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United States of America v. David G. Sklena

August 23, 2012

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
DAVID G. SKLENA, DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 09 CR 302-2--Samuel Der-Yeghiayan, Judge.

The opinion of the court was delivered by: Wood, Circuit Judge.

ARGUED JANUARY 13, 2012--

Before POSNER, WOOD, and HAMILTON, Circuit Judges.

In March 2009, David Sklena and his co-defendant Edward Sarvey were charged with seven counts of wire and commodity fraud, as well as two counts of noncompetitive futures contract trading. Sarvey died before the start of his trial, but Sklena went to trial. There he sought to use Sarvey's deposition before the U.S. Commodity Futures Trading Commis- sion (CFTC) as evidence of his innocence, but the district court excluded it as inadmissible hearsay and eventually convicted Sklena of seven of the nine charged counts. Sklena now appeals. He argues that the government's evidence was insufficient to support his convictions, and in the alternative, that the district court abused its discretion by excluding Sarvey's deposition testimony. Although we are satisfied that the government's evi- dence was sufficient, we conclude that the district court erred by excluding Sarvey's previous testimony. We therefore reverse Sklena's convictions and remand for further proceedings.

I

In April 2004, Sklena and Sarvey were floor traders in the Five-Year Treasury Note futures pit at the Chicago Board of Trade (CBOT). At that time, Sklena was just a "local," which means that he was authorized to trade only on his own behalf, whereas Sarvey was a "broker" and could therefore trade for himself as well as for his customers.

April 2, 2004, turned out to be a busy day at the CBOT: the price of the Five-Year Note futures fluctuated wildly, resulting in what was, in Sklena's opinion, "the busiest day in the history of the [CBOT]." It was on this day that Sarvey and Sklena executed the series of transac- tions that form the basis of this criminal prosecution. Everything happened between 7:31 and 7:38 in the morn- ing; even seconds counted, and so we include them in this account. At 7:31:35 the market price for Five-Year Note futures fell to 111.050, apparently in response to unemployment statistics that had just been released. This was a price that triggered a series of sell stop orders, which obligated Sarvey to sell 2,474 of his customers' contracts at the best available price. Over the course of the next few minutes, the price began to rise again. This was when, according to the government, Sklena and Sarvey conspired to sell Sarvey's customers' contracts noncompetitively. At about 7:37, other traders noticed that Sklena and Sarvey were engaged in a private con- versation while the rest of the pit was reacting to the volatile market conditions. Then, at 7:37:27, Sarvey sold 2,274 contracts to Sklena at a price of 111.065 each, and Sklena immediately sold 485 of those contracts back to Sarvey at 111.070. Both of these prices were well below the prevailing market price, and so when Sklena and Sarvey resold these contracts openly in the pit over the course of the next seven minutes, they were able to reap a healthy profit. Sklena's sales of his remaining 1,789 contracts netted him over $1.6 million, while Sarvey earned at least $350,000 from the sale of his 485 contracts.

In January 2008, the CFTC filed a civil complaint against Sarvey and Sklena, alleging that the two "engaged in a series of non-competitive trades" that defrauded customers out of over $2 million. During discovery, the CFTC took lengthy depositions from both Sarvey and Sklena regarding these trades, but its civil enforcement action was temporarily stayed during the pendency of the criminal proceedings that underlie this appeal. (The civil charges against Sarvey were dis- missed after his death, and the District Court for the Northern District of Illinois granted the CFTC's motion for summary judgment against Sklena in February 2012. See CFTC v. Sarvey & Sklena, No. 08 C 192, 2012 WL 426746 (N.D. Ill. Feb. 10, 2012). No appeal was taken from that judgment.)

On March 31, 2009, a grand jury indicted Sklena on siX counts of wire fraud, one count of commodity fraud, and two counts of noncompetitive futures contract trading. Sarvey was charged with the same offenses, as well as with two additional counts of noncompetitive futures trading, but as we said, he passed away before his trial could begin. The Department of Justice proceeded with its prosecution of Sklena and, after a bench trial in October 2010, the district court convicted Sklena on seven counts. He now appeals.

II

We begin with Sklena's contention that the govern- ment's evidence is insufficient to sustain his convictions for wire and commodities fraud. We review this de novo, drawing all inferences in favor of the prosecution. United States v. Speed, 656 F.3d 714, 717 (7th Cir. 2011). Sklena argues that the government failed to prove that he knew he was purchasing contracts that belonged to Sarvey's customers, thereby defrauding those customers, as op- posed to purchasing contracts from Sarvey's own account and thus merely engaging in noncompetitive trades. The government, however, contends that it has made its case by at least one of three ways. First, it con- tends that it has proved that Sklena actually knew that he was trading in customer contracts. Second, it argues that even if Sklena did not actually "know" Sarvey had sold him customer contracts, he is nevertheless liable because he consciously avoided such knowledge. Finally, it argues that Sklena may be liable for Sarvey's fraud under Pinkerton v. United States, 328 U.S. 640 (1946). Although the evidence supporting the contention that Sklena had actual or constructive knowledge of the owner of the futures contracts at issue is thin, we are satisfied that his conviction may be sustained under Pinkerton.

A

The district court's finding that Sklena actually knew that Sarvey was selling him customer contracts stands or falls on the following evidence. First, in response to a question at his CFTC deposition about Sarvey's customers, Sklena noted that Sarvey did not receive any complaints from his customers about the sale price that they received. Because "Sklena did not answer the question by stating that there w[ere] no customers in- volved," the district court inferred that Sklena must have known that the opposite was true--that is, that he was buying customer contracts. Second, because Sklena oc- casionally referred to Sarvey as "the broker next to him," the district court concluded that Sklena knew that Sarvey was selling on behalf of his customers (emphasis added). (As noted above, brokers may sell on behalf of either themselves or customers, while locals may trade only on behalf of themselves).

If this were all the government had, we would probably say that it is not enough. An inference based on what Sklena did not say, together with Sklena's accurate short- hand reference to Sarvey as a "broker,"does not prove beyond a reasonable doubt that Sklena knew who Sarvey was acting for, especially given the fact that the CFTC itself has blurred the distinction between brokers and locals. See Press Release, U.S. Commodity Futures Trading Commission, CFTC Charges Two Chicago Board of Trade Floor Brokers with Defrauding Customers Out of More Than $2 ...


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