U.S. v. Shvarts

• Decision Date: 01 March 2000
• Docket Number: No. 99-CR-372 (ILG).,99-CR-372 (ILG).
• Citation: 90 F.Supp.2d 219
• Parties: UNITED STATES of America, Plaintiff, v. Aleksandr SHVARTS, Igor Erik Kuvykin and Aleks Paul, Defendants.
• Court: U.S. District Court — Eastern District of New York

90 F.Supp.2d 219

UNITED STATES of America, Plaintiff, v. Aleksandr SHVARTS, Igor Erik Kuvykin and Aleks Paul, Defendants.

No. 99-CR-372 (ILG).

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

March 1, 2000.

Jonathan Mothner, Assistant U.S. Attorney, Brooklyn, NY, for U.S.

Gerald L. Shargel, Law Offices of Jeffrey H. Lichtman, New York City, for Aleksandr Shvartz.

Melissa M. Beck, Brafman & Ross, New York City, for Aleks Paul.

Michael S. Ross, LaRossa, Mitchell & Ross, New York City, for Igor Eric Kuvykin.

MEMORANDUM AND ORDER

GLASSER, District Judge.

The defendants have moved the Court for an order that would (1) suppress all evidence obtained through an investigation conducted by the National Association of Securities Dealers ("NASD") alleging that such evidence was obtained in violation of their Fourth Amendment rights; (2) dismiss Count Five for the reason that is exceeds the intended reach of the money laundering statute; (3) require the government to elect between money laundering objects; (4) require the government to proffer the propriety of venue for Count Five; (5) compel the government to comply with the mandates of Brady and Giglio; and (6) require the government to provide particulars with respect to Count Five.

The defendants are named in a five count indictment which, summarized as succinctly as an understanding of it would require, charges as follows:

The first count charges them with conspiracy to commit securities, mail and wire fraud based upon the following abbreviated allegations. In July, 1996, Cluckcorp, a publicly held company participated in an initial public offering ("IPO") of 1,000,000 shares of its common stock and 2,000,000 of its warrants. In this first of its IPOs, its stock was to be publicly offered at $5.50 per share and its warrants at 12.5 cents per warrant. Each warrant entitled its holder to purchase one share of common stock at $4.00 per share exercisable after one year from the date of the IPO and for four years thereafter.

In June, 1997, Cluckcorp participated in a second IPO of 500,000 shares of its preferred stock and 1,500,000 of its preferred warrants. The preferred stock was publicly offered at $10.00 per share and the preferred warrants at 10 cents per warrant. Each warrant entitled its holder to purchase one share of preferred stock at $10.50 per share exercisable after six months from the date of this IPO and for four and a half years thereafter.

Cluckcorp stock and warrants were traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") Small Cap stock market.

The defendants operated Global Equities Group, Inc. ("Global"), a licensed brokerage firm for the primary purpose, it is alleged, of earning money through the fraudulent manipulation of the price of Cluckcorp securities, among other things.

The securities activities of the defendants, Global and Cluckcorp, were subject to the rules and regulations of the Securities and Exchange Commission ("SEC") and NASD.

The indictment alleges that the defendants opened nominee accounts at Global over which they exercised control and through which they purchased large blocks of warrants and preferred warrants at the IPO prices. These purchases were not publicly disclosed. It is further alleged that the defendants then caused the artificial rise in the after market prices of Cluckcorp Securities by giving Global brokers large financial incentives to sell those securities to its customers. Those financial incentives included giving the brokers the warrants to put in their own nominee accounts without disclosure to the brokers' customers. Warrants were thus aggressively sold to those customers by misrepresentations of fact pertaining to Cluckcorp and its prospects and by crossing the sell orders with matching buy orders creating an illusion of demand and thus artificially inflating the prices of the securities. When the prices were thus artificially inflated, the defendants then sold their warrants for between $2.00 - $4.00 per warrant and $3.00 - $5.00 per preferred warrant. The profits thus realized, it is alleged, were dispersed by the defendants through various foreign and domestic accounts in the same names as their nominee accounts at Global.

The allegations of Count One spawn the charge of securities fraud in Count Two, mail fraud in Counts Three and Four, and a money laundering conspiracy in Count Five.

The defendants' motion to suppress is predicated upon their assertion of ample cause to believe that the NASD acted pretextually in conducting its investigation of Global in 1996, 1997, and 1998, and in requiring the defendants to produce documents and submit to depositions under the guise of an inquiry to determine whether its rules were violated. They also point to the arrest of the defendant Paul in July, 1998, on a complaint filed in the Southern District of New York, charging him with violating currency reporting requirements and thus bolstering their claim for suppression.

In its response, the government reveals that the aforementioned complaint was not aimed at the defendants Shvarts, Kuvykin or Global, but was aimed at the defendant Paul and his involvement with two different brokerage firms, namely, White Rock Partners and First Metropolitan Securities.

Shvarts and Kuvykin were indicted here in April, 1999, and in a superseding indictment, Paul was added in June, 1999.

In its opposition to this prong of the motion, the government urges the defendants' failure to provide any factual basis beyond speculation that the NASD investigations were either directed by the government or used in any way to advance its criminal prosecution. In addition, the government emphasizes the defendants' failure to make any connection, beyond simple conjecture, between the NASD investigation of Shvarts, Kuvykin and Global and Paul's arrest in the Southern District, notwithstanding it is that arrest on which they stake their claim that the NASD was operating at the request of the government. The government also affirmatively represents that it played no role in the investigation of Shvarts, Kuvykin or Global by the NASD, an investigation that was initiated by the NASD years before the government's investigation. Government's Memorandum of Law in Opposition to the Defendants' Motions at p. 5.

Discussion

The case most frequently cited in support of a motion to suppress in this posture is United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978) which addressed the issue of whether the District Court correctly refused to enforce an Internal Revenue Service summons when it specifically found that the special agent who issued it "was conducting his investigation solely for the purpose of unearthing evidence of criminal conduct." Id. at 299, 98 S.Ct. 2357.

At the outset it is important to bear in mind that the summons there was issued by a governmental agency, the Internal Revenue Service, pursuant to a statutory scheme not intended by Congress to categorize "tax fraud investigations into civil and criminal components." Id. at 311, 98 S.Ct. 2357. That scheme notwithstanding, the Court observed that "the primary limitation on the use of a summons occurs upon the recommendation of a criminal prosecution to the Department of Justice." Id. The policy interest served by such a limitation is the importance of not infringing on the role of the grand jury as the principal tool of criminal accusation. The likelihood of such infringement is substantial if use of the summons were permitted after a referral to the Justice Department for criminal prosecution.

Another limitation imposed by the Court upon the use of the summons before a referral to the Department of Justice is that it be used in good faith, in furtherance of a legitimate purpose, and not to harass the taxpayer by pressuring him to settle a collateral dispute. Id. at 314, 98 S.Ct. 2357.

Those opposing the enforcement of such a summons have the burden of disproving that it was issued in good faith, in an honest pursuit of the agency's goals. Id. at 316. As will be discussed hereafter, the information sought from the defendants was by a private and not a governmental agency and sought not by a summons or subpoena, but by a letter request to respond to its inquiries. Assuming without deciding, however, that the limitations imposed by LaSalle on the Internal Revenue Service summons are applicable here, the defendants have offered nothing more than a theory that is "as thin as the homeopathic soup that was made by boiling the shadow of a pigeon that had been starved to death." Grosswald v. Schweiker, 653 F.2d 58, 61 (2d Cir.1981).

It is beyond cavil that the NASD is not a government agency; it is a private, not-for-profit corporation. It was not created by statute. None of its directors or executives are government officials or appointees. It receives no government funding, and not being a part of the government or owing its existence to the government, its actions cannot be imputed to the government nor can its agents bind the government. See Graham v. NASD, 1998 WL 294022 (D.D.C.1998); United States v. Bloom, 450 F.Supp. 323 (E.D.Pa. 1978). See also United States v. Handler, 1978 WL 5690 (C.D.Cal.1978). It is also beyond cavil that questions put to the defendants by the NASD in carrying out its own legitimate investigative purposes do not activate the privilege against self-incrimination nor would the Fourth Amendment place any limitation upon the NASD in pursuing its regulatory functions. Nor would a violation of a rule of the NASD which would subject the defendants to sanctions by that Association, and even to civil and criminal enforcement proceedings by the government, suffice to create an agency relationship between the NASD and the government. See United States v. Solomon, 509 F.2d 863 (2d Cir.1975) (Friendly, J.)

In that case, Alan Solomon was an officer of a brokerage firm which was a...