Merrill Lynch ‘squawk-box’ brokers seek retrial, claim new evidence

A former broker at Merrill Lynch & Co. and Citigroup Inc. convicted of selling access to his brokerages' internal “squawk boxes” asked a judge to throw out his conviction and others because prosecutors hid evidence of their innocence.

A former broker at Merrill Lynch & Co. and Citigroup Inc. convicted of selling access to his brokerages’ internal “squawk boxes” asked a judge to throw out his conviction and others because prosecutors hid evidence of their innocence.

Kenneth Mahaffy Jr. and five co-defendants found guilty last year asked U.S. District Judge John Gleeson to cancel their convictions, throw out the indictment or grant them a new trial. Gleeson heard oral arguments today in Brooklyn, New York. He hasn’t said when he will rule.

Lawyers for the men claim federal prosecutors withheld 27 transcripts of testimony from witnesses in a related civil lawsuit brought by the U.S. Securities and Exchange Commission. Mahaffy’s lawyer said he discovered the documents in December, four days after the ex-broker was sentenced to two years in prison.

“The revelations contained in the transcripts are beyond astonishing, and the government’s failure to disclose them at any point over the past five years and through two trials is unfathomable,” the defense attorney, Andrew Frisch, said in a court papers.

Mahaffy was one of three brokers convicted last April of conspiring to sell day traders access to internal squawk boxes used to discuss pending trades. Three former day-trading executives at New York-based A.B. Watley Group Inc. were also convicted.

Gleeson has allowed the defendants, who were sentenced in December, to remain free during an appeal.

The first trial in the case in 2007 ended with a deadlocked jury on one conspiracy count and not-guilty verdicts on 12 other charges.

Ultimately convicted in a retrial were brokers Mahaffy, who worked at Merrill Lynch & Co., now a Bank of America unit, and at Citigroup; David Ghysels Jr., formerly of now bankrupt Lehman Brothers Holdings Inc.; and Timothy O’Connell, formerly of Merrill Lynch, who was ordered to serve four months’ home detention.

From Watley, those convicted were Robert Malin, former president, sentenced to four years in prison; Keevin Leonard, a former supervisor of proprietary trading, 34 months; and Linus Nwaigwe, a former compliance director, one year and one day plus six months’ home detention.

Defense lawyers argued that the government withheld the fact that more than 10 brokerage employees said in depositions that what was said on the squawk boxes wasn’t confidential. That information would have been useful to Mahaffy at the trial, his lawyer wrote.

“Virtually every element of his defense was supported by testimony of witnesses previously deposed by one of the prosecutors,” Frisch wrote to Gleeson.

The discovery of evidence that might have led to an acquittal may provide grounds for a new trial. Judges may also overturn verdicts if prosecutors are found to have withheld evidence of a defendant’s innocence.

Prosecutors said the transcripts wouldn’t have altered the verdict. The SEC testimony wasn’t favorable to the defendants, was immaterial, and wouldn’t have cleared them of wrongdoing, the government said.

“Much of this supposed new evidence is either irrelevant or cumulative, and nothing about it could have led to an acquittal,” Justice Department attorneys James E. McMahon and Jonathan Green wrote in court papers.

Dismissing the indictment isn’t warranted, because there is no evidence of intentional prosecutorial misconduct, the government said.

“The four Merrill witnesses cited by the defense provided testimony that was consistent with the government’s theory and evidence regarding the confidentiality of squawks,” prosecutors said.

“This testimony established that, as the government argued at trial, squawks were viewed at the brokerage firms as similar to patient Social Security numbers at a doctor’s office.” prosecutors argued in court papers. “They can be communicated, but only for a proper purpose.”

Frisch and Mahaffy began inspecting 65 cartons of documents in December, including one filled with transcripts of depositions taken by the SEC, the attorney said in court papers.

None of the transcripts from depositions of witnesses was given to Mahaffy, Frisch wrote.

“There are witnesses who testified at the SEC that squawks were not confidential, and that squawkers were trained to protect client confidentiality in broadcasting,” Frisch wrote. “There is testimony that it was acceptable to disseminate squawks to clients even by phone.”

Frisch also said one of the SEC’s lawyers worked as a prosecutor in the first trial and should have known to provide Mahaffy with the depositions. John D. Heine, an SEC spokesman, didn’t immediately reply to a voice-mail message left at his office seeking comment.

The case is U.S. v. Mahaffy, 05-cr-00613, U.S. District Court, Eastern District of New York (Brooklyn).