Opinion
00 Cr. 91-19 (RWS)
October 23, 2002
SENTENCING OPINION
On March 21, 2001, Donald Turney ("Turney") pled guilty to one count of conspiracy to commit securities, mail and wire fraud in violation of 18 U.S.C. § 371.
Turney 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. See United States v. Teieda, 146 F.3d 84, 87 (2nd 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.
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.
Mario Rodriguez ("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.
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 Offering 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.
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 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.
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, 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.
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.
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, artificially inflated purchase price, 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 FERPMTTE $1,109,593 GOURLAY $780,823 KEARNEY $23,628,619 (Team loss) $1,327,865 (individual loss) MACCAULL $829,156 MAS SARO $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 ImpactThe 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 Turney impeded or obstructed justice at the time of the arrest, or during the investigation or prosecution of the offense.
Adjustment for Acceptance of Responsibility
Turney now knows that the training he received from J. Gregory and Sterling Foster was wrong. He now has many regrets and is remorseful. Therefore, acceptance of responsibility will apply.
Adjustment for Acceptance of Responsibility The Guidelines
The 1995 edition of the Guidelines Manual has been used in this case as it was in effect at the time the offense was committed was utilized for calculation purposes in accordance with § 1B1.11(b)(1).
The guideline for a violation of 18 U.S.C. § 371 is found in § 2X1.1, which directs that the guideline for the substantive offense, plus any applicable special offense characteristics, be used. The offenses charged in Count 1 include securities, mail and wire fraud, which are covered by § 2F1.1(a), and which provides for a base offense level of 6.
Turney is responsible for losses of approximately $486,311. Accordingly, nine levels are added, pursuant to § 2F1.1(b)(1)(J), bringing the level to 15.
As the instant offense involved a scheme to defraud more than one victim, the offense is raised two levels to 17, pursuant to § 2F1.1(b)(2)(B)
In his role as a broker, Turney had a fiduciary responsibility to the investing public as well as his customers. As the defendant abused a position of public and private trust in a manner that significantly facilitated the commission or concealment of the offense, two levels are added, pursuant to § 3B1.3, bringing the offense level to 19.
Based on the defendant's statement and plea allocution, it is believed that Turney has shown recognition of responsibility for the offense. 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 16.
Total Offense Level
Turney's total offense level is 16 under the Guidelines.
Criminal History Category
Turney has no known criminal convictions. Therefore, he has zero criminal history points and a Criminal History Category of I.
There are several pending charges, however. On June 27, 2002, Turney was arrested for driving with a suspended license in Fort Lauderdale, Florida. On November 23, 2001, Turney was charged with possession of marijuana.
Applicable Guidelines Range
The statute under which Turney pled guilty provides for a maximum of five years of imprisonment ( 18 U.S.C. § 371). Based on a total offense level of 16 and a Criminal History Category of I, the applicable guideline range of imprisonment is 21-27 months.
Downward Departure
A downward departure is appropriate pursuant to § 5K2.0 because this case presents "aggravating or mitigating circumstances of a kind, or to a degree, not adequately taken into consideration by the Sentencing Commission in formulating the guidelines that should result in a sentence different from that described." The reason for this departure is based on the weight attached to a specific offense characteristic: the loss for which each defendant should be held accountable. The loss provision makes sense when the fraud involved is a small-scale operation. It does not make sense when up to 250 people are participating, and the loss is difficult — if not impossible — to apportion fairly.
The firm of Sterling Foster was comprised of somewhere between 150 and 250 brokers. From testimony presented before this Court in United v. Matthews, it may be concluded that all 150 to 250 brokers were engaged in exactly the same fraudulent practices. Yet only 21 defendants are being held accountable for differing level of loss that, at best, derives from the vagaries of proof of how much loss could be attributed to each defendant, and the availability of witnesses to that effect. As a result, defendants who played the same organizational role have widely varying enhancements based on the specific offense characteristic of loss. Among the Team Leaders who are now being sentenced, Tursi faces an 11-level enhancement for a loss of $1.1 million, while Matthews has a 12-level enhancement. Among the Assistant Branch Managers, the span is even greater: from an increase of 7 levels (Abish, with a loss of $157,738) to an increase of 13 levels (Scuteri, with a loss of $2,531,886). Similarly, the Account Executive Feeny faces a six-level enhancement (a loss of $75,411), while his colleague MacCaull faces an 11-level enhancement (a loss of $829,156).
Pratt, a Team Leader who was previously sentenced, as discussed above, received an 11-level enhancement.
As a result, this Court will downward depart for each defendant to the lowest level of enhancement in their respective tier. Thus, all Team Leaders will have a loss enhancement of 11 levels; all Assistant Branch Managers will have a loss enhancement of 7 levels; and all Account Executives will have a loss enhancement of 6 levels.
As discussed above, in other circumstances our Circuit has repeatedly held that a district court may not take into consideration whether co-defendants have similar sentences. E.g., United States v. Tejeda, 146 F.3d 84, 87 (2nd Cir. 1998). This situation differs, however, from the typical case where a Court tries to rectify apparent disparities in the sentences of codefendants. Here, the Court is specifically addressing one specific offense characteristic that, to its mind, inadequately represented the true nature of the fault involved. The specific offense characteristic — loss — was considered on an individual basis even though all defendants (and up to 220 other individuals who did not even face criminal charges) took part in the fraud, all defendants engaged in the same activities, and, apparently, the only differences between defendants who performed the exact same duties in the exact same fraudulent manner, was how much loss could be proved against them. The goal of the Court in departing downward is not, impermissibly, to make all the sentences of like-situated co-defendants uniform, but to address the problematic nature of a specific offense characteristic in a truly unique situation.
As a result, Turney's offense level is decreased three levels to 13, and the appropriate range for an offense level of 13 and a Criminal History Category of I is 12-18 months.
The Sentence
In light of the foregoing and in light of the sentences provided to other defendants who shared similar roles in the scheme, Turney shall be sentenced to 15 months in prison, to be followed by three years of supervised release.
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 $486,311 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) with the following special 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 the approval of the probation officer unless he is in compliance with the installment payment schedule with regard to restitution; and (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. 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.
Turney shall pay a mandatory special assessment of $100, which shall be due immediately.
This sentence is subject to further hearing on October 28, 2002.