U.S. v. Rosenthal

• Citation: 9 F.3d 1016
• Decision Date: 16 November 1993
• Docket Number: D,No. 1244,1244
• Parties: 17 Employee Benefits Cas. 1776 UNITED STATES of America, Appellee, v. Alan E. ROSENTHAL, Defendant-Appellant. ocket 92-1738.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 1016

9 F.3d 1016

17 Employee Benefits Cas. 1776

UNITED STATES of America, Appellee, v. Alan E. ROSENTHAL, Defendant-Appellant.

No. 1244, Docket 92-1738.

United States Court of Appeals Second Circuit.

Argued March 31, 1993.

Decided Nov. 16, 1993.

Peter E. Fleming, Jr., New York City (Eliot Lauer, Daniel R. Lenihan, Curtis Mallet-Prevost Colt & Mosle, of counsel), for defendant-appellant.

Nelson W. Cunningham, Asst. U.S. Atty., New York City (Roger S. Hayes, U.S. Atty., for S.D.N.Y., Karen Patton Seymour, Asst. U.S. Atty., of counsel), for appellee.

Before: OAKES, PIERCE, and PRATT, Circuit Judges.

PIERCE, Circuit Judge:

Alan E. Rosenthal appeals from a judgment of conviction entered in the United States District Court for the Southern District of New York, Louis L. Stanton, Judge. On November 18, 1992, after a trial by jury, Rosenthal was convicted of offering a gratuity in connection with a pension plan investment, in violation of 18 U.S.C. Sec. 1954. He was sentenced to a one year suspended prison term and three years' probation. As a condition of probation, he was ordered to pay a fine of $250,000, and to perform three-hundred hours of community service. Additionally, the court imposed a special assessment of $50. For the reasons set forth below, we affirm the judgment of the district court.

BACKGROUND

On May 9, 1991, Alan E. Rosenthal was charged with conspiracy and various substantive violations of federal law in an eleven-count indictment filed in the United States District Court for the Southern District of New York. On February 25, 1992, the Government filed an eleven count superseding indictment (the "indictment") which was identical to the original indictment in all respects relevant to this appeal. Count One of the indictment charged Rosenthal with conspiracy to commit securities, mail and wire fraud, to commit tax offenses, to offer an illegal gratuity in connection with a pension plan investment, to embezzle funds from a pension plan, and to obstruct justice. The substantive securities fraud charges were set forth in Counts Two and Nine of the indictment, and the mail fraud charges in Counts Three through Six and Count Ten. Count Seven charged Rosenthal with aiding and assisting the filing of a false tax return. Count Eight charged him with offering a gratuity in connection with a pension plan investment, and Count Eleven charged him with embezzlement from a pension plan.

Prior to trial, the Government voluntarily dismissed the mail fraud charges contained in Counts Three through Six of the indictment and, on defendant's motion, the trial court dismissed Count Two, one of the securities fraud charges. Count Seven, which charged Rosenthal with aiding and assisting the filing of a false tax return, was dismissed on defendant's motion at the close of the Government's case. The jury acquitted Rosenthal on four of the five remaining counts. The single count upon which Rosenthal was convicted, Count Eight, charged that in 1985 he "knowingly gave and offered" a "thing[ ] of value" to David Solomon, a pension fund manager, with intent to influence Solomon in his role as a pension fund manager, in violation of 18 U.S.C. Sec. 1954.

The evidence at trial consisted of, inter alia, the testimony of Solomon and of Michael Milken, who was the head of Drexel Burnham Lambert's ("Drexel") High Yield Bond Department ("HYBD"). From the evidence presented, the jury could conclude that Solomon was the majority shareholder of Solomon Asset Management ("SAM"), an investment advisory company registered with the Securities and Exchange Commission ("SEC"), which Solomon founded in 1983. Solomon testified that seventy percent of the assets managed by SAM were for corporate pension funds, and SAM invested those assets primarily in high yield bonds.

SAM appears to have been an important client of Drexel's HYBD. According to Solomon, SAM's assets under management reached a peak of approximately two and one half billion dollars and the firm did fifty to seventy percent of its overall business with Drexel. Solomon, as a money manager, had maintained a relationship with Milken since their initial meeting in 1973, and Solomon stated that he spoke with Milken by phone thirty to fifty times a day concerning business.

Solomon testified that in December 1985, he contacted Milken to request that Milken help him find a tax shelter for personal short term capital gains that he had realized in that year. According to Solomon, Milken informed him that no tax shelters were available but that he would be willing to arrange a transaction through Drexel consisting of a sale of securities by Drexel to Solomon and then a repurchase by Drexel of the securities at a lower price. This transaction would generate tax losses for Solomon for 1985 (the "1985 Tax Trades"). Solomon testified that he intended to use these losses to offset his short term capital gains for that year. Milken, Solomon stated, also promised to try to make up these 1985 losses by finding a favorable investment opportunity for Solomon in 1986.

Solomon stated that Milken directed him to "tell Alan [Rosenthal] what you need and Alan will take care of it for you." Solomon immediately called Rosenthal, who was the head of Drexel's Convertible Bond Department, and explained both his tax situation and that he was seeking to offset as much of his 1985 capital gains as possible. A few days later, Rosenthal called Solomon with the names of two securities--American Adventure and Patient Technology--that could be used to generate the desired losses. Rosenthal proposed prices and quantities and suggested that Solomon's personal broker, Arthur Dresner, contact Rosenthal to consummate the trades. Acting through Dresner, Solomon purchased the American Adventure bonds on December 2, and the Patient Technology bonds on December 4, 1985, from Drexel for a little over $4,100,000. Approximately one week later, Solomon spoke with Rosenthal concerning arrangements to have Drexel repurchase the bonds from him. Again acting through Dresner, Solomon sold the bonds back to Drexel for approximately $2,500,000, generating a loss for Solomon of about $1,600,000. Solomon claimed this loss on his 1985 federal income tax return, which reduced his federal tax liability by approximately $800,000.

Drexel trade tickets were introduced into evidence listing "Alan" or "Alan R." as the salesperson who arranged the trades involving the Patient Technology and American Adventure bonds, and who arranged the repurchase of those bonds at the lower price.

As noted, during their initial conversation in December 1985 concerning the tax trades, Milken had agreed to provide Solomon with the opportunity to recoup the 1985 losses sometime in 1986. In January of 1986, Milken offered Solomon the opportunity to purchase an interest in a limited partnership called MacPherson. MacPherson held warrants which enabled the holder to purchase, for a specified period of time and at a specified price, a designated quantity of common stock in a company called Storer Broadcasting. Milken informed Solomon that, if he purchased the interest in MacPherson and held onto it for six months, he could sell the interest back to Drexel for a profit large enough to offset the losses sustained in the 1985 Tax Trades. That same month, Solomon paid $88,000 for an interest in MacPherson. In October 1986, Solomon sold that interest to Drexel for approximately $2,200,000, yielding a personal profit to Solomon of approximately $2,100,000.

According to the testimony of Dominick Perrotta, an Internal Revenue Service agent, because Solomon held the securities for more than six months, the gains he derived were taxed at the more favorable long term capital gains rate. At the time, under the applicable provision of the tax code, only forty percent of the total gain was taxed. Thus, of the $2,100,000 gain in 1986, only $640,000 was subject to tax, and Solomon's resulting tax liability from the gain was roughly $320,000. In sum, the 1985 Tax Trades, when combined with the 1986 MacPherson transaction, resulted in a combined tax savings for Solomon of approximately $480,000.

Although both Solomon and Milken testified that Rosenthal was not directly involved in the MacPherson trades, the Government introduced documentary evidence demonstrating that Rosenthal was nevertheless aware of Solomon's expectation that the 1985 losses would be recouped later. This evidence was in the form of a balance sheet drawn up by Rosenthal on December 27, 1985, detailing Solomon's dealings with Drexel. The balance sheet contained two columns, one entitled "Solomon to DBL" and the other entitled "DBL to Solomon." The column marked "DBL to Solomon" contained the description "Losses for D.S.," with a notation corresponding to that description of "1,661,288"--the amount that Solomon had lost on the 1985 Tax Trades.

At the close of the Government's case, Rosenthal moved to dismiss, inter alia, Counts Seven and Eight of the indictment. He argued that Count Seven, which charged him with aiding and assisting the filing of a false tax return, should be dismissed since the Government failed to prove that Solomon's 1985 losses were fraudulent. On June 3, 1992, the trial judge dismissed Count Seven citing the insufficiency of the evidence indicating that Solomon's losses were compensated for by "insurance or its equivalent," and, therefore, fraudulent under 26 U.S.C. Sec. 165(a). The judge reasoned that reimbursement through a promised investment opportunity in 1986 was not certain enough to qualify as insurance or other compensation.

In contrast, Judge Stanton declined to dismiss Count Eight of the indictment, which charged Rosenthal with offering an illegal gratuity in connection with a pension plan investment, in violation of 18 U.S.C. Sec. 1954. ¹ Rosenthal argued that the Government was required to prove that he gave Solomon the "thing of value" that was specified in...