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Second Circuit Affirms Convictions of Defendants Who Traded On Press Releases Hacked From Major Newswires

In United States v. Korchevsky, the Second Circuit (Walker, Parker, Carney) affirmed two defendants’ conspiracy and securities fraud convictions over defendants’ myriad claims of error, which included challenges to the sufficiency of the evidence, including as to venue; and contentions that the government constructively amended the indictment, that the district court improperly instructed the jury on conscious avoidance, and responded to a jury note in impermissible fashion.  Despite a number of close calls, the Court rejected all of these arguments, as discussed below.


Defendant Vitaly Korchevsky was a hedge fund manager and investment advisor; Defendant Vladislav Khalupsky owned a trading company in Ukraine.  In 2010, Korchevsky was approached by two brothers, the Dubovoys.  The Dubovoys had access to a server holding pre-publication press releases containing important financial information:  they were working with Ukrainian hackers who would steal the press releases from three newswires’ electronic systems and store them on the server.  After the Dubovoys showed Korchevsky some of the press releases and Korchevsky agreed that they contained information that could be used to trade profitably, Korchevsky was given access to the server hosting the hacked information, and one of the Dubovoys opened and funded brokerage accounts in which Korchevsky could trade on his behalf.  Sometime later, the Dubovoys similarly gave Khalupsky access to the hacked releases, and created and funded brokerage accounts in which he could trade.  Korchevsky traded on the advance information in such hacked pre-publication press releases for more than four years; his trades reaped net profits of over $15 million, of which he received a percentage.  Khalupsky’s trading earned net profits of over $3 million, of which he, too, received a portion. 

Korchevsky and Khalupsky were indicted in 2015, in the Eastern District of New York; a superseding indictment in 2016, charging them with conspiracy to commit wire fraud, conspiracy to commit securities fraud and computer intrusion, conspiracy to commit money laundering, and substantive securities fraud.  They were convicted on all counts in July 2018, following a three-week trial.  Defendants raised a host of challenge on appeal:  (1) Korchevsky challenged the sufficiency of the evidence supporting his conspiracy and substantive securities fraud convictions; (2) Korchevsky argued that the government constructively amended the indictment or prejudicially varied from it; (3) both defendants argued that the court erred in instructing the jury as to conscious avoidance; (4) both defendants argued the evidence was insufficient to establish that venue was proper in the Eastern District of New York; and (5) Korchevsky argued the court erred in responding to a jury note.

The Second Circuit’s Decision

The panel dispensed with all of the claimed errors easily, and, with one exception, defendants’ arguments do not appear to have warranted more in-depth treatment.  As discussed below, however, the Court’s analysis of the district court’s response to a jury note suggests that a different outcome was possible.

As to insufficiency of the evidence on the conspiracy counts, Korchevsky’s argument hinged on the premise that individuals who do not know one another cannot conspire together.  While the panel recognized that the Second Circuit has vacated conspiracy convictions where a defendant was unaware he was part of a larger conspiracy, it emphasized established precedent holding that generally the government need not “prove that [a] defendant knew the identities of all the other co-conspirators,” and highlighted evidence that the defendants knew they were involved with a larger organization of conspirators.  The panel similarly explained that Korchevsky’s insufficiency arguments as to his securities fraud convictions were rooted in the mistaken premises that the government need prove he owed a fiduciary duty to investors (required for insider trading, but not for all forms of securities fraud), that the deception involved in the fraud needed to be directed at investors (it need only be “in connection with the purchase or sale of any security”), and that the use of stolen credentials to access one of the newswire’s systems did not constitute a “deceptive device or contrivance” (according to the panel, such use is “plainly ‘deceptive’”).  Some of these issues have been successful in other securities fraud contexts, but they were not found applicable here. 

The panel also found no merit in Korchevsky’s constructive amendment/prejudicial variance argument.  While Korchevsky maintained that the government introduced evidence of three categories of trades not identified in the superseding indictment—trades involving companies not specifically identified in that indictment; trades that took place after the time period in which most of the activity mentioned in the indictment occurred; and trades involving press releases from a newswire that was not the subject of a standalone securities fraud count—the court emphasized that the first two forms of evidence merely constituted additional examples of the same charged conduct, and that, as to the third, the newswire in question was identified as one of the victim newswires in the superseding indictment’s introduction and incorporated by reference elsewhere in the indictment.  Thus, the evidence did significantly, or even materially, differ from the indictment, as necessary to demonstrate a constructive amendment or prejudicial variance.  The precedent in this area of the law is not especially favorable to defendants, and the panel also found the doctrine inapplicable based on the facts presented here.

The panel deemed both defendants’ claim of instructional error wanting as well:  Defendants argued that there was no factual predicate for a conscious avoidance charge, that the instruction given improperly permitted the jury to convict them of aiding and abetting and participation in a conspiracy based on conscious avoidance, and that the instruction given presupposed Korchevsky had viewed stolen press releases, a fact he contested, and thereby prejudiced him.  But the panel readily concluded that an appropriate factual predicate for a conscious avoidance charge existed, based on evidence that both defendants received the press releases in a protected format that would have signaled the releases were obtained illicitly.  It also concluded that the instruction given was appropriate and would not have confused or misled the jury about the mens rea requirements for aiding and abetting and conspiracy in light of the court’s other instructions, nor presupposed any disputed fact, because the court expressly reiterated to the jury Korchevsky’s theory he had not knowingly or intentionally accessed stolen releases. 

Defendants’ venue argument also failed to persuade the panel, which explained that one of the ways the government could establish this element as to the securities fraud counts was through proof, by only a preponderance of the evidence, that it was foreseeable to defendants that an act in furtherance of the securities fraud would occur (and that such an act did occur) in the Eastern District.  The panel relied primarily on expert testimony that a number of defendants’ trades were consummated, or likely were consummated, with counterparties in the Eastern District.  The panel reasoned that this evidence, considered together with “the vast scope of the trading scheme and the defendants’ expertise as traders, cumulatively supports the inference that the defendants foresaw the existence of counterparties in the EDNY.”  Additionally, the panel pointed to evidence that one of Korchevsky’s brokerage accounts used to make the illicit trades employed a clearing agent located in EDNY, a fact that was clear on account opening documents and statements.  That evidence, in turn could support Khalupsky’s convictions as an aider and abettor:  no requirement existed that he need have aided and abetted the specific activity occurring in the relevant venue. 

Finally, the panel rejected the last claimed error, Korchevsky’s contention that the district court erred in responding to a jury note.  The note at issue (which was meant to clarify a prior note requesting communications to or from Korchevsky on any devices found in his possession) asked for “Korchevsky-Stargate-Dubavoy [sic] correspondence.”  “Stargate” referred to an email account that an iPad found in Korchevsky’s home had been used to access, according to a forensic report of the iPad the government introduced. That forensic report further showed that the Stargate email account had sent to itself four one-word emails, each containing an attachment (the attachments themselves could not be recovered).  The government argued that the jury could infer these emails attached stolen press releases Korchevsky read and relied on in his trading; Korchevsky argued that someone else accessed the Stargate account from this device.[1]  The court construed the jury’s note to request the forensic report and specifically the information about the Stargate account emails in the report, and sent the forensic report back to the jury with the page concerning these emails flagged, over the defense’s objection that this would endorse the government’s theory.  The panel largely sidestepped whether the court’s action amounted to its imprimatur of the government’s position, instead asserting that the jury’s note was “cryptic” and maintaining that district courts possess considerable discretion in construing such notes and in framing a response to them. 

On the particular facts of this case, the panel’s rejection of this claimed error probably was correct:  the Stargate emails referenced in the report appear to have been only material conceivably responsive to the jury’s note.  To be sure, the district court was faced with a challenging situation, subject to criticism however the note was addressed.  The panel’s analysis could be read to suggest that a court may properly construe a jury note in a manner that has the effect of endorsing one party’s construction of the evidence—without first requesting clarification or at least providing a limiting instruction—merely because the note is “cryptic.”  Jury notes are written by non-lawyers, sometimes in haste, and they are often ambiguous.  There is an understandable impulse when an unclear note is received for the trial judge not to ask the jury for clarification, or to interact much with the jury during its deliberations, lest the judge unintentionally signal something about the evidence or guilt or innocence.  Though the cases the panel relied upon emphasize the court’s broad discretion in considering and responding to jury notes, none stands for the proposition that answering a cryptic note without seeking clarification is an appropriate exercise of discretion.  One hopes that trial judges who read this decision will conclude that the better course in responding to an ambiguous request is to clarify the request, rather than to guess at what the jury may have meant. 

By Bonnie Robinson and Harry Sandick

[1] Although the panel’s decision does not mention this, circumstantial evidence connected the iPad to the Dubovoys.