## Facts

- Knueppel and Sonday worked for a financial magazine that prepared securities recommendations before publication.
- Misfeldt and Tyrer were friends/investors who traded securities.
- Before the magazine’s recommendations were publicly released, Knueppel or Sonday provided Misfeldt and Tyrer advance, nonpublic information about upcoming recommendations.
- Misfeldt and Tyrer traded in anticipation of price movements expected to follow the publication, generating profits linked to the prepublication information.
- The government proceeded under a misappropriation theory, alleging misuse of confidential employer information for securities trading.
- Defendants were charged with conspiracy to violate Exchange Act § 10(b) and SEC Rule 10b-5 and pleaded guilty to that conspiracy.

## Issues

1. Whether defendants who pleaded guilty to willful violations of § 10(b) and Rule 10b-5 could avoid imprisonment under 15 U.S.C. § 78ff(a) by proving they had “no knowledge” of the relevant SEC rule or regulation.

## Decision

- The court denied the motion by Knueppel, Sonday, and Tyrer to invoke § 78ff(a)’s “no-knowledge” proviso to bar imprisonment.
- The court treated § 78ff(a) as placing the burden on the defendant to prove lack of knowledge of the rule or regulation.
- The court concluded the defendants failed to meet that burden in light of their guilty pleas to willful securities-fraud conspiracy and their admissions concerning the wrongful nature of the conduct.

## Legal Principles

- Under 15 U.S.C. § 78ff(a), the “no-knowledge” proviso functions as an affirmative defense to imprisonment for a violation of an SEC rule or regulation; the defendant bears the burden of proof.
- A guilty plea to a willful § 10(b)/Rule 10b-5 offense substantially limits a defendant’s ability to claim “no knowledge” of the rule or regulation for purposes of avoiding incarceration.
- Post-plea claims of ignorance of Rule 10b-5 are unlikely to succeed where the defendant’s plea admissions and the scheme’s characteristics show deliberate, wrongful exploitation of confidential information.

## Conclusion

The court held that defendants who pleaded guilty to a willful conspiracy to violate § 10(b) and Rule 10b-5 could not use § 78ff(a)’s “no-knowledge” proviso to avoid imprisonment, because the proviso is defendant-borne and was not proven on the record established by the pleas and admitted conduct.


United States v. Knueppel, 293 F. Supp. 2d 199 (E.D.N.Y. 2003)