Opinion
02 Cr. 372 (RWS)
October 7, 2002
SENTENCING OPINION
On April 4, 2002, Anthony Gaglio ("Gaglio") pled guilty to one count of conspiracy to commit securities fraud, mail fraud and wire fraud in violation of 18 U.S.C. § 371 and one count of securities fraud in violation of 15 U.S.C. § 78j(b) and 78ff; 17 C.F.R. § 10b-5.
This is one of seven sentencing opinions that are related to the offense conduct at issue involving a so-called "boiler room" operation. In determining this and the related sentences, an effort has been made to achieve as much as possible uniformity while considering each defendant's respective role in the operation. In addition, the sentences are all based at the very least in the middle of the possible guideline range because the defendants have received the benefit of an earlier guideline which does not take into consideration the serious nature of fraud as emphasized in the new guidelines. The Offense Conduct Relevant Persons and Entities
See § 2B1.1(b)(1) and (2).
American Capital Securities, Inc. ("American Capital") was a corporation organized and existing under the laws of the State of New York, with a principal place of business at 135 Glenwood Road, Glenwood Landing, New York. American Capital had no significant assets or income and was not engaged in any regular business, but purported to be engaged in establishing itself as a broker-dealer of securities. For the alleged purpose of financing its business as a broker-dealer, American Capital issued, offered, and sold to public investors securities called "units" of American Capital Stock, each of which consisted of one share of American Capital common stock and one warrant giving the holder the right to purchase one share of American Capital common stock (the "American Capital units").
Jeffrey Graziose ("Graziose") was the Executive Vice President of American Capital and the leader/organizer of the scheme who supervised other securities brokers and "cold callers" who were engaged in soliciting investors to purchase American Capital Units. Graziose exercised control over the affairs of American Capital by, among other things, controlling American Capital's bank accounts, maintaining custody of American Capital's checkbook, and hiring others to participate in the sale to investors of the American Capital Units.
Alphonse Graziose ("A. Graziose") was the President of American Capital.
Jeffrey Chaimowitz ("Chaimowitz") was a securities broker registered with and licensed by the National Association of Securities Dealers. Chaimowitz served as the Vice-President of American Capital, participated in the offer and sale to investors of the American Capital Units and supervised other securities brokers and "cold callers" who were engaged in soliciting investors to purchase American Capital Units.
Gaglio was a securities broker registered with and licensed by the National Association of Securities Dealers. Gaglio participated in the offer and sale to investors of the American Capital Units, and supervised other securities brokers and "cold callers" who were engaged in soliciting investors to purchase American Capital Units.
Chris Caputo ("Caputo") was a securities broker registered with and licensed by the National Association of Securities Dealers. Caputo was engaged in the offer and sale to investors of the American Capital Units.
Chris Caputo is being sentenced by the Honorable Michael B. Mukasey and is the only defendant in this case not being sentenced by this Court.
Kenneth O'Connor ("O'Connor") was a securities broker registered with and licensed by the National Association of Securities Dealers. O'Connor was engaged in the offer and sale to investors of the American Capital Units.
Robert Abrahamson ("Abrahamson") was a securities broker registered with and licensed by the National Association of Securities Dealers. Abrahamson was engaged in the offer and sale to investors of the American Capital Units.
John DiCanio ("DiCanio") was a "cold caller" who was engaged in soliciting investors to purchase American Capital Units.
The Scheme to Defraud
In August 1997, Graziose, A. Graziose, Gaglio and Chaimowitz entered into an agreement to conduct a "boiler-room" operation at offices leased by the Grazioses at 135 Glenwood Road, Glenwood Landing, New York; to hire brokers and "cold callers" to make unsolicited telephone calls to potential investors; and to instruct those brokers and "cold callers" to sell American Capital Units by means of false and fraudulent representations.
Graziose and A. Graziose created the false appearance that American Capital was a legitimate broker-dealer and financial investment company by incorporating American Capital, opening a corporate bank account, and by preparing stock certificates and written promotional materials. Graziose, A. Graziose, Gaglio and Chaimowitz then hired numerous brokers and "cold callers" to solicit potential investors throughout the United States to purchase the American Capital Units as part of a purported private placement offering.
From September 1997 through August 1998, acting under the supervision of Graziose, Chaimowitz and Gaglio, various brokers and cold callers made hundreds of telephone calls to potential investors throughout the United States to solicit purchases of the American Capital Units. In addition, the defendants and their co-conspirators distributed and/or instructed administrative assistants at American Capital to distribute — written promotional materials about American Capital and American Capital Units to potential investors throughout the United States by mail and facsimile. Both orally and in writing, the defendants and their co-conspirators falsely and fraudulently represented, among other things, that:
• No portion of funds obtained from the sale of the American Capital Units would be used to pay commissions to brokers when, in truth and in fact, as the defendants and their co-conspirators well-knew, brokers and "cold callers" engaged in the sale of the American Capital Units would and did receive commissions equal to approximately 15% of the proceeds from each sale they solicited;
• The proceeds of the sale of American Capital Units would be held in an escrow fund and used primarily for the development of a securities broker-dealer business when, in truth and in fact as the defendants and their co-conspirators well knew, the vast majority of the proceeds from the sale of the American Capital Units were to be used for the undisclosed purposes of paying commissions to brokers, personal expenses of the co-conspirators, and business expenses necessary to permit the continued operation of the fraudulent scheme;
• American Capital planned to conduct an initial public offering of its common stock within four to six months, which offering would cause the value of American Capital common stock to increase 40 percent to 100 percent in value, when, in truth and in fact as the defendants and their co-conspirators well knew, American Capital had taken no significant steps toward conducting an offering of its shares to the public, and the defendants and their co-conspirators had no reasonable basis to represent that American Capital's common stock was likely to increase in value; and
• American Capital had hired experts in mergers and acquisitions and had previously undertaken assignments in many industries (i.e., banking and finance, manufacturing and distributing, medical and pharmaceutical industries, computer and telecommunication technologies, environmental engineering, consumer products, oil and gas) when, in truth and in fact as the defendants and their co-conspirators well knew, American Capital was a newly-formed company, the sole business of which was hiring brokers and "cold callers" to sell the American Capital Units.
In reliance on these and other misrepresentations, more than 100 investors paid a total of approximately $1.1 million to purchase the American Capital Units. Upon directions given by the defendants and their co-conspirators, investors sent checks payable to "American Capital" to 135 Glenwood Road, Glenwood Landing, New York and wired fund directly into American Capital's bank account.
Contrary to the oral and written representations made by defendants and their co-conspirators, funds were not used to develop a broker-dealer business and no substantial steps were taken to prepare for a public offering of American Capital's stock. Instead, virtually all of the $1.1 million obtained from investors from the sale of the American Capital Units was used to pay commissions to brokers and "cold callers," excessive salaries to other co-conspirators, personal expenses of the co-conspirators, and other expenses unrelated to the development of American Capital's purported business as a broker-dealer of securities.
An account in the name "American Capital Securities" was opened by Graziose on August 15, 1997. During that period, the mailing address for the account was 135 Glenwood Road, Glenwood Landing, New York, and the authorized signatures on the account were Graziose, identified as "President," A. Graziose, identified as "signer," and Chaimowitz, identified as "secretary."
Several other related accounts were opened:
• An account in the name of "Federal Equity Corp." was opened on Dec. 2, 1997 and closed on Jan. 29, 1999. During that period, the mailing address for the account was 135 Glenwood Road, Glenwood Landing, New York, and the authorized signatures on the account included Graziose.
• An account in the name of "K.P. Puma Corp." was opened on Feb. 1, 1996. In October 1997, the mailing address of the account was changed to 135 Glenwood Road, Glenwood Landing, New York, and the authorized signatures on the account included Graziose, identified as "secretary."
• An account in the name of "Ultex, Inc." was opened on June 5, 1998. 135 Glenwood Road, Glenwood Landing, New York, and the authorized signature on the account was Chaimowitz, identified as "President."
Between August 1997 and July 1998, the American Capital Bank Account received over $1 million in numerous deposits from various victim-investors and $51,000 in intra-bank transfers from the Federal Equity Bank Account. of the approximately $1.2 million deposited in the American Capital Bank Account during this period, nearly $1 million was withdrawn in commissions, personal expenses and other expenses unrelated to the development of American Capital's purported business as a broker/dealer of securities. For example:
• More than 50 checks, totaling over $47,000, were made payable to "cash."
• More than $250,000 in checks were made payable to and countersigned by the defendants, including more than $46,000 to Abrahamson, more than $38,000 to Caputo; approximately $34,000 to Chaimowitz; approximately $24,000 to A. Graziose; more than $25,000 to Graziose; more than $55,000 to Gaglio, and more than $4,500 to O'Connor.
• More than $17,000 was used to pay credit cards held in the name of Graziose; more than $16,000 was used to pay credit cards held in the name of A. Graziose; and more than $37,000 was used to pay credit cards held in the name of American Capital. Purchases on the American Capital card included jewelry, health club memberships and more than $10,000 in men's and women's clothing.
• More than $35,900 was used to pay automobile leases and/or loans associated with A. Graziose, including a lease on a 1998 Ferrari F355 Spider; more than $14,000 was used to pay a home equity loan in the name of A. Graziose; and more than $10,000 was used to pay yacht club bills and expenses on a speed boat.
• More than $36,000 was used to pay bills in the name of Graz Recycling, including insurance premiums, office equipment leases, vehicle leases, and/or loans. More than $133,000 was transferred to the bank account of Graz Recycling. According to records of the bank account, Graziose and A. Graziose are, respectively, president and secretary of this corporation.
• More than $56,000 was transferred to the K.P. Puma Bank Account, and approximately $28,000 was transferred to the Federal Equity Bank Account.Victims Contacted by Gaglio
In November 1997, a victim-investor ("V1") received an unsolicited phone call from Gaglio. In this call, Gaglio stated that he was selling stock in a company called "American Capital" that set up other companies, that it was not yet on the stock market, and that this "private investment" would be publicly trading by February 1998. Gaglio urged V1 to invest $50,000 and stated that the investment would be worth $115,000 when the company went public in February 1999. Gaglio also informed V1 that no commissions would be taken out of the investment until the company went public. V1 asked Gaglio, in the course of this call, whether Gaglio ever heard of Chaimowitz, whom V1 identified as his former broker at Sterling Foster who had lost a large investment. Gaglio responded that he had never heard of Chaimowitz. Based on these representations, V1 agreed to purchase 10,000 units of American Capital at $5 per unit, for a total of $50,000. That check was deposited into the American Capital Bank Account on Nov. 24, 1997.
In May 1999, V1 called Gaglio to inquire about the status of his investment. In this call, Gaglio advised V1 that American Capital was not doing very well. When V1 tried to call Gaglio back at the same number a few days later, V1 received an operator message indicating that the number had been disconnected. To date, V1 has not received back his principal or any return on his investment.
In September 1997, another victim-investor ("V2"), received a telephone call from Gaglio in which Gaglio urged V2 to participate in a private offering of American Capital. Gaglio stated, among other things, that American Capital would be a management-type company set up like a mutual fund, that it would invest in other private placements, that investors' funds would be kept in an escrow account until the company found suitable investments, that it would be a short-term investment with long-term opportunities, and that it would provide lucrative returns. Gaglio also assured V2 that V2 would not pay any commissions if he invested. Based on these representations, V2 agreed to purchase 5,000 units of American Capital at $5 per share, for a total of $25,000. That check was deposited into the American Capital bank account on October 1, 1997.
In late March or early April 1998, V2 received a letter from the J.P. Turner brokerage firm and called Gaglio. Gaglio advised V2 that there was simply a misunderstanding that would be straightened out and that Gaglio would continue to work at J.P. Turner.
In the summer of 1998, V2 received a telephone call from Gaglio in which Gaglio advised him that he was now working at a new firm and urged him to purchase another private placement called "Ultex." Sometime after V2 agreed to invest approximately $7,000 in Ultex, V2 received a call from Chaimowitz, who represented himself as the manager of Ultex. At some point, V2 asked Chaimowitz about American Capital. Chaimowitz initially responded that he was not associated with American Capital. When V2 pointed out that Chaimowitz's name appeared as a principal shareholder on the Private Placement Memorandum, Chaimowitz stated that he was only involved with American Capital early on, that he was never an officer with the company, and that he never gave permission for his name to be used in the Memorandum. To date, V2 has not received his principal or any return on his investment.
In January 1998, another victim-investor ("V3") received an unsolicited telephone call from Gaglio, who identified himself as a broker at J.P. Turner and encouraged V3 to open a brokerage account and try his services. V3 agreed to place two trades in January and March 1998. After his second trade in March 1998, Gaglio called V3 and told him that he was leaving J.P. Turner to start a new brokerage firm called American Capital. Gaglio stated that American Capital had already purchased an office building and that V3 would be getting into the company on the ground floor of a major brokerage firm comparable to Smith Barney. Gaglio also stated that the company would be public within one year. Based on these representations, V3 liquidated his position in various stocks held at J.P. Turner and agreed to purchase 1,000 units of American Capital at $5 per unit, for a total of $5,000. That check was deposited into the American Capital bank account on April 3, 1998.
In early April 1998, V3 received a letter from the J.P. Turner brokerage firm and called Gaglio to inquire about his investment. Gaglio advised V3 that J.P. Turner sent out the letter only to retaliate against Gaglio for leaving J.P. Turner. Over the following several months, when V3 attempted to call Gaglio, V3 was told that he was not available. Gaglio never returned V3's message's inquiring about the American Capital investment, and a secretary eventually told V3 that Gaglio had left the firm and that American Capital investments were now being handled by O'Connor. V3 then left repeated messages for O'Connor, — who failed to return his calls. To date, V3 has not received his principal or any return on his investment.
Gaglio's conduct in the offense resulted in a loss to investors of approximately $2 million.
In addition to fraudulently inducing investors to purchase American Capital Units, various defendants also participated in schemes between December 1997 and January 2000, fraudulently to induce investors to purchase securities in K.P. Puma, Federal Equity Corp., Republic Fund LLC, Ultex Inc., Trylon Premier Fund LP, Titan Asset Management, and First Funding of America, Inc.
The Grazioses, Abrahamson, Caputo, Gaglio and O'Connor were arrested on December 18, 2001. DiCanio was arrested on December 20, 2001. Chaimowitz was arrested on December 21, 2001.
Victim Impact
As a result of the defendants' conduct, more than 100 investors lost approximately $1 million in the American Capital scheme. Additionally, various defendants are responsible for an aggregate of $2 million in additional losses in related schemes conducted from the same premises, for a total of approximately $3 million. A number of these victims have written letters to the Court detailing the effect of these schemes on them.
Adjustment for Obstruction of Justice
There is no information to suggest that Gaglio impeded or obstructed justice at the time of the arrest, or during the investigation or prosecution of the offense.
for Acceptance of Responsibility
Based on the plea allocution, it appears that Gaglio has accepted responsibility for his involvement in the offense.
The Guidelines Offense Level
The Guidelines Manual in effect at the time the offense was committed was utilized for calculation purposes in accordance with § 1B1.11(b)(1). Therefore, the November 1, 1998 edition of the Guidelines Manual has been used in this case.
Counts One and Two are grouped together pursuant to § 3D1.2(d) because "the offense level is determined largely on the basis of the total amount of harm or loss . . . or some other measure of aggregate harm, [and) the offense behavior is ongoing or continuous in nature and the offense guideline is written to cover such behavior."
The guideline for a violation of 18 U.S.C. § 371 is found in § 2X1.1 and directs that the base offense level from the substantive offense be used. The substantive offenses are securities fraud, mail fraud and wire fraud in violation of 15 U.S.C. § 78j(b), 18 U.S.C. § 1341 and 18 U.S.C. § 1343. The Guideline for these offenses is found in § 2F1.1 which provides for a base offense level of 6 pursuant to § 2F1.1(a).
Because Gaglio's conduct resulted in a loss to investors of approximately $2 million, a 12-level enhancement is warranted, pursuant to § 2F1.1(b)(1)(M), bringing the offense level to 18.
Because the offense involved more than minimal planning, a 2-level enhancement is warranted, bringing the offense level to 20.
Because Gaglio was a manager and supervisor of more than five persons, the offense is increased three levels to 23 pursuant to § 3B1.1(b).
Due to Gaglio's timely notification of his intention to plead guilty and since the offense level is 16 or greater, Gaglio qualifies for a 3-level reduction pursuant to § 3E1.1(a) and (b). The offense is reduced three levels to 20.
Adjusted Offense Level
Gaglio's adjusted offense level is 20 under the Guidelines.
Criminal History Category
Available information indicates that Gaglio was represented by counsel in all matters resulting in conviction.
Gaglio was convicted on December 2, 1994 of aggravated unlicensed operation of a motor vehicle in the second degree and sentenced to three years probation. That sentence was amended on December 12, 1994 to 30 days' imprisonment and the probation was revoked. Pursuant to §§ 4A1.1(c) and 4A1.2(k), this qualifies for 1 criminal history point.
On January 28, 1995, Gaglio was charged with aggravated unlicensed operation of a motor vehicle. The disposition of this charge is unknown and therefore qualifies for 0 criminal history points.
On February 22, 1999, Gaglio was convicted of driving while intoxicated and sentenced to three years' probation and a $1,000 fine. Pursuant to § 4A1.1(c), that results in 1 criminal history point.
On September 19, 2000, Gaglio was convicted of aggravated unlicensed operation of a motor vehicle in the second degree and sentenced to three years' probation. At the time of the offense, on August 5, 1999, Gaglio's license had been suspended on numerous prior occasions for failure to answer, appear or pay fines. At the time of his arrest, Gaglio stated, "I'm on probation, my license is suspended . . . I'm gonna go to jail for two years." This qualifies for a criminal history point of 1.
Gaglio also has two pending charges in Volusia County, Florida. On March 25, 1996, Gaglio was charged with resisting arrest without violence and driving with a suspended license. A warrant has been issued and the disposition is pending.
The subtotal of the criminal history points is 3. At the time the instant offense was committed, Gaglio was on probation. Pursuant to § 4A1.1(d), two points are added. The total of the criminal history points is 5. According to the sentencing table at Chapter 5, Part A, 5 criminal history points establishes a Criminal History Category of III.
Applicable Guidelines Range
The statutes under which Gaglio pled guilty provide for a maximum term of five ( 18 U.S.C. § 371) and — ten years (17 U.S.C. § 78j(b) and 78ff).
The Guidelines range for an offender with a base offense level of 20 and a Criminal History Category of III is 41 to 51 months.
The Sentence
In light of the foregoing and in light of the sentences provided to other defendants who shared similar roles in the scheme, Gaglio shall be sentenced to 46 months in prison, to be followed by three years of supervised release on each count, to run concurrently.
It is further ordered that the defendant make restitution payable to the Clerk, U.S. District Court, for disbursement to the victims of the American Capital fraud in the amount of $2 million, except that no further payment shall be required after the sum of the amount paid by all defendants has fully covered all of the compensable injuries. The list of victims will be kept in the case file. Any payment made by the defendant shall be divided among the persons named in proportion to their compensable injuries. The restitution shall be paid in monthly installments of 10% of gross monthly income over a period of supervision to commence 30 days after the date of the judgment or release from custody if imprisonment is imposed. The restitution shall be paid in full no later than 3 months prior to the termination of supervision. If the defendant is engaged in a BOP non-UNICOR work program, the defendant shall pay $25 per quarter toward the criminal financial penalties. However, if Gaglio participates in the BOP's UNICOR program as a grade 1 through 4, he shall pay 50% of his monthly UNICOR earnings toward the criminal financial penalties, consistent with BOP regulations at 28 C.F.R. § 545.11. Gaglio shall notify the United States Attorney for this district within 30 days of any change in mailing address or residence address that occurs while any portion of the restitution remains unpaid.
The following conditions of supervised release are mandatory: Gaglio shall not (1) commit another federal, state or local crime; (2) illegally possess a controlled substance; or (3) possess a firearm or destructive device. The mandatory drug testing condition is suspended due to the imposition of a special condition requiring drug treatment and testing.
Gaglio will be subjected to the standard conditions of supervision (1-13) with the following special conditions: (1) Gaglio shall provide the probation officer with access to any requested financial information; and (2) Gaglio shall not incur new credit charges or open additional lines of credit without the approval of the probation officer unless Gaglio is in compliance with the installment payment schedule with regard to restitution; (3) Gaglio shall participate in a substance abuse treatment program approved by the United States Probation Office, which may include testing to determine whether Gaglio has reverted to the use of drugs or alcohol. The Court orders the release of available substance abuse treatment evaluations and reports to the treatment provider, as approved by the probation officer. Gaglio shall contribute to the costs of services rendered (co-payment) in an amount to be determined by the probation officer, based on ability to pay or availability of third-party payment; (4) Gaglio shall participate in an alcohol aftercare treatment program under a co-payment plan, which may include urine testing at the discretion of the probation officer; and (5) Gaglio shall not hold any future employment in the securities industry. Gaglio is to report to the nearest Probation Office within 72 hours of release from custody and is to be supervised by the district of residence.
Gaglio will pay a mandatory special assessment of $200, which shall be due immediately.
This sentence is subject to further hearing on October 24, 2002.