United States v. McDermott
245 F.3d 133 (2001)
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Rule of Law:
A defendant is not liable for a single, overarching conspiracy if they agreed to a criminal scheme with only one co-conspirator, who then, without the defendant's knowledge or reasonable foreseeability, extended the scheme to a third party.
Facts:
- James J. McDermott was the CEO and Chairman of Keefe Bruyette & Woods (KBW), an investment bank specializing in bank mergers.
- Around 1996, McDermott, who was married, began an extramarital affair with Kathryn Gannon, an adult film actress.
- During their affair, McDermott provided Gannon with numerous stock recommendations based on information he possessed as CEO.
- Unbeknownst to McDermott, Gannon was simultaneously having an affair with another man, Anthony Pomponio.
- Gannon passed the stock recommendations she received from McDermott on to Pomponio.
- McDermott had no knowledge of Pomponio's existence or of Gannon's relationship with him.
- Using the information from McDermott, Gannon and Pomponio executed stock trades that earned them approximately $170,000 in profits.
Procedural Posture:
- The U.S. government indicted James McDermott, Kathryn Gannon, and Anthony Pomponio in the United States District Court for the Southern District of New York.
- McDermott was charged with conspiracy to commit insider trading and several counts of substantive insider trading.
- McDermott and Pomponio were tried jointly before a jury.
- The jury found McDermott guilty on the conspiracy count and the substantive insider trading counts.
- The district court entered a judgment of conviction against McDermott and sentenced him to eight months' imprisonment, a fine, and supervised release.
- McDermott (appellant) appealed his conviction to the United States Court of Appeals for the Second Circuit, challenging the sufficiency of the evidence and alleging trial prejudice.
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Issue:
Does a defendant join a single conspiracy to commit insider trading when he agrees to provide material, non-public information to one person, who then, without the defendant's knowledge, provides that information to a third party?
Opinions:
Majority - Oakes, Senior Circuit Judge
No. A defendant does not join a single, overarching conspiracy under these circumstances. The essence of conspiracy is the agreement, and to prove a single conspiracy, the government must show that each member agreed to participate in what they knew to be a collective venture. Here, the evidence only supported an agreement between McDermott and Gannon. There was no evidence McDermott knew of Pomponio or agreed to a broader scheme that included him. Citing its precedent in United States v. Carpenter, the court held that a conspirator's liability is limited to the scope of their original agreement and does not extend to a co-conspirator's separate actions with unknown third parties. The court rejected the government's argument to define conspiracy by its purpose rather than by agreement, and it found that it was not reasonably foreseeable that Gannon would pass the information to another lover, stating, 'We decline to hold as a matter of law that a cheating heart must foresee a cheating heart.' Therefore, the evidence was insufficient to support the single conspiracy conviction. However, the court found the circumstantial evidence was sufficient to support the substantive insider trading convictions, but it remanded for a new trial on those counts due to the prejudicial 'spillover' effect of trying McDermott jointly with Pomponio under a flawed conspiracy charge.
Analysis:
This decision reinforces the foundational principle that a conspiracy requires a meeting of the minds and a shared agreement among its members. It prevents the government from aggregating separate criminal schemes into a single conspiracy charge merely because they share a common actor or purpose. The court's holding clarifies the limits of conspiratorial liability under the 'reasonable foreseeability' doctrine, particularly in cases involving chains of distribution for contraband or information. By strictly adhering to the scope of the defendant's actual agreement, the case serves as a crucial check on the government's ability to prosecute 'hub-and-spoke' conspiracies without proving a connection or common purpose among the 'spokes.'
