United States v. Watts
| Decision Date | 19 October 2020 |
| Docket Number | 17-CR-0372-4(JS) |
| Parties | UNITED STATES OF AMERICA, v. MICHAEL WATTS, Defendant. |
| Court | U.S. District Court — Eastern District of New York |
APPEARANCES
For the
United States:
Whitman G.S. Knapp, Esq.
Kaitlin T. Farrell, Esq.
U.S. Attorney's Office
Eastern District of New York
271 Cadman Plaza East
Brooklyn, New York 11201
For the Defendant
Michael Watts:
Joseph W. Ryan, Esq.
Joseph W. Ryan, Jr., P.C.
Melville Law Center
255 Old Country Road
Melville, New York 11747
After a five-day trial, a jury convicted defendant Michael Watts ("Defendant") of conspiracy to commit securities fraud in violation of 18 U.S.C. §§ 371, 3551 et seq., conspiracy to commit wire fraud in violation of 18 U.S.C. §§ 1349, 3351 et seq., securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff, 18 U.S.C. §§ 2, 3551 et seq., conspiracy to commit money laundering in violation of 18 U.S.C. §§ 1956(h), 3551 et seq., and three counts of money laundering in violation of 18 U.S.C. §§ 1957(a), 1957(b), 2, and 3551 et seq., arising out of his participation in a stock manipulation scheme. Currently before the Court is Defendant's motion for a new trial pursuant to Federal Rule of Criminal Procedure 33. (Def. Mot., D.E. 812; Def. Br., D.E. 812-1; Gov't Opp., D.E. 822; Def. Reply, D.E. 828.) For the reasons that follow, Defendant's motion is DENIED.
On August 5, 2019, the Government filed a Superseding Indictment charging Defendant, along with co-defendant Lawrence Isen ("Isen"), among others,2 with conspiracy to commit securities fraud, conspiracy to commit wire fraud, substantive securities fraud, conspiracy to commit money laundering, and three counts of money laundering, arising out of a scheme to defraud potential and actual investors in Hydrocarb Energy Corporation ("HECC"). (See Superseding Indictment, D.E. 465.) The Superseding Indictment charged Defendant with "artificially controlling the price and volume of traded shares" in HECC by: (1) "artificially generating price movements and trading volume in the shares;" and(b) "material misrepresentations and omissions in [his] communications with victim investors about" HECC. (Id. ¶ 31.)
To carry out this scheme, Defendant and Isen engaged co-defendant and cooperating witness Erik Matz ("Matz") who operated "My Street Research," a "purported financial services business" that "promoted the stocks of publicly traded companies to individual investors, primarily through cold-call campaigns and the circulation of a newsletter." (Id. ¶¶ 1, 27, 32, 65.) In reality, My Street Research operated a "Boiler Room" that engaged in "manipulative trading patterns, including wash trades and matched trades, to drive up" the share prices of various publicly traded companies while its employees "aggressively and repeatedly called and emailed victim investors to purchase shares." (Id. ¶¶ 32-35.) My Street Research operated under many names, including "Power Traders Press." (Id. ¶ 1.) The Court refers to My Street Research, Power Traders Press, or any variation thereof, as the "Boiler Room," as it was referred to at trial.
The Superseding Indictment details that the relevant "HECC Stock Manipulation Scheme" involved concentrated match trading in HECC shares by Defendant, Isen, co-defendant Robert Gleckman ("Gleckman"), and the Boiler Room resulting in an inflated share price for HECC stock. (Superseding Indictment ¶¶ 65-66.) The Superseding Indictment also charges that Defendant facilitated the stock manipulation scheme by compensating and/or providing theBoiler Room with HECC shares, through consulting agreements, that were "sold at a profit to unsuspecting victim investors." (Id. ¶ 32.) The Superseding Indictment further charges that Defendant sold HECC shares directly to victim investors and profited $884,018 when he "sold a substantial number" of shares at the inflated price. (Id. ¶¶ 65-66, 70-71.)
On April 11, 2018, Matz pled guilty to conspiracy to commit securities fraud, conspiracy to commit wire fraud, and conspiracy to commit money laundering. (Min. Entry, D.E. 195; Indictment, D.E. 1.) On August 2, 2019, Gleckman pled guilty to conspiracy to commit securities fraud. (Min. Entry, D.E. 460.) Other Boiler Room employee/defendants also pled guilty. Defendant, Chartier, Isen, and Lee, none of whom worked in the Boiler Room, did not plead guilty and the Government proceeded to trial against them.
On June 26, 2019, Defendant filed a motion for trial severance, arguing that neither the Superseding Indictment nor the discovery produced implicated him in the non-HECC stock manipulation schemes. (Severance Mot., D.E. 421; Severance Br., D.E. 421-1.) On August 6, 2019, the Court granted Defendant's motion. (Min. Entry, D.E. 466.)
HECC was a publicly traded "petroleum exploration and production" company that owned "21,000 square kilometers that borders Angola," Libya. (Superseding Indictment ¶ 5; Tr. 736.) Defendant's brother, who testified in his defense at trial, formed HECC around September 2009. (Tr. 734.) Galveston Bay Energy ("Galveston Bay") was a subsidiary of HECC and operated 18,000 acres of oil producing fields in Texas. (Tr. 735.) Defendant invested $15 million in HECC and served as a consultant who sought financing from investors or public and investor relations firms. (Tr. 769; 771-72.) Gleckman also invested in HECC and was a large shareholder. (Tr. 436:14-21.) By the end of 2014, oil prices started to decline and affected the oil and gas industry, including Galveston Bay's cash flow. (Tr. 409:22-410:15; 740-42; 752-53.) To raise capital at this time, HECC entered into a consulting agreement with Defendant, dated June 27, 2015, "to create awareness and hire investor relation firms and public relation firms." (Tr. 755; 760; DX E.) On April 13, 2016, HECC filed for bankruptcy. (GX 94.)
Around the end of July 2014, Isen introduced Defendant and Matz via conference call.3 (Tr. 72:24-73:12; 78:5-16; 778.) Matz testified that Defendant inquired as to how the Boiler Room operated and Matz provided examples of two companies he "previously promoted" and explained that he "increased volume, [ ] increased share price, and [ ] g[ave] support when it was needed." (Tr. 80:17-20; 86:6-14.) Matz expressed interest in promoting HECC but required "cash and possibly stock in the company" and that any agreement with the Boiler Room would reflect Keith Miller's signature4 because Matz was "kicked out of the stock industry." (Tr. 86:23-87:9.) Matz further explained to Defendant that the Boiler Room "supports" the stocks it promotes (Tr. 87:25-88:5), meaning that if a stock price dropped, the Boiler Room would buy the stock "back up, [and] bring it back to exactly where the price was, if exactly not where it was, as close as where we can get it so it looked like it never happened and then later on, we would cross those shares out to an investor" (Tr. 88:12-17, 89:14-24.) By "crossing shares with an investor," Matz elaborated that as astock price dropped, the Boiler Room used trading accounts to "buy the stock back up" while it aggressively pushed the stock to investors to purchase. (Tr. 89:11-24.) As unknowing investors purchased the stock, the Boiler Room sold, or "cross[ed] out," the recently purchased stock. (Tr. 89:11-24.)
After the initial call, the Boiler Room entered into a consulting agreement, by Keith Miller, with Geoserve Marketing LLP,5 by Defendant, effective August 1, 2014. (GX 101A at 2.) The consulting agreement required that Geoserve issue the Boiler Room 75,000 restricted HECC shares and pay $25,000 a month in six bi-weekly installments of $12,500. (Tr. 156:7-21; GX 101A.) The Boiler Room and Defendant entered into three similar consulting agreements: (1) effective November 1, 2014, for 50,000 restricted HECC shares and $25,000 a month to be paid in bi-weekly installments of $12,500 (GX 161A); (2) effective February 1, 2015, for 125,000 restricted HECC shares (GX 155A); and (3) effective July 17, 2015 for 400,000 restricted HECC shares (GX 144A). Although the consulting agreements state that the Boiler Room was an "independent consultant and has knowledge and experience toprovide marketing as the Client believes can assist it in furthering execution of its public awareness" (see, e.g., GX 101A at 1), Matz testified that the Boiler Room did not actually perform any of those services but was "promoting, pushing penny stocks, increasing volume, and giving support when needed" (Tr. 168:2-172:12).6 Matz also explained that the consulting agreements were required to clear the restricted HECC shares received as compensation with a brokerage firm. (Tr. 172:13-21; 246:15-21; see GX 113; GX 113A.)
The Boiler Room pushed HECC stock to potential investors--victims--from approximately August 2014 through April 2016. (Tr. 90:12-15.) Matz described the Boiler Room's promotional activity in two phases. Initially, the Boiler Room increased HECC trade volume to keep the price "stable" and provided support where needed. (Tr. 90:16-23.) Eventually, the Boiler Room's operations "morphed into a different kind of animal" where the Boiler Room, with Defendant, Isen, among others, purchased free trading HECC shares and pushed a large volume of shares at a "fast and heavy pace." (Tr. 90:24-91:5; 91:13-92:5.)
After signing the first consulting agreement, the Boiler Room started to push HECC stock. (Tr. 90:5-14.) During this period, the Boiler Room's "goal was to increase [HECC] volume, keep steady volume in there every day, support the stock when it needed support," and stabilize the price range. (Tr. 153:5-17.) To accomplish this, the Boiler Room falsely represented itself as a research company and called...
To continue reading
Request your trial