79 F.Supp.2d 357 (S.D.N.Y. 1999), S2 98 CR 144, United States v. Oakford Corp.
|Docket Nº:||S2 98 CR 144 JSR.|
|Citation:||79 F.Supp.2d 357|
|Party Name:||UNITED STATES of America v. The OAKFORD CORPORATION, William Killeen, Thomas W. Bock, John R. D'Alessio, Thomas Cavallino, Edward J. Mueger, John J. Savarese, and Mark R. Savarese, Defendants.|
|Case Date:||December 13, 1999|
|Court:||United States District Courts, 2nd Circuit, Southern District of New York|
As Amended Dec. 14, 1999.
Douglas R. Jensen, United States Attorney's Office, S.D.N.Y., New York City, for government.
Richard Greenberg, Gustave Newman, Newman Schwartz & Greenberg, New York City, for Oakford Corp. and William S. Killeen.
Francis Murray, Murray & McCann, Rockville Center, NY, for Thomas W. Bock.
Dominic F. Amorosa, New York City, for John D'Alessio.
Victor J. Rocco, Gordon Altman Butowsky Weitzen Shalov & Wein, New York City, for Thomas J. CavalliNo.
Michael Armstrong, Kirkpatrick & Lockhart LLP, New York City, for defendant Edward Mueger.
Benjamin Brafman, Brafman, Gilbert & Ross, P.C., New York City, for defendant John J. Savarese.
Robert Katzberg, Kaplan & Katzberg, New York City, for Mark Savarese.
OPINION AND ORDER
RAKOFF, District Judge.
Federal law delegates to the New York Stock Exchange (the "Exchange") substantial authority, and responsibility, to police itself and its members. See 15 U.S.C. § 78o-3(b)(2), (b)(6), (b)(7), (b)(8), and (h); see also § 78s(g). The legal problems posed by the instant case, culminating in the sentencing issues presently before the Court, largely derive from the apparent failure of the Exchange to fulfill that responsibility adequately in its supervision of independent floor brokers.
Independent floor brokers are members of the Exchange who, for a commission, stand ready, willing, and able to execute orders for the purchase and sale of securities on the floor of the Exchange. By reason of their presence on the trading floor, they have access to short-term trading information and trading opportunities denied to the general investing public. See In Re New York Stock Exchange, Inc., Admin.Proc. File No. 3-9925, 1999 SEC LEXIS 1290 (June 29, 1999) (" SEC Report ") at 6. To prevent floor brokers from taking unfair advantage of this "inside" information, and to foster public confidence in the Exchange, Section 11(a) of the Securities Exchange Act, 15 U.S.C. § 78k, prohibits floor brokers (and certain others) from "effect[ing] any transaction on such exchange for [their] own account, the account of an associated person, or an account with respect to which [they] or an
associated person thereof exercises investment discretion," id. Rule 11-a-1(a), 17 C.F.R.§ 240.11a-1(a), promulgated by the Securities and Exchange Commission (the "Commission") pursuant to Section 11(a), further provides that:
No member of a national securities exchange, while on the floor of such exchange, shall initiate, directly or indirectly, any transaction in any security admitted to trading on such exchange, for any account in which such member has an interest, or for any such account with respect to which such member has discretion as to the time of execution, the choice of security to be bought or sold, the total amount of any security to be bought or sold, or whether any such transaction shall be one of purchase or sale.
Finally, willful violations of any of these provisions is punishable as a crime. 15 U.S.C. § 78ff.
Count One of Indictment S2 98 Cr. 144 (the "Indictment") charges that between approximately 1993 and 1997 a Manhattan-based securities firm named The Oakford Corporation ("Oakford") and its two principals, William Killeen and Thomas Bock, conspired with five floor brokers named John R. D'Alessio, Thomas J. Cavallino, Edward J. Mueger, John Savarese, and Mark Savarese, and other unnamed coconspirators, to willfully violate the above-quoted prohibitions by arranging for these floor brokers to obtain beneficial interests in certain Oakford accounts and to use their investment discretion in trading these accounts. See Indictment, pp 15, 22. Count One further charges that, to conceal these unlawful activities, the conspirators agreed to falsify various required records, notably order tickets and invoices, see Indictment pp 18, 19, 23--such falsifications being themselves federal felonies. See 15 U.S.C. § 78ff. As a result of this unlawful scheme, the conspirators realized more than $15 million net profits. See Preliminary Presentence Report ("Prelim.PSR") for Oakford, 8/30/99, at 15-17 pp 78-79.1
On May 20, 1999, Oakford, Killeen, Bock, Cavallino, Mueger, John Savarese and Mark Savarese all pleaded guilty to Count One.2 Specifically, they admitted to conspiring to allow the floor brokers to execute occasional discretionary trades in the Oakford accounts, knowing this was unlawful. See, e.g., transcript ("tr.") 5/20/99 at 7, 31, 62-66.
In the manner typical of conspiracy pleas, these defendants' personal statements embraced only a portion of the conduct charged in the count to which the pleas were entered. It is well settled, however, that the Court may take into account for sentencing purposes all relevant conduct that occurred during the commission of the offense of conviction that is either undisputed or, if disputed, is established to the Court's satisfaction after an adequate hearing. See U.S. Sentencing Guidelines ("USSG") § 1B1.3 (broadly defining "relevant conduct" and mandating its use in determining sentencing range); USSG § 6A1.3 (after adequate hearing,
court may resolve sentencing disputes on basis of any information that has sufficient indicia of reliability to support its probable accuracy); USSG § 6B1.4(d) (factual and other stipulations of the parties not binding on the Court); see also, e.g., United States v. Watts, 519 U.S. 148, 117 S.Ct. 633, 136 L.Ed.2d 554 (1997); Witte v. United States, 515 U.S. 389, 115 S.Ct. 2199, 132 L.Ed.2d 351 (1995); United States v. Bove, 155 F.3d 44 (2d Cir. 1998); United States v. Lovaglia, 954 F.2d 811 (2d Cir. 1992); United States v. Ibanez, 924 F.2d 427 (2d Cir. 1991); United States v. Fatico, 579 F.2d 707 (2d Cir. 1978); United States v. Spiegelman, 4 F.Supp.2d 275 (S.D.N.Y.1998).
Rather more unusually, however, the Government and the defendants, in letter agreements submitted in conjunction with the guilty pleas, stipulated that "on the evidence presently available, there appears to be no basis on which to determine whether a particular trade [in the Oakford accounts] was a Discretionary Trade or a non-Discretionary Trade" and that, consequently, "there is no reasonable basis for calculating [a] defendant's gain, if any, that resulted from the Discretionary Trades." See, e.g., letter dated 5/17/99 from United States Attorney's Office to Michael Armstrong, Esq. ("Mueger Plea Letter") at 2, Section A ¶ 2; letter dated 5/17/99 from United States Attorney's Office to Robert Katzberg, Esq. ("Mark Savarese Plea Letter") at 2, Section A ¶ 2. These stipulations--the net effect of which would be to treat the defendants' misconduct as the equivalent of the least harmful fraud cognizable under the Sentencing Guidelines, see USSG § 2F1.1--were sufficiently problematic on their face that the Court, on first being apprised of them, reminded the parties that none of their stipulations was binding on the Court and that the Court might well convene an evidentiary hearing to determine the underlying facts to its own satisfaction. Tr. 5/19/99 at 18-19. After reflecting on this advice for 24 hours, the defendants proceeded with their guilty pleas. Tr. 5/20/99 at 3, 19, 38, 47-48.3
Thereupon, the Court referred the matter to the Probation Office for pre-sentence investigation. See Fed.R.Crim.P. 32(b). Based on that investigation, the Probation Office drafted preliminary presentence reports that were delivered to the parties in August 1999. In substance, the Probation Office concluded that as a practical matter the floor brokers exercised largely unfettered discretion in the investment of the Oakford accounts assigned to them and that the $15 million net profits realized in those accounts during the conspiratorial period were therefore a reasonable measure of the intended loss or gain attributable to the unlawful conspiracy. See Memorandum Order, 9/8/99 (summarizing the preliminary presentence reports). Under this approach, the individual defendants, instead of facing a Count One sentencing range of 0-6 months imprisonment estimated in the parties' letter agreements, see, e.g., Mueger Plea Letter at 3, Section C, would face instead a range of at least 37-46 months imprisonment on that count.4 See USSG § 2F1.1(b)(1)(P).
To resolve this disparity and determine the truth regarding this and other material sentencing issues that had arisen in this case, see Memorandum Order, 9/8/99, at 2-4, the Court conducted an evidentiary hearing on October 20-21, 1999.5 At the hearing the Court heard testimony from four coconspirators who had previously pleaded guilty pursuant to "cooperation" agreements with the Government (Christine Beyer, Michael Frayler, Richard Harman, and Angelo Meneghello) as well as from an immunized former employee of Oakford (Mitchell Lown) and a high-ranking enforcement officer of the Exchange (Edward Kwalwasser).6 The defendants, as was their right, chose not to testify, see Mitchell v. United States, 526 U.S. 314, 119 S.Ct. 1307, 143 L.Ed.2d 424 (1999), and their counsel chose to waive oral argument at the close of the hearing. Tr. 10/21/99 at 337-40. At the Court's invitation, however, all parties submitted substantial post-hearing briefs, which the Court has carefully considered.7
Based on its assessment of the evidence presented at the hearing, in the presentence reports, and in the parties' submissions, the Court makes the following findings and conclusions:8
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