U.S. v. Tzolov

• Decision Date: 15 June 2011
• Docket Number: 10–754–cr (XAP).,Docket Nos. 10–562–cr (Lead)
• Citation: 642 F.3d 314
• Parties: UNITED STATES of America, Appellee–Cross–Appellant,v.Julian TZOLOV, Defendant,Eric Butler, Defendant–Appellant–Cross–Appellee.*
• Court: U.S. Court of Appeals — Second Circuit

642 F.3d 314

UNITED STATES of America, Appellee–Cross–Appellant,

v.Julian TZOLOV, Defendant,Eric Butler, Defendant–Appellant–Cross–Appellee.*

Docket Nos. 10–562–cr (Lead)

10–754–cr (XAP).

United States Court of Appeals, Second Circuit.

Argued: Dec. 7, 2010.Decided: June 15, 2011.

Steven F. Molo, Edward F. Daniels, New York, N.Y. (Robert K. Kry, Washington, DC, on the brief), Molo Lamken LLP; Paul T. Weinstein, Emmet, Marvin & Martin, LLP, New York, NY, for Appellant.John P. Nowak (Daniel A. Spector, Jo Ann M. Navickas; on the brief), Assistant United States Attorney for the Eastern District of New York, for Loretta E. Lynch, United States Attorney for the Eastern District of New York, Brooklyn, NY, for Appellee.Before: FEINBERG, B.D. PARKER, and WESLEY, Circuit Judges.B.D. PARKER, JR., Circuit Judge:

Eric Butler appeals from a judgment of conviction in the United States District Court for the Eastern District of New York (Weinstein, J.). Butler was convicted of securities fraud and conspiracy to commit securities and wire fraud and was sentenced principally to five years' incarceration.¹ Butler argues, among other things, that venue was not proper in the Eastern District of New York.² For the reasons discussed below, we conclude that venue as to the substantive securities fraud count was improper. Accordingly, we vacate Butler's conviction as to that count. We affirm as to the remaining counts and remand for resentencing.

BACKGROUND

This case arises out of the failure of the auction rate securities (“ARS”) market. At the relevant time, e, ARS were securities composed of long-term, typically high-grade, debt obligations, such as student loans, mortgages, municipal bonds, corporate debt and preferred stock issued by closed-end mutual funds. Although ARS are structured as long-term fixed income securities and usually issued with maturities of thirty years, ARS were traded through auctions on short-term cycles, generally every 7, 14, 28 or 35 days. At the end of the cycle, an ARS holder could either sell the security for new paper through an auction or hold the security for another cycle. Thus, under normal market conditions, an investor could exchange his security for cash potentially every week or month. Because ARS auctions provided short-term liquidity to asset-backed securities with long-term maturity dates, they effectively transformed long-term bonds into investment vehicles akin to, but paying more than, money market funds or similar short-term instruments and, consequently, attracted investors interested in additional basis points and liquidity.

In the unlikely possibility that an investor decided simply to hold his ARS, he would receive a return of principal when the underlying security matured, often many years later. The federal government guaranteed against default up to 98 percent of the underlying principal of ARS that were backed by student loans. However, the guarantee did not protect investors against failures in the auction market. The other types of ARS had no such government guarantee. All the ARS at issue in this case had AAA credit ratings and were considered “safe” in that prior to 2007 there had not been a failure of a AAA-rated ARS auction.

Butler and his co-defendant Julian Tzolov worked in Credit Suisse's Corporate Investment Management group and worked from its Manhattan offices. The clients they serviced included large, sophisticated corporate clients, such as Glaxo Smith Kline, Roche International and ST Microelectronics, who invested in short-term, fixed-income vehicles.

Among other investment vehicles, Butler and Tzolov offered their clients ARS. In doing so, Butler and Tzolov would initially make email and telephone presentations to prospective clients. If a prospective client expressed an interest, Butler and Tzolov would typically follow up with in-person meetings at that client's office. Because most of the investors were located outside New York, Butler and Tzolov frequently flew out of John F. Kennedy Airport located in the Eastern District of New York to attend these meetings.

At trial, the government proved that Butler and Tzolov made false statements to the investors about the types of securities purchased on their behalf. Government witnesses testified that they instructed Butler and Tzolov only to purchase ARS backed by government guaranteed student loans, yet contrary to these instructions, Butler and Tzolov purchased ARS that were backed by debt instruments that did not carry government guarantees. After investors agreed to purchase a security, Butler and Tzolov would send them email confirmations and Credit Suisse would send them monthly account statements listing the ARS purchased. In a number of those email confirmations, the government's proof showed, Butler and Tzolov falsified the names of the securities to make it appear as though they were student-loan-backed ARS. The names were, however, correctly identified in the Credit Suisse statements. The government also presented evidence that during the time period in question, some of the investors called Butler to ask questions concerning their investments, and Butler falsely stated that he was investing in student-loan-backed ARS.

The auctions for the non-student-loan ARS began to fail in August 2007. This meant that investors could no longer resell their non-student-loan-backed securities through the monthly auctions. Instead, investors who purchased ARS as short-term investments were forced to hold them until liquidity returned to the market or until the principal matured. While this failure did not signal a default in the underlying debt instrument, the absence of liquidity was a major blow to purchasers who typically looked to ARS exclusively as short-term, highly liquid investments.

As the market failed, many of the investors were informed by Butler and other Credit Suisse employees that the securities they had purchased were not backed by student loans. Consequently, at the time of the market failure, many clients were saddled with hundreds of millions of dollars in ARS that were not backed by student loans and that could not be rolled over at the auctions. From August 2007 through the date of this appeal, no successful auction has occurred for non-student-loan-backed securities. The auctions for the student-loan-backed ARS continued to function until February 2008, when they also failed.

In April 2009, the government indicted Butler, charging him with securities fraud, conspiracy to commit securities fraud, and conspiracy to commit wire fraud. In a pretrial motion, Butler moved to dismiss all counts for lack of venue. Tzolov pled guilty and testified for the government at Butler's trial. Butler proceeded to trial and ultimately was convicted on all counts. Following his conviction, Butler moved for a judgment of acquittal arguing, among other things, that the government failed to prove that venue in the Eastern District was proper. The district court denied Butler's motion. This appeal followed.

DISCUSSION

Both the Sixth Amendment and Fed.R.Crim.P. 18 require that a defendant be tried in the district where his crime was “committed.” U.S. Const. amend. IV; Fed.R.Crim.P. 18; see also U.S. Const. art. iii, § 2, cl. 3. When a federal statute defining an offense does not specify how to determine where the crime was committed, “[t]he locus delicti must be determined from the nature of the crime alleged and the location of the act or acts constituting it.” United States v. Cabrales, 524 U.S. 1, 6–7, 118 S.Ct. 1772, 141 L.Ed.2d 1 (1998) (quoting United States v. Anderson, 328 U.S. 699, 703, 66 S.Ct. 1213, 90 L.Ed. 1529 (1946)). Venue is proper only where the acts constituting the offense—the crime's “essential conduct elements”—took place. See United States v. Rodriguez–Moreno, 526 U.S. 275, 280, 119 S.Ct. 1239, 143 L.Ed.2d 388 (1999).

The government bears the burden of proving venue. United States v. Beech–Nut Nutrition Corp., 871 F.2d 1181, 1188 (2d Cir.1989). Because venue is not an element of a crime, the government need establish it only by a preponderance of the evidence. See United States v. Smith, 198 F.3d 377, 384 (2d Cir.1999). We review the sufficiency of the evidence as to venue in the light most favorable to the government, crediting “every inference that could have been drawn in its favor.” United States v. Rosa, 17 F.3d 1531, 1542 (2d Cir.1994). Where, as here, the facts are not in dispute, venue challenges raise questions of law, which we review de novo. See United States v. Svoboda, 347 F.3d 471, 482 (2d Cir.2003).

As to each count, the jury found, by a preponderance of the evidence, that venue was proper in the Eastern District of New York. Butler challenges the sufficiency of the evidence supporting these findings. Because “venue must be proper with respect to each count,” we separately review each count. Beech–Nut, 871 F.2d at 1188.

A. Securities Fraud (Count Two)

Count Two charged Butler with securities fraud under 15 U.S.C. §§ 78j(b) and 78ff, which has its own specific venue provision: “Any criminal proceeding may be brought in the district wherein any act or transaction constituting the violation occurred.” 15 U.S.C. § 78aa. The government's sole basis for venue in the Eastern District on this substantive count was that Butler and Tzolov traveled through JFK airport on their way to meet with the investors. According to the government, these flights are sufficient to establish venue because, under United States v. Svoboda, 347 F.3d 471 (2d Cir.2003), the flights were “an important part of furthering the [fraudulent] scheme.”

We disagree. We have little difficulty concluding that the government failed to offer competent proof that any “act or transaction constituting the [securities fraud] violation occurred” in the Eastern District. See 15 U.S.C. § 78aa (emphasis added). Butler did not transmit any false or misleading information into or out of the Eastern District....