The Second Circuit's recent decision in United States v. Connolly underscores the government's burden of proving a materially false representation to sustain a wire fraud conviction.
On January 27, 2022, the U.S. Court of Appeals for the Second Circuit overturned the convictions of two former investment bankers who had been found guilty of wire fraud and wire fraud conspiracy following a jury trial in 2018 in the Southern District of New York. The defendants had been charged, after a multi-year DOJ investigation with manipulating their investment bank (Bank) employer's daily submissions relating to the London Interbank Offered Rate (LIBOR) to benefit the Bank and themselves. The Second Circuit concluded that the defendants' motivation in causing the Bank to alter the submissions was not relevant to whether they had made false representations. Because the Bank's submissions could have been true and did not violate the applicable guidelines for LIBOR submissions, the Court held that the prosecution failed to prove that the submissions contained false representations within the meaning of the wire fraud statute.
Key Takeaways:
- In Connolly, the Second Circuit drew a distinction between wire fraud and business practices that are deceptive, manipulative, or unethical, yet beyond the reach of the fraud statute.
- The Second Circuit placed the burden on the prosecution to negate the possibility that the statement at issue could have been true. The court appeared to divorce the motivation behind the statement from the question of whether the statement constituted a false representation.
- Connolly's reasoning may apply to other market manipulation cases, such as spoofing, foreign exchange currency pricing, securities and bond pricing, and mismarking of financial instruments, where representations may not be false even if individual actors' intent was to deceive.
- For example, in United States v. Vorley, commodities traders were convicted in federal court in Chicago of “spoofing,” or allegedly placing and canceling commodities orders that they did not intend to execute to benefit from price changes caused by their cancellations. Earlier this month, in the Seventh Circuit, the traders argued that their convictions should be overturned under Connolly's reasoning because (1) their motive was irrelevant to whether the orders constituted misrepresentations to the market and (2) there was no rule prohibiting their conduct.
- The Second Circuit likewise articulated the limits of actionable misrepresentations in United States v. Litvak, a 2018 decision in which the Second Circuit vacated the securities fraud conviction of a trader and indicated that misrepresentations to a purchaser about the seller's profit from the sale of a security may be immaterial if the misrepresentations are not relevant to the intrinsic value of the security.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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