U.S. v. Brennan

• Decision Date: 12 January 2005
• Docket Number: Docket No. 03-1367.
• Citation: 395 F.3d 59
• Parties: UNITED STATES of America, Appellee, v. Robert E. BRENNAN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

395 F.3d 59

UNITED STATES of America, Appellee, v. Robert E. BRENNAN, Defendant-Appellant.

Docket No. 03-1367.

United States Court of Appeals, Second Circuit.

Argued: May 21, 2004.

Decided: January 12, 2005.

COPYRIGHT MATERIAL OMITTED

Edward S. Zas, The Legal Aid Society, Federal Defender Division, Appeals Bureau, New York, New York, for Defendant-Appellant.

Brian D. Coad, Assistant United States Attorney (David N. Kelley, United States Attorney, Peter G. Neiman, Assistant United States Attorney, on the brief), New York, New York, for Appellee.

Before: WINTER, STRAUB, and LAY,^* Circuit Judges.

WINTER, Circuit Judge.

Robert E. Brennan appeals from Judge Owen's decision sentencing him to 36 months' imprisonment for criminal contempt, to be served consecutively to appellant's undischarged 110 month sentence for bankruptcy fraud. Appellant argues that the district court erred by: (i) imposing a consecutive rather than a concurrent sentence; (ii) wrongly calculating appellant's Criminal History Category ("CHC"); (iii) departing upwardly from the CHC; (iv) sentencing appellant under the larceny Guideline rather than the obstruction of justice Guideline; (v) including certain funds in the loss amount calculation; and (vi) denying appellant credit for acceptance of responsibility.¹ Appellant also argues that his sentence should be vacated and remanded for resentencing by a different judge.

We agree only with appellant's argument that his original CHC was wrongly calculated and remand for resentencing on that issue.² We do not direct the remand to a different district judge.

BACKGROUND

The facts relevant to appellant's sentencing claim arise principally from an SEC enforcement action against him, his bankruptcy, and his conviction for bankruptcy fraud.

a) The SEC Action

Appellant was the chairman, founder, and sole owner of now-defunct First Jersey Securities, Inc. ("FJS"), a broker-dealer trading in penny stocks. In 1985, the SEC sued appellant and FJS for committing securities fraud involving about 500,000 customers. SEC v. First Jersey Secs. Inc., 890 F.Supp. 1185, 1187-88 (S.D.N.Y.1995) (the "SEC Action"). On June 19, 1995, Judge Owen found appellant and FJS guilty of fraud, granted a permanent injunction against violations of the securities laws, and ordered appellant and FJS jointly and severally to disgorge approximately $75 million — $22 million in principal and $53 million in prejudgment interest. SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1456 (2d Cir.1996).³

b) The Bankruptcy and Fraud

On August 7, 1995, a few weeks after Judge Owen entered the $75 million judgment against appellant, appellant filed for bankruptcy under Chapter 11 in the District of New Jersey and became a debtor in possession. The bankruptcy court held that the $75 million judgment in favor of the SEC was nondischargeable. See SEC v. Brennan, 230 F.3d 65, 69 (2d Cir.2000).

Prior to trial in the SEC Action, appellant had created two offshore asset protection trusts. He consented to an order by the bankruptcy judge freezing those assets. Id. at 68 n. 1. Near the end of his trial in the SEC Action, appellant created a third offshore trust, the Cardinal Trust. United States v. Brennan, 326 F.3d 176, 180-81 (3d Cir.2003). This trust was funded by approximately $4 million in bearer bonds that appellant delivered to its trustee just before filing for bankruptcy. Id. Appellant did not disclose the existence of the Cardinal Trust in his original bankruptcy petition, id. at 181, and, when its existence was discovered, appellant valued his interest in it at $0, SEC v. Brennan, 230 F.3d at 68. He also did not disclose his ownership of the $4 million in bearer bonds or of about $500,000 in casino chips, which he cashed after filing for bankruptcy. United States v. Brennan, 326 F.3d at 181.

The assets in the Cardinal Trust grew to approximately $22 million by mid-1997. Id. at 194. In 1997, appellant used $12 million in assets from all three of the offshore trusts to purchase and refurbish a gambling boat, the Palm Beach Princess.⁴ The three trusts held a $12 million mortgage on the boat that appellant did not disclose in his bankruptcy filings. Appellant also continued to list his interest in the Cardinal Trust as $0, and the trust's situs was moved twice to evade detection. Id. at 181; SEC v. Brennan, 230 F.3d at 68.

Appellant was indicted and convicted in New Jersey of bankruptcy fraud for concealing the bearer bonds and casino chips and for money laundering of the bonds and their proceeds. On July 26, 2001, Judge Garrett E. Brown sentenced appellant to 110 months' imprisonment. Id. In calculating the loss amount under U.S.S.G. § 2F1.1, the court included not only the value of the bearer bonds and casino chips but also the $18 million in proceeds from investing these assets, giving a total loss amount of $22 million. Id. at 194. The court ordered restitution of $4,588,518, the value of the bearer bonds concealed by appellant. The Third Circuit affirmed appellant's conviction and sentence in all respects. United States v. Brennan, 326 F.3d at 201.

c) The April 5, 2000 Freeze Order

In April 2000, just prior to appellant's indictment for bankruptcy fraud in New Jersey, the SEC moved before Judge Owen in the Southern District for an order to show cause why appellant should not be held in civil contempt of the $75 million disgorgement order entered in 1995. SEC v. Brennan, 230 F.3d at 69, 77. Judge Owen granted the motion in an order issued on April 5, 2000. The order included the Freeze Order, which enjoined appellant and anyone working with or for him to

hold and retain within their control, and otherwise prevent any disposition, transfer, pledge, encumbrance, assignment, dissipation, concealment or other disposal whatsoever of any funds or other assets of [ ] Brennan that are not assets of his bankruptcy estate presently held by them, under their control or over which they exercise actual or apparent investment or other authority, in whatever form such assets may presently exist and wherever located.

On April 20, 2000, the district court modified the Freeze Order to allow appellant to compensate legal counsel, specifying that he could seek loans from third parties for that purpose. The loans were to be subordinated to his $75 million debt to the SEC; the third parties were to provide certifications of the source and terms of the loans; and appellant was to provide these certifications to the SEC. The SEC reserved the right to deem the Order violated if "the funds were advanced directly or indirectly by Mr. Brennan, his family or any other person related to the bankruptcy estate or against whom the bankruptcy estate is pursuing a claim."⁵

d) Offense Conduct — Violation of Freeze Order

On May 11, 2001, two months before appellant was sentenced in the New Jersey bankruptcy fraud case, Judge Owen issued a Notice of A Charge of Criminal Contempt ("Notice") to appellant under 18 U.S.C. § 401(3) for violations of the Freeze Order. It was alleged that appellant failed to declare the Palm Beach Princess as one of his assets and made a "circuitous and covert transfer in June and July 2000 of $500,000 out of the vessel to [appellant's] criminal counsel" in the bankruptcy fraud case.

As noted, the Palm Beach Princess was purchased at least in part with $12 million in funds from appellant's three offshore trusts. The ship was nominally owned by MJQ Corp. On June 9, 2000, MJQ Corp. transferred $1.5 million to MJQ Development LLC. Francis Murray, a friend of appellant's, was the director of both MJQ entities at the time. On July 20, 2000, MJQ Development transferred $1.5 million to GS Strategies, LLC, which is wholly owned by Murray. Finally, on July 28, 2000, GS Strategies paid Murray $500,000 by check. Murray then transferred $500,000 to Michael Critchley, appellant's criminal defense counsel in New Jersey, later that day. The location of the remaining $1 million is unknown.

e) Appellant's Plea Agreement and Guilty Plea

On August 8, 2002, appellant entered into a written plea agreement regarding the criminal contempt charge. Appellant pled guilty to the May 11 contempt notice, which the plea agreement characterized as charging him "with concealing and transferring between June and July, 2000 approximately $500,000" to his bankruptcy fraud attorney. The agreement stipulated that the obstruction of justice Guideline, U.S.S.G. § 2J1.2, was the "most analogous offense guideline" and thus applied to appellant's contempt offense under U.S.S.G. §§ 2J1.1 and 2X5.1. Assuming credit for acceptance of responsibility, this resulted in an offense level of 10; with a stipulated CHC of II, appellant would face an 8 to 14 month sentence. Appellant reserved the right to request that his sentence be imposed to run partially or wholly concurrently with his New Jersey 110 month bankruptcy fraud sentence. The agreement noted, however, that the length and other aspects of the sentence would be "determined solely by the Court." Appellant thereafter entered a plea of guilty.

f) Appellant's November 19 Letter to Court

On November 19, 2002, prior to his sentencing, appellant wrote a letter to Judge Owen. In the letter, appellant expressed his "categorical and unqualified remorse" for violating the Freeze Order. In an attempt to explain the circumstances of the offense, appellant claimed that, consistent with the Freeze Order, he gave the SEC copies of all the promissory notes used to secure funds for the payment of attorneys in the case before Judge Owen. However, he admitted that he did not provide the SEC with copies of the promissory notes underlying (or otherwise disclose) the "loans" to pay his criminal attorney in the New Jersey bankruptcy case because he "consciously did not want [the SEC] informed about anything to do with that matter." Appellant claimed that the $500,000 payment from Murray to appellant's lawyer was, like the loans for which app...