United States v. Smith
155 F.3d 1051
In the United States Court of Appeals for the Ninth Circuit
Case Number 97-50137
Before Circuit Judge O’Scannlain, Circuit Judge Trott, and Circuit Judge Fernandez
Decided on August 25, 1998

Relevancy of the Case: Appeal against conviction in an insider trading case based on illegally recorded voicemail conversation

Statutes and Provisions Involved

• The Securities Exchange Act, 15 USC § 78(b)
• The Victim and Witness Protection Act, 18 USC § 1505

Relevant Facts of the Case

• PDA Engineering, Inc. (“PDA”) is an Orange County-based firm that is publicly traded on the National Association of Securities Dealers Exchange.
• The defendant accumulated 51,445 shares of PDA stock and liquidated them over nine days in June 1993. In a voicemail, he told Bravo he would short this stock because he knew it was going down.
• A PDA employee accessed the voicemail by correctly guessing the password. The employee recorded this particular voicemail conversation and referred the matter to an Assistant US Attorney.
• Subsequently, the Assistant US Attorney referred the matter to the FBI, which then pressed charges for insider trading.

Prominent Arguments by the Counsels

• The defendant’s counsel submitted that the prosecution’s evidence is derived from an illegal wiretap. Therefore, the trial court should exclude it from the scope of the trial. The information that the defendant possessed was not material. In a conviction for insider trading, it would require the use of insider information and not its mere possession.

Opinion of the Bench

• The voicemail recording contained only limited information about the incident.
• However, the recording contains forward-looking information that could potentially constitute material information for an insider trading conviction.

Final Decision

• The court rejected the defendant’s appeal and challenge to the District Court’s state-of-mind instruction.

Khilansha Mukhija, an undergraduate student at the Institute of Law, Nirma University Ahmedabad, and Ritesh Karale, an undergraduate student at Maharashtra National Law University, Mumbai, prepared this case summary during their internship with The Cyber Blog India in January/February 2024.