United States v. Bailey: Ninth Circuit Determines Rule 404(b) Does Not Bar Evidence of Additional Transactions

In United States v. Bailey, No. 13-50467 (9th Cir. Dec. 10, 2014) (Bailey II), the Ninth Circuit Court of Appeals affirmed the United States District Court for the Central District of California’s ruling admitting evidence of securities distributions other than those related to the specific unlawful sale alleged in the case. The district court ruling was the result of a retrial of an earlier conviction that was reversed and remanded by the Ninth Circuit in 2012 (Bailey I). 

In 2003, the SEC filed a civil complaint against Bailey alleging a violation of Rule S-8.  Bailey settled the lawsuit with no admission of liability. Then in 2004, Bailey was criminally charged for issuing stock to a third party (“Owens”) in violation of Rule S-8. In that case, Bailey I, the prosecution offered the civil complaint as evidence of “knowledge” and “intent.” The Ninth Circuit determined that the SEC’s complaint was not admissible under the Federal Rules of Evidence 404(b) because it was not sufficient to support a finding that Bailey had committed the other act. The case was remanded for a new trial. 

On remand, Bailey was convicted of selling unregistered securities.  Over Bailey’s objections, the district court admitted an itemized list of additional stock transactions between Bailey and Owens. On appeal, Bailey argued the district court abused its discretion by admitting evidence of additional securities distributions besides the two that resulted in the specific unlawful sales at issue. Bailey also contended the jury instructions did not accurately define the word “willfully” because the district court used a definition of “willfully” that allowed Bailey to be convicted without knowledge his conduct was unlawful.

In Bailey II, the Ninth Circuit determined Rule 404(b) did not apply because the evidence of additional transactions between Bailey and Owens was “inextricably intertwined” with the transactions at issue and provided context regarding Bailey and Owen’s relationship. Thus the district court did not abuse its discretion when it admitted the evidence at issue. The Ninth Circuit also explained that “willful” conduct does not require knowledge of illegality, and therefore Bailey’s challenge to the jury instructions failed. 

Accordingly, the Ninth Circuit Court of Appeals affirmed the district court’s ruling admitting evidence of securities distributions other than those related to the specific unlawful transactions.

The primary materials for the post are available on the DU Corporate Governance Website.