SEC known Kelly defence mounted in Miami fraud trial
2003-10-09 16:55 ET - Street Wire
by Mort Lucoff in Miami and Lee M. Webb
James T. Kelly, on trial for securities fraud in the U.S. District Court for the Southern District of Florida in Miami, listened as his attorney Norman Moscowitz presented the case for the defence on Oct. 8. Mr. Kelly, who could face 25 years in prison if convicted on all seven counts relating to wire, mail and securities fraud, did not take the stand to testify in his own defence.
Mr. Kelly, the former head of Pennsylvania-based Shamrock Partners Ltd., is accused of conspiring with former co-defendants Bruce Cowen and Joseph Huard in a kickback and stock manipulation scheme involving shares of Lighthouse Fast Ferry Inc. All three were arrested in August of last year as part of Operation Bermuda Short, a two-year joint FBI-RCMP undercover sting that led to the arrests of 58 U.S. and Canadian penny stock players.
Mr. Huard and Mr. Cowen negotiated separate plea bargains in the case and testified as key prosecution witnesses against Mr. Kelly. The government called its first witness following opening statements on Sept. 24 and rested its case on Oct. 7.
According to prosecutors Thomas McCann and Thomas Hanusik of the U.S. Department of Justice Fraud Section, Mr. Kelly was motivated by greed and was a knowing participant in the kickback and stock manipulation scheme.
The alleged kickback scheme involved a proposed $5-million transaction for approximately 3.12 million restricted shares of Lighthouse Fast Ferry owned by the Lancer Group, an allegedly fraudulent hedge fund operation run by Michael Lauer that was shut down by the U.S. Securities and Exchange Commission on July 10. (All amounts are in U.S. dollars.)
As part of the undercover sting operation, a fictitious British fund operated by a purported corrupt manager known only as Nigel was supposed to ante up the $5-million for the Lighthouse Fast Ferry shares through another fictitious U.S. company called Connelly & Williams Associates Inc. Under the proposed deal, $900,000 was supposed to be kicked back to the undercover sting operatives and another $600,000 was to be split equally among Mr. Cowen, Mr. Huard and Mr. Kelly.
The sting also involved a $10,000 payoff to two purported due diligence officers of Connelly & Williams through a $16,000 "test trade."
The alleged stock manipulation also involved Lighthouse Fast Ferry shares. According to the prosecution, Lancer used Mr. Kelly's Shamrock Partners to run up the price of Lighthouse Fast Ferry by buying blocks of the thinly traded stock at the end of the month, a fraudulent practice known as "marking the close." The rigged month-end price was then used to value Lancer's holdings of Lighthouse Fast Ferry.
In his opening statement on Sept. 24 and throughout his cross-examination of the prosecution witnesses, Mr. Moscowitz disputed the government's allegations, claiming among other things that Lighthouse Fast Ferry was a legitimate company and the proposed $5-million transaction was a good deal.
Pointing out that his client participated in few of the secretly recorded discussions about the deal and that his name did not appear on the documents related to the allegedly fraudulent kickback scheme, the defence lawyer also claimed that Mr. Kelly was suffering from physical and mental problems at the time and relied upon his friends to operate his business.
Because of Mr. Kelly's documented health problems, Judge Cecilia Altonaga instituted abbreviated trial sessions running from 11:30 a.m. to 5 p.m. Taking into account that the court did not sit on Sept. 26 or Oct. 6 in order to allow a jury member to observe Rosh Hashanah and Yom Kippur, it took Mr. McCann and Mr. Hanusik eight abbreviated trial days to lay out the government's case.
Mr. Moscowitz, who confronted the prosecution witnesses with some close cross-examination during the course of their testimony, called his witnesses and wrapped up the defence case in less than three hours on Wednesday.
The defence witnesses included Professor Steven Thel, a former SEC attorney who teaches securities law at Fordham University. Prof. Thel is a widely acknowledged and oft-cited expert on the subject of stock manipulation.
Two of the defence witnesses, Dr. Richard Eisner and Daniel Tunkel, were the subjects of pretrial motions by the prosecution to exclude their testimony.
Even as the trial opened, prosecutors argued that the evidence of Dr. Eisner, a neurologist from Bryn Mawr, Pa., should not be admitted. The government lawyers claimed that Mr. Kelly was attempting to back into "a diminished capacity defence" by introducing evidence "that he complained to his doctor in 2001 that he suffered from memory loss, inability to focus, and various severe physical ailments."
According to the government, Dr. Eisner's proposed evidence would have the "unfairly prejudicial effect of swaying the jury to sympathize with what is presented as a suffering, infirm defendant who is constantly in physical agony and mental confusion." The prosecution attempts to exclude that evidence were not successful.
The prosecution was also unsuccessful in its motion to exclude the evidence of Mr. Tunkel, a British lawyer who authored a practitioner's guide entitled "Managed Funds."
"The purpose of Mr. Tunkel's testimony will undoubtedly be to confuse the jury by testifying about English law which is completely irrelevant to this case," prosecutors claimed in a motion filed on Sept. 29. "Such testimony will be confusing to a United States jury sitting in judgment of a United States citizen who is alleged to have violated United States laws through a series of transactions and acts that occurred wholly within the United States."
Judge Altonaga disagreed with the prosecution's claim that the prejudicial impact of such testimony outweighed any probative value, allowing Mr. Moscowitz to call the British lawyer.
DEFENCE MOTIONS DENIED
Before calling his first defence witness, Mr. Moscowitz asked Judge Altonaga for either a directed judgment of acquittal or a mistrial.
The defence lawyer argued that the prosecution had failed to prove that Mr. Kelly had breached his fiduciary duties and had not proven any intent to do so by the defendant. Nor did the prosecution show that the British fund was a "pump-and-dump" scheme or that the kickbacks with which Mr. Kelly was allegedly involved were in violation of English common law.
There were no misrepresentations, no acts of concealment in the selling of stock, Mr. Moscowitz argued. The government case is irretrievably defective, he said.
"The law is clear," Mr. Hanusik countered. "When a criminal acts, he takes his chances." The prosecutor argued that Mr. Kelly was caught on tape participating in the conspiracy.
Mr. Hanusik called the defence "window dressing." According to the prosecutor, Mr. Kelly was involved in "paying and receiving undisclosed commissions, was involved in ongoing manipulation and paying undisclosed fees and kickbacks."
In denying Mr. Moscowitz's motions for acquittal or a mistrial, Judge Altonaga said she "carefully considered his arguments, but they are not persuasive."
With the defence motions denied, Mr. Moscowitz called his witnesses.
BENIGN PROGNOSIS
Neurologist Dr. Eisner was called to the stand to testify about Mr. Kelly's complaints of health problems dating back to 1990. Dr. Eisner told the court that he last saw Mr. Kelly as a patient on May 21, 2001.
According to Dr. Eisner, Mr. Kelly complained of memory loss, losing his thought in mid-sentence and sometimes forgetting where he was going while he was driving. The neurologist also testified that Mr. Kelly complained of errors that he was making in his brokerage business.
On cross-examination, Dr. Eisner said that Mr. Kelly had "a benign prognosis," which he defined as ailments "not leading to death or marked disability."
Also testifying for the defence on the subject of Mr. Kelly's health was Kevin Barr. Mr. Barr, a financial consultant, worked for Mr. Kelly at Shamrock Partners from May of 1997 to mid-May of 2001. Mr. Barr testified that he observed Mr. Kelly's deteriorating health and that as time went on Mr. Kelly had more medical appointments and spent more time out of the office.
NO CROSS
Mr. Moscowitz called another of Mr. Kelly's former business associates, Conrad Huss, to the stand. Mr. Huss, an investment banker from Suffren, N.Y., testified that in early 2001 he had tried to structure a deal with Mr. Kelly.
According to Mr. Huss, Mr. Kelly was supposed to invest about $250,000 and take an equity position in the proposed deal. Eventually, he said, Mr. Kelly invested "approximately $50,000 to $60,000." However, the deal was never finalized and Mr. Kelly's investment became a loan, Mr. Huss said. According to the investment banker, Mr. Kelly "has never asked for his money back."
U.S. prosecutor Mr. Hanusik allowed Mr. Huss to leave the witness stand without any cross-examination.
THE PROFESSOR
Prof. Thel, an acknowledged expert in securities law and corporate and contract law, was the key defence witness on Wednesday.
The Fordham University law professor testified that his reading of the indictment against Mr. Kelly did not show any stock manipulation. Prof. Thel added that he had made no close and factual reading of the evidence in the case.
The professor, who is being paid $450 per hour for his defence testimony, was questioned extensively about the regulation of hedge funds. Prof. Thel said that hedge funds were typically investments of the wealthy and were not subject to more than minimal regulation.
Mr. Moscowitz asked Prof. Thel if hedge fund managers could be compensated from investments that they intend to buy for their own funds.
Yes, Prof. Thel replied, as long as it is part of their agreements or employment contracts with their investors.
Wealthy investors aren't concerned about their manager's compensation, the professor said. "They're interested in whether their investments have substantial returns," Prof. Thel testified.
The defence lawyer invited Prof. Thel to suppose that the hedge fund manager causes the payment of higher commissions and fees.
Yes, he replied. It is what known as the "soft dollar."
Prof. Thel also testified that hedge fund managers can have accounts with other agencies and accept compensation.
On cross-examination, Mr. Hanusik questioned Prof. Thel about disclosure, drawing testimony regarding the limited disclosure requirements of hedge funds.
Failure to disclose is not fraud, Prof. Thel testified. According to the professor, fraud requires false statements. Promising to sell without the intent to sell is fraud, Prof. Thel said.
ENGLISH LAW
The last witness to testify was the British lawyer Mr. Tunkel, a partner in the London firm of SJ Berwin, which provides financial services to investment companies. He said his field was in the regulation of funds and in advising investment managers.
Mr. Tunkel testified the British equivalent of mutual funds was closely regulated, but hedge funds or investments by private institutions were not.
Mr. Tunkel said that he knew of agreements in which fund managers were allowed to accept compensation from investments they were buying for their funds and the compensation was legal under English law.
With the testimony finished, the prosecution and defence will make their closing arguments on Thursday. Following instructions from the judge, the jury will begin deliberations.
(More information regarding Mr. Kelly's trial is available in Stockwatch articles published on Sept. 25, 26 and 29; and Oct. 1, 2, 3, 7 and 8, 2003.) |
