Undue Process: The Government’s Prosecution of Billy Walters

BILLY WALTERS AWAITS SENTENCING AFTER CONVICTION ON CHARGES OF INSIDER TRADING

Judge Alex Kozinski has sat on the 9th U.S. Circuit Court of Appeals the past 32 years, including seven of which he served as Chief Judge. There is, arguably, no jurist on the federal bench — including the nine worthies on the U.S. Supreme Court — more well-versed on the subject of prosecutorial misconduct.

In 2015, Judge Kozinski authored a treatise on the subject, which was published in the Georgetown Law Journal. Were he to write an addendum, he might very well include as a textbook example the recent prosecution of William “Billy” Walters by the U.S. Attorney’s Office for the Southern District of New York.

Walters, 70, is a legendarily successful Las Vegas sports bettor worth “hundreds of millions of dollars,” as “60 Minutes” reported in 2011. He also is Chairman and Chief Executive Officer of The Walters Group, a Henderson, Nevada holding company whose assets include auto dealerships, golf resorts, real estate developments and various other business ventures.

Walters found himself the target of former U.S. Attorney Preetinder Bharara, a/k/a “Preet, not because the betting man somehow managed to fix a World Series or something sensational like that, but because Bharara was determined to nail the businessman on charges of insider trading.

The government’s “star” witness against Walters was Thomas Davis, the non-executive Chairman of the Board of Dean Foods, the nation’s second-largest dairy processor. In the case of United States of America v. Walters, the government alleged that Davis provided Walters “material, non-public information” not only concerning Dean Foods, but also Darden Restaurants, which had solicited Davis to become a director of the Fortune 500 company.

According to federal prosecutors, Walters used information provided by Davis to “execute profitable trades in Dean Food’s stock,” which earned Walters realized and unrealized profits of approximately $32 million, while avoiding losses of approximately $11 million. The Vegas legend’s trades in Darden stock earned him an additional $1 million in profits, according to prosecutors.

In April, Walters was convicted by a federal jury in New York City of conspiracy to commit wire fraud. He is scheduled to be sentenced July 27 by U.S. District Judge P. Kevin Castel.

Bharara was not around for the Walters verdict, having been turned out of the U.S. Attorney’s Office by his boss (U.S. Attorney General Jeff Sessions) along with 45 other U.S. Attorneys around the country who were politically appointed by former president Barack Obama.

Nevertheless, Bharara’s unceremonious departure did not dampen the triumphalism at the U.S. Attorney’s Office for the Southern District of New York following its prosecution of Walters. “Today,” stated acting U.S. Attorney Joon Kim, “Billy Walters lost his bet that he could cheat the securities markets on a massive scale and get away with it scot-free.”

What troubles more than Kim’s triumphalism are the tactics the U.S. Attorney’s Office employed in US v. Walters to notch a conviction against defendant Walters. They are precisely those Judge Kozinski associated with prosecutorial misconduct.

“Prosecutors hold tremendous power,” the jurist wrote. They have “unparalleled access to the evidence, both inculpatory and exculpatory, and while they are required to provide evidence to the defense … it is very difficult for the defense to find out whether the prosecution is complying with this obligation.”

Prosecutors also have “tremendous control over witnesses: They can offer incentives, often highly compelling incentives — for suspects to testify. This includes providing sweetheart deals to alleged co-conspirators…”

And prosecutors can “pile on charges so as to make it exceedingly risky for a defendant to go to trial.”

So it was in the case of United States of America v. Walters.

In September 2016, attorneys representing Walters filed a pre-trial motion to dismiss the federal indictment against the defendant on grounds that the government had unlawfully leaked detailed information about the Walters case to The New York Times and The Wall Street Journal.

Bhrara’s office responded the following month in an opposition memorandum to Judge Castel, maintaining that Walters could not prove that the source of the information prejudicial to the defendant published by the Times and the Journal “was an attorney or agent for the Government.”

Moreover, the U.S. Attorney’s memo stated, a “declaration submitted under oath by the prosecutor principally responsible for the investigation in May and June 2014,” when the Times and Journal stories first appeared, “rebuts any notion that a Government attorney or agent provided grand jury materials to the press.”

After weighing the merits of both the Walter’s motion to dismiss his indictment and the government’s insistence that the defendant’s motion was much ado about nothing, Judge Castel in November 2016 ordered Bhrara’s office to investigate the unlawful leaks, which clearly trampled upon Walters’ right to due process of the law.

The following month, Bharara reported to Judge Castel that FBI Supervisory Special Agent David Chaves, supervisor of the FBI’s New York white-collar squad, “admitted that he was a significant source of confidential information leaked to reporters at both the Wall Street Journal and the New York Times about the underlying investigation.”

The leaks began in April 2013, following a dinner Chaves had with Times reporters Matthew Goldstein and Ben Protess, during which the FBI official told the two journalists about the Walters investigation. A few months later, Chaves met up with Journal reporter Susan Pulliam over lunch, during which he told her too that the bureau was targeting Walters.

While Bharara suggested he was shocked, shocked to find that a government agent illegally leaked information to the press, officials in the U.S. Attorney’s Office for the Southern District of New York clearly knew there was government lawbreaking going on in the Walters case long before Chaves was outed.

Indeed, after a Journal article on the Walters investigation appeared online in June 2014, the U.S. Attorney’s Office Chief Public Information Officer James Margolin — who came over to Bharara’s shop from the FBI — circulated a link to the Journal article to Bharara, Deputy U.S. Attorney Richard Zabel and Assistant U.S. Attorney Telemachus Kasulis, among others.

Bharara forwarded the link to George Venizelos, FBI Assistant Director in Charge for the New York Division, suggesting that they take action together. “I know you agree these leaks are outrageous and harmful,” Bhrara emailed.

Yet, neither the U.S. Attorney, nor the FBI Assistant Director in Charge of the bureau’s largest field office in the nation, took any action to stop the leaks. Because the leaks continued “as late as August 2015,” Judge Castel conjectured.

In fact, Chaves continued to share confidential information to reporters, using his personal cell phone instead of his government-issue phone. When he was finally found out last December, the FBI Supervisory Special Agent stopped cooperating with bureau’s internal investigators, taking the Fifth and hiring a lawyer.

Meanwhile, in U.S. v. Walters, prosecutors proferred Davis highly compelling incentives to incriminate Walters. The former Chairman of Dean Foods had repeatedly denied the governments allegations of insider trading. But when his name was leaked to the press as a putative co-conspirator in an alleged insider trading scheme, prosecutors persuaded Davis to flip.

He agreed to plead guilty to a dozen piled-on charges — including conspiracy, perjury and securities fraud, among other felonies. He agreed to testify against his former friend Walters. And he accepted the government’s plea agreement in exchange for assurance by the U.S. Attorney’s Office that it would ask Davis’ sentencing judge to go easy on its “star” witness in the government’s case against Walters.

Davis obviously was happy with the sweetheart deal he made with federal prosecutors. Because the very day he signed the deal, he booked a getaway to Las Vegas, where he dropped fifty-large gambling and otherwise having himself “a good time,” he acknowledged in court.

It was not long before prosecutors recognized that their supposed “star” witness was a liability in the courtroom. The jury in the circumstantial insider trading case simply did not find the former Fortune 500 business executive credible. And though government prosecutors almost certainly coached up Davis before he took the witness stand, he couldn’t keep his fake narrative straight.

He testified that Walters told him to use a secret code word (“Dallas Cowboys”) when referring to Dean Foods. But when cross examined by Walters’ defense attorney Barry Berke, the government’s “star” witness conceded there was no extant document he could point to in which the supposed code name was used by the defendant.

Davis testified that he told prosecutors Walters gave him a black prepaid cell phone (which he purportedly referred to as the “bat phone”) to surreptitiously pass along inside information. As it happens, prosecutors did not present that key piece of evidence at during the trial (which would have done much to corroborate Davis’ claim). That’s because, according to their “star ” witness, he disappeared the smoking smart phone in a creek behind his home.

So Berke asked Davis a simple question: What color was the missing bat phone? “Maroon,” the government’s “star” witness replied, unwittingly contradicting a previous statement to prosecutors.

Then there was testimony by the thrice-married Davis that he told prosecutors he never paid for sex after marrying his third wife in 2007. When Berke confronted the government’s “star ” witness with phone records indicating more contemporaneous phone calls to escort services in several cities, Davis said he neither recalled the calls, nor the sex for pay.

The U.S. Attorney’s Office worried that the jury had such serious doubts about Davis’ veracity that their case against Walters might very well result in an acquittal for the defendant. So they trotted out an unlikely witness to corroborate Davis’ testimony about the so-called bat-phone” — his estranged wife.

Terie Davis proved to be better coached than her soon-to-be-ex-husband. She testified that she saw the prosecution’s “star ” witness use the cell phone he got from Walters. That she checked the phone log (because she suspected her husband was cheating on her). And that she realized her husband had been talking to his soon-to-be-ex-friend Walters.

Whatever blandishments or highly compelling incentives (or highly compelling incentives) the prosecution used to persuade Davis’ estranged wife to do them a solid, it proved well worth it. Because it turned a likely acquittal for the defense into a conviction for the government.

The estranged wife’s testimony proved to tilt the jury’s verdict from acquittal to conviction, according to one juror, a Manhattan maintenance man. “She (Terie Davis) was important,” said one juror, a Manhattan maintenance man, “because she told us that, yes, the phone existed.”

So went the deeply disturbing conviction of Billy Walters:

There was a lawbreaking FBI Supervisory Special Agent guilty of prosecutorial misconduct. There was an obfuscating U.S. Attorney who almost certainly knew that at least one government prosecutor or agent leaked confidential information to the press, but repeatedly denied such a crime occurred. And there was a trial that led to the unjust conviction of a defendant whose right to a fair trial was abrogated by the government.

Judge Kozinsky warned in 2015 that there is “an epidemic of prosecutorial misconduct abroad in the land.” And as the profoundly disturbing case of United States of America v. Walters demonstrates, that epidemic continues apace.