U.S. v. Manas

• Decision Date: 01 August 2000
• Docket Number: DEFENDANTS-APPELLANTS,00-1109,Docket Nos. 00-1006
• Citation: 272 F.3d 159
• Parties: (2nd Cir. 2001) UNITED STATES OF AMERICA, APPELLEE, v. JAMES MANAS, DEFENDANT, JOHN FASANO, JOSEPH PIGNATIELLO,
• Court: U.S. Court of Appeals — Second Circuit

Page 159

272 F.3d 159 (2nd Cir. 2001)

UNITED STATES OF AMERICA, APPELLEE, v. JAMES MANAS, DEFENDANT, JOHN FASANO, JOSEPH PIGNATIELLO, DEFENDANTS-APPELLANTS.

Docket Nos. 00-1006, 00-1109

August Term, 2000

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued May 25, 2001

Decided November 27, 2001

Defendants appeal the judgments of conviction entered and sentences imposed on December 29, 1999 and February 8, 2000 in the United States District Court for the Southern District of New York (Sand, J.), following a jury verdict convicting them on one count of conspiracy to commit securities fraud, wire fraud, and commercial bribery, and separate substantive counts of wire fraud and commercial bribery. In this opinion, we address the district court's loss calculation pursuant to United States Sentencing Guidelines Manual § 2F1.1(b)(1) (1998). In a summary order filed separately, we affirm with respect to all other issues raised on appeal. Loss calculation affirmed.

Francisco E. Celedonio, New York, New York, for Defendant-Appellant Joseph Pignatiello.

Joshua L. Dratel, New York, New York (Joshua L. Dratel, P.C., New York, New York; Martin J. Siegel, Marshal A. Mintz, New York, New York, of counsel), for Defendant-Appellant John Fasano.

Timothy J. Coleman, Assistant United States Attorney, New York, New York (Richard M. Strassberg, James J. Benjamin, Jr., Assistant United States Attorneys, Mary Jo White, United States Attorney for the

Southern District of New York, New York, New York, of counsel), for Appellee United States of America.

Before: Cardamone, F. I. Parker, Circuit Judges, and MURTHA^*, District Judge.

Cardamone, Circuit Judge

Defendants John Fasano and Joseph Pignatiello (defendants or appellants) appeal the judgments of conviction entered following a jury trial and sentences imposed on December 29, 1999 and February 8, 2000, respectively, in the United States District Court for the Southern District of New York (Sand, J.). Each was found guilty of one count of conspiracy to commit securities fraud, wire fraud, and commercial bribery, in violation of 18 U.S.C. § 371 (1994); one substantive count of wire fraud, in violation of 18 U.S.C. §§ 1343, 1346 (1994); and one substantive count of commercial bribery, in violation of 18 U.S.C. § 1952(a)(3) (1994). In a separate summary order we affirm the judgments of conviction with respect to all of these counts. We also affirm the sentences imposed, and write to discuss one issue raised on appeal with respect to those sentences that questions whether the sentencing court properly calculated the loss resulting from defendants' criminal conduct under the United States Sentencing Guidelines Manual (U.S.S.G. or Sentencing Guidelines) § 2F1.1(b)(1) (1998).

Defendants' conduct came to light in a government sting operation. A "sting" is an elaborate confidence game worked by undercover police to catch criminals red-handed. The sting here was set up so that the intended victims of defendants' fraud never actually suffered an economic loss. Yet, as we have previously ruled, the test for calculating a loss for sentencing purposes is whether defendants intended that others suffer a loss, regardless of the likelihood of success of their fraudulent scheme. See United States v. Klisser, 190 F.3d 34, 35-36 (2d Cir. 1999), cert. denied, 592 U.S. 1112 (2000).

When the government in a sting operation holds itself out as a thief in order to catch a thief, we need to assure ourselves that the government has not exceeded its lawful authority. Here, the defendants do not allege that the police conduct was unconstitutional or arbitrary or otherwise beyond the authority of the police. Indeed, nothing in the record suggests any police misbehavior. Rather, the defendants raise several sentencing issues on appeal, and we find one particularly troubling.

The government has conceded that the person who manipulated the stock price at defendants' behest -- conduct for which defendants were charged -- was not a participant in any criminal activity with regard to the stock. Because the government took this somewhat anomalous position, it opened the door for defendants to challenge their sentences on the ground that the sentencing court's consideration of the conduct of this unwitting individual in their conspiracy unfairly penalizes them insomuch as that person's conduct resulted in meaningfully heavier sentences for each of them. We agree that in some situations it would not be appropriate for a court to enhance a sentence because of the conduct of an unwitting individual. In the end, however, we are satisfied that the conduct in this case was both directed by the defendants and integral to their criminal scheme. Hence, we affirm the loss calculation.

BACKGROUND

A. The Conspiracy

In light of the narrow issue to be resolved, our recitation of the facts will be brief. At trial the government sought to prove that defendants Fasano and Pignatiello engaged in a scheme to manipulate the stock of a publicly traded company called Spaceplex International Amusement Centers, Ltd. (Spaceplex). Its principal was James Manas, a named defendant, who entered a guilty plea pursuant to a cooperation agreement with the government. Spaceplex's primary asset was the Spaceplex indoor amusement center in St. James, Long Island, which boasted video games, a snack bar, a laser game, and rides. At all relevant times, Spaceplex common stock was a "penny stock" valued at less than $5 per share and traded on the OTC Bulletin Board, a securities quotation system operated by the National Association of Securities Dealers (NASD).

In the fall of 1995 Manas approached Fasano for help in "obtaining market support" for Spaceplex stock. Fasano introduced Manas to Pignatiello, a stock promoter. In a series of meetings and conversations conducted through early January 1996, the three men developed a strategy to raise the price of Spaceplex stock, which in December 1995 was trading at about $0.25 per share. This strategy called for a 30-for-1 reverse stock split that would reduce the number of shares available on the market, increase the price per share, and make it easier to control that price in the future. The scheme also called for the services of a market maker, defined by a federal statute to include as "any dealer who, with respect to a security, holds himself out [in the interdealer market] as being willing to buy and sell such security for his own account on a regular or continuous basis." 15 U.S.C. § 78c(a)(38) (1994); see SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1469 (2d Cir. 1996).

It was envisioned that the market maker would manipulate the price of the stock by placing bids and making numerous trades that would give the appearance that the stock had an active market. The three men further planned to enlist the services of a broker who would sell Spaceplex shares to investors in a private placement once the price had risen to $3 per share, as a means of solidifying the stock price and of generating profits for themselves. When the stock price had grown sufficiently high, ideally $8 to $10 per share, they hoped to launch a secondary public offering to generate further profits.

Pignatiello enlisted Peter Mazzeo to act as market maker. Mazzeo is a stock trader in Jericho, Long Island who, in Pignatiello's words, was willing to "do whatever we need done" but "[d]oesn't want to know anything." Thereafter, acting on Pignatiello's directions, Mazzeo posted a bid of $2.50 per share for Spaceplex stock at 1:56 p.m. on January 5, 1996. That quote represented a new high bid and raised the market price for the stock from its opening high bid of $2 the previous day. Over the next several weeks, Pignatiello asked Mazzeo's firm to enter the high opening bid for Spaceplex stock in 42 out of 64 consecutive trading days. In following Pignatiello's instructions, Mazzeo by the end of February 1996 had accumulated 7000 shares of Spaceplex stock, which he held in several nominee accounts under Pignatiello's control in anticipation of later sales.

Pignatiello also solicited and secured the brokerage services of an individual who in fact was an undercover FBI agent posing as a corrupt stock broker through a fictional firm with an office in Manhattan. Pignatiello explained to the government agent his plans to raise the price of Spaceplex stock, secured the agent's agreement to participate in return for a share of the profits, and introduced the agent to Fasano and Manas as his partners in the scheme. On January 17, 1996 Fasano hand delivered to the agent a certificate for 40,000 shares of Spaceplex stock that the agent was to sell to his fictitious brokerage customers, and Pignatiello also instructed the agent to arrange a sale to his customers of the 7000 shares that Mazzeo had accumulated.

Fortunately, out of concern for the danger of loss to innocent investors, the undercover agent's superiors at the FBI instructed him not to sell Spaceplex shares. Instead, he was told to complain that the certificate bore a restrictive legend preventing sale of the stock, that he was subject to an NASD examination, and later that he had already committed his available funds to another transaction. As a result of the agent's ruses, Fasano and Pignatiello arranged for the sale of Spaceplex stock through another company, and in March 1996 Manas caused Spaceplex to issue 129,404 additional shares to compensate the two of them (as well as Fasano's partner) for their services.

B. Prior Proceedings

On April 3, 1997 Pignatiello, Fasano, and Manas were indicted in the Southern District of New York on one count of conspiracy to commit securities fraud, wire fraud, and commercial bribery, as well as separate substantive counts of wire fraud and commercial bribery. As noted, Manas entered a guilty plea. Fasano and Pignatiello were tried as co-defendants by a jury before district court Judge Leonard B. Sand from late June to July 15,...