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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 4
2016 Julius H. Miner Moot Court Competition
ii
QUESTIONS PRESENTED 1. Whether the private search doctrine, a warrantless search exception to the Fourth
Amendment, allows the government to search e-mail folders without a warrant when
some, but not all, e-mails in those folders have already been examined by a private
individual and found to contain evidence of a financial crime.
2. Whether a tippee can be held derivatively liable for a tipper’s violation of fiduciary duty
when the tipper gifted the tippee with insider information, for which he did not receive
any immediate tangible compensation, and whether the creation of a mutually beneficial
relationship between the two individuals is sufficient to show that the tipper received a
personal benefit.
iii
TABLE OF CONTENTS
QUESTIONS PRESENTED ........................................................................................................ ii TABLE OF CONTENTS ............................................................................................................ iii
TABLE OF AUTHORITIES ........................................................................................................v OPINIONS BELOW .................................................................................................................. viii
STATEMENT OF THE CASE .....................................................................................................1 SUMMARY OF THE ARGUMENT ...........................................................................................4
ARGUMENT ..................................................................................................................................6 I. THE PRIVATE SEARCH DOCTRINE ALLOWS THE POLICE TO EXAMINE MATERIALS, INCLUDING DIGITAL DATA, ALREADY SEARCHED BY PRIVATE INDIVIDUALS, AND THEREFORE, THE GOVERNMENT’S SEARCH WAS NOT PROTECTED BY THE FOURTH AMENDMENT. .......................................6
A. There was no reasonable expectation of privacy with respect to the e-mails stored in the General Inbox and Stock Tips folders because a private individual had examined the folders prior to the government and therefore, the e-mails in the folders were not protected by the Fourth Amendment. ...........................................7
1. The folders in an e-mail account, but not the individual e-mails themselves, are “containers” for purposes of the Fourth Amendment and the private search doctrine. ..........................................................................7
2. Even if the government search is more exhaustive, it can still be within the scope of the initial private search, and therefore, the government can examine e-mails not viewed by the private individual. ...............................9 3. The Supreme Court’s decision in Riley concerned an invasion of the privacy interest of an arrestee, while a police search of an e-mail following a private search concerns a privacy interest that was already compromised. .............................................................................................10
B. Based on the private search, the government knew with substantial certainty the contents of the e-mails in the Stock Tips folder, and therefore, even if the individual e-mails are considered separate containers, the government’s examination of those e-mails does not violate the Fourth Amendment. ................11
II. A TIPPEE MAY BE HELD DERIVATIVELY LIABLE FOR THE TIPPER’S BREACH OF FIDUCIARY DUTY WHERE THE TIPPER OBTAINS PERSONAL BENEFIT THROUGH GIFTING INSIDER INFORMATION TO A TIPPEE, AND THE NATURE OF THEIR RELATIONSHIP IS SUCH THAT THE TIPPER EXPECTS A FUTURE RETURN ON HIS GIFT. ..................................................................................14
A. The personal benefit obtained by a tipper through gifting insider information to a tippee is sufficient to establish that the tipper breached his fiduciary duty, and the tippee may be held derivatively liable. ............................................................15
iv
1. The gift and exchange theories are distinct theories of liability because they focus on two discrete types of compensation for insider tips. ...........15
2. A tipper who gifts insider information to a tippee breaches his fiduciary duty because the act of giving creates personal benefit to the tipper. ........16
B. The nature of Skrelly and Stump’s mutually beneficial relationship and Skrelly’s implicit duty to reciprocate Stump’s gift create a personal benefit to Stump, and therefore, Skrelly should be held derivatively liable. .........................17
1. Although Skrelly did not convey an immediate material benefit in exchange for Stump’s gift, the mutually beneficial nature of their relationship gives rise to liability. ..............................................................18
2. When Stump disclosed insider information to Skrelly, he immediately received an implicit “I owe you,” a personal benefit. ................................19
Conclusion ....................................................................................................................................21
v
TABLE OF AUTHORITIES
CASES
Cady, Roberts & Co., 40 S.E.C. 907 (1961) ..................................................................................14
California v. Acevedo, 500 U.S. 565 (1991) ..................................................................................11
Chiarella v. United States, 445 U.S. 222 (1980) ...........................................................................14
Chimel v. California, 395 U.S. 752 (1969) ....................................................................................10
Davis v. United States, 131 S. Ct. 2419 (2011) ...............................................................................8
Dirks v. S.E.C., 463 U.S. 64 (1983) ...................................................................................14, 16, 18
Katz v. United States, 389 U.S. 347 (1967) .....................................................................................7
New York v. Belton, 453 U.S. 454 (1981) ........................................................................................8
Rann v. Atchison, 689 F.3d 832 (7th Cir. 2012) ....................................................................8, 9, 12
Riley v. California, 134 S. Ct. 2473 (2014) .........................................................................6, 10, 11
Robbins v. California, 453 U.S. 420 (1981) ..................................................................................11
S.E.C. v. Rocklage, 470 F.3d 1 (1st Cir. 2006) ..............................................................................15
S.E.C. v. Sargent, 229 F.3d 68 (1st Cir. 2000) .........................................................................18, 19
S.E.C. v. Yun, 327 F.3d 1263, 1275 (11th Cir. 2003) ..............................................................16, 19
United States v. Arnold, 533 F.3d 1003 (9th Cir. 2008) ................................................................11
United States v. Bomengo, 580 F.2d 173 (5th Cir. 1978) ................................................................9
United States v. Bowman, 907 F.2d 63 (8th Cir. 1990) .................................................................12
United States v. Durdley, No. 1:09-cr-00031-MP-AK, 2010 WL 916107 (N.D. Fla. Mar. 11,
2010) aff’d, 436 F. App’x 966 (11th Cir. 2011) .................................................................9
United States v. Evans, 486 F.3d 315 (7th Cir. 2007) ...................................................................18
United States v. Jacobsen, 466 U.S. 109 (1984) ....................................................................6, 7, 13
vi
United States v. Jiau, 734 F.3d 147 (2d Cir. 2013) .......................................................................16
United States v. Newman, 773 F.3d 434 (2d Cir. 2014) ....................................................16, 17, 19
United States v. Oliver, 630 F.3d 397 (5th Cir. 2011) ...................................................................12
United States v. Ross, 456 U.S. 798 (1982) ...............................................................................8, 11
United States v. Runyan, 275 F.3d 449 (5th Cir. 2001) ......................................................... passim
United States v. Salman, 792 F.3d 1087 (9th Cir. 2015) ...................................................15, 16, 18
United States v. Simpson, 904 F.2d 607 (11th Cir. 1990) ................................................................9
United States v. Skrelly, No. 15-3902 (13th Cir. 2015) ......................................................... passim
United States v. Slanina, 283 F.3d 670 (5th Cir. 2002), vacated on other grounds,
537 U.S. 802 ........................................................................................................................9
United States v. Wicks, 73 M.J. 93 (C.A.A.F. 2014) .....................................................................11
Vernoica School Dist. 47J v. Acton, 515 U.S. 646 (1995) ...............................................................6
Walter v. United States, 447 U.S. 649 (1980) ..................................................................................6
CONSTITUTIONAL PROVISIONS U.S. Const. amnd. IV .......................................................................................................................6 STATUTES
15 U.S.C. § 78j(b) ..........................................................................................................................14
OTHER AUTHORITIES
Black’s Law Dictionary (10th ed. 2004) ........................................................................................15
Colin Camerer, Gifts as Economic Signals and Social Symbols, 94 Am. J. of Sociology, S180
(1988) ...............................................................................................................................16
vii
Eric. A. Posner, Altruism, Status, and Trust in the Laws of Gifts and Gratuitous Promises, 1997
Wis. L. Rev. 567 (1997) ...................................................................................................17
Richard A. Posner, A Theory of Primitive Society, with Special Reference to Law, 23 J. of L. &
Econ. 1 (1980) ..................................................................................................................17
Tara Parker-Pope, A Gift that Gives Right Back? The Giving Itself, New York Times (Dec. 11,
2007), http://www.nytimes.com/2007/12/11/health/11well.html?_r=0 ...........................17
viii
OPINIONS BELOW
The court order of the United States District Court for the District of Wigmore is reported
as United States v. Skrelly, No. 2015-CM-0713 (D. Wig. May 15, 2015).
The opinion of the United States Court of Appeals for the Thirteenth Circuit is reported
as United States v. Skrelly, No. 15-3902 (13th Cir. 2015).
1
STATEMENT OF THE CASE
Petitioner Marvin Skrelly, a professional investor, “was considered a rising star in the
field.” United States v. Skrelly, No. 15-3902 at *2 (13th Cir. 2015). Skrelly’s firm, WUTANG
Financial, owned a sizeable portion of Sodreckso stock. Id. Sodreckso, “a titan of the American
food industry,” produced and distributed prepackaged meals. Id. Barrington Weatherbee Stump
III was the founder, CEO, and chairman of Sodreckso. Id. Even before meeting Stump, Skrelly
was aware of Stump’s reputation as a “notorious public figure” who “kept tight control” not only
over Sodreckso’s operation, but also the operations of its competitor, CPP Inc., by paying CPP
insiders for nonpublic information. Id.
On March 12, 2015, at the Silver Spoons Country Club, Skrelly initiated a conversation
with Michael Meneghini, a prominent member of the club, and Stump. Id. Meneghini and Stump
invited Skrelly to play golf and join them in the sauna. Id. Before entering the sauna, Meneghini
excused himself to take a phone call, leaving Skrelly and Stump alone. Id. Skrelly and Stump did
not testify at trial, but a search of Skrelly’s emails revealed that Stump disclosed nonpublic
information about Sodreckso at that time. Id. at *3. When Meneghini entered the sauna, he heard
Skrelly thank Stump, and Stump responded: “No problem, I’m always happy to do a favor for a
friend.” Id.
On March 12, Stump sent two e-mails to Skrelly’s WUTANG e-mail. Id. The “Sodreckso
e-mail,” informed Skrelly that Sodreckso was on the verge of financial collapse, and that Stump
disclosed this information in the sauna. Id. The “CPP e-mail,” disclosed that CPP was planning
to release new prepackaged pizzas, “a revolutionary development in the field.” The next day,
Skrelly sold his Sodreckso stock and bought a significant amount of CPP stock. Id. Two weeks
2
later, Sodreckso filed for bankruptcy and its stock price plummeted. Id. Consequently, the price
of its CPP soared. Id.
Deborah Rainden, Skrelly’s assistant at WUTANG was frustrated by Skrelly’s poor letter
of recommendation for business school. Id. In an attempt to get back at Skrelly, she searched his
computer, hoping to find compromising information. Id. Rainden went to Skrelly’s office, logged
on to his laptop with the company password, and successfully guessed his e-mail password. Id. at
*3–4. Skrelly’s emails were organized into folders, two of which were “General Inbox” and
“Stock Tips.” Id. at *4. Rainden read approximately fifty emails in the General Inbox, most of
which were business-related, but some of which were personal in nature. Id. She read the five
most recent e-mails out of the ten total in the Stock Tips folder; the e-mails were all from
insiders at public companies and contained nonpublic information that “appeared to be material
to an investor’s evaluation of each company’s value.” Id. “Suspecting that she had found
evidence of a financial crime,” Rainden turned Skrelly’s computer over to the police. Id.
The computer was investigated by Detective Whitney Woodward of the Wigmore State
Police, who had training and experience in recognizing financial crimes. Id. Rainden provided
Woodward with a sworn statement describing the contents of each e-mail she saw, opened, and
read during her search. Id. at *5. Woodward then read every email in the General Inbox and
Stock Tips folders, and she discovered the Sodreckso e-mail in the General Inbox folder and the
CPP e-mail in the Stock Tips folder. Id. Nine of the ten e-mails in the Stock Tips folder fit the
pattern of the other e-mails; one, however, was an exchange between Skrelly and a woman with
whom he was having an affair. Id. That email, however, “appeared to have been written as to
appear—until actually opened—to contain only business intelligence.” Id.
3
Based on the contents of the e-mails, Skrelly was prosecuted for two counts of insider
trading; the first alleged trading on insider information material to the value of Sodreckso stock,
while the second alleged trading on insider information material to the value of CPP stock. Id.
Skrelly filed a motion in limine to suppress the e-mails as obtained in violation of the Fourth
Amendment, and the district court denied the motion by oral decree. The court overruled his
objection to the introduction of the e-mails at trial. Id. At the end of the government’s case,
Skrelly moved for a judgment of acquittal, arguing “there was insufficient evidence that Stump
received a personal benefit in exchange for the Sodreckso tip.” Id. The district court denied this
motion, and Skrelly was convicted on both counts. Id. Skrelly then renewed his motion for
acquittal on the first count, and the district court denied the motion. Id. He appealed the court’s
denial of his motion to suppress the e-mails, and requested the Thirteenth Circuit issue a
judgment of acquittal on Count One and vacate his conviction on Count Two. Id. The Thirteenth
Circuit, however, affirmed his conviction. Id. at *1. The court held that the government’s search
of the email was valid under the Fourth Amendment because the private search doctrine applied.
Id. at *6. Moreover, the court held that under the gift theory, a tippee can be held liable for
insider trading even when the tipper does not receive tangible compensation. Id. at *15. It
determined that the nature of Skrelly and Stump’s relationship was sufficient to support a
conviction. Id.
On January 15, 2015, this Court granted a writ of certiorari and stayed the Thirteen
Circuit’s mandate, pending the appeal.
4
SUMMARY OF THE ARGUMENT
The Thirteenth Circuit properly affirmed petitioner’s conviction for insider trading in
violation of § 10(b) of the Securities Exchange Act of 1934. The Thirteenth Circuit correctly
affirmed the denial of petitioner’s motion to suppress the Sodreckso and CPP e-mails because the
private search doctrine permitted a warrantless search. Moreover, the Thirteenth Circuit correctly
held that the government’s evidence of the tipper’s personal benefit was sufficient to hold
petitioner derivatively liable for the tipper’s breach of fiduciary duty.
The government’s search of the Sodreckso e-mail, stored in the General Inbox folder, and
the CPP e-mail, stored in the Stock Tips folder, was permissible under the Fourth Amendment
because a private individual had previously examined the folders. The private search doctrine, a
warrantless search exception, exempts items from Fourth Amendment protection when the
government’s search is within the scope of the prior search. The Thirteenth Circuit was correct in
determining that e-mail folders, not individual e-mails, are akin to “containers” for purposes of
this analysis. E-mail folders have characteristics of a container: they hold and conceal
information. Moreover, the government can be more thorough in its search, and can examine
more e-mails within the folder than did the private searcher.
Even if this Court were to consider individual e-mails as containers, the government’s
examination of the CPP e-mail was still permissible. The private search revealed that five of the
ten e-mails in the Stock Tips folder contained trading tips, and the detective who examined the
CPP e-mail was trained in investigating financial crimes. Based on her expertise and the results
of the private search, the detective was “substantially certainty” that each e-mail in the folder
contained stock tips at the time of the search.
5
Skrelly, the tippee obtained insider information from the Sodreckso and CPP e-mails.
Stump, the tipper, breached his fiduciary duty by providing those e-mails to Skrelly as a gift, and
Skrelly is derivatively liable for that breach. Insiders are prohibited from using privileged
knowledge for personal benefit. If the benefit is tangible, the insider certainly violated his
fiduciary duty. Alternatively, if the tipper gifts the information, he can still obtain a personal
benefit, even if it is not an immediate pecuniary gain. The very act of giving creates this benefit.
Stump gave Skrelly insider tips without receiving tangible compensation, but still
received personal benefit from this exchange due to the nature of their relationship and the
creation of an “I owe you.” By gifting Skrelly insider information that enriched him financially,
Stump created a mutually-beneficial relationship, knowing the favor would be returned in the
future. Thus, since Stump received a personal benefit from his disclosure and violated his
fiduciary duty, Skrelly must be held derivatively liable.
6
ARGUMENT I. THE PRIVATE SEARCH DOCTRINE ALLOWS THE POLICE TO EXAMINE
MATERIALS, INCLUDING DIGITAL DATA, ALREADY SEARCHED BY PRIVATE INDIVIDUALS, AND THEREFORE, THE GOVERNMENT’S SEARCH WAS NOT PROTECTED BY THE FOURTH AMENDMENT.
Detective Woodward’s search of petitioner’s e-mail did not violate the Fourth
Amendment because a private individual had already examined e-mails stored in the same
electronic folders as the disputed emails. The Fourth Amendment protects “against unreasonable
searches and seizures.” U.S. Const. amnd. IV. It applies only to the government, and does not
apply “to a search or seizure, even an unreasonable one, effected by a private individual not
acting as an agent of the Government or with the participation or knowledge of any government
official.” Walter v. United States, 447 U.S. 649, 662 (1980) (Blackmun, J., dissenting)).
Generally, in order for a search to be reasonable, the police must obtain a warrant,
Vernoica School Dist. 47J v. Acton, 515 U.S. 646, 653 (1995). A search conducted without a
warrant “is reasonable only if it falls within a specific exception to the warrant requirement.”
Riley v. California, 134 S. Ct. 2473, 2482 (2014). One such exception is the private search
doctrine: items do not receive Fourth Amendment protection if they were previously searched by
a private party and the government’s subsequent examination does not “exceed[] the scope of the
private search.” United States v. Jacobsen, 466 U.S. 109, 115 (1984).
The government’s examination of petitioner’s e-mails is permissible under the private
search doctrine because a private individual already examined them. Electronic folders
containing e-mails are akin to containers, and a government examination of items inside a
container previously searched by a private party is within the scope of the original search.
Additionally, even if this Court were to determine electronic folders are not containers, Detective
Woodward’s examination of the CPP e-mail was still permissible because she was “substantially
7
certain” of its contents. Therefore, this Court should affirm the Thirteenth Circuit’s decision to
deny the petitioner’s motion to suppress.
A. There was no reasonable expectation of privacy with respect to the e-mails stored in the General Inbox and Stock Tips folders because a private individual had examined the folders prior to the government and therefore, the e-mails in the folders were not protected by the Fourth Amendment.
The government’s warrantless examination of petitioner’s e-mails in the General Inbox
and Stock Tips folders was permissible because a private individual had already inspected e-
mails in both folders, frustrating “the original expectation of privacy.” Jacobsen, 466 U.S. at
117. “[A]n individual’s expectation of privacy in the contents of a container [is] compromised if
the container was opened and examined by private searchers.” United States v. Runyan, 275 F.3d
449, 465 (5th Cir. 2001) (citing Jacobsen, 466 U.S. at 119). E-mail folders, not individual e-
mails, are akin to containers, and after a private individual examines some items in a container,
the government’s inspection of all items in that container falls within the scope of the original
search. Moreover, the Court’s decision in Riley does not impact the analysis because the private
search doctrine’s applicability depends “not [on] what ought to be private, but what was actually
kept private.” Skrelly, No. 15-3902 at *10.
1. The folders in an e-mail account, but not the individual e-mails themselves, are “containers” for purposes of the Fourth Amendment and the private search doctrine.
The Fourth Amendment only applies where “a person [has] exhibited an actual
(subjective) expectation of privacy . . . [which] society is prepared to recognize as ‘reasonable.’”
Katz v. United States, 389 U.S. 347, 516 (1967) (Harlan, J., concurring). An individual can
demonstrate an expectation of privacy by concealing items in a “container.” For Fourth
8
Amendment purposes, a container “denotes any object capable of holding another object.” New
York v. Belton, 453 U.S. 454, 460 n.4 (1981), abrogated on other grounds, Davis v. United
States, 131 S. Ct. 2419, 2426 (2011). “[T]he Fourth Amendment provides protection to the
owner of every container that conceals its contents from plain view.” United States v. Ross, 456
U.S. 798, 822–23 (1982).
E-mail folders, unlike individual e-mails, are containers for purposes of a Fourth
Amendment analysis. The Seventh and Fifth Circuits have identified digital storage devices as
containers. See Rann v. Atchison, 689 F.3d 832, 837 (7th Cir. 2012) (zip drives and photo
memory cards); United States v. Runyan, 275 F.3d 449, 458 (5th Cir. 2001) (floppy disks and
compact discs). E-mail folders have the same characteristics as those digital storage devices: they
can hold and conceal digital information. Individual e-mails, however, cannot. As Judge
Charizardo accurately stated, “[t]he information being transmitted lies in an e-mail’s text, not
some part of the e-mail in which another object can be inserted.” Skrelly, No. 15-3902, at *9. A
comparison between a postcard and an envelope is useful in illustrating this point. Unlike an
envelope, which can conceal an item, a message written on a postcard cannot be concealed; a
mere glimpse of the postcard can reveal the message. Like a postcard, contents of an e-mail are
revealed because the sender, subject line, and first sixty characters are displayed before opening
it.
Dissenting, Judge Poliwrath suggests that considering e-mail folders as containers
produces “anomalous results.” Skrelly, No. 15-3902 at *24 (Poliwrath, J., dissenting). While
Judge Poliwrath is correct in concluding that “defendants who happen to organize their
correspondence into folders receive more protection than those who rely on a general inbox,” id.,
9
this result is not anomalous. Individuals do not happen to utilize e-mail folders—it is an active
choice to ensure increased expectation of privacy.
2. Even if the government search is more exhaustive, it can still be within the scope of the initial private search, and therefore, the government can examine e-mails not viewed by the private individual.
Where a government search is “confined to the scope and product of the initial [private]
search,” it “does not constitute a ‘search’ within the meaning of the Fourth Amendment.”
Runyan, 275 F.3d at 458 (quoting United States v. Bomengo, 580 F.2d 173, 175 (5th Cir. 1978)).
“[T]he police do not exceed the scope of a prior search when they examine the same materials
that were examined by the private searchers, but they examine these materials more thoroughly
than did the private parties.” Id. at 464 (citing United States v. Simpson, 904 F.2d 607, 610 (11th
Cir. 1990)). Thus, “the police do not exceed the private search when they examine more items
within a closed container than did the private searchers.” Id. See, e.g., id. at 645 (holding the
government can examine more digital files on disks than the private individual); Rann, 689 F.3d
at 838 (holding police can view more images on a zip drive than the private individual); United
States v. Slanina, 283 F.3d 670, 680 (5th Cir. 2002), vacated on other grounds, 537 U.S. 802
(holding “the FBI’s full search of the computer equipment, which had already been partially
searched by [a private individual], did not run afoul of the Fourth Amendment”); United States v.
Durdley, No. 1:09–cr–00031–MP–AK, 2010 WL 916107, at *2, *6 (N.D. Fla. Mar. 11, 2010)
aff’d, 436 F. App’x 966 (11th Cir. 2011) (holding detectives’ complete search of a thumb drive
was within the scope of a private search of just a subfolder on that thumb drive). Likewise, it is
within the scope of a private search police to read every e-mail in the folder searched, including
those not read by the private party.
10
For policy reasons, this rule makes sense. An alternate rule would over-deter police.
Runyan, 275 F.3d at 465. Instead of conducting a thorough search, the police would waste time
and resources obtaining a warrant out of a “fear of coming across important evidence that the
private searchers did not happen to see and that would then be subject to suppression.” Id. The
Court can avoid this negative result without undermining the purpose of the Fourth Amendment.
3. The Supreme Court’s decision in Riley concerned an invasion of the privacy interest of an arrestee, while a police search of an e-mail following a private search concerns a privacy interest that was already compromised.
Relying on the Court’s decision in Riley, petitioner may argue that warrantless searches
involving electronic communication pose a unique and significant threat to privacy, and “must be
authorized with the utmost care.” See Skrelly, No. 15-3902 at 23 (Poliwarth, J., dissenting)
(citing Riley, 134 S. Ct. at 2488–89). In Riley, the Court recognized the unique nature of a digital
data search and held that “officers must generally secure a warrant before conducing a search” of
smartphone data. 134 S. Ct. at 2485. However, this application of Riley is flawed.
First, the issue in Riley was whether a warrantless search was permissible under the
“search incident to arrest doctrine,” not the private search doctrine. Id. at 2484. The former
allows reasonable warrantless searches after arrest to protect officer safety and prevent
concealment or destruction of evidence. Id. at 2483 (citing Chimel v. California, 395 U.S. 752,
762–63 (1969)). Thus, because smartphone data does not pose a safety threat and because
officers could seize the phone to preserve its contents while waiting for a warrant, the Court held
that allowing the search would violate the already-diminished privacy interests of the arrestee.
Id. at 2485, 2486, 2488. By contrast, the private search doctrine permits warrantless searches
where one’s privacy interest had already been exhausted by a private search. In other words,
11
unlike the still-existing privacy interest of an arrestee, one has no existing privacy interest in an
item already searched.
Second, privacy interests in a smartphone are distinguishable from privacy interests in an
e-mail. Smartphones contain information regarding virtually all aspects of private life: calendars,
bank statements, videos, photographs, internet browsing history, location tracking, and more. Id.
at 2489–90. By contrast, e-mail folders have one specific purpose: to house electronic messages
sent to the user.
Ultimately, “case law does not support finding that a search . . . is ‘particularly offensive’
simply due to the storage capacity of the object being searched.” United States v. Arnold, 533
F.3d 1003, 1010 (9th Cir. 2008) (citing California v. Acevedo, 500 U.S. 565, 576 (1991))
(holding a search of defendant’s laptop did not require special scrutiny). Nor is there a
“constitutional distinction between ‘worthy’ and ‘unworthy’ containers” based on the privacy
interest at stake. Ross, 456 U.S. at 822. See also Robbins v. California, 453 U.S. 420, 426 (1981)
(“[A] diary and a dishpan are equally protected by the Fourth Amendment.”), abrogated on other
grounds, Ross, 456 U.S. 798; United States v. Wicks, 73 M.J. 93, 99 (C.A.A.F. 2014) (“[E]very
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.”). In sum, because the government’s search was limited to e-mail folders
already examined, it did not exceed the scope of the private search. The petitioner’s privacy
interest was exhausted and therefore, the warrantless search was permissible.
B. Based on the private search, the government knew with substantial certainty the contents of the e-mails in the Stock Tips folder, and therefore, even if the individual emails are considered separate containers, the government’s examination of those e-mails does not violate the Fourth Amendment.
12
The examination of the CPP e-mail in the Stock Tips folder is permissible under the
private search doctrine because the government knew with “substantial certainty” the contents of
the folder. Where “police kn[ow] with substantial certainty, based on the statements of the
private searcher, the replication of the private search, and [the police’s] expertise,” the contents
of an unopened container, a defendant no longer has an expectation of privacy over the “rendered
obvious” contents of that container. Runyan, 275 F.3d at 463–64 (emphasis added). Therefore,
the government’s warrantless search does not exceed the scope of the private search and is
permitted. Id. See also Rann, 689 F.3d at 836–37 (quoting Runyan and adopting the substantial
certainty standard).
For example, in United States v. Oliver, 630 F.3d 397 (5th Cir. 2011), the court held the
government’s search of a notebook was permitted under the private search doctrine because “its
contents were obvious.” Id. at 408. Prior to the government search, a private individual examined
a cardboard box that contained evidence, including the notebook, of an unemployment benefits
scheme, but did not open the notebook. Id. at 403. In allowing the search, the court stressed the
agent’s expertise and that the notebook was labeled “business ideas.” Id. at 408. See also United
States v. Bowman, 907 F.2d 63, 64–65 (8th Cir. 1990) (holding that after a private individual
discovered five identical bundles in an unclaimed suitcase and opened one of the bundles to find
cocaine, an agent could examine the other four because the private search combined with the
“trained eye” of an officer “spoke volumes as to the contents of the remaining bundles”) (internal
citations omitted). Cf. Runyan, 275 F.3d at 453, 464 (holding that after a private individual found
and examined some unlabeled floppy and ZIP disks containing child pornography, the
government “could not have concluded with substantial certainty that all of the disks contained
child pornography”).
13
The private and subsequent government search of the Stock Tips folder is similar to the
searches in Oliver and Bowman. Just as the notebook in Oliver was labeled “business ideas” and
unlike the unlabeled disks in Runyan, the e-mail folder was labeled “Stock Tips,” signaling its
contents. Moreover, Detective Woodward knew there were only ten e-mails in the Stock Tips
folder and that each of the five privately searched e-mails “was sent from a corporate e-mail
address, from a corporate insider, and contained information about that insider’s corporation that
would be material to its stock price.” See Skrelly, No. 15-3092, at *14. Thus, it was clear that the
folder was meant to store a narrow set of messages pertaining to “stock tips,” and that the five
unsearched e-mails in the folder would be consistent with this pattern. Finally, Detective
Woodward has experience handling financial crimes, and was trained to identify signs of insider
training. Thus, based on Detective Woodward’s replication of the private search and her
expertise in financial crimes, the contents of the other five e-mails were “rendered obvious,” and
she was “substantially certain” that the unopened e-mails in the Stock Tip folder contained
illegal trading information.
It is undisputed that one of the e-mails discovered by Detective Woodward in the Stock
Tips folder was related to petitioner’s personal life, regarding an affair. While this is unfortunate,
“[t]he reasonableness of an official invasion of [a] citizen’s privacy must be appraised on the
basis of the facts as they exited at the time the invasion occurred.” Jacobsen, 466 U.S. at 115
(emphasis added). At the time of the search, a reasonable officer could not have expected to find
a personal e-mail the Stocks Tips folder. Thus, the regrettable fact that Detective Woodward
happened to find a private e-mail in the Stock Tips folder is irrelevant; at the time of the search,
she was substantially certain that the Stock Tips folder only contained e-mails about stock tips,
and therefore, a permissible warrantless search.
14
II. A TIPPEE MAY BE HELD DERIVATIVELY LIABLE FOR THE TIPPER’S BREACH OF FIDUCIARY DUTY WHERE THE TIPPER OBTAINS PERSONAL BENEFIT THROUGH GIFTING INSIDER INFORMATION TO A TIPPEE, AND THE NATURE OF THEIR RELATIONSHIP IS SUCH THAT THE TIPPER EXPECTS A FUTURE RETURN ON HIS GIFT.
The receipt of a gift is sufficient to hold a tippee derivatively liable for a tipper’s breach
of fiduciary duty because the tipper personally benefits from giving the gift; therefore, Skrelly’s
conviction for insider trading should be affirmed. Section 10(b) of the the Securities and
Exchange Act of 1934, 15 U.S.C. § 78j(b), permits the SEC to create laws prohibiting deceptive
conduct, such as unauthorized disclosure of inside information. See Skrelly, No. 15-3902 at *15.
A purpose of these laws “[is] to eliminate ‘use of inside information for personal advantage.’”
Dirks v. S.E.C., 463 U.S. 646, 662 (1983) (citing Cady, Roberts & Co., 40 S.E.C. 907, 912 n.15
(1961)). A tippee who knowingly receives such information is liable for insider trading when the
tipper violates his fiduciary duty.1 Dirks, 463 U.S. at 661. A tipper violates his fiduciary duty due
to the “inherent unfairness” of misusing insider information for personal benefit rather than
“corporate purpose.” Chiarella v. United States, 445 U.S. 222, 241 (1980) (citing Cady, Roberts
& Co., 40 S.E.C. at 912). Even when the tipper provides the information as a gift, and does not
immediately receive anything tangible in return, he can still benefit and therefore breach his
fiduciary duty. See Dirks, 463 U.S. at 663. Here, Stump gifted insider information to Skrelly.
Although Stump did not receive an immediate, tangible benefit, he received a personal benefit in
the form of an implicit “I owe you” from Skrelly, a successful businessman with whom he
formed a mutually beneficial relationship.
1 Skrelly does not dispute that he acted with scienter. Skrelly, No. 15-3902 at *16 n.10.
15
A. The personal benefit obtained by a tipper through gifting insider information to a tippee is sufficient to establish that the tipper breached his fiduciary duty, and the tippee may be held derivatively liable.
A tippee is derivatively liable where the tipper “benefit[s], directly or indirectly” from
disclosing insider information. Id. at 662. (emphasis added). One way which a court determines
the benefits received by a tipper, “foucs[es] on objective criteria… such as pecuniary gain or a
reputational benefit that will translate into future earnings.” Id. at 663. In these instances, the
reward is obvious. However, there is an alternate way a tipper can benefit from a disclosure. The
Court is clear: “The 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.
(emphasis added).
1. The gift and exchange theories are distinct theories of liability because they focus on two discrete types of compensation for insider tips.
The “gift” theory of liability is necessarily a separate concept from the “exchange” theory
of liability because it addresses instances where, even though he does not receive tangible
benefits for his disclosure, an insider’s actions nonetheless breach his fiduciary duty. An
individual who makes a pecuniary gain receives “money or of something having monetary
value.” Gain, Black’s Law Dictionary (10th ed. 2004). Diametrically opposed is one who gives a
gift, “[t]he voluntary transfer of property to another without compensation.” Gift, Black’s Law
Dictionary (10th ed. 2004) (emphasis added). As stated above, the language in Dirks illustrates
two separate ways in which a tipper can benefit from disclosing insider information to a tippee.
Several Circuits agree with this interpretation. See, e.g., United States v. Salman, 792 F.3d 1087,
1093 (9th Cir. 2015) (recognizing that a tipper could breach his fiduciary duty when gifting
insider information, without tangible compensation); S.E.C. v. Rocklage, 470 F.3d 1, 7 n.4 (1st
16
Cir. 2006) ([“T]he mere giving of a gift to relative or friend [by a tipper] is a sufficient personal
benefit.”); S.E.C. v. Yun, 327 F.3d 1263, 1275 (11th Cir. 2003) (“[T]he gain does not always
need to be pecuniary [and] . . . a gift to a trading partner or relative could suffice to show that the
tipper personally benefited.”).
The petitioner relies on United States v. Newman, 773 F.3d 438 (2d Cir. 2014), a non-
binding case on this Court, to argue that the gift theory is limited in scope. Although Newman
recognized that a personal benefit can include “the benefit one would obtain from simply making
a gift of confidential information to a trading relative or friend,” id. at 452 (quoting United States
v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013)), it narrowed the scope of such personal benefits to
instances where there is “an exchange that is objective, consequential, and represents at least a
potential gain of a pecuniary or similarly valuable nature.” Id. at 452. As the Ninth Circuit held
in Salman, accepting this narrow standard would “require [the court] to depart from the clear
holding of Dirks that the element of breach of fiduciary duty is met where an ‘insider makes a
gift of confidential information to a trading relative or friend,’” the very proposition Newman
acknowledged. Salman, 792 F.3d at 1093 (quoting Dirks, 463 U.S. at 664). In sum, while
Newman is not incorrect in stating that the personal benefit received by a tipper “must be of
some consequence,” Newman, 773 F.3d at 452, it collapses the “gift” and “exchange” theories
and discounts the personal benefits that one can obtain from giving a gift.
2. A tipper who gifts insider information to a tippee breaches his fiduciary duty because the act of giving creates personal benefit to the tipper.
The act of giving creates personal benefit for the insider. According to analyses of gift
giving, in a primitive society, “reciprocity is essential—accepting a gift implies a solemn
obligation of repayment.” Colin Camerer, Gifts as Economic Signals and Social Symbols, 94
17
Am. J. of Sociology, S180, S181 (1988). Thus, “a man is under a strong moral duty to repay a
gift, when he can, with a gift of equivalent value.” Richard A. Posner, A Theory of Primitive
Society, with Special Reference to Law, 23 J. of L. & Econ. 1, 16 (1980). Economists also
recognize the importance of reciprocity in gift giving in modern society. See, e.g., Eric A.
Posner, Altruism, Status, and Trust in the Law of Gifts and Gratuitous Promises, 1997 Wis. L.
Rev. 567, 570–71 (1997). Moreover, psychologists stress that “it is often the giver, rather than
the recipient, who reaps the biggest psychological gains from a gift.” Tara Parker-Pope, A Gift
that Gives Right Back? The Giving Itself, New York Times (Dec. 11, 2007),
http://www.nytimes.com/2007/12/11/health/11well.html?_r=0. Giving gifts, psychologists argue,
“makes [gift givers] feel effective and caring.” Id.
Therefore, an insider who discloses information as a gift personally benefits in the much
of the same way as an insider who gives an illegal tip in exchange for something tangible.
Whether the tipper receives a pecuniary gain in exchange for the tip, a tacit agreement of future
compensation, or just the psychological benefit of giving, the tipper violates his fiduciary due to
the “inherent unfairness” in using secret information for the benefit of himself rather than the
corporation. Thus, a tippee can be derivatively liable when receiving a gift.
B. The nature of Skrelly and Stump’s mutually beneficial relationship and Skrelly’s implicit duty to reciprocate Stump’s gift create a personal benefit to Stump, and therefore, Skrelly should be held derivatively liable.
Stump provided Skrelly with insider information regarding Sodreckso’s financial
problems and CPP’s forthcoming product, but Stump did not receive any immediate tangible
compensation for this information; he gave it as a “gift.” As discussed above, a tipper can
personally benefit, and thus breach his fiduciary duty when providing an insider tip as a gift.
18
“[D]etermining whether an insider personally benefits from a particular disclosure, a question of
fact, will not always be easy for courts.” Dirks, 463 U.S. at 664. Thus, to determine whether an
insider benefitted from giving a gift, courts should examine (1) the nature of the relationship
between the tipper and the tippee and (2) the nature of the benefit to the tipper. Here, the budding
relationship between Skrelly and Stump is mutually beneficial, and the benefit to Stump is in the
form of an “I owe you” to be collected in the future.
1. Although Skrelly did not convey an immediate material benefit in exchange for Stump’s gift, the mutually beneficial nature of their relationship gives rise to liability.
Even though Skrelly and Stump did not know one another prior to the day Stump
disclosed insider tips, the disclosure created a mutually beneficial relationship. As petitioner may
argue, in situations when a tippee has been held liable for receiving a gift of insider information,
the relationship between tipper and tippee was personal in nature. See e.g., United States v.
Evans, 486 F.3d 315, 319 (7th Cir. 2007) (college friends); S.E.C. v. Sargent, 229 F.3d 68, 77
(1st Cir. 2000) (“friendly” acquaintances); Salman, 792 F.3d at 1093 (brother-in-law). However,
in those cases, it is not the type of relationship that gives rise to liability, but rather, the mutually
beneficial aspect of the relationship. See id. at 1089 (emphasizing the tipper and tippee’s
“mutually beneficial relationship”). Likewise, the budding relationship between Skrelly and
Stump was “mutually beneficial” due to their respective positions at the time of the exchange.
Skrelly was as a successful businessman, while Stump’s company was on the verge of financial
collapse. From the tip, Skrelly knew to sell shares in a collapsing company and purchase shares
in an increasing successful company, while Stump obtained the benefit of securing a friend who
was prominent in the business community.
19
The petitioner will point to Newman to argue that Stump did not receive a personal
benefit. Not only, as discussed above, did the Newman court err in collapsing the gift and
exchange theories, but its own hypothetical illustration of what types of relationships do not meet
its standard (two individuals who are members of the same alumni network or attend the same
church), Newman, 773 F.2d at 452, is markedly different from the relationship between Skrelly
and Stump. Id. Unlike two people who happen to belong to the same organization and may never
interact, Stump consciously decided to invite Skrelly to golf and join him in the sauna. Thus, the
stage was set for the creation of a mutually beneficial relationship between “friends”2: Skrelly
benefited from Stump’s insider tip while Stump benefited from the creation of a future
obligation.
2. When Stump disclosed insider information to Skrelly, he immediately received an implicit “I owe you,” a personal benefit.
Although the relationship between Skrelly and Stump at the time of the disclosure was
just beginning, Stump’s gift to Skrelly created an expected future benefit, akin to an “I owe you”
that could be collected at any time. This is analogous to Yun, where the court stressed the future
nature of the benefit and held that a tipper “expected to benefit from her tip . . . by maintaining a
good relationship between a friend and frequent partner in real estate deals”). Id. at 1280. See
also Sargent, 228 F.3d at 77 (holding that a tipper’s disclosure “in an effort to . . . maintain a
useful networking contact” is evidence of personal benefit). Likewise, Stump gave Skrelly a gift
for the sake of future interactions. At a time when Stump was financially vulnerable, his
company on the verge of bankruptcy, having an “I owe you” from a successful businessman was
2 In fact, Meneghini overheard Stump call Skrelly call “a friend” in the sauna. Skrelly, No. 15-3902, at *3.
20
beneficial even if Stump never actually collected on the debt. Because Stump personally
benefited from gifting the tip to Skrelly, he breached his fiduciary duty; therefore, Skrelly is
derivatively liable and Skrelly’s convictions should be affirmed.
Moreover, failing to consider an “I owe you” received by a tipper a personal benefit is
dangerous to the securities industry. If the SEC were required to wait until the “I owe you” was
collected to prosecute a tipper for breach of fiduciary duty and a tippee under a theory of
derivative liability, the purpose of securities regulation would be defeated. By disclosing insider
information, Stump induced Skrelly to sell all of his Sodreckso stock, thus affecting the value of
all other shareholders’ shares, and likely accelerating Sodreckso’s collapse. Whether Stump
collected his “I owe you” does not impact the damage done to the shareholders not privy to
insider information. By the time Stump decides to collect his favor, the damage to the industry
will have already been done.
21
CONCLUSION
For the foregoing reasons, respondent respectfully requests that this Court affirm the Thirteenth
Circuit's decision affirming the Petitioner's conviction on two counts of insider trading, in
violation of § 10(b) of the Securities Exchange Act of 1934.
Respectfully Submitted,
United States of America, Respondent
By: ______Team Four_________
Counsel for the United States of America
Recommended