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United States v. Wang

United States District Court, S.D. California

April 29, 2015

UNITED STATES OF AMERICA, Plaintiff,
v.
JING WANG, Defendant.

ORDER

WILLIAM Q. HAYES, District Judge.

The matter before the Court is the objection by Defendant to the amount of gain resulting from insider trading pursuant Section 2B1.4 of the United States Sentencing Guidelines in Paragraphs 17, 21, 23, 26, and 29 of the presentence report. (ECF No. 66 at 6-10). The presentence report concludes that a 12 level increase is warranted on the grounds that "the gain resulting from the insider trading is more than $200, 000 [in this case $244, 167 pursuant to U.S.S.G. §2B1.1(b)(F)(G)]." (ECF No. 63 at 12). The presentence report calculates the gain using the price at the time of sale minus the price at the time of purchase to compute gain for each of the three insider trades detailed in the offense conduct.[1]

Defendant does not dispute the purchase prices, sale prices, or the gain at sale from the three trades using insider information in this case. Defendant asserts that the proper calculation of gain is the difference between the purchase price and the value of the stock after the insider information is made public, an approach used by the Securities and Exchange Commission in civil insider trading cases, referred to as the "market absorption approach." Defendant contends that the total gain for the three insider trades using the market absorption approach is $164, 231.12[2] which results in an increase of 10 levels pursuant to U.S.S.G. §2B1.1(b)(F).

Defendant contends that the calculations in the presentence report do not accurately represent the amount of gain that resulted from trading on the basis of material, nonpublic information. Defendant contends that the approach used in the presentence report includes gain or loss resulting from holding the securities after the insider information is made public and punishes conduct unrelated to the criminal wrongdoing. Defendant Wang contends that the market absorption approach accurately represents the amount of gain that resulted from the criminal conduct of insider trading.

The Government contends that the market absorption approach ignores the fact that Defendant maintained a fraudulent advantage over ordinary investors by continuing to own illegally acquired stock. The Government asserts that the Defendant continued to violate Qualcomm policies by holding and then later selling his illegally acquired shares. The Government asserts that Defendant has not provided evidence to support his claim that the market had absorbed the insider information.

APPLICABLE LAW

Section 2B1.4(b)(1)of the United States Sentencing Guidelines Insider Trading states: "If the gain resulting from the offense exceeds $5, 000, increase by the number of levels from the table in §2B1.1 (Theft, Property Destruction, and Fraud) corresponding to that amount." The Commentary to Section 2B1.4 states:

Background : This guideline applies to certain violations of Rule 10b-5 that are commonly referred to as "insider trading". Insider trading is treated essentially as a sophisticated fraud. Because the victims and their losses are difficult if not impossible to identify, the gain, i.e., the total increase in value realized through trading in securities by the defendant and persons acting in concert with the defendant or to whom the defendant provide inside information, is employed instead of the victims' losses.

U.S.S.G. § 2B1.4 Commentary.

In United States v. Mooney, 425 F.3d 1093 (8th Cir. 2005), Mooney was the vice president of underwriting for United Healthcare Corporation. Mooney opened a margin account in 1990 at a brokerage house and used it solely to invest in United stock. In 1995, United entered into negotiations to acquire Metra. During the due diligence inquiries, Mooney directed his stockbroker to sell his United stock and used part of the proceeds to purchase call options in United stock. Mooney subsequently sold his call options at a profit months after the public announcement of United's acquisition of Metra. Mooney was found guilty of "knowingly devising and engaging in a scheme to defraud United and its shareholders through his[] sale of United common stock and his subsequent purchase and sale of United call options, all while in possession of material nonpublic information concerning United's negotiations to acquire Metra." Id. at 1098.

At sentencing, the district court found that the gain resulting from the offense was the amount realized by the sale of Mooney's United call options. On appeal, Mooney asserted that a market absorption approach should be borrowed from civil insider trading cases to interpret the guidelines. Mooney asserted that the market would have reasonably absorbed his insider information two days after United announced its Metra acquisition well before his eventual sale of the call options. The Government opposed this approach asserting that this "standard to measure gain is inherently speculative and would require the sentencing court to identify the point at which material nonpublic information is fully assimilated by the market." Id. at 1099.

The Court of Appeals concluded that "the guidelines refers to the defendant's gain, not to market gain, and it ties gain to the defendant's offense. It speaks of gain that has resulted, not of potential gain." Id. at 1009. The Court of Appeals found that the civil law theory presents an imprecise standard particularly inappropriate in the criminal context and concluded that the commentary makes clear that gain is the total profit actually made from a defendant's illegal securities transactions." Id. at 1100.

In dissent, Judge Bright explained that the offense referenced in Section 2B1.4 "is not the purchase of stock itself, but the use of a manipulative or deceptive contrivance in connection with the purchase. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10(b)-5." Id. at 1106. Judge Bright concluded that the "gain resulting from the offense' is not the gain resulting from the purchase. It is rather the gain resulting from the deception." Id. Judge Bright concluded that the interpretation of the guidelines adopted by the majority did not adequately provide uniformity of sentences for similarly situated defendants. Using an example of three individuals who bought stock at the same time, with the same insider's knowledge at the same price, but held the stock for different periods of time after the insider information was publicly disclosed resulting in different gain after sale, Judge Bright explained:

Larry, Moe, and Curly committed the same crime, with the same effect on the market. If the "gain resulting from the offense" were the gain from the deception, the Guidelines would suggest the same increase (of two levels) over the base offense level for Larry, Moe, and Curly. See U.S.S.G. § 2B1.4; § 2B1.1(b). On the court's interpretation, however, Larry would receive a two-level increase, for a $10, 000 gain, Moe a six-level increase for a $45, 000 gain, and Curly no increase at all, because he lost money on the purchase. See id. If these increases were applied to a base offense level of 17 for a defendant with a criminal history category of I, as in Mooney's case, they would translate into additional minimum prison time of six months in Larry's case, a year and ten months in Moe's case, and no additional time in Curly's case. As I have noted above, the court's interpretation means unequal justice for equal crimes.
As the Supreme Court has recently said, the basic purpose of the Guidelines "was to move the sentencing system in the direction of increased uniformity, " a uniformity that consists of "similar relationships between sentences and real conduct[.]" Booker, 125 S.Ct. at 761. It is unreasonable to apply the Guidelines in a way that would lead to such disparate sentences for similarly situated defendants whose real conduct was identical. Such an application would create a ...

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