US v. Regan

• Decision Date: 03 February 1989
• Docket Number: No. 88 Cr. 517 (RLC).,88 Cr. 517 (RLC).
• Parties: UNITED STATES of America, v. James Sutton REGAN, Charles M. Zarzecki, Jack Z. Rabinowitz, Paul Berkman, Steven Barry Smotrich, Bruce Lee Newberg, Defendants.
• Court: U.S. District Court — Southern District of New York

706 F. Supp. 1102

UNITED STATES of America, v. James Sutton REGAN, Charles M. Zarzecki, Jack Z. Rabinowitz, Paul Berkman, Steven Barry Smotrich, Bruce Lee Newberg, Defendants.

No. 88 Cr. 517 (RLC).

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

February 3, 1989.

COPYRIGHT MATERIAL OMITTED

Benito Romano, U.S. Atty., S.D.N.Y., New York City (Mark C. Hansen, Neil Cartusciello, Peter G.A. Safirstein, Asst. U.S. Attys., of counsel), for U.S.

Lowenstein Sandler Kohl Fisher & Boylan, Roseland, N.J. (Theodore V. Wells, of counsel), for defendant Regan.

Grand & Ostrow, New York City (Paul Grand, Diana Parker, of counsel), for defendant Zarzecki.

Robert Hill Schwartz, P.C., New York City (Robert Hill Schwartz, of counsel), for defendant Rabinowitz.

Robinson Wayne & LaSala, Newark, N.J. (John D. Arseneault, of counsel), for defendant Berkman.

Hayden, Perle and Silber, New York City (Alan Silber, Paulette L. Pitt, of counsel), for defendant Smotrich.

Gerald B. Lefcourt, P.C., New York City (Gerald B. Lefcourt, of counsel), Goldman & Hafetz, New York City (Frederick P. Hafetz, of counsel), for defendant Newberg.

ROBERT L. CARTER, District Judge.

This opinion disposes of several motions brought by defendants in this complex RICO prosecution involving the activities of Princeton/Newport Partners, L.P. ("PNP"), a limited partnership whose primary business was the investment of the assets of its general and limited partners in various types of sophisticated securities and commodities, concentrating primarily on financial arbitrage.¹ Defendant Regan was one of two managing general partners of PNP. Defendants Rabinowitz and Zarzecki were general partners of PNP and held executive positions as the chief financial officer and head of trading, respectively. These three defendants were also the principals in Oakley Sutton Management Corporation ("OSMC"), a Delaware corporation that provided services for the benefit of PNP and its related or subsidiary entities. Defendant Berkman was a general partner of and principal trader for Princeton Newport Arbitrage Partners ("PNA"),² a subsidiary of PNP that engaged in a particular form of securities investing known as "convertible hedging" or "convertible arbitrage." Defendant Smotrich was an employee of OSMC and the comptroller of PNP and its related entities. Defendant Newberg was a trader for the investment bank Drexel Burnham Lambert, Inc. ("Drexel") from July, 1980, until approximately March, 1986.

Motion To Suppress Grand Jury Testimony

Defendant Steven Smotrich ("Smotrich") has moved to suppress testimony that he gave at federal grand jury appearances on March 4, 1987, and December 17, 1987. He claims that his waiver of his Fifth Amendment right not to testify was not knowing or voluntary.

Smotrich appeared at both sessions of the grand jury in response to subpoenas which were addressed not to him personally, but to the "Custodian of Records, Oakley Sutton Management Corp." At both appearances he was represented by an attorney retained by OSMC. At the outset of the March 4 appearance only, he was advised of his Fifth Amendment rights and was asked whether he consented to be represented by the OSMC attorney for purposes of the appearance despite the fact that a conflict of interest could arise during the course of the investigation between him and OSMC or other persons at OSMC. He responded that he understood his rights and consented to be represented by the OSMC attorney.

With respect to his December 17 appearance, Smotrich complains that he was not advised that he was a target of the grand jury's investigation and was not readvised of his Fifth Amendment rights. It is his contention that targets of a grand jury investigation must be advised of their status before they testify. In support of this contention, he cites United States v. Jacobs, 531 F.2d 87 (2d Cir.1976), vacated and remanded, 429 U.S. 909, 97 S.Ct. 299, 50 L.Ed.2d 277 (1976), original decision adhered to, 547 F.2d 772, (2d Cir.1976), cert granted, 431 U.S. 937, 97 S.Ct. 2647, 53 L.Ed.2d 254 (1977), cert. dismissed as improvidently granted, 436 U.S. 31, 98 S.Ct. 1873, 56 L.Ed.2d 53 (1978).³

This is not the law. Jacobs was an unusual case involving the court's supervision of a special Department of Justice Strike Force that was not abiding by the rules of the United States Attorney in the district where the Strike Force operated. The court expressly limited its holding to the facts of the case, indicating that its opinion was intended to have "no prospective application as precedent for the District Courts on the constitutional issue." Jacobs, 547 F.2d at 775.

Witnesses before a grand jury do not have a constitutional right to be advised that they are a target of the grand jury's investigation. United States v. Washington, 431 U.S. 181, 189, 97 S.Ct. 1814, 1820, 52 L.Ed.2d 238 (1977). Failure to give such a warning does not invalidate an indictment. United States v. D'Auria, 672 F.2d 1085, 1093 (2d Cir.1982). Nor does it require the exclusion of grand jury testimony. United States v. Valentine, 820 F.2d 565, 572 (2d Cir.1987); United States v. James, 609 F.2d 36, 41 (2d Cir. 1979), cert. denied, 445 U.S. 905, 100 S.Ct. 1082, 63 L.Ed.2d 321 (1980).

Smotrich's claim that his testimony should be suppressed because he was not readvised of his Fifth Amendment rights on December 17 is also without merit. Although there may be circumstances in which coercion could be evidenced by a prosecutor's failure to advise a witness of his Fifth Amendment rights, this is clearly not such a case. Smotrich was accompanied by counsel at both his grand jury appearances, and he was advised of his Fifth Amendment rights at his March 4 appearance. No claim is made that he was unaware of his rights, nor would such a claim be credible. In these circumstances, there is no constitutional bar to using Smotrich's testimony in a subsequent prosecution against him. See United States v. Horowitz, 452 F.Supp. 415, 420 (S.D.N.Y. 1978) (Duffy, J.); Moynahan v. Manson, 419 F.Supp. 1139, 1150 (D.Conn.1976).

Smotrich's motion to suppress his March 4 testimony is also without merit. He claims that he was misled regarding the scope of the grand jury's investigation. He was told that it concerned possible violations of federal criminal law in connection with insider trading involving Goldman, Sachs & Co., Robert Freeman and other persons. Smotrich understood that he did not have to provide testimony that would tend to incriminate him, whether or not he believed the grand jury was seeking such evidence. In fact, Smotrich makes no factual allegations which would suggest that what he was told was untrue, and even if Smotrich was a target of the grand jury investigation as of March 4, he need not have been informed of that fact. See United States v. DePalma, 461 F.Supp. 778, 791-93 (S.D. N.Y.1978) (Sweet, J.).

Smotrich claims as a separate grounds for excluding his grand jury testimony that the government violated Rule 6(e), F.R.Crim.P., by failing to obtain a court order before disclosing in affidavit form the contents of his grand jury testimony to a United States Magistrate in the District of New Jersey for purposes of obtaining a search warrant. As explained elsewhere in this opinion, the government's disclosure of grand jury testimony in this instance did not violate Rule 6(e), and even if it did, exclusion of his testimony is not the appropriate remedy. The disclosure therefore provides no support for Smotrich's motion.

Motion To Suppress Tape Recordings

Defendant Bruce Newberg ("Newberg") has moved to suppress certain tape recordings seized in a December 17, 1987 search of the business premises of OSMC and PNP in Princeton, New Jersey. The recordings were made in the OSMC/PNP trading room at the Princeton premises on equipment maintained by the firm to record automatically all calls to and from the trading floor.

The recordings are of telephone conversations between OSMC/PNP personnel in Princeton and employees of Drexel in Drexel's Beverly Hills, California offices.⁴ Newberg claims that he and other Drexel employees whose conversations were recorded did not consent to such recording.

Newberg concedes that federal rather than state law normally governs the admissibility of evidence in federal criminal proceedings.⁵ He argues, however, that an exception to this rule was recognized in United States v. Sotomayor, 592 F.2d 1219 (2d Cir.1979). In Sotomayor the court held that wiretap recordings which were solely the product of New York state action were admissible in a federal criminal prosecution even though they were not sealed in compliance with New York law. However, in reaching this decision, the court distinguished a line of cases stemming from United States v. Manfredi, 488 F.2d 588 (2d Cir.1973), as follows:

We believe that at most Manfredi requires us, in determining whether to admit a wiretap obtained by a state officer acting under a state court order issued pursuant to a state statute, to apply only those more stringent state statutory requirements or standards that are designed to protect an individual's right of privacy, as distinguished from procedural rules that are essentially evidentiary in character.

Sotomayor, 592 F.2d at 1225.

Newberg argues that this dictum establishes a rule for the Second Circuit requiring the court to defer to stricter state exclusionary rules when the state rules are designed to protect an individual's right of privacy rather than being merely procedural. He further argues that the Sotomayor rule requires suppression of the tape recordings at issue here, because they would not be admissible in a California court under provisions of the California Penal Code dealing with invasions of privacy. See Cal. Penal Code §§ 630 et seq.

Newberg cites Cal.Penal Code § 631 as the statutory provision to which the court must defer. However, the line of cases which offers the clearest support for Newberg's...