P. 1
1LOLES Gregory Govt Sentencing Memo

1LOLES Gregory Govt Sentencing Memo

|Views: 3|Likes:
Published by Helen Bennett
Sentencing memo in federal case of Gregory Loles in church embezzlement case
Sentencing memo in federal case of Gregory Loles in church embezzlement case

More info:

Published by: Helen Bennett on Feb 24, 2014
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

02/24/2014

pdf

text

original

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 1 of 52

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT UNITED STATES OF AMERICA CRIMINAL NO. 3:10CR 237 (AWT) v. November 7, 2012 GREGORY P. LOLES

GOVERNMENT’S SENTENCING MEMORANDUM: GUIDELINES CALCULATION This memorandum is submitted in aid of the sentencing of Defendant Gregory P. Loles, who stole more that $8 million from friends, clients, and the endowment fund of a Church in Orange, Connecticut, St. Barbara’s Greek Orthodox Church (“the Church” or “St. Barbara’s”). The purpose of this filing is two-fold. First, to provide information to the Court regarding the underlying criminal conduct and second, to set forth the Government’s initial Guidelines’ calculation pursuant to the United States Sentencing Guidelines. Sentencing is currently scheduled before this Court for February 27, 2013. This memorandum is also submitted in response to the Defendant’s initial sentencing memorandum filed July 25, 2012 and captioned: “Defendant’s Sentencing Memorandum I,” (herein after “Def. Mem.”), in which the Defendant explicitly requests that the Court ignore the holding of United States v. Booker and its progeny, entirely disregard the applicable United States Sentencing Guidelines, and impose a non-Guideline sentence. It bears mention that the Defendant’s request to the Court that it effectively ignore the United States Sentencing Guidelines and his unapologetic assertion that he will file a memorandum “urging that a sentence significantly below the guideline range is sufficient to attain the objectives of sentencing . . .” (Def. Mem. at 1) were made prior to a Guidelines range being calculated by the
-1-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 2 of 52

United States Probation Office and the Court. Accordingly, it seems clear at this point that no matter what the Defendant’s ultimate Sentencing Guidelines range is determined to be and no matter how fair and reasonable a sentence within that range would be, the Defendant will reflexively assert it is too high. The Court, after discussion with the parties, determined that it would be an efficient use of the Court’s resources and those of the United States Probation Office to address first the United States Sentencing Guidelines, the Defendant’s resulting adjusted offense level, and the corresponding Sentencing Guidelines range. Thereafter, the Court will consider any grounds for upward or downward departures, the § 3553(a) factors, and then impose the Defendant’s ultimate sentence consistent with 18 U.S.C. § 3553(a) and the controlling case law. It is the Government’s position that in faithfully considering the Guidelines and the all the applicable specific offense characteristics including: the seriousness of the offense, the millions of dollars of loss, the large number of victims (including the parishioners of Saint Barbara’s Greek Orthodox Church), the misrepresentations made by the Defendant about his work on behalf of Saint Barbara’s Greek Orthodox Church, the sophisticated means employed in the scheme, the fact that the Defendant committed the scheme while acting as an investment advisor, and the fact that the Defendant laundered the funds to conceal and disguise the proceeds of the fraud, the Defendant’s Guidelines’ range should be 235-293 months. I. Brief Procedural Background On November 30, 2010, Defendant Loles was charged in a 32-count indictment with violations of mail fraud in violation of 18 U.S.C. § 1341; wire fraud in violation of Title 18 U.S.C. § 1343; securities fraud in violation of violation of Title 15 U.S.C. §§ 78j(b) and 78ff

-2-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 3 of 52

and Title 17 Code of Federal Regulations Section 240.10b-5; and money laundering, in violation of Title 18 U.S.C. § 1956(a)(1)(B). On July 26, 2011, the defendant pleaded guilty before the Honorable Mark R. Kravitz, to four counts of the thirty-two counts charged in the indictment. Specifically, the defendant pleaded guilty to Count Four, charging him with mail fraud in violation of 18 U.S.C. § 1341; Count Nine, charging him with wire fraud in violation of Title 18 U.S.C. § 1343; Count Twenty, charging him with securities fraud in violation of violation of Title 15 U.S.C. §§ 78j(b) and 78ff and Title 17 Code of Federal Regulations Section 240.10b-5; and Count Thirty-Two, charging him with money laundering, in violation of Title 18 U.S.C. § 1956(a)(1)(B). The statutory maximum penalty for each count to which the Defendant pleaded guilty is twenty (20) years making the maximum term of imprisonment 80 years. The Defendant is also subject to a maximum fine, pursuant to 18 U.S.C. § 3571(d) of twice the gross gain or loss. II. The Offense Conduct A. The Impact On The Victims and Their Families

The impact of the Defendant’s crime is broad and wide-sweeping and goes well beyond the numbers associated with the more than $8 million that he stole from his victims through fraud and the millions more that he received from an overseas source that he systematically laundered to conceal and disguise his crimes. Moreover, the true impact goes well beyond the large number of victims, which is well in the hundreds when the Court considers the parishioners who each suffered part of the actual loss as a result of the Defendant’s stealing $1.4 million funds from the St. Barbara’s endowment fund and building fund. (See Attachment 1). The true financial and emotional impact on the victims and their families is illustrated, in part, by the victim impact statements, only a portion of which are included herein. As one victim wrote:
-3-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 4 of 52

Gregory Loles has caused so many problems for my family. We all have been under so much stress, and our days are mostly filled with pain and sadness instead of happiness. I am left with a broken heart, and am upset with myself that we were fooled by him. . . . Gregory’s crimes have hurt us so much. We lost my husband’s retirement savings and I am so ashamed to say that we trusted Gregory with a large amount of money that we were keeping safe for our daughter. She worked so hard when she was young and saved $90,000 by the time she graduated college. That money was supposed to be for when she got married and set off on her adult life. My Husband [ ] and I trusted our friend Gregory to help us invest the money in what he promised was a safe account. We trusted him because he was our friend a long time, and other successful people we knew had given him money to invest for them and everything seemed to be going well. He also seemed to have made a lot of money for our Church. We gave him this money from our daughter’s account from the beginning and everything seemed to be like he promised. It was a shock to find out this was just a lie. . . . Gregory’s cruelty to us lasted to the very end. You should know that we gave Gregory my $67,000 IRA sometime the year before his company fell. He kept telling me that I should not keep all my eggs in one basket. He said it was a mistake to keep all of my retirement in Fidelity, that I should give it to him. He said these words in my own house and sitting at my kitchen table while looking at my portfolio. I had done what he told me to do and to roll the money over to his company . . . Gregory’s rollover form was fake just like his company. . . . Gregory’s last act with us was about two months before he fell, when he convinced me to give the rest of my savings to him because he said he would pay much more interest than the bank. That was my last $90,000. So he took $90,000 from our daughter and $157,000 from my husband and me. It was all we had worked so hard to earn and save. That was the amount we gave him. He must have known by then that his fake investment business was falling apart and he could not save himself, but somehow he could not let one last chance to take our money get past him. (Victim Impact Statement, Attachment 4A (filed under seal)). As another victim wrote: I trusted Greg Loles, as so many other individuals did, with my entire estate and life savings. The amount of anger I experienced is unimaginable being a Christian it has affected me physically as well as spiritually. I’m 64 years of age and I along with my deceased husband have worked and sacrificed our whole lives for a better life for our children. He has taken everything from me. I also gave him my deceased husband’s life insurance policy, and even took a second mortgage loan on my current residence to invest with him. Each time he reassured me that my capital was always secure due to the type of insurance and
-4-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 5 of 52

provisions his “company/investment firm” had, therefore he led me to believe my investments were secure and safe. . . . I have feelings of immense despondence, unrelenting animosity and appalling trepidation. (Victim Impact Statement, Attachment 4B (filed under seal)). As yet another wrote: In January 2006, my husband passed away from [ ] cancer . . . . I reached out to Greg Loles to help me manage the finances. With trust, I turned over to him the money from my husband’s insurance policies, his 401Ks, and IRA. By December 2009, I had invested with him over $900,000. As a result of this crime I lost almost all of my money and forced to sell my home. . . . My husband worked very hard and made many sacrifices to provide the best for us, and I feel Greg Loles’s actions have made my husband’s effort all go in vain. It’s a shame because before passing away, my husband told me to trust and consult Greg Loles regarding our finances. (Victim Impact Statement, Attachment 4C (filed under seal)). A fourth wrote the following: When Greg Loles is in front of your bench for sentencing, I would like for you to consider the deviousness by which this man manipulated his victims. Whether this was an individual or his own Church, he displayed no moral values. It [his ploy] was sooo subtle, “oh, I have another investor interested in putting money into my fund, which is continuing to return 8%” “Just sent a check to Mr. ____ covering his interest earned in Apeiron.” Financially, we lost a major portion of our retirement funds. I am facing emotional stress owing to my wife’s continuing to remind me that she questioned the wisdom of my investing funds in Apeiron Capital Management. Our total financial loss is 350,000 dollars. (Victim Impact Statement, Attachment 4D (filed under seal)). To truly get a more full sense of the impact of the Defendant’s crimes on the victims and their families, the Court should review – as it no doubt will – all of the victim impact statements. Moreover, the Government expects that a number of victims will request to speak at the Defendant’s sentencing.

-5-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 6 of 52

B.

The Investment Fraud Scheme – Generally

As illustrated by the statements of just a selection of his numerous victims, the Defendant methodically, callously, and with a level of sophistication befitting of his degree and background in engineering and finance, devised and executed an intricate investment scheme that lasted over eight years and garnered him tens of millions of dollars. The Defendant executed the scheme using lies, deceit, and deception, including using his experience as a licensed broker, his position as a board member and parishioner of the Church, the use of shell companies, multiple bank accounts, authentic looking computer generated phoney account statements reflecting fictitious bond prices and returns on investments, and multiple wire transfers from account to account designed to conceal the true source of funds. He engaged in this sophisticated scheme in order to defraud friends, fellow parishioners, St. Barbara’s Church and all its parishioners out of their endowment fund, as well as a number of clients of his Farnbacher-Loles street performance Porsche automobile racing team. Additionally, the Defendant took in and laundered another $14 million that he received from an off-shore entity for the purpose of hiding it from foreign tax authorities or “park-it” in his account. However, the defendant did not merely park the funds in his accounts but instead laundered the funds through his various accounts and used these additional millions to perpetuate the scheme prevent discovery of the fraud and to support his financially failing automobile business. The Defendant fraudulently represented himself to be a registered investment adviser and claimed to have a legitimate investment firm that he owned and operated named Apeiron Capital Management, Inc. (“Apeiron” or “Apeiron Capital”). The Defendant had previously taken and passed the Series 7 and Series 63 licensing exams and had previously been licensed as a Registered Representative. He drew upon this experience to conduct financial transactions in the
-6-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 7 of 52

names of multiple entities and to create the appearance that funds provided to him were actually being invested. Apeiron Capital was an investment adviser and broker dealer registered with the U.S. Securities and Exchange Commission (“SEC”) from 1995 through 1998, until the registrations were cancelled. Despite the cancelled registrations, the Defendant continued to operate Apeiron as an unregistered investment adviser and falsely represented Apeiron to be a registered investment management firm. The Defendant controlled bank accounts at various financial institutions including among others, accounts at Citibank in the names of Apeiron Capital, Knightsbridge Holdings, Farnbacher Loles, Farnbacher Loles Motorsports, Farnbacher Loles Racing, and Farnbacher Loles Street Performance. The numerous bank accounts allowed him to transfer proceeds from the investment scheme from account to account which allowed him to create the appearance that funds sent back to investors from the Knightsbridge Holdings bank account, for instance, were coming from an investment security he purportedly had invested in, called he Knightsbridge Holdings arbitrage bonds. In reality the funds he was sending them were merely victim funds from his Ponzi scheme. Similarly, the numerous bank accounts allowed the Defendant to take money from investors and transfer it through his various Farnbacher-Loles bank accounts which allowed him to make it appear to vendors, employees, clients, and others that the funds he was using to support his car racing endeavors were proceeds or profits from his Farnbacher-Loles businesses. In truth and in fact the money used was money from victim-investors (and from a foreign entity Millbury Holdings described below (See Attachment 9 at 1-5)). This tactic was clearly designed to allow the Defendant to avoid detection of the fraud, which he did for approximately 8 years.

-7-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 8 of 52

Using the fraudulently obtained proceeds allowed the Defendant to move into and resided in a huge house in Easton Connecticut. (See Attachment 3A, 3B, and 3C). Throughout the fraud the Defendant’s primary source of income was the fraudulently obtained funds The Defendant attended St. Barbara’s and was an active member of the Church community. He held himself out to members of the Church as a successful broker and investment advisor. He even took out a regular advertisement in the bulletin of St. Barbara’s Church, which advertised his services as an “Investment Management” and providing “Brokerage Services.”1 He actively solicited business from friends and fellow parishioners. The Defendant used this facade of a successful investment advisor to join the board of St. Barbara’s and was selected to serve on the board of the Church’s Endowment Fund. Beginning in approximately 1996, the Defendant’s company Apeiron Capital was the executing broker for the Endowment fund. At some point in time, the Defendant assumed a fiduciary control over the money of the endowment fund. The Defendant then transferred the investments to his own control. (See Attachment 6, Hadjimical Witness Interview at 2-3). Thereafter, the Defendant began to manage the Church’s endowment fund and building fund. Having established his bonafides as an investment advisor – albeit falsely – the Defendant falsely represented to numerous victim-investors, including individuals who were his friends and fellow parishioners of St. Barbara’s and the Board of the Church itself, that he would act as their investment advisor and invest their funds through Apeiron in various securities, including in what he described as “Arbitrage Bonds.” He claimed these bonds would pay a safe and steady return. The Defendant falsely represented that the primary investment securities he was
Previous issues of the St. Barbara’s Church bulletin containing the advertisement can be found online. See, e.g., The Ministry 38 (September 2008), http://www.saintbarbara.org/pdf/ministries/sep_08_min.pdf; The Ministry 10 (January 2005), http://www.saintbarbara.org/pdf/ministries/jan_05_min.pdf; The Ministry 10 (February 2004), http://www.saintbarbara.org/pdf/ministries/feb_04_min.pdf.
1

-8-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 9 of 52

investing in were arbitrage bonds issued by “Knightsbridge Holdings,” which he claimed would pay a safe and steady the rate of 7.75% per annum. In addition to Knightsbridge Holdings, the Defendant also falsely represented to the numerous investor-victims that he would invest their money in General Electric Arbitrage Bonds, Travelers Insurance Arbitrage Bonds, and Applied Materials Arbitrage Bonds, also claiming that these were actual safe and secure bonds from actual entities in which the investors could safely invest and earn a steady return. In truth and fact, the Arbitrage Bonds as described by the Defendant did not exist. These bonds were also non-existent. The Defendant took individual victim-investors’ funds from whomever he could con. He took funds from victims that had previously been invested in IRAs, 401(k)s, and represented proceeds of life insurance payments. The Defendant even encouraged a victim, whose husband had recently passed away, to take out a second mortgage on her home to invest with him. The Defendant sought to use his knowledge and expertise as an investment adviser to gain control of the Church’s funds, including the Endowment Fund by claiming he would invest in, among other things, the same Arbitrage Bonds. At one point in time, the Defendant told one of his victims, who was a significant benefactor for the Church, that he, the Defendant, needed additional funds so that he could “trade” on the Church’s behalf and the proceeds would go to the Church. The Defendant told the victim that he could not perform “day-trading” with the funds in the endowment fund, but that if this individual provided the Defendant $750,000 in the form of a loan to the Church, that the Defendant would execute trades and generate money for the Church. The victim did in fact provide this money, thinking he was helping the Church, and the Defendant took the money as he did the other investor funds. (See Attachment 7, victim interview memorandum at 2; Attachment 8, Loles interview memorandum at 2-3.)
-9-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 10 of 52

The sad irony of the Defendant using his position on the Church’s Endowment Fund to defraud the Church and its parishioners is underscored by the fact that the Defendant was repeatedly thanked for helping the Church. He was even honored by the Church for his contributions to the Church and for making a significant pledge to help the Church, all the while he was stealing from the Church and every member of the parish who contributed to the Church. He was stealing from those who were to have benefitted from the money in the endowment fund and the funds that were to go to a proposed new building. In this regard, every member of the Church is a victim of the fraud in that they all suffer in the financial loss of the Church. To put the Church’s loss in perspective, in the Summer of 2012, the Church received 610 stewardship pledge cards from Church members and families pledging a total of $261,989 toward the 2012 goal of $350,000. (See www.saintbarbara.org Summer 2012/the Ministry). By comparison, the Defendant stole $1.4 million from the Church and the other approximately $700,000 that had been “loaned” to him for the benefit of the Church. (See attachment 1.) Instead of investing the funds of the individual investor-victims and of the Church, the Defendant cleverly conceived and executed an extensive Ponzi scheme perpetrated over a number of years that caused losses in the millions of dollars to a wide array of individuals. The Defendant diverted investors’ funds for his own personal use and benefit—including distributing large amounts of the funds to his luxury street performance automobile racing company, Farnbacher Loles. Money also went to hotel, foreign and domestic travel, credit cards, and his children’s tuition to premier preparatory schools and colleges. There is a certain bitter irony in the fact that the Defendant took the money for, among other things, his own flamboyant lifestyle and his own children’s education, given that the endowment fund was set up to fund the retirement of the priests and clergy, as a scholarship fund children of the Parish, for community
-10-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 11 of 52

outreach and development, and to fund a Greek language school for children. (See Attachment 6 at 1.) It can not be debated that in a very real sense each member of these groups is also a victim of the scheme – the retired priests, the children that received less funding for school or Greek classes, and those that received smaller scholarships or none at all given the loss of the endowment funds. In executing the money laundering aspect of the scheme, the Defendant took his victiminvestors’ funds and transferred them to Farnbacher-Loles accounts to conceal the true source of funds. He would then transfer funds to an account he controlled in the name of Knightsbridge Holdings to disguise the nature and source of the funds and to make it appear as if the checks drawn on the Knightsbridge Holdings account – which were sent to investors as lulling payments – were the promised proceeds from the Arbitrage Bonds, which they of course were not. Throughout the scheme, the Defendant falsely represented to the victim-investors, including the Church’s Endowment Fund Board and other members of the Church, that he was achieving a consistent and positive return on the investment funds. In order to create the appearance of legitimacy, Loles periodically provided investors fraudulent, yet official looking computer-generated account statements containing false transactions purportedly representing their principal and any retained interest on their investments, false prices for the fictitious securities, and false balances. (See Attachment 10.) The Defendant sought to lull investors into believing that their investment funds had been invested as represented. He prevented and delayed the discovery of the true use of investors’ funds by issuing periodic payments to the investors purportedly representing a return of earned interest on their investments or partial return of capital. These periodic interest payments were initiated from the Knightsbridge Holdings account that the Defendant opened and controlled and thus created the appearance that
-11-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 12 of 52

the payments were actually from Kinghtsbridge and that their investments were safe and earning the promised returns, when in truth and in fact, he was using portions of other victim-investors’ funds to make such payments. During the life of the scheme, which lasted almost eight years, beginning in or about November 2001 and continuing until in or about December 2009, the Defendant took in over $10 million in investments from his victim-investors here in the United States through lies deceit and deception. He used approximately $2 million to $3 million dollars to make the periodic lulling payments, including the payments out of the separate bank accounts opened up in the name of Knightsbridge. As mentioned above, instead of investing the money, the Defendant diverted investors’ funds for his own personal use and benefit, including to pay personal expenses such as credit card bills, his home, his family expenses, tuition for his children, domestic and foreign travel, a failing Porsche car servicing business, and most notable his “hobby” of racing streetperformance automobiles (generally Porsche stock-cars) around in circles on race tracks located throughout the United States. Remarkably, as described below, the Defendant also took in over $14 million in overseas wire transfers from an off-shore entity looking to park its money with the Defendant in order to evade detection and avoid taxes in foreign jurisdictions. In an almost unbelievable display of greed and gluttony, he spent approximately $21 million dollars on himself, his family, and his luxury-car servicing and car racing business. For the vast majority of his victims, the Defendant misappropriated all or a significant portion of their investment. His victim-investors, who included widows, retirees, the Parish priest with a disabled child, lost all or most of their savings, their retirement nest-egg, and even the life insurance benefits of their deceased spouses. Moreover, based on the representations
-12-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 13 of 52

made, the phoney interest payments, and the official looking statements, the victims believed that not only was there principal safe, but, in many instances, that they had earned additional retained interest or profits –the promised 7.75% year after year – such that they believe they were even more economically secure than they actually were. Moreover, many had based their future, be it retirement, college education for the children, or improvements to their home, based on his lies and the belief their investment principle and the earnings were safe and secure. In additional to defrauding the investor-victims and the Church out of over $8 million (see attachment 1), the Defendant also laundered approximately $14 Million that he had received from an overseas entity. (See Attachment 2; Attachment 9, Loles interview memorandum at 25). The Defendant used this money to continue the facade that he was running a successful investment management company, Apeiron, and that he was running a successful luxury automobile street performance racing team and service center, Farnbacher-loles. Neither of which was true. As demonstrated by the financial records, the Defendant co-mingled these funds with the funds from Apeiron, spent the addition $14 million as if it were his own, and used it to prop up his Ponzi scheme and his failing luxury automobile businesses. These funds were integral to keeping the scam going as they allowed to keep up the appearances of a successful investment advisor and business owner, when in reality he was spending his way through approximately $21 million. Moreover, by his own acknowledgment, the foreign entity had provided him the funds to “park” them in an attempt to avoid foreign taxes and possibly repatriation back to the foreign company. This other relevant conduct underscores the full extent of the Ponzi scheme and money laundering conduct to conceal and disguise the source of the funds and to promote and

-13-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 14 of 52

perpetuate the investment scheme. There can be no doubt that without these additional funds, the Defendant’s house of cards would have tumbled much sooner. III. The Need for Determining an Appropriate Sentence The Defendant suggests in his initial sentencing memorandum that the Court should not faithfully consider the United States Sentencing Guidelines in connection with his sentencing and endeavors to give them the proverbial ‘back of his hand’ as a factor that is not really worthy of weighty consideration. The United States Supreme Court and the Second Circuit however, disagree. In United States v. Crosby, 397 F.3d 103, the Second Circuit explained that, in light of United States v. Booker, 543 U.S. 220 (2005), district courts should engage in a three-step sentencing procedure. First, the district court must determine the applicable Guidelines range, and in so doing, “the sentencing judge will be entitled to find all of the facts that the Guidelines make relevant to the determination of a Guidelines sentence and all of the facts relevant to the determination of a non-Guidelines sentence.” Crosby, 397 F.3d at 112. Second, the district court should consider whether a departure from that Guidelines range is appropriate. Id. at 112. Third, the court must consider the Guidelines range, “along with all of the factors listed in section 3553(a),” and determine the sentence to impose. Id. at 112-13. The Second Circuit has instructed district judges to consider the Guidelines “faithfully” when sentencing. Crosby, 397 F.3d at 114. “Booker did not signal a return to wholly discretionary sentencing.” United States v. Rattoballi, 452 F.3d 127, 132 (2d Cir. 2006) (citing Crosby, 397 F.3d at 113). The fact that the Sentencing Guidelines are no longer mandatory does not reduce them to “a body of casual advice, to be consulted or overlooked at the whim of a sentencing judge.” Crosby, 397 F.3d at 113. The Defendant argues that the Guidelines are not based on empirical evidence (Def. Mem. at 4-5), citing to a collection of narcotics related cases.
-14-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 15 of 52

However, the Supreme Court disagrees, finding that the Guidelines are “the product of careful study based on extensive empirical evidence derived from the review of thousands of individual sentencing decisions,” Gall v. United States, 128 S. Ct. 586, 594 (2007), and concluding that as a result, district courts must treat the Guidelines as the “starting point and the initial benchmark” in sentencing proceedings. Id. at 596; see also Rattoballi, 452 F.3d at 133 (the Guidelines “‘cannot be called just ‘another factor’ in the statutory list, 18 U.S.C. § 3553(a), because they are the only integration of the multiple factors and, with important exceptions, their calculations were based upon the actual sentences of many judges.’”) (quoting United States v. JiminezBeltre, 440 F.3d 514, 518 (1st Cir. 2006) (en banc); Kimbrough v. United States, 128 S. Ct. 558, 574 (2007). The Second Circuit has “recognize[d] that in the overwhelming majority of cases, a Guidelines sentence will fall comfortably within the broad range of sentences that would be reasonable in the particular circumstances.” United States v. Fernandez, 443 F.3d 19, 27 (2d Cir. 2006); see also Kimbrough, 128 S. Ct. at 574 (“We have accordingly recognized that, in the ordinary case, the Commission’s recommendation of a sentencing range will ‘reflect a rough approximation of sentences that might achieve § 3553(a)’s objectives.’”) (quoting Rita v. United States, 127 S. Ct. 2456, 2465 (2007)); Rattoballi, 452 F.3d at 133 (“In calibrating our review for reasonableness, we will continue to seek guidance from the considered judgment of the Sentencing Commission as expressed in the Sentencing Guidelines and authorized by Congress.”). A. Fraud Guideline Applicability

Because the Defendant’s Sentencing Memo went to such great lengths to challenge the applicability of the fraud guidelines, it bears mention as to why the fraud guidelines in particular

-15-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 16 of 52

remain relevant and why those guidelines, when used as the starting point, truly advance the purposes of the Federal Sentencing statutes. The fraud guidelines, unlike the crack guidelines examined in Kimbrough, were drafted by the Commission, “bas[ing] its determinations on empirical data and national experience, guided by a professional staff with appropriate expertise.” Kimbrough, 128 S.Ct. at 574 (citing United States v. Pruitt, 502 F.3d 1154, 1171 (10th Cir. 2007)). The fraud guidelines amendments made pursuant to the economic crime package and the Sarbanes-Oxley Act exemplify the Commission’s role to respond to both Congressional needs while serving the sentencing goals set forth in 18 U.S.C. § 3553(a). Furthermore, the fraud guidelines in substance operate to promote the § 3553(a) sentencing goals. Through the loss table, and the other specific offense characteristics such as number of victims, sophisticated means, and others, the fraud guidelines operate to assist the Court in fashioning a sentence that will “reflect the seriousness of the offense, promote respect for the law, and . . . provide just punishment for [an] offense, ” 18 U.S.C. § 3553(a)(2)(A) and provide significant guidance to avoid unwarranted sentence disparities among defendants that have been found guilty of similar conduct. 18 U.S.C. § 3553(a)(6). 1. Amendments to Fraud Guidelines Since 2001 Exemplify The Commission’s Role in Sentencing Determinations The amendments made to the fraud guidelines in 2001, 2002, and 2003 are of particular note because they represent milestones in the history of the Sentencing Guidelines. The 2001 amendment, promulgated through the “economic crime package,” represented not only the first overhaul of a major guideline, but was also one of the most public and transparent amendments to the Guidelines to take place to date. The Sarbanes-Oxley amendments, first promulgated in

-16-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 17 of 52

2002 and made permanent in 2003, exemplify the Sentencing Commission’s ability to respond to Congressional directive in a way that was reasoned and statistically sound. a. The Economic Crime Package The economic crime package amendment, passed in 2001, was the result of a six-yearlong effort to gather information, hold hearings, and create an amended theft and fraud guidelines regime that remedied deficiencies that had come to light in the prior version of the guidelines. See Frank O. Bowman, III, The 2001 Federal Economic Crime Sentencing Reforms: An Analysis and Legislative History (hereinafter “Economic Crime”), 35 Ind. L. Rev. 5, 7-8 (2001). The Commission sought input from the defense bar, the Justice Department, probation officers, the Criminal Law Committee of the U.S. Judicial Conference (“Judicial Conference”), and academic commentators. Id. at 7. What emerged was a complete overhaul of §§ 2B1.1 and 2F1.1, remedying perceived problems that had existed since the implementation of the Guidelines. Specifically, the 2001 economic crime package consolidated §§ 2B1.1 and 2F1.1, revised the loss table to afford higher punishments for high-loss offenders and lower punishments for low-loss offenders, and redefined the term “loss” to avoid the ambiguity that had previously made it “one of the most commonly litigated issues in federal sentencing law.” Id. at 26; U.S.S.G. App. C 617. In all, this redrafting of such a major crime category – one which accounted for up to 20% of federal sentences – was both unprecedented in not only its breadth of change but also the transparent public process by which the change occurred. See Bowman, Economic Crime at 8. The economic crime package of 2001 has been described as “the first federal sentencing reform initiative in the guidelines era to have been conducted in the public eye from its inception.” Id. Furthermore, the economic crime package was not the result of a Congressional
-17-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 18 of 52

directive, but rather of a lengthy fact-finding mission to respond to comments from the Department of Justice and the Judicial Conference, among others, that “the offenses sentenced under the guidelines . . . under-punish individuals involved with moderate and high loss amounts, relative to penalty levels for offenses of similar seriousness sentenced under other guidelines.” U.S.S.G. App. C 617. The Sentencing Commission did not model this amendment to blithely follow Congressional statute in lockstep, as the Supreme Court critically suggested of the crack guidelines in Kimbrough. Rather, the Sentencing Commission made its own determinations, of its own volition, seeking to craft the most effective means to avoid unwanted disparities in sentencing and better reflect the seriousness of the various offenses sentenced under the fraud guidelines. See U.S.S.G. App. C 617. b. The Sarbanes-Oxley Amendments In 2002, the Sarbanes-Oxley Bill was passed in the wake of the Enron, Worldcom, Tyco and Adelphia scandals. This time, the Sentencing Commission was given the directive by Congress to “expeditiously consider the promulgation of new sentencing guidelines or amendments to existing sentencing guidelines to provide an enhancement for officers or directors of publicly traded corporations who commit fraud and related offenses.” SarbanesOxley Act of 2002, Pub. L. No. 107-204, § 1104, 116 Stat. 745 (2002). The Commission was also directed to report its findings to Congress. Id. In response to this directive, the Commission made a number of amendments to the recently revamped fraud guidelines. It added guideline enhancements for offense characteristics such as “offenses involving 250 or more victims,” “offenses that endanger the solvency or financial security of a substantial number of victims,” and “offenses committed by officers or directors of publicly traded companies.” 2002 Report to the Congress: Increased Penalties Under the Sarbanes-Oxley Act of 2002 (hereinafter “Report”)
-18-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 19 of 52

i-ii (available on the internet at: http://www.ussc.gov/r_congress/S-Oreport.pdf). These amendments served to enhance the economic crime package by allowing the fraud guidelines to account for loss on a larger scale than originally foreseen. As set forth below, having taken over $8 million (see Attachment 1) from friends, clients, and parishioners, including from the Endowment fund, and having done so while acting as an investment advisor, the Defendant is subject to the additional enhancements associated with these specific offense characteristics. The Sarbanes-Oxley amendments to the Guidelines exemplify the Commission’s thoughtful reconsideration of its 2001 amendments in light of the new and previously unforeseen circumstances—namely, the vast economic damage caused by large economic crimes that effect individuals and entities executed by those who hold positions of trust inside organizations. It is important to emphasize, however, that although Congress directed the Commission to reconsider the fraud guidelines, it did not specifically direct any changes to be made, much less dictate what those changes would be. In effect, the directive contained in the SarbanesOxley Act compelled the Commission only to reexamine its prior amendments from 2001 and make any necessary changes. These resulting changes were not as dramatic as the economic crime package but served only to complement it. In determining the 2002 amendments, the Commission held a hearing in which it solicited input and examined empirical data. See 2002 Report App. C. From this information, amendments were promulgated that increased penalties for the most egregious white collar crimes: those that betrayed the public trust, endangered the financial solvency of cornerstone American corporations, and resulted in monetary losses in the hundreds of millions. See U.S.S.C. App. C 647. The Commission further took into account its duties to draft guidelines that “reflect

-19-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 20 of 52

the seriousness of the offense,” 18 U.S.C. 3553(a)(2)(A), and give due weight to “the public concern generated by the offense.” 28 U.S.C. 994(c)(5). The Commission considered the impact of its actions and estimated that 95.6 percent of fraudsters would be unaffected by the amendment increasing fraud guideline levels relative to number of victims harmed. See 2002 Report at 3. It went on to estimate that only half of all cases involving securities fraud would be affected by upward offense level adjustments based upon this provision. Id. The vast range of offense levels between the majority of fraudsters and those who commit serious securities frauds in terms of loss and numbers of victims suggests that the Commission set out to “impose a sentence sufficient, but not greater than necessary” to meet the goals of sentencing, 18 U.S.C. § 3553(a), while adequately reflecting the seriousness of perpetrating a large-scale economic fraud. In other words, under the Commission’s amendments, only a very small proportion of people who commit the most serious frauds (including those with backgrounds in the securities business) face substantial sentence increases. The Commission did not seek to indiscriminately increase punishment for small garden variety fraud. They increased punishments for offenders who caused large losses, to large numbers of victims, that effected institutions, and/or used positions as insiders or as securities professionals to accomplish the frauds. The Commission further served its role by responding to the Sarbanes-Oxley directives with guidelines which took into account “the community view of the gravity of the offense” and “the public concern generated by the offense.” 28 U.S.C. 994(c)(4-5). Further illustrating the shock and lament of the recent financial scandals, Representative Rogers of Michigan recounted the following experience:

-20-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 21 of 52

The other day I had a woman at a coffee [sic] who came in, an elderly woman, and she could not get three words into her story before she started to shake and tears started running down her face because she was just informed that they would not be able to retire in 12 months. Too much of their 401(k), too much of their retirement, was gone. 148 Cong. Rec. H4839 (daily ed. July 17, 2002) (statement of Rep. Rogers). The white collar crimes at the time of Sarbanes-Oxley elicited serious public concern, as reflected in Roger’s comment, and were considered grave offenses which could jeopardize the financial security of countless innocent victims. The Commission rightly took these societal attitudes and concerns into account when drafting the amendments to the fraud guidelines. The crimes committed by the Defendant herein are remarkably similar to the anecdotal evidence provided in connection with the Sarbanes-Oxley legislation and the subsequent Guideline amendments, thus it is difficult if not impossible to argue credibly that the amendments were not meant for cases such as that of the Defendant herein. As shown in the foregoing, the recent amendments to the fraud guidelines exemplify the role of the Sentencing Commission: the amendments are in line with both the Commission’s sentencing goals as illustrated in 18 U.S.C. § 3553(a) and the Commission’s statutory duties set forth in 28 U.S.C. § 994. Furthermore, the Commission established its directives by “bas[ing] its determinations on empirical data and national experience, guided by a professional staff with appropriate expertise.” Kimbrough, 128 S.Ct. at 574. c. Loss Calculation Serves the Purposes of § 3553(a)

The Defendant has also argued that loss is not an appropriate measure of harm. This argument simply belies credulity. Loss has enjoyed a long history as the preferred method to measure the severity of economic crimes. Additionally, there is a logical justification behind adhering to a loss-structured analysis, as loss reflects the severity of a given offense. The
-21-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 22 of 52

comprehensive nature of the fraud guidelines, and the various safeguards in place within the Guideline rubric and well as those fashioned by judges after Booker more than adequately control for any danger caused by inapplicable skyrocketing loss figures. Furthermore, sentencing determinations using the fraud guidelines are especially important to serve the interests of avoiding unwarranted sentence disparities among defendants that have been found guilty of similar conduct, 18 U.S.C. § 3553(a)(6), by providing some uniformity for crimes that impact victims who may be dispersed across different judicial districts as is often the case in white collar crimes. The use of loss amount as a factor in determining a defendants fraud guidelines is serves as a proxy to determine both the harm to the victims and in many instances, as is the case herein, the culpability of the defendant’s state of mind. See Bowers, Economic Crime at 39; U.S.S.G. § 2B1.1, comment. (backg’d.). The calculation of loss as a measure of severity of theft has deep roots in our common law jurisprudence. As early as the year 1275, English common law developed divisions of larceny which hinged on the calculation of loss. Grand or petit larceny was charged solely based upon the value of the goods stolen. See Bower, Economic Crime at 13. Throughout history, while distinctions between crimes against persons became more refined (the creation of various degrees of murder and assault, for example), there still remained “only one recognized, commonly codified determinant of the degrees of seriousness of economic crimes – the value of the thing stolen.” Id. at 16. Even today, [n]o one disputes the notion that stealing more is worse than stealing less. Similarly, almost no one disagrees with the basic judgment at the heart of both the former and newly adopted economic crime guidelines that the sentences of thieves and swindlers should be determined in some significant part by the magnitude of the economic deprivations they caused or intended.

-22-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 23 of 52

Id. at 27. The rationale behind using loss to determine the severity of theft is simple, that loss adequately measure the severity of harm. Courts are in accord with this straightforward concept. See United States v. Innarelli, 524 F.3d 286 (1st Cir. 2008) (upholding district court’s calculation of intended loss and Guideline sentence, agreeing with the district court’s statement that “loss in a fraud case is a yardstick for moral culpability” (internal quotations and brackets omitted)); United States v. McCoy, 508 F.3d 74, 79 (1st Cir. 2007) (noting that expected loss is a “measure for the defendant's culpability”); United States v. Wittig, 528 F.3d 1280, 1285 (10th Cir. 2008) (holding district court’s use of estimates of intended loss and gross receipts proper “guideposts” in determining defendant’s sentence). Additionally, although sentencing courts have always had the discretion to depart from loss figures which substantially overstate the severity of the offense, See U.S.S.G. 2B1.1 comment. (n.19 (C)), courts have repeatedly adhered to loss figures, even post-Booker. See United States v. Cutler, 520 F.3d 136 (2d Cir. 2008); United States v. Gale, 468 F.3d 929 (6th Cir. 2006); United States v. Mickens, 453 F.3d 668 (6th Cir. 2006); United States v. Serrano, 234 F.App’x 685 (9th Cir. 2007). The Court’s use of the fraud guidelines’ loss figures further justifies their position as an adequate and reasonable method to measure harm. The Defendant has also argued that loss calculations, particularly those post-SarbanesOxley, create unduly harsh sentences which fail to reflect the severity of an offender’s crime. This is simply not the case. It is true that the fraud guidelines have increased the Guidelines range for a term of imprisonment for major economic crimes, however, “an enhancement of this magnitude appropriately responds to the pertinent directive [from Congress] and reflects both the

-23-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 24 of 52

extensive nature of such offenses and the large scale victimization caused by them.” Henning, Atmospherics at 252; 2002 Report 3. White collar crime is very serious and has the potential to dramatically alter the lives of vast numbers of innocent investors. The havoc white collar criminal wreak when they steal millions of dollars from the pockets and pensions of their victims is almost unfathomable. For the victims their lifetimes worth of savings are lost. The college tuition for their children and/or grandchildren are gone and their retirement years are literally taken away. As reflected in the victim impact statements, they are left feeling hopeless, broken hearted and helpless. Moreover, the belief or assumption that society at large does not ostracize white collar criminals in the same way as violent offenders militates in favor of longer sentences as opposed to shorter. See Henning, Atmospherics at 256. The collateral effects of a felony conviction, such as social stigma, are largely lost on white collar criminals. Many are able to successfully reenter society post-conviction, often reprising similar roles as those they once held. As such, a lengthy term of imprisonment is arguably more important than other available punishments to provide adequate deterrence for such crimes. Finally, the use of the Guidelines in loss cases is further justified by the scope of many white collar crimes. The Court that ultimately sentences a white collar criminal, like the Defendant herein, must protect the interests of numerous victims from numerous jurisdictions and even foreign victims. An undue variation in sentences and a complete disregard of the Guidelines calculation as suggested by the Defendant does little to inspire confidence in the federal judicial system and does not serve the interests of sentencing. In such large-scale cases, courts should be particularly careful to “avoid unwarranted sentence disparities among

-24-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 25 of 52

defendants with similar records who have been found guilty of similar conduct.” 18 U.S.C. § 3553(a)(6). IV. Guideline Calculation The Government asserts that as a result of the seriousness of the Defendant’s crimes, the more than $8 million in loss, the large number of victims, the misrepresentations made by the Defendant about his work on behalf of Saint Barbara’s, the sophisticated means employed, the fact that the Defendant committed the scheme while acting as an investment advisor, and the fact that the Defendant laundered funds to further and perpetuate the fraud and to conceal and disguise the proceeds of the fraud, the Defendant’s Guidelines’ range is 292 - 365 months. A. Sentencing Guideline Range The Defendant stands before the Court convicted of mail fraud (in violation of 18 U.S.C. § 1341), wire fraud (in violation of 18 U.S.C. § 1343), securities fraud (in violation of 15 U.S.C. §§ 78j(b) and 78ff and Title 17 Code of Federal Regulations Section 240.10b-5); and money laundering (in violation of 18 U.S.C. § 1956). Each of the violations has a statutory maximum sentence of 20 years. The fraud convictions are covered under United States Sentencing Guideline § 2B1.1 and the money laundering is covered under § 2S1.1. The base offense level pursuant to the Guidelines is 7 when the offense charged has a statutory maximum of 20 years or more. See U.S.S.G. § 2B1.1(a)(1). Therefore, the Defendant’s base offense level here is 7. The amount of loss suffered as a result of the fraud clearly greater than $7,000,000 but less than $20,000,000. Therefore, the offense level is increased by 20 pursuant to U.S.S.G § 2B1.1(b)(1). It bears note that while the Defendant also laundered an additional $14 million and while the grouping rules require the Court to group the fraud counts and the money
-25-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 26 of 52

laundering counts, under U.S.S.G § 3D1.2(d)(1), the Government is advancing the position that total the sum of money for loss purposes, is the money lost through the fraud and subsequent laundering (i.e., the victim funds in attachment 1) while the additional funds from the off-shore entity (See attachment 2) is other relevant conduct, but should not result in a total loss amount of $22 million. Nevertheless the Court can and should consider this conduct pursuant to 18 U.S.C. § 3553(a). Assuming the Court reaches the conclusion that the offense involved more than 250 victims, the offense level would be further increased by 6. See U.S.S.G § 2B1.1(b)(2)(C). As set forth in Attachment 1, by simply counting the names and bank accounts of the individuals and funds that were victims, there clearly are more than 10 victims. Thus a two-level increase would apply pursuant to U.S.S.G § 2B1.1(b)(2)(A). However, as discussed in more detail below, the Court should consider as victims the hundreds of parishioners who donated to the endowment fund. These parishioners gave money and were relying on the health and security of the endowment fund to support the Church, the clergy, the scholarship programs, and other Church programs. The funds being stolen leaves them as a member of the church in a serious financial crises. It is fair to conclude that each and member of the Church suffered a part of the financial loss. St. Barbara’s Church is when they practice their religion, but even more so it is part of the cultural community. The Church members rely on the programs of the Church and on the funds to provide those programs. The $1.4 million in loss is staggering. By comparison, according to the Church’s website a total of 610 parishioners and families pledged to give money to the Church in 2012. Those 610 pledges, as generous as they are, will only replace a fraction of the $1.4 million of dollars stolen by the Defendant. (See www.SaintBarbara.org)
-26-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 27 of 52

The offense involved a misrepresentation that the defendant was acting on behalf of a religious and charitable organization. Therefore, the offense level is further increased by 2. See U.S.S.G § 2B1.1(b)(8)(A). This section is applicable for two reasons, first because the Defendant explicitly told one victim that if he provided the Defendant a $700,000 loan for the benefit of the Church, the Defendant would used the money for the Church’s benefit and to make more money for the Church through day-trading. This was of course a lie. This section is also applicable because each of the victims believed the Defendant was acting on behalf of the Church and relied on that fact when investing. The offense also involved sophisticated means to carry out the offense, and to conceal the offense from the victims and from law enforcement. Therefore, the offense level is further increased by 2. See U.S.S.G. § 2B1.1(b)(9)( C). The offense also involved fraud in violation of securities law while the defendant was an investment advisor to the victims. Therefore, the offense level is further increased by 4 pursuant to U.S.S.G. § 2B1.1(b)(18)(A)(iii). Since this section applies, there are not the two additional levels added for an abuse of position of trust pursuant to U.S.S.G. § 3B1.3, which would of course normally apply when a defendant holds himself out as an investment advisor and defrauds his client-victims. See U.S.S.G. § 3B1.3, Appl. Note 3. But see U.S.S.G. § 2B1.1(b)(18)(A)(iii) Appl. Note 14( C). The Guideline for a violation of 18 U.S.C. § 1956 is found in § 2S1.1(a)(1), which provides that the base offense level is the offense level for the underlying offense from which the funds were derived because (A), the defendant committed the underlying offense, and (B) the offense level for that offense can be determined. For the money laundering count, the Court should apply U.S.S.G. § 2S1.1(a)(1), which imports the adjusted offense level from the wire
-27-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 28 of 52

fraud and mail fraud securities fraud counts to the money laundering count. Next, the Court adds 2 levels pursuant to § 2S1.1(b)(2)(B) because the defendant was also convicted of violating 18 U.S.C. § 1956. Therefore, to arrive at a single offense level for the multiple counts, the Court should use the adjusted offense level on the money laundering count and applied § 3D1.3(a), which calls for adopting the higher of the adjusted offense levels. The defendant has made a timely acceptance of responsibility, and thus is to receive a decrease in the offense level by 3. See U.S.S.G. § 3E1.1. In total, the offense level is 36 if the Court does not find the parishioners to be victims, or level 40 if the Court does so find pursuant to U.S.S.G § 2B1.1(b)(2)(C). The defendant has no criminal history. Therefore, the guideline sentencing range would be 188 to 235 months or 292 to 365 months. (See also summary table, infra). Base Offense Level Loss Greater than $7,000,000 More than 250 Victims (or more than 10 victims) Charitable Misrepresentation Sophisticated Means Violation of Securities Law while acting as Investment Advisor Money Laundering in Violation of § 1956 Acceptance of Responsibility Total 7 +20 +6 (or +2) +2 +2 +4 +2 -3 40 or 36

-28-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 29 of 52

1.

Nature of the Conduct

Here, the Defendant engaged in a fraud that was extensive and caused significant financial harm. This fraud caused harm in the millions of dollars to numerous victims. The funds that were taken in were used by the defendant to live a lavish lifestyle racing luxury cars. All the while, he led the victims to believe that the funds were safely invested. Many of the victims sent significant portions of their retirement savings to the defendant because of repeated assurances, including phoney account statement and lulling payments that the money invested with him was safe and was earning significant returns. The Board of St. Barbara’s Church entrusted the defendant with their endowment, and honored him for his “successes” with their investments. This conduct by an individual with experience as a securities broker, who was entrusted with the funds of others, clearly calls for a significance period of incarceration. 2. Determination of Loss and Number of Victims

The specific offense characteristic for “loss” results in an increase of 20 levels pursuant to U.S.S.G. § 2B1.1(b)(1)(K). This loss is determined by the loss suffered as a result of the mail fraud, wire fraud, and securities fraud. Pursuant to the Sentencing Guidelines the cumulative loss amount should be used. (See U.S.S.G. § 2B1.1 appl. note 18.). At a minimum, the defendant defrauded 42 investors out of $8,037,258. (See Attachment 1). Moreover, were the Court to take an aggressive posture in evaluating the Defendant’s relevant conduct, the Court could well find that the additional $21 million taken in by the Defendant, from Milbury Holdings (Attachment 2), could be included in the loss amount. As the Second Circuit has repeatedly held, “the court in ‘determining the amount of loss for purposes of calculating the offense level for a fraud, [must] include ‘all such acts and omissions that were part of the same course of conduct or common scheme or plan as the offense of conviction.’” United States v. Carboni, 204

-29-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 30 of 52

F.3d 39, 47 (2d Cir. 2000) (quoting United States v. McCormick, 993 F.2d 1012, 1013 (2d Cir. 1992) (quoting U.S.S.G. § 1B1.3(a)(2)). In that regard the money taken in from overseas was used in such a way (i.e., to perpetuate and further the scheme) as to make it part of the same course of conduct and common scheme or plan. (See Attachment 2). Nevertheless, the Government is merely advancing the position that $8,037,258 is the appropriate loss figure for the Court to use. This figure credits the Defendant with the amount of money returned to the victims during the course of the Ponzi scheme. See U.S.S.G. § 2B1.1 appl. note 3(E). The other conduct can be evaluated by the Court pursuant to 18 U.S.C. § 3553(a). The number of victims is not as straight forward. As explained above, by simply counting the names and bank accounts of the individuals that were defrauded and the Endowment fund as a single victim, the Court would conclude that there were approximately 42 victims. (See Attachment 1.) Were this the case, since there were clearly more than 10 victims a two-level increase would apply pursuant to U.S.S.G § 2B1.1(b)(2)(A). However, this does not end the discussion. The Government contends that the Court should count as victims the hundreds of parishioners who donated to the endowment fund and who were relying on the health and security of the endowment fund. The Church members who, as a whole support donated to the Endowment fund to support the Church itself, the clergy, the scholarship programs, and other Church programs. In a very real sense the Church members have suffered part of the financial loss as many of them also benefit and participate in the various programs. The definition of a “victim” under § 2B1.1(b)(1) does not mirror the definition of a “victim” under 18 U.S.C. § 3663(a)(2) or § 3663A(a)(2) (defining a “victim” as “a person

-30-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 31 of 52

directly and proximately harmed as a result of the commission of an offense for which restitution may be ordered”), or 18 U.S.C. § 3771(e) (defining a crime victim as “a person directly and proximately harmed as a result of the commission of a Federal offense”). A “victim” is defined in the Guidelines as “any person who sustained any part of the actual loss . . .” U.S.S.G. § 2B1.1, App. Note 1. See United States v. Abiodun, 536 F.3d 162, 169 (2d Cir. 2008) (concluding that when a court makes a finding as to actual loss, a victim enhancement must be based on those who “sustained losses as determined by the loss calculation guidelines.”) The Second Circuit has stated that “‘victims’ of fraud counts are those persons who have lost money or property as a direct result of the fraud.” United States v. Napoli, 179 F.3d 1, 7 (2d Cir. 1999). Here, there can be no doubt that the Endowment fund and thus the Church suffered part of the actual loss, in fact approximately $1.4 million of the loss. Nor can it be doubted that the Church is a victim. However, since the Church is, in reality, comprised of its parishioners and since the Church operates for the religious and secular benefit of those parishioners, it seems clear that each and every parishioner suffered a part of the financial loss. The Church is not only where they practice their religion but is also where they participate in the various family programs and cultural programs. The loss of $1.4 million has had a direct financial impact on them. The endowment fund was set up to fund the retirement of the priests and clergy, to pay for scholarships for the children of the Parish, to fund a Greek language school for children, and for community outreach and development. (See Attachment 6 at 1). Clearly, each student who received a smaller scholarship or received no scholarship at all because of the fraud is a victim. Moreover, by its very nature an endowment fund provides funds for programs year after year almost in perpetuity. Thus the number of Church members who will suffer financially as a result of the fraud will in a real sense be seen as growing each year. Where a group of people

-31-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 32 of 52

give to a charity or collectively benefit from a fund and the fund has been defrauded the individuals can be considered victims. In United States v. Longo, 184 Fed.Appx. 910, 2006 WL 1674267 (11th Cir. 2006) (unpublished per curiam), the Eleventh Circuit held that the district court did not err in counting as victims all 110 individual members of an employee benefit plan from which the defendant embezzled. See also id. at 970 n.1 (noting that “the record showed that Longo’s fraud and theft diminished the total plan assets”). The Eleventh Circuit's analysis in Longo applies here. There each participant in the employee benefit plan put money into the plan and seeks to draw on it in the future. When the plans funds were diminished each employee was determined to be a victim. Here, since the money was going to the st. Barbara Endowment fund, each parishioner relied on the fact that it would be there in the future to support the Church and its programs. Since the Endowment fund was stolen they all suffered part of the financial loss. Moreover, to the extent that the donors to the Endowment fund relied on the fact that the Defendant was touted as earning money for the Church by managing the fund and placing the money in the safe and secure bonds, those donors would be considered victims. See, United States v. Gonzalez, 647 F.3d 41, 64 (2d Cir. 2011) (finding there to be more than 50 victims and noting that while a not-for-profit organization rather than the donors is generally considered the victim, when donors to a non-profit relied on misrepresentations as to the intended uses of the funds they were therefore considered the victims). Finally, regardless of what the Court determines for Guidelines purposes, the Court must nonetheless consider the real-life impact that the Defendant’s stealing of the Endowment funds had on the members of the Church community. In that regard, to the extent that the Court determines that a mere two-level increase is appropriate, the Government will reserve the right to

-32-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 33 of 52

argue for an upward departure. The true loss was suffered by the parishioners as members of the church, not by the fund itself as a legal entity or as a bank account. Thus, they should all be considered in someway by the Court. 3. Misrepresentation that the Defendant was Acting on Behalf of a Charitable or Religious Organization

Section 2B1.1(b)(8)(A)1 provides for a 2-point enhancement to the base offense level if “the offense involved a misrepresentation that the defendant was acting on behalf of a charitable, educational, religious, or political organization, or a government agency.” The Application Notes clarify that the enhancement “applies in any case in which the defendant represented that the defendant was acting to obtain a benefit on behalf of a charitable educational, religious, or political organization . . . when, in fact, the defendant intended to divert all or part of that benefit.” U.S.S.G. § 2B1.1 app. n. 7(B). “[T]his guideline is aimed at enhancing punishment for those who prey upon and exploit a person’s tendency to be humanitarian.” United States v. Treadwell, 593 F.3d 990, 1006 (9th Cir. 2010). It thereby punishes both those that solicit funds under false charitable pretense. See, e.g. United States v. Berger, 224 F.3d 107 (2d Cir. 2000); United States v. Kinney, 211 F.3d 13 (2d Cir. 2000). It is also applicable to those using their legitimate charitable ties to further their own ends, while falsely purporting to act for the charity. See, e.g. United States v. Reasor, 541 F.3d 366 (5th Cir. 2008); United States v. Wiant, 314 F.3d 826 (6th Cir. 2003); United States v. Marcum, 16 F.3d 599 (4th Cir. 1994.) Courts have read the provision broadly, and require only that a defendant has represented — even vaguely — that the funds will be allocated to a charitable ends, not necessarily to a
Several of the cases cited reference an alternative section of the Sentencing Guidelines. Before 1998, the appropriate provision was located at § 2F1.1(b)(3); from 1998 through 2001, the provision was located at § 2F1.1(b)(4); from 2001 through 2004, the provision was located at § 2B1.1(b)(7)(A). The provision was given its current numbering in the revision of the U.S.S.G. dated November 1, 2004.
1

-33-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 34 of 52

particular charitable organization. See, e.g., Treadwell, 593 F.3d at 990 (defendant stated “some of the programs that we’re involve in, a certain percentage of the returns that we do uh, gain from these projects do have to be returned into humanitarian needs”); United States v. Edelman, 458 F.3d 791 (8th Cir. 2006) (defendant stated that “part of this money would be used for humanitarian projects.”) Moreover, section “2B1.1(b)(8)(A) requires only that the offense ‘involve’ a misrepresentation about charities, not that the investors be misled or otherwise motivated by the misrepresentation.” Treadwell, 593 F.3d at 1008. Courts have applied the enhancement even when the target of the misrepresentation was motivated by profit. See, e.g., Treadwell, 595 F.3d 990 (investors seeking for-profit investments); “[t]aking advantage of a victim’s self interest does not mitigate the seriousness of [a defendant’s] conduct.” U.S.S.G. § 2B1.1 cmt. (backg’d). “[T]he focus of [the court’s] inquiry must be on the defendant’s motivation for making the prohibited misrepresentation.” United States v. Ferrera, 107 F.3d 537, 541 (7th Cir. 1997). The Defendant now before the Court made the misrepresentations, that he was managing the Church’s Endowment fund and that he needed a loan so he could day-trade for the benefit of the Church. He made these misrepresentations so that the victim-investors would trust him with their money and examine him with less scrutiny when evaluating him as an investment advisor. His role as the Church’s money manager gave him the imprimatur of an honest money manager and no doubt caused the victims to let their guard down or put them more at ease than they would normally be with an investment advisor. Furthermore, this Guideline section is not limited to fraudulent solicitations directly from charitable donors, but also to those frauds in which misrepresentation is merely one component of the fraud.

-34-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 35 of 52

For example, In United States v. Reasor, 541 F.3d 366 (5th Cir. 2008), a church employee wrote checks to herself from church accounts, and cashed them at a local grocery store. See Reasor, 541 F.3d at 368. The court found this section applicable, reasoning that the defendant therein “did misrepresent that she was acting wholly on behalf of the church in her fraudulent conduct [of cashing the check], which is all that is required.” Id. at 372. Here the Defendant misrepresented himself as acting for the Church in managing the Endowment fund. A fund the contents of which he stole, just as the defendant in Reasor cashed the checks to take the church’s funds. Similarly, in United States v. Wiant, 314 F.3d 826 (6th Cir. 2003), the defendant was an employee of the American Cancer Society, who transferred $7 million of American Cancer Society funds to his personal account in Austria, under the ruse that it was for a research grant. See Wiant, 314 F.3d at 828. His misrepresentation was made to the bank performing the transfer, when he misrepresented that he was acting wholly on behalf of the American Cancer Society when he was really acting on his own behalf. Id. at 829. The court explained two reasons why the defendant’s offense was consistent with the harm targeted by the enhancement. First, those that misrepresent a charitable status take advantage of others’ kind intentions towards charities. See id. (“Bank officials might easily have been put at ease by the ostensibly charitable purpose”). Second, “the social harm Wiant caused by tarnishing the reputation of the American Cancer Society is closely analogous to the social harm caused by scam artists who exploit victims’ willingness to contribute to charity.” Id. Both tend to discourage donations and diminish charitable impulses, and therefore were specifically the type of harm addressed by the guideline. See id.

-35-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 36 of 52

Turning to the case here, the Defendant repeatedly misrepresented himself to the members of the Church, the board at the Church, his clients at Farnbacher-loles, and the public in general that he was acting on behalf of St. Barbara’s Church as manager of their Endowment fund and that he was making money on behalf of the Church. He received recognition for the success, was mentioned prominently in the church bulletin, received standing ovations, and was even bestowed honors by the church. His misrepresentations regarding his record of consistent success encouraged parishioners to contribute to the very same organization from which he was diverting funds. Moreover, his misrepresentations put individual investors at ease in their personal dealings with him. As one victim stated “[w]e trusted him because he was our friend a long time, and other successful people we knew had given him money to invest for them and everything seemed to be going well. He also seemed to have made a lot of money for our Church.” (Attachment 4A). Even if it was not his direct purpose, the parishioners and donors to the endowment fund believed that their donations would grow and were growing at 7.75%. In making the misrepresentations about his affiliation with the Church, he abused the goodwill that the parishioners have towards charitable and religious institutions. Additionally, his misrepresentations were actually a means by which he generated additional capital to perpetuate the Ponzi scheme. Such a scheme requires a constant influx of new capital to pay false returns to previous investors. Without the misrepresentations, there would have been fewer contributions to the endowment fund, fewer new victims to grow the Ponzi scheme and thus less capital to continue the scheme. Thus, the misrepresentations about his charitable affiliations were fundamental to the scheme. Accordingly, it is appropriate to apply the enhancement on this basis. As the Sixth Circuit has noted, members of the public may tend to be easily “put at ease”

-36-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 37 of 52

when dealing with an agent of a charity, as an expression of their good will. See Wiant, 314 F.3d at 826 (“Had Wiant been employed by a private, for-profit corporation, bank officials might have been more skeptical”). The Defendant also explicitly represented to a specific victim that $700,000 in funds that were loaned to the Defendant – purportedly for day-trading – were being used for the benefit of the church. This money was not invested, was not used for the benefit of the Church but was used to provide additional money for the Ponzi scheme. The fact that the Defendant explictitly and blatantly told this particular victim that the $700,000 was a “loan” to the Church makes the charitable misrepresentation enhancement applicable on this basis alone. (See Attachment 7 at 1-2) 4. Use of Sophisticated Means to Carry Out and Conceal the Offense

United States Sentencing Guidelines § 2B1.1(b)(10) provides for a two-level enhancement “[if] the offense otherwise involved sophisticated means.” “ ‘[S]ophisticated means’ means especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense.” U.S.S.G. § 2B1.1 app. n. 8(B). By way of example, the guidelines state that “[c]onduct such as hiding assets or transactions, or both, through the use of fictitious entities . . . also ordinarily indicates sophisticated means.” Id. Each individual step in the scheme need not be intricate or sophisticated; rather, it is only necessary that the offense conduct “when viewed as a whole, [is] notably more intricate than that of a garden-variety [ ] fraud scheme.” United States v. Cole, 296 Fed. Appx. 195 (2d Cir. 2008) (quoting United States v. Hance, 501 F.3d 900, 909-910 (8th Cir. 2007)); United States v. Lewis, 93 F.3d 1075, 1083 (2d Cir. 1996) (holding, in tax case, that sophisticated means enhancement

-37-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 38 of 52

applied even when “each step in the planned tax evasion was simple, [because] when viewed together, the steps comprised a plan more complex than merely filling out a false tax return”). In United States v. Regensberg, 2010 WL 2501042, 1 (2d Cir. 2010) the Court applied the enhancement when a defendant ran a Ponzi scheme and the execution of the scheme included “creation of fraudulent [ ] documents, detailed reporting of fake earnings, use of Ponzi scheme payments to lull his investors, and alteration of an account statement to make it appear as if he had not lost his investors' money.” Regensberg, 2010 WL 2501042, 1 (2d Cir. 2010). The Second Circuit determined that this conduct over three years was the sort of “repetitive conduct . . . [that] demonstrates that more than routine planning was involved,” and agreed that the enhancement for sophisticated means was appropriate. Id. In United States v. Cole, 296 Fed. Appx. 195 (2d Cir. 2008), the Second Circuit found that fabricating financial statements constituted, at least in part, sophisticated means, where Cole also fabricated financial statements and utilized a mail forwarding service to make it look as though his victims were receiving the financial statements from an address in Nevada, where his shell corporation was located. In United States v. Jones, the Tenth Circuit noted that the defendants' “creation of checks with a home computer, while not requiring considerable technical acumen, added to the scheme's sophistication in that the tactic was designed to avoid detection of fraud.” Jones, 530 F.3d 1292, 1306 (10th Cir. 2008) (emphasis added). See also, United States v. Halloran, 415 F.3d 940, 945 (8th Cir.2005) (applying sophisticated means enhancement where defendant created fraudulent mortgages using “a corporate entity, numerous fraudulent documents and forged notary stamps”) (emphasis added). In United States v. Kostakis, 364 F.3d 45 (2d Cir. 2004) altering entries in an official log book on a repeated basis was found to be “sophisticated means.” Kostakis, 364 F.3d 45 (2d Cir.

-38-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 39 of 52

2004). In Kostakis, an oil tanker’s engineer was convicted of making materially false statements in order to conceal the discharge of contaminants from the Coast Guard. See id. at 48. The defendant falsified two logs, over a nine-month period, on 30 separate occasions, and the entries had numerous technical components. See id. at 52. The Second Circuit noted that “Kostakis's conduct appears to have been rather sophisticated” and remanded to the district court for findings of fact. Id. Indeed, even seemingly less sophisticated conduct has been held by Courts to constitute sophisticated means. For instance in United States v. Rettenberger, 344 F.3d 702 (7th Cir.2003) the Court found the applicable the sophisticated means enhancement where a husband faked an injury and his wife collaborated with him in order to collect insurance. In this case, the Defendant’s conduct was significantly more complex than that in Kostakis, or Rettenberger and remarkably similar if not indistinguishable from that in Regensberg. Here the Defendant falsified hundreds of documents, opened up numerous bank accounts, controlled what proved to be a shell companies in Apeiron and Kinghtsbridge Holdings, and did so for nearly eight years. As in Regensberg and Jones, he used his computer to create fake forms and account statements, maintained careful and detailed records to organize and keep track of all the victims in the scheme, sent out the correct amount interest payments each month to the penny and sent client-specific records to each one when asked. He also created an elaborate story about the nature of the Knightsbridge transaction, and varied the scheme to include other fake bonds (the “GE ARB” and “Travelers ARB”) to give his scheme more plausibility, and continue to conceal it from his victims. This conduct clearly constitutes sophisticated means for the purpose of the enhancement.

-39-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 40 of 52

Additionally, to the extent that the Court examines the money laundering aspect of the scheme and the use of the off-shore funds to prolong and perpetuate the scheme, the Government is not seeking an upward adjustment for sophisticated laundering pursuant to U.S.S.G. § 2S1.1(b)(3). See U.S.S.G. § 2S1.1(b)(3) Appl. Note 5(B). 5. Violation of Securities Law While An Investment Advisor

United States Sentencing Guidelines § 2B1.1(b)(17)(A)(iii)2 provides for a four-level enhancement to the offense level “[i]f the offense involved a violation of securities law and, at the time of the offense, the defendant was . . . an investment adviser, or a person associated with an investment adviser.” Courts of Appeals have upheld the enhancement in cases where defendants sold fabricated investments that were actually Ponzi schemes, see, e.g., United States v. Ogale, 2010 WL 1857351 (11th Cir. 2010); United States v. Ramunno, 289 Fed. Appx. 359 (11th Cir. 2008) (background in 599 F.3d 1269), as well as cases where the defendants drained funds from previously legitimate investments. See, e.g., United States v. Kelley, 305 Fed. Appx. 705 (2d Cir. 2009) (background in 551 F.3d 171); United States v. Longo, 184 Fed. Appx. 910 (11th Cir. 2006). The first requirement of the enhancement is a violation of “securities law,” defined in U.S.S.G. § 2B1.1 app. n. 14(A) by reference to 15 U.S.C. § 78c(a)(47), which in turn refers to the Securities Act of 1933 (15 U.S.C. §§ 77a et seq.). While the Guidelines dictate that “[a] conviction under a securities law . . . is not required in order for subsection (b)(17) to apply, (U.S.S.G. § 2B1.1 app. n. 14(B)) here the Defendant was convicted of a violation of the

The Guideline provision was first introduced in 2003 as § 2B1.1(b)(14), following a Congressional directive to the Sentencing Commission in the Sarbanes-Oxley Act. See Pub. L. 107-204 § 1104. In November 2004, it was relocated to § 2B1.1(b)(15). It was renumbered as § 2B1.1(b)(16) in November 2008, and again renumbered in November 2009.

2

-40-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 41 of 52

securities fraud statutes, namely Title 15 U.S.C. §§ 78j(b) and 78ff and Title 17 Code of Federal Regulations Section 240.10b-5, more commonly referred to as 10b-5. The second requirement of the enhancement is that the defendant was an “investment advisor,” defined in U.S.S.G. § 2B1.1 app. n. 14(A) by reference to the Investment Advisers Act, 15 U.S.C. § 80b-2(a)(11), which states: “‘investment adviser’ means any person who, for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. . . .” The Second Circuit has interpreted “advice” broadly; it is not limited to specific information that is conveyed regarding an investment, but also applies when the adviser manages clients’ money with some discretionary authority. See Abrahamson v. Fleschner, 568 F.2d 862, 871 (2d Cir. 1977) (“These provisions [of the Investment Advisers Act] reflect the fact that many investment advisers ‘advise’ their customers by exercising control over what purchases and sales are made with their clients' funds.”). In Abrahamson, a general partner of an investment partnership, who controlled the funds and directed the investments, was held to be an “investment advisor” for the purpose of the anti-fraud provisions. Id. at 870. Here, the Defendant sat down with victims in their kitchens gave them advice on investing with him as compared with Banks or with Fidelity and had complete authority over the victim-investors funds. Furthermore, one may be an “investment advisor,” for the purpose of the Investment Advisers Act, without being registered according to Section 803(c) of the Act (15 U.S.C. § 80b3(b)). See Teicher v. S.E.C., 177 F.3d 1016, 1018 (D.C. Cir. 1999) (“As the [Investment Advisers Act] in various places specifies ‘registered’ advisers, and in others ‘those exempt[ ] from registration,’ there seems every reason to believe that when it uses the term unmodified, it

-41-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 42 of 52

means both.”) (citations omitted); cf. S.E.C. Release No. IA-1092, 52 Fed. Reg. 38400, 38404 (Oct. 8, 1987) [hereinafter S.E.C. Release] (“The antifraud provisions . . . apply to any person who is an investment adviser as defined in the Advisers Act, whether or not the person is required to be registered.”). The Defendant and his company had previously been registered with the SEC but despite no longer being registered he continued to act as an investment advisor. Courts have applied the sentencing enhancement to unregistered investment advisors. In United States v. Ramunno, 289 Fed. Appx. 359 (11th Cir. 2008) (background in 599 F.3d 1269) the defendant purported to offer commodity investments with high rates of return, which were actually fictitious, and in which current investors were paid returns from the principal of new investors (i.e. a Ponzi scheme, like that of the Defendant herein). See 599 F.3d at 1271. The defendant asserted that the enhancement applied only to registered advisors, which he was not. See Ramunno, 289 Fed. Appx. at 361. The Eleventh Circuit rejected this contention finding that he solicited and accepted money from investors, advised investors in the merits of trading in commodities, and issued earning reports; thus the facts plainly supported the finding that he was a commodities advisor. Id. In addition to merely providing advice, the law also requires that to be considered an investment advisor, one must be “in the business of” providing such advice. See Title 15 U.S.C. § 80b-2(a)(11). In making such determinations, the Securities and Exchange Commission considers whether the person “[h]olds himself out as an investment adviser . . . or on anything other than rare, isolated and non-periodic instances, provides specific investment advice.” S.E.C. Release, 52 Fed. Reg. at 38404; see also United States v. Elliott, 62 F.3d 1304 (applying the test proposed in this S.E.C. release).

-42-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 43 of 52

Finally, the law requires that to be considered an investment adviser, one must provide advice “for compensation.” 15 U.S.C. § 80b-2(a)(11). Courts and the S.E.C. have taken a broad view of what constitutes “compensation”: This compensation element is satisfied by the receipt of any economic benefit, whether in the form of an advisory fee or some other fee relating to the total services rendered, commissions, or some combination of the foregoing. It is not necessary that a person who provides investment advisory and other services to a client charge a separate fee for the investment advisory portion of the total services. Elliot, 62 F.3d at 1311 (emphasis original) (quoting S.E.C. Release, 52 Fed. Reg. at 38403). Both the “in the business of” and the “for compensation” criteria were found to be present in the case of United States v. Ogale, 2010 WL 1857351 (11th Cir. 2010). In Ogale, the defendant was a president of a hedge fund that was in fact a Ponzi scheme. Id. at 1. He first claimed that he was not “in the business of” advising others, but that he merely sold shares in his hedge fund. Id. The Eleventh Circuit found this unpersuasive, and citing Abrahamson, 568 F.2d at 871, held that “[t]he exercise of control over what purchases and sales are made with investors' funds is considered to be investment advice.” Ogale, 2010 WL 1857351 at 1. The defendant also claimed that “he was not compensated for providing investment advice . . . that the only money he received was investors' misappropriated funds . . . [and] that ill-gotten gains are not compensation.” Id. at 2. The Eleventh Circuit also rejected this argument, finding that any economic benefit — including fraudulent gains — was compensation, and thus upheld the investment adviser sentencing enhancement. Id. Here, the Defendant committed fraud in violation of securities law while acting as the victims’ investment advisor and acting as the investment advisor for the Church. Therefore, four-level sentencing enhancement under U.S.S.G. § 2B1.1(b)(17)(A)(iii) applies.

-43-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 44 of 52

First, the offense involved a violation of securities law. As noted, it is unnecessary that the defendant actually be convicted of a violation of securities laws. It should be noted that the violation of securities law in the present case is virtually indistinguishable from that in Ogale and Rammuno, in which the sentencing enhancement was applied. Here as in those cases, the Defendant passed himself off as someone with an expertise in investments, who had a reliable method to make significant returns for his clients (the arbitrage bonds). Here as in those case, the Defendant actually ran a Ponzi scheme that sold fictitious securities and paid returns to existing investors from the principal of new investors. If the cases are distinguishable at all, it is that the clients placed significantly more trust in the Defendant here than they did in Ogale and Ramunno. Here the Defendant was more than just a salesman for a fund, he was their trusted friend and adviser and fellow parishioner and also a member of the Church’s board. Second, the guideline requires a showing that the defendant was an investment advisor at the time of the offense. This requires that the defendant gave advice on the purchase of investments, was in the business of providing such advice, and did so for compensation. All three apply here. The Supreme Court has advised that “Congress intended the Investment Advisers Act of 1940 to be construed like other securities legislation enacted for the purpose of avoiding frauds, not technically and restrictively, but flexibly to effectuate its remedial purposes.” S.E.C. v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963) (internal quotation marks omitted). The Defendant portrayed himself as an investment advisor, and his victim-investors treated him as one. He gave advice to his victims and that was his business. Accordingly, his victims are entitled to the protections against fraud intended by the Act. The Defendant provided his friends, his church, and his fellow parishioners with what they thought was reliable investment advice. He was not a broker with whom they dealt at arm’s length to the

-44-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 45 of 52

contrary he was their trusted adviser. They came to him with their deceased spouses’ life insurance money; with funds that they had set aside for their children; with money that they had set aside for retirement. They knew the Defendant as a friend and fellow parishioner and trusted him because he had successfully helped the church increase the value of its investments (or so they were led to believe). He literally sat at their kitchen tables and advised them that they could get better returns then at a bank if they invested with him. He advised them not to keep all their eggs in one basket, not to keep all the money at Fidelity, that he could do better for them. His victims considered him a successful investment advisor, treated him as such, and were defrauded. Like the hedge fund manager that was held to be an investment adviser in Abrahamson, the Defendant was entrusted with discretionary authority. He stated to clients that Knightsbridge was his primary investment, but he also purportedly invested his clients’ money in “GE ARB” and “Travelers ARB” bonds without their prior authorization. Although certain clients asked why some of their money was in the lower-paying bonds, they did not challenge his exercise of discretion. This was because they knew his reputation as the investment advisor for St. Barbara’s and they had confidence in him to make the best decisions with their money. In that regard, the fellow Board members of the Church gave the Defendant wide discretion to invest the Endowment Fund however he saw fit and he saw fit to take it. To his victim-investors, he was an adviser who advised them that instead of stocks, they should invest in bonds — and he had a solid lead on an excellent, reliable bond that would pay steady returns. Once he got their trust, he nurtured it. He visited clients at their homes and picked up checks personally. The Defendant also held himself out to the public as an investment advisor. He named his company “Apeiron Capital Management,” and advertised himself as providing capital

-45-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 46 of 52

management services. He took out a regular ad in the bulletin of St. Barbara’s Church, which advertised “Investment Management” and “Brokerage Services.” He actively solicited business from customers on many occasions, and at all times presented himself as being in the business of providing investment advice. Most importantly, the clients viewed him as an investment adviser because of the representations that he made. Finally, The Defendant was to be compensated for his investment advice, and was in fact compensated. He took a percentage from all his victims — from some of them he took 100 percent. See Ogale, 2010 WL 1857351 (11th Cir. 2010). Accordingly, this four-point enhancement applies to him. 6. Abuse of a Position of Trust

United States Sentencing Guideline § 3B1.3 provides for a two-level enhancement to the offense level if the defendant “abused a position of public or private trust . . . in a manner that significantly facilitated the commission or concealment of the offense.” This enhancement cannot be applied cumulatively with the enhancement for a violation of the securities laws while an investment advisor. See U.S.S.G. § 2B1.1 app. n. 14(C). Therefore, the Government does not believe § 3B1.3 is applicable. However, while the Government asserts, strongly, that the investment-adviser enhancement is appropriate, should the Court for some reason decline to apply that enhancement, the defendant should receive the two-level enhancement for abuse of a position of trust pursuant to U.S.S.G. § 3B1.3. Courts have routinely upheld the enhancement for abuse of a position of trust when an investment broker or adviser defrauded his clients, see, e.g., United States v. Santoro, 302 F.3d 76 (2d Cir. 2002); United States v. Hussey, 254 F.3d 428 (2d Cir. 2001); United States v. Hirsch,

-46-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 47 of 52

239 F.3d 221, 227 (2d Cir. 2001); United States v Kaye, 23 F.3d 50 (2d Cir. 1994), and when the defendant used his position of authority to embezzle from a non-profit organization, see, e.g., United States v. Friedberg, 558 F.3d 131 (2d Cir. 2009); United States v. Wright, 160 F.3d 905 (2d Cir. 1998); United States v. Valenti, 60 F.3d 941 (2d Cir. 1995). The primary distinction between these cases and a typical fraud is “the extent to which the position provides the freedom to commit a difficult-to-detect wrong.” United States v. Laljie, 184 F.3d 180, 194 (2d Cir.1999). Such defendants have been trusted by their victims with greater discretion — and thus greater freedom from supervision — enabling them to escape detection. See Hirsch, 239 F.3d at 227 ( “the defendant's position must involve discretionary authority . . . [and] this discretion must have been entrusted to the defendant by the victim.”). The question of whether or not a defendant was entrusted with discretion is “viewed from the perspective of the victim” Hussey, 254 F.3d at 431. Thus, “a court should objectively evaluate whether a reasonable person in the victim's position would view the defendant as occupying a position of trust under the circumstances of the particular case.” Santoro, 302 F.3d at 76. Courts have thus held that brokers and investment advisers are entrusted with significant discretion. See, e.g., Santoro, 302 F.3d 76; Hussey, 254 F.3d at 431 (“stockbroker occupies a ‘position of trust’ . . . if his victim entrusts him with discretionary authority.”); Hirsch, 239 F.3d at 228 (investment advisor who was “entrusted with investment discretion" by his victims and had “a fiduciary and personal relationship with . . . with [them]” held a position of trust); Jolly, 102 F.3d at 50 (“investment advisors and brokers are entrusted with discretion by their clients”). See also United States v. Paneras, 222 F.3d 406, 412-13 (7th Cir. 2000) (defendant who held himself out as a licensed broker occupied position of trust); United States v. Queen, 4 F.3d 925,

-47-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 48 of 52

928-30 (10th Cir. 1993) (president of company who solicited funds by claiming to be an investment advisor and broker occupied position of trust). The Second Circuit held that “a relationship of trust and confidence [exists] between a broker and a customer with respect to those matters that have been entrusted to the broker.” Santoro, 302 F.3d at 80. Accordingly, a reasonable client relies on his broker or investment adviser to be candid about conflicts of interest. See id. at 81. In Hirsch, 239 F.3d at 225, the defendant ran a Ponzi scheme by which he claimed to invest clients’ money in secure investments. See id. at 223. He was able to perpetuate his scheme by virtue of his personal trust relationships with clients. See id. at 228. (“Hirsch used the investors' trust in him to discourage them from demanding their money.”). Here the Defendant established a relationship of trust with his clients, and proceeded to abuse that trust for his own gain. Additionally, as a member of the Endowment board of St. Barbara’s Church, the Defendant assumed a fiduciary duty to the Church, independent of his role as an investment adviser. This role is a position of trust, and his position enabled him to take the money without detection. Therefore, should the Court decide not to apply the four-point enhancement pursuant U.S.S.G. § 2B1.1(b)(17)(A)(iii) the two-level enhancement would certainly apply. Finally, the aspect of the Defendant’s conduct that is covered by this enhancement is distinct from that covered by the charitable misrepresentation enhancement. Thus, the two may be applied cumulatively without any double counting. the Defendant both violated his duty to St. Barbara’s Church, warranting the abuse-of-trust enhancement, and misrepresented to the parishioners that he was working on behalf of the Church and would invest their contributions on behalf of the church, warranting the charitable misrepresentation enhancement.

-48-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 49 of 52

7.

The Money Laundering in Violation of § 1956 adds an Additional 2 levels

The Guideline for a violation of 18 U.S.C. § 1956 is found in § 2S1.1(a)(1), which provides that the base offense level is the offense level for the underlying offense from which the funds were derived because (A), the defendant committed the underlying offense, and (B) the offense level for that offense can be determined. Having applied the base offense level and the specific offense characteristics for the investment scheme, the Court should now apply the adjustments located in U.S.S.G. § 2S1.1. It is clear that there needs to be an additional adjustment attributable to a defendant who engages in laundering stolen funds in such a way as to conceal and disguise the underlying fraud as well as engages in the type of laundering that promotes the fraud, as is the case in a Ponzi scheme where the laundering of the funds perpetuates and conceals the scheme. Obviously this conduct is judged to be more sever criminal conduct than merely taking the money. Here, the Defendant carefully and methodically moved the proceeds of the fraud from account to account to conceal the source of funds. As the bank records reveal, when he had a payment due to Porsche for automobiles, he did not make the payments from an Apeiron account, even though the funds were from the victim-investors. Instead, he moved the funds to a Farnbacher-Loles account so the payment would appear to come from his luxury car racing business. Similarly, the bank records reveal that when he needed to make the bogus interest payments to the victims of the Ponzi scheme, he first moved money to the Knightsbridge Holdings account, which was in reality a shell company with no operations and no holdings. Once the money was in a Knightsbridge account, the defendant would then initiate the payments

-49-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 50 of 52

to the victims. By doing this, the payments from a Knightsbridge bank account would reflect “Knightsbridge” on the payment. Pursuant to the grouping rules of U.S.S.G. § 3D1.2(d), since the offense level is based largely on the basis of total amount of harm and the loss amount as a measure of the aggregate harm and since the § 3D1.2(d) dictates that § 2B1.1 and § 2S1.1 are to be grouped, the Court should group the counts. Additionally, since the money laundering was an integral part of the Ponzi scheme and allowed the Defendant to prolong and perpetrate the underlying fraud, it could be said that the victims of the crimes are the same and that the crimes are part of the same criminal episode. See § 3D1.2(d) App. Note 3. This is a case where the money laundering and fraud were so highly interwoven that the counts should be grouped since the money laundering was part of a Ponzi scheme and permitted the Defendant to keep the scheme afloat and to prevent and forestall detection of the ongoing fraud. Accordingly, for the money laundering count, the Court should apply U.S.S.G. § 2S1.1(a)(1), which imports the adjusted offense level from the wire fraud and mail fraud securities fraud counts as the base offense level for the money laundering count. Next, the Court should add two levels to that base offense level pursuant to § 2S1.1(b)(2)(B) because the defendant was convicted of violating 18 U.S.C. § 1956. Accord United States v. Vargas, 11 CR 240 01(RWS), 2012 WL 363120 (S.D.N.Y. Feb. 2, 2012); United States v. Parker, 468 F. App'x 183, 185 (3d Cir. 2012) (holding that for the money laundering count, the Court applied § 2S1.1(a)(1), which imports the adjusted offense level [ ] from the wire fraud count to the money laundering count and [n]ext, the Court added 2 levels pursuant to § 2S1.1(b)(2)(B) because the defendant pled guilty to a violation of 18 U.S.C. § 1956.

-50-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 51 of 52

Therefore, to arrive at a single offense level for the multiple counts, the Court should use the adjusted offense level on the money laundering count and applied § 3D1.3(a). Thus, the Court imports the adjusted offense level from the wire fraud and mail fraud securities fraud counts, which here is a level 41, and next, the Court should add two levels to that base offense level pursuant to § 2S1.1(b)(2)(B) because the defendant was convicted of violating 18 U.S.C. § 1956. This results in an adjusted offense level of 43 before the adjustment for acceptance of responsibility. The defendant should receive a three level reduction for acceptance of responsibility. VI. Conclusion For the foregoing reasons, the Government respectfully submits that, under the circumstances of this case the Defendant’s Offense level is a level 40, resulting in a Guidelines range of 292-365 months.

Respectfully submitted, DAVID FEIN UNITED STATES ATTORNEY /S/ MICHAEL S. MCGARRY ASSISTANT U.S. ATTORNEY Federal Bar No. CT25713 157 Church Street, 23rd Floor New Haven, CT 06510 Tel.: (203) 821-3751 Fax: (203) 773-5378 Michael.McGarry@usdoj.gov

-51-

Case 3:10-cr-00237-AWT Document 80

Filed 11/07/12 Page 52 of 52

CERTIFICATION I hereby certify that on November 7, 2012 a copy of foregoing Government’s Sentencing Memorandum was filed electronically and served by hand on anyone unable to accept electronic filing. Notice of this filing will be sent by e-mail to all parties by operation of the Court’s electronic filing system or by mail to anyone unable to accept electronic filing as indicated on the Notice of Electronic Filing. Parties may access this filing through the Court’s CM/ECF System.

/S/ MICHAEL S. McGARRY ASSISTANT U.S. ATTORNEY

-52-

Case 3:10-cr-00237-AWT Document 80-1

Filed 11/07/12 Page 1 of 1

Attachments 1 - 10 (filed under seal)

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->