U.S. v. Leonard
| Decision Date | 11 June 2008 |
| Docket Number | Docket No. 06-0080-cr(con).,Docket No. 06-2392-cr(con).,Docket No. 05-5523-cr(L). |
| Parties | UNITED STATES of America, Appellee, v. James M. LEONARD, Laurence Bowsky, Vincent Cavarra, Abraham M. Daniels, Alberto Ferreiras, Howard P. Goodman, Mary L. Goodman, Ian Hahn, Rosemarie Ingenito, Richard H. Jenkins, Kurt E. Kranz, Anthony Liggio, Philip Manzione, William Newsom, Lisa Niksic, Donald F. O'Grady, Frank Rossi, Anthony R. Stark, Beverly J. Tedder, Eric Thom, Dana Valensky, Kenneth R. Zolo, Defendants, Cynthia Silver,<SMALL><SUP>1</SUP></SMALL> Paul C. Dickau, Nanci Silverstein, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Second Circuit |
Norman Trabulus, Garden City, N.Y., for Paul C. Dickau.
Michael F. Bachner (Danielle L. Attias, of counsel), Bachner & Associates, P.C., New York, N.Y., for Nanci Silverstein.
Geoffrey R. Kaiser (David C. James, of counsel), Assistant United States Attorneys for Roslynn R. Mauskopf, United States Attorney for the Eastern District of New York, Brooklyn, N.Y., for Appellee.
Before: KEARSE, CALABRESI, and KATZMANN, Circuit Judges.
Over sixty years ago, the Supreme Court established the test for whether a given financial instrument or transaction constitutes an "investment contract" — and, therefore, a security — for purposes of the federal securities laws. SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). We write today to underscore that, in applying the Howey factors, courts can (and should) look beyond the formal terms of a relationship to the reality of the parties' positions to evaluate whether "the reasonable expectation was one of significant investor control." SEC v. Aqua-Sonic Prods. Corp., 687 F.2d 577, 585 (2d Cir.1982).
Appellants Dickau and Silverstein were two of twenty-five individuals indicted for criminal fraud for their role in marketing investment interests in film companies. Following a jury trial, they were each convicted of securities fraud and conspiracy to commit securities and mail fraud. On appeal, they challenge their convictions, claiming, inter alia, that insufficient evidence supported the determination that the interests at issue were securities and that the district court erred in including a "no ultimate harm" charge in the jury instructions. In addition, they challenge their sentences on the ground that the district court erred in measuring the loss amount as the entire cost of the total shares that defendants sold. We find the various objections to the conviction to be without merit. We agree with appellants, however, that the district court erred in its determination of the loss amount and therefore remand the cases for resentencing.
Appellants Paul C. Dickau and Nanci Silverstein each operated an independent sales office ("ISO") selling interests in companies formed to finance the production and distribution of motion pictures. Dickau's ISO sold interests in Little Giant, LLC, an entity created to produce the film Carlo's Wake.2 Both appellants' ISOs sold interests in Heritage Film Group, LLC, which was established to produce the film The Amati Girls. As their names suggest, Little Giant and Heritage are limited liability companies ("LLCs"), and the interests in the companies took the form of investment "units," priced at $10,000 each.
The ISOs solicited investments in Little Giant and Heritage over the phone, calling potential investors to generate interest in the film projects. The film's promoters would then mail potential investors offering materials, including a brochure, operating agreement, subscription agreement, risk disclosure sheet, and instruction sheet. If the potential investor decided to participate in the investment, he or she would send the subscription agreement, along with a check, directly to the film's promoters.
When an ISO succeeded in selling an interest in Little Giant or Heritage, it would receive a commission. Dickau's company received a 42% and 45% commission on sales of Little Giant and Heritage units, respectively. Silverstein's company received a 45% commission on sales of Heritage units. The offering memoranda did not reflect these hefty commission rates. Read liberally, the offering materials might be said to indicate that no more than 20% of the unit price would go toward sales commissions.3
Dickau's company sold a combined total of $520,000 worth of Little Giant and Heritage units and retained $210,376 in commissions. Silverstein's company sold $90,000 in interests in Heritage, pocketing $32,939 in commissions.
The government charged Dickau with four counts: one count of conspiracy to commit securities and mail fraud in relation to each of Little Giant and Heritage, see 18 U.S.C. § 371, and one count of securities fraud in relation to each of Little Giant and Heritage, see 15 U.S.C. §§ 78j, 78ff. The government charged Silverstein with one conspiracy count and one fraud count in relation to Heritage. All counts centered around the failure to disclose accurately the sales commission that the ISOs would be taking on the investment units. Following a trial in the Eastern District of New York, the jury returned a verdict of guilty on all counts against Dickau and Silverstein. Judge Wexler sentenced Dickau to forty-three months' imprisonment and ordered him to pay $499,989.64 in restitution. Judge Wexler sentenced Silverstein to six months' imprisonment, ordering her to pay $14,490 in restitution.
"A defendant challenging the sufficiency of the evidence supporting his conviction bears a heavy burden." United States v. Nektalov, 461 F.3d 309, 317 (2d Cir.2006). As we consider the challenge, "we must view the evidence, whether direct or circumstantial, in the light most favorable to the government and credit every inference that could have been drawn in its favor." United States v. Diaz, 176 F.3d 52, 89 (2d Cir.1999). We will reject the sufficiency challenge if "any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." Jackson v. Virginia, 443 U.S. 307, 319, 99 S.Ct. 2781, 61 L.Ed.2d 560 (1979).
Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device." 15 U.S.C. § 78j(b). Section 32 of the 1934 Act creates criminal penalties for willful violations of the provisions of the 1934 Act, including violations of Section 10(b). 15 U.S.C. § 78ff(a). Thus, for the convictions of securities fraud and conspiracy to commit securities fraud to stand, there must be sufficient record evidence for the jury to have concluded that the interests in Little Giant and Heritage were "securities" within the meaning of the 1934 Act.4
Although federal statutes enumerate many different instruments that fit the definition of security, the parties agree that the only category that potentially applies to this case is "investment contract."5 In the seminal case, SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), the Supreme Court provided the following definition of investment contract:
an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.
Id. at 298-99, 66 S.Ct. 1100. Appellants suggest that the Little Giant and Heritage units cannot constitute securities because investors never expected profits "solely from the efforts" of the promoters or others.
Following the Ninth Circuit's lead, see SEC v. Glenn W. Turner Enterprises, 474 F.2d 476, 482 (9th Cir.1973), we have held that the word "solely" should not be construed as a literal limitation; rather, we "consider whether, under all the circumstances, the scheme was being promoted primarily as an investment or as a means whereby participants could pool their own activities, their money and the promoter's contribution in a meaningful way." SEC v. Aqua-Sonic Prods. Corp., 687 F.2d 577, 582 (2d Cir.1982).6 Thus, in Aqua-Sonic we distinguished between companies that seek the "passive investor" and situations where there is a "reasonable expectation ... of significant investor control." Id. at 585. It is the passive investor "for whose benefit the securities laws were enacted"; where there is a reasonable expectation of significant investor control, "the protection of the 1933 and 1934 Acts would be unnecessary." Id.
Our consideration of whether the investors in Little Giant and Heritage viewed the units primarily as a passive investment is complicated by the fact that Little Giant and Heritage were each structured as an LLC — a relatively new, hybrid vehicle that combines elements of the traditional corporation with elements of the general partnership while retaining flexibility for federal tax purposes. See generally Louis Loss & Joel Seligman, Securities Regulation § 3-A-1 (3d ed.2006). Although "common stock is the quintessence of a security," Reves v. Ernst & Young, 494 U.S. 56, 62, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990) (citing Landreth Timber Co. v. Landreth, 471 U.S. 681, 693, 105 S.Ct. 2297, 85 L.Ed.2d 692 (1985)), and "[n]ormally, a general partnership interest is not considered a `security,'" Odom v. Slavik, 703 F.2d 212, 215 (6th Cir.1983), because of the sheer diversity of LLCs, membership interests therein resist categorical classification. Thus, an interest in an LLC is the sort of instrument that requires "case-by-case analysis" into the "economic realities" of the underlying transaction, Reves, 494...
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