U.S. v. Falkowitz

Decision Date07 August 2002
Docket NumberNo. 01 CR. 852(VM).,01 CR. 852(VM).
Citation214 F.Supp.2d 365
PartiesUNITED STATES of America, v. Michael FALKOWITZ, a/k/a "Mike Jacobs", Steven Falkowitz, Steven Dreyfus, and Benjamino R. Baiocco, Defendants.
CourtU.S. District Court — Southern District of New York

Michael G. Berger and Scott R. Matthews, Law Offices of Michael G. Berger, New York City, for defendant Michael Falkowitz.

Frederick L. Sosinsky, New York City, for defendant Steven Falkowitz.

Scott B. Tulman, New York City, for defendant Steven Dreyfus.

Wayne P. Stix, White Plains, NY, for defendant Benjamin R. Baiocco.

Daniel S. Ruzumna, Assistant United States Attorney, Mary Jo White, United States Attorney, Criminal Division, New York City, for United States.

DECISION AND ORDER

MARRERO, District Judge.

Defendants Michael Falkowitz, a/k/a "Mike Jacobs" ("M.Falkowitz"), Steven Falkowitz ("S.Falkowitz"), Steven Dryfus ("Dryfus") and Benjamino R. Baiocco ("Baiocco") (collectively "Defendants") are charged by superceding indictment S1 01 Cr. 852 (the "Indictment") with one count of conspiracy in violation of 18 U.S.C. § 371, six counts of mail fraud in violation of 18 U.S.C. §§ 1341 and 1342, and two counts of wire fraud in violation of 18 U.S.C. § 1343. Pending before the Court is Defendants' Joint Omnibus Motion (the "Motion") to: (i) dismiss the indictment in its entirety; (ii) suppress evidence pursuant to Federal Rule of Criminal Procedure ("F.R.C.P.") 12(b)(3); (iii) request an evidentiary hearing regarding pre-arrest statements made by Baiocco; and (iv) compel a bill of particulars and additional discovery pursuant to F.R.C.P. 12(b)(4). The Government opposes the Motion and also requests an evidentiary hearing concerning pre-arrest statements made by Baiocco. Among the questions the Motion raises is whether the conduct of which Defendants are accused constitutes an intentional scheme to defraud, as defined by the mail and wire fraud statutes, absent evidence that the alleged victims displayed ordinary prudence and comprehension under the circumstances — an issue on which various circuit courts are split and the Second Circuit has not pronounced itself definitively, despite some relevant dicta. For the reasons set forth below, the Motion is granted in part and denied in part.

I. BACKGROUND

Fraud, in this way perhaps unique among offenses, may hold the distinction for inspiring the greatest creativity in the criminal mind. Every phase of fraud's consummation typically occasions the exercise of acute imagination. There is the sharpness that enables the initial recognition of frailty, the opportunistic flair that pinpoints both the victim and the opportunity to make a market of depriving the unwitting of their money or other property. When that opportune moment for exploitation arises, the trickster then evinces a canny knack to seize upon the target's particular weakness at its most fragile.

In aid of keen perception and timing comes fraud's inventive spirit. The schemer devises wiles and perfects ways and means equal to the victims' flaws, employing fraud's peculiar charms to gain their trust by plying them with promises and lulling them with falsehoods.

Deceit also demands the craft and guiles of the dramatic arts, not only to pass off the artifice as real, but to entertain while distracting, to sustain the act and at the same time avoid detection. By these means, the intriguers endeavor to convert deception into a gainful livelihood which they hope will pay off handsomely while leaving the victims taken in by the performance, often in multitudes, momentarily gratified and even thankful.

Rounding out this arsenal are the stores of creativity the imposters reserve for denial and defense. No less inventive than the prowess to contrive, beguile and dissemble are the ingenuities that frauds commonly summon to explain away why a sham is not a sham. A mark of this nimbleness is the many ways they design to fault the duped for being duped. Their foul play exposed, the wrongdoers in essence then accuse their victims of imprudently bringing harm upon themselves by not being alert or astute enough soon enough to recognize the fake in the person they fully trusted, and to take effective steps to avert their self-inflicted injuries.

The Motion, as emerges from the fraud charges the Government levels in this case, and from Defendants' counter-arguments, exemplifies many aspects of these elements and patterns.

II. FACTS

The Indictment sets forth the Government's allegations against Defendants and is incorporated by reference here.1 To briefly summarize the charges, Empire State Financial Group ("Empire") facilitated the transfer of ownership and entitlement to life insurance policy death benefits from the insured person (the "viator") to investors who provide immediate payment for those rights. Upon the viator's death, the life insurance policy proceeds would be distributed to the investor. This investment practice is known as viatical settlements, and the process of transferring such rights is referred to as "viaticating" a life insurance policy. Defendants were officers or agents of Empire. M. Falkowitz served as the Director of Empire and was in charge of all operations. S. Falkowitz was Empire's Operations Director, also a managerial position. Dreyfus was the New Business Development Director and was primarily responsible for the purchase of life insurance policies from viators and viatical brokers. Baiocco was an independent insurance agent who sold life insurance to individuals who subsequently viaticated their policies through Empire.

Investments in viatical settlements, though probably occupying a highly-specialized, narrow corner of financial markets, apparently comprises a legitimate industry, even when centered on insured people known to have lower life expectancies. According to the Government's accusations, into this lawful if untraditional investment business Defendants, applying their entrepreneurial creativity and inventive energies, carved a macabre market niche as their method of livelihood. Empire and its employees solicited investments in life insurance policies owned by individuals who either had AIDS or tested HIV positive. Ordinarily, if an applicant stated he was HIV positive, his application for life insurance was rejected. However, as the operating method of the fraudulent scheme the Government charges (the "Scheme"), Empire's employees recruited people they knew had been diagnosed with HIV to apply for life insurance under the misrepresentation of being HIV negative.

Defendants' purpose was enabled by a weakness in the insurers' business practices that Defendants spotted and exploited as a lynchpin of their Scheme. Various carriers, as a means of facilitating life insurance for some individuals at lower premiums, maintained a practice of not requiring applicants for policies with face values under $100,000 to undergo medical examinations, thereby reducing underwriting costs and presumably passing some of the savings to the consumers in the form of more affordable coverage. This business policy, if a laudable constructive boon for some, opened for others a method for spoliation, perhaps true to the reality that much of life carries within it the vulnerability for its corruption by unsuspected agents of corruption. The Indictment alleges that Defendants knowingly induced individuals who had AIDS or tested HIV positive to engage in fraud by falsely and intentionally misrepresenting that they were in good health in order to obtain insurance for which they otherwise would not qualify and then to sell their policies through Empire. Empire would arrange viaticatical settlements with regard such fraudulent insurance policies, paying the viators a fraction of the face value of the policies, marketing the policies to investors and retaining a portion of the viatical settlement payment in exchange for its services.2 Defendants allegedly made various mailings and telephone calls in furtherance of the Scheme, including the mailing of insurance policies and viatical settlement agreements.

During the Government's investigation preceding the Indictment, it obtained a warrant to search Empire's premises. To show probable cause, the Government submitted the Amended Affidavit of Stephen R. Tortorella, dated May 9, 1999 ("Tortorella Aff."). According to the Tortorella Affidavit, Empire "specialized in viatical settlements". (Id., at ¶ 4.) The Government had identified a confidential witness ("CW") who was recruited by Empire to participate, and who not only participated but also referred other persons to participate, in the Scheme. The CW, who is HIV positive, obtained a life insurance policy upon the representation that he was HIV negative. The CW then sold the policy to Empire. According to the CW, all employees of Empire were aware of or involved in the Scheme. The Federal Bureau of Investigation also had "identified approximately 84 participants (in addition to [Empire's] employees)" in the alleged fraud. (Id., at ¶ 4.) The Government believed that Empire had "fewer than ten file cabinets holding business records relating to viatical settlements" on the premises, (id., at ¶ 3), and sought to search and seize items that "constitute evidence, fruits and/or instrumentalities of violations of 18 U.S.C. § 1341 [mail fraud] and/or 18 U.S.C. § 1956 [money laundering]." (Id., at ¶ 12.)

Magistrate Judge Peck issued a warrant authorizing a search of Empire's premises and seizure of:

Documents pertaining to viatical settlements, including,

A. Life insurance applications and policies

B. Trust agreements

C. Viatical settlement applications

D. Bank statements, deposit slips, canceled checks, withdrawal slips, check stubs, and other bank documents

E. Medical records and life expectancy evaluations for viators

F. Viatical settlement contracts between viatical settlement provider and investors

G....

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