United States v. Discala

Decision Date27 February 2018
Docket Number14-cr-399 (ENV)
PartiesUNITED STATES OF AMERICA, v. ABRAXAS J. DISCALA, Also known as "AJ DiScala," MARC WEXLER, IRA SHAPIRO, MATTHEW BELL, CRAIG JOSEPHBERG, Also known as "Jobo," KYLEEN CANE, DARREN GOODRICH, DARREN OFSINK, VICTOR AZRAK, and MICHAEL MORRIS, Defendants.
CourtU.S. District Court — Eastern District of New York
MEMORANDUM OPINION

VITALIANO, D.J.

This memorandum opinion sets forth the Court's reasoning for the determinations it made in its order of February 2, 2018, deciding various motions made individually or collectively by the remaining defendants: Abraxas "AJ" DiScala ("DiScala"), Craig "Jobo" Josephberg ("Josephberg"), Michael Morris ("Morris"), and Kyleen Cane ("Cane"). The 11-count superseding indictment charged the extant defendants and others who have pled guilty already with engaging in a securities fraud conspiracy and committing various substantive other acts in furtherance of it, ("Indictment"), see ECF Dkt. No. 166 at 1-3, to defraud investors and potential investors in certain targeted securities in the period from October 2012 through July 2014. Id. at 6, ¶ 18.

On September 15, 2017, DiScala moved to suppress the fruits of a wiretap, both as originally ordered and then extended, and from a search warrant, or, in the alternative, granting an evidentiary hearing pursuant to Franks v. Delaware, 438 U.S. 154 (1978).1 That same day, Morris and Cane moved for severance of their trial from the trial of other defendants and dismissal of several counts against them. On a separate track, Cane sought the use of a jury questionnaire.2 After the motions were fully briefed,3 the Court heard oral argument on December 8, 2017. See December 8, 2017 Hearing Transcript. Prompted by the fulsome argument, came a flurry of supplemental filings.4 The Court heard further argument on January 10, 2018. See January 10, 2018 Hearing Transcript. DiScala then followed that with an untimely motion to suppress a warrantless search of his home.5 With the stated purpose of urging counsel to proceed full bore in their preparations for the scheduled April 2, 2018 trial, and with hope of facilitating that preparation, on February 2, 2018, the Court entered an order deciding the fully briefed and argued pending motions6: DiScala's motions to suppress and for aFranks hearing were denied; Morris's motion to sever was denied on the grounds asserted; Morris's motion to dismiss for want of venue was denied without prejudice to renewal at the close of the government's case-in-chief; Cane and DiScala's motion to sever was denied; Cane's motion to dismiss the indictment was denied; and Cane's requests for the use of a juror questionnaire to aid in voir dire was granted. This is the promised memorandum opinion that details the bases for these determinations.

1. Background7

At all relevant times, DiScala, a resident of Connecticut, was the CEO and founder of Omniview Advisors LLC ("Omniview"), Indictment at 1, ¶s 1-2, which had its principal place of business in Connecticut. Omniview was marketed as a merchant bank providing capital markets seasoned advice. Id. at 2, ¶ 2. Shapiro was the CEO and board chair of CodeSmart and First Independence Corporation ("First Independence"). Id. at 2, ¶ 3. Both Josephberg and Morris worked for Halcyon Cabot Partners, Ltd. ("Halcyon"), which was "a broker-dealer registeredwith the Securities and Exchange Commission ("SEC") and the Financial Industry Regulatory Authority, Inc. ("FINRA"). Id. at 2, ¶ 4; 3, ¶ 8. Josephberg worked as a broker at Halcyon from approximately November 2010 through October 2013, then at another broker dealer from October 2013 through June 2014. Id. at 2, ¶ 4. Morris was a broker and managing director of Halcyon. Id. at 3, ¶ 8. Goodrich was a managing director and head trader at a California broker-dealer. Id. at 3, ¶ 6. Also ensnared in the tangled web were two lawyers, Darren Ofsink, a resident of Merrick, New York, and head of Ofsink, LLC, a law firm that served small and mid-sized corporate clients. Id. at 3, ¶ 7. The second, Kyleen Cane, a resident of Nevada, was the managing partner of Cane Clark LLP, which specialized in "providing corporate and securities [advice] to public companies with small capitalization." Id. at 3, ¶ 5.

The indictment charges an overarching scheme by connected players to manipulate the market and several discrete manipulations advancing the overall objective. Among those specifically charged, the first in these was a scheme that targeted CodeSmart. In April 2012, First Independence registered with the SEC for an offering of 3,000,000 shares of its stock. The SEC filing did not authorize any post-sale distribution of these shares to non-purchasers or to the general public. Despite poor projections, in January 2013, the company sold the initial offering to 24 shareholders "for $.0115 per share, raising $34,500 for the company." Indictment at 7, ¶ 19. Until May 2013, there was no public trading of First Independence stock, and then, on or about May 3, 2013, First Independence acquired CodeSmart in a reverse merger.8 The resultingcompany operated under the CodeSmart legend. Id. at ¶ 20.

During the same month as the CodeSmart reverse merger, DiScala, Josephberg, Ofsink, and Morris purchased 3 million "purportedly unrestricted shares [of CodeSmart] at $0,023 per share from the aforementioned twenty-four shareholders," but concealed their ownership by distributing shares "across a number of co-conspirators and by placing them in nominee accounts designed to conceal the true beneficial owners of the shares." Id. at ¶ 21.

In June 2013, CodeSmart approved a 2 for 1 stock split,9 which doubled the 3 million shares owned by the co-conspirators to 6 million. Id. at 7-8, ¶ 21. Following the stock split, it is alleged, DiScala, Shapiro, Josephberg, Ofsink, and Morris engaged in two CodeSmart "pump and dump"10 schemes targeting CodeSmart, with the first occurring between May 1 and August 21, 2013, and the second between August 21 and September 20, 2013. Id. at 8, ¶ 22. In these efforts, the defendants allegedly used a misleading Form 10-K, at least one misleading press release, three separate misleading Form 8-Ks, a misleading form 10-Q, wash trades,11 matchtrades,12 and the manipulation of investor accounts to execute the pump and dumps. Id. at 8-12, ¶s 23-32. These defendants allegedly profited by at least $3,000,000 (DiScala's profit included $600,000 in an account held in the name of Jane Doe); $750,000 (Josephberg); $300,000 (Ofsink); and $160,000 (Morris, which included $135,000 from an account held in his son's name). Id. at 32. Morris had no further contact with the other defendants after August 2013. See Dkt. No. 350 at 8-9.

Next on the conspirators' hit list, according to the indictment, was a scheme involving StarStream and the Staffing Group, supposedly taking place between October 2013 and July 2014. Indictment at 17, ¶ 43. DiScala, Josephberg, and Cane allegedly controlled the price and volume of StarStream's and Staffing Group's stocks artificially through, among other methods, wash trades and match trades. Id. The government proffers text messages and phone conversations as proof of coordinated action by the involved conspirators. Id. at ¶ 44, 18, ¶ 47; see, e.g., id. at 17-18, ¶ 45; 18, ¶ 46; 18, ¶ 49; 19, ¶ 50.

After that manipulation, in March 2014, the bull's eye spotlighted Cubed. Id. at13. On March 6, 2014, Northwest, "a shell public company with only nominal assets and no revenues," appointed an individual who was the president and chief operating officer of Crackpot (a private company), as its sole director and officer. Id. at 13, ¶ 33. On March 14, 2014, Northwest filed a form 8-K with the SEC indicating that it had changed its name to Cubed. Id. On March 24, 2014, Cubed filed a form 8-K giving notice that it had entered into an asset purchase agreement with Crackpot, with Cubed acquiring intellectual property in exchange for $350,000 and approximately 2.5 million shares of restricted stock. Id. at ¶ 34. At the time, Cubed had zero assets and was a penny stock. Id.

Two weeks later, on March 28, 2014, "200 shares of Cubed were sold at $5.00 per share." Id. at ¶ 35.13 Based on this share price, Cubed "had a market capitalization of approximately $150 million." Id. at 13-14, ¶ 35. After these developments, between April 22 and April 30, 2014, DiScala, Josephberg, Cane, and Goodrich allegedly manipulated trading in Cubed through wash sales and matched trades, purchasing over 50% of all Cubed shares bought during that eight-day period, using the broker-dealer firms where Josephberg and Goodrich were employed. Id. at ¶ 36.

It is further alleged, based on the wiretap intercepts, that the involved co-conspirators were trying to gradually increase Cubed's stock value "to give it the appearance of a legitimate company." Id. at 37. To that and other unlawful ends, it is additionally alleged that escrow accounts maintained by Cane were used to manipulate the price and volume of Cubed stock. Id. at 15, ¶ 39. For instance, during a May 20,2014 telephone call between DiScala and an unnamed, unindicted co-conspirator, DiScala "explained his control over Cubed's share price, and stated, in part, 'I'm the [expletive] brake and the gas, [expletive]. If I take my foot off the brake it's 55 [dollars] tomorrow (Laughter)." Id. at 14-15, ¶ 39 (brackets in original). The Cubed scheme continued over the next month, using the Cane escrow account, among others, resulting in a market capitalization that contradicted an April 2014 form 10-Q. Id. at 16-17, ¶ 42. On July 9, 2014, the SEC halted trading in Cubed. Id. at 17, ¶ 42.

Shadowing the litany of communal acts intoned by the indictment is the important procedural history of the authorization and reauthorization of Title III intercepts. These wiretaps were overseen by the United States District Court for the Southern District of New York. On May 1, 2014, Judge P. Kevin Castel granted the...

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