U.S. v. Hall, S1 97 CR. 1215(DC).

• Decision Date: 04 May 1999
• Docket Number: No. S1 97 CR. 1215(DC).,S1 97 CR. 1215(DC).
• Citation: 48 F.Supp.2d 386
• Parties: UNITED STATES of America v. Gordon HALL and Michael Motsykulashvili, a/k/a "Mike the Russian," Defendants.
• Court: U.S. District Court — Southern District of New York

Page 386

48 F.Supp.2d 386

UNITED STATES of America v. Gordon HALL and Michael Motsykulashvili, a/k/a "Mike the Russian," Defendants.

No. S1 97 CR. 1215(DC).

United States District Court, S.D. New York.

May 4, 1999.

Mary Jo White, United States Attorney for the Southern District of New York by Celeste Koeleveld, Douglas Lankler, Jason Sabot, Assistant United States Attorneys, New York, for the United States.

White & Case LLP by James J. McGuire, Thomas M. Mullaney, New York City, for Defendant Gordon Hall.

Barry S. Turner, New York City, for Defendant Michael Motsykulashvili.

MEMORANDUM DECISION

CHIN, District Judge.

In this RICO and securities fraud case, defendant Gordon Hall argues that there can be no unlawful manipulation unless the stock is at an artificially high price, that is, above its actual value or true worth. In his testimony at trial yesterday in response to my questions, Hall's expert used what he referred to as an "economic definition of `manipulation'" (Tr. 2960), contending that if a stock is not trading above its real value, by definition there can be no manipulation. The flip side of this argument is that if a stock is underpriced, that is, trading below its actual value, a defendant cannot be guilty of manipulation merely because he tries to bring the price up to where he believes it ought to be.

These arguments are rejected. I hold that a defendant may be guilty of manipulation even if he believes a stock is underpriced or even if in fact a stock is trading below its actual value. I reach this conclusion for the following reasons.

First, there is nothing in the securities laws to suggest that a defendant cannot be guilty of manipulation unless a stock is trading above its "true worth." To the contrary, section 10(b) makes unlawful the use of "any manipulative or deceptive device or contrivance in contravention" of SEC rules and regulations. 15 U.S.C. § 78j(b) (emphasis added); see generally Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). There is no requirement that the manipulative device result in a price above a stock's "true worth," nor does the law provide that a defendant is free to use a manipulative device to bring a stock's price up to where the defendant believes the stock should be. A defendant may not use any fraudulent means to manipulate the price of a stock, and a fraudulent scheme to manipulate price is unlawful even if the goal is to get the stock to a price more reflective of its "true worth."

Second, Hall relies on an incorrect understanding of "artificial." Whether the price of a stock is "artificial" does not turn on whether the stock is trading above or below its "true worth." Rather, the trading price of a stock is determined by available information and market forces, and a stock is trading at an "artificial level" when it is trading at a level above what market forces would otherwise dictate. United States v. Russo, 74 F.3d 1383, 1394 (2d Cir.), cert. denied, 519 U.S. 927, 117 S.Ct. 293, 136 L.Ed.2d 213 (1996). A company may lawfully seek to "manipulate" the market by hiring legitimate stock promoters who disseminate information about the company to the public. As a consequence, the price of the stock may be driven up, but the new level is not an artificial one because it is the result of a better educated public. A company may not unlawfully seek to "manipulate" the market, however, by hiring illegitimate stock promoters who seek to drive the price up by generating trading by making undisclosed payments to brokers to push the stock with their customers.

Third, the "true worth" of a stock is something that is often...