Opinion
02 Cr. 367 (RWS)
October 7, 2002
SENTENCING OPINION
On April 3, 2002, Alphonse Graziose ("Graziose") 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 ("J. 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. J. 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 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.
Anthony Gaglio ("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, J. 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 J. 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, J. 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 J. 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 J. 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 J. Graziose, identified as "President;" 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 J. 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 J. 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 Graziose; more than $25,000 to J. Graziose; more than $55,000 to Gagilo, and more than $4,500 to O'Connor.
• More than $17,000 was used to pay credit cards held in the name of J. Graziose; more than $16,000 was used to pay credit cards held in the name of 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 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 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, J. Graziose and Grazjose 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.
Graziose's and J. Graziose'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 Graziose impeded or obstructed justice at the time of the arrest, or during the investigation or prosecution of the offense.
Adjustment for Acceptance of Responsibility
During the presentence interview, Graziose stated that he was sincerely remorseful for his actions and that it was a stupid and embarrassing thing to do. Based on this statement, Graziose 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 Graziose'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.
Due to Graziose's timely notification of his intention to plead guilty and since the offense level is 16 or greater, Graziose qualifies for a 3-level reduction pursuant to § 3E1.1(a) and (b). The offense is reduced three levels to 17.
Adjusted Offense Level
Graziose' s adjusted offense level is 17 under the Guidelines.
Criminal History Category
Graziose has no known criminal convictions. Therefore, he has zero criminal history points and a Criminal History Category of I.
Applicable Guidelines Range
The statutes under which Graziose 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 17 and a Criminal History Category of I is 24 to 30 months.
The Sentence
In light of the foregoing, Graziose shall be sentenced to 27 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 Graziose is engaged in a BOP non-UNICOR work program, he shall pay $25 per quarter toward the criminal financial penalties. However, if Graziose 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. Graziose 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: Graziose 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 based on the Court's determination that Graziose poses a low risk of future substance abuse.
Graziose shall be subjected to the standard conditions of supervision (1-13) with the following special conditions: (1) Graziose shall provide the probation officer with access to any requested financial information; (2) Graziose shall not incur new credit charges or open additional lines of credit without the approval of the probation officer unless he is in compliance with the installment payment schedule with regard to restitution; (3) Graziose shall not hold any future employment in the securities industry; and (4) Graziose shall participate in a mental health program approved by the U.S. Probation Office. Graziose shall continue to take any prescribed medications unless otherwise instructed by the health care provider. Graziose shall contribute to the costs of services rendered not covered by third-party payment, if Graziose has the ability to pay. The Court authorizes the release of available psychological and psychiatric evaluations and reports to the health care provider. Graziose 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.
Graziose shall pay a mandatory special assessment of $200, which shall be due immediately.
This sentence is subject to further hearing on October 24, 2002.