People v. Thompson

• Citation: 28 N.Y.S.3d 237,51 Misc.3d 693
• Parties: The PEOPLE of the State of New York v. Anthony J. THOMPSON, Eric Van Nguyen, Jay Fung, Joseph Dervali, Christopher Balseiro, Hanna Schmieder, Luz Rodriguez, Kenneth Oxsalida, Defendants.
• Decision Date: 17 February 2016
• Court: New York Supreme Court

51 Misc.3d 693
28 N.Y.S.3d 237

The PEOPLE of the State of New York
v.
Anthony J. THOMPSON, Eric Van Nguyen, Jay Fung, Joseph Dervali, Christopher Balseiro, Hanna Schmieder, Luz Rodriguez, Kenneth Oxsalida, Defendants.

Supreme Court, New York County, New York.

Feb. 17, 2016.

28 N.Y.S.3d 239

New York County District Attorney Cyrus R. Vance, Jr. (Garrett A. Lynch, Brian A. Kudon and Sean Pippen, of counsel) for the People.

28 N.Y.S.3d 240

Thompson Hine (Miranda E. Fritz, of counsel) for Defendant Anthony Thompson.

DANIEL P. CONVISER, J.

51 Misc.3d 694

The Defendants are charged with 85 counts of securities fraud, scheme to defraud, criminal possession of stolen property and grand larceny. The charges arise out of nine alleged fraudulent "pump and dump" penny stock promotion schemes. Defendant Anthony Thompson moves here to suppress approximately 100,000 of his emails recovered in the execution of two search warrants directed to his internet service providers in 2012.

For the reasons outlined infra, the Court holds that: (i) the People were not required to obtain an eavesdropping warrant to seize the emails; (ii) the warrants were supported by probable cause; (iii) the warrants, as interpreted by the People, were overbroad; (iv) the First Department's recent assertion in the case of

51 Misc.3d 695

In re 381 Search Warrants Directed to Facebook, Inc., 132 A.D.3d 11, 14 N.Y.S.3d 23 (1st Dept.2015), lv. granted, 2015 N.Y. Slip Op. 93656, 2015 WL 8804263 ("Facebook ") that the Fourth Amendment does not apply to seizures like those here because of the "third-party doctrine" means suppression is not an available remedy in this case; (v) the Defendant's suppression motion is therefore denied in all respects, and (vi) the People are hereby ordered to return and expunge seized communications they did not identify as responsive to the warrants prior to February 6, 2015 as outlined in section 10 of this Decision.

1. General Factual Background

The parties in this case are all alleged to have been participants in a series of penny stock pump and dump schemes. A penny stock is one which trades for less than $5 per share, is not listed on the NASDAQ and requires limited disclosure, making investments more risky and volatile. The alleged principal of the schemes was Kevin Sepe. Mr. Thompson is alleged to have been a key participant in the frauds through penny stock promotional internet newsletters he owned which fraudulently touted the stocks. It is alleged that Thompson was compensated with substantial shares of the companies which he sold during the promotions and was a key participant in the frauds. Kevin Sepe and the Defendants are alleged to have earned millions of dollars in profits from the stock sales.

It is alleged that the Defendants acquired companies with little or no assets and trading volume and promoted the stocks during discrete periods through multiple internet newsletters. They employed various fraudulent devices, such as hiding the fact that virtually all of the company stock was owned by Sepe and his nominees and that the stock tips outlined in multiple seemingly unconnected internet newsletters were in fact all coming from promotions generated by the defendants. The Defendants carefully coordinated their sales of the company's stock to coincide with the promotions. Share price and volume rose rapidly during the promotions and the Defendants then sold their stock for significant profits. The promotional periods then ended and share prices and volume fell dramatically. Numerous individual investors lost sums ranging from several thousand to over forty thousand dollars. In multiple cases, individual investors lost virtually all of the money they paid for the stocks when share prices plummeted.

2. The Search Warrants and Search Warrant Affidavits

The warrants here authorized the seizure of communications from two of

28 N.Y.S.3d 241

Thompson's email accounts, one at gmail and one

51 Misc.3d 696

at hotmail (the "gmail" and "hotmail" accounts). The gmail warrant was initially issued on December 21, 2011 by Criminal Court Judge James M. Burke. A revised warrant was issued by Criminal Court Judge Melissa Jackson on January 4, 2012¹ . The hotmail warrant was issued on June 21, 2012 by Judge Burke. Both of the warrants were supported by substantively identical affidavits from an investigator for the New York County district attorney's office alleging there was reasonable cause to believe the emails would provide evidence of a Scheme to Defraud in the First Degree (PL 190.65) and related crimes. The affidavits sought identifying information from the accounts, evidence of the commission of crimes, information concerning persons the Defendant communicated with and evidence of financial proceeds derived from the crimes.

The information supporting the affidavits came from an investigator for the United States Securities and Exchange Commission (the "SEC"), Timothy Nealon. Mr. Nealon had investigated a microcap or "penny stock" called Blast Applications ("BLAST"). BLAST was a company which claimed to develop applications for Iphone, Facebook and Twitter but whose monthly profits rarely exceeded a few hundred dollars. Nealon asserted that BLAST's stock history provided evidence its owners had engaged in a pump and dump scheme. In a pump and dump, share prices are inflated by having conspirators buy and sell stock on the same day to create the false impression the stock is being actively traded in the market and through website advertising campaigns which indicate, with no basis, that a stock is poised to significantly increase in value.

The affidavits asserted there were certain "red flags" indicating a pump and dump with respect to BLAST. These were consulting agreements where the company contracted with promoters who were then compensated with large shares of the company's stock, extensive promotion, the exercise of the right to obtain shares by consultants on the eve of a promotion, a large increase in stock volume and price over a short period and the liquidation of the shares by the consultants during the promotion.

BLAST issued 100 million shares in October of 2009. Multiple consultants were hired to promote the company including OTC solutions ("OTC") which was owned by Anthony

51 Misc.3d 697

Thompson. OTC was compensated with 18 million shares of BLAST stock. It was asserted that OTC and other promoters colluded to artificially inflate BLAST's share price. The affidavits included emails from Mr. Thompson to two other promoters including one in which Mr. Thompson apparently directed a second defendant to disclose that he would be compensated with 6 million shares rather than 18 million shares. The emails also indicated a plan to sell the shares at a specific time and split the proceeds.

Promotion of the stock began on November 18, 2009. The promotion claimed the stock could rise up to 500% in value. The affidavits alleged the promotion falsely stated the amount of compensation received by the promoters was 6 million rather than 18 million shares. Prior to the promotion, BLAST stock averaged .02 cents per share with a daily trading volume of less than 1000 shares. On the first day of the promotion, the share price jumped to .05 cents and trading volume

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was over 45 million shares. On that same day, OTC sold 2.35 million shares and a second conspirator sold 3.4 million shares for a total profit of over $250,000. The following day, Mr. Thompson and a second alleged conspirator emailed to discuss how to coordinate their share liquidations. By the end of the month, OTC had sold all of its 18 million shares for a profit just over half a million dollars. As is typical in a pump and dump, the share price then fell dramatically. From November 30, 2009 until the end of the calendar year, the share price never rose above .015 cents per share and daily trading volume was a few hundred thousand shares.

The warrants authorized the seizure of communications from January 1, 2008 through the warrant dates. With respect to the gmail warrant, this included communications until January 4, 2012 (a period of four years). With respect to the hotmail warrant, this included communications until June 21, 2102 (a period of roughly 4 ½ years). The warrants authorized the email service providers to conduct the searches and provide the emails to law enforcement.

The People seized all of the communications in the subject email accounts within the 10 days authorized by the warrants. They then had the contents of the recovered emails assessed by a "privilege review team" to segregate any attorney-client communications from the assistant district attorneys working on the investigation. The People have provided copies of all of these email files to the Defendant (who, presumably, has them in...