United States v. Faruki

• Decision Date: 13 October 2015
• Docket Number: No. 14–2914.,14–2914.
• Citation: 803 F.3d 847
• Parties: UNITED STATES of America, Plaintiff–Appellee, v. Belal FARUKI, Defendant–Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

803 F.3d 847

UNITED STATES of America, Plaintiff–Appellee
v.
Belal FARUKI, Defendant–Appellant.

No. 14–2914.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 10, 2015.
Decided Oct. 13, 2015.

803 F.3d 849

John Douglas Mitchell, Assistant U.S. Attorney, Office of the United States Attorney, Chicago, IL, for Plaintiff–Appellee.

Andrew Gable, Attorney, Steve A. Greenberg, Attorney, Steven A. Greenberg and Associates, Ltd., Chicago, IL, for Defendant–Appellant.

Before FLAUM, RIPPLE, and SYKES, Circuit Judges.

Opinion

FLAUM, Circuit Judge.

Belal Faruki was convicted of wire fraud in federal district court on January 17, 2014. The jury determined that, between January 2010 and January 2011, Faruki operated an investment scheme through which he defrauded one investor, Marc Tishfield, and attempted to defraud a second investor, Richard Schottenfeld. Following denials of Faruki's motion for a judgment of acquittal and motion for a new trial, the district court sentenced Faruki to forty-eight months in prison. Faruki now challenges the sufficiency of the evidence underlying his convictions, as well as two evidentiary rulings by the district court. We affirm.

I. Background

Faruki met Tishfield in 2006 while Tishfield was working as a portfolio manager at SAC Capital, a Connecticut-based hedge fund. At the time, Faruki was a computer technology consultant retained by SAC Capital to help examine and improve its electronic trading systems. Faruki and Tishfield stayed in touch after Faruki completed his project at SAC Capital, periodically meeting in person and communicating by telephone, e-mail, and instant message.

In January 2010, Faruki informed Tishfield that he had launched his own investment fund, Neural Markets, using mathematically-driven trading strategies. Faruki stated that he was currently investing his own money in the fund in an effort to establish a trading history he could pitch to prospective investors. He

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told Tishfield that in December 2009 his fund had achieved investment returns exceeding 12%, and that his investment return in January 2010 was 32%. Faruki also told Tishfield that he had hired RSM McGladrey, an accounting firm, to audit his fund's investment performance.

On August 25, 2010, Faruki sent Tishfield an e-mail outlining the investment strategy and returns achieved by Neural Markets. Faruki's e-mail indicated that the fund had been trading since March 2009 and had achieved investment returns exceeding 200%. Faruki also represented that Neural Markets employed “almost zero leverage.” According to a document attached to the e-mail, Neural Markets' prime brokers were TradeStation and JPMorgan, and the fund's profits and losses were accounted for by Liccar CPA and audited by RSM McGladrey. Marketing materials attached to the e-mail stated: “Neural Markets currently manages only a simulated portfolio.”

Tishfield testified at trial that he and Faruki had several conversations in which they discussed the meaning of “simulated portfolio.” According to Tishfield, Faruki said that he was managing $5 million in assets for wealthy clients in Chicago. Faruki explained that his “simulated” investing accounts mirrored his trading for wealthy Chicago clients, but did not contain clients' specific information in an effort to protect their identities.

On September 5, 2010, Faruki sent Tishfield a private placement memorandum (“PPM”) for the Neural Markets fund. A PPM is commonplace in the investment fund industry and governs all of the terms of an investment. The PPM stated that TradeStation and JPMorgan would be the prime brokers, Liccar CPA would be the fund administrator, RSM McGladrey would be the auditor, and Foley & Lardner LLP would be the fund's legal counsel. The PPM also provided that Faruki would not use leverage when investing Tishfield's funds, except in exceptional circumstances. Tishfield signed the PPM and committed to invest $1 million in the Neural Markets fund on September 8, 2010.

On September 16, 2010—after Tishfield signed the PPM but before he transferred funds to Faruki—Faruki met with Tishfield and Tishfield's brother-in-law, Richard Schottenfeld, at Schottenfeld's office in Manhattan. Schottenfeld is the chairman of a trading firm in New York City called Schottenfeld Capital. During this meeting, Faruki told both Tishfield and Schottenfeld that he was trading Neural Markets' funds in trading accounts at a broker-dealer called TradeStation, and that the fund was using JPMorgan as a clearing broker. Tishfield also recalled Faruki saying that he had attended either Boston University or Boston College. Schottenfeld decided not to invest with Faruki following the meeting.

At trial, the government presented evidence that much of the information Faruki gave to Tishfield prior to Tishfield's decision to invest in Neural Markets was false. For instance, an FBI agent analyzed Faruki's bank and trading account records, as well as his hedge funds, and determined that Faruki never traded $5 million for other investors. In fact, Faruki and his hedge funds never traded any funds for any investors other than Tishfield. Additionally, a representative from Liccar CPA testified that Faruki had not hired the accounting firm in August 2010 and that the firm does not provide the type of reporting that Faruki represented it would provide in his August 2010 e-mail to Tishfield. Similarly, the managing director of RSM McGladrey testified that Faruki never retained RSM McGladrey to provide auditing services. The parties stipulated that Faruki never had any prime brokerage accounts at JPMorgan. The government

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also offered evidence showing that from January 27, 2010 through September 24, 2010, Faruki was prohibited from selling securities in or from Illinois (the “Illinois Order of Prohibition”).¹ Faruki did not dispute at trial—nor does he dispute on appeal—that he did not attend either Boston University or Boston College.

Sometime in September 2010, Faruki opened his first account at TradeStation. The account he opened was an individual account, into which he deposited $150,000. Faruki subsequently applied for an institutional account on behalf of Neural Markets. In evaluating Faruki's application for an institutional account, TradeStation discovered the Illinois Order of Prohibition and denied Faruki's application. TradeStation also closed Faruki's personal account. TradeStation's general counsel informed Faruki that TradeStation was no longer interested in doing business with him.

In the process of trying to open the personal and institutional TradeStation accounts, Faruki made a number of false representations to two TradeStation employees, Lance Baraker and Charles Runyon. These representations included some of the same representations that Faruki made to Tishfield and Schottenfeld, including that Faruki was managing $5 million in investor funds.

On September 28, 2010, Tishfield sent Faruki $1 million by wire transfer to a Neural Markets bank account to invest in the Neural Markets fund. Even though TradeStation had denied Faruki's request for an institutional account and closed his personal account, Faruki told Tishfield that TradeStation would open the account within a week. Faruki had previously represented to Tishfield that he would begin trading Tishfield's investment on October 1, 2010.

The government alleges that following his encounter with TradeStation, Faruki had two of his friends open institutional accounts at TradeStation in the name of Evolution Quantitative 1X, LLC (“Evolution Quantitative”), accounts which Faruki secretly controlled. Faruki then transferred Tishfield's $1 million into a newly opened bank account in the name of Evolution Quantitative. He subsequently transferred the money into the Evolution Quantitative accounts at TradeStation, where he traded Tishfield's funds.

In November 2010, TradeStation discovered that Faruki controlled the Evolution Quantitative accounts and terminated them. Faruki—again through friends—then set up another trading account at a different broker-dealer, Interactive Brokers, and transferred Tishfield's money to that account. Faruki informed Tishfield that his money was being transferred to the Interactive Brokers account, but represented that TradeStation had closed the initial account due to a “trading error.”

In December 2010, Tishfield received his first account statement from Liccar CPA, which reported significant losses associated with his $1 million investment. Tishfield asked Faruki to return what was left of his investment but Faruki refused, citing the PPM. Faruki also reminded Tishfield that under the terms of the PPM, he was permitted to use Tishfield's investment funds to defend himself against any lawsuit initiated by Tishfield.

On February 6, 2013, a grand jury indicted Faruki on seven counts of wire fraud, in violation of 18 U.S.C. § 1343. The indictment alleged that between January 2010 and January 2011, Faruki operated

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a fraudulent investment scheme in which he defrauded Marc Tishfield out of $1 million and attempted to defraud...