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662 (PAC) ROSS MANDELL, et al., Defendants. -----------------------------------------------------------x
DEFENDANT ROSS MANDELL’S MEMORANDUM OF LAW IN SUPPORT OF HIS MOTIONS TO SUPPRESS AND FOR A BILL OF PARTICULARS
HOFFMAN & POLLOK, LLP Attorneys for Defendant Ross Mandell 260 Madison Avenue New York, NY 10016 Tel. (212) 679-2900 Fax (212) 679-1844
TABLE OF CONTENTS Page Statement of Facts………………………………………………………………….. I. Summary of The Indictment.……………………………………………………. II. The Search Warrant − The Supporting Affidavit And The Recorded Conversations………………………………………………………………….. A. Allegations Made By CW-1 (Mario Figueroa)………………………... B. The “UK Investor”…………………………………………………….. C. Allegations Regarding Akel’s Scheme With CW-1 and the UC ……… D. Akel’s Cooperation and Allegation …………………………………… E. Dengler’s Allegations About the Conversations Recorded by Akel ….. Argument: Point I – The Search Warrant Affidavit Recklessly Omits Material Information Critical To A Determination Of Probable Cause, Warranting Suppression Or, In The Alternative, A Hearing ……………… Overview of the Applicable Law………..…………………………………………. I. The Material Omissions…..…………………………………………….. a. Alleged Materially False And Misleading Statements To Induce Investors To Purchase Securities ………………………. b. Alleged “Ponzi” Scheme To Raise Money From Investors To Pay Off Prior Investors, To Keep Sky Capital Afloat, And To Personally Enrich Ross Mandell And Others ………….. c. Alleged Manipulation Of The Market For Publicly-Traded Securities Of Companies Related To Sky Capital……………….. II. Without the Tainted Allegations, The Affidavit Fails To Establish Probable Cause………………..……………………………………….. 1 1 4 6 8 10 16 21
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Point II – The Court Should Order The Government To Provide A Bill Of Particulars……………………………………………………….. A. Applicable Law………………………………………………………… Conclusion………………………………………………………………………….
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TABLE OF AUTHORITIES Page CASES: Franks v. Delaware, 438 U.S. 154, 98 S. Ct. 2674 (1978)…………………………… Rivera v. United States, 928 F.2d 592 (2d Cir. 1991)……………………………….. . United States v. Bennett, 36 F.R.D. 103 (E.D.S.C. 1964) …………………………… United States v. Bortnovsky, 820 F.2d 572 (2d Cir. 1987)…………………………… United States v. Campino, 890 F.2d 588 (2d Cir.), cert. denied, 494 U.S. 1068 (1990)……………………………………………………………. United States v. Canfield, 212 F.3d 713 (2d Cir.2000)………………………………. United States v. Davidoff, 845 F.2d 1151 (2d Cir. 1988) ……………………………. United States v. Jacobs, 986 F.2d 1231 (8th Cir. 1993)………………………………. United States v. Lino, No. 00 Cr. 630, 2001 WL 8356 (S.D.N.Y. Dec. 29, 2000)…………………………………………………………. United States v. Nachamie, 91 F. Supp.2d 565 (S.D.N.Y. 2000) ……………………. United States v. Orena, 32 F.3d 704 (2d Cir. 1994) …………………………………. United States v. Ranney, 298 F.3d 74 (1st Cir.2002)………………………………… United States v. Reilly, 76 F.3d 1271 2d Cir.1996)…………………………………… United States v. Salameh, 152 F.3d 88 (2d Cir.1998)………………………………… United States v. Schmitz, 181 F.3d 981 (8th Cir. 1999)………………………………. United States v. Trie, 21 F. Supp. 2d 7 (D.D.C. 1998) ………………………………. United States v. Vilar, 2007 WL 1075041 (S.D.N.Y. 2007).…………………………. United States v. Whitely, 249 F.3d 614 (7th Cir. 2001)………………………………. United States v. Williams, 737 F.2d 594 (7th Cir.1984)……………………………… 1, 27 25, 26, 32 40 37, 38, 39 26 25 37, 39 26 38, 39 38, 39 39, 40 26 26 25 26 38 27 26 26
United States v. Wilson, 493 F. Supp. 2d 364 (E.D.N.Y. 2006)……………………… Wilson v. Russo, 212 F.3d 781 (3d Cir. 2000)………………………………………… OTHER AUTHORITIES: 17 CFR 240.10b-5 ……………………………………………………………………
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK -----------------------------------------------------------x UNITED STATES OF AMERICA -against09 Cr. 662 (PAC) ROSS MANDELL, et al., Defendants. -----------------------------------------------------------x DEFENDANT ROSS MANDELL’S MEMORANDUM OF LAW IN SUPPORT OF HIS MOTIONS TO SUPPRESS AND FOR A BILL OF PARTICULARS Defendant Ross Mandell respectfully submits this memorandum in support of his motions: 1) to suppress evidence seized pursuant to search warrants executed on or about November 6th and 20th, 2006, at the offices Sky Capital Enterprises, Inc., et al., at 110 Wall Street, 8th Floor and a basement storage area, and; 2) for a bill of particulars The defendant seeks suppression of all evidence obtained from the searches, and all leads obtained therefrom, under Franks v. Delaware, 438 U.S. 154, 98 S. Ct. 2674 (1978), on the ground that the search warrant affidavit omitted material information and was made with reckless disregard for the truth. Further, without the tainted portions that are either untrue or misleading because of the omissions, the affidavit does not establish probable cause to support the warrant. The defendant also seeks leave to supplement this motion upon receipt of missing audiotapes and transcripts and to file additional motions after his review of the voluminous discovery in this case.
STATEMENT OF FACTS I. SUMMARY OF THE INDICTMENT The two-count indictment charges Ross Mandell and five others with conspiracy to commit securities, mail and wire fraud. The defendants are also charged with one count of substantive securities fraud under 17 CFR 240.10b-5; a scheme to defraud and the making of untrue statements of material facts in connection with the purchase and sale of securities. The indictment focuses on the operations of two brokerage firms; 1) The Thornwater Company L.P. (“Thornwater”), from 1998 until early 2003, and; 2) Sky Capital LLC (“Sky LLC”), from 2002 until 2006. More particularly, it focuses on the solicitation of investments in “private placements,” whereby investors purchased “units,” “shares,” or “interests” in various private companies. The conspiracy count alleges that defendant Ross Mandell joined Thornwater in 1997 and left in or about 2001 to start Sky Capital Holdings Ltd. (“Sky Holdings” or “SKH”), and Sky Capital Enterprises (“Sky Enterprises” or “SKE”), of which companies Mandell was the chief executive officer. (Sky Holdings, Sky LLC and Sky Enterprises are collectively referred to as “Sky Capital.”). The other defendants were either registered brokers or officers of Thornwater and Sky Capital. Defendant Stephen Shea was Thornwater’s Operations Principal from 1999 until 2002, when he left to become the Chief Operating Officer of Sky Holdings and Sky LLC (the brokerage firm). Defendant Robert Grabowski was Thornwater’s Executive Vice President in June, 1998 and was listed as the President and CEO from July, 2001 until February, 2003. In June, 2003 he joined Sky Capital as a registered broker. Defendants Harrington, Wilson and Passaro were, at various times, registered brokers at Thornwater and later at Sky Capital. Id. at ¶¶ 5-15.
At both firms, the defendants allegedly told investors that their funds would be used for legitimate business purposes described by the private placement memoranda, such as, e.g., acquiring business assets and bringing companies public on a securities exchange, typically the Alternative Investment Market (“AIM”) exchange in London. Indictment at ¶¶ 20-21, 27. Instead, according to the indictment, investor funds were allegedly used to enrich the defendants through, inter alia, excessive, undisclosed commissions to brokers and to pay off the losses of previous investors. Id. at ¶¶ 17, 19, 24-25. In soliciting investors, the defendants allegedly made misrepresentations and omissions regarding, inter alia: 1) how investor funds would be used and had been used in the past; 2) the value of the securities purchased; 3) expected investor profits due to, e.g., an IPO or expected acquisition; 4) the amount of compensation brokers were receiving on trades of Sky Capital stock, and; 5) that Sky Capital stock’s list price on the AIM had been artificially inflated and fraudulently maintained. Id. at ¶¶ 29, 30, 33. II. THE SEARCH WARRANT − THE SUPPORTING AFFIDAVIT AND THE RECORDED CONVERSATIONS The government obtained two warrants to search the offices of the Sky Capital companies at 110 Wall Street, New York, New York, the first of which it did not execute. According to FBI Agent Kurt Dengler, Sky LLC, located at 110 Wall Street, was a brokerage firm owned by Sky Holdings, a public company whose shares were traded on the London Stock Exchange. The offices were shared with Sky Enterprises, a venture capital firm whose shares were also publicly traded on the London Stock Exchange. According to Dengler, Mandell was the Chairman and CEO of all three entities, and Mandell was previously associated
with the Thornwater Co., L.P. 1 See Affidavit of FBI Agent Kurt Dengler, dated November 2, 2006 (“Dengler Aff.”) at p. 5, Exhibit A.2 The first warrant application, dated August 24, 2006, primarily described tape-recordings between a Sky Capital broker named Philip Akel and a cooperating witness (“CW-1”) who had worked with Akel years previously. According to the second application, the first warrant was not executed because Akel agreed to cooperate and the government decided to wait in order to obtain more information. Id. at p. 3.3 As part of his cooperation, Akel continued to work at Sky Capital and recorded his conversations, through a body wire and over the telephone, with Mandell and various Sky Capital officers and brokers. In his affidavit, Agent Dengler articulated three specific areas of allegedly criminal conduct for which, he alleged, he would demonstrate probable cause to issue a warrant: [that individuals associated with Sky Capital have and/or are continuing to]  disseminate…materially false and misleading statements about securities traded through Sky Capital in order to induce investors to purchase such securities[;]  participate in…a “ponzi” scheme…to use various purported investment opportunities, including private placement offerings, to pay off prior investors, to keep Sky Capital afloat as an ongoing business, and to personally enrich Ross Mandell and others[;] [and]
Contrary to Dengler’s claim, and according to publicly filed documents, Mr. Mandell was never the chairman of any of the Sky companies. The July 2002 prospectus for Sky Holdings lists Mr. Mandell as the Group Chief Executive and Alexander Agim Duma as the Non-Executive Chairman. The March 2004 prospectus for Sky Enterprises similarly lists Mr. Mandell as an Executive Director. Copies of the relevant pages of the prospectuses for Sky Holdings and Sky Enterprises, Exs. B and C. The exhibits are contained in a separately bound book following the Notice of Motion and Affirmation. A third warrant, dated November 7, 2006, was obtained to search a basement storage space on the same premises.
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 engage in practices to unlawfully manipulate the market for publicly-traded securities of companies related to Sky Capital. Ex. A, Dengler Aff. at p. 4. The warrants that were executed authorized the wholesale seizure of all documents, inter alia, pertaining to Thornwater Capital, Sky Capital private placements and all Sky Capital clients, including all electronic media containing such information. As demonstrated below, the government excluded numerous conversations and documentary evidence that contradicted its allegations of wrongdoings at Sky Capital. We summarize in detail the second application, the first part of which relates the conversations between Akel and CW-1, which were the basis for the first, unexecuted warrant. Throughout this summary we juxtapose the warrant’s allegations to statements from certain tape transcripts that have been provided to us by the government and to other readily available information that were not disclosed to the issuing Magistrate. For purposes of clarity, paragraphs relating the allegations in the search warrant affidavit are preceded by “[Affidavit],” paragraphs summarizing tape-recorded conversations not disclosed to the Magistrate are preceded by “[Tapes],” and paragraphs summarizing records and documents not disclosed to the Magistrate are preceded by “[Documents].” In addition, for the convenience of the Court and the parties, we have included as Exhibit L spreadsheet comparing allegations in the affidavit to undisclosed tape-recordings and documents., A. Allegations Made By CW-1 (Mario Figueroa) [Affidavit] Dengler’s original source of information was a cooperating witness (CW-1) who was convicted of securities fraud in an unrelated case and who allegedly worked with Mandell at Thornwater from 1999 to 2001. It is apparent from the tape-recordings and
transcripts provided by the government that CW-1 is an individual named Mario Figueroa. 4 Figueroa claimed to have participated in five private placements, raising money from investors for initial public offerings. Figueroa claimed that, although he was instructed to tell investors that their funds were for IPOs, Mandell and Thornwater did nothing to initiate the IPOs and spent the money, instead, to pay brokers excessive, undisclosed commissions and for their own benefit. Figueroa also claimed that Mandell told the brokers to inform investors that the private placements went “belly up,” but that they would be compensated with shares in other private placements, which also failed to result in IPOs, allegedly rendering the private placement shares worthless. Id. at p. 6. [Documents] Dengler identified the five private placements Figueroa worked on as: St. James Holdings, LLC, Ticketplanet.com, Inc., Lanesborough Holdings LLC, Chipcards Inc., and Raleigh Holdings LLC. Id. at 5-6.5 Only the offering memorandum for Ticketplanet mentions the use of investors’ funds for an initial public offering. In contrast, the “Use of Proceeds” section of the Lanesborough Private Offering Memorandum (“POM”) states: The Holding Company intends to use the proceeds from this Offering to (i) pay the fees and expenses associated with the formation of the Holding Company and the Managing Member; (ii) make a subordinated loan to the Firm [Thornwater]; (iii) provide for working capital and future investments by the Holding Company; and (iv) pay the fees and expenses associated with this Offering.
The “unrelated securities fraud case” was a federal indictment in New Jersey that alleged that, in 2003, Figueroa and others fraudulently induced investors to purchase securities, falsely claiming, inter alia, that other investors had made returns from private equity deals of 500% and 1600%. See Information filed in United States v. Figueroa, No. 05 Cr. 181, included as Exhibit D. Available records show no private placement of stock in Chipcards. Moreover, Figueroa, who left Thornwater in 2001, could not have been involved with Chipcards, whose original registration statement was filed with the SEC in or around November, 2001 and an amended registration statement was filed in or around May, 2002.
Copies of the “Use of Proceeds” sections from the Lanesborough, Raleigh, and St. James POMs – none of which refer to an initial public offering – are collectively attached as Exhibit E. The written materials provided to investors flatly contradict Figueroa’s claim that investors’ funds were solicited for five initial public offerings. [Tapes] In addition, in contrast to Figueroa’s claim that nothing was ever done to initiate IPOs at Thornwater, Philip Akel recorded a conversation with two Sky Capital brokers on November 13, 2006, during which they discussed an accusation that there was “no intention of these companies ever going public or becoming profitable.” All three agreed that the allegation was “ridiculous,” and that “everything possible [was done] to bring these companies public.” Ex. K-1 at p. 5.6 Although the conversations do not identify the companies, the indictment itself states that Sky Holdings and Sky Enterprises were successful IPOs. See Indictment at ¶¶ 1, 4, 25, 26. B. The “UK Investor” [Affidavit] Agent Dengler offered information from a single investor, “the UK investor,” as corroboration of some of Figueroa’s claims. According to the UK investor, Mandell contacted him in the mid-1990s, as a broker at Thornwater, about investing in the U.S. stock market, and the UK investor did so. In the Fall of 1999, Mandell solicited the UK investor to invest in the Ticketplanet and Raleigh private placements, assuring him that the companies would go public and that his investments would at least double. The “UK investor” invested $100,000 and $125,000 in the private placements respectively. Neither company went public. Dengler Aff. at pp. 8-9, ¶¶ 13-14.
The transcripts of the taped conversations referenced herein are collectively included as Exhibit K; each conversation is identified by a number.
[Documents] As noted above, the Raleigh private placement materials do not mention use of investor funds for an initial public offering. See Exhibit E. [Affidavit ] In 2001, unsatisfied with responses to his inquiries from Mandell and others, the UK investor contacted the NASD. In February, 2002, Mandell met with the UK investor in Great Britain and allegedly promised to give him 150,000 shares each in two other companies, Chipcards and Sky Holdings, as compensation for his prior investments. In March, 2002, defendant Grabowski met with the UK investor and they executed a written agreement under which the UK investor would forego any claim with the NASD and receive the Chipcards and SKH shares. The UK investor never received the shares. When Sky Holdings went public, he complained to Mandell, who referred the UK investor to his attorney. Id. at pp. 8-9. [Documents] It is apparent from the allegations that the “UK investor” is a UK citizen named Christopher Tappin. Agent Dengler failed to disclose that, in December 2004, Tappin initiated an NASD arbitration concerning the alleged agreements with Mandell and Grabowski. In his complaint before the NASD, Tappin made no claim about a $100,000 investment in Ticketplanet. Tappin’s claims as to Mandell were solely based on an alleged oral agreement in February, 2002, to exchange Tappin’s shares of Raleigh for 150,000 shares each of Chipcards and Sky Holdings. Mandell and Sky LLC moved to stay the arbitration in Supreme Court, New York County on the grounds that there was no oral contract and, further, that there was no valid arbitration agreement between the parties, in part because Mandell and Sky LLC were not members of the NASD at the relevant time. The court permanently stayed the arbitration as to Mandell for the latter reason, and also expressed its doubts as to the existence of the February 2002 oral agreement: At the outset, based on the evidence before this Court, the Court questions whether there even was an oral contract…In the instant
case, there is no writing memorializing the agreement of the parties signed by [Mandell and Sky LLC]. Aside from Mr. Tappin’s allegations regarding the events of February 20, 2002 and his written agreement with Raleigh Holdings, which was neither signed nor acknowledged by [Mandell and Sky LLC] there is no proof of any transaction between the parties that constitutes a meeting of the minds and mutual promises supported by consideration. Thus, the Court’s doubts as to the existence of an oral contract. A copy of the court’s decision in Mandell et ano. v. Tappin et ano., Index No. 102895 (Sup. Ct., N.Y. Co., Sept. 7, 2005) is included as Ex. F. Agent Dengler’s failure to disclose the facts of the arbitration and subsequent proceedings in New York State Court deprived the Magistrate of facts critical to assessing the “UK Investor’s” credibility and the extent, if any, to which his allegations corroborated Figueroa’s claims.7 C. Allegations Regarding Akel’s Scheme With CW-1 and the UC8 The recorded conversations between Sky Capital broker Philip Akel and Figueroa (“CW1”) are limited to a scheme between the two men (one acting as a government agent) to find and induce customers to purchase Sky Capital stock through false representations. Figueroa introduced a purported investor (“UC”) to Akel, and their conversations were also recorded. The recordings were made between December, 2005, and August, 2006. These conversations revealed no evidence of the participation of the defendants ultimately charged in the indictment or any other employee or officers of Sky Capital.
The “UK Investor” is the one and only investor whose information was offered to support probable cause that, inter alia, there was an extensive, fraudulent “ponzi” scheme. Dengler alleges, through triple hearsay, that Figueroa told him about three former Thornwater clients who were promised by Mandell that they would receive shares of Sky Capital Holdings and other private placement for not complaining. Dengler Aff. at p.7. However, Dengler either could not, or did nothing to, corroborate this allegation, since no information from these alleged investors was provided.
Akel is referred to by name in the first application, and as “the Broker” in the second application.
Several of the conversations between Akel and Figueroa cited by Dengler in his affidavit have not been transcribed by the government.9 Many other transcripts that have been provided, however, but were not referenced in the affidavit, directly contradict Dengler’s allegations about the untranscribed conversations. Moreover, as set forth in the argument section of this Memorandum, the conversations Dengler cites do not provide the probable cause Dengler alleges, and they do not provide probable cause to support the all-inclusive search warrant issued by the Magistrate. [Affidavit] Beginning in December, 2005, at the FBI’s direction, Figueroa recorded a series of conversations with Philip Akel (the “Broker”), who worked with Mandell at Thornwater and then at Sky Capital. Dengler Aff. at pp. 5, 10. The recordings were made during the ensuing nine months. Akel allegedly invited Figueroa to locate investors for Sky Capital’s private placements. On December 8, 200, Akel claimed that Sky Enterprises owned a company called GlobaSecurel (“Global”), and that the brokers’ commission on Global shares was 7%. According to Dengler, Akel also claimed that his commission on the sale of Sky Enterprises (SKE) stock was 50%. Akel said he would give Figueroa, in cash, 40% of his commission for any SKE investors that Figueroa could produce. Id. at 11. [Tapes] During the December 8th conversation, Akel mentioned a “50% payout,” not a 50% commission, for certain transactions. Ex. K-16, at p. 19 “Payout” obviously refers to the broker’s share of the commission. Agent Dengler, however, substituted “commission” for “payout,” misrepresenting to the Magistrate that Akel claimed to make an exorbitant 50% commission on the sale of SKE stock. In addition, in the same conversation, Figueroa challenged Akel about the amount of the commission, and Akel insisted that the highest
Because the tapes themselves are difficult to hear, we request leave to supplement this aspect of our motion upon our further review of the tapes or upon receipt of transcripts from the government.
commission the firm received was 7%, on private placements. Id. at 17. This part of the conversation was never conveyed to the Magistrate. Dengler also omitted a subsequent conversation in which Akel reiterated that his commission on private placements was 7%. During a conversation recorded on January 6, 2006, upon Figueroa’s persistent urging, Akel agreed to contact Figueroa’s “leads,” and he was unequivocal that the highest commission he could charge was 7%: PA [Philip Akel]: I’m doing a raise right now MF [Mario Figueroa]: What about like, what about like uh, no, no, do it where you’re making the most money. Do it in fucking SKY bro. PA: Right, the only, exactly, I’m doing a raise right now for SKY but SKY only 7 percent. Dude listen, at this point I fucking What happen to fucking 60 cents on $1.60 That was a, that was, forget that, that was, (UI) no. The only thing that that that’s not even, that’s never happen. I don’t know what you’re talking about. It’s seven percent private. That’s that’s where we maxed out. You think I’m lying to you. If you think about it why would I (UI) but this fucking In the past it used to be at 10. Right now it’s 7 percent….
Exhibit K-2 at p. 12. This conversation wholly contradicts Agent Dengler’s claim that Akel made, or even claimed to have made, 50% in commissions on any transaction. Two days later, in another undisclosed conversation, Figueroa complained that “[t]here’s gotta be something to make more money.” Akel said, “unfortunately, there isn’t … there’s absolutely nothing. There’s no smoke and mirrors . . . .” Ex. K-25 at p.4
[Affidavit] In February, 2006, Figueroa gave Akel the name and contact number for an undercover agent posing as an investor named “Reed Walker.” Dengler Aff. at pp. 10-11. In an untranscribed conversation on March 3, 2006, Akel called “Walker” and told him that the maximum allowable commission was 5%, but that Sky Capital only charged 3%, which Akel would only charge if his client is making money. Id. at p.13 [Tapes] In citing this conversation, Dengler invited the Magistrate to believe that Akel was lying to the undercover about the commission, since, according to Dengler, Akel previously told Figuroa that the commission was 7% or 50%. Dengler omitted to inform the Magistrate about a conversation on January 8, 2006, in which Akel said that there were only two kinds of commissions the firm charged, “a regular commission business where the maximum I control is just 3% and . . . a private placement, it used to be ten, it’s now seven.” Ex. K-25 at p. 4-5 Dengler also omitted a subsequent conversation with Figueroa, in which Figueroa complained about Akel’s approach with “Walker.” On March 7, 2006, Figueroa told Akel that “Walker” was “not looking to buy fucking listed stocks.” Akel responded that he would not offer a new client like “Walker” an investment in a private placement. Ex. K-26, at p. 3. On March 8, 2006, Figueroa again complained to Akel that “Walker” was expecting more than being “pitched … a stock.” Ex. K-27 at 8, 22). It is obvious that Akel’s conversation with “Walker” involved an ordinary stock transaction, which explains why Akel mentioned a maximum commission of 5% (the industry standard) and Sky Capital’s commission of 3% on such transactions. Omitting the above conversations, Dengler led the Magistrate to believe that Akel lied to “Walker” from the outset. Any misrepresentations Akel made to the undercover, however, were made at the insistence of
the government’s agent, Figueroa, who repeatedly told Akel that he was in desperate financial straights and needed Akel’s help. See, e.g. Ex. K-16 p.7, 20; Ex. K-2 at p. 8-11, 14. [Affidavit] When Akel spoke to “Walker,” he told “Walker” about companies called GlobalSecure and Advanced Spinal. Akel claimed that Sky Enterprises owned all the patents for a device to treat back pain marketed by Advanced Spinal. Ex. A, Dengler Aff. at 13. Thereafter, Akel told Figueroa to advise “Walker” that Sky Enterprises was undervalued and about to explode; that Sky Capital paid $27 Million for a homeland security company to be sold in a matter of weeks for double or triple, and; that it owned 70% of a company marketing a back pain device. Akel subsequently told “Walker” that Sky Enterprises owned Global outright and that a Sky Enterprises investment would probably double or triple. Id. at pp. 14-15. There are no transcripts of these conversations between Akel and “Walker.”. [Affidavit Cont.] According to Agent Dengler, public records showed that Sky Enterprises owned 20% of Global Secure, and Ross Mandell owned 30%. Id. Dengler confirmed that a company called “Advanced Spinal Technologies” was marketing a back pain treatment device. Its website indicated that Sky Enterprises owned 40% of the company. 10 Dengler alleged that a patent search yielded no results for the company or the device.11 Id.
The Sky Enterprises private placement memorandum dated July, 2005 (“SKE PPM”), states that Sky Enterprises had a “controlling position in two companies, GlobalSecure and Advanced Spinal Technologies” as follows: Sky Enterprises owned 17.8 per cent of the issued voting share capital of GlobalSecure and 40% of Advanced Spinal. Ex. G at pp. I-17, I-19. The SKE PPM further indicates that Sky Holdings and Mandell owned 18% and 12.5% of AST, respectively. Id. It is therefore reasonable to infer that Akel’s claim that Sky Capital owned 70% of Advanced Spinal was based on the combined interests of Sky Enterprises, Sky Holdings and Mandell. See Dengler Aff. at p. 20. An online search of the U.S. Patent & Trademark Office (“USPTO”) reveals that a patent application for the back treatment device, a copy of which is included as Ex. H, was filed with the USPTO on January 13, 2006.
[Affidavit Cont.] On April 3, 2006, the FBI wired $30,000, ostensibly from “Walker,” for an investment in Sky Enterprises. On April 27, 2006, Akel advised Figueroa to tell “Walker” that his investment had already appreciated by 30%, in order to get him to purchase more stock. There is no transcript of this conversation. According to Agent Dengler, SKE stock had decreased in value. Id. at p. 17. [Affidavit Cont.] In another untranscribed conversation on May 11, 2006, Akel offered to pay Figueroa $25,000 (or 5%) if Figueroa could get “Walker” to invest $500,000 in SKE. Akel told Figueroa to guarantee “Walker” that he would be able to sell at least half of his stock in six months, because Akel controlled 700 other accounts that he could use to buy “Walker’s” stock. Agent Dengler opined that Akel was referring to an illegal practice of “crossing stock” to manipulate the market by minimizing stock sales in the open market to support the stock price. Id. at p.19. [Tapes] Agent Dengler provided no evidence to corroborate Akel’s claim of controlling 700 accounts that he could use to purchase “Walker’s” stock. Indeed, nothing in the conversations Akel subsequently recorded corroborated this boast. The conversation is a prime example of Akel and Figueroa engaging in a scheme of their own. [Affidavit] On June 8, 2006 Akel met with “Walker” and another undercover officer posing as an investor (“UC-2”) at Sky Capital’s Wall Street offices. Akel gave them a tour of the offices and discussed with them the GlobalSecure and Advanced Spinal companies. This time Akel said that Advanced Spinal was owned 40% by Sky Capital Enterprises, consistent with Dengler’s records search. Ex. A, Dengler Aff. at p. 19-20. [Tapes] Although Akel and Figueroa had several subsequent conversations, the ones that have been transcribed show that Akel was not interested in working with Figueroa. On August
18, 2006, Akel told Figueroa that he did not take a call from “him” and that he (Akel) was only interested in playing golf with Figueroa. Ex. K-28 at p. 3). Dengler also failed to disclose to the Magistrate that, during a number of Figueroa’s meeting with Akel, Akel either talked about or took illegal drugs, referring to them a “blast” or “weed.” See, e.g., Ex. K-16, at p. 28; K- 29 at p. 20, 21, 27, 39; K-27 at p. 33. D. Akel’s Cooperation and Allegations [Affidavit] On August 24, 2006, government agents advised Akel that he was under investigation. He agreed to cooperate in the hope of obtaining a reduced sentence. Akel told the government that he worked for Mandell at Thornwater soliciting investors for private placements. In late 2002, he joined Sky Capital and participated in private placements for Sky Holdings and Sky Enterprises before they went public. Akel claimed that Mandell received salaries, large bonuses and payments for personal expenses from several of the Sky Capital companies, even when the companies were losing money. According to Akel, brokers were under pressure to raise more money to keep Sky Capital afloat and to induce clients to take large positions in SKH and SKE stock, often by liquidating their other holdings, contrary to their clients’ best interests. Ex. A, Dengler Aff. at pp. 22, 24-25. [Tapes] Akel’s recorded conversations, however, contradicted these allegations. Presumably at the direction of his government handlers, Akel specifically queried his co-workers and supervisors about Mandell’s compensation arrangements. Michael Recca, the President of Sky LLC and Sky Holdings, told Akel that Mandell’s credit cards had always been carefully monitored. In response to Akel’s comment that Mandell “expenses everything,” Recca firmly disagreed and said that Mandell “doesn’t expense everything.” Ex. K-3 at p. 3. When Akel persisted and claimed there was a lot he (Akel) did not know about, Recca again disagreed,
stating, “No, there’s not a lot you don’t know about.” Id. During another conversation about Mandell’s expenses, an individual named Fran Duffy told Akel that he (Duffy) takes money out, presumably from Mandell’s paychecks, in order to account for Mandell’s expenses. Ex. K-4 at p. 4. Moreover, according to the recorded conversations, the biggest ticket item was not the amount of money that was paid to Mandell, but legal fees in the range of $13 to $14 Million for litigation with regulators. Ex. K-5 at p. 3; Ex. K-6 at p. 9. [Tapes Cont.] In addition, contrary to Akel’s claim of pressure to sell shares even when the transactions were not in clients’ best interests, on at least two tape-recordings, Akel asked Steven Shea, the company’s COO, if he could make some money selling SKE shares, and Shea did not give him an answer. Ex. K-7 at p. 4; Ex. K-8 at p. 1. According to the tapes, any “pressure” on Akel came from his own ambitions, not from others. [Affidavit] Akel also claimed that Mandell and the brokers made numerous unfulfilled promises to investors, including misrepresentations about the likelihood that Global Secure would go public and the anticipated price of its shares. Agent Dengler alleged that, even if Global Secure were to go public, its shares would not trade at the prices Mandell predicted to investors. Dengler Aff. at pp. 22-23.12 [Tapes] Contrary to the allegation that brokers were instructed to make misrepresentations to investors, the recorded conversations are replete with instructions from Mandell to disclose to investors the true financial circumstances of the firm and companies for which it did private placements. For example, during a recorded meeting between Mandell and a group of brokers on August 29, 2006, Mandell answered the question of what to tell investors about the prospects of Global going public by giving them a letter to review. He specifically told
Execution of the search warrant obviated any possibility of an IPO.
the group that they could not give investors time or price information. Ex. K-7 at p. 6. On another occasion, when a broker asked Mandell what he could say to customers about Global, Mandell again refused to give the broker a specific time frame to convey to customers. Ex. K-9 at pp. 3-4. To another broker, Mandell said that there was a lot of disinformation going around that the Global deal was imminent. Ex. K-6 at p. 12. These conversations show that Mandell told the brokers not to make misrepresentations and predictions about Global. In addition, as addressed below, he was brutally honest with brokers and investors about the financial state of the firm in connection with then current efforts to raise money to rescue the firm. None of these conversations were disclosed to the Magistrate. [Affidavit] Akel further claimed that the Sky Capital brokerage firm’s proprietary account would purchase shares of the publicly-traded Sky Capital stock (SKH and SKE) in order to prevent the stock from reaching the open market and decreasing in value. The brokers were then instructed to sell the stock in the proprietary account to the firm’s customers, receiving large, undisclosed commissions disguised as bonuses. Dengler Aff. at p. 23. Another way of keeping the stock prices from falling, according to Akel, was to discourage customers from selling their SKH and SKE shares. Pursuant to a “no net sales” policy, if an investor insisted on selling his stock, the broker was required to “cross” the stock, i.e. find a Sky Capital client to buy the stock. Id. at p. 24. [Tapes] According to the recorded conversations, however, when customers’ sale orders were not executed on the open market, it was because there was no market for the shares. As a result, customers’ shares could not be sold on the open market. Moreover, investors were not discouraged from selling, except to the extent that they were honestly advised about the state of the market. For example, on the first day Akel began recording his conversations, he discussed a
market order for 10,000 shares that was two weeks old. Akel was told that the trading desk was trying to execute the order, not that the stock had to be held or crossed. Ex. K-10 at pp. 1, 7. Later on the same day, Akel and a Sky trader discussed another broker’s market order that could only be executed at “1 p,” so it was cancelled. Id. at pp. 5-6. On September 6, 2006, Akel gave the trading desk a limit order to sell a client’s shares, and advised the trader that he would change it to market if that was the only way to get the client out that day. Ex. K-11 at p.2. On October 4, 2006, Akel gave an order to the trading desk to sell a client’s 10,000 shares of SKH at market. He was told that it would only sell for “1 p,” even though the stock was listed at “10 p,” because there were no buyers. When he checked back to see if the shares were executed, the trading desk had not been able to do so. Ex. K-4 at pp.1, 4. In complaining about the transaction to another employee, the employee suggested crossing the stock, but said that he didn’t think they were allowed to cross. Id. at p. 3. When Akel told Mandell that he put in a market order to sell 10,000 shares, Mandell simply said “yup.” Ex. K-12 at p. 1. [Tapes Cont.] Mandell explained the inability to execute orders during one of the undisclosed, recorded conversations. He said that, even though the bid price of a stock on the AIM (London’s Alternative Investment Market) may be 17 p, and the offer price is 27 p, transactions could not be executed at these prices because there were no buyers or sellers. Ex. K-9 at p. 1. On November 13, 2006, after the execution of the search warrant, defendant/broker Arn Wilson was recorded stating that “they” do not understand the AIM; that it is not like the NASDAQ because the AIM exchange does not have to honor the bid or offer; that Sky Capital never refused to sell customers’ shares, and that the market makers would be able to confirm that there were no buyers through their order flow information. Ex. K-13 at pp. 4-5.
[Tapes Cont.] Not only do the conversations Akel recorded contradict his allegations about manipulating the market, but Akel himself said otherwise while Figueroa was surresptitiously recording him. On February 10, 2006, Akel told Figueroa: “it’s simple supply and demand. We have no control over the stock. We don’t make a market in it. We can’t mani-. You know, manip--, nobody can ever say I couldn’t sell, I couldn’t buy, you manipulated, the market makers. I have plenty of clients that have bought and plenty of clients that have s-- ….” Ex. K-29 at p. 7. This conversation was never disclosed to the Magistrate. [Documents] Agent Dengler failed to discuss, in any way, how London’s AIM market operates. Instead, Dengler led the Magistrate to believe that the same rules and practices apply, without any reference to the above conversations, particularly about liquidity (i.e. the ability to sell). Indeed, the private placement memoranda themselves warned investors about the AIM’s lack of liquidity. For example, the SKE PPM contains language about the risks of investing on the AIM: “Other risk factors relating to (i) the nature of the AIM market, (ii) the possible limited liquidity of the Common Shares….” Ex. G at p. I-6. In addition, the prospectus published in connection with SKE’s admission to trading on the AIM includes similar language among the listed “Risk Factors:” “[t]he Rules of Aim are less demanding than those of the Official List of the UKLA.13 An investment in a share that is traded on AIM is likely to carry a higher risk than an investment in shares listed on the Official List.” Ex. I at p. 13. Agent Dengler either knew or certainly should have known that there are differences between the AIM and other exchanges, particularly in terms of liquidity, but he failed to alert the Magistrate.
The “UKLA” is defined as “[t]he Financial Services Authority acting in its capacity as the competent authority for the purposes of the Financial Services and Markets Act 2000.” Ex. I at p. 5.
[Affidavit] Akel reported to Dengler that Sky Capital was then currently involved in soliciting investors in the United Kingdom for a Sky Holdings private placement, referred to as “the Current Raise” or “Raise.” He quoted Mandell as frequently stating that Sky Capital would probably go out of business in the near future unless the Raise was successful. Mandell said they had found 30 million shares that could be offered, and he allegedly promised the brokers a 10% commission on any money they raised, which they did not have to disclose to potential investors. Agent Dengler quoted language from written materials provided to investors about the Raise, that the investor would not pay a commission to participate in the placing. Dengler Aff. at p. 25, 29. [Tapes] With respect to the commission, there were numerous discussions about the language in the private placements materials, the rules of the AIM exchange and whether a commission could or could not be paid. Rather than making promises to brokers, Mandell said that he was “trying” to pay and “working on” figuring out how to pay a 10% commission. Ex. K-6 at pp. 3, 14. Indeed, Akel had several conversations about the commissions with both Mandell and Michael Recca, who initially disagreed with Mandell, advising Akel that the commission would only be 3% and fully disclosed to clients. Id. at p. 14. The next day, Recca and Mandell told Akel that they had found a way to pay the 10%, based on a legal opinion regarding the law in the United Kingdom. Ex. K-14 at p.1. Mandell subsequently advised Akel that the commission would be paid by the company, not the client, which Akel could tell the client if asked. Ex. K-15 at p. 3. Recca, however, warned Akel that the company may not be able to pay the 10%. Id. at p. 7.
Ignoring the tape-recorded conversations, Dengler alleged in his affidavit that Mandel affirmatively and unequivocally promised brokers a 10% undisclosed commission. Dengler Aff. at p. 25 E. Dengler’s Allegations About the Conversations Recorded by Akel [Affidavit] Akel began recording conversations at the end of August, 2006, while he continued to work at Sky Capital. According to Agent Dengler, these conversations corroborated the government’s information that misrepresentations and misleading omissions were made to investors and that Sky Capital funds were being diverted for the personal enrichment of Mandell and others. Dengler Aff. at p. 22. As demonstrated below, however, Dengler cited snippets of some conversations and omitted numerous others that contradicted the allegations. [Affidavit] Several comments quoted by Dengler were either hyperbole or said in jest. For example, Dengler alleged that Akel and another employee,“CC-1,” “discussed the fact that Mandell uses Sky Capital as his ‘personal piggy bank.’” Dengler Aff. at p. 26. [Tapes] According to the tape transcript summary, however, Akel put the words in the employee’s mouth by asking the precise leading question. When Akel repeated the comment to defendant Shea − Sky Capital’s COO and clearly no friend of Mandel’s at the time − Shea did not confirm the allegation. Ex. K-7 at p. 4. In addition, as noted above, the tapes revealed that Mandell’s expenditures were carefully monitored. See, e.g., Ex. K-3 at p. 3 ( Recca told Akel that Mandell’s credit cards had always been carefully monitored and that Mandell “doesn’t expense everything”); Ex. K-4 at p. 4 (Fran Duffy told Akel that he (Duffy) takes money out in order to account for Mandell’s expenses).
[Affidavit] Agent Dengler related the comments of another employee about frequent occasions when brokers were told that stock was “at the desk” and had to be “cleaned up.” Dengler alleges that this comment referred to “crossing stock” pursuant to a “no net sales policy.” Dengler Aff. at p. 27. Dengler cited another conversation about a client who wanted to sell 300,000 shares of SKE. Stephen Shea (the COO of Sky Holdings), said that the stock was sold, and he was “still trying to clean it up.” Dengler opined that Shea was referring to “crossing” the stock. Id. at p. 28. [Tapes] Although Dengler attributes a comment about cleaning up stock at the desk to another employee (“CC-2”), the transcript indicates that the comment was made by Akel to CC2, and was not confirmed by her. Ex. K-7 at p. 4. In addition, as noted above, in other conversations not cited by Dengler, brokers discussed their attempts to sell clients’ shares on the market without success, resulting in the stock staying on the desk. Ex. K-10 at pp. 1, 5-7; Ex. K11 at p.2; Ex K-4 at pp. 1,4 Those conversations wholly contradict the central allegation that there was a “no net sales policy.” Moreover, during a conversation on September 1, 2006, Stephen Shea himself stated that the brokers were not allowed to cross. Ex. K-5 at p. 4. [Affidavit] In discussing what Akel should say to potential investors, Mandell told him to say that Sky Capital would not take their money unless they expected to “be open for at least another year.” Dengler Aff. at p. 30. [Documents] Mandell’s statement was far from the high-pressure sales tactic Agent Dengler claimed at the outset of his affidavit. Any investor, especially the sophisticated ones who participated in the private placements, would know that such a statement was not a positive forecast about the firm’s future. For example, the Raleigh, Lanesborough, St. James, Dorchester, Ticketplanet and Sky private placements were only available to “Accredited Investors,” as
defined by federal securities laws. See Rule 501 of Regulation D of the Securities Act of 1933, available at http://www.sec.gov/answers/accred.htm. Each investor was required to complete and sign a subscription agreement in which the investor represented, inter alia, that he or she: had reviewed and is familiar with the terms of the relevant offering or placement memoranda; had the financial ability to bear the economic risk of his investment, including a complete loss of such investment; had no need for liquidity with respect to his investment; and is experienced and knowledgeable in financial and business matters as to be capable of evaluating the merits and risks of an investment in the [securities or Holding Company].” An example of a subscription agreement is included as Exhibit J. [Affidavit] In late September, 2006, Akel reported that Mandell and others had met with potential investors in England, including some of Akel’s clients. Akel claimed that, on October 3, 2006, a client called Akel and said his meeting with Mandell was a “complete disaster,” and that he felt Mandell was lying about the true state of Sky Capital. Akel reported that Mandell traveled to the UK again in late October, 2006 to solicit investors. Dengler Aff. at p. 31. [Tapes] According to the tape recordings, Akel told Mandell that the client in question “didn’t think he got the whole story and that the meeting was a disaster.” Ex. K-19 at p. 16. Contrary to Agent Dengler’s suggestion that the client thought the meeting was a disaster because he felt Mandell was lying to him, subsequent conversations make clear that the client was reacting to Mandell’s truthful disclosure about the firm’s financial circumstances. The next day, Akel told Mandell that the client said he was “horrified by the financials.” Ex. K-12 at p. 1. Indeed, Mandell and Recca had previously advised Akel that clients would receive disclosure of the firm’s financials before investing in the Raise, precisely so that they could not complain
afterwards that they would not have invested if they had seen the financials. Ex. K-9 at p. 5. These conversations were never disclosed to the Magistrate. [Tapes Cont.] Moreover, the tapes are replete with conversations about the necessity of telling the clients the truth. On September 7, 2006, Mandell explained to Akel the basis for the Current Raise, involving shares that had been previously issued to the firm during the IPO. In response to Akel’s enthusiasm about how much the shares could be sold for, Mandell said “don’t mischaracterize it,” and told him he could not talk to clients about it yet. Ex. K-20 at p. 21, 24. Further, in discussing with brokers how they would pitch the investment, he suggested an “average down” pitch, rather than predictions or promises about the value of the investment. Ex. K-9 at p. 3. In another conversation, Mandell told Akel that he believed the company would be profitable in 2007, but that Akel could not say that to clients; the stock could go to zero, it could be de-listed or it could go to 200 p. Ex. K-6 at p. 19. On September 15, 2006, Mandell told Akel that he had been speaking to the company’s lawyers, Wilmer, Cutler, Pickering in Washington, and they were going to make sure the company had the right document with disclosure points, and that everyone knows “exactly what to say and how to say it.” Ex. K-21 at p. 2. Later in the same conversation, Mandell told Akel that all investors had to be “accredited,” i.e. if they were not Sky shareholders already, they had to be sophisticated, high net worth investors. Id. at p. 9. None of these conversations were conveyed to the Magistrate. Instead, Agent Dengler alleged triple hearsay – that a client told Akel that he felt Mandel was “lying” to him. Agent Dengler even opted for his own characterization of what Akel said the client said; that Mandell “lied” to the client, rather than, as the tapes disclosed, that the client was “not getting the whole story.” Dengler Aff. at p. 31.
[Tapes Cont.] On September 19, 2006, when brokers queried Mandell about what to say to clients, he advised them to use words like “we believe” in explaining that the company is undervalued in view of the prospects of Global and Advanced Spinal coming to market. Ex. K22 at p. 6. On September 28, 2006, when Akel asked Mandel what he should say to investors, Mandell’s response was entirely understated: tell them the company needs funding, the numbers have been poor but they’ve reduced expenses, and that, if certain deals go through, they should be able to “break even to a profitable company.” Ex. K-23 at p. 5. When Akel pressed for details on what to say to particular investors, Mandel said “I let them know that we’re in financial difficulties, and we’re doing a deal because we have to do a deal.” Id. at pp. 10-11. On October 6, 2006, when Akel complained that the pitch was too negative, Mandell reiterated that the customer must be “fully appraised” [sic], so that they do not complain later that they were told everything was great. Ex. K-24 at pp. 20-21. ARGUMENT POINT I THE SEARCH WARRANT AFFIDAVIT RECKLESSLY OMITS MATERIAL INFORMATION CRITICAL TO A DETERMINATION OF PROBABLE CAUSE, WARRANTING SUPPRESSION OR, IN THE ALTERNATIVE, A HEARING A. Overview of the Applicable Law In Franks v. Delaware, the Supreme Court held that, where an affiant deliberately or recklessly disregards the truth in a warrant application, and where the application's “remaining content is insufficient to establish probable cause, the search warrant must be voided and the fruits of the search excluded to the same extent as if probable cause was lacking on the face of the affidavit.” 438 U.S. at 156; see also United States v. Canfield, 212 F.3d 713, 718 (2d
Cir.2000) (the defendant must show that: ‘(1) the claimed inaccuracies or omissions are the result of the affiant's deliberate falsehood or reckless disregard for the truth; and (2) the alleged falsehoods or omissions were necessary to the [issuing] judge's probable cause finding.” ’ (quoting United States v. Salameh, 152 F.3d 88, 113 (2d Cir.1998))). A hearing is warranted upon a “’substantial preliminary showing’ that the affiant knowingly and intentionally, or with reckless disregard for the truth, made a false statement in his affidavit and that the allegedly false statement was ‘necessary to the finding of probable cause.’” Rivera v. United States, 928 F.2d 592, 604 (2d Cir. 1991), quoting Franks, 438 U.S. at 155-56 (additional citations omitted). The same standard applies where, instead of a false statement, the defendant alleges that the affiant, with reckless disregard for the truth, omitted material information. Id., citing United States v. Campino, 890 F.2d 588, 592 (2d Cir.), cert. denied, 494 U.S. 1068 (1990). Although there is relatively little case law defining “reckless disregard,” there are certain basic common principles. In Rivera, the Second Circuit stated that “recklessness may be inferred where the omitted information was ‘clearly critical’ to the probable cause determination.” 928 F.2d at 604; United States v. Reilly, 76 F.3d 1271, 1280 (2d Cir.1996) (quoting Rivera, 928 F.2d at 604). Several Circuit Courts have held that proof of “reckless disregard” entails proof that the affiant “entertained serious doubts about the truth of his allegations.” United States v. Whitely, 249 F.3d 614, 621 (7th Cir. 2001)(citation omitted); United States v. Ranney, 298 F.3d 74, 78 (1st Cir.2002) (recklessness may be inferred from “circumstances evincing obvious reasons to doubt the veracity of the allegations”) (quoting United States v. Williams, 737 F.2d 594, 602 (7th Cir.1984)); United States v. Schmitz, 181 F.3d 981, 986-87(8th Cir. 1999). The Seventh Circuit
recognized that, typically, “states of mind must be proved circumstantially,” Whitley, 249 F.3d at 621, which is consistent with the Second Circuit’s view that “recklessness may be inferred” from the critical nature of the omitted information. Rivera, 928 F.2d at 604. The Third Circuit has opined that omissions “are made with reckless disregard if an officer withholds a fact in his ken that ‘any reasonable person would have known that this was the kind of thing the judge would wish to know.’” Wilson v. Russo, 212 F.3d 781, 788 (3d Cir. 2000), quoting United States v. Jacobs, 986 F.2d 1231, 1233 (8th Cir. 1993). In Jacobs, the affiant told the Magistrate that a drug-sniffing dog “showed interest in the package,” but withheld the fact, conveyed to the affiant by the handler, that the dog did not give a full alert. The Eighth Circuit found the omission material − something that “[a]ny reasonable person” would have known the “judge would wish to know.” − and that the remainder of the affidavit was insufficient to support probable cause. Id. at 1235. Perhaps an astute Magistrate would or should have realized that “interest” is not an alert or a positive hit. That did not excuse, however, the omission of facts necessary to make the affidavit not misleading. In reviewing the caselaw regarding omissions as a basis to controvert a warrant, Judge Kenneth Karas concluded that the affiant “cannot intentionally or recklessly hide from the magistrate judge that which would be critical to the probable cause determination. And, if a defendant shows by a preponderance of the evidence that an affiant did just that, then the first prong of the Franks analysis will have been met.” United States v. Vilar, 2007 WL 1075041 (S.D.N.Y. 2007) at *27. The second prong is whether the affidavit, with the tainted portions excised, establishes probable cause based upon independent consideration of only the untainted portions. Id. at *28. With respect to the second prong, the burden shifts to the government. See Franks, 438 U.S. at
156 (defendant’s burden is to show either deliberateness or reckless disregard by a preponderance of the evidence). 1. The Material Omissions
In his affidavit, Agent Dengler stated that the government had probable cause for three specific areas of allegedly criminal conduct: 1) dissemination of materially false and misleading statements in order to induce investors to purchase securities traded through Sky Capital; 2) a “ponzi” scheme to use purported investment opportunities, including private placements, to pay off prior investors, to keep Sky Capital afloat, and to personally enrich Ross Mandell and others, and; 3) manipulation of the market for publicly-traded securities of companies related to Sky Capital. Ex. A, Dengler Aff. at p. 4. The affidavit contains four basic sources of information, each of which is fundamentally flawed: 1) the allegations of Mario Figueroa, whose credibility, as a convicted cooperator, was necessarily suspect, and whose allegations were not corroborated; 2) the allegations of a single investor, about whose claims a judge had already expressed doubt; 3) the tape-recordings between Philip Akel and Mario Figueroa, that were not as Dengler represented them and that did not implicate any other broker or officer, and; 4) the allegations of Philip Akel, which were contradicted by his own tape-recordings after he agreed to cooperate. In the preceding sections juxtaposing the warrant affidavit and the omitted information, the defendant has made “a substantial preliminary showing” that Agent Dengler omitted material facts necessary to determination of the probable cause alleged. Taking each of the three areas of alleged criminal conduct one at a time, and summarizing the pertinent omitted information, we demonstrate that the warrant affidavit was made with reckless disregard for the truth; in other
words, it omitted information that Agent Dengler knew or should have known the issuing magistrate would want to know in assessing probable cause. a. Alleged Materially False And Misleading Statements To Induce Investors To Purchase Securities
In the course of a 38-page affidavit, Dengler only identifies a single – a total of one – investor from whom he obtained information to support his allegations of massive fraud, warranting the wholesale seizure of virtually all of Sky Capital’s records. The government alleged that the investor corroborated Mario Figueroa. That investor, Christopher Tappin, however, litigated his claims against Mandell and Sky Capital, and a judge expressed, in a written opinion, doubt about both the validity of Tappin’s claims and his credibility. The Magistrate was never informed about this litigation. Mario Figueroa, an individual cooperating with the government in order to help himself in connection with an unrelated criminal conviction, allegedly told Dengler that money was raised for IPO’s through at least five named private placements. Investors, however, received written materials describing how their funds would be used and, for three of those private placements, there was no mention of an initial public offering. A fourth company Figueroa mentioned never did a private placement. The Magistrate was entitled to know, but was never told, that written materials contradicted a government informant’s claims about the purposes for raising money, which were disclosed to investors.14 In addition, the Magistrate was never informed about the numerous conversations contradicting allegations of Philip Akel that brokers were instructed to make misrepresentations to investors. As cited above, in conversation after conversation, Mandell told brokers that they
Neither Figueroa nor Tappin were involved with Sky Capital investment activities, and thus did not provide information to support probable cause to search and seize Sky Capital records.
could not give investors predictions about when and at what price a company might go public. Ex. K-7 at p. 6; Ex. K-9 at pp. 3-4.; Ex. K-6 at p. 12. Mandell told Akel not to “mischaracterize” the shares that were being offered, Ex. K-20 at p. 21, 24, and that he could not make any predictions about the future performance of the stock currently being marketed to clients. Ex K6 at p. 19. Mandell also told Akel that he had been speaking to the company’s lawyers, Wilmer, Cutler, Pickering in Washington, and they were going to make sure that everyone knows “exactly what to say and how to say it.” Ex. K-21 at p. 2. Indeed, Mandell advised Akel to be brutally honest with potential investors; to tell them the company needs funding, that the numbers have been poor, that we’re in financial difficulties, and that “we’re doing a deal because we have to do a deal.” Ex. K-23 at p. 5, 10-11. When Akel complained that the pitch was too negative, Mandell reiterated that the customer must be “fully appraised” [sic], so that they do not complain later that they were told everything was great.” Ex. K-24 at pp. 20-21. Dengler also alleged that, according to Akel, Mandell promised brokers a 10% commission on the “Current Raise” that did not have to be disclosed to investors. Dengler omitted, however, that the amount of the commission and the disclosure requirements were the subject of ongoing dispute and debate. Rather than making promises to brokers, Mandell said in one conversation that he was “trying” to pay and “working on” figuring out how to pay a 10% commission. Ex. K-6 at pp. 3, 14. Akel had several conversations about the commissions with Michael Recca, the company’s president, who initially disagreed with Mandell, advising Akel that the commission would only be 3% and fully disclosed to clients. Id. at p. 14; see Ex. K-15 at p.7. In another conversation, Mandell told Akel that the commission would be paid by the
company, not the client, which Akel could tell the client if asked. Ex. K-15 at p.3. Upon information and belief, because the search warrant caused the company to become de-listed,
funds raised during the “Current Raise” were returned to investors and no commissions were ever paid. . b. Alleged “Ponzi” Scheme To Raise Money From Investors To Pay Off Prior Investors, To Keep Sky Capital Afloat, And To Personally Enrich Ross Mandell And Others
As stated above, Agent Dengler presented the allegations of only one investor, about whose claims a judicial officer expressed doubt in a written decision. One investor, however, does not a Ponzi scheme make. Misuse of investor funds for personal enrichment was obviously an area about which the government specifically instructed Akel to gather information when he donned the cooperator’s body wire. The Magistrate, however, was never informed about the responses to Akel’s inquiries. The Magistrate was never advised that the President of Sky Holdings, Michael Recca, told Akel that Mandell’s credit cards had always been carefully monitored and denied Akel’s suggestion that Mandell “ expense[s] everything.” Ex. K-3 at p. 3. Dengler omitted another conversation where Fran Duffy told Akel that he (Duffy) makes deductions from Mandell’s paychecks for Mandell’s expenses. Ex. K-4 at p. 4. Agent Dengler also led the Magistrate to believe that Mandell and others were using investor funds to pay brokers a 50% commission on investments in Sky Capital Enterprises stock. Ex. A, Dengler Aff. at p. 11. In purporting to quote statements Philip Akel made to Figueroa, Dengler affirmatively misled the Magistrate. According to the transcripts and taperecordings, Akel did not say he received a 50% commission. Ex. K-16 at p. 17, 19. Moreover, in another conversation, he explicitly told Figueroa that the commission on private placements was 7%, that he had never said otherwise, and that there was no such thing as a commission of “60 cents on $1.60.” Exhibit K-2 at p. 12. When Figueroa complained that “[t]here’s gotta be
something to make more money,” Akel said, “there’s absolutely nothing. There’s no smoke and mirrors….” Ex. K-25 at p.4) c. Alleged Manipulation Of The Market For Publicly-Traded Securities Of Companies Related To Sky Capital.
Contrary to Dengler’s allegation of manipulation by discouraging client’s from selling and employing a “no-net-sales policy,” Dengler Aff. at p. 24, there were numerous conversations on the tapes, which were not disclosed to the Magistrate, in which brokers discussed attempting to sell client’s shares, but being unable, not prohibited or unwilling, to do so. First, Dengler failed to inform the Magistrate that investors (sophisticated, experienced investors) were advised in written materials, of the risks of trading on London’s AIM, specifically because of the potential illiquidity of shares. Ex. G at p. I-6; Ex. I at p. 13. Second, Dengler failed to disclose several recorded conversations in which Akel was neither prohibited nor even discouraged from putting in an order to sell a client’s shares. Ex. K-10 at pp. 1, 5, 6, 7; Ex. K-11 at p.2; Ex. K-4 at pp. 1,4; Ex. K-12 at p.1. Dengler also failed to disclose conversations addressing why client’s orders could not be executed. i.e., because, in an illiquid market, there are no buyers. Ex. K-9 at p.1; Ex. K-13 at p.4-5. All of the above-cited conversations involved information the Magistrate would have wanted to know in assessing the three areas of probable cause Dengler alleged, and they were critical to the probable cause determination. Dengler either intentionally or recklessly hid from the magistrate information that was critical to the probable cause determination. The first prong of the Franks test is therefore satisfied. See Rivera v. United States, 928 F.2d at 604 (“recklessness may be inferred” from the critical nature of the omitted information); Wilson v. Russo, 212 F.3d at 788 (omissions “are made with reckless disregard if an officer withholds a
fact in his ken that ‘any reasonable person would have known that this was the kind of thing the judge would wish to know.’”) 2. Without the Tainted Allegations, The Affidavit Fails to Establish Probable Cause
As demonstrated above, all of the allegations about false statements to investors, undisclosed and excessive commissions and market manipulation must be excised because of the material omissions. Other than Akel’s say-so, which was contradicted by the conversations he recorded, there was no evidence of excessive commissions or market manipulation. In addition, according to the tapes, when Akel asked what to say to investors, he was advised to not to mislead them. Without the allegations tainted by material omissions, the affidavit rests solely on uncorroborated allegations and double and triple hearsay. The government is therefore left with, for example, the gossiping and griping of employees about Sky Capital’s financial situation. Dengler Aff. at p. 28. According to Dengler, one broker commented that, if Sky Capital goes out of business, they will be talking to lawyers for the next three years just on customer complaints, not including “misappropriation of funds, none of those fantasy stories.” Id. In another conversation, Stephen Shea said that if Sky Capital goes out of business, they would all be “in court for the rest of their lives.” Shea mentioned one broker who had unauthorized trades, current customer complaints and regulatory problems. Id. Contrary to the government’s spin on these conversations, it is hardly surprising that employees were worried about customer complaints and litigation, whether or not any actual wrongdoing occurred, when those employees were faced with the prospect of their firm’s financial collapse at a time when the financial industry was being blamed for a disastrous economy. Moreover, the reference to “misappropriation of funds” is ambiguous at best, as it is referred to as a “fantasy story.”
Similarly, Dengler cites a conversation in which, he alleges, Mandell “joked that it would be a good idea to hire a deaf person to handle client complaint.” Dengler Aff. at p. 27-28. Not only do jokes by their very nature have minimal probative value, but Dengler misrepresented that Mandell made the joke. According to the transcript (the government has not yet provided a copy of the audiotape), individuals named Wilson and Schwartman “talk about how they should have a ‘deaf’ person taking all the SKY complaints.” Ex. K-7 at p. 6. Thus, Dengler did not even accurately relate conversations such as several of those cited throughout this memorandum. Had the Magistrate known of these errors, he would have known that he could not rely on Dengler’s representations. In sum, with the tainted portions of the affidavit excised, the government cannot demonstrate that the affidavit establishes probable cause for the search warrants. Since it does not, all evidence seized pursuant to the warrants, and all leads there from, including the identities of investors, must be suppressed. POINT II THE COURT SHOULD ORDER THE GOVERNMENT TO PROVIDE A BILL OF PARTICULARS The indictment alleges a wide-ranging fraud that spanned at least eight years, involved two separate brokerage firms and victimized investors both in the United States and the United Kingdom to the tune of approximately $140 million. Mr. Mandell and four co-defendants are charged with “participat[ing] in a scheme to defraud investors through the operations of Thornwater and Sky Capital…by soliciting millions of dollars of funds under false pretenses, manipulating the market for SKH and SKE securities, failing to use investors’ funds as promised, and misappropriating and converting investors’ funds without the knowledge or authorization of the investors.” Indictment at ¶ 16. In particular, the indictment charges that between 1998 and
2002, the defendants made material misrepresentations and omissions in connection with a series of private placements, offered by Thornwater, in which investors purchased shares in certain holding companies. Id. at ¶ 20. Investors were allegedly told that their investments in the holding companies would be used for legitimate business purposes, such as funding an IPO and making subordinated loans to the brokerage firm, and that they would receive a substantial returns on their investment. Id. The indictment, however, only describes a few specific misrepresentations without identifying the source of the misrepresentation, when it was made and to whom, or the transaction involved. The defendants are also charged with making material misrepresentations and omissions in connection with a series of private placements, offered by Sky Capital between 2002 and 2006. Id. at ¶ 27. The misrepresentations and omissions regarded, “among other things, how investor funds would be used, what profits investors would make from their investments, how investor funds had been used in the past and the value of the securities that investors were purchasing.” Id. at ¶ 28. Here, again, the indictment indentifies two examples of misstatements (Id. at ¶¶ 29-30), but otherwise refers generally to unspecified statements, by unnamed individuals, to unnamed investors. The indictment also repeatedly refers to “others” who allegedly made misrepresentations to investors in connection with the private placements. See, e.g., id. at ¶¶ 16, 17, 20, 23, 25, 28, 29, 30. On August 26, 2009, defense counsel, on behalf of Mr. Mandell, sent the government a written request for discovery pursuant to Rule 16 of the Federal Rules of Criminal Procedure. Ex. N. The Rule 16 letter included a request for a bill of particulars indentifying, among other things, the alleged material misrepresentations or omissions. Id. at pp. 9-10. The government did not respond to our request for a bill of particulars.
Over the past seven months the government has produced to the defendants well over a million pages of discovery, containing thousands of pages of communications with investors who are potential witnesses in this case. Despite repeated requests from defense counsel, the government has not provided the defendants with any means to navigate these voluminous materials and has refused to indentify which of the documents it intends to use at trial. On March 4, 2010, in an effort to obtain the information necessary to prepare a defense, we served the government with a supplemental request for a bill of particulars which seeks, among other things, the identity of the individuals who were allegedly defrauded out of their investments. Ex. O. The government has refused to disclose this information. The defendant asks for the following particulars: 1. The identity of “victims” to whom materials misrepresentations and omissions were made (indictment at ¶¶ 16-17), including the identity of investors who were promised substantial returns on their investments. (Id. at ¶ 20.) 2. The identity of investors who “complained about their losses,” and those who “received shares in subsequent private placements…or other forms of compensation.” (Indictment at ¶ 21.) 3. The “other forms of compensation” that were allegedly generated by the defendants and others acting at the defendants’ direction; the identity of the investors who allegedly received such compensation and the dates on which it was allegedly paid, other than those identified in the overt acts. (Indictment at ¶ 21.) 4. The identity of investors who were told “that they would receive an ownership interest in Thornwater and that their Dorchester shares would be exchanged on a “one-to-one” basis for SKH stock.” (Indictment at ¶ 24.) 5. The identity brokers who received loans and signed “promissory notes,” including a copy of the alleged promissory notes, and were told that they did not have to repay the loans, as well as the dates and amount of the alleged loans, whether or not embodied in a promissory note. (Indictment at ¶¶ 25, 33.) 6. The identity of investors who were told “that they were receiving an opportunity to purchase shares of SKH and SHE stock that had been ‘discounted,’” and who were told that the value of the stock would increase dramatically in the near future due to “liquidity events.” (Indictment at ¶¶ 29, 30.)
7. The identity of investors who were discouraged from selling SKH and/or SKE stock, or whose orders were not executed, or in whose accounts unauthorized purchases were made. (Indictment at ¶ 32.) 8. The identity of investors to whom oral statements were made “affirmatively misrepresent[ing] [brokers’] compensation.” (Indictment at ¶ 33.) 9. The identity of Sky customers who were solicited to purchase Sky Capital stock at prices higher than the alleged “discounted prices.” (Indictment at ¶ 34.) 10. The identity of “prior victims” and other individuals who received cash or securities and were falsely described as “consultants.” (Indictment at ¶ 36.) 11. Identify the statements made which were either “untrue statements of material facts” and/or “omitt[ed] to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading....” (Indictment at ¶ 38.) 12. Identify the statements which contained material misrepresentations and/or omissions that were (i) made to convince victims to invest millions of dollars in Thornwater and Sky Capital; and (ii) concerned how investors’ funds would be used. (Indictment at ¶ 41.) 13. The date(s) on which each alleged securities violation(s) occurred and, with respect to each alleged purchase or sale of a security, identify the security, the date on which it was purchased or sold, and the untrue statements of material fact and/or the statements made in which contained material omissions. (Indictment at ¶ 44.) A defendant’s request for a bill of particulars should be granted where, as here, the information sought is “vital to [his] understanding of the charges and to the preparation of the defense” as well as to interpose a plea of double jeopardy, should he be prosecuted a second time for the same offense. United States v. Bortnovsky, 820 F.2d 572, 574-75 (2d Cir. 1987); see also United States v. Davidoff, 845 F.2d 1151, 1154 (2d Cir. 1988). Given the scope of the alleged conspiracy and the number of investors involved as well as the scope of discovery in this case, the defendant cannot prepare a defense based on the broad language of the allegations in the indictment. The government should be required to identify: (1) the specific statements that it contends are misrepresentations of material fact or the material
information that was withheld from the investor; and (2) to whom the misrepresentations were made, by whom they were made and when. The indictment not only fails to provide this information, but charges with such vague and open-ended language as to remove any limits as to the conduct at issue. For example, with respect to the defendants’ solicitation of investments in the Sky Holdings private placements, the indictment charges that the defendants “and others” made material misrepresentations and omissions concerning “among other things” a wide variety of categories, including, how investors funds would be used, what profits investors would make from their investment and how investors funds had been used in the past. Indictment at ¶ 28. Considering that these private placements took place over the span of four years, there are innumerable investor communications potentially at issue. Courts have routinely held that the government must particularize allegations of false statements. United States v. Lino, No. 00 Cr. 630, 2001 WL 8356, at *6 (S.D.N.Y. Dec. 29, 2000) (citing cases). In Bortnovsky, 820 F.2d 572, the Second Circuit reversed the defendants’ convictions for mail fraud and RICO violations where the district court denied the defendants’ request for a bill of particulars identifying which of the insurance claims for burglary losses were fraudulent and which of the invoices submitted to substantiate those claims were falsified. Because the government had introduced evidence of twelve burglaries, only four of which were alleged to be fabricated, and numerous documents regarding all twelve burglaries, the defendants were forced to prove to the jury that eight of the burglaries actually occurred. Id. at 574-75. The Second Circuit held that the government’s failure to reveal the dates of the fake burglaries and identify the fraudulent documents hindered the defendants’ ability to prepare their defense and, in effect, impermissibly shifting the burden of proof to the defendants’ at trial. Id. at 575. See also, United States v. Nachamie, 91 F. Supp.2d 565, 574 (S.D.N.Y. 2000) (granting particulars
regarding identity of false and misleading insurance claims); United States v. Trie, 21 F. Supp. 2d 7, 21-22 (D.D.C. 1998) (“[t]he government must provide information as to exactly what the false statements are, what about them is false, who made them, and how Mr. Trie caused them to be made”). Moreover, providing a mass of documents through which a defendant must search to ferret out the necessary particulars − as the government has done in this case − does not obviate the government’s obligation to particularize the offense charged. Lino, 2001 WL 8356, at *4 (“The Second Circuit  has made clear that the Government does ‘not fulfill its obligations merely by providing mountains of documents to defense counsel who were left unguided’ as to the nature of the charges pending.”) citing Bortnovsky, 820 F.2d at 575. Indeed, the production of such voluminous discovery augments the need for particulars. Bortnovsky at 574-75; Davidoff, 845 F.2d at 1155; Nachamie, 91 F. Supp. 2d at 572-73. In Nachamie, 91 F. Supp. 2d 565, in which the defendants were charged with conspiracy to commit Medicare fraud, the court ordered the government to provide a bill of particulars where the government produced over 200,000 documents relating to 2,000 claims. Id. at 571. The indictment specified five ways in which claims were falsified, but failed to identify the claims by defendant, type of falsity, claim number and date. Id. The court held that the government had not yet informed the defendants which of the claims were false and in what way they were false and ordered a bill of particulars identifying each “false and misleading” claim submitted and/or filed as part of the conspiracy and, for each such claim, details including (i) who prepared and submitted it; (ii) when and where it was prepared and submitted; (iii) each statement on the claim that was alleged to be “false and misleading;” (iv) the manner in which it
was allegedly false and what the government contended would have been an accurate statement. Id. at 574. The government should likewise be required to identify the investors referenced in the indictment as victims of the defendants’ scheme. Indictment at ¶¶ 16, 17, 20, 21, 24, 29, 30, 3234, 36. In United States v. Orena, 32 F.3d 704, 714-715 (2d Cir. 1994), the Second Circuit held that the government had satisfied the defendant’s request for the identities of the intended victims of a murder conspiracy even though the government’s response indicated there might be others unknown. The Orena court noted that the government had satisfied its obligation by providing “all the information that was available to it.” Id. citing United States v. Bennett, 36 F.R.D. 103, 104 (E.D.S.C. 1964) (“An indictment should name, as was done here, the persons defrauded when they are known by the government.”). See also, United States v. Wilson, 493 F. Supp. 2d 364, 373 (E.D.N.Y. 2006) (court ordered the government to disclose identities of alleged victims of conspiracies to murder in aid of racketeering) citing Orena, supra. The government represented at the last status conference that, in addition to the over 400 boxes of documents and 13 hard drives equaling several hundred Gigabytes of data presently in its possession, it is in the process of acquiring of several hundred boxes of materials from Granta Capital, the successor company to Thornwater and Sky Capital.15 The Granta materials include 40-50 CDs containing email correspondence from various brokers and accountants, among others. The government has also informed the defendants that several boxes of the Granta materials have been set aside for the defendants to purchase copies of. It is simply unreasonable to assume that the defendant can cull particular communications the government contends are
According to Lexis Nexis, one Gigabyte contains, on average, 100,099 pages of emails and 64, 782 pages of Microsoft Word Files. See, “How Many Pages in a Gigabyte?” at http://www.lexisnexis.com/applieddiscovery/lawlibrary/whitePapers/ADI_FS_PagesInAGigabyte.pdf.
fraudulent from millions of pages of documents without identifying the specific statements, to whom it was said, by whom and when. Under these circumstances, Mr. Mandell’s request for a bill of particulars, as set forth above, should be granted.
CONCLUSION For all of the reasons stated above, defendant Mandell respectfully requests that the Court grant Defendants’ motions and (1) suppress all evidence seized from the New York offices and basement storage area of the Sky Capital companies, located at 110 Wall Street, New York, NY, or, in the alternative, grant a hearing based upon the defendant’s “substantial preliminary showing,” as set forth above, and (2) direct the government to provide the Bill of Particulars requested. The defendant also seeks leave to supplement this motion and to file additional motions upon receipt of additional discovery from the government, including audiotapes and transcripts.16 Dated: New York, New York March 10, 2010 Respectfully Submitted, HOFFMAN & POLLOK LLP By: /s/ Susan C. Wolfe Susan C. Wolfe Jeffrey C. Hoffman Diane M. Fischer 260 Madison Avenue New York, New York 10016 T. (212) 679-2900 F. (212) 679-1844 firstname.lastname@example.org email@example.com firstname.lastname@example.org Attorneys for the Defendant Ross Mandell
In particular, an additional motion for which there may be a basis is a motion to suppress based on the overbreadth of the execution of the warrant, for which defendants need to conduct a thorough review of the seized materials in order to determine if items were seized that were not authorized by the warrant.
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