Opinion
02 Cr. 429 (RWS)
October 7, 2002
SENTENCING OPINION
On April 12, 2002, Kenneth O'Connor ("O'Connor") 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
See § 2B1.1(b)(1) and (2).
Relevant Persons and Entities
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.
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 solicitinq 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.
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 December 2, 1997 and closed on January 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 February 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 O'Connor
In January 1998, a victim-investor (`V1') received an unsolicited telephone call from O'Connor. In this call, O'Connor told V1 that he worked for the brokerage firm of J.P. Turner, that he was looking for investors, and that he could make V1 a lot of money in the stock market. O'Connor told V1 that he had numerous investors who had invested more than $1 million with J.P. Turner and that O'Connor had doubled and tripled their investments. V1 advised O'Connor that he had another brokerage firm, but that he had just received a $10,000 Christmas bonus and was willing to invest half of that bonus with O'Connor. Either in this conversation or one shortly thereafter, O'Connor mentioned Gaglio as a close associate at J.P. Turner.
On January 7, 1998, J.P. Turner opened an account for V1, listing Gaglio as the registered representative. V1's account statements reflected the purchase of approximately $5,000 in a NASDAQ-listed security in January 1998. In February 1998, on the recommendation of O'Connor, V1 liquidated that security and purchased approximately $8,800 of another security.
In March 1998, V1 received a telephone call from O'Connor who advised V1 that he should liquidate his position and invest that money in "American Capital," which O'Connor said was his own brokerage firm that he had started with his partner, Gaglio. O'Connor said that American Capital would go public, that V1 could double his money with this investment, and that O'Connor was already in the process of doing paperwork to go public. When V1 expressed concern that the investment was high risk and asked what would happen if he changed his mind and wanted to sell the stock, O'Connor told V1 that the stock would have value, and that V1 would be able to sell his shares before the company went public, but that it might take longer to sell than a stock on the New York Stock Exchange because it had less "liquidity." O'Connor also told V1 that he had millionaires investing in American Capital, that this investment would be the best he ever made, and that American Capital would "set the world on fire." On the basis of these representations, V1 agreed to liquidate his holdings with J.P. Turner and sent O'Connor a check for approximately $6,000, made payable to "American Capital" and dated March 26, 1998.
Between March 1998 and June 1998, V1 received telephone calls up to two to three times a week from O'Connor and occasionally Gaglio. In these calls, O'Connor attempted to solicit additional investments in American Capital and other securities, told V1 that a minimum investment of $50,000 would be required, advised him that he was being offered an opportunity available only for wealthy people, and urged V1 to obtain funding from any possible source, including family members and a second mortgage on his home. O'Connor also stated that he had doubled other people's money in six months and made millions for investors. When V1 asked O'Connor when American Capital would go public, O'Connor told him that his accountants and lawyers were working on it. On certain occasions, Gaglio would join O'Connor on the calls and on other occasions, Gaglio would call himself to solicit additional investments from V1. V1 repeatedly told O'Connor and Gaglio that he did not have additional funds to invest and eventually asked that they stop calling him so frequently. In these calls, V1 made numerous requests for a stock certificate or other documentation confirming his purchase of American Capital.
On June 24, 1998, V1 received a facsimile sent by O'Connor with an attached three-page Private Placement Memorandum. In October 1998, V1 received a stock certificate for 1,200 shares of American Capital and a warrant to purchase up to 1,200 additional shares. Those documents were dated October 1, 1998.
Approximately one month after receiving those documents, V1 received a call from O'Connor in which O'Connor asked V1 to invest additional funds. In response to V1's questions, O'Connor assured V1 that his American Capital investment had value and that the company was still moving towards going public. When V1 asked if he could sell his shares back, O'Connor told him that it would be very difficult then, but reassured him that the investors who got "in on the ground floor" would do "great." To date, V1 has not received back his principal or any return on his investment.
In September 1997, another victim-investor ("V2") received an unsolicited telephone call from O'Connor. In this call, O'Connor told V2 that he was calling from American Capital about a private placement investment and that V2 would be a "ground floor" investor who would stand to gain the most when the company went public. V2 understood from O'Connor that American Capital would go public within one year and that he would make a good return on his investment.
On or before September 12, 1997, V2 received a Private Placement Memorandum, a subscription agreement, and a return overnight envelope. On September 12, 1997, V2 faxed the signed subscription agreement to O'Connor at American Capital and mailed a $2,500 check, made payable to "American Capital," and dated September 9, 1997.
In September 1997, V2 began to receive unsolicited calls from Gaglio. In these calls, Gaglio urged V2 to open a brokerage account with J.P. Turner and advised him that Gaglio and others from J.P. Turner intended to start their own brokerage firm. V2 then opened a brokerage account and an IRA account with J.P. Turner and authorized Gaglio to invest in "blue chip" securities. In April or May 1998, after V2 learned that J.P. Turner had terminated Gaglio's branch, Gaglio advised V2 that Gaglio was starting his own brokerage firm. Gaglio told V2 that he was purchasing computer monitors, a telephone system, and would utilize the Small Order Execution System ("SOES") that connected directly to the stock exchange. Gaglio also advised V2 that his firm was purchasing another brokerage firm, Colin Winthrop, so that they would have a license and the benefits of an existing brokerage business.
In May or June 1998, Gaglio solicited V2 to purchase $50,000 in "Ultex," advising V2, among other things, that he would at a minimum triple his investment, that Gaglio would not hesitate to include his own mother in this investment, and that this was a "sure" investment. V2 thereafter invested approximately $30,000 in Ultex.
In the course of one of his conversations with Gaglio, V2 asked Gaglio about his American Capital investment and was told that he would have to speak with O'Connor about that. To date, V2 has not received back his principal or any return on his investment.
O'Connor's conduct in the offense resulted in a loss to investors of approximately $43,000.
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 O'Connor impeded or obstructed justice at the time of the arrest, or during the investigation or prosecution of the offense.
Adjustment for Acceptance of Responsibility
Based on the plea allocution, it appears that O'Connor 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 § lBl.ll(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 O'Connor's conduct resulted in a loss to investors of approximately $43,000, a 5-level enhancement is warranted, pursuant to § 2F1.1(b)(1)(F), bringing the offense level to 11.
Because the offense involved more than minimal planning, a 2-level enhancement is warranted, bringing the offense level to 13.
Due to O'Connor's timely notification of his intention to plead guilty, O'Connor qualifies for a 2-level reduction pursuant to § 3E1.1(a) and (b). The offense is reduced two levels to 13.
Adjusted Offense Level
O'Connor's adjusted offense level is 13 under the Guidelines.
Criminal History Category
O'Connor 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 O'Connor 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 13 and a Criminal History Category of I is 12 to 18 months.
Downward Departure
By letter dated September 18, 2002, the Government has informed the Court that it believes that O'Connor is entitled to a downward departure pursuant to § 5K1.1(a)(1)-(5) because O'Connor complied with the terms of his cooperation agreement with the Government and provided substantial assistance in the investigation and prosecution of dozens of co-conspirators in New York and elsewhere.
The Sentence
In consideration of the fact that O'Connor faces a minimum of 12 months' imprisonment and that the United States has written a 5K letter, it appears that a term of incarceration is unnecessary in this case. Therefore, O'Connor shall be sentenced to four years of probation on each count, to run concurrently, and four months' home detention as a special condition of probation.
It is further ordered that the defendant make restitution. An order of restitution shall be delayed for 90 days in accordance with 18 U.S.C. § 3664 (d) to enable the Government to supply the Court with information necessary to effectuate the order. The balance due in restitution shall be paid in monthly installments of not less than 15% of the defendant's total monthly income over a period of supervision to commence 30 days after the date of the judgment. The defendant shall notify the U.S. Attorney within 30 days of any change of mailing or residence address that occurs while any portion of the restitution remains unpaid.
The following conditions of probation are mandatory: O'Connor 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.
O'Connor shall be subjected to the standard conditions of supervision (1-13) with the following special conditions: (1) O'Connor shall provide the probation officer with access to any requested financial information; (2) O'Connor 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) O'Connor shall not hold any future employment in the securities industry; and (4) O'Connor shall participate in a substance abuse treatment program approved by the United States Probation Office, which may include testing to determine whether O'Connor 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. O'Connor 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. O'Connor 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.
O'Connor shall pay a mandatory special assessment of $200, which shall be due immediately.
The sentence is subject to further hearing on October 25, 2002.
It is so ordered.