PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 18-3549
____________
UNITED STATES OF AMERICA
v.
STEVEN FISHOFF,
Appellant
On Appeal from the United States District Court
for the District of New Jersey
(D. C. Criminal No. 3-15-cr-00586-001)
District Judge: Honorable Michael A. Shipp
Submitted under Third Circuit LAR 34.1(a)
on July 8, 2019
Before: MCKEE, ROTH and RENDELL, Circuit Judges
(Opinion filed: January 30, 2020)
Daniel T. Brown
Murphy & McGonigle
1001 G Street, NW
Seventh Floor
Washington, DC 20001
Counsel for Appellant
Mark E. Coyne
John F. Romano
Office of United States Attorney
970 Broad Street
Room 700
Newark, NJ 07102
Counsel for Appellee
O P I N I ON
ROTH, Circuit Judge:
Under Section 32 of the Securities Exchange Act, a
defendant who violates a Security and Exchange Commission
(SEC) rule or regulation but proves that he “had no
knowledge of such rule or regulation” is not subject to
imprisonment. 1 The rule is intended to protect laypersons
1
15 U.S.C. § 78ff(a).
2
who commit technical violations. 2 This case requires us to
determine the precise burden on a defendant who wishes to
use the so-called “non-imprisonment defense.” We hold that
a defendant can establish lack of knowledge and avoid
imprisonment if he demonstrates, by a preponderance of the
evidence, that he did not know the substance of the rule or
regulation that he violated. Because appellant Steven Fishoff
did not establish a lack of knowledge of the rule that he pled
guilty to violating and because his other procedural
arguments fail, we will affirm the judgment of the District
Court.
I
Fishoff began trading securities in the early 1990s. He
was a skilled trader and eventually quit his job in the clothing
manufacturing sector to trade full-time. He initially traded in
partnership with a “backer,” i.e., an investor who provided the
capital for his trading activity. By 2009, he had earned
enough money to set up his own firm, Featherwood Capital,
Inc. At Featherwood, he had one full-time employee and also
worked with several independent contractors. He controlled
accounts that yielded profits between $2 and $5 million per
year. Despite his successes, Fishoff neither had any formal
training in nor took any courses on the securities markets,
regulations, or compliance. Nor did he ever hold a securities
or other professional license. He operated Featherwood
without any expert legal or regulatory advice.
2
See United States v. Lilley, 291 F. Supp. 989, 992 (S.D. Tex.
1968) (citing Report of the Joint Conference Committee, 78
Cong. Rec. 10263 (1934)); see also 78 Cong. Rec. 8295-96
(1934) (statement of Sen. Steiwer).
3
One of Fishoff’s practices was short-selling a
company’s stock in anticipation of the company making a
secondary offering. Short-selling is the sale of a security that
the seller has borrowed with the belief that the price of the
security will drop. This enables the seller to make a profit by
buying back the stock at a lower price before returning it.
Secondary offerings, i.e., when a public company issues and
sells new shares to raise money, can cause the company’s
share price to decrease because the new shares dilute the
value of existing shares. Not surprisingly, many traders and
market researchers try to predict when a company will make a
secondary offering by, for example, forecasting when a
company will need an influx of cash. In order to make such a
forecast, a trader will use public financial disclosures or
watch for updated shelf registration statements. 3
Although secondary offerings are confidential, a
company, through its underwriter, may contact potential
buyers to assess interest in the offering. Different investment
banks, acting as underwriters, take different approaches in
authorizing their salespeople to describe the subject company
and its market capitalization. However, when a salesperson
provides confidential information, such as the name of the
3
Short-selling can artificially depress a stock’s price. To
ensure that secondary offerings reflect market forces, the SEC
issued Rule 105 of Regulation M, 17 C.F.R. § 242.105, which
generally prohibits the purchase of securities in secondary
offerings if the purchaser engaged in short-selling of that
stock within a five-day period before the offering. Although
Rule 105 is not at issue here, it is the subject of certain claims
in a related SEC case. SEC v. Fishoff, No. 13-cv-3725-MAS-
DEA (D.N.J.) (filed June 3, 2015).
4
issuing company and the pricing and timing of the offering,
the recipient of this information is considered to be “over the
wall” or “OTW” and is barred by relevant law, including the
SEC’s Rule 10b-5-2, from trading the issuer’s securities or
disclosing the information to anyone else before the offering
is publicly announced. Otherwise, the recipient will have an
unfair advantage and be able to profit from the inside
information, for example by short-selling the stock and
repurchasing it after the announcement of the secondary
offering, assuming the price has indeed dropped.
The criminal insider trading activity at issue in this
case relates to Featherwood’s practice of receiving
confidential information about impending secondary
offerings, i.e. being brought over the wall, and short-selling
based on that inside information. Two of Fishoff’s associates,
Ronald Chernin and Steven Constantin, opened accounts at
investment banking firms and cultivated relationships with
investment bankers in order to receive solicitations to invest
in secondary offerings. Chernin and Constantin learned about
specific secondary offerings from the investment banks and
agreed to keep the information confidential. They then
telephoned Fishoff and told him they were “OTW” and had
learned when a certain company was planning a secondary
offering. Fishoff would short-sell the company’s shares, later
profiting by purchasing the shares after the announcement of
the secondary offering, when the price had fallen. Fishoff
also shared the inside information with Paul Petrello, a long-
time business associate, personal friend, and former colleague
at Worldwide Capital, one of Fishoff’s early backers. Petrello
similarly used the inside information to short-sell, and he and
Fishoff split the trading profits. Petrello testified at his own
plea hearing that Fishoff would send the first two letters of
5
the company’s stock trading symbol by text message and then
tell him the last two letters by phone. 4
In November 2015, Fishoff was charged in a five-
count Indictment including one count of conspiracy to
commit securities fraud and four separate counts of securities
fraud. He eventually pled guilty to Count 4, securities fraud
in violation of 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. §
240.10b-5 (Rule 10b-5), and 18 U.S.C. § 2. His plea related
to the trading of stock in Synergy Pharmaceuticals, Inc. As
described in the plea agreement, in the government’s
sentencing memorandum, and at the plea hearing, Chernin
was solicited by phone to participate in Synergy’s
confidentially marketed secondary offering and brought over
the wall on April 30, 2012. He called Fishoff a few minutes
later. Featherwood started short-selling Synergy stock later
the same morning via Fishoff’s online trading account. The
secondary offering was publicly announced on May 3, 2012.
4
The government in its brief refers to Fishoff’s use of “coded
language” to pass along the confidential information to
others. The government cites to the portion of the sentencing
hearing transcript where the prosecution discussed Fishoff’s
and Petrello’s use of coded language, including the
transmittal of stock symbols in fragments. Fishoff objected at
the sentencing hearing that Petrello’s plea was not part of the
record. However, because Fishoff did not object in his reply
brief to the government’s mention of the same evidence (and
in fact refers to Petrello’s testimony on other issues), he has
waived any objection to our consideration of that evidence.
See United States v. Shaw, 891 F.3d 441, 455 n.17 (3d Cir.
2018); Suarez-Valenzuela v. Holder, 714 F.3d 241, 248-49
(4th Cir. 2013).
6
Fishoff stipulated that he and his associates made between
$1.5 and $3.5 million by short-selling Synergy stock based on
the confidential information regarding the upcoming
secondary offering. Fishoff also stipulated that he had
breached the duty of confidentiality and trust owed to the
source of the inside information and agreed that he had done
so “willfully.” 5
Fishoff’s sentencing took place on November 5, 2018.
In his sentencing memorandum, Fishoff claimed that he had
no knowledge of SEC Rule 10b5-2 and was entitled to the
affirmative defense against imprisonment pursuant to Section
32 of the Securities Exchange Act. The government, in its
sentencing memorandum, requested a sentence within the
Guidelines range of 46 to 57 months. At the sentencing
hearing, the court asked whether the parties had non-
Guidelines objections to the Pre-Sentence Report. Fishoff’s
attorney clarified that the court was not referring to the
affirmative defense of Section 32, and the court agreed and
said it would hear about that “separate[ly].” 6 The court
proceeded to calculate the Guidelines range of Fishoff’s
sentence, denied Fishoff’s request for a departure, and heard
Fishoff’s allocution. The court also heard argument from
Fishoff’s counsel that a sentence of home confinement would
be appropriate. Following a break, the court asked the parties
if there were any clarifications for the record. Hearing none,
the court proceeded to discuss the factors it needed to
consider under 18 U.S.C. § 3553(a), granted a variance
downward, and sentenced Fishoff to 30 months’
imprisonment. The government then moved to dismiss the
5
S.A. 21 (Plea Hearing Tr. 21:11-12).
6
A131.
7
remaining counts, which the Court granted.
After the District Court announced the sentence and
dismissed the remaining counts, Fishoff’s attorney reminded
the court that it had not addressed its Section 32 argument on
the non-imprisonment defense. The court responded that it
had “addressed all of the steps necessary for sentencing,” and
when Fishoff’s attorney responded with an explanation of the
affirmative defense and pointed to the relevant portion of the
sentencing submission, the court stated for the record that
“[a]ny motion pursuant to Section 32 of the Securities
Exchange Act prohibiting imprisonment is hereby denied in
its entirety.” 7 Fishoff did not object. The next day, on
November 6, the court issued a written order “for the sake of
clarity” explaining that Fishoff had failed to establish that he
was a layperson and failed to present evidence supporting his
argument that he lacked knowledge of Rule 10b5-2. 8
7
A184.
8
A18. Rule 10b5-2 sets forth “a non-exclusive definition of
circumstances” in which the misappropriation theory of Rule
10b-5 would apply. Under that theory, the defendant is not an
insider but an outsider who possesses inside information and
owes a fiduciary duty to the source. Rule 10b5-2, which the
SEC promulgated in 2000 to codify the Supreme Court’s
decision in United States v. O’Hagan, provides guidance on
such cases. United States v. McPhail, 831 F.3d 1, 5 (1st Cir.
2016) (citing United States v. O’Hagan, 521 U.S. 642
(1997)). Fishoff refers to Rule 10b5-2 in his briefs, as does
the District Court in its order, while the government refers to
Rule 10b-5. Section 78ff(a) makes clear that a defendant
must demonstrate a lack of knowledge of the rule he violated
in order to avail himself of the affirmative defense. Because
8
This appeal followed. Fishoff raises three main
arguments. First, he argues that the District Court violated
Federal Rule of Criminal Procedure 32 by failing to make
factual findings at sentencing and improperly curtailing his
argument on the affirmative defense. Second, he argues that
the government may not oppose his request on appeal because
it was silent with respect to the affirmative defense in the
course of the proceedings below. Third, he urges us to
overturn the District Court’s ruling that he did not
demonstrate a lack of knowledge of the rule he violated. We
discuss each in turn.
Fishoff pled guilty to violating Rule 10b-5, the relevant rule
in this case is Rule 10b-5. In any event, Rule 10b5-2 does not
stand alone as a source of liability; as a special case of insider
trading, it assumes the other relevant elements of that charge
are present. See 17 C.F.R. § 240.10b5-2(a) (“This section
shall apply to any violation of . . . § 240.10b-5 . . . .”); see
also United States v. Knueppel, 293 F. Supp. 2d 199, 204
(E.D.N.Y. 2003) (“Whether or not defendants knew that they
faced potential prosecution under a theory labeled by lawyers
as the ‘misappropriation theory,’ they pled guilty to
[conspiracy to commit securities fraud].”). For that reason,
defendants in misappropriation cases are simply charged with
violating Rule 10b-5, e.g., United States v. Parigian, 824 F.3d
5, 8 (1st Cir. 2016), or sometimes both Rule 10b-5 and Rule
10b5-2, e.g., United States v. Gansman, 657 F.3d 85, 90 (2d
Cir. 2011). To the extent that Fishoff believed he needed to
demonstrate only a lack of knowledge of the misappropriation
theory, he was mistaken, and to the extent that the District
Court erred in this regard, any error is harmless.
9
II 9
A
We first address Fishoff’s argument that the District
Court violated Rule 32. The purpose of Rule 32 is “threefold:
(1) to allow the defendant to present mitigating
circumstances, (2) to permit the defendant to present personal
characteristics to enable the sentencing court to craft an
individualized sentence, and (3) to preserve the appearance of
fairness in the criminal justice system.” 10
Fishoff relies on two separate subsections of this rule.
First, Fishoff argues that the District Court failed to make
factual findings on the record in violation of Rule 32(i)(3)(B),
which requires the sentencing court, “for any . . . controverted
matter,” to “rule on the dispute or determine that a ruling is
unnecessary either because the matter will not affect
sentencing, or because the court will not consider the matter
in sentencing.” The rule is “strictly enforced” and requires
the court to make express findings on disputed facts or to
disclaim reliance upon disputed facts. 11
Here, the District Court did not violate Rule
9
The District Court had jurisdiction pursuant to 18 U.S.C. §
3231. We have jurisdiction pursuant to 18 U.S.C. §§ 1291
and 3742(a).
10
United States v. Moreno, 809 F.3d 766, 777 (3d Cir. 2016)
(internal quotation marks omitted).
11
United States v. Electrodyne Sys. Corp., 147 F.3d 250, 255
(3d Cir. 1998).
10
32(i)(3)(B) by failing to rule on the affirmative defense. 12
First of all, the Court did issue a clear ruling in response to
Fishoff’s objection, 13 unlike in United States v. Electrodyne
Systems Corp., cited by Fishoff, where the record was “[a]t
best . . . ambiguous as to the district court’s reliance upon the
disputed matters.” 14 Fishoff also relies on United States v.
Metro, but in that case, the court did not resolve a dispute
about the defendant’s role in the scheme because it
mistakenly considered the factual dispute to be moot, when it
was in fact “very much alive.” 15 Here, the Court made no
12
Our review of the District Court’s adherence to Rule 32 is
plenary. United States v. Ward, 732 F.3d 175, 180 n.4 (3d
Cir. 2013). The government urges us to apply plain error
review. We are not persuaded. The government relies on
United States v. Flores-Mejia, 759 F.3d 253, 257 (3d Cir.
2014), in which we held that a defendant must raise any
procedural objection to his sentence (such as a court’s failure
to give meaningful consideration to the defendant’s
substantive argument) after the sentence is pronounced. In
that case, the parties argued for and against a variance but the
court did not rule on it. The court then announced its
sentence, at which point defense counsel did not object to the
court’s failure to rule on the variance issue. Here, the District
Court announced its sentence, Fishoff objected that the court
had not addressed Section 32, and the court ruled on the
objection. In this manner, then, the court ruled on the
affirmative defense.
13
A184 (“Any motion pursuant to Section 32 of the
Securities Exchange Act prohibiting imprisonment is hereby
denied in its entirety.”).
14
147 F.3d 250, 255 (3d Cir. 1998).
15
882 F.3d 431, 442 (3d Cir. 2018).
11
such mistake.
Moreover, to the extent the Rule requires express
findings on the viability of the affirmative defense, we find a
clear statement of the court’s findings in its rejection of the
defense. As the Ninth Circuit held in United States v.
Laurienti, by rejecting the affirmative defense without
providing specific reasons, the court “necessarily found he
knew of the [SEC] rule” he was charged with violating. 16
Finally, even if there was error, it is evident from the court’s
November 6 ruling that any further explanation on the part of
the court would not have changed the sentence it imposed.
Thus, any error is harmless.
Second, Fishoff argues that the District Court
improperly curtailed his argument on the affirmative non-
imprisonment defense at sentencing in violation of Rule
32(i)(4)(A). That subsection requires the court, “[b]efore
imposing sentence,” to “provide the defendant’s attorney an
opportunity to speak on the defendant’s behalf” and “address
16
731 F.3d 967, 972 (9th Cir. 2013); see also United States v.
Campbell, 295 F.3d 398, 406 (3d Cir. 2002) (holding that the
district court fulfilled its obligation to make factual findings
on controverted matters by stating that the disputed portions
of the presentence report were supported by a preponderance
of the evidence); cf. United States v. Zehrung, 714 F.3d 628,
632 (1st Cir. 2013) (sentencing court may “implicitly” resolve
factual disputes when its statements and the sentence “show[]
that the facts were decided in a particular way” as long as
both the findings and the basis for the findings are clear
enough “to permit effective appellate review” (internal
quotation marks omitted)).
12
the defendant personally in order to permit the defendant to
speak or present any information to mitigate the sentence.”
We see no plain error violation of this subsection of
Rule 32. 17 As an initial matter, the sentencing court “has
always retained the discretion to place certain restrictions on
what may be presented during an allocution.” 18 Here, Fishoff
submitted an extensive sentencing memorandum, which
included a section on the non-imprisonment defense, as well
as 38 letters of support, a DVD, and a letter from Fishoff. At
the hearing, the court heard lengthy arguments from Fishoff’s
counsel, who at several points requested a sentence of home
confinement. The court addressed Fishoff personally and
Fishoff himself spoke at length. This case is unlike those
relied upon by Fishoff, such as United States v. Chapman,
where the district court refused a continuance so that the
defendant, who had mistakenly not been notified of the day of
sentencing, could gather letters from family members and
prepare for allocution. 19 This case is also unlike those in
which we have found error because the sentencing court
infringed on the right of the defendant to allocute. 20 Finally,
17
Fishoff did not object at sentencing that the court was
interfering with his right to present information. We thus
review for plain error only. Moreno, 809 F.3d at 777.
18
Ward, 732 F.3d at 182; see also U.S.S.G. § 6A1.3 cmt.
(“When a dispute exists about any factor important to the
sentencing determination, the court must ensure that the
parties have an adequate opportunity to present relevant
information. Written statements of counsel or affidavits of
witnesses may be adequate under many circumstances.”).
19
915 F.3d 139, 144-47 (3d Cir. 2019).
20
E.g., Moreno, 809 F.3d 766.
13
it is clear from the November 6 order that oral argument on
the affirmative defense would not have made a difference in
Fishoff’s sentence. Thus, any error did not affect his
substantial rights. 21
We do not condone the practice of telling defense
counsel that they will be permitted to argue for an affirmative
defense at sentencing and then denying the defense without
oral argument. Nevertheless, Fishoff was able to present his
defense adequately, and the court’s ruling on it was sufficient.
Furthermore, as discussed below, 22 Fishoff’s arguments that
he was entitled to the defense are not persuasive. For those
reasons we hold that the court did not violate Rule 32.
B
We next address Fishoff’s argument that the
government was silent in the face of his affirmative defense
below and therefore should, on appeal, not be permitted to
argue against it. Fishoff points out that the government
responded to other portions of his sentencing memorandum,
thereby demonstrating “that it was fully capable of advising”
the court on matters affecting sentencing, but that it failed to
do so with respect to his affirmative non-imprisonment
defense. His argument fails for two reasons.
First, by requesting a sentence of imprisonment within
the Guidelines range of 46 to 57 months, the government was
necessarily opposing Fishoff’s argument that he should not be
sentenced to prison. As the government points out, it
21
See Fed. R. Crim. P. 52(b).
22
Infra Part II.C.
14
submitted its sentencing memorandum before Fishoff
submitted his; the court did not require or permit
supplemental briefing before sentencing, merely the filing of
supplemental documents. Nor did the court elicit the
government’s views on the matter at sentencing. To be sure,
the government could have volunteered its position at the
hearing. But even if the government did not provide its
explicit view on the matter, its request for a sentence of
imprisonment clearly demonstrated its position—that Fishoff
was not entitled to the defense. 23
Second, as other circuits have made clear, when a
criminal defendant appeals, the government is “tasked, in
effect, with defending the district court’s judgment.” 24 This
is so even when the government agreed to a sentencing
adjustment that the district court did not award. 25 Although
we have not addressed this exact issue, we held in United
States v. Griswold that the government may defend the
23
The cases cited by Fishoff do not require a contrary result.
In United States v. Weatherspoon, 696 F.3d 416, 421-22 (3d
Cir. 2012), we held that the government was barred from
arguing for the first time on appeal that a defendant could not
file a second motion pursuant to 18 U.S.C. § 3582(c)(2).
Here, by contrast, the government necessarily opposed the
motion. The second case, United States v. Schiff, 602 F.3d
152 (3d Cir. 2010), is distinguishable because the government
in that case took a position on appeal that contradicted several
express statements it made below. There were no such
express statements here.
24
United States v. Carbajal-Valdez, 874 F.3d 778, 786 (1st
Cir. 2017).
25
Huff v. United States, 734 F.3d 600, 610 (6th Cir. 2013).
15
district court’s factual finding with respect to a defendant’s
offense level even if the government stipulated to contrary
facts in the plea negotiation. 26 Here, the plea agreement
explicitly reserved the government’s right (and Fishoff’s
right) to take any position on appeal. 27 Moreover, the
government never agreed that the non-imprisonment defense
applied.
For these reasons, Fishoff’s preclusion argument lacks
merit.
C
We turn, last, to Fishoff’s argument that the District
Court erred in finding that he did not meet his burden of
demonstrating a lack of knowledge of the substantive SEC
Rule he pled guilty to violating. We review the District
Court’s factual findings for clear error. 28 In doing so, we do
not find clear error simply because “there are two permissible
views of the evidence.” 29
We have not previously had occasion to interpret the
non-imprisonment defense of Section 32. Other circuits have
done so and we find their analyses helpful, especially the
26
57 F.3d 291, 298-99 (3d Cir. 1995).
27
Except that neither side could argue on appeal that the
sentencing court erred in accepting the factual stipulations.
28
United States v. Grier, 475 F.3d 556, 561 (3d Cir. 2007)
(en banc).
29
Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 574
(1985).
16
reasoning of the Eighth Circuit in United States v. Behrens. 30
In that case, the Eighth Circuit rejected the defendant’s view
that the non-imprisonment defense is available to one who
shows that he did not know that the rule in question applied to
his conduct (even if he was aware of the rule). 31 The court
also rejected the government’s view that the non-
imprisonment defense is only available to a defendant who
can show “a complete absence of knowledge” of the rule’s
“very existence.” 32 The court instead drew a middle line,
based on the plain language of the statute, and held that
defendants must show by a preponderance of the evidence
“that they did not know the substance of the SEC rule or
regulation they allegedly violated, regardless of whether they
understood its particular application to their conduct.” 33 By
requiring the defendant to demonstrate a lack of knowledge of
the substance of the rule, the defense marks only a minor
departure from the traditional principle that ignorance of the
law is no excuse. 34
30
713 F.3d 926 (8th Cir. 2013).
31
The Eighth Circuit found that such an interpretation would
create a specific intent mens rea more appropriate for, e.g.,
criminal tax cases, which run a higher risk of “convicting
individuals engaged in apparently innocent activity.” Id. at
931 (quoting Bryan v. United States, 524 U.S. 184, 195
(1998)).
32
713 F.3d at 929.
33
Id. at 930, 932.
34
Id. at 931 (“This rule protects from imprisonment
individuals who truly are unaware of the substance of an SEC
rule or regulation, but it does not go so far as to completely
vitiate the principle that ignorance of the law is no defense.”);
id. at 931-32 (“The purpose of the no-knowledge provision is
17
We agree with the Eighth Circuit’s reasoning in
Behrens that a defendant who wishes to qualify for the non-
imprisonment defense must demonstrate, by a preponderance
of the evidence, that he did not know the substance of the rule
that he violated. It is immaterial that a defendant does not
know the exact number of the rule, and immaterial that the
defendant did not specifically intend to violate the rule. 35
Applying this construction of the defense to the case
before us, we find that Fishoff did not meet his burden. He
offers four main pieces of evidence.
First, he maintains that “there can be no presumption
that [he] would generally have knowledge of the SEC’s
technical rules,” and that “[n]o layperson would generally
know of Rule 10b5-2.” 36 But Fishoff was a full-time trader
who made his living by trading stocks. Even assuming a true
layperson would not be aware that insider trading is
prohibited, which is a dubious proposition, we cannot credit
his claim to be a layperson. He was an experienced trader
certainly to ‘soften[] the impact of the common-law
presumption’ that ‘mistake of law is no defense’ . . . .”
(quoting Cheek v. United States, 498 U.S. 192, 199, (1991))
(alterations in original)).
35
Cf. Lilley, 291 F. Supp. at 993 (holding that it is irrelevant
that the defendant does not know “the precise number or
common name of the rule, the book and page where it was to
be found, or the date upon which it was promulgated”).
36
As explained above, the rule in question is the rule to which
Fishoff pled guilty to violating, which here is Rule 10b-5 and
not the rule setting forth the misappropriation theory (Rule
10b5-2). See supra n.8.
18
with years in the business. He had performed hundreds of
thousands of trades. 37 We recognize that the illicit trades
constituted a tiny fraction of the trades completed by
Featherwood. But the sheer volume of normal, non-violative
trading activity carried out or overseen by Fishoff merely
throws into sharper relief the few trades that relied on
confidential inside information. Based on his trading activity,
Fishoff cannot plausibly claim, without more, that he was not
a professional trader. Thus, he does not benefit from any
presumption that he was unaware of insider trading rules.
Second, Fishoff points out that he has never held a
securities license, worked as a registered broker/dealer,
studied for any securities licensing exam, or received training
in the securities laws. This evidence is an extension of his
claimed non-professional status. We find it unpersuasive for
the same reasons. His lack of licensure or training carries less
weight in light of the fact that he made his living by trading
securities; it is implausible that a professional trader like
Fishoff would not know about Rule 10b-5. 38 We find no
clear error in the District Court’s decision that this evidence
does not meet the preponderance standard.
Third, Fishoff refers to the emails he and his associates
37
United States v. D’Honau, 459 F.2d 73, 75 (9th Cir. 1972)
(“Appellant was experienced in the stock market; it is a
remote possibility that he did not know the actions prohibited
by 17 C.F.R. 240.10b-5 were contrary to law.”).
38
Other courts have similarly denied the defense to
individuals who claimed not to have “academic” or
“professional” experience. See Knueppel, 293 F. Supp. 2d at
204-05.
19
received from investment banks containing form
confidentiality agreements and points out that these emails do
not mention Rule 10b-5. This argument is meritless. The
emails clearly stated that they contained confidential
information, the use of which was restricted. If anything,
these form confidentiality agreements should have been red
flags for Fishoff that he was not permitted to trade based on
the confidential information. They certainly do not
demonstrate his lack of knowledge, much less meet the
preponderance standard.
Fourth, Fishoff points out that he became aware of
Rule 105 39 in September 2013, after the SEC brought a case
against 23 individuals based on that rule. The head of
Featherwood’s introducing broker, Montecito, sent Fishoff
copies of Rule 105 and Reg SHO on October 2, 2013 (over
one year after the Synergy trades described in Count 4).
Once he became aware of Rule 105, he realized some of his
short-selling had violated that rule and took efforts to ensure
future compliance by directing his associates to stop short-
selling after being solicited by underwriters. But Rule 105 is
not at issue here. Fishoff claims that he did not know that the
government would consider the short-selling to violate Rule
10b-5 in addition to violating Rule 105, but that is not enough
to qualify for the defense. 40 The fact that he learned of Rule
105, realized the SEC was able to enforce it, and sought to
avoid such enforcement of that rule does not demonstrate that
he did not know of Rule 10b-5. The best inference one could
draw from this evidence is that Fishoff lacked knowledge of
39
17 C.F.R. § 242.105, “Short selling in connection with a
public offering.”
40
Behrens, 713 F.3d at 929-30.
20
the substance of Rule 105 before October 2013. But neither
his lack of knowledge of Rule 105 nor his attempts to avoid a
Rule 105 enforcement action have any bearing on his
knowledge of a separate rule.
In short, none of Fishoff’s proffered evidence
demonstrates his lack of knowledge by a preponderance of
the evidence. In addition, there is enough countervailing
evidence on the other side of the equation to conclude that the
District Court did not clearly err. First, there is the fact that
he was an experienced professional, discussed above.
Second, the government points out that Fishoff told his
associates to notify him of the confidential information by
phone and conveyed the same information to Petrello using a
code. Fishoff does not dispute the government’s
characterization of these communications. His attempts to
conceal the scheme suggests that he was aware that it was
wrong and could support an inference that he knew of a
prohibition against trading on the confidential information.41
Finally, his reluctance to hire compliance personnel, despite
advice from friends who were securities professionals,
indicates that on some level Fishoff was aware he was
violating a securities rule—or at least risking a violation of a
securities rule and choosing to disregard that risk.
In sum, we hold that the District Court did not err in
ruling that Fishoff did not establish by a preponderance of the
41
United States v. Reyes, 577 F.3d 1069, 1081-82 (9th Cir.
2009) (based on evidence of “conceal[ment]” and “directing
employees to not communicate . . . over the phone or email,”
the district court appropriately found that the defendant had
not met her burden of establishing lack of knowledge).
21
evidence a lack of knowledge of Rule 10b-5.
III
We will affirm the judgment of sentence of the District
Court.
22