United States v. Wey

• Decision Date: 14 June 2017
• Docket Number: 15-CR-611 (AJN).
• Citation: 256 F.Supp.3d 355
• Parties: UNITED STATES of America, v. Benjamin WEY, Defendant.
• Court: U.S. District Court — Southern District of New York

256 F.Supp.3d 355

UNITED STATES of America,

v.Benjamin WEY, Defendant.

15-CR-611 (AJN).

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

Filed June 13, 2017

Signed June 14, 2017

Andrew Caldwell Adams, Brooke Elizabeth Cucinella, Ian Patrick McGinley, Michael Ferrara, Sarah Kathleen Eddy, Brendan Francis Quigley, United States Attorney's Office, New York, NY, for United States of America.

Barry McNeil, Haynes and Boone, LLP, Dallas, TX, Joseph Craig Lawlor, Sarah Elizabeth Jacobson, David Mark Siegal, Haynes and Boone, LLP, New York, NY, for Defendant.

OPINION & ORDER [CORRECTED]

ALISON J. NATHAN, District Judge:

Defendant Benjamin Wey faces an eight-count indictment charging him with securities fraud, wire fraud, conspiracy to commit securities and wire fraud, money laundering, and failure to disclose beneficial ownership of publicly traded companies. Before the Court is Wey's motion to suppress evidence seized during Government searches of his residence and the offices of his consulting firm, New York Global Group, Inc., both conducted on January 25, 2012. For the reasons set forth below, Wey's motion is GRANTED.

I. Background

A. The Indictment

Wey is charged in an eight-count indictment returned on September 8, 2015. Dkt. No. 2 (the "Indictment"). The Indictment alleges that between approximately 2007 and 2011, Wey, along with co-Defendant Seref Dogan Erbek (who remains at large) and unindicted co-conspirators known and unknown, orchestrated a scheme whereby Wey—through various non-party entities, family members, and associates (the "Nominees")—covertly amassed beneficial ownership of substantial portions of the equity stock of certain publicly traded companies (the "Issuers"), manipulated the market price of the Issuers' stock, liquidated his holdings at artificially inflated prices, and then laundered millions of dollars in ill-gotten proceeds. See, e.g., Indictment ¶¶ 7, 13, 18–22.

Specifically, according to the Indictment, Wey secretly caused the Nominees to acquire, on his behalf, substantial portions of the shares of certain U.S.-based over-the-counter-traded shell companies and then, through his consulting firm New York Global Group, Inc. ("NYGG") and its alleged affiliate in Beijing, China, facilitated so-called "reverse merger" transactions by which China-based operating companies merged into those shell companies, thus forming new publicly traded corporations—the Issuers. Id. ¶¶ 8–12. The Government alleges that the Nominees acquired and retained, for Wey's benefit, stock in the Issuers by virtue of their ownership of the target shell companies, and that these holdings together constituted more than five percent of the Issuers' outstanding shares. Id. ¶¶ 7, 13. Because Wey, among other things, purportedly exercised investment authority over the shares held by the Nominees, he was required to disclose his beneficial ownership under Section 13(d) of the Securities Exchange Act of 1934 and Rule 13d–1 promulgated thereunder within ten days of the acquisition of shares in excess of five percent. Id. ¶ 13. The Government alleges that Wey was "well aware" of this reporting requirement but intentionally failed to file the required disclosures in order to conceal his ownership from the investing public. Id. ¶ 14.

Wey also, according to the Indictment, caused several of the Issuers, including SmartHeat, Inc. ("SmartHeat"), Deer Consumer Products, Inc. ("Deer"), and Clean Tech Innovations, Inc. ("CleanTech"), to apply for listings on the Nasdaq. Id. ¶ 15. In order to secure approval of these applications, Wey allegedly engaged in deception to artificially satisfy Nasdaq's so-called "round-lot" shareholder requirement—i.e., the requirement that every listed issuer has at least 300 shareholders each owning 100 or more shares of common stock. Id. ¶¶ 16–17. In particular, Wey purportedly facilitated deceptive transfers of shares of Issuer stock from Nominees to other Wey confederates, as well as issuances of round-lot blocks of shares in the names of individuals who never actually received such shares or were otherwise unaware of their ownership. Id. ¶¶ 15–17.

After successfully getting the Issuers listed on Nasdaq, the Government alleges, Wey proceeded to manipulate the demand for and price of Issuer stock. This was purportedly accomplished by, among other things: (i) causing Manhattan-based retail brokers to solicit their customers to purchase common stock of the Issuers, often on margin, while at the same time actively discouraging the sale of such stock; (ii) instructing Erbek to maintain the share prices of certain Issuers' stock held in various Nominees' accounts; and (iii) facilitating match trades in the Issuers' stock involving Nominees and/or other Wey confederates. Id. ¶¶ 18–19.

Contemporaneous with this market manipulation scheme, the Government alleges, Wey caused certain Nominees to sell shares of the Issuers' stock at artificially inflated prices. Id. ¶ 20. Wey then purportedly laundered the proceeds of these sales by causing them to be transferred from accounts located in the U.S. to Nominees' accounts located overseas, including in Switzerland and Hong Kong, before being repatriated back to the U.S. and into accounts controlled by Wey and his wife or otherwise held for Wey's benefit. Id. ¶¶ 20–22.

Wey is charged with one count of conspiracy to commit securities fraud and wire fraud under 18 U.S.C. § 371; one count of securities fraud under Section 10(b) of the Exchange Act and Rule 10b–5 promulgated thereunder, 15 U.S.C. §§ 78j(b) & 78ff, 17 C.F.R. § 240.10b–5; one count of securities fraud under 18 U.S.C. § 1348; one count of wire fraud under 18 U.S.C. § 1343 ("Count Four"); two counts—concerning Deer and CleanTech stock, respectively—of failure to disclose ownership in excess of five percent of a covered class of equity securities under Section 13(d) of the Exchange Act and Rule 13d–l, 15 U.S.C. §§ 78m(d) & 78ff, 17 C.F.R. § 240.13d–l; one count of money laundering under 18 U.S.C. § 1956(a)(l)(B)(i); and one count of money laundering under 18 U.S.C. § 1956(a)(2)(A). See Indictment ¶¶ 23–40.

B. The Search Warrant Affidavits

1. Affidavit Concerning NYGG's Offices

On January 24, 2012, Special Agent Matthew F. Komar of the Federal Bureau of Investigation ("FBI") swore out an affidavit in support of an application for a warrant to search NYGG's Manhattan offices located at 40 Wall Street, Suite 3800. See July 8, 2016 Declaration of Matthew F. Komar Ex. 1, Dkt. No. 54–1 (the "Komar Affidavit" or "Komar Aff."). The Komar Affidavit described an ongoing FBI investigation of Wey, Wey's sister (a Chinese citizen apparently employed by NYGG or its purported Beijing-based counterpart), and NYGG itself—which it characterized as a "corporate advisory firm" founded by Wey in approximately 2004 that specialized in "introducing middle-market Chinese operating companies to the U.S. capital markets." See, e.g., Komar Aff. ¶¶ 2–7, 16. It asserted that there was probable cause to believe that fruits, instrumentalities, and evidence of violations of the federal securities, mail, and wire fraud laws were located within the subject premises. See, e.g., id. ¶¶ 2–7.

Based on the investigation to date, including information obtained from current and former NYGG employees, the Komar Affidavit detailed a suspected "fraud and market manipulation scheme" perpetuated by Wey, acting through NYGG and other entities. See, e.g., Id. ¶¶ 4–14. Komar's description of the purported scheme broadly tracked, in substantial measure, the allegations set forth in the Indictment and discussed above. As outlined in the Komar Affidavit, the scheme involved Wey retaining undisclosed beneficial ownership of Issuers created through reverse merger transactions facilitated by NYGG and then artificially inflating the Issuers' round-lot shareholder bases to secure Nasdaq listings and manipulating demand for the Issuers' stock by encouraging a "a hand-picked team of retail stock brokers" to "aggressively solicit purchases" of the Issuers' securities. Wey would then, according to the Affidavit, effectuate the sale of Nominee-held shares at inflated prices and launder the proceeds, including through fund transfers to Wey's wife. See, e.g., id. ¶¶ 8–14, 18–29.

Notwithstanding its length, the Komar Affidavit is notable for its focus on Wey's connection to a handful of specific companies. Like the Indictment, the Komar Affidavit principally addressed SmartHeat, Deer, and CleanTech. Id. ¶¶ 11–12, 18–20, 35–36. With respect to SmartHeat and Deer, the Affidavit discussed particular purported misrepresentations made by the Issuers, and by Wey, to Nasdaq in the course of the listing application process and described serial transactions by which Wey allegedly inflated the Issuers' round-lot shareholder bases in 2008 and 2009. Id. ¶¶ 18–19. It further set out alleged market manipulation tactics undertaken in 2009 through 2010 by the broker group over which Wey purportedly exercised influence, including improper high-pressure promotion of Issuer securities and misrepresentations concerning the future value of the stocks. Id. ¶¶ 20–25. A $350,000 kickback allegedly paid to the broker group in connection with its promotion of Deer, at least, was described in some detail. Id. ¶ 26. The Affidavit also discussed, to some extent on a transaction-level basis, the Nominees' sales, in 2009 and 2010, of large blocks of Issuer shares at purportedly inflated prices and the wiring of the sale proceeds to accounts linked to Wey confederates and family members in Switzerland and Hong Kong and, ultimately, back to the U.S. Id. ¶¶ 27–29.

As to CleanTech, the Affidavit described Wey's purported facilitation in 2010 and 2011 of the placement of Issuer stock with individuals and entities formerly used as Nominees with respect to Deer and SmartHeat. Id. ¶ 36. It also identified documents allegedly demonstrating Wey's indirect control over CleanTech, and discussed Nasdaq's decision to delist CleanTech...