Opinion
00 Cr. 91-01 (RWS)
October 23, 2002
SENTENCING OPINION
On April 5, 2000, Mario Rodriguez ("Rodriguez") pled guilty to one count of conspiracy to commit securities fraud, mail fraud and wire fraud in violation of 18 U.S.C. § 371, three counts of securities fraud in violation of 15 U.S.C. § 78(b), and one count of mail fraud in violation of 18 U.S.C. § 1341.
Rodriguez is one of twenty-one defendants to be or that have been sentenced in relation to the offense conduct at issue involving the Sterling Foster "boiler room" operation. The underlying charges against five defendants were tried from March 25, 2002 to May 9, 2002. The remaining defendants pled guilty at varying times before the trial. 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. This effort was severely hampered, however, by earlier and inconsistent sentences in two related cases,United States v. Pratt, 00 Crim. 91, and United States v. Lieberman, 98 Crim. 164.
The five defendants are Timothy J. Matthews, James P. Corcoran, Joseph J. Ferrante, Brian Kearney, and John B. Massaro. On April 18, 2002, Ferrante withdrew from trial and pled guilty. The others were found guilty on May 9, 2002. Massaro committed suicide subsequent to his conviction.
On December 10, 2001, Robert Pratt was sentenced to 28 months in prison and $50,000 in restitution, having argued without government opposition that he should not be given a role enhancement. Pratt, transcript at 17 (Dec. 10, 2001). However, Pratt was in the highest level of authority in the operation, as a "Team Leader." In the pending sentences, all of the Team Leaders were recommended to receive the role enhancement that Pratt avoided. In addition, he was held responsible only for his loss calculations and not those of his Team because the information provided by the government was not yet complete at the time of sentencing. Because his case was the first to come before this Court and because the information provided by the government was not yet complete at that time, Pratt was given a substantially lower sentence than other Team Leaders who are now before this Court, and a lesser or equal sentence to those recommended for seven co-defendants who performed at lower levels in the operation. Unfortunately, this Court is constrained by the Guidelines and Second Circuit precedent from attempting to level out the sentences on this basis alone. E.g., United States v. Tejeda, 146 F.3d 84, 87 (2d Cir. 1998). The instant case is thus a classic demonstration of the disparities and inequalities that result in the individual case from mechanistic application of the Guidelines.
For instance, the recommended sentence — which this Court has not followed for a number of reasons detailed within the particular sentencing opinions — for Team Leaders Timothy Matthews and Brian Kearney was between 87 to 108 months. Even considering the fact that Matthews and Kearney took their case to trial, as opposed to pleading out, a five- to seven-year gap is too extreme.
In addition, Adam Lieberman ("Lieberman") pled guilty on March 4, 1998 in a three-count felony information. Lieberman was the president and nominal 100 percent shareholder of Sterling Foster. Yet on June 27, 2002, Lieberman was sentenced to just 366 days' imprisonment and $14,500,000 in restitution in light of a downward departure pursuant to § 5K1.1(a). Although it is contrary to more customary prosecutorial practice to allow the principal wrongdoer to plead and to cooperate against those lesser defendants whom he trained and who followed his orders, the departure was granted here in light of the great assistance given by Lieberman in a related case. It is nonetheless virtually impossible to justify imprisoning the defendants before this Court for up to five times as long as the man who hired, inspired and gravely misled them. This disparity arises because related criminal cases are assigned to different judges. The absence of a related-case rule in criminal matters thus contributes to the heart-rending unfairness of the present sentencing system.
The Offense Conduct
Between June 1994 and June 1997, Sterling Foster Company, Inc. was a securities broker-dealer incorporated under the laws of the State of Delaware. Sterling Foster was registered as a securities broker-dealer with the Securities and Exchange Commission ("SEC"), was a member of the National Association of Securities Dealers ("NASD"), and maintained offices in Melville, NY. Among its other businesses, Sterling Foster underwrote IPOs of securities and made markets in securities following those offerings.
During certain time at Sterling Foster, the firm was divided into five groups of brokers called "Teams." Each Team, which consisted of 30 to 50 brokers, was headed by one or more Branch Managers (or Team Leaders). A Branch Manager was responsible for teaching and enforcing the firm's policies and practices, approving buy and sell tickets, conducting team meetings and training sessions to promote the firm's "sales techniques," and dealing with customer complaints, among other things. Team Leaders were usually chosen based on their sales ability, their longevity with the company and because they held a Series 24 license.
Team Leaders led meetings where selling strategies were discussed. They prevented the sale of House Stocks, and brokers were required to seek their permission in order to sell a stock. Team Leaders also regularly held meetings with each other to plan the manipulation of the stock prices of the House Stocks and to discuss various fraudulent sales techniques. While Team Leader positions began as commission-only, some Team Leaders later became salaried employees who earned approximately $10,000 monthly, plus bonuses.
Brokers on each Team who were late to work, who needed to miss work, or otherwise had issues for supervisors had to go through their respective Branch Managers.
Assistant Branch Managers, working under the guidance of the Branch Managers, were responsible for most of the day-to-day training of brokers and dealing with customer complaints.
Below Assistant Branch Managers were Assistant Managers — brokers who would sometimes be called on to give meetings or perform other supervisory functions, but much less frequently than Assistant Branch Managers.
Lastly, the line brokers who spent most of their time dealing directly with customers were called Account Executives.
The five Teams at Sterling Foster were comprised as follows:
________________________________________________________________________ TEAM ONE TWO THREE FOUR FIVE ________________________________________________________________________ Team Tursi Pratt Cohn Rodriguez Kearney Leader Matthew Betts Weeks ________________________________________________________________________ Asst. DiStefano Charvat Abish Corcoran Branch Gourlay Ferrante Mngrs Rueb Scuteri Siegel ________________________________________________________________________ Account Massaro Feeny Exec.s MacCaull Turney ________________________________________________________________________
Randolph Pace was a financial consultant who was purportedly involved in the business of providing debt and equity financing to corporations through private and public offerings of securities. Pace was president of, and exercised control over various financial enterprises.
In October 1986, Pace was suspended by the SEC from associating with any broker-dealer for three months, after it was discovered that Pace had engaged in violations of federal securities laws and SEC rules and regulations. By November 1987, Pace had again been suspended by the SEC for a nine-month period. He was also prohibited from acting as a principal of, or acting in any proprietary capacity with any broker-dealer for five years following the suspension.
Adam Lieberman was a registered representative who served as the president and nominal 100-percent shareholder of Sterling Foster. He, along with Pace and a third individual, controlled the operations of Sterling Foster.
At all relevant times, VTR Capital, Inc. was a securities broker-dealer incorporated under the laws of the State of Colorado. VTR Capital was registered with the SEC, was a member of the NASD, and maintained offices in various states, including New York, Colorado, Florida, Georgia and Pennsylvania. Among its other businesses, VTR Capital underwrote IPOs of securities, made markets in various securities, and offered a variety of brokerage services to customers throughout the U.S.
Frank Monroig ("Monroig") was a registered representative employed by Sterling Foster from June 1994 through February 1995, and from May 1995 through February 1997. While at Sterling Foster, Monroig held the title of Senior Branch Manager and all Team leaders reported to him. Between March 1995 and April 1995, Monroig was a registered representative employed by VTR Capital. Monroig was widely considered by the brokers at Sterling Foster to be second in authority only to Adam Lieberman, the President of Sterling Foster.
Timothy Matthews ("Matthews") was a registered representative employed by Sterling Foster from June 1994 through April 1997. He was widely considered by brokers at Sterling Foster to be third in authority at Sterling Foster, behind Lieberman, and Monroig. He held the title of Senior Branch Manager.
David Abish ("Abish") was a registered representative employed by Sterling Foster from June 1994 through June 1997. Abish held the title of Assistant Branch Manager.
Christopher Betts ("Betts") was a registered representative employed by Sterling Foster from about June 1994 through February 1997. Betts held the title of Team Leader. After he pled guilty, he cooperated with the government.
Mark Charvat ("Charvat") was a registered representative employed by Sterling Foster between June 1994 and May 1995, and between August 1995 and February 1997. While at Sterling Foster, Charvat held the title of Assistant Branch Manager. From May 1995 through July 1995, Charvat was a registered representative employed by VTR Capital. According to trial testimony, Charvat admitted lying to the SEC about the conduct at Sterling Foster in order to keep his brokers license. After he pled guilty, he cooperated with the government.
Michael Cohn ("Cohn") was a registered representative employed by Sterling Foster from June 1994 through February 1997. Cohn held the title of Team Leader.
James Corcoran ("Corcoran") was a registered representative employed by Sterling Foster from June 1994 until February 1997. He held the title of Assistant Branch Manager.
Charles DiStefano ("DiStefano") was a registered representative employed by Sterling Foster between June 1994 and May 1995, and from August 1995 until January 1997. Between May 1995 and July 1995, DiStefano was a registered representative employed by VTR Capital. He held the title Assistant Branch Manager.
Paul Feeny ("Feeny") was a registered representative employed by Sterling Foster between October 1994 and February 1997. He held the title of Account Executive. After he pled guilty, he cooperated with the government.
Joseph Ferrante ("Ferrante") was a registered representative employed by Sterling Foster from June 1994 through February 1997. He held the title of Assistant Branch Manager.
Stephen Gourlay ("Gourlay") was a registered representative employed by Sterling Foster between June 1994 and February 1997. Gourlay held the title of Assistant Branch Manager. After he pled guilty, he cooperated with the government.
Brian Kearney ("Kearney") was a registered representative employed by Sterling Foster from June 1994 through March 1997. Kearney held the title of Team Leader.
Michael MacCaull ("MacCaull") was a registered representative employed by Sterling Foster between January 1995 and May 1995, and from August 1995 through March 1997. While at Sterling Foster, he held the title of Account Executive. Between May 1995 and July 1995, MacCaull was a registered representative employed by VTR Capital.
John Massaro ("Massaro") was a registered representative employed by Sterling Foster between February 1995 and May 1995, and from August 1995 until October 1996. Between May 1995 and July 1995, Massaro was a registered representative employed by VTR Capital. He held the title Account Executive. Massaro committed suicide subsequent to his conviction.
Robert Pratt ("Pratt") was a registered representative employed by Sterling Foster between June 1994 and February 1997. Pratt held the title of Team Leader.
Dennis Rueb ("Rueb") was a registered representative employed by Sterling Foster from June 1994 through April 1997. Rueb held the title of Assistant Branch Manager.
William Scuteri ("Scuteri") was a registered representative employed by Sterling Foster from June 1994 through March 1997. Scuteri held the title of Assistant Branch Manager.
Scott Siegel ("Siegel") was a registered representative employed by Sterling Foster from June 1994 through April 1995, and from August 1995 through March 1997. Between May 1995 and July 1995, Siegel was a registered representative employed by VTR Capital and held the title Assistant Branch Manager.
Donald Turney ("Turney") was a registered representative employed by Sterling Foster from June 1994 through March 1995, and from August 1995 through March 1997. Turney held the title of Account Executive.
Andrew Tursi ("Tursi") was a registered representative employed by Sterling Foster from June 1994 through March 1997. He held the title of Team Leader.
David Weeks ("Weeks") was a registered representative employed by Sterling Foster from June 1994 through in March 1997. Weeks held the title of Team Leader.
Rodriguez was a registered representative employed by Sterling Foster between June 1994 and May 1995, and again from June 1995 through June 1997. Rodriguez held several titles during his time at Sterling Foster, including as a Team Leader. Between May 1995 and August 1995, Rodriguez was a registered representative employed by VTR Capital. After he pled guilty, he cooperated with the government.
The House Stocks
Between June 1994 and June 1997, Sterling Foster engaged in the initial or secondary public offering of, and/or aftermarket trading in, the securities of the following six corporations, which are referred to herein as the "House Stocks":
• Lasergate Systems, Inc. — a Florida corporation engaged in the development, assembly, marketing, servicing, and installation of admission control and revenue accounting systems at amusement parks, theme parks, and other public facilities. In October 1994, Sterling Foster underwrote a $4.4 million public offering of securities for Lasergate;
• Advanced Voice Technologies, Inc. — a Delaware corporation engaged in the sale and support of a "Homework Hotline" voice processing system designed for use in education. Advanced Voice is located at 369 Lexington Avenue, New York, NY. In February 1995, Sterling Foster underwrote a $5.5 million IPO of securities for Advanced Voice;
• Com/Tech Communication Technologies, Inc. — a New York corporation engaged in the business of developing, designing, and managing interactive video programming and private satellite networks for live one-way and interactive video programs and teleconferencing. Com/Tech is located at 770 Lexington Avenue, New York, NY. In August 1995, Sterling Foster underwrote a $5 million IPO of securities for Com/Tech;
• Embryo Development Corporation — a Delaware corporation engaged in the development, acquisition, manufacturing, and marketing of biomedical devices. Embryo is located at 305 Broadway, New York, NY. In November 1995, Sterling Foster underwrote a $5 million IPO of securities for Embryo;
• Applewoods, Inc. — a Delaware corporation. In April 1996, Applewoods acquired all the outstanding stock of Applewoods International Limited, a corporation organized under the laws of Great Britain in 1978. Applewoods is located at 110 East 59th Street, New York, NY. Applewoods manufactured and sold natural soaps, oils, lotions, toiletries, and related products. In April 1996, Sterling Foster underwrote a $6 million IPO of securities for Applewoods;
• ML Direct, Inc. — a Delaware corporation engaged in the business of expanding the marketing opportunities for products that had already been successfully sold on "infomercials" and home shopping networks. ML Direct is located at 300 Park Avenue, New York, NY. In September 1996, Sterling Foster sold portions of the $7.2 million IPO of securities for ML Direct.
Sterling Foster acted as lead underwriter for five of the six offerings, and Patterson Travis acted as lead underwriter for the ML Direct Public Offering. The six issuers are referred to as "Issuers"; the public offerings of securities of these companies are referred to as the "Public Offerings."
At all relevant times, Monroig, Matthews, Abish, Betts, Charvat, Cohn, Corcoran, DiStefano, Feeny, Ferrante, Gourlay, Kearney, MacCaull, Massaro, Pratt, Rueb, Scuteri, Siegel, Turney, Tursi, Weeks, Rodriguez and other co-conspirators marketed the House Stocks throughout the U.S., including in the Southern District of New York.
At all relevant times, Sterling Foster customers paid for their stock investments in three ways: (a) sending a check to Sterling Foster in Melville, NY; (b) sending a check to Bear Stearns Securities Corp., Sterling Foster's clearing agent, in either Brooklyn or Manhattan; or (c) wiring funds to Bear Stearns' account at Citibank in Manhattan.
1. Lasergate stock
In mid-1994, Sterling Foster agreed to underwrite a secondary offering of approximately 800,000 Lasergate units at $5.50 per unit. Each unit consisted of one share of common stock and two redeemable common stock purchase warrants exercisable one year from the effective date of the offering at $5.50 per share.
In the fall of 1994, Sterling Foster started its sales efforts with respect to the Lasergate public offering. In order to generate interest in Lasergate securities, the defendants, with the exceptions of MacCaull and Massaro, made material misrepresentations and omissions of material facts to customers, and unlawfully confirmed sales of Lasergate securities in the offering and in secondary market trading prior to the effective date of the offering.
On October 19, 1994, Monroig, Matthews, Abish, Betts, Charvat, Cohn, Corcoran, DiStefano, Feeny, Ferrante, Gourlay, Kearney, Pratt, Rueb, Scuteri, Siegel, Turney, Tursi and Weeks sold approximately 1.8 million shares of Lasergate common stock to its retail customers at prices ranging from approximately $7.75 to approximately $10.62 per share. Sterling Foster paid its registered representatives a sales credit of approximately $1.25 for every share of Lasergate common stock they sold to customers that day.
On that date, Monroig caused a purchase to be made in Customer #1's account of approximately 5,000 shares of Lasergate at a price of $8.50 per share.
On October 26, 1994, Siegel caused a purchase to be made in Customer #2's account of approximately 500 shares of Lasergate at a price of $10.00 per share.
On February 27, 1995, Corcoran caused an unauthorized purchase to be made in Customer #8's account of 1,000 shares of Lasergate common stock at a price of $11.25 per share. Later, in May 1995, the defendant refused to sell shares of Advanced Voice and Lasergate common stock as instructed by the customer.
In March 1995, Matthews caused Customer #18 to be called in New York City and induced to purchase 5,000 shares of Lasergate common stock.
On March 6, 1995, DiStefano caused an unauthorized purchase to be made in Customer #20's account of approximately 1,450 shares of Lasergate common stock at a price of $7.56 per share.
On April 19, 1995, Kearney caused a purchase to be made in Customer #21's account of 1,000 shares of Lasergate common stock at a price of $8.50 per share.
On May 19, 1995, Tursi placed a telephone call from Melville, N.Y. to Customer #26 in Alamo, CA, and falsely assured him that approximately half of the customer's shares of Lasergate common stock had been sold as instructed, when in truth, no shares had yet been sold.
On June 1, 1995, Monroig met with Customer #27 in Boston, MA to discuss the unauthorized purchase of 30,000 shares of Lasergate stock in the customer's Sterling Foster account.
On December 18, 1995, Betts refused to sell shares of Lasergate common stock as directed by Customer #37.
After closing at a high of approximately $14.87 on November 4, 1994, the price of Lasergate common stock, as quoted on the NASDAQ, fell to $8.12 per share by March 1, 1995. On May 31, 1995, the price of Lasergate common stock closed at approximately $5.00 per share. By January 22, 1996, the price for the common stock had decreased to less than $1.00 per share.
2. Advanced Voice stock
In June 1994, Sterling Foster agreed to underwrite a Public Offering of 1 million Advanced Voice units at $5.50 per unit. Each unit consisted of one share of common stock and one class A redeemable common stock purchase warrant.
In late 1994 and early 1995, Sterling Foster commenced its sales efforts with respect to the Advanced Voice Public Offering. In order to generate extraordinary market demand for Advanced Voice securities, the defendants made material misrepresentations and omissions of material facts to Sterling Foster customers, and unlawfully confirmed sales of Advanced Voice securities in the Public of fering and in aftermarket trading prior to the effective date of the Public Offering.
On February 7, 1995, Monroig, Matthews, Abish, Betts, Charvat, Cohn, Corcoran, DiStefano, Feeny, Ferrante, Gourlay, Kearney, MacCaull, Massaro, Pratt, Rueb, Scuteri, Siegel, Turney, Tursi, Weeks, and Rodriguez sold approximately 2.3 million shares of Advanced Voice common stock to Sterling Foster's retail customers at prices ranging from approximately $12.25 to approximately $12.75 per share. Sterling Foster paid its registered representatives a sales credit of approximately $1.75 for every share of Advanced Voice common stock they sold to customers that day.
In February 1995, Cohn told Customer #3 that Advanced Voice common stock would be trading at a price of $20.00 per share within six months. During this same period, Gourlay caused a purchase to be made in Customer #4's account of approximately 100 shares of common stock at a price of $12.75 per share.
In February 1995, Gourlay caused a purchase to be made in Customer #5's account of approximately 1,000 units of Advanced Voice at a price of $5.50 per unit and approximately 3,500 shares of Advanced Voice at a price of $10.00 per share.
On February 6, 1995, Cohn told Customer #6 that a precondition for getting IPO units of Advanced Voice was purchasing aftermarket shares of Advanced Voice common stock. The following day, Cohn caused a purchase to be made in Customer #6's account of 4,400 shares of Advanced Voice common stock at a price of $12.50 per share.
On February 7, 1995, Cohn caused a purchase to be made in Customer #7's account of 400 shares of Advanced Voice at a price of $12.75 per share, although Customer #7 had only authorized the purchase of IPO units and not aftermarket shares.
On this date, Corcoran caused a purchase to be made in Customer #8's account of 1,200 shares of Advanced Voice common stock.
On February 7, 1995, Matthews caused a purchase to be made in Customer #9's account of 44,500 shares of Advanced Voice common stock for $545,125, although Customer #9 had authorized the purchase of only $475,000 worth of common stock. He also caused a purchase to be made in Customer #12's account of 2,000 shares of common stock at a price of $12.25 per share.
On this date, Kearney caused a purchase to be made in Customer #10's account of 3,900 shares of Advanced Voice at a price of $12.75 per share. He also caused a purchase to be made in Customer #11's account of 900 shares of Advanced Voice at $12.75 per share.
On this date, Pratt caused an unauthorized purchase to be made in Customer #13's account of 3,500 shares of Advanced Voice common stock at a price of $12.75 per share.
On this date, Rueb caused a purchase to be made in Customer #14's account of 1,000 shares of Advanced Voice common stock at a price of $12.75 per share, without the customer's authorization. On May 11, 1995, the defendant caused an unauthorized purchase to be made of 2,000 shares of Advanced Voice, at a price of $9 per share.
On this date, Scuteri caused a purchase to be made in Customer #15's account of $25,000 worth of Advanced Voice IPO units and common stock. He also caused a purchase to be made in Customer #16's account of $57,000 worth of common stock.
In February 1995, DiStefano refused to sell shares of Advanced Voice common stock as instructed by Customer #17.
On March 3, 1995, Monroig caused an unauthorized purchase to be made in Customer #19's account of 20,000 shares of Advanced Voice common stock.
In May 1995, Tursi caused an unauthorized purchase to be made in Customer #22's account of 5,000 shares of Advanced Voice common stock at a price of $9 per share.
In May 1995, Weeks caused an unauthorized purchase to be made in Customer #23's account of 2,500 shares of Advanced Voice at a price of $9 per share.
On May 19, 1995, Corcoran caused an unauthorized purchase to be made in Customer #24's account of 1,000 shares of Advanced Voice common stock at a price of $8.75 per share.
On the same date, Ferrante caused an unauthorized purchase to be made in Customer #25's account of 375 shares of Advance Voice at a price of $9 per share.
On October 18, 1995, Feeny caused a purchase to be made in Customer #31's account of approximately 5,000 shares of Advanced Voice common stock at a price of $5.25 per share.
On April 9, 1996, Betts refused to sell shares of Advanced Voice common stock as directed by Customer #37.
On June 24, 1996, Turney caused a purchase to be made in Customer #40's account of 25,000 warrants of Advance Voice for a total price of $81,262, although the customer had authorized the purchase of only $25,000 worth of the warrants.
By May 31, 1995, the price of Advanced Voice common stock, as quoted on the NASDAQ, closed at approximately $5.62 per share. On August 30, 1995, the price of Advanced Voice common stock closed at approximately $3.12 per share. By February 21, 1997, the price of the common stock had decreased to less than $1.00 per share.
3. Com/Tech stock
In 1995, Sterling Foster agreed to underwrite a Public Offering of 1 million shares of Com/Tech common stock at $5 per share. In mid-1995, the defendants used similar unlawful and fraudulent practices in order to generate extraordinary market demand for the Com/Tech securities.
On August 24, 1995, the defendants sold approximately 2.4 million shares of Com/Tech common stock to Sterling Foster's retail customers at prices ranging from $9.50 to $9.75 per share. Sterling Foster paid its registered representatives $1.25 for every share of Com/Tech stock they sold that day. After a closing high price of $10.62 on September 19, 1995, the price of Com/Tech stock, according to the NASDAQ steadily decreased. On March 29, 1996, the price of the stock closed at $5.00 per share. By November 7, 1996, the price of Com/Tech stock had decreased to less than $1.00 per share.
On August 23, 1995, Cohn induced Customer #28 to purchase 1,000 shares of Com/Tech stock at a price of $9.75 per share.
On August 24, 1995, Rueb caused a purchase to be made in Customer #29's account of 600 shares of Com/Tech at a price of $9.50 per share.
On this same date, MacCaull caused a purchase to be made in Customer #30's account of 200 shares of Com/Tech common stock at a price of $9.75 per share.
On November 29, 1995, Pratt, during a telephone call from Sterling Foster to Brighton, MI told Customer #35 that the defendant had confidential, material, nonpublic information that would lead the price of Com/Tech shares to increase.
On December 18, 1995, Pratt informed Customer #12 that NBC was going to purchase Com/Tech, which would cause the price of the stock to rise. Pratt then induced the customer to purchase 1,100 shares of Com/Tech common stock for $8,949, at a price of $8.12 per share.
On May 28, 1996, Turney caused an unauthorized purchase to be made in Customer #42's account of 5,000 shares of Com/Tech at a cost of $7.94 per share.
4. Embryo stock
In 1995, Sterling Foster agreed to underwrite a Public Offering of 1 million shares of Embryo common stock at $5.00 per share. In the fall of 1995, Sterling Foster commenced sales efforts, using similar misleading and fraudulent practices as in the other Public Offerings.
On November 17, 1995, Monroig, Matthews, Abish, Betts, Charvat, Cohn, Corcoran, DiStefano, Feeny, Ferrante, Gourlay, Kearney, MacCaull, Massaro, Pratt, Rueb, Scuteri, Siegel, Turney, Tursi and Weeks sold 3 million shares of Embryo common stock to Sterling Foster's retail customers, at prices ranging from $9.87 to $10.06 per share. The registered representatives received a sales credit of $1.00 for every share of Embryo stock they sold to customers that day.
On November 17, 1995, Turney caused an unauthorized purchase to be made in Customer #33's account of 250 shares of Embryo common stock at a price of $9.87 per share.
On November 20, 1995, Massaro caused a purchase to be made in Customer #34's account of 2,000 shares of Embryo stock at a price of $9.87 per share.
In December 1995, Charvat refused to sell 3,000 shares of Embryo common stock as instructed by Customer #36.
On January 15, 1996, Rueb caused an unauthorized purchase to be made in Customer #38's account of 500 shares of Embryo common stock at a price of $9.50 per share.
On February 14, 1996, Matthews caused an unauthorized purchase to be made in Customer #14's account of 1,000 shares of Embryo common stock at a price of $7.25 per share.
After closing at a high of $13.00 per share on December 6, 1995, the price of the Embryo stock steadily decreased. By June 28, 1996, the price of the stock closed at $5.75 per share. On December 2, 1996, the price of the stock had decreased to less than $1.00 per share.
5. Applewoods stock
In 1995 and 1996, Sterling Foster agreed to underwrite a Public Offering of 1.2 million shares of Applewoods common stock at $5 per share. In 1996, Sterling Foster commenced its sales efforts with regard to the stock. In order to generate extraordinary interest in the Applewoods stock, the defendants made material misrepresentations and omissions of material facts to customers and confirmed sales of Applewoods securities in the Public Offering and in aftermarket trading prior to the effective date of the Public Offering.
On April 11, 1996, the defendants sold more than 2 million shares of Applewoods common stock to its customers at prices ranging from $9.00 to $14.25 per share, with the registered representatives receiving $2.00 for every share they sold to customers that day. After closing at a high price of $18.75 per share on May 14, 1996, as in all of the other instances, the price of Applewoods common stock steadily declined. On August 30, 1996, the price of the common stock, as quoted on NASDAQ, was $5.75 per share. By December 23, 1996, the price of the stock had decreased to less than $1.00 per share.
On April 11, 1996, Kearney caused an unauthorized purchase to be made in Customer #39's account of 1,000 shares of Applewoods at a price of $13.50.
On the same date, Turney caused a purchase to be made in Customer #40's account of 5,000 shares of Applewoods at a price of $13.75 per share. On April 18, 1996, Customer #40 wired $69,000 from Dallas, TX to New York to pay for his purchase.
In May 1996, Charvat refused to sell 2,400 shares of Applewoods common stock as instructed by Customer #41.
6. ML Direct stock
Between 1995 and 1995, Adam Lieberman and others considered causing Sterling Foster to underwrite a public offering of securities on behalf of ML Direct. However, because of inquiries from regulators regarding Sterling Foster's underwriting activities, Lieberman agreed to have other broker-dealers, including Patterson Travis and VTR Capital, underwrite the ML Direct Public Offering.
In 1996, Patterson Travis, VTR Capital and others agreed to underwrite a Public Offering of 480,000 ML Direct units at $15.00 per unit. Each Public Offering unit consisted of two shares of common stock and one class A redeemable common stock purchase warrant.
In August 1996, Sterling Foster commenced sales efforts of the ML Direct common stock. The defendants, using the same fraudulent and misleading practices engaged in the sale of ML Direct common stock to Sterling Foster's retail customers at prices ranging from $13.50 to $14.50 per share. Sterling Foster paid its registered representatives a sales credit of $.50 for every share of ML Direct they sold that day.
On September 4, 1996, Abish caused an unauthorized purchase to be made in Customer #43's account of 15,000 shares of ML Direct common stock at a price of $13.75 per share.
On the same date, Feeny caused an unauthorized purchase to be made in Customer #44's account of 2,500 shares of common stock.
Also on this date, MacCaull caused a purchase to be made in Customer #45's account of 10,000 shares of ML Direct at a price of $14 per share.
Massaro caused an unauthorized purchase to be made in Customer #47's account of 3,000 shares of ML Direct at a cost of $14.50 per share.
In November 1996, Charvat refused Customer #48's instruction to sell 2,500 shares of ML Direct common stock.
In December 1996, Siegel used a $5,583 cash balance in Customer #49's account to purchase 5,000 warrants of ML Direct at a price of $4.75 per warrant with the customer's authorization.
On January 16, 1997, Rueb caused an unauthorized purchase to be made in Customer # 50's account of 500 shares of ML Direct at a price of $4.31 per share.
After closing at a high of approximately $15.75 per share on September 6, 1996, the price began to decline. On November 4, 1996, the price was at $5.75 per share. By March 3, 1997, the price of the stock had decreased to $.44 per share.
Deceptive Practices and Market Manipulations
During the course of this scheme, the defendants used various means to manipulate the market price of the House Stocks and engaged in deceptive sales practices with respect to public customers, in violation of the fiduciary and other duties they owed to those customers.
The prices of the House Stocks were artificially maintained through a variety of techniques designed to insulate the House Stock from the adverse pressure of a lack of market demand, which would cause the stock price to collapse. These techniques included: providing excessively high compensation to the brokers, which was not disclosed to customers. The brokers' compensation could be as high as 15 percent of the price of the stock and brokers were encouraged to aggressively tout the House Stocks to the public. These commissions were not paid to brokers when selling non-House stock to customers or when buying House Stock from customers. Instead of disclosing these excessive commissions to the public, the defendants routinely falsely informed their customers that a nominal fee or no commission would be charged, and that they were not making any money from the customer's purchase transaction.
The defendants also used high-pressure tactics, false and misleading sales pitches to induce customers to buy House Stocks. Many of the false sales pitches and rebuttals to clients were scripted. The defendants assured customers that the price of the House Stock would rise quickly and made greatly elevated price predictions. The defendants actively discouraged clients from reading literature on the Issuers and frequently failed to provide the Issuers prospectuses to customers when requested.
Another technique employed by the defendants was to open customer accounts with well established non-House Stocks and then switching customers to the House Stocks. The defendants would recommend a better known and more established non-House stock to potential new customers in order to lure them to open accounts at Sterling Foster. Once a customer established an account and purchased the non-House Stock, the broker would switch the customer into a House Stock, routinely using a false and misleading sales pitch designed to make the customer believe that the House Stock was a better investment than the non-House Stock.
During the course of this scheme, the defendants made unauthorized purchases of House Stocks in customers' accounts. The defendants often caused their customers to purchase a stock the customer had not agreed to buy or to purchase a higher amount than the customer had authorized. Once a customer received confirmation of an unauthorized purchase, the defendants attempted to force the customer to pay for the unauthorized purchase by persuading the customer that the House Stock was an investment worth keeping.
Another technique employed by the defendants to create artificial market demand and defraud customers was to tell a customer that the customer could purchase Public Offering units from a Sterling Foster Public Offering only if the customer committed to purchase a certain amount of House Stock shares in the aftermarket.
The defendants falsely told their customers that the customer should purchase House Stock prior to when the institutional investors were allowed to purchase the stock. The defendants told the customers that institutional investors were presently restricted from buying the House Stock, that those restrictions would soon be lifted, and that once the institutional investors began purchasing the House stock, the price of the House Stock would increase. In truth, the defendants did not know of any imminent institutional investments.
Prior to the effective date of each Public Offering, the defendants wrote order tickets for their customers to purchase aftermarket shares of the House Stock. Because the defendants could not know the share price of the House Stock prior to the Public Offering effective date, they would write a dollar amount on the part of the order ticket that would be discarded. The defendants would not find out the number of shares purchased of the House Stock's share price until after the purchase was executed.
When customers indicated a desire to sell House Stock, the defendants frequently and falsely told the customers to hold the stock because the defendants knew nonpublic information about the Issuer that, once made public, would cause the Issuer's stock price to increase dramatically. In fact, the defendants did not have access to any such information. The defendants also told customers that if they sold House Stock, the customers would not be part of Sterling Foster's next IPO. If customers persisted in their desire to sell House Stock, the defendants frequently employed a number of techniques to avoid or delay a sale, including avoiding customers' telephone calls; transferring customer calls to another broker who would continue putting off the customers' attempts to sell; failing to write out the sell ticket; and failing to give the sell ticket to a trader to be executed.
Another technique used by the defendants was, on occasion, to refuse to process a sale of a House Stock unless the sale was paired or "crossed" with the purchase of the same amount of the House Stock by another customer.
None of these fraudulent practices was disclosed to customers at the time of their purchases of the House Stock or thereafter.
Between January 10, 1996, and February 20, 1996, several of the defendants, including Weeks, Scuteri, Ferrante and Matthews, conducted sales meetings at Sterling Foster for certain top-producing brokers to discuss, among other things, strategies for inducing customers to place "big ticket" orders; the "mental tricks" of becoming a "big broker;" the underwriting process and how to open accounts for IPOs; and how each broker could "put away" 1,000 shares of Advance Voice stock.
In 1996, Adam Lieberman gave Rodriguez approximately $6 million as a bonus for his work at Sterling Foster, with the understanding that if Lieberman asked Rodriguez for money in the future, Rodriguez would provide it to Lieberman. Rodriguez opened a corporate account in the name of Chestnut Enterprises, Inc., and deposited the $6 million into the account. Rodriguez subsequently made numerous withdrawals from that account to benefit himself and others. No one else had any control or authority over the account.
Subsequently, between May 10, 1998, and May 1999, Rodriguez filed false sworn petitions in the U.S. Bankruptcy Court in Westbury, N.Y. that did not indicate that he had received $6 million in income in 1996.
The government noted that the total loss resulting from this offense was approximately $88,833,095.
According to the government, none of the brokers had prior selling experience; all were trained at Sterling Foster. While the offense discusses 50 "customers," the government noted that there are hundreds of victims of this offense.
In determining the losses attributable to each defendant, the government included for Team Leaders their individual losses as well as the losses that were caused by the respective Team members that they supervised. The government seeks to hold responsible only those Team Leaders who did not plead guilty because at the time those who pled guilty entered their plea, there was insufficient information to attribute to them responsibility for the losses caused by the brokers under their supervision.
Losses for each of the defendants as calculated by the government are as follows:
________________________________________________________________________ DEFENDANT ATTRIBUTABLE LOSSES ________________________________________________________________________ MONROIG $1,589,018 ________________________________________________________________________ MATTHEWS $19,085,419 (Team Loss) $1,973,309 (individual loss) ________________________________________________________________________ ABISH $301,088
BETTS $19,816,980 (Team loss) $1,335,068 (individual loss) ________________________________________________________________________ CHARVAT $1,124,023 ________________________________________________________________________ COHN $1,391,393 ________________________________________________________________________ CORCORAN $810,481 ________________________________________________________________________ DISTEFANO $842,958 ________________________________________________________________________ FEENY $75,411 ________________________________________________________________________ FERRANTE $1,109,593 ________________________________________________________________________ GOURLAY $780,823 ________________________________________________________________________ KEARNEY $23,628,619 (Team loss) $1,327,865 (individual loss) ________________________________________________________________________ MACCAULL $829,156 ________________________________________________________________________ MASSARO $607,926 ________________________________________________________________________ PRATT $1,071,740 ________________________________________________________________________ RUEB $560,638 ________________________________________________________________________ SCUTERI $2,531,886 ________________________________________________________________________ SIEGEL $727,931 ________________________________________________________________________ TURNEY $486,311 ________________________________________________________________________ TURSI $1,120,816 ________________________________________________________________________ WEEKS $23,452,404 (Team loss) $1,151,649 (individual loss) ________________________________________________________________________ RODRIGUEZ $14,595,867 (Team loss) $1,185,287.50 (individual loss) ________________________________________________________________________
Victim Impact
The defendants defrauded hundreds of individuals and caused losses totaling approximately $88,833,095.
According to the government, the restitution in this case should be paid to the fund created in the case of United States v. Randolph Pace, S1 98 CR 1247 (LAP). In that case, the Honorable Loretta A. Preska appointed Robert Romano, Esq. now of the firm of Morgan, Lewis Bockius, to serve as special master to oversee the payment of restitution to the former customers of various "boiler room" brokerage firms, including Sterling Foster. Mr. Romano is responsible for gathering the assets from the various defendants, identifying the victims, and determining the formula for paying out the funds that are collected.
Adjustment for Obstruction of Justice
There is no information to suggest that the defendant impeded or obstructed justice at the time of the arrest, or during the investigation or prosecution of the offense.
Adjustrnent for Acceptance of Responsibility
Based on the plea allocution, it appears that Rodriguez has accepted responsibility for his involvement in the offense.
The Guidelines
The 1995 edition of the Guidelines Manual has been used in this case, pursuant to § 1B1.11(b)(1).
All counts shall be grouped together pursuant to § 3D1.2(d) because the offense level is determined largely by the amount of loss caused in the offense.
The most appropriate guideline for offenses of conviction is § 2F1.1 which provides for a base offense level of 6, pursuant to § 2F1.1(a).
Rodriguez shall not be held responsible for the Team loss because the work of others should not be attributed to him, particularly as Pratt, another Team Leader, did not face the same enhancement. Therefore, he shall be responsible for his individual loss of $1,185,287.50, and his offense level is enhanced by 11 levels to 17, pursuant to § 2F1.1(b)(L).
Because more than minimal planning was involved in committing the instant offense, and the offense involved a scheme to defraud more than one victim, an increase of two levels to 19 is applicable, pursuant to § 2F1.1(b)(2)(A) or (B).
Because the defendant abused a position of trust in a manner that significantly facilitated the commission and concealment of the offense, an enhancement of two levels to 21 is applicable, pursuant to § 3B1.3.
Pursuant to § 3B1.1(b), an enhancement of three levels to 24 is applicable as the defendant was a manager or supervisor of the criminal activity that involved five or more participants or was otherwise extensive.
With regard to Count 3, an enhancement of two levels is applicable as the defendant committed perjury in connection with the bankruptcy filing wherein he failed to report $6 million of income, derived from the fraudulent activities charged in Counts 1 and 2, thus raising the offense level to 26.
Because of the defendant's timely notification of his intention to plead guilty, thus allowing the government to allocate its resources more efficiently, and because the aforementioned base offense level is 16 or greater, pursuant to § 3E1.1(a) and (b), the offense is reduced three levels to 23.
Total Offense Level
Rodriguez's total offense level is 23.
Criminal History Category
Available information indicates that the defendant was represented by counsel in all matters resulting in conviction, unless otherwise noted.
Rodriguez was arrested on July 1, 1981 and charged with unlawful possession of marijuana. He received a conditional discharge on February 24, 1982 and paid a $100 fine. Pursuant to § 4A1.2(e)(3), that qualifies for 0 criminal history points.
Rodriguez was arrested on February 23, 1983 and charged with unlawful possession of marijuana. On June 21, 1983, he was sentenced with a $25 fine. Pursuant to § 4A1.2(e)(3), that qualifies for 0 criminal history points.
On June 8, 1984, Rodriguez was charged with criminal mischief, for which he received a conditional discharge on October 19, 1984. Pursuant to § 4A1.2(e)(3), that qualifies for 0 criminal history points.
On August 25, 1999, Rodriguez was charged with driving under the influence of alcohol. He received a conditional discharge, a $500 fine and his license was suspended for 90 days on December 2, 1999. Pursuant to § 4A1.1(d), that qualifies for 1 criminal history point.
The above convictions result in one criminal history point. According to the sentencing table at Chapter 5, Part A, one criminal history point establishes a Criminal History Category of I.
Applicable Guidelines Range
The statutes under which Rodriguez pled guilty provide for a maximum of five years of imprisonment ( 18 U.S.C. § 371); a maximum of ten years of imprisonment ( 15 U.S.C. § 78j(b) and 78ff and 17 C.F.R. § 240.10b-5); and a maximum of five years of imprisonment ( 18 U.S.C. § 1341). Based on a total offense level of 23 and a Criminal History Category of I, the applicable guideline range of imprisonment is 46-57 months.
Downward Departure
The government has informed the Court that it believes that Rodriguez is entitled to a downward departure pursuant to § 5K1.1(a)(l)-(s) because Rodriguez complied with the terms of his cooperation agreement with the government and provided substantial assistance in the investigation and prosecution of co-conspirators.
The government reported that Rodriguez was the first broker at Sterling Foster to plead guilty and begin cooperating. He met with the government over many months to describe sales techniques, identify and explain the nature of documents recovered from Sterling Foster, and to prepare for testimony at the trial of five co-defendants. Partly as a result of the defendant's cooperation, the guilty pleas of 15 other defendants were able to be obtained.
The Sentence
In light of the foregoing and in light of the sentences provided to other defendants who shared similar roles in the scheme, Rodriguez shall be sentenced to 366 days 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 fund created in the case of United States v. Randolph Pace, s1 98 CR 1247 (LAP) in the amount of $1,185,287.50, 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 defendant should begin restitution payments while incarcerated. If the defendant is engaged in a BOP non-UNICOR work program, he shall pay $25 per quarter toward the criminal financial penalties. However, if the defendant 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.
The remainder of the restitution shall be paid in monthly installments over a period of supervision to commence 30 days after the date of the judgment or release from custody if imprisonment is imposed. The amount of the monthly installment shall be 5% of the gross monthly income if the defendant's net salary is less than $100,000 per annum and 10% of the gross monthly income if the defendant's net salary is more than $100,000 per annum.
The defendant 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: the defendant 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 drug testing condition is suspended due to imposition of a special condition requiring drug treatment and testing.
The defendant shall be subjected to the standard conditions of supervision (1-13) in addition to the following conditions: 1) the defendant shall provide the probation officer with access to any requested financial information; 2) the defendant shall not incur new credit charges or open additional lines of credit without approval of the probation officer unless the defendant is in compliance with the installment payment schedule; 3) the defendant will participate in a program approved by the United States Probation Office, which program may include testing to determine whether the defendant has resorted to using drugs or alcohol. The Court authorizes the release of available drug treatment evaluations and reports to the substance abuse treatment provider, as approved by the probation officer. The defendant will be required to contribute to the costs of services (co-payment) in an amount to be determined by the probation officer, based on ability to pay or availability of third-party payment; 4) the defendant is prohibited from engaging in a business, occupation, or profession which has a reasonably direct relationship to the conduct involved in the instant offense.
The defendant 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.
Rodriguez shall pay a mandatory special assessment of $300, which shall be due immediately.
This sentence is subject to further hearing on October 28, 2002.