Tuesday, February 17, 2015

Securities Fraud: Irrevocable Liability Establishes the Locus of a Securities Transaction For Purposes of Determining Whether a Transaction was Domestic

In United States v. Georgiou, Nos. 10-4774, 11-4587, and 12-2077, the Third Circuit upheld the defendant’s securities fraud, wire fraud, and conspiracy convictions against a host of legal challenges.  Georgiou was accused of engaging in a scheme to manipulate the markets of four over-the-counter stocks, i.e. stocks not listed on an American stock exchange.  Georgiou and his co-conspirators opened brokerage accounts in Canada, the Bahamas, and Turks and Caicos and then used these accounts to engage in manipulative trading in the target stocks.  By trading stocks between the various accounts they controlled, the co-conspirators were able to artificially inflate the stock prices to create an impression that each target stock had an active market.  The manipulation allowed Georgiou and his co-conspirators to sell their shares at inflated prices and to use the inflated shares as collateral to fraudulently borrow funds on margin and obtain millions of dollars in loans from different brokerage firms in the Bahamas.  These accounts experienced large trading losses.

The Supreme Court has explained the securities fraud statute, 15 U.S.C. §§ 78j(b) and 78ff, criminalizes deceptive conduct in two contexts:  (1)  transactions involving purchases or sales of securities listed on an American stock exchange; and (2) transactions involving purchases or sales of any other security in the United States (“domestic transactions”).  See Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010).  Prong one’s theory of liability was not applicable because the target stocks were not listed on an American stock exchange.  The Third Circuit held under prong two, irrevocable liability establishes the location of a securities transaction.   Relevant factors demonstrating irrevocable liability include the formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money.

 The evidence was sufficient to convict Georgiou under prong two’s domestic transaction theory of liability.  The evidence showed at least one of the fraudulent transactions in each target stock was bought and sold through U.S.-based market makers.  Some of the transactions required the involvement of a purchaser or seller working with a market maker and committing to a transaction within the United States, incurring irrevocable liability in the U.S., or passing title in the U.S.  There were also specific instances where target stocks were bought or sold at Georgiou’s direction from entities within the United States.  The district court’s jury instructions, which explained the jurisdictional requirements, were proper.  The district court was not required to preclude the jury from considering foreign activity in assessing guilt.

 Unlike securities fraud, wire fraud applies extraterritorially.  The wire fraud’s jurisdictional requirement is that a communication be transmitted through interstate or foreign commerce for the purpose of executing a scheme to defraud.  The evidence was sufficient to convict Georgiou of wire fraud because he regularly used e-mail to direct a cooperating witness and he wired money from a Canadian bank to an undercover FBI agent’s account in Pennsylvania.  

 The Third Circuit also upheld Georgiou’s conviction and sentence against a host of other challenges:
           Georgiou failed to raise a winning claim under Brady v. Maryland, 373 U.S. 83 (1963) or the Jencks Act based on alleged suppression of evidence regarding the cooperating witness’s mental health issues, drug use, and statements to the SEC.  Evidence of the cooperator’s drug use and mental health were discussed in his bail report and minutes of his guilty plea.  The evidence was not suppressed because it was equally available to the defense through the exercise of due diligence.  Evidence of the drug use was cumulative because it was disclosed pre-trial through statements provided in discovery.  The evidence was not favorable, nor material because there is no evidence to suggest it affected the reliability of the cooperator’s testimony, or that its introduction would have affected the verdict.  Likewise, Georgiou failed to identify any specific statements that were withheld under the Jencks Act.

           An SEC employee’s testimony making comparisons of stock quantities and prices did not require scientific, technical, or specialized knowledge and was therefore proper lay testimony under Federal Rule of Evidence 701.

           The district court did not abuse its discretion when it prohibited Georgiou from introducing extrinsic evidence of, and limited the cross-examination of the cooperating witness regarding his alleged post-cooperation fraud, under Federal Rules of Evidence 608(b) and 403.

           District courts are not required to consider the impact of market forces when making a loss calculation in securities fraud cases under U.S.S.G. § 2B1.1(b)(1)(M).  Even if the district court were required to do so, however, any error would be harmless because the district court properly found that Georgiou’s intended loss was over $100 Million, which would have resulted in an offense level two points above the guideline maximum.

           The district court properly assessed a six-level upward adjustment for 250 or more victims under U.S.S.G. § 2B1.1(b)(2)(C).  The jury found that he participated in a “pump and dump” scheme, and the SEC witness identified 1,918 investor accounts that purchased the stock during the scheme.  All of them lost over $1,000.

           Georgiou waived his right to object to the district court’s forfeiture order. 


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