## Facts

- Richard J. Smith, Vice President for North American Sales at PDA Engineering, Inc., held a large position in PDA stock while having access to internal financial information.
- In June 1993, after receiving internal earnings projections reflecting worse-than-expected performance (including discovery of an approximately $1.5 million budgeting error), Smith sold his entire PDA position and later sold additional PDA shares short.
- Smith’s parents also sold and sold short PDA shares during the same period.
- Smith left a voicemail for a PDA employee stating he had sold all his stock and intended to short the stock because he expected it to decline when adverse earnings information was released.
- A co-worker, without authorization, accessed the voicemail system by guessing the recipient’s password, recorded the message, and provided it to PDA’s corporate counsel, ultimately leading to a government investigation.
- Smith was charged with 11 counts of criminal insider trading, convicted by a jury, and appealed evidentiary rulings and jury instructions.

## Issues

1. Whether a voicemail recording obtained by a private party through unauthorized access to a voicemail system required suppression under federal electronic-privacy statutes.
2. Whether internal corporate earnings projections and related budget corrections can constitute material, nonpublic information for insider-trading purposes.
3. Whether criminal insider trading requires proof of actual “use” of inside information, and whether an instruction requiring the information to be a “significant factor” in the trading decision correctly states the law.
4. Whether the evidence was sufficient to support the convictions.

## Decision

- The Ninth Circuit affirmed Smith’s convictions on all counts.
- The court held the voicemail recording was admissible; the relevant federal statutes did not require exclusion on these facts, particularly where the recording was made by a private actor rather than the government.
- The court held internal earnings projections, including corrections reflecting a significant budgeting error affecting earnings expectations, may be material nonpublic information.
- The court approved the jury instruction requiring a causal relationship between possession of material nonpublic information and the trading, satisfied if the information was a significant factor in the decision (not necessarily the sole reason).
- The court found sufficient evidence of materiality, nonpublic status, and the required mental state/causal connection, relying heavily on the recorded voicemail and trading pattern.

## Legal Principles

- Suppression under federal electronic-privacy statutes is limited to the exclusions expressly provided by statute and is not a broad remedy automatically triggered by private misconduct involving stored electronic communications.
- Internal earnings projections and related internal budget information can be material if a reasonable investor would view them as significantly altering the total mix of available information.
- In criminal insider trading, the government must prove a causal connection between the defendant’s inside information and the trade; it is enough that the inside information significantly influenced the decision, even if other motives also existed.
- A defendant’s statements linking trading decisions to anticipated disclosure of adverse earnings information can support findings of materiality, nonpublic status, and the required causal relationship.

## Conclusion

The Ninth Circuit affirmed insider-trading convictions, holding that internal earnings projections can be material nonpublic information, that the government must show the inside information was a significant factor in the trading decision, and that suppression of a privately obtained voicemail was not required under the governing federal statutes.


United States v. Smith, 155 F.3d 1051 (9th Cir. 1998)