Opinion ID: 201377
Heading Depth: 3
Heading Rank: 2

Heading: Admission of Evidence of Correspondence With CAI Wireless

Text: 56 Happ also challenges the admission of two letters he wrote to counsel for CAI Wireless, a company for which he had been a director in early 1997. The letters related to Happ's improper purchase of CAI Wireless stock during a period that he believed an approved trading window was open. As a result of Happ's purchase of CAI Wireless stock, he was asked to sell the stock, causing him to violate the short-swing profit rule and to disgorge his profits to the company. Happ testified that he wrote to counsel for CAI Wireless in both letters that he would in the future confirm in advance with the company that a trading window was open before purchasing its stock. Happ argues that the letters were irrelevant and constituted impermissible impeachment evidence under Fed.R.Evid. 608(b), 10 designed to show that, because Happ knew that CAI Wireless had an insider trading policy when he was a CAI Wireless director, he should have known that Galileo did. But the SEC responds that this evidence was admissible under Fed.R.Evid. 404(b) 11 to show Happ's state of mind when he sold his Galileo stock. We agree. 57 This Circuit applies a two-part test to determine whether evidence of extrinsic acts is admissible. United States v. Frankhauser, 80 F.3d 641, 648 (1st Cir.1996). First, the evidence must be probative of an issue in the case, such as intent or knowledge, without including bad character or propensity in the inferential chain. Id.; Fed.R.Evid. 404(b). Second, its probative value must not be substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury. Fed.R.Evid. 403; see Frankhauser, 80 F.3d at 648-49. 58 Here, evidence of the correspondence from Happ to counsel for CAI Wireless was probative of Happ's state of mind when he sold his Galileo stock. The government had the burden to prove that Happ had the requisite scienter, which the Supreme Court has defined as a mental state embracing intent to deceive, manipulate, or defraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Happ testified at trial that his purchase and sale of CAI Wireless stock made him more aware of insider trading policies. He also testified that he first learned of the short-swing profit rule during the incident with CAI Wireless, and that this incident was on his mind when he contemplated selling his Galileo stock. Due to the similarity of the violations alleged here and in the CAI Wireless episode, we think the letters were admissible to show Happ's understanding of what he could do under the securities laws and why he sold his Galileo stock when he did. Moreover, given Happ's awareness of insider trading policies and his expressed intent to seek prior clearance of future CAI Wireless trades, his failure to clear his sale of Galileo stock in advance and his failure to inquire as to Galileo's insider trading policies were probative of his intent. We also think the court could reasonably determine that the probative value was not substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury. See Fed.R.Evid. 403. 59