Court: District Court, S.D. New York; April 18, 2017; Federal District Court
On January 19, 2017, a jury convicted Stefan Lumiere of wire fraud, securities fraud, and conspiracy related to a fraudulent scheme at Visium Capital Management, which misled investors about the performance of the Visium Credit Opportunities Fund (the "Credit Fund"). Lumiere, a senior analyst and portfolio manager, participated alongside senior portfolio manager Christopher Plaford and trader Jason Thorell in deceiving investors over a two-year period, from 2011 to 2013, as the fund's performance declined. Plaford testified against Lumiere after pleading guilty, while Thorell testified under immunity.
The Credit Fund, which once managed up to $500 million and had $8 billion in total assets under management, began to struggle in 2011. To maintain investors' confidence and their own compensation, Plaford and Lumiere manipulated the fund’s net asset value (NAV) and liquidity reports, which were critical metrics for investor assessments. They influenced the NAV calculations by providing manipulated security prices to the back-office Operations group, which relied on this information for their monthly reporting. The scheme aimed to conceal the increasing proportion of illiquid "Level 3" assets, which investors preferred to avoid. Lumiere's motion for a new trial was denied.
Operations obtained market prices from a third-party pricing source, such as Markit, and compared these prices with Visium’s in-house valuations. To use an in-house price for calculating the Net Asset Value (NAV) instead of the third-party price, the investment team needed to provide independent verification to demonstrate that the in-house price was fair. A quote from an outside broker agreeing to transact at the in-house price was sufficient for this override. Starting in mid-2011, Plaford and Lumiere engaged outside brokers, specifically Scott Vandersnow and Jonathan Brook, to provide false assurances regarding security price quotes, despite these brokers being personal friends of Lumiere and lacking objectivity due to their firms not trading the relevant securities. They later involved a third broker, Matthew O’Callaghan, similarly aligned with their corrupt practices. Lumiere and his associates dictated the prices to the brokers, who then provided sham verifications without independent checks. This fraudulent scheme involved creating inflated prices for poorly performing securities at month-end, with Plaford preparing spreadsheets of these prices for submission to Operations. Lumiere would direct brokers to confirm these prices, often while still on the phone, with no disagreement from the brokers over two years of transactions. These falsified quotes were submitted to Operations as documentation backing the inflated prices, enabling Lumiere and his co-conspirators to grossly inflate the NAV.
Using broker quotes as a back-up allowed the securities, often thinly traded, to avoid being classified as illiquid Level 3 assets. Lumiere, at times, deviated from this method by purchasing securities at inflated prices to provide a 'real-world' transaction for month-end pricing, a tactic known as 'painting the tape.' He sometimes transmitted fabricated prices to brokers via flash drives containing only spreadsheets of prices. For several months, Thorell procured the fake broker quotes at Lumiere's direction. However, suspicion led to Lumiere's termination in April 2013 due to poor performance, after which the investment team was removed from the pricing process, causing the scheme to collapse. The trial presented overwhelming evidence, including extensive documentation, audio recordings, and credible testimonies from three conspirators. The central trial issue was whether Lumiere had a good-faith belief in the inflated securities prices used to enhance the NAV.
Under Rule 33(a), a court may vacate a judgment and grant a new trial if justice requires it, particularly if it would be a manifest injustice to uphold a guilty verdict. Lumiere alleged evidentiary errors, prosecutorial misconduct, and flawed jury instructions, most of which he did not contest at trial. His claims are subject to the 'plain error' review standard, which requires that any identified errors substantially affect rights and the integrity of judicial proceedings. Lumiere challenged the admission of Thorell’s testimony interpreting a recording as improper lay opinion, arguing it did not meet the criteria for such testimony under Rule 701. The Government played excerpts of a recording from January 2014, highlighting a conversation where Lumiere discussed the misrepresentation of values, indicating awareness of misconduct.
Stefan Lumiere indicated that since 2011, he has been intentionally underreporting figures to manipulate earnings for future benefit, engaging in significant mismarking of financial data, particularly relating to ATI and a Chi-named entity. Jason Thorell, during direct examination, clarified that when Lumiere referred to "Chris," he was speaking about their former boss, Plaford, and himself. Although Lumiere raised objections to Thorell's testimony being inadmissible, claiming it lacked a rational basis and that "Chris" was not a necessary reference for the jury, the court found Thorell's testimony to be properly admitted. Thorell had firsthand knowledge of the conversation and the conspiracy, having participated in the mismarking scheme and reported it to management and the SEC. His insights were deemed relevant and beneficial to the jury's understanding, particularly since the conversation utilized shorthand that required contextual knowledge to interpret. Thorell's role in the conspiracy and his actions, such as sending documents under his name to conceal Plaford’s involvement, further substantiated his testimony. Ultimately, the court upheld the admission of Thorell's interpretative testimony as it was crucial for understanding the events discussed.
Lumiere contends that Thorell’s testimony interpreting 'Chris' to refer to both Plaford and Lumiere was inadmissible due to its prejudicial impact under Fed. R. Evid. 403. However, the objection was not raised at trial, and the court found it meritless, noting Thorell's role as a participant in the fraudulent scheme justified his testimony as relevant rather than unfairly prejudicial. Lumiere further argues that Thorell's out-of-court statements should be excluded as hearsay because the Government reportedly failed to prove their co-conspirator status. Under Fed. R. Evid. 801(d)(2)(E), such statements can be admitted if a conspiracy is established by a preponderance of evidence, which may include the out-of-court statements themselves. The court determined that sufficient evidence existed to establish the conspiracy between Thorell and Lumiere, as Thorell detailed their collaborative actions, including Lumiere providing documentation and directing Thorell to solicit sham price quotes from brokers. The argument that Thorell's reluctance to label their actions as a 'criminal enterprise' negated his participation was dismissed as frivolous. Additionally, Lumiere argued that the court erred in excluding portions of a recording involving Thorell and Lumiere that he claimed would demonstrate his good faith, invoking the rule of completeness under Fed. R. Evid. 106. The Government had only introduced a limited segment of the recording, despite its lengthy full version containing potentially exculpatory material.
The rule mandates the admission of statements or recordings necessary to explain or provide context for admitted evidence, ensuring a clear understanding for the trier of fact. However, it does not require the inclusion of irrelevant or non-explanatory portions. Courts have discretion to exclude a defendant's post-hoc justifications for actions. In this case, Lumiere contended that the court wrongly excluded parts of a recording that provided context by showing his later realization of discrepancies in Plaford's explanations regarding security pricing. Lumiere claimed these portions were essential to prevent misleading the jury. However, the government introduced portions of the recording to demonstrate the mechanics of a mismarking scheme without needing the excluded context, which were seen as attempts by Lumiere to diminish his culpability. The court found that the excluded statements did not clarify the admitted facts and were merely self-serving justifications, thus falling outside the scope of Rule 106.
The Thorell-Lumiere recording's additional portions are deemed inadmissible hearsay and do not satisfy the rule of completeness. Lumiere contends that the entire recording should have been admitted under Rule 106, citing it as evidence of his good faith and his intent to report misconduct under a whistleblower provision. However, this argument fails because the entire recording was never presented, and much of the transcript is largely irrelevant and constitutes post-hoc explanations, which are inadmissible hearsay.
Lumiere also argues that the Government "opened the door" to introducing the full recording when Thorell testified that he understood "Chris" to refer to both Lumiere and Plaford. The doctrine of curative admissibility allows for the introduction of otherwise inadmissible evidence if it is necessary to counteract a false impression created by the opposing party's evidence. However, this argument is also unpersuasive, as Lumiere never sought to admit the full recording under this rationale. Moreover, even if he had, the recording would remain inadmissible under this doctrine because Thorell's testimony was properly admitted and does not justify the introduction of additional inadmissible evidence. Instead, the recording supports Thorell’s testimony of Lumiere and Plaford's joint involvement in the alleged wrongdoing, contradicting Lumiere's claim that it would clarify the reference to "Chris."
Lumiere's argument that a recording discussing extortion should be excluded as inadmissible propensity evidence is addressed under Federal Rule of Evidence 404. This rule prohibits the admission of evidence of prior bad acts to prove character or propensity to commit a crime, but allows it for purposes such as intent and knowledge. The Second Circuit adopts an inclusionary approach, allowing 'other act' evidence if it does not solely aim to show bad character and meets relevance and prejudice standards under Rules 403 and 402. Such evidence must be offered for a proper purpose, be relevant, and be more probative than prejudicial, with jury instructions provided upon request.
In this case, Lumiere contended that the extortion recording was irrelevant and prejudicial. However, the recording was deemed admissible as it was relevant to counter Lumiere's defense that he acted in good faith during the alleged conspiracy. The defense argued that Lumiere's meticulous record-keeping indicated honest behavior, while the prosecution used the extortion recording to demonstrate that Lumiere viewed these recordings as tools for manipulation, undermining his claim of good faith. The evidence presented suggested Lumiere might have recorded the conspiracy to threaten his co-conspirators, thus reinforcing the prosecution's argument against his innocence.
The court found that the recorded evidence regarding an extortion attempt was not unfairly prejudicial, as it merely presented an undeveloped idea with no further evidence provided. The Government's limited use of the recording aimed to counter the defense's claim that Lumiere's recordings indicated good faith. Unlike the graphic threats in United States v. Hodges, which involved severe prejudicial testimony, the extortion recording was a brief, non-violent idea that did not invoke jury bias. The court emphasized that the recording directly challenged Lumiere's assertion of innocence, providing a basis for the jury to infer guilty knowledge.
Lumiere contended that prosecutorial misconduct during rebuttal summation compromised his trial's fairness due to false statements regarding his good faith. The court evaluates prosecutorial misconduct based on its severity, the measures taken to address it, and the likelihood of conviction without it. Lumiere specifically criticized the Government's assertions that he did not demonstrate awareness of mismarking securities in the admitted recording. The court concluded there were no evidentiary errors or issues affecting the trial's fairness, thus upholding the conviction.
Lumiere argues that an error in the trial stems from the exclusion of much of the recording from evidence, leading the Government to assert that there was no evidence of his good faith, despite the excluded portions allegedly containing such evidence. The Court finds this argument frivolous, noting that the defense did not object to the Government's statements during summation or afterward. The Court deems the Government's comments appropriate rebuttals to the defense's claims of good faith. The defense's argument relies on the assumption that the Government should have accepted their interpretation of the excluded tapes, which the Court rejects. The Government maintains that the excluded recordings do not indicate good faith, and the Court finds no impropriety in the Government's rebuttal remarks. Furthermore, the Court considers the defense's interpretation of the excluded evidence as weak and unconvincing, asserting that even if some statements could be construed as evidence of a lack of awareness of fraud, they are fragmented and insufficient. Ultimately, Lumiere's motion for a new trial is denied.
Lumiere's endorsement of Plaford's methods was weak, leading the Government to reasonably infer that Lumiere recognized the inadequacy of Plaford's explanations regarding the mislabeling of securities. The focus on ATI was misguided, as multiple securities were involved; Lumiere's remark that “everything kind of made sense” in relation to ATI suggests a deeper awareness of wrongdoing. The Government argued that Lumiere's claims of good faith were unfounded, especially in light of his defense that he only learned of the misconduct later. This defense lacked factual support, as there was no recorded evidence of Lumiere’s awareness of the misconduct at the time it occurred. The Government’s rebuttal highlighted the absence of evidence supporting Lumiere's good faith, which was factually accurate. The prosecutor is entitled to respond to defense claims, and it would be unjust to prevent the Government from discussing the admitted evidence while allowing the defense to reference excluded material. Furthermore, the overwhelming evidence indicated that Lumiere was aware that mismarking securities was wrong, supported by his professional certifications that underscored his understanding of prohibited practices. Additionally, Visium's internal policies, which Lumiere was bound to follow, required fair and verifiable pricing practices, further contradicting his claims of innocence.
Lumiere had clear knowledge that mismarking securities was illegal and actively engaged in this practice over two years by enlisting small-time brokers to provide fictitious prices for securities they had no involvement with. He directed these brokers to repeat back prices he dictated, often in exchange for business referrals, indicating a significant lack of independence on their part. Lumiere's actions were further evidenced by his choice to communicate price requests via cell phone rather than in writing, and in some cases, he used flash drives to transmit extensive price demands, minimizing any paper trail. A recorded statement from Lumiere referred to his company's pricing practices as "fucking bullshit," supporting the assertion of his awareness of wrongdoing.
The prosecution argued that there was no evidence of Lumiere's good faith, which did not undermine the fairness of his trial or conviction. Lumiere contested the jury instructions on "conscious avoidance," claiming that the prosecution's case was based on actual knowledge of fraud, but this argument was rejected. The court clarified that a conscious-avoidance instruction is valid even if actual knowledge is claimed, as long as there is a factual basis for disputing knowledge. Evidence presented could allow a rational juror to conclude that Lumiere was consciously avoiding confirmation of his involvement in the fraud, justifying the jury instruction on this matter.
Lumiere challenges the jury instructions regarding the concept of conscious avoidance, arguing that the hypothetical examples presented led the jury to perceive the knowledge requirement as objective rather than subjective. Specifically, Lumiere contends that the instructions suggested the defendant had a duty to investigate further, which improperly imposed a burden on him. However, the court found these arguments meritless, emphasizing that the instructions clearly required the jury to determine whether the defendant was "aware of the high probability" of pricing fraud, thus affirming the subjective nature of knowledge. The court also noted that jury instructions should be considered in their entirety, which reinforced that the defendant bore no burden of proof. Consequently, Lumiere's motion for a new trial was denied.
Additionally, Lumiere cited cases where the Second Circuit found errors in admitting lay opinion testimony based on second-hand knowledge. However, the court distinguished these cases from the testimony provided by Thorell, asserting that Thorell's explanations of ambiguous references were valid and aligned with Second Circuit precedent. Lumiere further argued that the exclusion of certain statements was erroneous due to their proximity to government evidence. The court rejected this claim, maintaining that proximity is indeed relevant and citing a prior case that denied the admissibility of self-serving justifications as context. Thus, Lumiere's position lacked support, and the court proceeded to deny his appeal.
Lesniewski addressed the argument regarding the admissibility of statements based solely on their proximity, clarifying that proximity does not inherently determine the relevance of a statement's remoteness in providing necessary context. Lumiere's cited cases are distinguished on the grounds that the excluded evidence was essential to prevent misleading the jury. In *Phoenix Assocs. III v. Stone*, the exclusion of work papers was deemed erroneous as they clarified the financial statement. Similarly, in *United States v. Walker*, prior testimony about a bribe was improperly excluded, which fragmented the jury's understanding of the complete context. The excerpt further notes that the government made five statements in rebuttal summation, asserting that there was no evidence the defendant did not understand the implications of his actions. Lumiere's reliance on *Blueford* is countered by the acknowledgment that, unlike in that case, the government could reasonably argue the absence of good faith based on the unadmitted recording. Additionally, it is clarified that the conscious avoidance instruction was requested by the government, and Lumiere’s subsequent motion for an extension to investigate his trial counsel's effectiveness was denied for lack of a good-faith basis. Ultimately, the defendant’s counsel did not support this motion with relevant arguments.
