The CFTC and Department of Justice Are The Same Party For A Hearsay Rule, Says the Seventh Circuit

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Explore:  CFTC DOJ Evidence Fraud Hearsay

David Sklena and Edward Sarvey worked together in the futures pit of the Chicago Board of Trade.

On April 2, 2004, between 7:31 and 7:38 in the morning, the government contends that the two men engaged in a conspiracy to commit commodities and wire fraud.

7776_share_markets.jpgSeven Minutes in April

April 2, 2004, it turns out, was a bad day. Thirty-five seconds into 7:31 a.m. the market price for Five-Year Note futures dropped in response to new unemployment numbers.

That price drop triggered sell orders - it required Sarvey to sell 2,474 of his customer's futures contracts at the best price he could find.

At 7:37, Sarvey sold 2,274 contracts to Sklena at a lower-than-market price. Sklena sold back 485 of them for a slightly higher, but still below-market price.

Both men then turned around and sold the contracts they had purchased for a market price on the open market. Skelna's sales brought in $1.6 million. Sarvey took in $350,000.

During the time that the two men made their below-market and off-market trades, others on the trading floor noticed the two men were huddled together talking. One has the impression that their conversation appeared almost conspiratorial.

The CFTC Investigates

They were investigated by the Commodity Futures Trading Commission (the CFTC for those in the know). The CFTC filed a civil complaint against them for making non-competitive trades.

As a part of that case, the CFTC took lengthy depositions from both men.

The Criminal Charges

The two men were charged in federal court with making noncompetitive trades, and conspiracy to commit wire and commodities fraud.

Before trial, Mr. Sarvey died. Because he died, the Department of Justice no longer prosecuted him.

As a part of his defense, Mr. Skelna wanted to use Mr. Sarvey's deposition testimony from the CFTC matter.

The district court said no - the deposition testimony was not admitted.

Mr. Skelna was convicted. He appealed, and in United States v. Skelna, the Seventh Circuit reversed and remanded based on the failure to admit Mr. Sarvey's deposition.

Hearsay and the Federal Government

The deposition is, of course, hearsay. Hearsay is generally not admissible. However, there are exceptions.

One exception is Federal Rule of Evidence 804(b)(1):

"[t]estimony that [(A)] was given as a witness at a . . . lawful deposition, whether given during the current proceeding or a different one; and [(B)] is now offered against a party who had . . . an opportunity and similar motive to develop it by direct, cross-, or redirect examination" may be admitted where the witness has since become unavailable.

So, 804(b)(1) applies if the CFTC is the same party as DOJ for the purpose of the deposition and if the CFTC and DOJ had a similar motive between the deposition and later trial use of the testimony.

The Seventh Circuit was comforted that the CFTC and DOJ were close enough by the statutory framework:

the CFTC is an executive branch agency that, although possessing its own litigating authority, is required by statute to report on its litigation activities directly to the Justice Department (which as we said acts as the attorney for the United States). See 7 U.S.C. § 13a-1(a), (f)-(g). This statutory control mechanism suggests to us that, had the Department wished, it could have ensured that the CFTC lawyers included questions of interest to the United States when they deposed Sarvey.

The statutory structure and the way the attorneys were acting gave the court of appeals comfort that the CFTC and DOJ were the same party for Rule 804(b)(1) purposes:

the CFTC and the Department of Justice play closely coordinated roles on behalf of the United States in the overall enforcement of a single statutory scheme. Their interdependence is memorialized in the statute. Perhaps the point would be even more clear if the Department had litigating authority for the agency, as it often does, but we decline to hold that this is the sine qua non for finding that the United States and one of its agencies are in substance the same party. Functionally, the United States is acting in the present case through both its attorneys in the Department and one of its agencies, and we find this to be enough to satisfy the "same party" requirement of Rule 804(b)(1).

Moreover, the court of appeals concluded that DOJ and the CFTC had a similar motive:

Both were investigating the same underlying conduct with an eye to taking enforcement action, and so they shared the same motive to find out what went on. In fact, aside from the Department's need to prove the jurisdictional fact of the use of the wires, the agency and the Department alleged and needed to prove the same allegations, as a comparison of the CFTC's civil complaint and the indictment demonstrates. Furthermore, although the CFTC proceeding was civil in nature and the present prosecution criminal, the deterrent effect of a large civil penalty (like the one that the court ultimately imposed against Sklena) can be similar to that of a criminal sentence.

The Seventh Circuit then found that the error was not harmless. It vacated Mr. Skelna's conviction and remanded for a new trial.