74 F.3d 1383 (2nd Cir. 1996), 372, United States v. Russo
|Docket Nº:||372, 373, 374, Docket 95-1123, -1124, -1125.|
|Citation:||74 F.3d 1383|
|Party Name:||UNITED STATES of America, Appellee, v. Paul RUSSO, Barbara Hosman, William Petrokansky, Defendants-Appellants.|
|Case Date:||January 11, 1996|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued Oct. 27, 1995.
[Copyrighted Material Omitted]
Daniel Richman, New York City (James A. Cohen, Ian Weinstein, of counsel), for Defendant-Appellant Hosman.
Terence J. Lynam, New York City (C. Fairley Spillman, Neil J. Welch, Jr., Akin, Gump, Strauss, Hauer & Feld, L.L.P., of counsel), for Defendant-Appellant Russo.
Lawrence S. Bader, New York City (Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C., of counsel), for Defendant-Appellant Petrokansky.
Alan B. Vickery, Assistant United States Attorney, Brooklyn, NY (Zachary W. Carter, United States Attorney, Peter A. Norling, Gordon Mehler, Assistant United States Attorneys, of counsel), for Appellee.
Before: FEINBERG, OAKES and CABRANES, Circuit Judges.
OAKES, Senior Circuit Judge:
This is an appeal in a stock market manipulation case. Paul Russo, Barbara Hosman, and William Petrokansky appeal from judgments of conviction entered February 28, 1995, by the United States District Court for the Eastern District of New York, Sterling
Johnson, Jr., J., after a jury found them guilty of mail fraud under 18 U.S.C. Sec. 1341 and securities fraud under 15 U.S.C. Secs. 78j(b) and 78ff. Russo and Hosman were also found guilty of conspiracy to commit mail fraud and securities fraud under 18 U.S.C. Sec. 371. Russo was sentenced to 18 months' imprisonment, five years' probation, and restitution; Hosman was sentenced to five years' imprisonment with all but six months suspended and five years' probation; and Petrokansky was sentenced to 12 months' imprisonment and five years' probation. The appellants argue that the district court's instructions to the jury on several aspects of securities law were erroneous; that the district court improperly permitted testimony by the government's expert witness; that the evidence against Hosman and Petrokansky was insufficient to convict them; and that the government's rebuttal summation deprived them of a fair trial. We affirm.
As is typical in cases involving manipulation of stocks, the facts before us are extensive and detailed. For purposes of clarity, we divide them into three sections: the business framework, the manipulation scheme, and the trial. We consider all facts and inferences to be drawn from the evidence in the light most favorable to the government. United States v. Birnbaum, 373 F.2d 250, 252 (2d Cir.), cert. denied, 389 U.S. 837, 88 S.Ct. 53, 19 L.Ed.2d 99 (1967).
I. The Business Framework
All three defendants worked for Kureen & Cooper ("K & C") a broker-dealer which traded in small stocks generally valued at under five dollars per share. 1 Russo bought K & C in 1985 after another small broker-dealer firm he co-owned, Creative Securities, went out of business due to insufficient minimum capital. Russo installed himself as president of K & C and oversaw its operations. Hosman, who had worked with Russo since 1962 and moved with him from Creative Securities, managed the K & C office for Russo and was a K & C broker. She also served as one of K & C's three directors starting in 1986. Petrokansky, who had also followed Russo from Creative Securities, was one of roughly 20 K & C brokers. Unlike the other brokers, however, Petrokansky had his own office and reported directly to Russo rather than to a manager.
As part of its business, K & C underwrote initial public offerings ("IPOs") of penny stocks, including the IPOs of the stocks at issue in this case: Lopat and EAS. Both Lopat and EAS were new high-risk companies from which K & C received substantial commissions for its underwritings as well as warrants entitling K & C to buy large numbers of shares at set prices after one year. These warrants served as an incentive to K & C to establish markets for Lopat and EAS so that the price of each company's shares would rise above the set warrant price. After handling the IPOs, K & C acted as the principal market maker for Lopat and EAS, holding itself out to the market as ready to buy and sell Lopat and EAS stocks at prices which it posted on NASDAQ.
K & C's customer accounts and its own trading accounts were handled by Evans & Co. ("Evans"), a larger brokerage firm that acted as a "clearing broker" for approximately ten small broker-dealers like K & C. Pursuant to a clearing agreement, Evans performed all the processing and administrative functions associated with K & C's trades. K & C would execute the trades by filling out buy and sell tickets, which were collected and processed by Evans at the end of each day. Evans would then send out confirmations and account statements to K & C's customers for whom trades had been executed and to K & C for trading in its own accounts. Evans also provided K & C with a daily "trading slate" that documented all the activity in K & C's account for the previous day.
II. The Manipulation Scheme
Despite the prospects for Lopat and EAS at the time of their IPOs, the stocks did not perform well. By August 1986, there were more customers selling Lopat and EAS to K
& C than buying from the firm, putting K & C at risk of substantial losses. K & C was so thinly capitalized that if it bought stock, it had to sell most of it the same day in order to maintain the minimum net capital required by federal securities regulations. Given the low demand for Lopat and EAS, K & C feared that it would have to sell off the stock at reduced prices and risk triggering a snowball effect as more holders sold Lopat and EAS back to K & C before the price dropped further. K & C was therefore burdened with the problem of continuing to make a market for Lopat and EAS stock so as not to put itself out of business.
In response to this crisis, Russo came up with a complex scheme to manipulate Lopat and EAS stock so that much of it remained off the market and prices did not decline. The scheme involved both unauthorized placement of Lopat and EAS in customers' accounts and the "parking" of Lopat and EAS stock in the accounts of K & C customers in exchange for guaranteed profits. The scheme also included a buy-up of Lopat and EAS that was financed with false credits in K & C's trading account generated through short sales of other stocks. Russo enlisted Hosman and Petrokansky to implement the scheme, directing Hosman to place the unauthorized trades and Petrokansky to park the stock. Russo directed another K & C employee, Paul Miano ("Miano"), who was the firm's head trader and cooperated with the government in the prosecution, to make the short sales.
A. The Unauthorized Placements
From August to October 1986, Hosman placed blocks of Lopat or EAS stock in K & C accounts without customers' authorization by presenting buy tickets to Miano. The stock would then be "sold" from K & C's account to the customer's account and K & C would receive credit for stock sold at the selling price quoted in NASDAQ. When the customer received confirmation of the sale and called to question it, he or she would be told that a mistake had been made. K & C, after prolonging payment by seeking a seven-day credit extension on behalf of the customer, 2 would either buy back the stock or cancel the original trade. Hosman would then frequently take the same block of stock and place it in another customer account without authorization.
These unauthorized trades kept large blocks of Lopat and EAS stock off the market and out of K & C's account for up to two weeks. K & C thus created an impression of interest in the stock that did not exist while at the same time avoiding the need to sell Lopat and EAS on the open market at prices below its offer prices.
B. The Parking
During the same period that Hosman made unauthorized placements of stock, Petrokansky engaged in another method of "hiding" Lopat and EAS stock from the market. On instructions from Russo, Petrokansky placed Lopat or EAS with customers by guaranteeing them that K & C would buy the stock back in one or two weeks at a small profit of an eighth or sixteenth of a dollar per share. When the time came to buy back the stock, Petrokansky presented sell tickets reflecting a higher price than the customer had paid or than was posted on NASDAQ that day. Petrokansky would often immediately park the same stock with a new customer.
Parking Lopat and EAS stock accomplished the same purpose as making unauthorized placements: it kept Lopat and EAS off the market and out of K & C's account. In so doing, the parking created a false impression of Lopat's and EAS's vitality on the market and freed K & C from responsibility for the stock. Unlike the unauthorized placements, however, the parking bore a cost to K & C, namely, the profits it paid out to the customers who held the stock.
C. The Short Sales
In order to purchase and keep in inventory the Lopat and EAS shares that were being sold back by customers, as well as to finance
the parking of Lopat and EAS stock, K & C needed a ready source of cash. The appellants found one when Russo inadvertently discovered that he could generate false cash credits from Evans in K & C's trading account by making short sales of high-value stocks.
A short sale involves a seller agreeing to sell stock it does not own and then borrowing the stock from a broker to tender to its customer. The seller pays a fee while it borrows the stock and eventually must "cover" the short sale by returning an equivalent amount of stock to the broker. Short sales are closely regulated, and, according to the...
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