677 F.3d 86 (2nd Cir. 2012), 10-4546-cr, United States v. Zangari

Docket Nº:10-4546-cr.
Citation:677 F.3d 86
Opinion Judge:JOS
Party Name:UNITED STATES of America, Appellee, v. Salvatore ZANGARI, Defendant-Appellant.
Attorney:Randy Zelin, Moritt Hock & Hamroff, LLP, Garden City, NY, for Defendant-Appellant Salvatore Zangari. Winston M. Paes, Assistant United States Attorney (Jo Ann M. Navickas, Assistant United States Attorney, of counsel), for Loretta E. Lynch, United States Attorney for the Eastern District of New Y...
Judge Panel:Before: CABRANES, POOLER, and WESLEY, Circuit Judges.
Case Date:April 18, 2012
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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677 F.3d 86 (2nd Cir. 2012)

UNITED STATES of America, Appellee,

v.

Salvatore ZANGARI, Defendant-Appellant.

No. 10-4546-cr.

United States Court of Appeals, Second Circuit.

April 18, 2012

Argued: Dec. 8, 2011.

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Randy Zelin, Moritt Hock & Hamroff, LLP, Garden City, NY, for Defendant-Appellant Salvatore Zangari.

Winston M. Paes, Assistant United States Attorney (Jo Ann M. Navickas, Assistant United States Attorney, of counsel), for Loretta E. Lynch, United States Attorney for the Eastern District of New York, Brooklyn, NY, for Appellee the United States of America.

Before: CABRANES, POOLER, and WESLEY, Circuit Judges.

JOSÉ A. CABRANES, Circuit Judge:

In this appeal, we consider, as a matter of first impression in this Circuit, the propriety of substituting a defendant's gain for his victims' losses in calculating restitution under the Mandatory Victims Restitution Act (" MVRA" ), 18 U.S.C. §§ 3663A-3664. Although we join several of our sister circuits in concluding that such a substitution is error, we decline to exercise our discretion under Federal Rule of Criminal Procedure 52(b) to notice the error in this case because the defendant failed to object to the restitution calculation before the District Court and has not satisfied his burden of persuading us that the erroneous restitution order both " affected [his] substantial rights" and " seriously

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affect[s] the fairness, integrity or public reputation of judicial proceedings." Puckett v. United States, 556 U.S. 129, 135, 129 S.Ct. 1423, 173 L.Ed.2d 266 (2009) (internal citation and quotation marks omitted). The judgment of the District Court is therefore affirmed.

BACKGROUND

From about August 1998 through October 2006, defendant-appellant Salvatore Zangari worked as a securities broker in the securities-lending departments of, first, Morgan Stanley and, subsequently, Bank of America. As a broker, Zangari's responsibilities included borrowing and loaning securities on behalf of his employers and their clients in the securities-lending market.

As described by a leading commentator:

Securities lending is an important and significant business that describes the market practice whereby securities are temporarily transferred by one party (the lender) to another (the borrower). The borrower is obliged to return the securities to the lender, either on demand, or at the end of any agreed term. For the period of the loan the lender is secured by acceptable assets delivered by the borrower to the lender as collateral.

Mark C. Faulkner, " An Introduction to Securities Lending," in Securities Lending & Repurchase Agreements 3-4 (Frank J. Fabozzi & Steven V. Mann eds., 2005). Typically, the collateral— which, in the United States, often takes the form of cash 1— is valued at 102%-105% of the market value of the loaned securities. Peter Economou, " Risk, Return, and Performance Measurement in Securities Lending," in Securities Lending & Repurchase Agreements 152-53.

The borrower of securities may be motivated by any number of factors, including the desire to cover a short position, to sell the borrowed securities in hopes of buying them back at a lower price before returning them to the lender, or to gain tax advantages associated with the temporary transfer of ownership of the securities. See Faulkner, supra, at 21-25. The lender, meanwhile, is principally motivated by the ability to earn a return on the collateral during the course of the loan, either through fees paid by the borrower (in the case of noncash collateral) or (in the case of cash collateral) by reinvesting it or making short-term loans to other borrowers at a higher interest rate than that paid to the borrower. See id. at 6-9.

In addition to the lender and borrower, stock-loan transactions often involve a third party, known as a " stock-loan finder." According to the Information filed in this case,

[s]tock-loan finders [are] entities that [are] in the business of facilitating stock loan transactions in exchange for fees.... Borrowers and lenders typically pa[y] the finders' fees from the fees, rebates and negative rebates that they earn[ ] in connection with particular stock-loan transactions.

Information ¶ 3, United States v. Zangari, No. 10-cr-255 (E.D.N.Y. Apr. 15, 2010), ECF No. 3. See generally Morgan, Olmstead, Kennedy & Gardner, Inc. v. Fed. Ins. Co., 637 F.Supp. 973, 975 n. 2 (S.D.N.Y.1986).

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The Information alleged that, while Zangari was employed as a broker with Morgan Stanley, he and a co-worker, Peter Sherlock, agreed to cause Morgan Stanley to enter into stock-loan transactions with two other financial institutions, Paloma Securities, LLC (" Paloma" ) and Swiss American Securities, Inc. (" SASI" ). As a result of those transactions, Paloma and SASI paid sham finder's fees to Clinton Management, Ltd. (" Clinton Management" ), a straw stock-loan finder operated by Anthony Lupo, an acquaintance of Sherlock's. Lupo, in turn, paid cash kickbacks to Sherlock (among other co-conspirators) and Sherlock paid a portion of these kickbacks to Zangari. The arrangement continued when Zangari moved to Bank of America. Neither Morgan Stanley nor Bank of America approved the stock-loan transactions that were the subject of the Information.

According to the Government, as a result of the fraudulent scheme, Bank of America and Morgan Stanley suffered losses in the form of unrealized profit. As summarized in its brief on appeal:

Zangari knew Paloma and SASI were willing to charge less to loan or pay more to borrow securities than Morgan Stanley or Bank of America ultimately paid or received. Rather than obtain this readily available profit for his employers, however, Zangari had his employers pay the higher price and receive the lower price, thereby causing his employers and their clients to lose money.

Government's Brief at 13.2

On April 15, 2010, Zangari waived indictment and pleaded guilty to the Information, which charged him with one count of conspiracy to violate the Travel Act, in violation of 18 U.S.C. §§ 371 & 1952. By the terms of his plea agreement, Zangari conceded that his conduct involved a bribe greater than $70,000, but agreed to forfeit the smaller sum of $65,600, which represented the amount that he had actually deposited into his bank account. The plea agreement also stipulated that restitution was " [a]pplicable, in an amount to be determined by the [District] Court." Plea Agreement, United States v. Zangari, No. 10-cr-255 (E.D.N.Y. Apr. 15, 2010).

Following Zangari's plea, the United States Probation Office prepared a Presentence Investigation Report (" PSR" ), which laid out the facts underlying Zangari's plea and calculated the applicable sentencing range pursuant to the United States Sentencing Guidelines (" Guidelines" or " USSG" ). In calculating Zangari's adjusted offense level, the PSR included a six-level enhancement under USSG § 2B4.1, reflecting that the amount of loss to the victims of Zangari's crime was more than $30,000 and less than $70,000.3 To support this enhancement, the PSR stated that, though neither Morgan Stanley nor Bank of America had submitted affidavits of

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loss, it was decided following a conversation with Morgan Stanley's legal counsel " that a starting point to determine the loss ... would be the amount of money each defendant gained from kickbacks." Presentence Investigation Report ¶ 14, United States v. Zangari, No. 10-cr-255 (E.D.N.Y. July 12, 2010). Elsewhere, the PSR reported that, " [a]ccording to the Government and Morgan Stanley representatives, the loss to Morgan Stanley and Bank of America is the difference between the selling price of the securities and the lower price that was negotiated by the defendants without Morgan Stanley and Bank of America's authorization." Id. ¶ 16. The PSR went on to state, without explanation, that " it was this difference in price that the defendants gained in kickbacks and bribes." Id. Citing Application Note 3(b) to Guideline § 2B1.1, which allows a sentencing court to " use the gain that resulted from the offenses as an alternative measure of loss only if there is a loss, but it reasonably cannot be determined," the PSR proceeded to substitute the amount of Zangari's gain for the amount of the victims' losses, resulting in a six-level increase in Zangari's adjusted offense level.4

The PSR also reported that restitution was required under the MVRA, and concluded that Zangari was " liable for restitution in the amount of $65,600 ($38,800 owed to Morgan Stanley and $26,800 owed to Bank of America)." Id. ¶ 78. It did not include any explanation for this conclusion, except that it was " [p]ursuant to the guidance found in United States v. Liu, 200 [Fed.Appx.] 39, [2006 WL 2853027] (2d Cir.2006)." Id. The amount and apportionment of loss identified for purposes of restitution was, of course, identical to that justifying the six-level enhancement, which itself was expressly based on Zangari's gain from the fraud.

Prior to sentencing, Zangari's attorney submitted a list of " objections, clarifications and additions" to the PSR. The list did not contain any objection to the PSR's restitution calculation. At the sentencing hearing, the District Judge asked if there were any other objections or corrections to the PSR and Zangari, through counsel, confirmed that there were none.5 Later, in the course of a discussion of whether Zangari ought to be made to pay a fine, given his significant assets, the District Judge asked if restitution had already been paid. The Assistant U.S. Attorney confirmed that forfeiture, not...

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