeals and appeals and appeals. For some, it's about delaying the inevitable incarceration and fines; for others, it's a belief that the law was not followed. More often than not, after years of argument, the guilty verdict is affirmed. In a recent case, a defendant was convicted in 2018 of conspiracy to commit securities fraud and securities fraud but was still pursuing his appeals in 2022. My guess is that we will still be talking about this case in 2023.

2018 Insider Trading Conviction

In 2018, Schultz Chan a/k/a "Jason Chan" was convicted by a jury in the United States District Court for the District of Massachusetts ("D. Mass") of one count of conspiracy to commit securities fraud and three counts of securities fraud. As more fully explained in part in "Biopharmaceutical Employee Sentenced for Insider Trading" (DOJ Release / November 5, 2018)

Schultz "Jason" Chan, 54, of Newton, the Director of Biostatistics at a Cambridge-based biopharmaceutical company, was sentenced by U.S. District Court Judge Indira Talwani to three years in prison and one year of supervised release. Judge Talwani also ordered the defendant to either pay a fine or forfeiture of $65,000 and restitution to be determined at a later date. In July 2018, Chan was convicted by a federal jury of one count of conspiracy to commit securities fraud and three counts of securities fraud. Co-defendant Songjiang Wang, 54, of Westford, the Director of Statistical Programming at a different biopharmaceutical company, was convicted during the same trial of one count of conspiracy to commit securities fraud and two count of securities fraud. Wang is scheduled to be sentenced on Nov. 13, 2018.

From August 2013 to September 2015, Wang and Chan, who were friends, conspired to commit securities fraud by trading insider information regarding successful clinical drug trials at their respective companies. Specifically, Wang traded on inside information Chan provided regarding a clinical study conducted by Chan's employer. In addition, over a period of several months, Wang tipped Chan of clinical trial results of a Phase 3 clinical trial being conducted by his employer. Furthermore, Wang gave Chan cash, which Chan used to purchase stock shares of Wang's employer. Chan subsequently sold those shares and paid back Wang.

Chan Moves to Vacate

In a pro se Motion to Vacate, Chan asserts five grounds in support of his petition:

(i) prejudice from a constructive amendment to and variance from the second superseding indictment ("SSI"); (ii) insufficiency of evidence as to the charges in the SSI; (iii) violation of Chan's right to a fair review by the First Circuit; (iv) violation of his right to a fair trial (based on (a) a claimed prejudicial variance from the SSI, (b) a denial to his motion to produce the Financial Industry Regulatory Authority ("FINRA") referral letter, which he purports to be Brady material, and (c) non-disclosure of the grand jury materials, which he believes contain perjured testimonies); and (v) ineffective assistance of counsel.1 Also pending is Chan's Motion to Request for Evidences [Doc. No. 485], Motion to Compel Discovery [Doc. No. 502], and Request for Exculpatory Evidence [Doc. No. 503]. . . .
= = =
Footnote 1: Chan's motion lists seven "grounds" for relief: (1) "Violation of defendants' fundamental rights to a fair trial," (2) "Prejudicial variance and constructive [amendment] of the [SSI]," (3) "The Court of Appeals denied Defendants' right to a fair review," (4) "Count 1 of SSI," (5) "Count 2 of SSI," (6) "Count 3 of SSI," and (7) "Count 4 of SSI." Mot. to Vacate [#476]. Many of the grounds contain sub-issues. However, several of the grounds and sub-issues overlap and effectively raise the same claim. 

at Pages 1 - 2 of Schultz Chan a/k/a "Jason Chan," Petitioner, v. United States of America, Respondent (Memorandum and Order, United States District Court for the District of Massachusetts, 16-CR-10268 / March 25, 2022)

Pro Se

At the threshold, D. Mass notes Chan's "pro se" status and acknowledges the bias to extend some leniency when construing motions present to by such a party; however, notwithstanding that deference, the Court admonishes that such a motion must still comply with procedural/substantive legal requirements. 

The FINRA Referral Letter

In part, Chan's appeal cites a so-called "FINRA referral letter," and whether that document constituted disclosable "Brady" information:

In reviewing this court's denial of Defendants' motion to compel discovery of the FINRA referral letter, the First Circuit found "undeveloped" the Defendants argument that the FINRA referral letter constitutes Brady material to which they were entitled. Chan, 981 F.3d at 61-62. Specifically, the First Circuit noted that Defendants "simply stated the issue along with some conjecture about what the FBI, the grandy jury, and FINRA may have relied up on during their investigations." Id. Thus, the First Circuit found that "the defendants ha[d] not given [it] any reason to conclude the district court abused its discretion when it denied their motion to compel." Id. The First Circuit similarly found that Defendants waived the argument "that a constructive amendment to the SSI occurred at trial" because they "d[id] not provide any argument or case law about how the evidence the government presented at trial constituted a constructive amendment from the SSI." Id. at 55 n.7. Defendants clearly had the opportunity to raise both issues on direct appeal but failed to do so properly. 

In his Motion to Vacate [Doc. No. 476], Chan does not explain why on direct appeal he did not provide "any argument about how the district court abused its discretion when it denied the defendants' pre-trial motion to compel" the FINRA referral letter, id. at 62, nor do more than "define the concept [of constructive amendment] and mention it a couple of times," id. at 55 n.7, resulting in the First Circuit finding both arguments waived. Accordingly, Chan's Motion to Vacate [Doc. No. 476] is denied with respect to the arguments that (i) a prejudicial constructive amendment to the SSI occurred at trial and (ii) the FINRA referral letter constitutes undisclosed Brady material, violating his right to a fair trial. 

at Pages 5 - 6 of the D. Mass Memo/Order

SIDE BAR: If the federal grand jury investigation and subsequent trial proceeded while DOJ knew or should have known about any purportedly exculpatory information, then the Supreme Court held in Brady v. Maryland that the withholding of material evidence by the prosecutors as to the determination of either guilt or punishment of a criminal defendant violates the defendant's constitutional right to due process. As you may imagine, Brady is a foundational legal principle when it comes to a Defendant's Due Process rights in a criminal trial. 
  As D. Mass saw it, Chan had failed to raise his Brady issue pertaining to the FINRA referral letter at trial or on appeal, and, as such, he had had waived his right to argue that issue at this late date. As to why this is all being relitigated at the District Court after the First Circuit seems to have disposed of the same issues is somewhat puzzling -- notably, the D. Mass Memo/Order found Chan's effort to rehash as procedurally barred from consideration by the lower court after the higher court issued its orders.

The FINRA Referral Letter

By way of providing more context and content, consider this extract from  United States of America, Appellee, v. Schultz Chan a/k/a "Jason Chan;" Songjiang Wang, Defendants/Appellants
(Opinion, United States Court of Appeals for the First Circuit,/ November 20, 2020) :

FINRA's Interest Is Piqued and the Feds Close In 

The Financial Industry Regulatory Authority (FINRA) is "a non-governmental organization that regulates professionals and firms in the securities industry," United States v. Bray, 853 F.3d 18, 23 (1st Cir. 2017), and helps the SEC (Securities and Exchange Commission) enforce federal securities laws. FINRA got in touch with both Akebia and Merrimack soon after each company announced the results from the clinical trials identified above to conduct a routine review and to ask who knew about the trial results before they were publicly announced, as well as to find out if any of these individuals knew any of the company's stockholders. 

at Page 10 of the 2020 1Cir Opinion

C. FINRA Referral Letter

Long before the trial started, the defendants filed a motion to compel the government to turn over a referral letter FINRA sent to the SEC about purchases of Akebia stock before the results of the "11 study" became public. The defendants asserted they were entitled to this letter pursuant to Federal Rule of Criminal Procedure 16 and Brady v. Maryland, 373 U.S. 83, 83 S.Ct. 1194, 10 L.Ed.2d 215 (1963). The government opposed the motion, asserting the defendants were not entitled to the letter because the government had already provided them with all of the documents attached to the letter and the text of the letter itself did not provide any additional or exculpatory information but simply "summarized FINRA's findings and its suspicions concerning trading by the defendants and others -- or evidence concerning trading by other individuals FINRA investigated who were not targets of the government's investigation and have no connection to the charged conspiracy." At a hearing on the motion, the defendants explained their suspicion that the letter "drove the investigation in a direction that perhaps it shouldn't have, or it may have driven the prosecution itself based on what we believe is false information."

The district court denied the motion, finding the government had provided the supporting documentation to the FINRA referral letter in question to the defendants already. The district court concluded the actual letter was both immaterial to the preparation of their defense and irrelevant because the SEC and U.S. Attorney's Office had independently investigated the concerns raised by FINRA. Moreover, the district court reasoned that even if the defendants were correct with their theory FINRA passed incorrect information on to the SEC, the only relevant issue after the grand jury indicted the defendants was whether the government could prove the charges beyond a reasonable doubt.

Before us, the defendants imply that the way in which the FBI conducted its investigation into the defendants' activities reveals the FBI relied on FINRA material withheld from the defendants but provided to the grand jury, so the FINRA document or documents constitute " Brady material" to which the defendants were  entitled. The government, for its part, maintains its position that the defendants are not entitled to the FINRA letter because the government provided the defendants with all of the documentary attachments to the letter and the letter itself did not provide any additional or exculpatory information.

We usually review the denial of a motion to compel discovery for abuse of discretion. United States v. Flete-Garcia, 925 F.3d 17, 33 (1st Cir. 2019). But here the defendants have simply stated the issue along with some conjecture about what the FBI, the grand jury, and FINRA may have relied upon during their investigations. The defendants have not provided any argument about how the district court abused its discretion when it denied the defendants' pre-trial motion to compel. As we've stated already, we generally consider undeveloped arguments to be waived. Valdés-Ayala, 900 F.3d at 33 n.14 ; Rodríguez, 659 F.3d at 175. As a result, the defendants have not given us any reason to conclude the district court abused its discretion when it denied their motion to compel.

at Pages 40 - 43 of the 2020 1Cir Opinion

Purportedly Perjured Testimony

An issue not ruled upon by the District Court and not reviewed as such by the Circuit Court was Chan's argument that perjured testimony was offered to the Grand Jury:

Chan contends that FBI agent McKay's trial testimony proves that FBI agent Cirilli fabricated the criminal complaint affidavit, in which he relied on the FINRA referral letter, to secure the indictment against Chan. Mot. to Vacate 4 [Doc. No. 476]. Further, Chan "believes[s] that perjured testimonies were presented to the grand jury to obtain the indictments . . . which render the indictments invalid." Id. Chan concludes that he has "shown a particularized need[] for disclosure of grand jury minutes." Id. The court disagrees.

at Page 7 of the D. Mass Memo/Order

Trial Jury NEVER Reviewed the FINRA Referral Letter -- a no-harm-no-foul point?

In further considering Chan's allegations about perjured testimony, the District Court noted that [Ed: footnotes omitted]:

[S]ince Chan was convicted by a petit jury, which never reviewed the FINRA referral letter nor heard the allegedly perjurious testimony, the indictment did not prejudice Chan, and the court may not dismiss it.

Moreover, absent his conclusory assertion that trial testimony proves misconduct in the grand jury proceedings, Chan provides no basis on which the court can find malfeasance. Federal Rule of Criminal Procedure 6(e)(3)(E) "is not an invitation to engage in 'fishing expeditions' for misconduct in grand jury proceedings 'when there are no grounds to believe that any wrongdoing or abuse has occurred.'" George, 839 F. Supp. 2d at 437 (quoting United States v. Rodriguez- Torres, 570 F.Supp.2d 237, 241 (D.P.R.2008)). By making the speculative allegation that the grand jury received perjured testimony, Chan fails to satisfy his burden of demonstrating a particularized need to compel production of the grand jury materials. Accordingly, Chan's Motion to Vacate [476] with respect to his claim that his right to a fair trial was violated by the non-disclosure of the grand jury materials is denied.

at Page 8 of the D. Mass Memo/Order

Ineffective Assistance of Counsel

Finally the District Court considers what it has characterized as an "ineffective assistance of counsel" argument by Chan:

While Chan does not explicitly raise an ineffective assistance claim in the Motion to Vacate [Doc. No. 476], he does argue that his lawyer "refused to present" the argument that "government agents tampered with [] exculpatory evidence[.]" Mot. to Vacate 9 [Doc. No. 476]. The evidence that Chan alleges the government tampered with is an email from Karen Annis to Chan on August 21, 2015 ("Annis e-mail"), and Akebia's response to Request 1 made by the SEC on June 8, 2016 ("Akebia response"). Id. The court has previously determined that Chan's assertion raises an ineffective assistance of counsel claim because "Chan is alleging his lawyer refused to present an argument that was supported by evidence." Mem. & Order 1-2 [Doc. No. 487].
. . .

at Page 9 of the D. Mass Memo/Order 

In disposing of Chan's ineffective counsel assertions, D. Mass found that:

Chan is unable to establish deficient performance by his counsel in deciding to not pursue a "tampered evidence" strategy because the record undermines Chan's claim that the government tampered with the Annis e-mail or the Akebia response. With respect to Chan's concerns about the Annis e-mail, Chan's counsel "requested production of the metadata for the Akebia production prior to trial and [was] given access to the metadata at the U.S. Attorney's office 2-3 weeks before trial." Aff. of Peter Charles Horstmann ¶ 18 [Doc. No. 500]. Chan's counsel testified that he is "not presently aware of any evidence in the metadata or otherwise that shows that Mr. Chan's emails were tampered with." Id. at ¶ 19. With respect to Chan's concerns about Case 1:16-cr-10268-IT Document 504 Filed 03/25/22 Page 10 of 11 11 the Akebia response, Chan's counsel testified that he requested such letter and was "satisfied before trial that no such letter/information existed." Id. at ¶ 20. Chan offers no support to the contrary. Finding no evidence of tampering, Chan's counsel acted well within reason by not raising frivolous claims. 

at Pages 10 -11 of the D. Mass Memo/Order 

Ultimately, D. Mass denied all of Chan's Motions.