First Circuit Upholds Securities and Wire Fraud Convictions Against Former State Street Vice-President Ross

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In United States v. McLellan, the First Circuit upheld securities and wire fraud convictions against former State Street Vice-President and head of the Department of Transitional Services Ross McLellan (“McLellan”). McLellan was convicted by a jury in the United States District Court for the District of Massachusetts on charges of securities fraud, wire fraud, and conspiracy to commit securities and wire fraud. During his tenure as head of the transitional management group, McLellan served as the overseer of State Street’s transition management program which assisted large institutional investors in restructuring their portfolios as they transitioned from one asset manager to another. At trial, the prosecution presented evidence that McLellan designed a scheme to promise low commissions to potential clients, then embedded large, hidden commissions into the price of the securities when reporting the prices to his clients.

On appeal, McLellan challenged the insufficiency of the evidence supporting the securities fraud conviction. Specifically, he argued that Securities and Exchange Commission regulation 17 C.F.R. § 240.10b-5 (“Rule 10b-5”) does not prohibit the type of misrepresentation he made to potential clients. Under Rule 10b-5d, it is illegal to-among other things-engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security. McLellan contended that his misrepresentation only pertained to inducing potential clients to choose State Street as a transition manager, and there was no evidence that the up-front misrepresentation impacted any client’s decision to buy or sell any securities. The Court then focused its inquiry on whether the allegedly fraudulent scheme was sufficiently close to the purchase or sale of securities to warrant the application of Rule 10b-5.

Despite McLellan’s argument, the Court was unpersuaded by McLellan’s reasoning. It stated that the clients delegated nuanced decisions about trading securities to State Street as the transition manager-decisions State Street could not have made without first inducing the clients under a false pretense. Thus, McLellan’s misrepresentation of the amount his clients would pay, or the value they would receive, for the securities he traded on their behalf warranted a finding a securities fraud within the meaning of Rule 10b-5.

Relatedly, McLellan further argued that the district court erred in instructing the jury regarding the “in connection with” phrase in Rule 10b-5. The District Court judge instructed the jury that the “in connection with” requirement was satisfied if they found McLellan’s misrepresentations or deceit had some relationship to the individual sales or purchases. McLellan alleged that this instruction was too broad, and the judge should have used a narrower instruction that required the jury to find that the initial misrepresentation was material to an investor’s decision to buy or sell a security. The Court disagreed.

Even assuming that the instructions were overly broad and after reviewing the record at trial, the court stated that any potential error would be harmless beyond a reasonable doubt if the jury could not have found McLellan guilty without making the proper factual findings. Here, the evidence showed that prosecution presented evidence that McLellan created a scheme to induce clients with the promise of low commissions only to hide larger commissions in the price of the securities. As mentioned above, this scheme materially impacted the trading decisions of State Street’s clients; thus, the jury could have concluded that McLellan violated Rule10b-5 even if the judge gave the narrower instruction.

Finally, McLellan argued that the court should overturn his wire fraud conviction because the federal wire fraud statute, 18 U.S.C. § 1343, does not apply extraterritorially-that is, the jury was required to find a domestic application in order to convict him under § 1343. The court did not comment on whether §1343 applies exterritorialy because the facts were sufficient to establish that McLellan used domestic wires in order to carry out his fraudulent scheme. Thus, the Appeals Court found that the District Court had not erred in refusing to give the domestic application jury instruction.


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