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From Securities Regulation Daily, March 13, 2015

Convicted Galleon attorney plays Newman get-out-of-jail-free card

By Anne Sherry, J.D.

An attorney convicted of insider trading as part of the Galleon case is leveraging the Second Circuit’s Newman decision in an attempt to have his conviction and sentence vacated. Michael Kimelman has hired new lawyers for the challenge, which argues that he had no knowledge of a personal benefit as required byNewman and that his previous counsel was constitutionally ineffective (U.S. v. Goffer, March 12, 2015).

Conviction and sentence. Kimelman was convicted for his alleged participation in the $10 million Galleon insider-trading conspiracy. He was sentenced to 30 months’ imprisonment followed by three years of supervised release and was ordered to forfeit nearly $300,000. Kimelman has completed his prison sentence and is now halfway through his term of supervised release.

At his trial, Kimelman’s attorneys requested that the court instruct the jury that the government was required to prove that the defendants knew of the personal benefits that the tippers received. The court rejected the request and instructed the jury that it need only find that the tippers personally benefitted. Kimelman’s counsel renewed their objections to the rejection of the jury instructions. They also moved for a new trial based on the conscious avoidance instruction.

Appeal. Kimelman appealed his conviction to the Second Circuit, which affirmed. In the appeal, his trial attorneys challenged the conscious avoidance instruction but did not challenge the district court’s refusal to instruct the jury about knowledge of personal benefit. Furthermore, Kimelman’s brief asserts, they did not attack the sufficiency of the evidence for any of the three counts against Kimelman on the grounds that the government failed to prove his knowledge of a personal benefit to the tippers.

Challenge following Newman. Last December, in Newman, a unanimous Second Circuit panel vacated the insider trading convictions of two hedge fund portfolio managers because there was no evidence that the managers knew they were trading on information obtained from insiders, or knew that those insiders received any benefit in exchange for the disclosures, or even that the portfolio managers consciously avoided learning of these facts.

Kimelman is challenging his conviction and sentence under 28 U.S.C § 2255, which allows a prisoner in custody (including under supervised release) to move to have the sentence vacated if it was tainted by a constitutional error, lack of jurisdiction, or a “fundamental defect” in law or fact that “inherently results in complete miscarriage of justice” (Graziano v. U.S., 83 F.3d 587, 589-90 (2d Cir. 1996)). The brief maintains that Kimelman was convicted for conduct that is not a crime under Newman, by a jury that was never asked to determine a critical element of the offense—his knowledge of a personal benefit to the tipper. Had the jury been properly instructed, he argues, it could not have found him guilty because there was no evidence that he knew that the insiders were being paid for their tips. He also claims entitlement to relief because his counsel was constitutionally ineffective for failing to make these arguments in his direct appeal when there was no possible strategic or logistical reason for holding back.

Petition for rehearing. The government has asked for rehearing in Newman, but its beef is with the Second Circuit panel’s narrow definition of personal benefit. Kimelman argues that because the petition for rehearing expressly declines to challenge the core holding that knowledge of a personal benefit is an essential element of insider trading liability, Newman dictates vacatur of his conviction regardless of whether the appeals court reconsiders other aspect of its opinion.

The case is No. 10-cr-00056.

Attorneys: Andrew L. Fish, United States Attorney’s Office for the USA. Cynthia Margaret Monaco (Law Offices of Cynthia M. Monaco) for Zvi Goffer.

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