United States v. Richard Bailey

I. BACKGROUND

Bailey was the President, Chief Executive Officer, and Chairman of the Board of Directors of Gateway, a small, pub- lic company involved in selling health and dietary supplements.1 In 2002, Bailey met Richard Owens, another businessman, and the two began doing business together. The nature and legitimacy of some of their business deals was the critical issue at trial.

According to the prosecution, Bailey did not comply with the Securities and Exchange Commission’s rules on stock issuances. The SEC requires public companies to disclose voluminous information before issuing stock (e.g. details regarding past performance; information about executives; intended use of the sale proceeds). This process can be time- consuming and expensive. Without these disclosures, the SEC allows public companies to issue stock to employees, consul- tants, or advisors who provide bona fide services to the com- pany. The issuance cannot be used merely to raise capital for the company and must be in exchange for legitimate services.

In 2003, the SEC filed a civil complaint against Bailey and his company for violating Rule S-8, the rule that requires the distribution of stock to be in…

Opinion by Judge B. FLETCHER; Dissent by Judge M. SMITH.

OPINION

A jury convicted Richard A. Bailey of two counts of securities fraud. Bailey appeals his conviction arguing that he was prejudiced by the trial court’s improper admission of a prior civil complaint filed by the SEC against Bailey. We agree and vacate Bailey’s conviction and remand for a new trial.

I. BACKGROUND

Bailey was the President, Chief Executive Officer, and Chairman of the Board of Directors of Gateway, a small, public company involved in selling health and dietary supplements. 1 In 2002, Bailey met Richard Owens, another businessman, and the two began doing business together. The nature and legitimacy of some of their business deals was the critical issue at trial.

According to the prosecution, Bailey did not comply with the Securities and Exchange Commission’s rules on stock issuances. The SEC requires public companies to disclose voluminous information before issuing stock (e.g. details regarding past performance; information about executives; intended use of the sale proceeds). This process can be time-consuming and expensive. Without these disclosures, the SEC allows public companies to issue stock…

dissenting:

I respectfully dissent. I would uphold the district court’s admission of the SEC’s Complaint, under Rule 404(b), because the Complaint showed that Bailey knew that he had been previously sued for issuing unregistered securities, in violation of SEC Rule S-8. Because the Complaint was admitted for the purpose of showing Bailey’s knowledge, it is not, as the majority contends, necessary that the Complaint, in and of itself, be “sufficient to support a finding that Bailey committed the act charged [therein].” Bailey’s knowledge of Rule S-8 was conditioned upon the fact that he had been named as a defendant in the prior Complaint, not whether he actually committed the acts alleged therein. Accordingly, I would hold that the district court did not err, let alone abuse its discretion, in admitting the Complaint as evidence, under Rule 404(b).

Because I would find that the evidence was properly admitted under Rule 404(b), I believe that the majority should have applied a Rule 403(b) balancing analysis to determine whether the probative value of the Complaint was substantially out *806 weighed by its prejudicial effect. Nonetheless, even assuming error, as did the majority,…