Butler v. United States

• Decision Date: 17 January 2014
• Docket Number: No. 13–CV–4639.,13–CV–4639.
• Citation: 992 F.Supp.2d 165
• Parties: Eric BUTLER, Movant, v. UNITED STATES of America.
• Court: U.S. District Court — Eastern District of New York

992 F.Supp.2d 165

Eric BUTLER, Movant,
v.
UNITED STATES of America.

No. 13–CV–4639.

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

Jan. 17, 2014.

[992 F.Supp.2d 168]

Paul T. Weinstein, Esq. Emmet, Marvn & Martin, LLP, New York, NY, for Movant.

Daniel A. Spector, John P. Nowak, United States Attorney's Office, Brooklyn, NY, for the United States.

MEMORANDUM, ORDER, AND JUDGMENT ON 28 U.S.C. § 2255 MOTION
JACK B. WEINSTEIN, Senior District Judge.

Table of Contents

I.	Introduction	169
II.	Facts	169
III.	Trial	171
IV.	Appeals	171
V.	Movant's Claims	172

A.
Procedural Bar
172

1.	Failure to Disclose Information	172
2.	Extraterritoriality	172
3.	Actual Innocence	172
4.	Conclusion	172

B.
Brady and Giglio Violations
172

1.	Law	172
2.	Application of Law to Facts	173

i.	Glaxo	173
ii.	Medis Technologies and Lumec	174
iii.	S & P	175

C.
Securities Fraud under 10(b)
175

1.	Change of law	175
2.	Extraterritorial Application of section 10(b)	175
3.	Domestic Transaction Defined	176

i.	Morrison	176
ii.	Absolute Activist	177
iii.	Vilar	177

4.
Application of Law to Facts
177

D.
Wire Fraud Conspiracy
179

1.	Law	179
2.	Application of Law to Facts	179

VI.	Certificate of Appealability	179
VII.	Conclusion	179

[992 F.Supp.2d 169]

I. Introduction

Eric Butler moves to vacate his criminal conviction and sentence. See28 U.S.C. § 2255. In the alternative he requests a new trial. SeeFed.R. Crim.P. 33. He is currently serving a five year sentence imposed on August 23, 2011 for conspiracy to commit securities fraud, securities fraud, and conspiracy to commit wire fraud.

He states two grounds for relief. First, he claims that the government withheld exculpatory information in violation of Brady v. Maryland, 373 U.S. 83, 83 S.Ct. 1194, 10 L.Ed.2d 215 (1963), and Giglio v. United States, 405 U.S. 150, 92 S.Ct. 763, 31 L.Ed.2d 104 (1972). See Pet'r's section 2255 Mot. (“Pet'r's Br.”) 1130, CM/ECF No. 1. Second, he alleges that new interpretations of securities fraud law excluding prosecutions from foreign-based transactions render his conviction invalid. See id. at 31–38 (relying on Morrison v. National Australia Bank, 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010) and U.S. v. Vilar, 729 F.3d 62 (2d Cir.2013)).

A non-evidentiary hearing was held on January 15, 2014. Movant was represented by counsel and present via telephone.

The motion is denied.

II. Facts

Auction Rate Securities (“ARS”) were securities composed of long-term, usually high-grade, debt obligations. See U.S. v. Tzolov, 642 F.3d 314, 316–17 (2d Cir.2011). The underlying collateral included student loans, mortgages, municipal bonds, corporate debt, and preferred stock issued by closed-end mutual funds. See id. The maturity on these debt obligations was usually thirty years, but ARS were traded through auctions on short-term cycles. See id. Auctions took place every 7, 14, 28, or 35 days. See id. At the end of a cycle, the ARS could either be sold through an auction, or the investor could hold the security for another cycle. See id. ARS were not listed on exchanges.

The structure of the product and short-term auction cycle attracted investors interested in additional basis points and liquidity. See id. Prior to the failure of the market, an investor could exchange his security for cash potentially every week or month. See id. If an investor instead decided to hold his ARS, the principal would be returned when the underlying security matured many years later. See id.

The federal government guaranteed against default up to 98 percent of the underlying principal of ARS backed by student loans. See id. Other types of ARS did not carry this guarantee. See id.

The auctions for non-student loan-backed ARS began to fail in August 2007. See id. The failure effectively eliminated the market for these securities because investors could not resell the product through short-term auctions. See id.

[992 F.Supp.2d 170]

His co-conspirator, Julian Tzolov, and Butler worked at Credit Suisse's Manhattan office in the Corporate Investment Management group. See Tzolov, 642 F.3d at 317. When clients had excess cash, based upon advice from Butler and Tzolov, they invested it in securities products that earned the substantial interest associated with long-term securities and provided the liquidity of short-term investments. Many clients were large, international corporations with total investments of many millions of dollars.

In 2005 and 2006, these conspirators presented corporate clients with ARS as an investment product. See id. These were long term loans split into short term investments readily convertible to cash. The presentations focused on ARS incorporating student loans because of the federal guarantee. See, e.g., Trial Tr., 1624, Aug. 3, 2009, CM/ECF No. 360; Tzolov, 642 F.3d at 317.

To present ARS to clients, Butler and Tzolov sometimes traveled out of the country. See, e.g., Tzolov, 642 F.3d at 317; Trial Tr., 1624, Aug. 3, 2009. At other times their merchandizing was conducted over the phone or via email from the United States. See Tzolov, 642 F.3d at 317; Trial Tr., 629, July 27, 2009, CM/ECF No. 376. From both this country and abroad, they provided clients with misleading and false information. See Trial Tr., 2357–71, Aug. 10, 2009, CM/ECF No. 355.

When a client decided to invest in student loan-backed ARS, they contacted Butler and completed Credit Suisse's account opening documents. See Trial Tr., 1019–20, July 28, 2009, CM/ECF No. 377. This process included starting New York based brokerage accounts with Credit Suisse and completing tax documentation that exempted the transactions from United States tax withholding. See Mem. in Opp'n of 2255 Mot. (“Mem. in Opp'n”) 2, CM/ECF No. 10 (Ex. 3B). The accounts were non-discretionary, which meant Butler could not unilaterally make a purchase without a client's permission. See, e.g., Trial Tr., 2404, Aug. 10, 2009; Trial Tr., 2220–21, Aug. 6, 2009, CM/ECF No. 352.

The excess cash the corporation wished to invest was wired from a foreign country to the United States. See Trial Tr., 313839, Aug. 13, 2009, CM/ECF No. 358. Contrary to clients' instructions to purchase student loan-backed ARS, Butler purchased non-government guaranteed ARS. See Tzolov, 642 F.3d at 317. Obtaining a higher commission was the primary purpose of investing in non-student loan-backed ARS. See Trial Tr., 2203–07, Aug. 6, 2009.

Prior to each auction in which a client held eligible securities, Butler contacted the client, from New York, to ask whether it wished to liquidate or hold the security for another cycle. Orders were taken by phone or by email in New York. See, e.g., Trial Tr., 1664, Aug. 3, 2009; Trial Tr., 184849, Aug. 4, 2009, CM/ECF No. 361. Once Butler received instructions from the client, he relayed the order to a trader in New York, who executed the purchase or sale here. See Trial Tr., 303640, Aug. 13, 2009. All ARS trades went through a trading desk in New York. See id. at 3078. Sometimes the trades were executed between two Credit Suisse clients, known as cross-trades. See id. at 3030–32. Other trades were executed between Credit Suisse and Wall Street banks such as Merrill Lynch, Deutsche Bank, JP Morgan, and Lehman Brothers in New York. See id. at 3040–41, 3053, 3081.

Email confirmations sent to the client after the completion of trades falsely indicated that student loan ARS were purchased when in fact other, non-guaranteed collateral backed the securities. See Tzolov, 642 F.3d at 317. Paper confirmations

[992 F.Supp.2d 171]

for the same trades were sent from Credit Suisse to the clients at a later date. See id. The paper confirmations indicated the correct name of the securities purchased. See id.

Auctions for non-student loan-backed ARS failed in 2007. Butler's clients who held these securities could not sell them on a short-term basis.

III. Trial

At trial, the government introduced witnesses from six of Butler's former clients: Randgold Resources Ltd. (“Randgold”), Potash Corporation (“Potash”), Copa Airlines (“Copa”), Roche International (“Roche”), STMicroelectronics (“STMicro”), and GlaxoSmithKline (“Glaxo”). Pet'r's Br. at 15. Witnesses from Randgold, Potash, Copa, and Roche testified that they ordered the purchase of student loan-backed ARS, but Butler purchased other types of ARS. See id. One investment criteria for clients was that the ARS be AAA rated. AAA rating was important, but it was not central. See, e.g., Trial Tr., 1016, July 28, 2006; Trial Tr., 1621, Aug. 3, 2009. The key feature was the government guarantee.

Glaxo's testimony at trial was similar to that of the others. The difference was that Glaxo exited the ARS market before it crashed. It did not suffer losses as a result of Butler's unauthorized activities. See Trial Tr., 1900, Aug. 4, 2009, CM/ECF No. 361.

Cooperating with the government, Tzolov testified against Butler. See CM/ECF No. 352, 355, 356, 357, 358; Trial Tr., 2483–84, Aug. 10, 2009. His motives and veracity were thoroughly attacked at trial. See Trial Tr., 2147, Aug. 6, 2009; Trial Tr., 2476–2506, Aug. 10, 2009.

IV. Appeals

The Court of Appeals affirmed each of the conspiracy counts and vacated the securities fraud count for improper venue. See U.S. v. Tzolov, 642 F.3d 314, 316 (2d Cir.2011). Resentencing was ordered. See id. Butler's other contentions on appeal were rejected under a separate summary order. See U.S. v. Tzolov, 435 Fed.Appx. 15 (2d Cir.2011) (dismissing arguments of evidentiary error and sentencing miscalculation). The district court issued a Memorandum and Order setting the schedule for resentencing. Mem. and Order, 08–cr–370, CM/ECF No. 429.

Brought against Butler in 2009 in the Southern District of New York was another case, alleging seven counts of wire fraud. Indictment, United States v. Butler, 11–cr–588 (E.D.N.Y. July 27, 2011), CM/ECF No. 2. This case was transferred to the Eastern District of New York in 2011. Order of Transfer, United States v. Butler, 11–cr–588 (E.D.N.Y. Aug. 15, 2011), CM/ECF No. 1.

In a single proceeding on August 23, 2011,...