Justice Marcy L. Kahn
Decided: May 2, 2011
DECISION AND ORDER ON MOTIONS TO DISMISS INDICTMENT (OMNIBUS)
(Edited and portions of opinion omitted for publication)
(D2, DPO1, DJR1, DJM1, DCS1, DMT1)1
Defendants, including sixteen individuals who are owners or employees of JSC (or the firm), a securities broker-dealer firm, and the firm itself, have been charged in a 94-count indictment with enterprise corruption,
larceny and other crimes committed against the firm's customers based upon allegations that they systematically engaged in deceptive and fraudulent trading in small cap securities with the goal and result of artificially increasing firm profits to the detriment of the firm's clients. Specifically, defendants have been charged with enterprise corruption (PL §460.20)(the Organized Crime Control Act [L.1986, ch. 516, §2, codified as Penal L. art. 460][OCCA] count)(138 criminal acts); securities fraud under the Martin Act (General Business Law §352-c,)(38 counts); criminal possession of stolen property in the second (PL §165.52), third (PL §165.50) and fourth (PL §165.45) degrees (26 counts); grand larceny in the second (PL §155.40) and third (PL §155.40) degrees (23 counts); and falsifying business records in the first degree (PL §175.10)(six counts)(collectively, the non-OCCA counts). It is alleged that through a corrupt scheme involving, inter alia, market manipulations, solicitation of new accounts, falsification of documents related to those accounts in furtherance of manipulative practices, failures to properly disclose aspects of stock trades to customers and the wrongful obtaining of unauthorized commissions on the trading of shares in the firm's account, defendants engaged in a pattern of criminal activity intended to maximize profits for themselves unlawfully at the expense of their customers.
Defendants now jointly move, inter alia, for the following relief: inspection and release of the grand jury minutes pursuant to CPL §210.30(2),(3); dismissal of the indictment as defective (CPL §§210.20[a], 210.25, ), on the grounds that this court lacks geographic jurisdiction as to certain of the counts against defendants, that the enterprise corruption statute as applied in this case is unconstitutionally vague and denies defendants due process of law, that the state criminal charges contained within the indictment are preempted by federal law and that OCCA's pattern of criminal activity requirement is defectively pleaded in the enterprise corruption count; dismissal of the indictment on the ground that the grand jury proceedings were defective and the integrity of those proceedings was impaired (CPL §§210.20[c], 210.35,,), in that, inter alia, the People introduced misleading evidence, engaged in improper use of expert testimony, gave improper instructions to the grand jury, used misleading summary charts, failed to offer exculpatory evidence, failed to give proper instructions to the grand jury on the use of a cooperating defendant's guilty plea, made impermissible use of hearsay before the grand jury and permitted the grand jury to vote on counts of the indictment without sufficient grand juror attendance; dismissal on the grounds of legal insufficiency of the indictment due to lack of corroboration of accomplice testimony, and of the counts of enterprise corruption and grand larceny on various grounds (CPL §210.20[b]); and dismissal of the enterprise corruption count in the interest of justice (CPL §210.40).
Defendant Tripodi separately moves to dismiss all counts of the indictment pending against him in the interest of justice (CPL §§210.20[i]; 210.40). Defendant Orthos, joined by his co-defendants, moves pursuant to CPL §210.25(1) to dismiss the grand larceny and securities fraud counts of the indictment as defective, for lack of sufficient specificity of the time periods involved, as required by due process and by CPL §200.50(6). In addition, defendant Micciola moves to preclude introduction at trial of any unnoticed statements made by him pursuant to CPL §710.30; defendants Tripodi and Micciola move for disclosure of exculpatory information under Brady v. Maryland, 373 US 82 (1963), and CPL §240.20; defendants Tripodi, Shapiro, Micciola and Rathgeber2 move to preclude cross-examination at trial by means of any prior bad acts, or in the alternative, for a Sandoval (People v. Sandoval, 34 NY2d 371 ) hearing; and defendants Micciola and Rathgeber move to preclude introduction of any prior uncharged crimes against them on the People's case in chief, or, alternatively, for a Ventimiglia (People v. Ventimiglia, 52 NY2d 350 ) hearing.
At a pre-trial status conference held on March 25, 2011, this court issued a summary order setting forth the dispositions of the six motions before it. This decision and order explains and supplements that summary order.
For the reasons stated, the motion to inspect is granted; the motions to dismiss are denied, except as follows: Criminal Acts 58, 59, 113, 114 and 115 are dismissed as to all defendants, on quorum grounds, pursuant to CPL §§190.25(1), 210.20(1)(c) and 210.35(3); Criminal Act 14 and Count 12 are dismissed pursuant to CPL §210.20(1)(b) as to all defendants, as legally insufficient; as to defendant Craig Shapiro, Criminal Acts 71, 86 and 93 and Counts 56, 61, 67 and 82 are dismissed pursuant to CPL §210.20(1)(b), as legally insufficient; as to defendant John Moraitis, Criminal Acts 97, 124, 133 and 135 and Counts 52, 69 and 84 are dismissed pursuant to CPL §210.20(1)(b), as legally insufficient; as to defendant Massimo Martinucci, Criminal Act 131 and Counts 48, 82 and 90 are dismissed pursuant to CPL §210.20(1)(b), as legally insufficient; and Counts 59, 62, 65, 72, 87 and 88 are dismissed pursuant to CPL §§20.40, 210.20(1)(a) and 210.25(2) as to all defendants based upon lack of geographical jurisdiction. Other pretrial relief is determined as set forth in this opinion.
TABLE OF CONTENTS
I. FACTUAL AND PROCEDURAL BACKGROUND
A. The Investigation
B. The Indictment
II. MOTION TO INSPECT AND DISMISS
A. Evidence Before the Grand Jury
*B. Motion for Inspection and Release of the
Grand Jury Minutes
C. Dismissal for Defects in Indictment
1. Geographic Jurisdiction of Non-OCCA
2. Due Process Vagueness Challenge to
Application of the Enterprise Corruption Statute
3. Federal Preemption
4. Defective Pleading of OCCA Pattern of Criminal Activity
*5. Lack of Specificity and Notice
D. Defective Grand Jury Proceedings and Impaired
Integrity of Grand Jury Proceedings
*1. Misleading Evidence and Improper Use of Experts
2. Use of Summary Charts
*3. Failure to Offer Exculpatory Evidence
*4. Instructions on Cooperating Witnesses
*6. Quorum Requirement
*7. Miscellaneous Defects
*8. Abuse of Discretion
E. Motion to Dismiss for Legal Insufficiency
*1. Use of Accomplice Testimony
2. Enterprise Corruption Count
3. Grand Larceny Counts
*4. Martin Act Counts
*5. Criminal Possession of Stolen Property Counts
*F. Dismissal of Enterprise Corruption Count in Interest of Justice
*1. Exercise of Prosecutorial Discretion
*3. Minor Participation
*G. Dismissal of Remaining Counts in Interest of Justice (Tripodi)
*III. MOTIONS FOR OTHER PRETRIAL RELIEF
*A. Motion to Preclude Statements
*B. Brady and Other Disclosures
*C. Sandoval Motions
*D. Molineux/Ventimiglia Applications
* Omitted for purposes of publication.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. The Investigation
From 2005 to 2009, the Office of the New York County District Attorney (DANY) investigated allegations of criminal conduct at JSC, a broker-dealer firm that was headquartered in New York County with branch offices in Melville and Staten Island, New York and Old Bridge, New Jersey. On three separate occasions between December 2005 and December 2007, DANY investigators executed court-authorized search warrants at all four JSC offices and at storage facilities located in Staten Island, Brooklyn and New Jersey. In all, more than one thousand boxes of evidence were seized pursuant to the search warrants.
B. The Indictment
On May 20, 2009, the instant indictment was filed charging the seventeen defendants as set forth above. The indictment alleges that the individual defendants ran JSC as a criminal enterprise from January 2001 through December 2005, defrauding more than 800 clients of the firm in more than 5000 securities trades, resulting in the generation of more than $6,000,000 in illegal undisclosed commissions to the defendants. It is further alleged that through a corrupt scheme involving, inter alia, market manipulations, falsification of documents and failures to make required disclosures, defendants engaged in a pattern of criminal activity intended to maximize profits for themselves unlawfully at the expense of their customers. The indictment was obtained by the DANY3 and unsealed on May 19, 2009, following which the defendants were arraigned on it by this court.
II. MOTION TO INSPECT AND DISMISS
A. Evidence Before the Grand Jury
The evidence before the grand jury established that during the period between January 2001 and December 2005, JSC, a registered broker-dealer firm which specialized in making markets in small cap securities primarily in the biotechnology field, had its headquarters in Manhattan, with branch or satellite offices in Long Island, Staten Island and New Jersey. Defendants Joseph Sorbara and Steven Markowitz were the firm's principals (principal defendants), and supervised the firm's traders, including defendants Craig Shapiro, John Moraitis and Massimo Martinucci (trader defendants), as well as its brokers, including defendants Peter Orthos, Alan Ferraro, Charles Raspa, Scott Tierney, John Micciola, Steven Scarcella, Michael Tripodi, Douglas Costabile, James Rathgeber, Matthew Menies and Hajradin "Harry" Mucovic (broker defendants).
The evidence further demonstrated that during this period, defendants systematically engaged in a practice to promote the purchase and sale by firm clients of selected securities (scheme stocks) in which the firm made a market solely for the purpose of maximizing profits to themselves and without regard to the suitability of the investment for the clients' investment objectives or any disclosure that their true motivation for recommending the stock was to earn additional undisclosed profits from the trades. The trader defendants would inform the broker defendants that trading in a scheme stock was being planned for an upcoming date. The brokers would then solicit orders for trades in such stocks from their customers and would inform the traders of the advance commitments they had received from their customers for purchases or sales of shares of the particular scheme stock. The stocks would be largely illiquid securities of minimally capitalized companies which, for example, were awaiting, but had not yet received, approval of their pharmaceutical products for release from the federal Food and Drug Administration. The brokers would encourage their clients to purchase the stock, notwithstanding the absence of any positive information having been received about the company, and frequently in contravention of the customer's own stated investment objectives. Upon their receiving commitments from the brokers as to the number of shares the brokers' clients would purchase (or sell), the trader defendants would then acquire (or sell) shares of the scheme stock based upon that information, using carefully executed trading techniques to raise (or lower) and maintain the prices of the otherwise lightly traded scheme stocks artificially. The brokers, meanwhile, had obtained the trading orders from their clients but would delay their execution, for hours or days, until advised by the traders that they had successfully manipulated the price of the stock to a price which would maximize the defendants' income from the transactions while concomitantly producing a less advantageous price for the customer, in contravention of the broker's duty to attempt to obtain the best price execution for the customer on the trade. Upon receipt of that advice from the trader to do so, the broker would then immediately direct the virtually simultaneous execution of all of the trading orders he had obtained for the scheme stock over the preceding hours and days, completing each customer's purchase (or sale) of the scheme stock at a significantly less advantageous price to the customer than could have been achieved in the absence of the delay of the execution and ensuing market manipulation by the traders. After the flurry of the execution of these delayed trades, which often would exhaust JSC's inventory of the scheme stock, the price of the scheme stock would typically decline significantly, leaving the customer with heavy losses.
The scheme would essentially take one of two forms. The first type (block schemes) involved the firm acquiring a block of a scheme stock at a discounted price and then selling the shares to firm customers at the (higher) market price, never disclosing to the customers the lower price at which the firm acquired the stock and at which the customer, too, could have purchased it, nor that customers were purchasing their shares from JSC's firm inventory. The second type of scheme (spread schemes) involved the firm manipulating the price of the scheme stock by making timed purchases throughout the early part of the trading day ("walking up the stock"), sometimes by putting in a bid above any other bids for the stock, at the ask level, in an effort to drive up the price ("ripping out" the offer), and only executing the customers' buy orders later in the day, after the price had risen accordingly. In neither case would the customer be informed that she was not receiving the best possible execution price on the trade, nor the price at which she could have acquired the stock absent the scheme, and under neither scenario would the customer be informed that the primary, if not sole, reason for the trade was the incentive for the broker, trader and firm principals to receive the inflated commissions and excess profits so generated.
The compensation received by the broker defendants on trades in the scheme stocks consisted of two parts: first, the regular per-share mark-up (or mark-down) commission on the price of the stock, which was generally no greater than five percent of the share price, in accordance with industry guidelines, and which was regularly disclosed to the customer through the confirmation report received shortly after the execution of the transaction; and second, the receipt of a percentage of the trading profit for the firm (the "inside" commission, based upon the spread between the price at which the firm acquired the market maker stock and the price at which it sold the shares to its clients), which was generated by the trader defendants and a portion of which comprised their compensation, and which they shared with the broker defendants in the scheme stock trades, and which was never disclosed to the customers. The combination of the mark-up and inside, together characterized by the firm as the "gross credit," was the broker's compensation on the trade, and, similarly, was never disclosed to the client.
The grand jury heard evidence that in any transaction in which it is a market maker and assumes the risks of the acquisition and (uncertain) eventual sale of stock from its own inventory, a firm may legitimately capture the inside profit and charge its clients for the risk it has taken, with industry guidelines, and JSC's own internal policies, setting a cap of ten percent on such charges. The grand jury also received evidence that in the block and spread scheme stock transactions at JSC, the firm took no risk, as it had received commitments for the purchase of its stock inventory holdings at a higher price than the firm's own acquisition cost.
The grand jury heard testimony that the defendants established various strategies for the concealment of their improper remuneration in these transactions from effective review by customers, regulatory agencies and even the firm's own compliance department. These strategies included falsifying and misrepresenting customer authorizations to reflect a desire for speculative investments and the granting of discretionary trading authority (not held orders) where none existed; misrepresenting the time at which the trading order had been received from the client; cancelling commissions exceeding the ten percent guideline (cancel and correct) in accordance with the direction of JSC's compliance department and in order to evade regulators' scrutiny, but then immediately returning the amounts to the firm's trading account and redistributing them to be paid to the defendants in connection with future, unrelated market maker transactions; and mischaracterizing such resulting additional payments, for example, as credits against the broker's expenses.
C. Dismissal for Defects in Indictment
1. Geographic Jurisdiction of Non-OCCA Counts
a. Parties' Contentions
Defendants argue that to the extent that the non-OCCA counts charged in the indictment relate to conduct which allegedly occurred outside of New York County, they must be dismissed for lack of geographic jurisdiction under CPL §20.40. (CPL §§210.20[a], 210.25,). Specifically, this argument applies to those defendants who worked outside of New York County, including: Mucovic (Staten Island); Tripodi, Micciola, Scarcella, Raspa and Tierney (New Jersey); and Martinucci and Rathgeber (Long Island) (collectively, the out-of-county defendants).
In order to establish geographical jurisdiction to prosecute an offense, the evidence must satisfy the terms of CPL §20.40(1)(a), which provides, in pertinent part, that:
[a] person may be convicted in an appropriate criminal court of a particular county, of an offense...committed either by his own conduct or by the conduct of another for which he is legally accountable...when...[c]onduct occurred within such county sufficient to establish...an element of such offense....
(CPL §20.40[a][emphasis added]). Thus, CPL §20.40(1)(a) makes clear that jurisdiction will lie in a particular county if any the conduct of a defendant or a defendant's accomplice in that county establishes an element of the offense to be prosecuted.5
With respect to the grand larceny counts, a person commits larceny "when, with intent to deprive another of property, or to appropriate same to himself or to a third person, he wrongfully takes, obtains or withholds such property from an owner thereof." (PL §155.05). Here, the evidence before the grand jury established that accomplices in JSC's New York office acted in concert with the out-of-county defendants in obtaining property from their clients in the form of profits from trades by calculating and distributing those profits from the New York office. Thus, the jurisdictional requirements of CPL §20.40(1)(a) are satisfied as to the grand larceny counts against the out-of-county defendants.
With respect to the GBL §352-c(5) counts, the pertinent elements of the offense are that "[a]ny person, partnership, corporation, company...or any agent or employee thereof who intentionally engages in any scheme constituting a systematic ongoing course of conduct with intent to defraud ten or more persons...and so obtains property from one or more of such persons while engaged in inducing or promoting the...sale...or purchase of any securities...." is guilty of the crime. (GBL §352-c). Here, the evidence showed that the out-of-county defendants acted in concert with their New York County-based accomplices on an ongoing basis in intentionally obtaining property from JSC customers as described above through the execution of orders for the sales and purchases of securities, and the record-keeping and payroll accounting activities occurring in the New York office. Therefore, jurisdiction over the out-of-county defendants lies in New York County with respect to the GBL §352-c(5) counts.
Similarly, with respect to the GBL §352-c(6) counts, which apply to "[a]ny person, partnership, corporation, company...or any agent or employee thereof who intentionally engages in fraud, deception, concealment...[or] false pretense ..." with respect to the sale or purchase of securities, the evidence shows that the out-of-county defendants acted in concert with their New York County-based accomplices to engage in fraud and concealment of commissions based on artificial pricing of the traded securities in the manner described above and, with respect to each count, acted in concert to "wrongfully obtain property of a value in excess of two hundred fifty dollars...." (GBL §352-c). Thus, with respect to the out-of-county defendants, jurisdiction as to these counts is similarly properly placed in New York County.
Regarding the counts of criminal possession of stolen property, elements of those counts include "knowingly possess[ing] stolen property" or "imped[ing] the recovery by an owner thereof...." (PL §§165.45, 165.50, 165.52). Here, once again, New York-based accomplices of the out-of-county defendants obtained the property of JSC customers in the form of profits from larcenous and fraudulent trades, which they calculated and distributed to the out-of-county defendants from New York County, pursuant to the plan to which they had all agreed, thereby knowingly possessing the unlawful profits. Further, by misstating the records of the trades in question on the confirmation reports ordered from the New York office and distributing the profits of those trades from the New York office, defendants, directly and through their accomplices, acted to impede the recovery of those monies by the customers while in New York County. Thus, jurisdiction over the counts of criminal possession of stolen property as to the out-of-county defendants is properly placed in New York County.
In any case, CPL §20.60(2) provides, in pertinent part:
A person who causes property to be transported from one jurisdiction to another by means of mail, common carrier or any other method is deemed to have personally transported it in each jurisdiction....
Here, since the proceeds of the transactions in question, including those trades not made in New York County, were received by and distributed from the New York office, the property in question was transported through New York County, thereby establishing jurisdiction in that county with respect to the counts of grand larceny, securities fraud and criminal possession of stolen property. (See People v. Taylor, 304 AD2d 434 [1st Dept. 2003][jurisdiction lay in New York County where, as part of a scheme to defraud, defendant caused property to be delivered from New York County to defendant in Florida]).
Cases such as People v. Lightbody, 62 AD3d 632 (1st Dept. 2009), cited by the defendants, are distinguishable. There, every element of the crime occurred in a county other than the one in which the defendant was being prosecuted. Here, the proceeds of their crimes were obtained, processed in and transmitted to the out-of-county defendants by their accomplices in the New York County office of JSC.
With respect to the counts charging falsifying business records in the first degree, defendants are correct that since each count of the indictment is deemed to be a separate accusatory instrument pursuant to People ex rel. Ortiz v. Commissioner of New York City Dep't of Corr., 253 AD2d 688 (1st Dept. 1998), aff'd, 93 NY2d 959 (1999), the prosecution was required to present evidence to the grand jury establishing geographical jurisdiction as to each count. Specifically, defendants question whether the evidence presented before the grand jury establishes that the out-of-county broker defendants charged with these counts, defendants Raspa, Scarcella and Rathgeber, caused false documents to be filed in New York County.
"A person is guilty of falsifying business records when, with intent to defraud, he...makes or causes a false entry in the business records of an enterprise...." (PL §175.10). Here, the evidence demonstrates that the documents in question, i.e., the new account applications, were signed by the customers in question in JSC's New Jersey and Long Island offices and prepared or completed by the defendants in question or by their assistants in said out-of-county offices. Thus, any false entries made or caused to be made by defendants Raspa, Scarcella and Rathgeber on the documents in question were made in their New Jersey or Long Island offices. Further, any intent to defraud on the part of Raspa, Scarcella or Rathgeber was likewise formulated in the New Jersey or Long Island office. Thus, neither the actus reus nor mens rea elements of falsifying business records occurred in the New York office.
In this regard, the People's only argument is that the branch offices of JSC are so interconnected with the main office in Manhattan as to establish jurisdiction in New York County. This argument is unavailing, as it does not establish conduct in New York County of the out-of-county defendants or any New York County accomplice sufficient to establish at least one element of the offense of falsifying business records occurring in this county.
Accordingly, Counts 59, 62, 65, 72, 87 and 88, each charging falsifying business records in the first degree (PL §175.10), are dismissed.
2. Due Process Vagueness Challenge to the Application of the Enterprise Corruption Statute
a. Parties' Contentions
Defendants contend that OCCA's enterprise corruption provisions are unconstitutionally vague as applied to this case, in that the definitions of "criminal enterprise" and "pattern of criminal activity" set forth in PL §460.10(3) and (4), respectively, fail either to provide fair notice that the conduct at issue is prohibited, or to set explicit standards for enforcement so that ad hoc and discriminatory enforcement of them may be avoided. They argue, as to the first issue, that because their conduct, if not acceptable industry practice, presents nothing more than a regulatory issue, they had no notice that it was criminally proscribed, and that as to the second issue, they have been unfairly selected for prosecution in order to meet the needs of government cooperators seeking to achieve more favorable dispositions of their own criminal cases.
The People respond that similar challenges to the enterprise corruption statute have been consistently rejected, citing as examples People v. Capaldo, 151 Misc2d 114 (Sup. Ct. NY County 1991), and People v. Cantarella, 160 Misc2d 8 (Sup. Ct. NY County 1993). They also argue that the actions of defendants in stealing, defrauding customers and falsifying records cannot be characterized as mere regulatory matters, and that defendants were given reasonable notice that their conduct was criminally proscribed.
Statutory enactments are presumptively constitutional (Brady v. State of New York, 80 NY2d 596, 602 , cert. denied, 509 US 905 ; People v. Bright, 71 NY2d 376, 382 ), and the party challenging them bears the burden of establishing unconstitutionality beyond a reasonable doubt. (People v. Scalza, 76 NY2d 604, 607 [citation omitted]; People v. Bright, supra). As the Court of Appeals has explained:
A vagueness challenge involves a two-part analysis. First, it must be determined whether the statute in question is sufficiently definite to give a person of ordinary intelligence fair notice that his contemplated conduct is forbidden by the statute. Citizens must be afforded fair warning of what is prohibited by law so that they may act accordingly. Second, a statute must provide explicit standards for those who apply them so as to avoid resolution on an ad hoc and subjective basis, with the attendant dangers of arbitrary and discriminatory application.
(People v. Nelson, 69 NY2d 302, 307  [citations and quotation marks omitted]; see International Harvester Co. v. Kentucky, 234 US 216, 221 [notice requirement]; People v. Stuart, 100 NY2d 412, 419 [same]; Grayned v. City of Rockford, 408 US 104, 108-09 [explicit standards requirement]). On a "vagueness as applied" challenge to a statute, the court must consider whether the statute can be constitutionally applied to the defendant under the facts of the case at hand. (Chapman v. United States, 500 US 453, 467-468 ; People v. Parker, 41 NY2d 21, 24 ).
New York's enterprise corruption statute, as codified in Penal Law Article 460, includes a preamble (Legislative Findings, PL §460.00) setting forth the legislative findings on which the 1986 enactment was predicated. The findings explain that the illegitimate gains from organized criminal operations are increasingly used to corrupt legitimate enterprises and employ them as the instrumentalities through which criminal ends may be accomplished. "Thus,...the concept of criminal enterprise should not be limited to traditional criminal syndicates or crime families, and may include persons who join together in a criminal enterprise...for the purpose of corrupting such legitimate enterprises...." (Id.).
Significantly, in light of the confusion engendered by similar statutes in other jurisdictions, the Legislature in drafting New York's enterprise corruption statute placed "limitations on its applicability" and provided "more rigorous definitions," in order to circumscribe the range of possible enforcement while still providing an effective tool to dismantle the type of sophisticated organization that could otherwise avoid detection and elude law enforcement authorities. (Id.).
The legislative findings note that the definitions of the terms "criminal enterprise" and "pattern of criminal activity" were carefully drawn and these terms "should be given their plain meaning, and should not be construed either liberally or strictly, but in the context of the legislative purposes set forth in these findings." (Id.).
Defendants acknowledge that similar challenges to the statute have consistently proven unavailing. This result no doubt derives from the attention paid by New York's Legislature to avoiding the problems encountered in federal practice under the Racketeer Influenced and Corrupt Organizations Act (Pub. L. 91-452, 84 Stat. 941, codified as 18 USC §§1961-1968 [RICO]). (See, e.g., People v. Cantarella, supra, 160 Misc2d at 13 [court rejected vagueness challenge "in light of the definition sections of the statute, which render this statute significantly more definite in its scope than the comparable Federal RICO statute which has been upheld as constitutional"]; People v. Wakefield Fin. Corp., 155 Misc2d 775, 783-84 [Sup. Ct. NY County 1992][denying vagueness challenge based on "more rigorous" definitions targeting certain well-defined criminal activities]; People v. Capaldo, supra, 151 Misc2d at 119 [court found Legislature avoided ambiguities of other statutes by use of "significantly clearer and more limited" statutory scheme than the RICO, and observed lack of success of similar constitutional challenges to that statute]). Appellate courts have similarly rejected such challenges. (See, e.g., People v. Association of Trade Waste Removers of Greater New York, 267 AD2d 137, 139 [1st Dept. 1999][OCCA not unconstitutionally vague where two defendants convicted of enterprise corruption based upon committing at least three criminal acts]; People v. Barone, 221 AD2d 553 [2d Dept. 1995][OCCA not vague where defendant's participation in defrauding scheme for the benefit of an organized crime family is "within the ambit of the statute"]).
Defendants here offer no persuasive argument, and certainly none meeting the high standard required, for this court to reject the reasoning of the courts which have already addressed the issue. The sections of the statute defining "criminal enterprise" and "pattern of criminal activity" are sufficiently well-defined to give adequate notice of the proscribed conduct. The argument that defendants engaged in no more than conduct subject to regulatory discipline, and had no awareness of the criminal nature of their actions, withers when juxtaposed with the evidence of the thousands of transactions in which they participated allegedly resulting in a years-long series of systematic transgressions of fraud, theft and concealment at JSC which forms the framework for the charges in this indictment.
Defendants also claim that they were chosen for prosecution not because law enforcement officials made a subjective assessment that they had engaged in criminal activities, but because JSC and the individual defendants provided the consortium of criminals turned cooperators who had once been employed by JSC with targets against which to cooperate, thereby deflecting the prosecution's attention away from the cooperators. Defendants argue that the sorts of compensation and disclosure issues at the heart of this case can be found in brokerage houses across the country and are common in the industry, that the activities for which defendants were indicted are no different from those of other small cap brokerage houses, and that JSC and its staff have been the subject of an impermissible discriminatory prosecution.
As the Court of Appeals observed in People v. Bright, supra, in order to prevent arbitrary or discriminatory enforcement:
the Legislature must include in a penal statute minimal guidelines to govern law enforcement. The absence of objective standards to guide those enforcing the laws permits the police to make arrests based upon their own personal, subjective idea of right and wrong. A vague statute confers upon police a virtually unrestrained power to arrest and charge persons with a violation and furnishes a convenient tool for harsh and discriminatory enforcement by local prosecuting officials, against particular groups deemed to merit their displeasure.
(People v. Bright, supra, 71 NY2d at 382 [citations and internal quotation marks omitted]).
To the extent that the defendants were arrested and prosecuted as a result of cooperation by an informant, that circumstance, without more, does not support a claim of "discriminatory enforcement" which would render the enterprise corruption statute unconstitutionally vague. "[T]here must be not only a showing that the law was not applied to others similarly situated but also that the selective application of the law was deliberately based upon an impermissible standard such as race, religion or some other arbitrary classification." (304 West 42nd St. Corp. v. Klein, 46 NY2d 686, 693 [citations omitted]). Here, defendants make no such claim.
In fact, "the conscious exercise of some selectivity in enforcement of the law is not in itself a constitutional violation" even where defendant may demonstrate that other, similar offenders have not been prosecuted. (People v. Goodman, 31 NY2d 262, 268 ). Undoubtedly, "each day informants provide tips and the People act without having to ascertain the informant's motives." (People v. Keller, 176 Misc2d 466, 472 [Sup. Ct. NY County 1998]). Moreover, it is not discriminatory for the People to prosecute, or not, based on the strength of their case, their enforcement priorities, their perception of the deterrence value of the prosecution, or even budgetary and personnel allocation concerns. (People v. O'Hara, 9 Misc3d 1113(A), 2005 WL 2333754 [Sup. Ct. Kings County Sept. 23, 2005], at *4 n.17 [citing Wayte v. United States, 470 US 598, 607-608 (1985)]). Accordingly, defendants have failed to satisfy their heavy burden of establishing that there was no rational basis for the People's decision to prosecute them and that they were victims of unconstitutional selective enforcement of the Penal Law. (People v. Blount, 90 NY2d 998, 999 ).
Accordingly, the terms "criminal enterprise" and "pattern of criminal activity" used in PL §460.10(3) and (4) are not unconstitutionally vague as applied to defendants, and the motion to dismiss the count of enterprise corruption on this ground is denied.
3. Federal Preemption
a. Parties' Contentions
Defendants contend that the counts of securities fraud, grand larceny and falsifying business records should be dismissed because this court lacks jurisdiction over them due to their preemption by Rule 10b-10 (17 CFR §240.10b-10), promulgated by the Securities and Exchange Commission (SEC) pursuant to the Securities and Exchange Act of 1934 (15 USC §78a et seq.)(SEA or Exchange Act). Rule 10b-10 is a regulation among those created by the SEC and the Financial Industry Regulatory Authority (formerly National Association of Securities Dealers [NASD])(FINRA) which addresses certain disclosures which must be made by brokers and broker-dealers to their customers in connection with any securities transaction, and establishes, inter alia, that no disclosure need generally be made of incentive payments in the form of "order flow"6 payments they receive. Defendants argue that to the extent that the state law claims included in the instant indictment are premised upon the theory that the broker defendants breached their fiduciary duty to their customers by failing to disclose to their customers their receipt of the insides, such payments were incentive payments analogous to the order flow payments protected from disclosure by Rule 10b-10, rendering the instant charges preempted by the federal regulation. Again, they contend that to the extent that they engaged in any misconduct with regard to such payments, the matter is exclusively one for regulation under applicable SEC and FINRA rules, and that state prosecutors lack any authority to police defendants' actions under state law.
The People respond that they are not prosecuting defendants for violating Rule 10b-10 or any other SEC or FINRA disclosure rules. Rather, they maintain that the defendants violated state penal laws by colluding to generate undisclosed additional profits at the expense of JSC's customers by manipulating stock prices and aggressively pushing their clients to buy certain stocks at times advantageous only to defendants.
b. Legal Standards
The Supremacy Clause of the United States Constitution provides that federal laws "shall be the supreme Law of the Land...any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." (US Const, art. VI, cl. 2). Thus, the Supremacy Clause provides for federal preemption of state law by "vest(ing) in Congress the power to supersede not only state statutory or regulatory law but common law as well...." (Guice v. Charles Schwab & Co., supra, 89 NY2d at 39 [citations omitted]). The issue of federal preemption "is ultimately one of congressional intent." (Id. [citing Barnett Bank of Marion County, N.A. v. Nelson, 517 US 25, 30 (1996)(other citation omitted)]).
The law recognizes four types of preemption of state law. The first of these, express preemption, may be found where the statute includes express language to that effect. (Guice v. Charles Schwab & Co., supra, 89 NY2d at 39 [citing Barnett Bank of Marion County, N.A. v. Nelson, supra, 517 US at 31]). Alternatively, congressional preemptive intent may be found implicitly, in one of two ways: where the federal statute "create(s) a scheme of federal regulation 'so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it'" (Barnett Bank of Marion County, N.A. v. Nelson, supra, 517 US at 31 [quoting Rice v. Santa Fe Elevator Corp., 331 US 218, 230 (1947)])(field preemption); or where federal law is in "'irreconcilable conflict' with state law" (Barnett Bank of Marion County, N.A. v. Nelson, supra, 517 US at 31 [quoting Rice v. Norman Williams Co., 458 US 654, 659 (1982)])(conflict preemption). Implied conflict preemption may be found where compliance with both the federal and state laws is impossible or when state law "stand[s] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." (Hines v. Davidowitz, 312 US 52, 67 ). Finally, federal regulations promulgated in furtherance of congressional intent to delegate to administrative agencies the authority to effectuate the purposes of Congress may also preempt State law. (Guice v. Charles Schwab & Co., supra, 89 NY2d at 39 [citing Capital Cities Cable, Inc. v. Crisp, 467 US 691, 699-700 (1984)])(regulatory preemption).
Preemption is not to be lightly assumed, however. "In all pre-emption cases...we start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress." (Medtronic, Inc. v. Lohr, 518 US 470, 485 [quoting Rice v. Santa Fe Elevator Corp., supra, 331 US at 230]; City of New York v. Job-Lot Pushcart, 88 NY2d 163, 166-167 , cert. denied, 519 US 871 (1996); People v. Caridi, 47 AD3d 944, 945 [2d Dept. 2008]). To sustain a claim that state law has been preempted by federal law, "the defendant must show a clear and unambiguous intent of Congress to do so...." (People v. Cohen, 9 AD3d 71, 87 [1st Dept.], lv. denied, 2 NY3d 797, cert. denied, 543 US 927 ). In the field of securities regulation, however, "Congress plainly contemplated the possibility of dual litigation in state and federal courts...." (Matsushita Elec. Indus. Co. v. Epstein, 516 US 367, 383 ).
In Guice v. Charles Schwab & Co., cited by defendants, the defendant broker-dealers sought dismissal of state civil law actions brought by the plaintiffs, who were their former customers, on the grounds that they were preempted by SEC Rule 10b-10. Plaintiffs' state law claims were based upon the defendants' receipt of order flow payments, in the form of monetary remuneration given by wholesalers to retail securities broker-dealers for routing their customers' orders for execution of certain securities to such dealers. (Guice v. Charles Schwab & Co., supra, 89 NY2d at 37). The Guice Court held that the state common law actions were preempted because they would "thwart the objectives of Congress" as delegated to the SEC, in that they sought to impose a duty of disclosure with respect to order flow payments which the SEC through its promulgation of Rule 10b-10 had specifically concluded "might be unworkable or costly out of all proportion to possible benefits to investors." (Id. at 47). Further, the Guice Court rejected the plaintiffs' argument that preemption was negated by section 28(a) of the SEA (15 USC §78bb[a]),7pursuant to which Rule 10b-10 was promulgated. The Court of Appeals reasoned that while the legislative history of section 28(a) indicates that its purpose was to "save the blue-sky laws from pre-emption" (Id. at 49 [quoting Leroy v. Great W. United Corp., 443 US 173, 182 n.13 (1979)]), savings clauses such as section 28(a) negate implied field preemption, but not conflict preemption, as was presented by the facts in Guice.
Examination of Rule 10b-10 reveals that it contains no language expressly preempting prosecution of any of the state criminal law counts brought in this case. Thus, express preemption is clearly inapplicable in this case.
Further, there is neither anything in the structure, purpose or language of Rule 10b-10, nor is its regulatory scheme so pervasive, as to signal that Congress had a clear and manifest purpose of Congress intent to preempt the field. Therefore, implied field preemption is also inapplicable to this case.
Nevertheless, defendants urge that the state law counts against them are subject to preemption because they conflict with Rule 10b-10, as was the case in Guice.
Defendants' claims of conflict preemption are not supportable here, however.
In United States v. Schulman, 1998 WL 80179 (SDNY Feb. 25, 1998)(Keenan, J.), the court addressed a similar question, where the defendants maintained that the commercial bribery statute (PL §180.03) was preempted by the SEA, citing Guice. (United States v. Schulman, supra, at *1). The Schulman Court rejected this argument, distinguishing Guice from the case before it on several grounds.
First, Judge Keenan observed that the Guice ruling was limited to civil common law causes of action and neither construed New York's commercial bribery statute nor established that all undisclosed payments to a broker made with the intent to influence the broker's conduct toward the customer are protected and preempted by the Exchange Act. (Id.). The Schulman Court noted that the Guice holding was limited to claims based entirely on an alleged common law duty to disclose, and did not address violations of state criminal statutes, such as the commercial bribery statute there at issue. (Id.).
The same reasoning applies with respect to the Martin Act provisions at issue in this case: Guice had nothing whatsoever to do with New York's enforcement of its criminal securities fraud laws. And this court concurs with the conclusion of the court in Schulman that Guice did not exempt all undisclosed payments to brokers from state prosecution.
Second, Judge Keenan distinguished the basis of the Guice Court's holding that state law claims entirely founded upon a duty to disclose order flow payments were preempted, namely, that imposition of such a duty under state law was inconsistent with federal regulation of the same duty under Rule 10b-10, from the gravamen of the commercial bribery statute at issue in Schulman, namely, "the intent to influence the conduct of another by bestowing a benefit." (Id. [citation omitted]). Thus, Judge Keenan made clear that the commercial bribery counts before him, unlike the state common law claims in Guice, did not involve claims for breach of an alleged state law duty to disclose order payments and therefore were not subject to preemption on that basis.8
The same is true of the theft and securities fraud claims in this case. A person is not exempt from prosecution for those crimes merely because he is a broker and the benefit he has wrongfully and fraudulently obtained from his customer was an incentivized commission which he did not disclose.
The third distinguishing feature the Schulman Court found was that, in contrast to the goal of the litigation in Guice, prosecution under the commercial bribery case was "consistent with the federal scheme of regulation controlling disclosure with respect to Penny Stocks" and therefore would not interfere with the objectives of Congress. (Id.; see United States v. Szur, 1998 WL 132942 [SDNY Mar. 20, 1998][Koeltl, J.][Szur (SDNY)]9 [applying the reasoning of Schulman to reject the same preemption argument]).
In the same way, New York's criminal statute proscribing securities fraud, the Martin Act (GBL §§352-c,), presents no express or implied conflict, on these facts, with the federal regulatory scheme under the Exchange Act or Rule 10b-10. (SEA §28[a], supra; see note 7, supra). Rather, its provisions prohibit (a) intention-ally engaging in a systematic and ongoing scheme with the intent to defraud or obtain property from at least ten persons by false or fraudulent pretenses, and so obtaining property from at least one person, while inducing or promoting the sale or purchase of securities (§352-c); and (b) intentionally engaging in fraud, deception, concealment or false pretense, or making material false statements with intent to deceive or defraud, while inducing or promoting the sale or purchase of securities within or from New York, and thereby wrongfully obtaining property in excess of $250.
In sum, like Schulman, this case is easily distinguished from Guice. It involves alleged violations of state criminal statutes, not civil common law claims. Indeed, a review of the instructions to the grand jury in this case reveals that there was no mention of Rule 10b-10 or of fiduciary duty. Moreover, this is not a prosecution for the violation of an alleged duty to disclose order flow payments, and so does not present any possibility of inconsistency between the enforcement of state criminal law and the federal regulatory scheme. Thus, the prosecution of the crimes alleged here does not represent any effort to override or circumvent Rule 10b-10, which, in any event, does not preempt prosecution of the crimes alleged here.
Defendants cite United States v. Alvarado, 2001 WL 1631396 (SDNY Dec. 19, 2001)(Patterson, J.), in support of their contention that any actionable fiduciary duty is exclusively a matter for federal regulation. That case does not help them. In Alvarado, the defendants, all former registered representatives of a broker-dealer, challenged the inclusion in their indictment of allegations of excessively high compensation and incentivizing sales of house stocks. The Alvarado Court found that the compensation at issue was not material to the transactions in question and therefore did not need to be disclosed, but, rather than dismiss the charges of conspiracy and securities fraud or bar presentation of evidence pertaining to the alleged compensation, simply ordered that the allegations be stricken from the indictment. (Id.). Notably, the Alvarado court stated that "affirmatively lying about (defendant's) own compensation on a transaction can result in criminal liability." (United States v. Alvarado, supra, at *8, n.4). Thus, contrary to defendants' assertion, Alvarado does not stand for the proposition that breach of fiduciary duty is exclusively a federal regulatory matter.
Accordingly, defendants' claims of federal preemption are rejected.
4. Defective Pleading of OCCA Pattern of Criminal Activity
a. Parties' Contentions
Defendants move to dismiss the enterprise corruption count as improperly pleaded, in that it does not plead "a pattern of criminal activity" within the meaning of PL §460.10(4).10 Relying upon People v. Scarantino, 167 Misc2d 388 (Sup. Ct. Queens County 1996), defendants contend that while the People may properly plead more than one substantive count (e.g., grand larceny and securities fraud) based upon the same conduct or "criminal transaction," as that term is used in CPL §40.10(2), they may not derive more than one pattern "criminal act" (PL §460.10) from the same conduct or criminal transaction for purposes of pleading the "pattern of criminal activity" element (PL §460.10) of the enterprise corruption count. Defendants further claim that dismissing various pattern acts from the OCCA count will not correct the defect in the pleading, and citing People v. Colletti, 73 AD3d 1203 (2d Dept. 2010), contend that the sole redress for the error is dismissal of the entire enterprise corruption count with leave for the People to represent their evidence to another grand jury.
The People respond that the manner in which the enterprise corruption count is pleaded in the indictment complies with the requirements of CPL §200.40(1)(d), and that the count is, therefore, properly pleaded.
Defendants' argument is based upon PL §460.10(4)(b), which provides, in pertinent part:
"Pattern of criminal activity" means conduct engaged in by persons charged in an enterprise corruption count constituting three or more criminal acts that:
(b) are neither isolated incidents, nor so closely related and connected in point of time as to constitute a criminal offense or criminal transaction, as those terms are defined in section 40.10 of the criminal procedure law....
(PL §460.10[b]). CPL §40.10(2), incorporated by reference into PL §460.10(4)(b), provides:
"Criminal transaction" means conduct which establishes at least one offense, and which is comprised of two or more or a group of acts either (a) so closely related and connected in point of time and circumstance of commission as to constitute a single criminal incident, or (b) so closely related in criminal purpose or objective as to constitute elements or integral parts of a single criminal venture.
Under the governing provisions of the New York Penal Law and Criminal Procedure Law, defendants' argument has no resonance, as it conflates the evidentiary and pleading requirements for an enterprise corruption claim. While PL §460.10(4)(b) and, by reference, CPL §40.10(2), govern the evidentiary requirements for establishment of a legally sufficient pattern of criminal activity, the pleading requirements for an enterprise corruption count are governed by CPL §200.40(1)(d), relating to joinder of defendants in an indictment. That section provides, in pertinent part, that two or more defendants may be charged in an indictment with enterprise corruption, provided that:
(i) all the defendants are jointly charged with every count of enterprise corruption alleged therein; and
(ii) every offense, other than a count alleging enterprise corruption, is a criminal act specifically included in the pattern of criminal activity on which the charge or charges of enterprise corruption is or are based; and
(iii) each such defendant could have been jointly charged with at least one of the other defendants, absent a count alleging enterprise corruption, under the provisions of paragraph (a), (b) or (c) of this subdivision....
In this case, clearly, the indictment jointly charges all defendants with the count of enterprise corruption, thus satisfying CPL §200.40(1)(d)(i), and every substantive count set forth in the indictment has a corresponding criminal act included in the enterprise corruption count, thereby meeting the requirements of CPL §200.40(1)(d)(ii). Further, this court's review of the substantive counts establishes that each defendant could have, and has been, charged jointly with at least one other defendant pursuant to CPL §200.40(1)(b), in that all of the substantive counts "are based upon a common scheme or plan" to manipulate the prices of small cap stocks in order to share artificially created insides which would not be disclosed to JSC customers, thereby satisfying CPL §200.40(1)(d)(iii). Accordingly, this court finds that the enterprise corruption count of this indictment, including its pattern of criminal activity element, satisfies the requirements of CPL §200.40(1)(d) and is, therefore, properly pleaded under the terms of the governing state statutory law.
In Scarantino, the sole state case cited by defendants in support of their argument, the trial court applied PL §460.10(4) and CPL §40.10(2) in evaluating the legal sufficiency of grand jury evidence supporting the pattern of criminal activity element of an enterprise corruption count, rather than examining whether the pleading of that count was satisfactory. There, the defendant's false report of a stolen vehicle to an insurance company had served as the basis of the three separate criminal acts upon which the prosecution relied to establish the pattern of criminal activity. In dismissing the OCCA count for failure to establish the pattern, the court made an evidentiary ruling, finding the evidence of the defendant's single act in falsely reporting a car stolen to have formed an identical evidentiary basis for all three criminal acts, and to have thus constituted no more than one criminal transaction, thereby failing to establish legally sufficient proof of a pattern of criminal activity for purposes of PL §460.10(4)(b) and CPL §40.10(2). (People v. Scarantino, supra, 167 Misc2d at 390, 391). Defendants' reliance on Scarantino to support their argument purely relating to alleged defects in the pleading of the indictment is, therefore, misplaced.
Defendants' further contention that the sole remedy for the purported defect is dismissal of the OCCA count and re-presentation of the evidence to the grand jury is also baseless. In People v. Colletti, supra, on which defendants rely, the Appellate Division, Second Department ordered a new trial due to the prosecution's having broadened its theory of the criminal enterprise at trial from that which was presented to, and found by, the grand jury to form the basis of the charge in the indictment. (See People v. Colletti, supra, 73 AD3d at 1205-1207).12 Here, however, the challenge to the pattern of criminal activity as pleaded is unfounded, for the reasons stated.
D. Defective Grand Jury Proceedings and Impaired Integrity of Grand Jury Proceedings
2. Use of Summary Charts
a. Parties' Contentions
Defendants contend that the experts who testified before the grand jury relied upon incomplete and misleading summary charts. They assert that the summary charts failed to disclose JSC's bid/ask quotations or the real time market conditions or account for national best bid or offer (NBBO) or volume weighted average price (VWAP) at the time of the execution of the trades in question, so the grand jury could not determine whether "best execution" occurred or whether the market was manipulated in executing the trades in question. Defendants further argue that the summary charts were misleading because neither the charts nor any other evidence before the grand jury provided information as to the identity of the market makers who posted the bid/ask prices; realtime quotes of the amounts or the stock available for purchase over the course of the day: or the total volume of trades made by JSC in the stock compared to the total volume of trades in the stock on that day. Defendants contend that lacking such information, the grand jury could not have concluded that the trades in question by the defendant's resulted in manipulation of the price of that stock.
Defendants also assert that the People incorrectly portrayed the role of "cancel and correct" orders, arguing that certain trades were marked "c/c" on the charts to signify that they were cancelled in furtherance of the stock manipulation scheme while in fact all JSC "cancel and correct" orders represented necessary internal adjustments made by the traders to various trades and were routed through JSC's back office to be approved by the compliance department and had nothing to do with the trades in question. Further, defendants argue that since the "cancel and correct" portions of the summary charts were derived from information inputted into the BRASS system,16the summary charts and expert testimony omitted information related to "cancel and correct" orders related "price improvement" and commission reductions, which orders, while targeted to reduce excessive commissions, were always implemented post-trade and therefore not reflected in the BRASS system. They also contend that the charts did not reflect that JSC maintained other trading accounts used to trade risk positions, thereby leaving the grand jury with the false impression that JSC's not held orders were riskless transactions. Defendants further assert that the summary charts, as well as the expert testimony, were erroneous in reflecting that JSC was only entitled to the "spread," or profit, if it took risk in a position, while failing to explain that a market maker may also be properly compensated by the spread if it stands ready to buy or sell a specified number of shares of given stocks
17. Defendants further contend that a substantial number of the trades included in the People's summary charts were unsolicited transactions, and that therefore the People's argument that the JSC brokers colluded with the traders to aggressively market these stocks with unwitting customers in order to earn additional undisclosed compensation is untrue.
Defendants argue that the summary charts (Exhs. 163-165) violate the voluminous writings standard, which defendants contend is analogous to Rule 1006 of the Federal Rules of Evidence.18Defendants argue that that standard is not met, in that the author of the charts and the sources of the information which they contained were unknown to the grand jury, and the sources were not shown to have been admissible for each entry or document.
The People respond that the summary charts were not misleading and assisted the grand jury by summarizing documents already in evidence. They argue that defendants' objections that the summary charts do not detail other aspects of what may have been happening in the market do not alter the fact that there were 5,022 trades identified as criminal. Further, the People assert that, while representing only 2.78 percent of the overall trades during the period in question, these trades, virtually all not held orders and solicited trades, represented about 6.62 percent of JSC's revenue during 2003-2005, making them 238 percent more profitable than other JSC trades during the same period. They contend that the summary charts reflect these facts and the undisclosed compensation derived from these trades in summary form, with line-by-line details of each trade and explanations of details, e.g., the bid/ask price of a stock at order time.
A review of the summary charts reveals that they reflect 23 separate points of information about each of the more than 5000 trades which are the subject of this indictment, including the date of the transaction, name of the stock, value of shares traded, brokers and customers involved in each trade, time of receipt of the order, time of execution of the trade, price per share reported to customers, actual price per share, the mark-up or mark-down, the amount of gross credit per trade and the amount of undisclosed compensation per trade. Clearly, the summary charts aided the grand jury in examining the contents of thousands of documents which could not conveniently be examined in court by assimilating such overwhelmingly large amounts of data, and were supported by explanatory testimony from individuals familiar with the documents in question and investigators who had reviewed them and used them to create the summary charts. In light of the testimony received, the charts were not misleading.
While Rule 1006 is not directly applicable to state trial or grand jury proceedings, the concerns raised by defendants that the summary charts violate the standard derived from the Rule, including that the charts be based on facts in evidence verified by the person who prepared them, and that they be verifiable by reference to the actual records in evidence, and that they be made available to all parties at a reasonable place and time, have been adequately addressed here. Each of the summary charts was authenticated by its maker, who testified to accurately preparing each such chart from documents which had been received in evidence by the grand jury, and which themselves had been properly authenticated.19 The documents thus summarized numbered in the thousands, and could not have been feasibly examined by the grand jurors. In addition, the information contained in the documents regarding the more than 5000 stock trades referenced in the documents would likely have been difficult for the grand jurors to comprehend without the use of the summary charts. Accordingly, the court finds that the summary charts were properly introduced as an aid to the grand jury in examining the contents of the voluminous writings presented before it as evidence, and that there was no impairment of the integrity of the grand jury proceedings or possibility of prejudice to defendants on this ground.
E. Motion to Dismiss for Legal Insufficiency
Defendants raise several arguments supporting their claim that the indictment should be dismissed on grounds of legal insufficiency. (CPL §210.20[b]).
Pursuant to CPL §210.20(1), the court may dismiss an "indictment or any count thereof" where, inter alia, "[t]he evidence before the grand jury was not legally sufficient to establish the offense charged or any lesser included offense" (CPL §210.20[b]). Legally sufficient evidence is defined as "competent evidence which, if accepted as true, would establish every element of an offense charged and the defendant's commission thereof...." (CPL §70.10). When conducting a legal sufficiency review, "[t]he reviewing court must consider whether the evidence, viewed most favorably to the People, if unexplained and uncontradicted-and deferring all questions as to the weight or quality of the evidence-would warrant conviction...." (People v. Swamp, 84 NY2d 725, 730 [citations omitted]; People v. Mack, 76 AD3d 877, 881 [1st Dept. 2010]). Evidence is legally sufficient if it establishes a prima facie case before the grand jury; proof beyond a reasonable doubt is not required. (See People v. Swamp, supra, 84 NY2d at 730). The possibility that alternative conclusions may be drawn from the facts presented is irrelevant, "as long as the [g]rand [j]ury could rationally have drawn the guilty inference." (People v. Deegan, 69 NY2d 976, 979 ).
With these standards in mind, the court will now address each of defendants' contentions of legal insufficiency in turn.
2. Enterprise Corruption Count
a. Criminal Enterprise
i. Parties' contentions
Defendants argue that the enterprise corruption count must be dismissed because the evidence before the grand jury was insufficient to prove the existence of a criminal enterprise with a continuity of existence, structure, and criminal purpose; that each of the defendants shared a common purpose in that enterprise, in that each of them was specifically aware of the different aspects of the charged criminal scheme; that each defendant was associated with the criminal enterprise; and that each defendant intentionally conducted or participated in the affairs of the criminal enterprise.
The People respond that the enterprise had a continuity of existence and an ascertainable structure beyond the individual criminal acts committed within the criminal enterprise and that it is not required that each defendant be aware of every aspect of the criminal scheme. They further contend that the grand jury heard sufficient evidence of defendants' various acts in furtherance of the criminal enterprise to satisfy this element of the enterprise corruption count.
ii. Legal standards
To the extent relevant here, Penal Law §460.20(1) defines enterprise corruption as follows:
A person is guilty of enterprise corruption when, having knowledge of the existence of a criminal enterprise and the nature of its activities, and being employed by or associated with such enterprise, he:
(a) intentionally conducts or participates in the affairs of an enterprise by participating in a pattern of criminal activity....
In order to prove a prima facie case of enterprise corruption, the prosecution must first establish the existence of a criminal enterprise. Penal Law §460.10(3) defines a "criminal enterprise" as a group of persons sharing a "common purpose" of engaging in criminal conduct, associated in an "ascertainable structure" distinct from a pattern of criminal activity, and with a "continuity of existence, structure and criminal purpose" beyond the scope of individual criminal incidents. Thus, a criminal enterprise consists of three elements: (1) a group of persons sharing a common purpose; (2) an ascertainable structure distinct from the pattern of criminal activity; and (3) a continuity of existence, structure and criminal purpose. The existence of a pattern of criminal activity does not necessarily establish a criminal enterprise. Rather, a criminal enterprise also requires that there be a "group of persons" whose "common purpose" is to engage in criminal conduct.
(A) Common purpose
The first element required to establish the existence of a criminal enterprise is that there be a "common purpose" shared by a group of actors. Thus, this court must initially determine whether there is legally sufficient evidence to establish that all defendants in this case shared a common criminal purpose.
Courts have found that a common purpose was established under circumstances where members of a criminal enterprise have jointly engaged in a corrupt scheme to utilize the corpus and resources of an established legitimate organization to engage in conduct resulting in an economic benefit for themselves. "Realizing an economic benefit qualifies as a 'common purpose' under the enterprise corruption statute." (People v. Pustilnik, 14 Misc3d 1237[A], 2007 WL 674116, 2007 N.Y. Slip Op. 50407[U] [Sup. Ct. New York County 2007], at *4). For example, in D.H. Blair, the court found that the common purpose was to use the legitimate enterprise of the D.H. Blair firm as a device for obtaining an economic benefit by defrauding members of the investing public under the guise of running a legitimate securities firm. (D.H. Blair, supra, 2002 WL 766119, at *8). In Meyers Pollock, the court found that the common purpose of the enterprise was to use the outwardly legitimate business structure of the corporate defendant to deceive its clients and serve as the vehicle by which the defendants stole money from unsuspecting investors by manipulating small cap securities. While not every defendant engaged in the same particular criminal act or acts, the grand jury evidence established that they were still a group of persons sharing the common purpose of engaging in larcenous and fraudulent securities transactions.
In this case, the evidence presented to the grand jury established prima facie that all of the individual defendants acted in furtherance of a common purpose similar to that found in D.H. Blair and Meyers Pollock, by using the legitimate corpus of JSC to create an economic benefit for themselves, and for the firm, by illegally maximizing profits, at the expense of their customers. This was accomplished by their engaging in criminal conduct in furtherance of that purpose, which included acts constituting securities fraud, grand larceny, criminal possession of stolen property and falsifying business records. Thus, in this case, the evidence is legally sufficient to satisfy the requirement that the criminal enterprise have a common purpose.
(B) Ascertainable structure
The second issue is whether the grand jury was presented with legally sufficient evidence to establish that an ascertainable structure distinct from a pattern of criminal activity existed at all relevant times. Defendants argue that a criminal enterprise is not properly alleged here, because the structure of the enterprise as alleged is indistinguishable from the legitimate corporate structure of JSC and is, therefore, not ascertainable. They further contend that in order to establish that the enterprise has an ascertainable structure, the People were required to provide evidence to the grand jury that the legitimate corporate structure of JSC was infiltrated or taken over by outside criminal forces, which transformed JSC into a criminal enterprise.
For a criminal enterprise to have a distinct ascertainable structure, it is neither required that there be an organization that is functionally independent of the criminal activity, nor that the criminal enterprise have a structure distinct from a legitimate enterprise. (See Marcus, "Enterprise Corruption-Article 460, [Greenberg, ed., West 2010][Marcus 2010] §36.3, at n.24). As explained in the Governor's Memorandum on the bill:
[T]he definition of criminal enterprise in this bill does not require that the structure of a criminal enterprise be distinct from that of a legitimate one.... [G]roups that have both legitimate and illegitimate purposes...can constitute criminal enterprises.... [The bill] permits the hierarchy of and positions within a legitimate enterprise...to contribute to the structure of a criminal group existing and operating within that legitimate enterprise.
(Bill Jacket, L.1986, ch. 516, Governor's Memorandum on Assembly Bill 11726, July 24, 1986 [Governor's Memo], at
What is significant is that the structure of the enterprise be distinct from the pattern of criminal activity, and that it "extend beyond the common plan or scheme encompassing the criminal acts." (People v. Besser, 92 NY2d 136, 143 ). If the enterprise exhibits a "system of authority beyond what is minimally necessary to effectuate individual substantive criminal offenses," it may be deemed sufficient to establish a sufficiently ascertainable structure. (People v. Wakefield Fin. Corp., supra, 155 Misc2d at 785). These views are consistent with the legislative intent of OCCA, which focuses on the conduct of organized criminal activity rather than on the appearance of an organization committing the criminal activity. (People v. Forson, NYLJ, May 12, 1994, at 29 [Sup. Ct. NY County 1994]).
An ascertainable structure requires something more than a "mere ad hoc association." (People v. Wakefield Fin. Corp., supra, 155 Misc2d at 785). It must be clear that the alleged criminal enterprise neither came into existence for the purpose of committing one or more of the criminal acts alleged, nor did its existence depend upon commission of any particular criminal act or acts. (Id.). Crimes committed by individuals who engage in a brief series of criminal acts in an ad hoc and unstructured group are not subject to prosecution under OCCA. (See Marcus 2010 §36.3 [two or more people acting in concert to commit several crimes does not, without more, establish a structure distinct from a pattern of criminal activity]). If, however, the group demonstrates a structure or a specialization, the requirement is satisfied. (W.C. Donnino, Practice Commentaries, McKinney's Cons. Laws of NY, Book 39, Penal L. §460.20 , at 175 regulatory review. (Id., Slip Op. at 6-7). [citing Governor's Memo]).
Moreover, the enterprise corruption statute is not so limited as to encompass only an organization which is consumed by criminal activities. The criminal enterprise may have legal activity as well as illegal activity, and still fall under the coverage of the statute, which only requires that the organization be taken over by individuals who use it as a vehicle for commission of illegal activity which could not have been otherwise committed without the organization's legitimate corpus. (People v. Western Express International, Inc.,-AD3d -,-NYS2d -, 2011 WL 1467217, 2011 NY Slip Op. 03136 [1st Dept. Apr. 19, 2011]; D.H. Blair, supra, 2002 WL 766119, at *10; Marcus 2010 §36.3).
In a very recent decision, a divided panel of the Appellate Division, First Department reversed a lower court's dismissal of enterprise corruption charges, finding an ascertainable structure to have existed where individuals employed cyber-crime techniques to use the facilities of a check cashing and digital currency exchange firm to facilitate money laundering and the buying and selling of stolen credit card information. In Western Express, supra, the court reviewed the case law applying OCCA's ascertainable structure requirement and concluded that a criminal enterprise had been created, using the structure of the legitimate firm to transform its originally legitimate operations of the financial services firm's website into a hub for criminal activity, albeit comprising only five percent of the firm's business, using the company's structure as a framework to attract others to join in the participants' criminal transactions and to shield the criminal conduct from regulatory review. (Id., Slip Op. at 6-7). The dissent, on the other hand, citing the same cases, opined that the lack in the scheme of any organizational structure, hierarchy of personnel, system of authority, collective decision making, coordination of activities and profit sharing mechanism evinced the absence of any ascertainable structure, and observed pointedly that the criminal transactions persisted, even after the company ceased its operations, through the arm's-length transactions between individual defendants acting independently for their individual benefit. (Id., at 8-9, 11).
The instant case presents a far more readily identifiable criminal enterprise structure than that in Western Express. Here, the evidence presented to the grand jury supports the conclusion that the criminal enterprise operated within JSC's legitimate corpus, availing itself of JSC's corporate form, its support staff members, its regulatory status, its office locations and its clearinghouse relationship. The principals recruited employees to join the firm because of their willingness to participate in the scheme transactions. Meetings were held at which the principals announced the schemes, and the traders and brokers communicated and carefully coordinated their own actions, as well as that of the support staff, to ensure that they would be carried out at a time and in a manner designed to ensure their success. Directions were given by traders to brokers as to when to obtain orders and execute trades. Profits were taken by the firm and principals, who shared them with the trader and broker defendants according to formulas negotiated by traders with brokers, and which were subject to approval by the principals. At JSC, none of the alleged criminal transactions were committed by individual defendants independently of the organization, and none of the criminal activity continued after the demise of the firm.
Rather, the participants in the criminal enterprise were organized based upon their hierarchical positions within the corporate structure and their locations with the headquarters on Maiden Lane or in the branch offices. Utilizing the resources of JSC, the members of the criminal enterprise each played a role within the structure of that enterprise in the overall scheme. The evidence supports the conclusion that JSC principals Sorbara and Markowitz were the managers of the criminal enterprise, supervising the trades specified in the indictment and settling disputes concerning the undisclosed compensation those trades generated. Defendants Shapiro, Moraitis and Martinucci were the traders who informed brokers which scheme stocks would be manipulated, and when such action would occur. Their role was to manipulate scheme stocks and to execute customer orders in such a manner as to maximize the profits to be shared by members of the criminal enterprise, without regard to the customers' well-being. Defendants Orthos, Ferraro, Raspa, Tierney, Micciola, Scarcella, Tripodi, Rathgeber, Menies, Mucovic and Costabile were brokers, whose role was to coordinate with the traders in selling and buying scheme stocks by giving advance commitments as to the number of shares their customers would purchase and, without their clients' knowledge or consent, delaying entry and execution of customer orders pending the successful manipulation of the prices of the scheme stocks, and then, on direction from the traders, executing those orders at prices unfavorable to the customers to generate unlawful profits to be shared by the members of the criminal enterprise. Thus, the evidence clearly identified who the members of the criminal enterprise are and what their roles were in the hierarchy of that enterprise, the unlawful purpose of which could not have been achieved on a continuing basis in the absence of such a hierarchical structure within the legitimate corpus of JSC. In this case, clearly, there was "a system of authority beyond what is minimally necessary to effectuate individual substantive criminal offenses," (People v. Wakefield Fin. Corp., supra, 155 Misc2d at 785), and defendants could not have committed their crimes independently of the structure of the corrupt enterprise.
Defendants also argue that, in this case, the People were required to present legally sufficient evidence of an ascertainable structure consisting of outside criminal forces that infiltrated the legitimate corpus of JSC and transformed it into a criminal enterprise. Here, the People presented evidence which established, prima facie, that the principal defendants, Sorbara and Markowitz, hired brokers and traders willing to take part in the fraudulent activities of the enterprise, who in turn corrupted the legitimate enterprise for which they worked and used its hierarchy as a parallel structure for the ongoing pursuit of criminal activity in which they participated. The evidence further shows that the enterprise continued to maintain its structure, notwithstanding changes in participants in the enterprise over time.
Accordingly, the evidence sufficiently established that the criminal enterprise had, at all relevant times, an ascertainable structure distinct from its pattern of criminal activity.
(C) Continuity of existence, structure and criminal purpose
The third component of a criminal enterprise is that it have a continuity of existence, structure and criminal purpose beyond the scope of individual criminal incidents.
The enterprise must continue in existence beyond the time required to commit any individual criminal incident, and must be distinct from any ad hoc association entered into for the purpose of carrying out one or more of the criminal incidents relied upon to establish its existence. (People v. Cantarella, supra, 160 Misc2d at 20; Bill Jacket, L.1986, ch. 516, Letter from Hon. Melvin H. Miller, Chairman, Committee on Codes, to Hon. Evan A. Davis, Counsel to the Governor, July 16, 1986, at 2). Thus, the third issue to be determined is whether there is legally sufficient evidence to establish that the criminal enterprise's purpose is larger in scope than any one particular transaction and whether it is dependent on the continuation of any one transaction.
In the instant case, evidence was presented from which the grand jury could have reasonably found that, from the period from on or about January 2001 through to on or about December 2005, defendants organized into groups, primarily based on their branch locations and positions within the corporate structure, to participate in a pattern of criminal activity which included securities fraud, grand larceny, criminal possession of stolen property and falsifying business records in order to carry out fraudulent schemes which enabled them to artificially raise, maintain, and manipulate the prices of certain securities. The alleged criminal enterprise is not alleged to have depended on the participation on any key individual defendant, but to have utilized the hierarchy of JSC to operate as a result of the participation and contribution of each group member, notwithstanding the entry and departure of different members to the group over time.
In sum, this court finds that the evidence is sufficient to establish a prima facie case that a criminal enterprise existed at all relevant times.
b. The Pattern of Criminal Activity and Defendants' Participation in It
Once the existence of a criminal enterprise is established, the evidence must demonstrate the existence of a pattern of criminal activity (PL §460.10) and that each defendant, having knowledge of the existence of the criminal enterprise and the nature of its activities, engaged in the affairs of the enterprise by participating in that pattern (PL §460.20). Defendants challenge the sufficiency of the proof before the grand jury both as to the existence of a pattern and also as to their participation in it.
i. Pattern of criminal activity
Defendants reprise their argument made with respect to the form of the indictment (see section II.C.4, supra) that while a single criminal transaction can serve as the basis for multiple counts of an indictment, it cannot serve as the basis for multiple pattern acts within the enterprise corruption count. They contend that regardless of the extent to which the CPL §40.10(2)(b) "single criminal venture" standard is incorporated into the definition of "criminal transaction" contained in PL §460.10(4)(b), the evidence before the grand jury fell short of bringing them within its terms. The People maintain that the evidence demonstrates the commission by each defendant of multiple crimes associated with the manipulation of multiple scheme stocks, including grand larceny, securities fraud and falsifying business records, thereby establishing many more than the requisite three criminal acts for each defendant.
With respect to the existence of a pattern of criminal activity, this court has reviewed the indictment and the evidence before the grand jury and finds that the first requirement, that the evidence establish three or more criminal acts which were committed within ten years of the commencement of the criminal action, is satisfied. (PL §460.10[a]). All 138 criminal acts charged in the indictment werecommitted within ten years of the filing of the indictment on May 19, 2009.
More complicated, however, is the court's examination of the second requirement for a finding of a pattern (PL §460.10[b]), respecting the relation of the criminal acts to one another. This determination requires the court first to address the meaning of "criminal transaction" as employed in PL §460.10(4)(b). The controversy, acknowledged by both sides here (see note 11, supra), involves that provision's reference to CPL §40.10 for the definition of "criminal offense" and "criminal transaction," and specifically whether subsection (b) of section 40.10(2) is properly to be deemed incorporated by reference into the definition of "criminal transaction" found in PL §460.10(4)(b).
This court agrees with those courts which have held that OCCA incorporates the terms of CPL §40.10(2)(a) to define the term "criminal transaction" but does not include the "criminal venture" language of CPL §40.10(2)(b) in PL §460.10(4)(b), not only because the language of the latter statute expressly incorporates virtually the same language as subsection 2(a) without including any language similar to that of subsection 2(b), but also because the contrary view would undermine the very purposes of the enterprise corruption statute and eviscerate it as an effective law enforcement tool. (See D.H. Blair, supra, 2002 WL 766119, at *13 [quoting Marcus, New York Criminal Law (Richard A. Greenberg, ed., West 1996), at 877 n.57 (if "criminal venture" language were incorporated, "crimes committed as part of a common scheme or plan,...would count only as one 'criminal act', and thus could never be sufficient to constitute a pattern [and the] Legislature's intent to permit patterns to include crimes committed pursuant to a common scheme or plan would be negated_)]; People v. Giordano, NYLJ, December 7, 1992, at 28 [Sup. Ct. NY County 1992] [to hold otherwise would mean that "no OCCA charge would ever be feasible"]; People v. Gambino, NYLJ, May 1, 1991, at 23 [Sup. Ct. NY County 1991][_To construe the statute otherwise would be to prevent the prosecution of the exact type of criminal activity the statute was designed to thwart_]; see People v. Conigliaro, 290 AD2d 87, 90 [2d Dept. 2002][rejecting defense argument that "all criminal acts perpetrated by (a criminal) enterprise...constitute integral parts of a single criminal venture"]). Additionally, a reading of the statute which incorporated CPL §40.10(2)(b) would introduce ambiguity into an otherwise clearly written statute, which expressly directs that its "definitions should be given their plain meaning, and should not be construed either liberally or strictly, but in the context of the legislative purposes set forth in (the statute)." (PL §460.00).
Applying that interpretation of the pattern of criminal activity definition in PL §460.10(4)(b) to the instant case, it is clear that the evidence before the grand jury amply supported the view that the alleged criminal acts, which were executed according to the formulaic procedures established by defendants and took place over a period of several years, involving numerous clients and various securities, were "neither isolated incidents nor so closely related and connected in point of time or circumstance of commission as to constitute a criminal offense or criminal transaction" (PL §460.10[b]) as those terms are defined in CPL §40.10(2)(a), that is, as to constitute "a single criminal incident." Accordingly, under the interpretation of the statute finding greatest favor in the case law and treatises, the evidence here was shown to involve a pattern of criminal activity. As an alternative ground for upholding the enterprise corruption count before it, the D.H. Blair court observed that the large number of separate criminal transactions supported by legally sufficient evidence in that case sufficiently established a "pattern of criminal activity," even were section 2(b) of CPL §40.10 properly read into the pattern of criminal activity definition. (D.H. Blair, supra, at *13 [citing People v. Conigliaro, supra]). Similarly, in the instant case, the enterprise corruption count alleges some 138 pattern acts (more than 120 of which remain viable after the dismissals ordered in this decision), involving approximately 5000 stock trades occurring over a five-year period, affecting more than two dozen testifying customers and utilizing nineteen separate fraudulent schemes, each involving a different security. On the record presented, therefore, even were this court to read section 40.10(2)(b) into the statutory definition of PL §460.10(4)(b), the requirements of the statute would have been adequately established, since the numerosity and diversity of the securities trades and victims would take them outside of the confines of being integral parts of a single criminal venture. (See People v. Conigliaro, supra, 290 AD2d at 92; D.H. Blair, supra, at *13).22
Finally, the criminal acts comprising the enterprise corruption count are related to one another through a common scheme and plan to use the criminal enterprise to promote securities transactions which would maximize profits for the defendants without regard to the duties owing to, or interests of, their customers, satisfying the final requirement of the definition, and establishing the existence of a pattern of criminal activity. (PL §460.10[c][i]).
ii. Participation in the pattern
Defendants further argue that the evidence before the grand jury of the participation by each defendant in the pattern of criminal activity (PL §460.20) was insufficient, because it failed to establish that every defendant participated in and was aware of every pattern act alleged in the enterprise corruption count. The People answer that while each defendant did not participate in every criminal act comprising the pattern of criminal activity, they have sufficiently met their burden by demonstrating that each defendant knew that he could participate in the scheme and benefit by illegally taking a portion of JSC's customers' money.
A person participates in a pattern of criminal activity when, with intent to advance the affairs of the criminal enterprise, he commits, or is an accomplice to committing, at least three of the criminal acts in the pattern. (PL §460.20). As to those three acts, two must be felonies other than conspiracy; two of the acts, one of which is a felony, must have occurred within five years of the commencement of the criminal action; and each of the acts must have occurred within three years of a prior act. (PL §460.20[a],[b],[c]).
With respect to the issue of individual participation, this court has carefully reviewed the criminal acts charged in the indictment23 as to each defendant and concludes that the evidence before the grand jury, viewed in the light most favorable to the People, establishes a prima facie case that each defendant, intending to participate in the schemes of the criminal enterprise, engaged in a pattern of criminal activity by committing, as a principal or as an accomplice, at least three of the criminal acts comprising the pattern (without regard to criminal acts which have been dismissed as to that defendant) (CPL §460.20), all of which were felonies other than conspiracy (PL §460.20[a]), two of which occurred within five years of the commencement of the action (PL §460.20[b]) and each of which occurred within three years of a prior act (PL §460.20[c]. Thus, each defendant's conduct met the standards of PL §460.20(2).
With respect to the defendants' claims that the People failed to establish each defendant's participation in and awareness of every pattern act alleged, the Meyers Pollock case, which has striking similarities to this one, is instructive. There, the court addressed this issue in its examination of a count of enterprise corruption involving a pattern of criminal activity on the part of twenty individuals who were employed by the defendant investment firm. In Meyers Pollock, the court determined that a particular defendant's lack of knowledge of the exact parameters of the extremely expensive scheme there at issue would not defeat a finding of participation, because the nature of the scheme (manipulation of highly speculative securities for which there was no true market) was such that a defendant's knowledge of the larger scheme to defraud could be inferred. (See also People v. Besser, supra, 96 NY2d at 145 [rejecting argument that "the United States, 328 US 640, 647 ), *64 People were required to offer evidence connecting defendants to each pattern act" to meet standard of sufficiency of accomplice liability evidence under CPL §60.22]).
Here, too, evidence before the grand jury revealed that defendant traders and brokers were informed of the schemes at meetings with the principals, and that this was well known throughout the firm's Manhattan office and among the participating brokers and traders in its branch offices. The procedures for the schemes were in place and were triggered on instruction from the principals and or the trader defendants, following which the broker defendants took the numerous steps necessary to fulfill their roles in the scheme, fully aware of the steps to complete the process which would be taken in the Manhattan headquarters office where the trades were processed and recorded, and profits were calculated and distributed. All participants acted in conformity with their position in the hierarchy of the criminal enterprise, and the conduct proven could not have occurred without the defendants' knowledge of the larger criminal venture being run by the criminal enterprise.
Accordingly, the court finds that the evidence before the grand jury, viewed in the light most favorable to the People, warrants the conclusion that each of the defendants participated in the pattern of criminal activity. (PL §460.20).
c. Evidence as to the Principals
Defendants argue that the liability of the JSC principals, defendants Sorbara and Markowitz, cannot be based upon a Pinkerton theory (Pinkerton v. United States, 328 US 640, 647 ), namely, that a co-conspirator may be held liable for offenses committed by another co-conspirator if those offenses are within the scope of the conspiracy, are in furtherance of it, and are reasonably foreseeable as a necessary or natural consequence of the conspiracy. Defendants further argue that it is inconceivable that the evidence before the grand jury established that defendants Sorbara and Markowitz actively participated in the manipulation of every stock in the indictment or in every transaction.
The People's theory of the case as to the liability of defendants Sorbara and Markowitz is not based on Pinkerton or any other conspiracy theory, however. Rather, the evidence presented to the grand jury showed that Sorbara and Markowitz, as principals of JSC, guided the overall scheme. They hired brokers and traders who would willingly participate in the schemes, decided which stocks would be involved, authorized and announced the scheme stock transactions and knew when they would take place. They also approved the transactions, resolved conflicts as to distribution of compensation from them, misrepresented their nature to regulators so as to protect them from detection and congratulated the brokers on their successful completion of them. When viewed in the light most favorable to the People, the evidence established a prima facie case from which the grand jury could rationally conclude that defendants Sorbara and Markowitz intentionally conducted or participated in the affairs of the criminal enterprise by soliciting, requesting, importuning or intentionally aiding and abetting other defendants in each and every criminal act within the alleged pattern of criminal activity. Accordingly, defendants' argument that the enterprise corruption count must be dismissed under Pinkerton as to defendants Sorbara and Markowitz fails, and their motion to dismiss for legal insufficiency on this ground is denied.
d. Evidence as to the Corporate Defendant
Defendants cite Cedric Kushner Promotions v. King Ltd., 533 US 158 (2001), for the proposition that a charged RICO enterprise cannot also be a RICO defendant, and urge that the same rationale pertains under New York's enterprise corruption law. The People respond that corporate entities have been recognized under OCCA as both the corrupted enterprise and a defendant, citing People v. A.S. Goldmen, 9 AD3d 283, 285 (1st Dept.), lv. denied, 3 NY3d 703 (2004).
Although New York appellate courts have yet to address the issue squarely, it seems clear from review of the existing enterprise corruption decisions that legitimate corporate entities have both lent their corporate form, hierarchy and operations to criminal enterprises which flourished within their corporate structure, and at the same time been prosecuted as one of the group of persons constituting the "criminal enterprise" for purposes of PL §460.10(3). (See, e.g., People v. Western Express, supra [corporate defendant convicted of enterprise corruption]; People v. A.S. Goldmen, supra [same]; People v. D.H. Blair, supra, 2002 WL 766119 at *2 [corporate defendant was also the legitimate corporate enterprise used "as a 'device for defrauding members of the investing public under the guise of running a legitimate securities firm,'" quoting People v. Forson, supra, at 29]; People v. Wakefield Financial Corp., supra, 155 Misc2d at 777 [corporate defendant among three securities firms and fifteen individuals found to have acted as a single criminal enterprise]).
The enterprise corruption statute does not define "person" as that term is used in the definition of "criminal enterprise" in section 460.10(3). Nonetheless, the statute must be read in light of other provisions of the Penal Law, as well as in the context of OCCA's own legislative history. There can be no doubt that a corporation may be guilty of an offense when, inter alia, "[t]he conduct constituting the offense is engaged in, authorized, solicited, requested, commanded, or recklessly tolerated" by an employee or officer of the corporation charged with the formulation of corporate policy or managerial supervision of subordinate employees. (PL §20.20,). The grand jury heard evidence to that effect and was instructed in accordance with this provision. Further, the Penal Law defines a "person" to include "where appropriate, a public or private corporation, an unincorporated association, a partnership...." (PL §10.00; see also People v. Newspaper and Mail Deliverers' Union of New York and Vicinity, 250 AD2d 207, 211 [1st Dept. 1998][relying on section 10.00(7) to construe enterprise corruption statute's class of "persons" subject to liability to include a labor union which was an unincorporated association]).
With respect to the legislative history, the Legislature's findings upon enactment of the New York's OCCA statute stated:
The money and power derived by organized crime through its illegal enterprises and endeavors is increasingly being used to infiltrate and corrupt businesses, unions and other legitimate enterprises.... Through such infiltration the power of an enterprise can be diverted to criminal ends.... Thus,...the concept of criminal enterprise should not be limited to traditional criminal syndicates or crime families, and may include persons who join together in a criminal enterprise...for the purpose of corrupting such legitimate enterprises....
(PL §460.00). In Newspaper and Mail Deliverers' Union, supra, 250 AD2d at 213-14, the First Department relied on the legislative goals of OCCA in concluding that the term "persons" should not be given an unduly restrictive meaning, particularly where the entity's structure and instrumentalities were the means by which all crimes alleged were carried out and the acts and intents of the individual defendants were the acts and intents of the entity, as well. There, as here, the entity within which the enterprise operated was also charged as a criminal defendant.
Cedric Kushner Promotions v. King Ltd., supra, is distinguishable, as it relates to whether a corporate entity may be named as a defendant in a civil RICO action. This court must follow the provisions and legislative history of the applicable New York statutory and case law as set forth above.
Accordingly, this court finds no basis to dismiss the enterprise corruption count as to the corporate defendant, JSC.
For all of these reasons, the defendants' motions to dismiss the count of enterprise corruption for legal insufficiency is denied.24
3. Grand Larceny Counts
The People's theory is that each grand larceny count reflects the theft over time of the aggregate gross credit taken from a particular JSC customer in multiple transactions involving multiple securities. Defendants contend that the grand larceny criminal acts and counts must be dismissed, because a failure to disclose compensation is not a proper basis for a larceny offense, absent a duty to disclose. Defendants maintain that they had no duty to disclose the incentive compensation they received on the trades in question, both by virtue of Rule 10b-10 and because they had no discretion with respect to the execution of those trades.
Defendants further assert that to the extent that the grand larceny counts are based upon a theory of larceny by false pretenses, the charges require the making of a material false statement and cannot be based upon either an omission or a failure to disclose information, absent the existence of an affirmative duty which was breached by defendants, and that the evidence was insufficient to establish any such material false statement or affirmative duty breach in the course of the charged transactions.
Defendants aver that the total alleged illegitimate commissions received by them during the relevant period amounted to less than two percent of the firm's trades, and thus does not constitute information which is "clearly significant and must be disclosed accurately." (Szur [2d Cir.], at 211). Finally, defendants urge that allowing prosecution of the grand larceny counts on a larceny by false pretenses theory premised on defendants' alleged material omissions would render both the Martin Act and scheme to defraud statutes superfluous.
The People respond that those transactions involving "not held" orders gave price and timing discretion to the broker defendants. Because the brokers had such discretion, the People argue, they had a duty to disclose the incentive payments they were receiving at the expense of their clients. They contend that in any event the existence of such duty is not essential to establish the grand larceny counts.
The evidence as to the grand larceny counts supports the People's theory of a continuing theft from the particular individual client, based upon amounts the defendants charged the client as gross credits on the various scheme stock transactions in which that client was involved, over the period of time the client was a customer of JSC. As is permissible under established case law, the amounts wrongfully taken or appropriated from the client pursuant to a single intent and in execution of a common fraudulent scheme over the series of transactions have been aggregated and charged as a single larceny from that client. (People v. Buckley, 75 NY2d 843, 846 ; People v. Rossi, 5 NY2d 396, 401 ). The amount allegedly stolen with respect to each grand larceny count is the total of the gross credits received by defendants for trades handled for that particular customer.
The Penal Law permits conviction for larceny as broadly defined upon pleading and proof, regardless of which theory of larceny applies, and the People need not reveal which theory of larceny applies unless the larceny is from the person or by extortion, neither of which applies here. (People v. Ponnapula, 229 AD2d 257, 273 [1st Dept. 1997], lv. denied, 94 NY2d 951 ). The evidence presented to the grand jury, viewed in the light most favorable to the People, was sufficient to allow the grand jury to charge defendants with each of the grand larceny counts on theories of by trepassory taking, embezzlement, trick, false pretense or false promise. Further, the grand jury was properly instructed as to each of these theories.
As the grand jury could reasonably have reached its conclusions based upon a theory other than larceny by false pretenses, there is no reason for this court to reach the question of whether an omission, or failure to disclose, could support such a charge. In any case, evidence was presented from which the grand jury could have found that under the circumstances, the broker defendants had a duty to disclose information which would have been material to the client's decision to enter into the transaction and breached that duty. Moreover, the discretion employed by the brokers on the not held orders, and their exercise of de facto control and dominance in the trading relationship with the client (Szur [2d Cir.], 289 F3d at 210; United States v. Chestman, 947 F2d 551, 569 (2d Cir. 1991), cert. denied, 503 US 1004 ), provided support for a finding of a fiduciary relationship between the broker defendants and their clients.
The grand jury also heard evidence that defendants failed to disclose the true facts concerning the relevant research as to the scheme stocks; their market stability and suitability for the investors to whom their purchase was being recommended; the false entries defendants were making in the clients' records with the firm to conceal the unsuitability of the investments for the clients; the true prices at which the stocks were trading at the time defendants received the customers' orders and could have executed the trades; and the fact that artificial delays in the executions of trades were effected solely to enable defendants to realize greater profits and commissions from the trades by driving up the prices of the stocks before putting in customers' orders for execution, while the clients paid correspondingly excessive premiums for the transactions. The fact that the trade confirmation report sent to the client was characterized as reflecting the broker's commission on the trade, when, in fact, it understated it, could have been determined, on the facts presented here, to have constituted an affirmative misstatement as to that compensation.
Notwithstanding defendants' claims that industry custom and regulation did not impose any duty on them to disclose all aspects of their compensation to their clients, and that the practice here was akin to the well-established practice of non-disclosure of remuneration for order flow payments authorized by Rule 10b-10 (17 CFR §240.10b-10), the evidence before the grand jury amply justified the conclusion of a substantial likelihood that disclosure of the withheld information would have been viewed as material by an objective reasonable investor in the victim's position when deciding to follow her broker's recommendation to engage in a trade in the particular scheme stock. Thus, a duty of disclosure on the part of the broker defendants was established by the evidence, along with a basis for a finding of false pretense by omission.
The fact that the trades in question involved less than two percent of the firm's business does not render the transactions immaterial. (See Western Express, supra [alleged criminal transactions constituted no more than five percent of company's transactions]). Indeed, the undisclosed amounts allegedly stolen from each of the clients were in the thousands of dollars, and, according to their testimony before the grand jury, were material to them.
Finally, prosecution of grand larceny by false pretenses on the evidence presented here does not render the Martin Act charges superfluous. As eloquently stated by Justice Fried in D.H. Blair, in pertinent part:
There are significant differences between these statutes. The felony thresholds are different: larceny requires an amount in excess of $1000, while the securities fraud statute specifies $250.... Furthermore, a false pretenses larceny involving an affirmative misrepresentation requires reliance, which is not required in a fraud case. Finally, among the differences between the statutes [is the fact that]...the Martin Act imposes liability on a corporation for acts of its employees even if they are not "high managerial agents"....
(D.H. Blair, supra, 2002 NY Slip Op. 50152(U), at 50-51).
Accordingly, upon review of the evidence presented to the grand jury in the light most favorable to the People, the court finds legally sufficient evidence to support each of the criminal acts and counts charging grand larceny in the second degree and grand larceny in the third degree.***25
For the foregoing reasons, it is now hereby
ORDERED, that the motion to inspect the grand jury minutes is granted; and it is further
ORDERED, that the motions for release of the grand jury minutes to defendants for their inspection are denied; and it is further
ORDERED, that upon this court's examination of the grand jury minutes and the evidence presented before the grand jury, the following Criminal Acts and Counts are dismissed as to all defendants:
(A)Criminal Acts 58, 59, 113, 114 and 115, each charging falsifying business records in the first degree (PL §175.10), due to a defect in the grand jury proceedings on quorum grounds, pursuant to CPL §§190.25(1), 210.20(1)(c) and 210.35(3); and
(B) Criminal Act 14 and Count 12, both charging securities fraud under the Martin Act (GBL §352-c), on grounds of legal insufficiency, pursuant to CPL §210.20(1)(b); and
(C) Counts 59, 62, 65, 72, 87 and 88, each charging falsifying business records in the first degree (PL §175.10), on grounds of lack of geographic jurisdiction pursuant to CPL §20.40(1); and it is further
ORDERED, that the following criminal acts and counts, each charging securities fraud under the Martin Act (GBL §352-c), are dismissed on the ground of legal insufficiency pursuant to CPL §210.20(1)(b), as to the following defendants:
(A) as to defendant Craig Shapiro, Criminal Acts 71, 86 and 93, and Counts 56, 61, 67 and 82; and
(B) as to defendant John Moraitis, Criminal Acts 97, 124, 133 and 135, and Counts 52, 69 and 84; and
(C) as to defendant Massimo Martinucci, Criminal Act 131 and Counts 48, 82 and 90; and it is further
ORDERED, that the motion of defendant Orthos to dismiss the indictment as defective for lack of specificity as to date of the crime pursuant to CPL §200.50(6) is denied; and it is further
ORDERED, that defendants' joint motion for dismissal of the enterprise corruption count in the interest of justice pursuant to CPL §210.40(2) and the motion of defendant Michael Tripodi for dismissal of the indictment in the interest of justice pursuant to CPL §§210.40(1)and 210.40(2) are both denied; and it is further
ORDERED, that the motion of defendant John Micciola pursuant to CPL §710.30(3) to preclude introduction at trial of statement and identification evidence is granted, and should the People seek to use any statement made by the defendant to impeach his credibility, should he testify at trial, a voluntariness hearing pursuant will be held no less than two weeks prior to trial; and it is further
ORDERED, that hearings on the Sandoval (People v. Sandoval, 34 NY2d 371 ) and CPL §240.43 motions of defendants Tripodi, Micciola, Rathgeber, Shapiro and Raspa will be held no later than two weeks prior to trial; and it is further
ORDERED, that with respect to the motions of defendants Micciola and Rathgeber for disclosure and preclusion of Molineux (People v. Molineux, 168 NY 264 ) evidence or, alternatively, for a hearing pursuant to People v. Ventimiglia, 52 NY2d 350 (1981), those motions are granted to the extent that any such applications contemplated by the People should be served on defendants and submitted to the court in writing not less than 30 days before trial, with any hearings to be held not less than two weeks before trial.
Decision on the motion to controvert the search warrants has been reserved.
In all other respects, defendants' motions to dismiss and for other relief have been considered and are denied.
The foregoing constitutes the decision and order of the court.
1. Defendants' joint motion has been designated "D2" by the court in accordance with the court's previous pretrial order. In addition, certain individual defendants have filed motions on their own behalf seeking dismiss of the indictment and other relief. Their motions have been designated as follows: Peter Orthos (DPO1), James Rathgeber (DJR1), John Micciola (DJM1), Craig Shapiro (DCS1) and Michael Tripodi (DMT1). This decision and order will address the issues raised in all six motions with the exception of defendants' joint motion to controvert the search warrants, which will be addressed in a separate decision and order.
2. Defendant Charles Raspa, by his newly appearing counsel, has also moved for such relief.
3. Upon the election of District Attorney Cyrus Vance, Jr. in November 2009, defendants informally raised the possibility of a conflict due to his brief representation of defendants Sorbara, Markowitz and JSC in 2005 in connection with the DANY search warrant executions. Thereafter, on January 10, 2010, defendants moved to disqualify Vance and the People moved for appointment of a special district attorney pursuant to County Law §701. After discussion with the Office of the Chief Administrative Judge, this court referred both motions to the Chief Administrative Judge, who assigned them to the Deputy Chief Administrative Judge for decision. On March 18, 2010, the Deputy Chief Administrative Judge issued an order appointing the Attorney General as a special district attorney in this case and cross-designating four assistant district attorneys as special assistant attorneys general (SAAGs). After defendants filed and served an Article 78 petition seeking to prohibit the Deputy Chief Administrative Judge's appointment of the Attorney General as a special district attorney and the four assistant district attorneys as SAAGs, the DANY sought and obtained from Governor David A. Paterson a letter appointing the Attorney General as a special prosecutor in this case pursuant to Executive Law §63(2). Abandoning their pursuit of Article 78 relief, defendants then moved, on May 20, 2010, before this court to disqualify the DANY staff, the Attorney General and the Office of the Attorney General (OAG) from prosecution of this case. On September 16, 2010, this court, in a written decision (D-4), held that defendants had not shown that appointment of members of the DANY staff as SAAGs had created "actual prejudice arising from a demonstrated conflict of interest...." (People v. English, 88 NY2d 30, 34 ), or that the OAG had been tainted as the result of improper conduct by the DANY staff and, for those reasons, denied the motion.
4. Section II.B is omitted for purposes of publication.
5. Defendants have not challenged this court's jurisdiction over the enterprise corruption count, which is governed by its own jurisdictional statute, (PL §460.40 [enterprise corruption may be prosecuted "in any county in which the principal place of business...of the enter-prise was located at the time of the offense...."]), apparently because JSC's principal office was located in Manhattan. With respect to the out-of-county criminal acts set forth in that count, it bears noting that PL §460.40(1) includes no requirement that the pattern acts comprising the enterprise corruption count must have been committed in the county in which that count is being prosecuted, as the offense in question is the count of enterprise corruption. (People v. Meyers Pollock Robbins, Inc., NYLJ, Apr. 5, 2001 at 20 [Sup. Ct. NY County 2001][Fried, J.][Meyers Pollock]; see CPL §200.40[d][iii] [permitting joinder of pattern acts which would not be "prosecutable, when standing alone, by reason of...lack of geographical jurisdiction.").
6. "Order flow payments" are a form of compensation paid to registered securities representatives for routing their customers' orders for execution to particular wholesale dealers or other market makers in the subject securities. (Guice v. Charles Schwab & Co., 89 NY2d 31, 37 , cert. denied, 520 US 118 ).
7. Section 28(a) of the SEA provides that the SEA's rights and remedies are "in addition to any and all other rights and remedies that may exist at law or in equity," and that the SEA does not "affect the jurisdiction of [state securities regulatory bodies] over any security or any person insofar as it does not conflict with the provisions of this title or the rules and regulations thereunder." (15 USC §78bb[a]).
8. For this same reason, other cases cited by defendants in which state common law claims challenging the receipt of order flow payments by a broker-dealer were dismissed on preemption grounds are distinguishable, both from Schulman and from the instant case. (See, e.g., McKey v. Charles Schwab & Co., Inc., 67 CalApp4th 731 [CalApp2Dist. 1998][citing Guice, court found state law claims challenging order flow payments could undermine federal regulation of such payments]).
9. The defendants in Szur (SDNY) were convicted after a trial by jury. Their convictions were affirmed in United States v. Szur, 289 F3d 200 (2d Cir. 2002)[Szur (2d Cir.)]
10. Defendants concede that they neither challenge the legal sufficiency of the pattern acts, nor argue that the indictment contains multiplicitous or duplicitous counts. Rather, defendants' argument addresses the manner in which the pattern acts in the enterprise corruption count are pleaded.
11. For purposes of this argument, defendants adopt the reading of PL §460.10(4)(b) employed by the court in People v. D.H. Blair & Co., Inc., 2002 WL 766119 (Sup. Ct. NY County Jan. 29, 2002)(D.H. Blair), that in contrast to its intention to incorporate the contemporaneity prong of the previous prosecution statute (CPL §40.10[a]) into the enterprise corruption law's definition of pattern of criminal activity, the Legislature did not intend to incorporate its relatedness of purpose prong (CPL §40.10[b]) into the text of PL §460.10[b]). (See discussion at section II.E.2, infra).
12. In contrast to Colletti, in Meyers Pollock the court dismissed a pattern act on the ground of legal insufficiency, noting that it was narrowing, rather than expanding or changing, the theory presented to the grand jury and of which the defendants had received notice. The court did not consider dismissal of the pattern act as improperly pleaded, as defendants urge this court to do here.
13. In any case, to the extent that any pattern acts are improperly pleaded, the court can dismiss them during trial, or tailor the verdict sheet and jury instructions accordingly. Such a step would not raise the concerns present in Colletti, as the People's theory before the grand jury would be narrowed, not broadened, by such action. (See note 12, supra).
14. Section II.C.5 is omitted for purposes of publication.
15. Section II.D.1 is omitted for purposes of publication.
16. BRASS (Broker Realtime Automated Security System) is the computerized system by which JSC recorded and tracked the trading activity it conducted.
17. In this regard, defendant Tripodi asserts that the People, while conceding that "insides" are legitimate under certain circumstances, have failed to delineate what those circumstances are, and that he should not be the subject of criminal charges for engaging in a lawful practice. In D.H. Blair, the Court rejected a similar argument, concluding that even if the undisclosed and excessive commissions and "specials" in that case were not necessarily criminal in and of themselves, they represented a part of the evidence that supported the defendants' fraudulent scheme. (D.H. Blair, supra, 2002 WL 766119, at *16, n.6). Similarly, here, the grand jury evidence pertaining to undisclosed commissions, gross credits and insides is a part of the overall evidence of defendants' alleged fraudulent scheme, when viewed in light of the testimony and other evidence presented to the grand jury.
18. FRE 1006 provides, in pertinent part:
The contents of voluminous writings, recordings, or photographs which cannot conveniently be examined in court may be presented in the form of a chart, summary, or calculation. The originals, or duplicates, shall be made available for examination or copying, or both, by other parties at reasonable time and place.
19. Discovery of the documents admitted before the grand jury and the summary charts was provided to defendants shortly after their arraignments.
20. Sections II.D.3, II.D.4, II.D.5, II.D.6, II.D.7 and II.D.8 are omitted for purposes of publication.
21. Section II.E.1 is omitted for purposes of publication.
22. This case is unlike People v. Scarantino, supra, where the counts of grand larceny and falsifying business records emanated from a single incident of filing a false insurance claim, thereby constituting only one criminal transaction, and being legally insufficient to establish an enterprise corruption count. (See discussion in section II.C.4, supra). Rather, this case is more like D.H. Blair, in which the court found the existence of ten separate schemes to defraud, each relating to a different security and constituting a separate criminal transaction, sufficient to establish a pattern of criminal activity for evidentiary purposes.
23. The court is cognizant of the fact that the GBL §352-c(5) and criminal possession of stolen property criminal acts are based upon each of the 19 particular scheme stocks, while the GBL §352-c(6) and grand larceny criminal acts are based upon conduct with respect to one of the 24 named customers. Therefore, in reviewing the pattern acts alleged as to each defendant (without having made any determination of the necessity for so doing), this court has taken care to avoid double-counting elements of the criminal acts, as requested by defendants. Thus, I have not included, among the three required pattern acts for any defendant, any GBL §352-c(6) or grand larceny criminal acts which could have been comprised within any GBL §352-c(5) or stolen property criminal act in the pattern, and vice versa.
24. This court has reviewed each of the pattern criminal acts included in the enterprise corruption count and, with the exceptions noted at the outset of this decision, has found that all of the criminal acts are supported by legally sufficient evidence as to each of the defendants charged.
25. Sections II.E.4, II.E.5, II.F.1, II.F.2, II.F.3, II.G, III.A, III.B, III.C and III.D are omitted for purposes of publication.