I am posting this for Tony at his request. This is all text provided by Tony and any statements put forth here are his and not necessarily mine, though I'm going to reply with my own 2 cents.
This message is in 3 parts:
1. Intro from Tony
2. Opposition to Forfeiture
3. Joshuan Kellner's Affadavit in support of Opposition to Forfeiture.
Bob Zumbrunnen
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Dear folks,
It’s me, Anthony. I am writing to you all publicly for the first time since April of last year. Immediately following this open letter you will find a document that relates to the sentencing phase of this trial. This document quite simply will blow your mind. In the coming days and weeks you will see what the case of US v. Elgindy was really all about.
Keep in mind as you review the following documents, that I had every cent I ever had to my name seized and frozen three years ago. Since then I’ve spent millions defending this case. I have lost virtually every dollar I ever earned or saved in the past 17 years. I have lost my family, friends, business reputation, credibility, and most of all my liberty and my desperate need to be with my three young boys has not diminished as they face these critical years ahead.
On May 21, 2002, at my office in Encinitas, California, FBI agents stormed into my office and arrested me. The following day in a courtroom packed with spectators and reporters I was informed of the various securities related charges against me. My lawyer, Jeanne Knight, then requested bail. A man spoke up identifying himself as my prosecutor. He had flown in from New York. He stated in open court that aside from the stock market related charges there was another parallel investigation-- an investigation into whether I knew about the attacks months earlier on September 11. He stated that he believed that not only did I know about them but that I “tried to profit from it, rather than report it.” These nine words effectively ended the world for me as I knew it. Overnight I went from being a relatively well known short seller, comical internet commentator, and financial analyst to an enemy of the United States. My family was speechless, and my children suffered immeasurable shame and humiliation. There are simply no words to adequately explain the horror and pain we all felt. Not only was I facing charges of inside trading and corruption, I was linked to this country’s worst mass murder in history. My Egyptian heritage only added credibility and weight to his words. It may be worth noting that the 9/11 Commission Report, which interviewed Ken Breen, concluded: “Exhaustive investigations by the Securities and Exchange Commission, FBI, and other agencies have uncovered no evidence that anyone with advance knowledge of the attacks profited through securities transactions.” Unfortunately, words once spoken cannot be retracted and I was forever a tainted man.
My request for bail was denied, setting off a month long journey in buses, vans and airplanes, handcuffed and shackled, to New York City. My family was without resources, shunned by all but a few good friends. What followed for me was and continues to be a nightmare without end. I will have a great deal to say in the coming days about the events of the past three years, as well as the events that led up to my conviction. What I hope you will do now is read the following document that has been filed by my lawyers. It is a detailed response to the government’s request that I forfeit an amount in excess of $11 million dollars. An amount, BTW, that could translate into a 20 year sentence.
That I risked everything I had, my name, my family, a successful business, three wonderful children for $41,000.00 in profits is absurd. That 20 years of my life could be confiscated is a frightening commentary on our system of justice.
Stay tuned. It’s all coming to an A&P grocer near you.
Peace
A@P
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Part 2: Opposition to Forfeiture
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
––––––––––––––––––––––––––––––––––––––––– x No.02 CR 589 (S-2) (RJD)
UNITED STATES OF AMERICA- against -AMR I. (ANTHONY) ELGINDY et al.Defendants. ::::::::::
––––––––––––––––––––––––––––––––––––––––– x
MEMORANDUM OF LAW IN OPPOSITION TO
THE GOVERNMENT'S MOTION FOR A PRELIMINARY ORDER
OF FORFEITURE UNDER FED. R. CRIM. P. 32.2
Barry Berke, Esq. (BB 1421)
Eric A. Tirschwell (ET 3023)
Erin A. Walter (EW 1777)
KRAMER LEVIN NAFTALIS & FRANKEL LLP
1177 Avenue of the Americas
New York, New York 10036
(212) 715-9100
Attorneys for Defendant Anthony Elgindy
Preliminary Statement
Mr. Elgindy respectfully submits this memorandum of law in opposition to the government’s proposed findings of fact on the criminal forfeiture allegations. The government’s proposed forfeiture of $11,850,909.05 is not a proper forfeiture under either 18 U.S.C. § 1963(a) (RICO criminal forfeiture) or 18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. §2461(c) (criminal forfeiture based on securities fraud, wire fraud and extortion). The amount sought goes far beyond the ill-gotten gains that these forfeiture provisions are intended to reach. The government has not proven and, we respectfully submit, cannot prove, that the government’s nearly $12 million figure constitutes the “gross profits” that Mr. Elgindy would not have earned but for the illegal activities found by the jury.
The government simply asserts without legal or factual support that Mr. Elgindy must forfeit every cent of site fees that was collected from the time he started Anthonypacific.com -- which was before the conspiracy iss even alleged to have begun -- and every cent he made trading any stock the government put in its trading exhibits -- including trading in stocks outside the 41 identified pretrial and in others never mentioned at trial -- and in addition, every cent made by a select group of people -- most of whom we never heard from at trial. The government does not even attempt to carry its burden of proving (1) what portion of the site fees would not have been acquired but for the illegal activity as opposed to legitimate business activity; (2) what stocks were involved in the illegal activity as opposed to legitimate business activity; (3) who the co-conspirators were and whether any of their trading was foreseeable to Mr. Elgindy; and (4) what trading profits were made as a result of the illegal activity as opposed to legitimate trading activities.
The government’s unsupported assertions cannot form the basis of a contested criminal forfeiture. A proper forfeiture must link the property to be forfeited to the illegal activity for which Mr. Elgindy was convicted and we submit that in this case, the forfeiture should be limited in the following manner.
Site Fees:
Anthonypacific.com was overwhelmingly a legitimate site with legitimate members engaging in legitimate trading activity and therefore the portion of the site fees subject to forfeiture should be limited to those fees paid by the convicted codefendants who have admitted to insider trading based on information provided on the Anthonypacific.com website starting in October 2000. This amounts to $30,300. The government has not proven that any other member of Anthonypacific.com paid site fees for any reason other than to receive legitimate, lawfully-obtained information about stocks and benefit from Mr. Elgindy’s extensive trading experience.
Mr. Elgindy’s Trading Profits:
The portion of Mr. Elgindy’s trading profits subject to forfeiture should be limited to his profits from the alleged insider trading in only the four stocks as to which the jury found Mr. Elgindy had engaged in securities fraud: OSIN, PLMD, JUNM and SEVU (the “conviction stocks”). Using a method of calculating proceeds from insider trading that actually takes into account when alleged inside information regarding the four conviction stocks was disseminated to Mr. Elgindy and when the information would no longer be material (as discussed in detail below), Mr. Elgindy’s illegal profits on these stocks would be $41,897.89.
As to any other stocks as to which the government submitted evidence of the dissemination of alleged inside information to Mr. Elgindy, there is no finding that insider trading occurred. Before any of these stocks can be considered for inclusion in any calculation of Mr. Elgindy’s “illegal” profits, the government must prove at a hearing and the Court must find (1) that the information disseminated about the particular stock was non-public and came from an FBI database or other law enforcement source; (2) that such information was material; and (3) that such information “informed” a particular trade by Mr. Elgindy in that stock.
Other Individuals’ Trading Profits:
Mr. Elgindy should not be required to forfeit the trading profits of any other individual. First, joint and several liability is inappropriate in this case because the allocation of the proceeds from the alleged illegal activity is easily determined. Each individual allegedly involved in the securities fraud conspiracy traded in his own account and retained his own trading profits. It is patently unfair for the government to seek forfeiture of these other individual’s trading profits from Mr. Elgindy alone when the government has access to these individuals and can seek forfeiture of their profits from them.
Second, the requested forfeiture is grossly disproportionate to and inappropriate in light of the treatment of other convicted defendants. The record shows that as part of the alleged conspiracy, Derrick Cleveland and Jonathan Daws received and disseminated law enforcement information without Mr. Elgindy’s knowledge; yet, the government seeks no forfeiture from them of their retained trading profits. In fact, the government appears to have stipulated that Mr. Daws should be held responsible only for a sub-set of his own trading profits and not even for the trading profits of any of his alleged tippees. We submit that Mr. Elgindy should be treated no worse than the government has stipulated Mr. Daws should be treated and accordingly, Mr. Elgindy should be required to forfeit only his own trading profits from the alleged insider trading.
Even if the Court were to determine that Mr. Elgindy could be required to forfeit trading profits of other site members, the forfeiture must be limited to the trading profits of the three convicted codefendants who testified at trial and specifically admitted to insider trading in specified stocks (i.e., Mr. Cleveland, Mr. Hansen and Mr. Terrell). Their insider trading profits in the four conviction stocks -- analyzed according to the parameters set out below -- would add $29,716.77.
As to other alleged tippees, none of these individuals was ever called to testify that he either received the alleged inside information or that his trades where informed by such information. Before any of their trading profits can be considered forfeitable by Mr. Elgindy, the government must prove and this Court must determine (1) that the individual was a coconspirator; (2) that he received non-public information that came from an FBI database or other law enforcement source about a particular stock; (3) that such information was material; (4) that such information informed a particular trade in that stock; and (5) that his trading was foreseeable to Mr. Elgindy.
In sum, Mr. Elgindy submits that the forfeiture should be limited to the site fees paid by convicted coconspirators who admitted to using Anthonypacific.com to obtain law enforcement information and to his own profits from insider trading in the four conviction stocks. Alternatively, Mr. Elgindy intends to vigorously contest at an evidentiary hearing the government’s assertions that he be required to forfeit close to $12 million.
Argument
I. The Court Must Determine What Property Is Subject to Forfeiture Under the RICO Forfeiture Provision Based on Evidence Presented at a Forfeiture Bench Trial.
Pursuant to Federal Rule of Criminal Procedure 32.2(b)(1), where forfeiture is contested -- as it is here -- the court “must determine what property is subject to forfeiture under the applicable statute . . . based . . . on evidence or information presented by the parties at a hearing after the verdict or finding of guilt.” Fed. R. Crim. P. 32.2(b)(1).
A. The Applicable Statute
The government grounds its allegations of what property is subject to forfeiture on 18 U.S.C. § 1963 based on Mr. Elgindy’s conviction for RICO conspiracy in Count One of the Indictment. Although the government also mentions 18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. § 2461(c) as a ground for its forfeiture request based on the securities fraud, extortion and wire fraud convictions, the government does not analyze what property is subject to forfeiture under this statute. The government merely states that § 981(a)(1)(C) provides for forfeiture of “proceeds traceable to a violation” (Government Memorandum (“Gov’t Mem.”) at 8), and then analyzes what property is subject to forfeiture under the RICO forfeiture statute.
This is likely because forfeiture under § 981(a)(1)(C) is significantly narrower than forfeiture under § 1963 and far more complicated to determine. For example, Congress provided a definition of “proceeds” in § 981 that is narrower than the interpretation given to proceeds in § 1963. In cases involving “unlawful activities,” “proceeds” is defined as “property of any kind obtained directly or indirectly, as a result of the commission of the offense giving rise to forfeiture . . . and is not limited to the net gain or profit realized from the offense.” 18 U.S.C. § 981(a)(2)(A). In cases involving “lawful services . . . provided in an illegal manner,” “proceeds” is defined as “the amount of money acquired through the illegal transactions resulting in forfeiture, less the direct costs incurred in providing the . . . services. . . . The direct costs shall not include any part of the overhead expenses of the entity providing the . . . services, or any part of the income taxes paid by the entity.” 18 U.S.C. § 981(a)(2)(B). We submit that the latter definition would apply to Mr. Elgindy’s operation of the website.
In addition, §2461(c) does not authorize criminal forfeiture based on the wire fraud convictions in this case. In United States v. Croce, the court held that “18 U.S.C. § 982(a)(2)(A) is a specific statutory provision made for criminal forfeiture upon conviction of mail [or wire] fraud, so § 2461(c) does not authorize us to order criminal forfeiture of mail [or wire] fraud proceeds.” 345 F. Supp. 2d 492, 496 & n.9 (E.D. Pa. 2004) (citations omitted). Perhaps this is why the government does not reference the wire fraud convictions (which were not part of the RICO charge) in its arguments in support of forfeiture. (See, e.g., Gov’t Mem. part C at 7, 9.)
And further limiting the application of § 981, § 2461(c) does not authorize criminal forfeiture of any proceeds from any fraud that occurred before the effective date of the Civil Asset Forfeiture Reform Act of 2000 (“CAFRA”) (effective August 23, 2000), which made “specified unlawful activity” subject to criminal forfeiture through the enactment of 28 U.S.C. § 2461(c) and the amendment of 18 U.S.C. § 981. See Croce, 345 F. Supp. 2d at 496-97; United States v. Causey, 309 F. Supp. 2d 917, 923-24 (S.D. Tx. 2004).
Thus, section 981(a)(1)(C) cannot support the government’s request for forfeiture. In any event, because the RICO forfeiture statute is either coextensive or broader than the forfeiture provision for securities fraud and extortion, and because the securities fraud and extortion convictions relied upon by the government to support its forfeiture allegations were found to be predicate acts of the RICO conviction, we will also analyze what property is subject to forfeiture under section 1963.
B. Mr. Elgindy Is Entitled to a Forfeiture Bench Trial
Mr. Elgindy contests the government’s forfeiture allegations and is therefore entitled to a hearing at which the government must establish by a preponderance of the evidence what property is subject to forfeiture under 18 U.S.C. § 1963. Fed. R. Crim. P. 32.2; United States v. Fruchter, 411 F.3d 377, 382 (2nd Cir. 2005) (preponderance standard); United States v. Bellomo, 176 F.3d 580, 595 (2d Cir. 1999) (preponderance standard). Mr. Elgindy waived his right to have the jury determine what property the government proved subject to forfeiture only because he believed that he had the same right to require the government to present evidence and to present his own rebuttal evidence to this Court in a forfeiture bench trial in lieu of a jury trial. In light of the government’s grossly overbroad forfeiture request, Mr. Elgindy intends to invoke his right to an evidentiary hearing.
II. A Proper Forfeiture Does Not Include Legitimately Acquired Property.
The government’s forfeiture allegations rest on 18 U.S.C. §§ 1963(a)(1) and (a)(3), which, according to the government, make criminally forfeitable “any interest the person has acquired or maintained in violation of section 1962” and “any property constituting, or derived from, any proceeds which the person obtained, directly or indirectly, from racketeering activity . . . in violation of section 1962.” (Gov’t Mem. at 7; see 18 U.S.C. §§ 1963(a)(1) and (a)(3).) These provisions require that the convicted defendant forfeit his “ill-gotten gains” but not “legitimately acquired property.” United States v. Porcelli, 865 F.2d 1352, 1365 (2d Cir. 1989) (interpreting § 1963(a)(1) before (a)(3) was added but after the Supreme Court held in Russello v. United States, 464 U.S. 16 (1983) that section (a)(1) “interests” included “proceeds” of racketeering activity). As the government acknowledges at pages 14-15 of its brief, the Second Circuit in Porcelli adopted the “but for” test of United States v. Horak, 833 F.2d 1235, 1243 (7th Cir. 1987), for determining what property is subject to forfeiture under these provisions. See Porcelli, 865 F.2d at 1363, 1365. Under this test, forfeiture under § 1963(a)(1) and (3) is “limited to interests that would not have been acquired or maintained ‘but for’ defendant’s racketeering activities.” Id. at 1363. In other words, “the government must show . . . that [the defendant’s] racketeering activities were a cause in fact of the acquisition or maintenance of these interests or some portion of them.” Horak, 833 F.2d at 1243.
We do not quarrel with the government’s definition of the proper amount of forfeiture as the “gross profits” from Mr. Elgindy’s illegal activity. (Gov’t Mem. at 8 (citing United States v. Lizza Indus., 775 F.2d 492 (2d Cir. 1985)), and 10.) Rather, we dispute the government’s characterization of all subscriber fees from the inception of the Anthonypacific.com website and all trading profits of all of the people in all of the stocks that the government put in its trading exhibits (minus SLPH and FLOR as to which Mr. Elgindy was acquitted) as being acquired or maintained through the illegal activity for which Mr. Elgindy was convicted. (See Gov’t Mem. at 10, 12.) The government’s unreasonable and baseless assertions that all of these fees and trading profits should be forfeited is just the type of “undue prosecutorial zeal in invoking RICO” forfeiture that the Horak and Porcelli courts warned should be avoided. Porcelli, 865 F.2d at 1363 (discussing United States v. Huber, 603 F.2d 387, 395 (2d Cir. 1979) and Horak, 833 F.2d at 1251).
As noted above, the government has not carried its burden to prove by a preponderance of the evidence (1) what portion of the site fees would not have been acquired but for the illegal activity as opposed to legitimate business activity; (2) what stocks were involved in the illegal activity; (3) which individuals were co-conspirators involved in what illegal activity; and (4) what trading profits were made as a result of the illegal activity as opposed to legitimate trading activities. The government therefore cannot prevail because it has failed to connect the forfeiture it seeks with the illegal activity that forms the basis for criminal forfeiture in this case. See Porcelli, 865 F.2d at 1365; United States v. Simmons, 154 F.3d 765, 771 (8th Cir. 1998) (discussing United States v. Riley, 78 F.3d 367 (8th Cir. 1996) as holding that the government cannot seek forfeiture of “gross receipts” of a business that includes money obtained through legal activity).
III. The Site Fees Subject to Forfeiture Must Be Limited to Those That Would Not Have Been Acquired But For The Proven Illegal Activity.
The government’s allegation that all site fees paid by all site members from the inception of Anthonypacific.com should be forfeited (Gov’t Mem. at 10) is clearly overbroad. The government includes in its proposed forfeiture site fees beginning in 1999 even though the indictment does not allege, and the government concedes in its forfeiture brief it did not prove, that any conspiracy or other illegal activity began until March 2000. (Indictment 34; Gov’t Mem. at 9 (“At trial, the government proved that, between March 2000 and May 2002, Elgindy and his coconspirators engaged in a pattern of racketeering activity”).) Beyond that obvious flaw, the government makes no attempt to show why any of these site fees should be forfeited. The record shows that Anthonypacific.com was overwhelmingly a legitimate site with legitimate members engaging in legitimate business activity. In such a case, the government must show what portion of the site fees Mr. Elgindy would not have acquired but for the illegal activity for which he was convicted and the Court must order forfeiture of no more than that.
Mr. Elgindy submits that the portion of site fees that the government has even arguably shown at trial would not have been acquired but for the illegal activity for which he was convicted is limited to those fees paid by convicted coconspirators who admitted that starting in October 2000, they used Anthonypacific.com to receive law enforcement information about particular stocks (i.e., Mr. Cleveland, Mr. Hansen, Mr. Terrell and Mr. Daws). This amounts to $30,300. (See Affidavit of Joshua Kelner (“Kelner Aff.”) 22-23 and Ex. D.)
A. The Relevant Time Frame Begins in October 2000
As to the relevant time frame, the record shows that the first time Anthonypacific.com was used to disseminate information obtained (directly or indirectly) from Mr. Royer was in October 2000 with the dissemination of information about SEVU. Derrick Cleveland – the government’s star witness -- testified as such:
Q Was there a time when Mr. Elgindy was released from jail and became active again at the site?
A Yes.
Q When approximately was that?
A That was I believe October, around October of 2000.
Q When he did, did you provide -- did you begin providing him with information that you received from Royer?
A Yes.
Q What was the first significant information that you remember?
A The first significant information that I remember is on a company called Seaview where I provided him that Seaview was under SEC investigation.
(Tr. 266-67.) Another government witness, Robert Hansen, testified that when the site started in 1999, the Anthonypacific.com website was a “bona fide research site” and that the site gradually started changing in “late 2000.” (Tr. 2498-99.) Government witness Kent Terrell testified that when he joined the site he was paying for Mr. Elgindy’s identification of overvalued stocks (Tr. 3964-65), discussions about those stocks, and investigation of those companies (Tr. 3972-73).
The government similarly argued in summation that Mr. Elgindy started using Anthonypacific.com to disseminate Royer’s information in the fall of 2000 “after Elgindy got back” from prison:
What the evidence shows, as I've told you, is what you've all seen; that they started after Elgindy got back and was able to see how the web site was doing. They started sharing the information exactly that time, about November of 2000. That's when it all really starts.
(Tr. 8014.)
In sum, prior to October 2000, the site was not used to disseminate any of the alleged inside information identified by the government, and there is no evidence to contradict the proposition that the site fees paid prior to that time were paid for the purpose of engaging in legitimate discussions about stocks and to share legitimate research on companies. Thus, it cannot be said that the site fees collected prior to October 2000 would not have been acquired but for the illegal insider trading activity. The total site fees collected starting in October 2000 amounts to $1.6 million (see Kelner Aff. 36 and Ex. I), which is already significantly less than the $2.7 million the government claims only by including fees for four months before it even alleges the conspiracy began.
B. The Site Was Overwhelmingly a Legitimate Site
The Court must determine the extent of Mr. Elgindy’s interest in the site fees that was acquired or maintained by his racketeering activities, as opposed to site fees acquired based on Mr. Elgindy’s hard work and legitimate business acumen. In the words of the Second Circuit:
There is also evidence that Porcelli’s business expanded and prospered as a result of his hard work and business acumen. In other words, these properties are not entirely the tainted fruits of Porcelli’s fraud. The court below erred in not determining the extent of Porcelli’s interest in these properties that he would not have acquired or maintained but for his fraudulent scheme.
Porcelli, 865 F.2d at 1365 (citing Horak, 833 F.2d at 1241-44).
During the period when information from Mr. Royer was disseminated on the Anthonypacific.com site, the site was not all about trading on inside information. To the contrary, the record shows that the site was predominantly (indeed overwhelmingly) a legitimate site with legitimate members seeking and receiving legitimate, lawfully-obtained information about stocks in an entertaining environment. To see that the site was overwhelmingly not about stocks as to which law enforcement information was shared, one need only recall that the broadcast calls related to the 19 stocks as to which the government claimed inside information from law enforcement sources was disseminated on the Anthonypacific.com website amounted to only 4.86% of all broadcast calls issued on the Anthonypacific.com website starting in March 2000. (See Kelner Aff. 28-31 and Exs. F and G.) And this does not even account for the thousands of legitimate broadcast calls made before March 2000. Thus, at minimum, 95.24% of the stock tips given out on the site were based on information that the government has not even claimed – much less proved – was “tainted” by any unlawful “insider information.”
The government acknowledged in its summation that there were legitimate aspects to the site’s activities:
Does that mean that we're saying they did no research, that they never looked into anything, that it was an absolute zero effort? No. We're not saying that. We've never said that. Just as we never said that every single word on the site was illegal.
(Tr. 8053.) And as one site member testified:
It was just a trading room, chat room like hundreds of others on the web. It was for discussing ideas, for sharing information, for raising, you know, suggestions about a trade and getting feedback to see if people had different perspectives. It was to enhance everybody's trading abilities, and it was also to be a kind of community, you know, it was very isolating. It's very lonely to sit at your computer at home and trade, and it's tedious, sort of boring a lot of times. Not much is happening. You are looking at numbers. So this was a way to have fun, to have sort of a trading community.
(Tr. 5586-87 (testimony of NYU Professor and Anthonypacific.com website member Jeffrey Rubenstein).) Regardless of whether the site may have been used in part for illegal trading activities, the evidence adduced at trial showed that the site was also about learning to trade and having fun doing it.
Moreover, nothing in the record contradicts the obvious fact that the vast majority of the approximately 300 paying subscribers (Hansen, Tr. 2470) were not part of any conspiracy. The record supports a finding that the vast majority of members joined Anthonypacific.com because Mr. Elgindy was a famous and highly entertaining internet personality on SiliconInvestor.com and other websites who had a very good track record in the area of stock trading long before he met Derrick Cleveland or FBI Agent Jeffrey Royer. (See, e.g., Joey Anuff and Gary Wolf, The Dumbass, The Day Trader, and the New Democracy, Wired Magazine (April 2000) (“Anthony, who is 32, stocky, and bellicose, is respected for his rare ability to sift the complexities of the market and reduce his analysis of a company's value to simple terms.”); John R. Emshwiller, Online Maverick Sells the Internet Short, The Wall Street Journal, C1 (July 22, 1999) (describing Mr. Elgindy as “one of the leaders in a sort of cyberspace countermovement-investors who are trying to make money when Internet stocks fall” and noting his “loyal following” on SiliconInvestor.com and his being featured “in a 1997 segment on ABC’s ‘20/20’ news program as someone trying to help clean up Wall Street”).) By the time Mr. Elgindy created Anthonypacific.com, there were countless newspaper and magazine articles, and several books published about him and his trading abilities. (See, e.g., id.; John R. Emshwiller, Scam Dogs & Mo-Mo Mamas: Inside the Wild and Woolly World of Internet Stock Trading, Chs. 9-12 (HarperCollins NY, NY 2000); Aaron Elstein and Jason Anders, Heard on the Net: Two Message-Board Posters Foretold eConnect’s Woes, The Wall Street Journal Online (March 14, 2000).) That is what attracted his members to the site. More importantly, the government has not even attempted to meet its burden of proving otherwise as to any but the handful of members who testified at trial and/or pleaded guilty.
Based on this factual record, Mr. Elgindy respectfully submits that the only site fees even arguably “tainted” by the insider trading of which he stands convicted would be those paid during the relevant time period by admitted insider traders – i.e., Messrs. Cleveland, Terrell, Hansen and Daws. There simply is no evidence, and certainly no finding, that the remaining site members – constituting the overwhelming majority of total site members – were engaged in insider trading or were paying for inside information. As noted above, the aggregate of the site fees paid by the admitted insider traders for the period beginning in October 2000 amounts to $30,300. Those site fees alone should be the measure of the “gross profits” on subscriber fees that Mr. Elgindy would not have received but for his illegal activities.
IV. The Trading Profits Subject to Forfeiture Must Be Limited to Those That Would Not Have Been Acquired But For The Proven Illegal Activity.
As with the site fees, the government makes no attempt to meet its burden of linking Mr. Elgindy’s or anyone else’s trading profits to the illegal activity for which Mr. Elgindy was convicted. In fact, the government provides no rationale at all for its calculation of trading profits. The government simply took the trading records of a select group of individuals in a select number of stocks and added up all of the trading profits over a select period of time (see Ex. D to the Gov’t Mem.), without connecting the individuals, stocks or trades to any alleged illegal activity.
Although the government claims in its brief that Mr. Elgindy and his co-conspirators committed securities fraud and that the securities fraud involved both insider trading and market manipulation (Gov’t Mem. at 2), the government did not present at trial and does not present here any calculation of proceeds that could conceivably be based on market manipulation. Thus, assuming that the government is attempting to forfeit trading profits from the alleged insider trading, the sum total of the government’s “proof” that the trading profits presented in Exhibit D to its brief are criminally forfeitable is to list the stocks referenced in the indictment and to state:
The securities fraud conspiracy included trading by Elgindy and his co-conspirators in numerous stocks other than those listed in the Indictment, such as Biopulse and Choice One Communications; the specific trades in which the conspiracy participated are set forth in [Exhibit C and] the total profits [are summarized in Exhibit D].
(Gov’t Mem. at 12.) This is wholly insufficient to prove that all of these trading profits by all of these individuals are forfeitable.
Mr. Elgindy submits that a proper forfeiture of trading profits should be based on a calculation of Mr. Elgindy’s trading profits from only those specific trades that both followed the receipt of the inside information and preceded the point at which the inside information had been impounded into the price of the stock and therefore ceased to be “non-public” or “material.” Using these criteria, Mr. Elgindy’s insider trading profits on the four conviction stocks (OSIN, PLMD, JUNM and SEVU) calculates to $41,897.89.
A. Relevant Stocks, Persons and Trades for Calculating Forfeitable Insider Trading Profits.
For trading profits to be forfeitable “proceeds” from insider trading activity, the government must show what trading profits Mr. Elgindy would not have acquired but for his illegal activity. Three questions must be answered before this calculation can be made. The first question is what are the stocks as to which the government has proven that Mr. Elgindy received and disseminated inside information. We submit that the answer is only the four stocks as to which the jury was required to make a finding with respect to the securities fraud/insider trading charges: OSIN, PLMD, JUNM and SEVU. Once the universe of relevant stocks is identified, the second question is whose trades should be included. We submit that there is sufficient evidence of how trading profits in any given stock were allocated among the alleged participants in the RICO and securities fraud conspiracies that it would be improper to impose joint and several liability on Mr. Elgindy. A fair calculation of the trading proceeds subject to forfeiture by Mr. Elgindy therefore should be limited to Mr. Elgindy’s trading profits alone. Once the universe of proven stocks and the universe of proven coconspirators is properly identified, the third and last question is which particular trades are properly included in the forfeiture calculation. We submit that the calculation should include only those specific trades that both followed the receipt of the alleged inside information and preceded the point at which the inside information was impounded into the price and therefore no longer non-public or material.
1. Identifying the Proven Insider Trading Stocks
The government includes in its forfeiture calculation stocks that were never mentioned at trial, stocks that were not on the list of 41 stocks identified pretrial as involved in the alleged illegal activity, and stocks that we have never even heard of. Clearly, the government has not met its burden to prove that these stocks were involved in insider trading. In fact, we submit that the only stocks that the government has proven were involved in insider trading are the four conviction stocks: OSIN, PLMD, JUNM and SEVU.
a. SPLH and FLOR Must Be Excluded
As the government states in its brief at page 12, footnote 6, trading in the stocks for which Mr. Elgindy was acquitted of securities fraud -- SLPH and FLOR -- should be excluded from the forfeiture calculation. Its calculation of $9,145,695.72 in forfeitable trading profits in Exhibit D, however, necessarily includes SLPH and FLOR. (See Kelner Aff. 4.) It also includes a typo. The true total of Exhibit D is $9,185,695.72. (Id.) Subtracting SLPH and FLOR takes the calculation down to $8,301,016.42. (Id. 5.)
b. Other Than the Conviction Stocks, the Government Must Prove at a Hearing That a Particular Stock Was Involved in Insider Trading of Which Mr. Elgindy Was Aware.
Absent a conviction for securities fraud with regard to a specific stock, the government must prove at a hearing the illegal activity allegedly involving any stock it wishes to include in its forfeiture calculation. For many of the stocks included in the forfeiture calculation, the only evidence presented on those stocks was GX-JL-1, the government’s summary exhibit of improperly obtained law enforcement information. The fact that information about a company was accessed by Royer or Wingate, however, does not show that the information ever reached Mr. Elgindy, that Mr. Elgindy traded on it, or that Mr. Elgindy could have foreseen anyone else’s use of the information. See United States v. Fruchter, 411 F.3d 377, 384 (2nd Cir. 2005) (holding that court must find “that the criminal conduct through which the proceeds were made was foreseeable to the defendant” in order for proceeds to form part of forfeiture and noting that the sentencing court appropriately “took care to exclude from the forfeiture amount any proceeds resulting from conduct of which [the defendant] was not aware and had no reason to be aware”); United States v. Hurley, 63 F.3d 1, 22 (1st Cir. 1995) (defendant liable only for “so much of [illegally obtained amount] as was foreseeable” to that particular defendant).
Information about ImClone, for example, was accessed by Wingate, but whatever negative information regarding the investigation into ImClone Ms. Wingate may have found in the FBI computers and imparted to Mr. Royer, there is no evidence that Mr. Elgindy was aware of that information and he clearly did not trade on it. Mr. Elgindy never shorted ImClone; all of his trades are long. (See Gov’t Mem. Exs. C & D; Kelner Aff. 6.) More importantly, all of his trades were completed before Ms. Wingate accessed any information on ImClone. (See id.) Thus, the information could not possibly have impacted Mr. Elgindy’s trading in ImClone. In addition, there being no evidence that Mr. Elgindy received any information about ImClone, other people’s trading in the stock was not foreseeable to Mr. Elgindy. Yet the government includes in its forfeiture calculation the profits of Mr. Elgindy’s long trades in ImClone before the law enforcement access, as well as the short sales of other individuals.
In addition, the government included in its calculation trading on information that the government’s own witness testified never reached Mr. Elgindy. Cleveland testified that he and Royer obtained information about Potomac Energy and Energas through Royer’s FBI investigation in the summer of 2000 and traded on that information (Tr. 244-49), but that they did not tell Mr. Elgindy about this information or trading because he was “in prison at the time and he wasn’t around” (Tr. 248). Cleveland also testified that although he received information from Mr. Royer on CATH, CWON, INIV, MDPA, TTRE, NAPH and REFR, he did not provide any of the information to Mr. Elgindy, and none was disseminated on the site. (See GX-JL-1.) Mr. Elgindy did not make any illegal trades in these stocks and any alleged insider trading in these stocks by others was not foreseeable to Mr. Elgindy. Mr. Elgindy therefore cannot be held responsible for any profits from any trading in those stocks. See Fruchter, 411 F.3d at 384 (noting the proper exclusion of profit from conduct of which the defendant was not aware); Hurley, 63 F.3d at 22. Yet again, the government claims that Mr. Elgindy should be required to forfeit his own and everyone else’s trading profits on these stocks.
As to the remaining stocks as to which the government introduced evidence of the dissemination of alleged inside information to Mr. Elgindy and/or from Mr. Elgindy on the Anthonypacific.com website, there is no jury finding that insider trading was proved. As to each of these stocks, before it can be considered for inclusion in any calculation of forfeitable proceeds from the alleged insider trading, the government must show and the Court must find: (1) that the information disseminated about the particular stock was non-public and came from an FBI database or other law enforcement source; (2) that such information was material; and (3) that such information “informed” a particular trade in that stock. We further submit that the government has not offered sufficient proof at this point as to any of the stocks beyond the four stocks as to which the jury rendered its verdicts.
2. Identifying the Relevant Trader(s)
Fairness dictates that Mr. Elgindy should be required to forfeit only his own illegal trading profits because the allocation of the proceeds of the alleged insider trading conspiracy is easily identifiable and because similarly-situated codefendants are not being asked to forfeit their profits. If the Court does not agree that the forfeiture should be so limited, any additions must be limited to the three convicted codefendants who testified at trial and specifically admitted to insider trading in specified stocks (i.e., Mr. Cleveland, Mr. Hansen, and Mr. Terrell). As to other alleged tippees (such as Jonathan Daws, Gryphon Partners, McGreggor, Slotnick, Spinner Global and Thorpe), none of these individuals or entities (or representatives of such entities) was ever called to testify that they either received and were in possession of the alleged inside information or that their trades in any specific stock were “informed by” such information.
a. Mr. Elgindy Should Be Required To Forfeit Only His Own Trading Profits Because the Imposition of Joint and Several Liability on Mr. Elgindy Alone Is Inappropriate in this Case.
Although joint and several liability has been imposed in RICO criminal forfeiture cases, it has been limited to amounts reasonably foreseeable to the particular defendant and to situations in which the government is unable to prove how the illegal proceeds of racketeering activity have been allocated among multiple coconspirator defendants. See United States v. Simmons, 154 F.3d 765, 769-70 (8th Cir. 1998); United States v. Caporale, 806 F.2d 1487, 1507-08 (11th Cir. 1986); United States v. Benevento, 663 F. Supp 1115, 1118-19 (S.D.N.Y. 1987), aff’d 836 F.2d 129, 130 (2nd Cir. 1988) (agreeing with district court construction of RICO forfeiture statute and affirming on the basis of district court opinion); see also 31A Am. Jur. 2d Extortion § 160 (May 2004) (describing joint and several liability in RICO criminal forfeiture as follows: “Where the government is unable to prove how the illegal proceeds of racketeering activity have been allocated among multiple defendants, a District Court may properly impose joint and several liability on the defendants in its forfeiture order.”); United States v. Corrado, 227 F.3d 543, 553-58 (6th Cir. 2000) (agreeing with the reasoning in Simmons, 154 F.3d at 769-70); Fruchter, 411 F.3d at 384 (relying on Corrado, 277 F.3d at 554-58, for the availability of joint and several liability in RICO forfeiture).
In Caporale, the court determined the “issue of first impression” of whether “a RICO forfeiture can be imposed jointly and severally.” 806 F.2d at 1506. In that case, four codefendant officers of a Union conspired to grant a dental care contract to a certain entity which paid kickbacks to several dummy corporations that funneled money to all four codefendants. Id. at 1495-96. The government conceded that it could not prove how the kickbacks had been allocated among the four defendants. Id. at 1506. After considering the intent of RICO and the role the forfeiture provision plays in the Congressional scheme, the court held that “joint and several liability may be imposed in these circumstances.” Id. at 1507-08 (emphasis added). The court then explained these circumstances as one where the amount of proceeds can be shown but the allocation among codefendants cannot, where all four codefendants are held jointly and severally liable, and where the defendants fail to demonstrate that imposition of joint and several liability is unfair. Id.
The court reasoned as follows:
If the government were required to determine the precise allocation of racketeering proceeds between two offenders before the court could impose forfeiture, the effectiveness of the remedy would be impaired substantially. The offenders would simply have to mask the allocation of the proceeds to avoid forfeiting them altogether. If the government can prove the amount of the proceeds and identify a finite group of people receiving the proceeds, it defeats the purpose of the provision to hold that the proceeds cannot be forfeited because the government cannot prove exactly which defendant received how much of the pot.
806 F.2d at 1508. Imposing joint and several liability on all four defendants was appropriate because it “simply places the burden of satisfying the order collectively on [the four defendants]” and “in this context is simply a collection device.” Id. at 1508 (emphasis added). “Finally, and perhaps most importantly, these four appellants have failed to demonstrate that imposition of joint and several liability is in any way unfair.” Id..
In Simmons, the defendants were owners and officers of several lobbying firms that received money to lobby on certain bills before the Missouri legislature. One defendant argued that he should not be held jointly and severally liable for the money the lobbying firms received related to a bribery scheme for which he was not convicted. The district court found that he had helped to secure the lobbying contract and assisted with the lobbying efforts. The Eight Circuit held that the codefendants were properly held jointly and severally liable because “[t]he government is not required to prove the specific portion of proceeds for which each defendant is responsible. Such a requirement would allow defendants ‘to mask the allocation of the proceeds to avoid forfeiting them altogether.’” 154 F.3d at 769-70 (quoting United States v. Caporale, 806 F.2d 1487, 1508 (11th Cir. 1986)).
In Benevento, a defendant asserted that he should be required to forfeit only his share of illegal proceeds, despite that he actually received all of the money that was acquired through his own and others actions. 663 F. Supp at 1118. The court ended by imposing individual liability on this particular defendant, but reasoned that joint and several liability was available “to address the phenomenon of defendants defeating forfeiture by removing, transferring, or concealing assets prior to conviction.” Id. (internal quotation omitted). More precisely, “If the defendant were to escape liability under the criminal forfeiture provision because he had compatriots in crime who also profited from the criminal behavior, the defendant effectively would be able to conceal or transfer assets prior to conviction and, thus, defeat the purposes of the provision. . . . [I]t is unlikely that the criminal organization will have well-maintained and accurate files of proportional participation in the group.” Id.
In this case, the government is attempting to exceed these limits by holding Mr. Elgindy alone jointly and severally liable for the illegal proceeds of multiple defendants and others, even though it is exceedingly easy for the government to identify the amount of illegal proceeds obtained and retained by each coconspirator. Each alleged coconspirator included in the government’s calculation traded with his own money (or his hedge fund’s money) in individual, separate accounts. It is thus quite clear what amount of the total proceeds from the illegal trading activities of the RICO enterprise was obtained by a given coconspirator, and there is no evidence that any of the alleged coconspirators (other than Mr. Cleveland and Mr. Royer) shared their profits with each other. Thus, Mr. Elgindy received absolutely none of these other individuals’ trading profits as part of the alleged RICO or securities fraud conspiracy; yet, in the government’s view, he alone should be held responsible for forfeiting them.
Not only is it easy for the government to allocate the illegal proceeds among the coconspirators in this case, the government has access to each coconspirator included in their trading profit calculations. Derrick Cleveland pled guilty to Count 1 of the Indictment, RICO conspiracy; Jonathan Daws plead guilty to Count 2 of the Indictment, securities fraud conspiracy; Robert Hansen and Donald Kent Terrell plead guilty to the same securities fraud conspiracy. The government should seek forfeiture from Mr. Hansen for the 15% of the site fees that he retained for his services (Gov’t summation Tr. 8108-09 (“We learned from Mr. Hansen only between nine and 15 percent of the fees go to maintenance and Mr. Hansen was getting that fee . . . ”)), and for his own trading profits from insider trading based on his conviction for the securities fraud conspiracy. The government should seek forfeiture from the other convicted defendants for their trading profits from the securities fraud conspiracy. In addition, the government entered into non-prosecution agreements with many of the other individuals whose trading it includes in its forfeiture calculation. The government can seek civil forfeiture of trading profits from those individuals.
This is simply not a case where imposition of joint and several liability serves the purpose of the RICO statute by preventing defendants from hiding the allocation of proceeds and thereby avoiding forfeiting them. To the contrary, in light of these facts, this is a case where the imposition of joint and several liability on Mr. Elgindy alone is extremely unfair. See Caporale, 806 F.2d at 1507-08. We are not aware of any case where one defendant has been required to forfeit the profits of his convicted codefendants while those codefendants are allowed to keep their own easily calculated and separately forfeitable profits. The government should be required to seek criminal or civil forfeiture from the other convicted and unindicted coconspirators for their easily identifiable proceeds.
b. To the Extent Trading by Other Individuals Is Included in the Calculation of Proceeds Under a Theory of Joint and Several Liability, It Should Be Limited to the Codefendants Who Testified at Trial.
The government must prove that the individuals whose trading profits it seeks to attribute to Mr. Elgindy under a theory of joint and several liability were coconspirators in the RICO conspiracy for which Mr. Elgindy was convicted, that the alleged inside information informed their trades, and that their alleged illegal trading was foreseeable to Mr. Elgindy. Fruchter, 411 F.3d at 384. The government has failed to do any of this for any individual other than the codefendants who testified at trial that they conspired with Mr. Elgindy to engage in insider trading in specified stocks. Simply putting the name of an Anthonypacific.com site member on a list does not prove that person to be a coconspirator.
And as to Mr. Daws, while he did plead guilty to conspiracy to commit insider trading, he specifically stated that in only “some cases” did “the law enforcement information inform[] my decision to trade.” (Kelner Aff. Ex. J at 22.) He did not specify – and thus we do not know – in which cases the alleged inside information did not “inform” his decision to trade. Absent such stock-specific and trade-specific testimony from Mr. Daws and these other individuals and entities, and absent an opportunity for Mr. Elgindy to cross-examine, there is no basis for a finding that the government has proven that any of their trading profits were derived from the alleged inside information that was disseminated.
3. Identifying the Relevant Trades.
In order to determine profits from insider trading, the Court must determine which particular trades to include based on the timing of the dissemination of alleged inside information. Of course trades made on dates prior to when the first alleged inside information was disseminated must be excluded; yet, the summary trading exhibits the government uses to calculate forfeiture include many such irrelevant trades. What we have done to arrive at what we submit is a more precise, reasonable, fair and accurate calculation is to calculate profits from trades in the relevant stocks that occurred (1) after the dissemination of inside information on each of those stocks and (2) before the inside information was either no longer reasonably informing the trade or was impounded into the price. (See Jury Charge Tr. 8842 (“For each stock, the government alleges insider trading only for those trades by a defendant that occurred in a particular stock after the defendant became aware of material, non-public information concerning that stock.”); United States v. Libera, 989 F.2d 596, 601 (2d Cir. 1993) (“Once the information is fully impounded in price, such information can no longer be misused by trading because no further profit can be made.”); see also S.E.C. v. Mayhew, 121 F.3d 44, 50 (2d Cir. 1997).)
Using these principles as a guide, we took into account all short positions in each of the relevant stocks entered into between the first date on which alleged inside information about each such stock was disseminated and three days after the last date on which such information was disseminated. For Mr. Elgindy and Mr. Cleveland, we assumed that the information was disseminated immediately and directly to them from law enforcement and therefore calculated profits on short positions in each of the relevant stocks taken between the first date on which a law enforcement database was accessed and three days after the last date on which a law enforcement database was accessed with regard to each such stock. For Mr. Terrell and Mr. Hansen, the government has argued that they received their information from Mr. Elgindy through publication on the Anothonypacific.com website and we therefore calculated profits on their short positions in each of the relevant stocks taken between the first date on which alleged inside information about the stock was disseminated on the site and three days after the last date on which such information was disseminated on the site.
We chose three days as a reasonable time within which inside information would inform or motivate someone’s trade. After three days elapsed, the connection between the trade and the information becomes too attenuated. Furthermore, inside information concerning a company’s stock is quickly absorbed by the market through trading activity, so that the price of a security will reflect the inside information in a reasonable amount of time after the insiders begin trading. See Libera, 989 at 601; Mayhew, 121 F.3d at 50. We choose three days as a reasonable (and arguably conservative) amount of time for trading on the information to impound the information into the price of the stocks in question. Once the date range was determined, we calculated the difference between the amount received for a given short position and the amount paid for the next cover (or combination of covers) in that stock for an offsetting number of shares. See SEC v. McCaskey, No. 98-CIV-6153 (SWK) (AJP), 2002 WL 850001, *10 (S.D.N.Y. Mar. 26, 2002) (discussing “pocket measure” of calculating gains from insider trading where there is a promptly offsetting trade).
Following this methodology, we calculated that Mr. Elgindy’s total trading profits from insider trading on the four conviction stocks – OSIN, PLMD, JUNM and SEVU – amount to $41,897.89. (Kelner Aff. 23 and Ex. D.) Mr. Elgindy’s total trading profits from all 22 stocks as to which the government submitted evidence that inside information from law enforcement sources was disseminated to Mr. Elgindy plus the conviction stocks would amount to $157,506.93 (id. 24-26 and Ex. E). Applying this same methodology to the four conviction stocks for Mr. Cleveland, Mr. Hansen, and Mr. Terrell adds $29,716.77 (see id. 23 and Ex. D), and if all 22 stocks are included for Cleveland and all 19 stocks as to which the government claimed inside information from law enforcement sources was disseminated on the Anthonypacific.com website are included for Hansen and Terrell, the total amount added would be $108,217.46 (see id. 24-26 and Ex. E).
In sum, Mr. Elgindy submits that the forfeiture calculation of trading proceeds should be limited to his trading alone, and to the specific four stocks as to which the jury rendered verdicts of guilty, for a total of $41,897.89, and that even if the Court were to disagree with that proposed limitation, any amounts to be added based on trading in other stocks or the trading of other individuals should be limited to the stocks, the persons, and the amounts set forth above.
B. Insider Trading vs. Market Manipulation
The government does not claim that its forfeiture figures can be justified under a market manipulation theory. As the Court is aware, Mr. Elgindy was convicted on, among other charges, RICO conspiracy involving securities fraud predicate acts (Count One, predicate acts 1 through 5), one count of conspiracy to commit securities fraud (Count Two), and four substantive counts of securities fraud (Counts Three through Six) (hereafter the “securities fraud charges”). Each of these securities fraud charges alleged two different theories: market manipulation and insider trading. But there is no basis in the record to calculate forfeiture based on any alleged market manipulation (as opposed to insider trading).
The government has never presented any evidence of any proceeds based on the alleged market manipulation. At trial, the government offered several exhibits tallying alleged insider trading profits by Mr. Elgindy and other alleged co-conspirators (see, e.g., GX 2582, 2574 and 2579), but offered no similar evidence or analysis of “loss” due to alleged manipulation. And the government certainly has not provided any such evidence or analysis in its forfeiture allegations.
In fact, the government fell far short of proving at trial that manipulation of any stock occurred. The government presented no credible evidence that Mr. Elgindy or any coconspirators made any materially false statements or injected into the market any materially false information intended to artificially affect the price of any stock. See GFL Advantage Fund v. Colkitt, 272 F.3d 189, 207 (3d Cir. 2001). There was no evidence of any impact on a stock price, artificial or otherwise, from these alleged activities.
Indeed, as Mr. Elgindy argued and believes he proved at trial, and as the government barely contested, all or virtually all of the core stocks about which the government offered evidence were in fact scam companies. Any alleged activity by Mr. Elgindy or his site members that may have had the effect of driving the prices of these stocks down – more precisely, down closer to their true value – cannot reasonably be said to have caused “losses” to investors. See id. at 205-207, 209 (“[S]hort selling, even in large volumes, is not in and of itself unlawful and therefore cannot be regarded as evidence of market manipulation. That short selling may depress share prices, which in turn may enable traders to acquire more shares for less cash . . . is not evidence of unlawful market manipulation, for they simply are natural consequences of a lawful and carefully regulated trading practice.”) Mr. Elgindy accordingly submits that the government has not met and cannot sustain its burden of proving any loss attributable to the manipulation claims.
Moreover, the only reasonable interpretation of the jury’s verdicts is that the jurors rejected the market manipulation claims across the board. In acquitting Mr. Elgindy on the securities fraud charges comprising Counts 7 and 8, as well as rejecting predicate acts 6 and 7 of Count One (RICO), the jury necessarily found that the government failed to prove securities fraud under both its insider trading and manipulation theories as to two of the stocks as to which it made such allegations: SLPH and FLOR. (See Jury charge, Tr. 8850 (instructing the jury to evaluate the proof under both theories).) The manipulation evidence presented to the jury, however, was the same or similar for every stock, including SLPH and FLOR. The government argued in summation that it had proved manipulation through: (1) group, or controlled, trading; (2) misleading statements to the market; and (3) timed release of negative information to put downward pressure on a stock. (Tr. 8008, 8025-26, 8117-21.) Putting aside that “the dissemination of truthful information, negative or not, into the marketplace by itself is not market manipulation” (Jury charge Tr. 8845), all of this type of so-called manipulation evidence was presented for SLPH and FLOR and the jury rejected it. The only logical conclusion to be drawn from the jury’s rejection of the manipulation charges as to SLPH and FLOR then is that the jury must have rejected the government’s manipulation theory as a basis for securities fraud across the board.
Although we have no reason to believe the government will even attempt to calculate or put forth a “loss” figure based on the manipulation claims given the jury’s verdict and the dirth of evidence, even if the jury’s guilty verdicts on the securities fraud counts were ambiguous as to whether the findings were based on manipulation or insider trading or both (an ambiguity that would have been created by the government’s decision to combine its two theories in single counts and its opposition at the end of trial to Mr. Elgindy’s more specific proposed special verdict form), such ambiguity must and should be resolved in Mr. Elgindy’s favor. See United States v. Sturdivant, 244 F.3d 71, 80 (2nd Cir. 2001). In Sturdivant, the jury returned a general verdict on a count charging two distinct drug transactions and the district court sentenced the defendant based on the total amount of drugs it found involved in both transactions. 244 F.3d at 75. On appeal, the Second Circuit held that the sentence did “not properly take into account ‘the uncertainty of whether a general verdict of guilty conceal[ed] a finding of guilty as to one crime and a finding of not guilty as to the other.’” Id. at 78 (quoting United States v. Margiotta, 646 F.2d 729, 733 (2d Cir. 1981)). The remedy for such uncertainty was to sentence the defendant based upon conviction for only the offense carrying the lesser penalty. Sturdivant, 244 F.3d at 80.
In this case, it is because the government did not allow the jury to specify whether it was convicting for insider trading or market manipulation, or both, that we now may not be able to determine the basis for the jury’s conviction. Mr. Elgindy should not be prejudiced by the ambiguity the government created. See id. at 77 (“Principles of equity prohibit the government from benefitting[sic] from the prejudicial ambiguity that the government alone was responsible for creating.”). The reasoning of Sturdivant compels the conclusion that Mr. Elgindy’s sentence, including forfeiture, should be calculated based on his being convicted of insider trading and acquitted of market manipulation.
V. The Principles of Sentencing Dictate That the Court Consider the Treatment of the Other Alleged Wrongdoers in this Case.
“The Supreme Court . . . has determined that criminal forfeiture is part of the process of criminal sentencing.” United States v. Bellomo, 176 F.3d 580, 595 (2d Cir. 1999). As a criminal penalty against the convicted defendant, criminal forfeiture “must meet the same constitutional standards as do other forms of punishment. For example, it should not lay ‘an unequal hand on those who have committed intrinsically the same quality of offense.’” United States v. Lizza, 775 F.2d 492, 499 (2nd Cir. 1985) (Van Graafeiland, CJ, dissent) (discussing RICO criminal forfeiture and quoting McLaughlin v. Florida, 379 U.S. 184, 194 (1964)). Under the advisory Guidelines system created by United States v. Booker, 125 S. Ct. 738, 766 (2005), the sentencing court has a statutory obligation to consider the factors in 18 U.S.C. § 3553(a), including § 3553(a)(6), which requires the court to avoid unwarranted sentence disparities among defendants who have been found guilty of similar conduct. See United States v. Jaber, 362 F. Supp. 2d 365, 381 (D. Mass. 2005).
The forfeiture sought by the government as part of Mr. Elgindy’s sentence makes Mr. Elgindy responsible for an amount of proceeds from the illegal activity in this case that is wildly disproportionate to the amounts for which the government apparently intends to make any other convicted defendant responsible as part of any criminal or civil forfeiture, or any Guidelines calculation. In particular, there is evidence in the record creating ambiguity about who was disseminating what information to whom, and evidence that others who were involved in the Anthonypacfic.com website and who have admitted their own guilt were acting independently of Mr. Elgindy. Mr. Elgindy should be treated no differently in this respect than those codefendants.
Derrick Cleveland, for example, testified in many instances that he acted independently of Mr. Elgindy and in fact purposely kept information from him. (See, e.g., Tr. 439 (discussed with Terrell how they should communicate in a way that Mr. Elgindy could not view), 514-16 (gave information on BYTE to Terrell so they could build a position before giving information to Mr. Elgindy), 521 (discussed with Terrell how to hide that they kept information from Mr. Elgindy), 605-06 (Terrell, not Mr. Elgindy, called HDVG on Anthonypacific.com), 688 (joined a separate “Tony-bashing” site), 1680-81 (testifying that he “controlled the flow of information”).) There were times when Cleveland did not share information that he received from FBI Agent Jeffrey Royer with anyone and there were times when he did not share information that he received from Royer with Mr. Elgindy, but shared such information with Kent Terrell (“quack”), Jonathan Daws (“archer”), and others. See supra note 4.
Mr. Daws has also admitted that he received information directly from FBI Agent Jeffrey Royer and Derrick Cleveland, and that he disseminated it to other traders completely independent of Mr. Elgindy. In his plea allocution, Mr. Daws admitted that he had direct contact not only with Mr. Elgindy, but also with FBI agent Jeffrey Royer and with Derrick Cleveland; he admitted that he received “law-enforcement information” not just from Mr. Elgindy but also from Cleveland and Royer; and he admitted that he “passed” some of that information to other traders. (See Kelner Aff. Ex. J at 21-22.) There is also evidence that Jonathan Daws participated in an independent chat room called Retired Chat (“RC chat”) from which Mr. Elgindy was specifically excluded and the existence of which was purposely kept hidden from Mr. Elgindy. (See Kelner Aff. 42-43.) For example, in the RC Chat log for November 27, 2000 starting at 15:50, Mr. Daws, aka, “Trebuchet”, states that he does not share any information from RC chat with Mr. Elgindy or on Anthonypacific.com and that he has not told anyone that RC even exists. In the RC chat log for January 12, 2001 starting at 15:22, an RC Chat member states that he wants nothing to do with Mr. Elgindy. In the RC chat log for March 12, 2001 starting at 12:02, Daws asks if he should give Mr. Elgindy information about OSIN and says he will keep it secret if the RC chat members prefer, but states that he likes the idea of Mr. Elgindy “being the lightning rod” for trouble on OSIN. (Id. 43.)
In that chat room, Jonathan Daws disseminated the law enforcement information that he received from Jeffrey Royer, Derrick Cleveland and Mr. Elgindy without Mr. Elgindy’s knowledge. (See Id. 44.) Moreover, many of the stocks included in the government’s summary trading exhibits are stocks that were discussed in the RC chat room, but not on Anthonypacific.com. (Id. 45.) This evidence makes clear that Mr. Daws acted independently of Mr. Elgindy and without Mr. Elgindy’s knowledge in receiving and disseminating law enforcement information.
Despite that Mr. Cleveland and Mr. Daws on many occasions acted independently of Mr. Elgindy in receiving and disseminating law enforcement information and in trading on that information, it appears that the government is seeking no forfeiture from Mr. Cleveland or Mr. Daws for their own trading profits or any trading profits of those they allegedly tipped. Instead, it asks this Court to order that Mr. Elgindy forfeit Mr. Cleveland’s and Mr. Daws’ easily identifiable trading profits. For example, according to the government’s trading profit calculation -- which we submit is not based on any connection to any alleged illegal activity and is incorrect, but which is useful for comparative purposes -- Mr. Elgindy made $782,742.29 in trading profits, while Mr. Daws made $1,047,752.44 for himself and a total of $5,543,852.52 for himself and his hedge fund Gryphon. (Gov’t Mem. Exs. C & D.) Thus, notwithstanding that its assertion that Mr. Daws made over five times what Mr. Elgindy made from the alleged illegal trading conspiracy, the government seeks forfeiture of $9,185,695.72 in trading profits from Mr. Elgindy alone, while seeking no forfeiture from Mr. Daws or, as far as we know, any other alleged coconspirator.
Furthermore, while according to the government’s brief Mr. Daws gained over five million dollars as part of the securities fraud conspiracy for which he was convicted, not only will the government not require him to forfeit that money, but the government apparently attributes to him for purposes of his sentence a gain of at most $200,000. In other words, it appears that the government stipulated that Mr. Daws should be held accountable only for some sub-set of the trading profits it claims in its brief are attributable directly to him and apparently not for any trading profits of other convicted coconspirators -- including Mr. Cleveland or Mr. Elgindy – or any individuals or entities arguably acting in concert with him. This appears to be the case notwithstanding the facts that he – like Mr. Elgindy – both received certain information directly from Cleveland and Royer and in certain instances disseminated the information to others.
As a result, it is clear that for purposes of punishing Mr. Elgindy, the government calculates Mr. Daws’ illegal gains from the securities fraud conspiracy one way, while for purposes of punishing Mr. Daws, the government calculates his illegal gains a very different way. We respectfully submit that Mr. Elgindy should be treated no worse than the government has stipulated Mr. Daws should be treated, and that accordingly, the Court should require Mr. Elgindy to forfeit only his own trading profits.
VI. The Elgindy Residence Is Not Separate Property “Derived From” Proceeds of the RICO Conspiracy.
The government argues that Mr. Elgindy’s residence (the “Elgindy Residence”) should be separately forfeited as proceeds traceable to Mr. Elgindy’s illegal activity because he allegedly financed the purchase of the property and mortgage payments with site fees. (Gov’t Mem. at 13-15.) As we show above, the site fees derived from the alleged illegal activity are at most $30,300 and would have been significantly less at the time Mr. Elgindy placed the downpayment on the Elgindy residence. Even if Mr. Elgindy used that $30,300 as part of the downpayment or as part of his mortgage payments, that does not entitled the government to forfeiture of the entire (and much greater) value of his residence.
The government cites no case allowing for forfeiture of an entire property based on a small percentage of its value having come from illegal proceeds. Moreover, the government’s reliance on the “but for” test here is misplaced. The government argues that but for the illegal activity, Mr. Elgindy would not have received the site fees and but for those site fees, would not have the house. The “but for” test, however, was articulated to determine what portion of the proceeds of a legitimate business are subject to forfeiture as illegally obtained. Under this test, forfeiture under § 1963(a)(1) and (3) is “limited to interests that would not have been acquired or maintained ‘but for’ defendant’s racketeering activities.” Porcelli, 865 F.2d at 1363. Here, the Elgindy residence would have been acquired and maintained regardless of the site fees Mr. Elgindy collected; at most, only the portion of the value of the residence attributable to the illegal site fees should be forfeited as substitute property.
In any event, the money used for the down payment on the Elgindy residence was money Mr. Elgindy had before the conspiracy is even alleged to have begun. As detailed in the Presentence Report from Mr. Elgindy’s 1999 Texas conviction, Mr. Elgindy had over $2 million in his Global Securities account in the summer of 2000. (United States v. Elgindy, Case No. 4:99-CR-109-Y (01) (N.D. Tx.), Presentence Report at 14.). As shown above, this was before Mr. Elgindy or Pacific Equity Investigations received any site fees that can be considered proceeds of his illegal activity and before he had any trading profits on any of the conviction stocks, or any stock mentioned in the government’s forfeiture brief other than BBAN for that matter. On April 17, 2001, Mr. Elgindy transferred $949,985.00 from his Global Securities account to his Bank of America account. (See GX 3712 at 4 (April 2001 probation report with attached Bank of America statement showing transfer).) This would have provided Mr. Elgindy with more than enough “untainted” money for his downpayment and his mortgage payments.
In addtion, we submit that we could prove at a hearing that at the same time that Mr. Elgindy was allegedly profiting from trading on inside information, he separately and legitimately earned more than enough money to make the downpayment and all mortgage payments on his residence through his trading in stocks other than the stocks the government alleged were involved in the illegal activity. As of May 14, 2001, when Mr. Elgindy had paid $380,250 as down payment on his residence, he had made only $39,955.82 in trading profits from the conviction stocks (Kelner Aff. 38-40) and $15,000 in site fees paid by the convicted codefendants starting in October 2000 (Id. 41). These alleged proceeds from illegal activity would not have even covered the downpayment and meanwhile there was more than sufficient untained money available for the downpayment and mortgage payments from pre-conspiracy earnings and legitimate trading. Thus, the Elgindy residence is not property “derived from” proceeds of the RICO or securities fraud conspiracy and is not separately forfeitable.
Conclusion
For the foregoing reasons, the Court should reject the government’s proposed findings of fact on the criminal forfeiture allegation and deny the government’s motion for a preliminary order of forfeiture under Fed. R. Crim. P. 32.2. At most, the Court should enter an order of forfeiture of $30,300 in site fees and $41,897.89 in Mr. Elgindy’s own trading profits in the four conviction stocks. To the extent the Court is considering ordering forfeiture in any greater
amounts, Mr. Elgindy intends to contest the government’s efforts to prove any such additional forfeiture amounts at an evidentiary hearing to which we respectfully submit he is entitled.
Dated: August 2, 2005
New York, New York
Respectfully submitted,
.
Barry H. Berke (BB 1421
Eric A. Tirschwell (ET 3023)
Erin A. Walter (EW 1777)
KRAMER LEVIN NAFTALIS & FRANKEL LLP
1177 Avenue of the Americas
New York, NY 10036
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Part 3: Kelner Affidavit regarding Forfeiture
UNITED STATES DISTRICT COURTEASTERN DISTRICT OF NEW YORK-------------------------------------------------------------------XUNITED STATES OF AMERICA v. AMR I. ELGINDY, ET AL. Defendants. -------------------------------------------------------------------X Cr. No. 02-589 (S-1) (RJD) AFFIDAVIT OF JOSHUA D. KELNER
I, JOSHUA D. KELNER, declare as follows:
1. Kramer, Levin, Naftalis & Frankel, LLP (“Kramer Levin”) is counsel to defendant Amr I. Elgindy in the above captioned matter. I am an associate in the litigation department of Kramer Levin and am admitted to practice in the State of New York. I am familiar with the facts of this case.
2. This affidavit is submitted in support of Mr. Elgindy’s Memorandum of Law in Opposition to the Government’s Motion for a Preliminary Order of Forfeiture under Fed. R. Crim. P. 32.2 (the “Opposition Memorandum”).
3. This affidavit provides the basis for various calculations and factual conclusions on which the Opposition Memorandum relies. I conducted and/or supervised the calculations and review of underlying documents discussed herein.
A. The Trading Profits Subject to Forfeiture.
1. Profits from Trading in SLPH, FLOR, and IMCL Must Be Excluded.
4. The jury acquitted Mr. Elgindy of the counts charging him with securities fraud in connection with his trading in SLPH and FLOR. The government stated in its Memorandum of Law in Support of Findings of Fact on the Criminal Forfeiture Allegation and a Preliminary Order of Forfeiture under Fed. R. Crim. P. 32.2 (“Government Memorandum”) that, in view of the jury’s verdict, it was excluding these companies from its calculation of trading profits subject to forfeiture. Perhaps by mistake, however, the government actually included the trading profits from SLPH and FLOR in the total trading profits figure asserted in its brief. I determined this by adding all of the profits listed in Exhibit D to the Government Memorandum, including SLPH and FLOR, for a total of $9,185,695.72. The government asserts forfeitable trading profits of $9,145,695.72, which is presumably a typo as the profits listed in Exhibit D for SLPH and FLOR exceed $40,000.
5. I added the profits listed in Exhibit D to the Government Memorandum for SLPH and FLOR for an aggregate of $884,679.30. See Exhibit A. Subtracting SLPH and FLOR takes the profit calculation in Exhibit D down to $8,301,016.42.
6. The government also includes trading in Imclone in its calculation of forfeitable trading profits. GX-2582 (the government’s summary trading exhibit for Mr. Elgindy which can be found in Exhibit C to the Government Memorandum) indicates that Mr. Elgindy traded Imclone long and for the last time on 1/18/02. The only law enforcement access concerning IMCL took place after this on 3/4/02. See GX-JL-1 (government law enforcement access chart).
2. Stocks Outside the 41 Identified Pretrial Must Be Excluded.
7. The following stocks were included in Exhibits C and D to the Government Memorandum as part of its profit calculations, but were not on the list of 41 stocks: Britesmile; Global Seafood; Micromem Tech.; Piranha, Inc.; Teligent, Inc.; Creative Host Services; Nanopierce; Princeton Video Imaging; Black Giant Oil; and AARW.
8. The conspiracy charged in the indictment in this case spanned from March 2000 until the date of Mr. Elgindy’s arrest, i.e., May 22, 2002. The trades included in Exhibits C and D to the Government Memorandum that took place outside that time frame are highlighted in Exhibit B to this Affidavit. See Exhibit B.
3. Proceeds of Insider Trading Activity Should Be Calculated Based on Trades Occurring a Reasonable Time after the Dissemination of Inside Information and Before the Information is Impounded into the Price.
9. We have attempted to make a reasonable calculation of trading profits from alleged insider trading by calculating profits from trades in certain stocks that occurred after the dissemination of alleged inside information on a stock and before the alleged inside information was either no longer reasonably informing the trade or was impounded into the price.
10. Using these principles as a guide, we took into account all short positions in a given stock entered into between the first date on which alleged inside information about that stock was disseminated and three days after the last date on which such information was disseminated. For Mr. Elgindy and Mr. Cleveland, we assumed that the information was disseminated immediately and directly to them from law enforcement and therefore calculated profits on short positions in a stock taken between the first date on which a law enforcement database was accessed and three days after the last date on which a law enforcement database was accessed with regard to that stock. For the other admitted insider traders, the government has argued that they received their information from publication on the site and we therefore calculated profits on their short positions in a stock taken between the first date on which alleged inside information about the stock was disseminated on the site and three days after the last date on which such information was disseminated on the site.
11. We chose three days as a reasonable time within which the alleged inside information would inform or motivate someone’s trade. After three days have elapsed, any connection that may have existed between the trade and the information becomes too attenuated. Furthermore, inside information concerning a company’s stock is quickly absorbed by the market through trading activity, so that the price of a security will reflect the inside information in a reasonable amount of time after the insiders begin trading. We choose three days as a reasonable (and arguably conservative) amount of time for trading on the alleged inside information to impound the information into the price of the stocks in question.
12. The trades by Mr. Elgindy, Mr. Cleveland, and the entities on behalf of which Mr. Cleveland traded are reflected in GX-2575, GX-2576, GX-2577, GX-2578, GX-2580, GX-2582, GX-2583, GX-2584, GX-2585, and GX-2598 (“Group 1”). The trades of the remainder of the convicted co-defendants – i.e., Jonathan Daws, Robert Hansen, and Donald Terrell -- are reflected in GX-2574, GX-2579, and GX-2581 (“Group 2”). (See Ex. C to Gov’t Mem.)
13. For Group 1, the time range started with the first law enforcement access and ended three days following the final law enforcement access, as reflected on GX-JL-1. See Exhibit C.
14. For Group 2, the date range for each stock was determined by locating the date and time of the first and last chat dissemination of nonpublic information that was included in the chat exhibits identified on GX-JL-1, see Exhibit C, and adding three calendar days to the final date.
15. These profit calculations take account only of the short positions acquired during the applicable time ranges. Because the alleged inside information was negative with respect to the companies involved, the relatively rare instances in which traders assumed, and proceeded to sell, long positions within the relevant date ranges were not included in the calculations.
16. In order to determine the profits made from a short sale, the difference was determined between the price credited to the account in question for that transaction and the price debited for the next cover or combination of covers in an offsetting amount of shares in the stock.
17. For example, if a trader’s first transaction in the range was a short sale of 100 shares, the difference was determined between the price of those shares and the next 100 shares covered. If the soonest subsequent cover was for fewer shares than the original short, the calculations took into account whatever proportion of the next soonest cover was necessary to achieve the offsetting number of shares. For instance, if the relevant short was for 100 shares, the first cover was for 50 shares, and the next cover after that was for 100 shares, the calculations would reflect the price paid for the first cover of 50 shares and half the price paid for the later cover of 100 shares.
18. If the next cover was for more shares than was the short sale, the calculations included the proportion of the price paid attributable to the relevant offsetting number of shares. For instance, if the short was for 100 shares and the subsequent cover was for 200 shares, the price paid to cover the 200 shares was divided by 2 to determine the amount proportionally paid for covering 100 shares, i.e., the offsetting amount.
19. If there were no short sales within the relevant time range (including the three day expansion of the final date), the calculations reflect that no profits were made from the information in question.
20. Based on the current record, we calculated trading profits using this method for Mr. Elgindy and the three codefendants who testified at trial that they relied on the alleged inside information when they traded, i.e., Mr. Cleveland, Mr. Hansen, and Mr. Terrell.
21. We also calculated trading profits using this method for convicted co-defendant Jonathan Daws.
22. We calculated the trading profits using this method for Mr. Elgindy, Mr. Cleveland, Mr. Hansen, Mr. Terrell and Mr. Daws in the four stocks for which the jury found that Mr. Elgindy engaged in insider trading, i.e., SEVU (Count 3), OSIN (Count 4), PLMD (Count 5) and JUNM (Count 6).
23. Mr. Elgindy’s profits in these four stocks were $41,897.89. The total profits earned by Mr. Elgindy, Derrick Cleveland, Robert Hansen and Donald Terrell in these four stocks were $71,614.66. Mr. Daws’ profits in these stocks were $91,015.60. See Exhibit D.
24. We also used this method to calculate the trading profits of each individual listed above in the following 19 stocks: BGII, BIOP, EGBT, FRSH, GENI, GAHI, HDVG, IVSO, JUNM, MHUT, NMNW, NSOL, OSIN, PLMD, RTCI, SEVU, SXML, TDNT, and VLPI. For three additional stocks – BBAN, BYTE and JGUR – we calculated profits only for Mr. Elgindy and Mr. Cleveland, based on Mr. Cleveland’s testimony that he provided nonpublic information about these stocks to Mr. Elgindy, but that it was not disseminated on the site. As explained more fully in the Opposition Memorandum, this list of stocks was derived by taking the list of stocks in GX-JL-1 (the government’s law enforcement access chart) and excluding (1) any stocks that were not on the list of 41 stocks identified pre-trial as involved in illegal activity; (2) SLPH and FLOR because the jury acquitted Mr. Elgindy of securities fraud related to those stocks; (3) IMCL because Mr. Elgindy traded it long and only before any access of law enforcement information; and (4) CATH, CWON, INIV, MDPA, TTRE, NAPH and REFR because Mr. Cleveland never testified that he conveyed any information about these stocks to Mr. Elgindy.
25. Employing these methodologies, I and those working under my supervision arrived at the following total profit amounts (including the four conviction stocks and the stocks listed in paragraph 24). These calculations are accurate and complete to the best of my knowledge:
Exhibit Total Profits
Elgindy (GX-2582) $156,839.26
Elgindy (GX-2583) $667.67
Elgindy (GX-2584) $0.00
Elgindy (GX-2585) $0.00
Cleveland (GX-2575) $638.39
Cleveland (GX-2576) $0.00
Cleveland (GX-2577) $0.00
Cleveland (GX-2578) $15,903.27
Cleveland (GX-2580) $29.44
Cleveland (GX- 2598) $0.00
Royer (GX-2589) $0.00
Royer (GX-2590) $0.00
Terrell (GX-2579) $22,348.75
Hansen (GX-2581) $68,813.04
See Exhibit E.
26. Taking into account the 22 stocks plus the conviction stocks, the alleged illegal trading profits of Mr. Elgindy alone would be $157,506.93. Taking into account the 22 stocks plus the stocks of conviction for Cleveland and the 19 stocks about which the government claims inside information was disseminated on the Anthonypacific.com website plus the stocks of conviction for Hansen and Terrell, the alleged illegal trading profits of the convicted co-defendants who testified at trial would be $108,217.46. See Exhibit E. The total alleged illegal trading profits of Mr. Elgindy and the convicted co-defendants who testified at trial would be $265,724.39. See Exhibit E.
27. Taking into account the 19 stocks about which the government claims inside information was disseminated on the Anthonypacific.com website plus the stocks of conviction, the trading profits of Mr. Daws would be $195,361.51. See Exhibit E.
B. The Site Fees Subject to Forfeiture.
28. I reviewed GX 3001 (a spreadsheet created by Robert Hansen of all broadcasts sent out on Anthonypacific.com starting on 3/21/00) to determine the number of broadcasts related to the 19 stocks about which the government claims inside information was disseminated on the Anthonypacific.com website.
29. GX 3001 indicates that there were 1,997 broadcasts related to stocks. See Exhibit F.
30. GX 3001 indicates that there were 97 broadcasts related to the 19 stocks about which the government claims inside information was disseminated on the Anthonypacific.com website. See Exhibit G.
31. The percentage of broadcast calls related to alleged illegal activity was calculated by dividing 97 by 1,997, which yielded a percentage of 4.86.
32. The total site fees collected, starting in December 1999, appear in Exhibit B to the Government’s Memorandum. That document lists fees paid to Robert Hansen by name, site alias, date of payment, and amount of payment. I used that chart to create a document reflecting the site fees collected for the appropriate time frame and group of individuals.
33. The amount of site fees attributable to a given individual was determined by searching Exhibit B to the Government Memorandum for the individual’s name and chat room alias.
34. I used Exhibit B to the Government Memorandum to calculate the site fees paid by Mr. Elgindy’s convicted co-defendants, i.e., Jonathan Daws, Derrick Cleveland, Donald Terrell, Robert Hansen and Jeffrey Royer, from October 2000 through May 2002.
35. The site fees paid by the convicted co-defendants from October 2000 through May 2002 were $30,300. See Exhibit H.
36. From October 2000 through May 2002, Robert Hansen collected site fees in the total amount of $1,603,773.33. This was determined by excluding from Exhibit B to the Government Memorandum those fees that were collected before October 2000. See Exhibit I.
37. 4.86% of the site fees collected from October 2000 through May 2002 is $77,943.38.
C. Mr. Elgindy’s Residence Was Not Derived From Illegal Proceeds
38. Using the method of calculating trading profits described above, we also determined Mr. Elgindy’s trading profits on the stocks of conviction as of May 14, 2001, the date by which he paid $66,000 plus $314,250 as downpayment on his residence at 3371 Calle Tres Vistas, Encinitas, California (the “Elgindy Residence”). (See Declaration of FBI Special Agent Robert M. Cappadona 3 and Ex. A.) We calculated such profits by including the relevant short sales and covers executed on or prior to May 14, 2001.
39. Using this methodology, we arrived at the following total relevant profits up through May 14, 2001. These calculations are accurate and complete to the best of my knowledge:
Stock Total Relevant Profits ($)
JUNM 0
OSIN 3,255.62
PLMD 0
SEVU 36,700.20
40. The total relevant profits up through May 14, 2001 were $39,955.82.
41. We also calculated the site fees paid by the convicted codefendants starting October 2000 up through May 2001. This amounts to $15,000. See Exhibit H.
D. Independent Action By Convicted Co-Defendants
42. As part of the discovery in this case, the government provided chat logs from an independent chat room called Retired Chat (“RC chat”). I have been informed that Jonathan Daws participated in RC chat under the alias “Trebuchet” and that David Slotnick participated in RC chat under the alias “hemo.” I have also been informed that several members of the RC chat, including Jonathan Daws and David Slotnick, were also members of Anthonypacific.com. I have reviewed certain portions of the RC chat logs provided by the government and here summarize those portions of the RC chat logs.
43. The RC chat logs that I reviewed indicate that members of RC chat had a strict policy that information discussed on RC chat would not be disseminated to Mr. Elgindy or other Anthonypacific.com members. For example, in the RC Chat log for November 27, 2000 starting at 15:50, Mr. Daws, aka, “Trebuchet”, states that he does not share any information from RC chat with Mr. Elgindy or on Anthonypacific.com and that he has not told anyone that RC even exists. In the RC chat log for January 12, 2001 starting at 15:22, an RC Chat member states that he wants nothing to do with Mr. Elgindy. In the RC chat log for March 12, 2001 starting at 12:02, Daws asks if he should give Mr. Elgindy information about OSIN and says he will keep it secret if the RC chat members prefer, but states that he likes the idea of Mr. Elgindy “being the lightning rod” for trouble on OSIN.
44. The RC chat logs I reviewed indicate that Mr. Daws received information directly from FBI Agent Jeffrey Royer and from Derrick Cleveland. In the RC chat log for March 16, 2001 starting at 11:29, Mr. Daws states that Derrick is asking him about FWLD/SLPH and that he gave Derrick information on SLPH for “Jeff the FBI guy” to look at. Mr. Daws then states that Jeff is Derrick’s friend who feeds Derrick information about scam companies. Mr. Daws then states that Jeff “confirmed the OSIN SEC investigation to [him].” In the RC chat log for April 23, 2002 starting at 14:01, Mr. Daws states that Jeff gave the RC chat members the Fort Worth SEC contact for BGII. In the RC chat log for April 29, 2002 starting at 11:11, Mr. Daws states that he has spoken to Jeff Royer who is working in Mr. Elgindy’s office and calls Royer his “bug” in Mr. Elgindy’s office.
45. The RC chat logs I reviewed indicate that many of the stocks that appear on GX-JL-1 (law enforcement access chart) and the government’s summary trading exhibits were discussed on RC chat. Some of these stocks are stocks about which there is no evidence that Mr. Elgindy was ever given any law enforcement information, but there is evidence that Mr. Daws and Mr. Slotnick were given law enforcement information.
46. The plea allocution of Jonathan Daws is a matter of public record and shows that he pled guilty to Count Two of the indictment, charging securities fraud conspiracy, and in particular pled to only the insider trading aspect of that charge. Attached hereto as Exhibit J is the plea allocution of Jonathan Daws.
Dated: New York, New York
August 2, 2004
________________________
JOSHUA D. KELNER |
