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denying a 17(c) subpoenas for "any and all" documents as too broad
Summary of this case from U.S. v. NGOpinion
01 Cr. 156 (RPP)
December 17, 2001
Attorney for Plaintiff, Mary Jo White, United States Attorney for the Southern District of New York, One St. Andrew's Plaza New York, NY. By: Michael S. Kim, AUSA Josh Klein, AUSA.
Attorney(s) for Defendant(s), Maranda Fritz, Esq. 565 Fifth Avenue New York, NY. Nancy Lee Ennis, Esq. Carro, Velez, Carro Mitchell, LLP 475 Fifth Avenue South New York, NY. Robert C. Gottlieb, Esq. Gottlieb Nitkewicz 353 Veterans Memorial Highway Commack, NY. David Wikstrom, Esq. 565 Fifth Avenue New York, NY. Paulette Wunsch, Esq. Day, Berry Howard, LLP One Canterbury Green Stamford, CT. Joseph A. Quatela, Esq. Morganstern Quatela 310 Old Country Road #101 Garden City, NY. Larry Dubin, Esq. Goldberger Dubin, P.C. 401 Broadway, Suite 306 New York, NY. Bruce Vetri, Esq. 1213 A Main Street Oakdale, NY. David Wikstrom, Esq. On behalf of Joel Winograd, Esq. Winograd Winograd 450 7th Avenue New York, NY. Howard L. Jacobs, Esq. 401 Broadway New York, NY. Louis R. Aidala, Esq. 597 Fifth Avenue New York, NY.
OPINION AND ORDER
Defendants move to compel the Government: (1) to disclose materials pursuant to Brady v. Maryland, 373 U.S. 83 (1963) and its progeny, 18 U.S.C. § 3500, and Rule 16 of the Federal Rules of Criminal Procedure; (2) to provide a bill of particulars; (3) to disclose the evidence that was presented to the Grand Jury; (4) to provide notice of prior acts and criminal convictions pursuant to Rules 404(b) and 403 of the Federal Rules of Evidence; and for the Court (5) to dismiss the indictment; (6) to suppress evidence relating to broker compensation; and (7) to strike portions of the Indictment. In a separate motion, Defendants Patrick Boyce, Michael DiFrancesca, Torin Greenspan, Jason Hunkler, and Anthony Lopresti, move to suppress audiotapes of conversations. Their motion was joined by Defendant Eric Stuerken and at oral argument by Defendant Peter Chen. The Government filed opposing papers on November 2, 2001 and Defendants filed reply papers on November 15, 2001. Arguments were heard on November 19, 2001.
I. Background
A. The Indictment
On February 26, 2001, a Grand Jury returned the Indictment charging all Defendants with conspiring to commit securities fraud, in violation of 15 U.S.C. § 78j(b), 78ff and 17 C.F.R. § 240.10b-5, 10b-6, mail fraud, in violation of 18 U.S.C. § 1341, and wire fraud, in violation of 18 U.S.C. § 1343, in connection with the purchase and sale of certain securities denominated as House Stocks during the period September 1995 to February 1997 in violation of 18 U.S.C. § 371; and various of the Defendants in four counts of securities fraud involving the purchase and sale respectively of House Stock securities, Compare Generiks (Count Two), Perry's Majestic Beer (Count Three), Decor Group (Count Four), and Superior Supplements (Count Five). The Defendants are twenty-tree former registered representatives of the Melville, New York branch office of Investors Associates, Inc. ("Investors Associates"), a securities broker-dealer that underwrote initial public offerings ("IPOs") in House Stocks, made markets in various securities, and offered a variety of brokerage services to customers throughout the United States.
Named as co-conspirators but not defendants are Douglas Mangan and Vincent Greico, principals of the Melville, New York branch office, who are alleged to have planned the execution of the conspiracy and who pled guilty to similar charges in September 1999.
Defendants, in order to generate extraordinary interest and market demand in the House Stocks, are alleged to have made material misrepresentations and omitted to state material facts to customers and unlawfully confirmed sales prior to the effective dates of the public offerings of House Stocks in IPO and secondary market trading. (Ind. ¶¶ 30, 35, 39, 43, 47.)
The Indictment charges that Defendants and their co-conspirators "participated in various means to manipulate the market prices of the House Stocks and engaged in deceptive sales practices with respect to public customers, in violation of the fiduciary and other duties they owed to those customers." (Ind. ¶ 50.) The Indictment alleges that "the prices of House Stocks were artificially maintained by a variety of techniques designed to insulate the House Stocks from the adverse pressure of lack of market demand, which would cause the stock prices to collapse": a) providing excessively high compensation to the registered representatives, without disclosing this to customers, b) using high-pressure tactics to induce customers to buy House Stocks, c) opening customer accounts with well established non-House Stocks and then switching the customers to the House Stocks, d) making unauthorized purchases of House Stocks in customers' accounts, e) making false and misleading statements to persuade customers not to sell House Stocks, f) failing to take and execute customer orders to sell House Stocks, and g) at times, executing a sale of a House Stock only if it could be paired with a purchase of the same stock by other customers (Ind. ¶ 51.)
The Indictment then describes, in greater detail, the manner in which each of these techniques was employed after setting forth that the objects of the conspiracy were to violate 18 U.S.C. § 1341, 1343 and 15 U.S.C. § 78j(b), 78ff and SEC Rules 10b-5 and 10b-6. (Ind. ¶¶ 52-59.) The Indictment alleges that the Defendants and co-conspirators carried out the conspiracy unlawfully 1) creating a demand for the House Stocks by engaging in manipulative and deceptive acts and practices in connection with their sale; 2) by pre-sale of millions of shares of secondary market of the House Stocks prior to the effective dates of the public offerings; 3) by sale of millions of shares of House Stocks to retail customers immediately following the effective dates of the public offerings of the House Stocks; and 4) by making false and misleading statements to persuade customers not to sell the House Stocks and unlawfully refused to honor or execute sell orders for the House Stocks. (Ind. ¶ 65) In furtherance of the conspiracy and to effect its unlawful objects, each defendant is alleged to have caused a purchase of shares of a House Stock to be made in a customer's account on a specific date and at a specific price. (Ind. ¶ 66.)
B. The Tapes
Certain Defendants moved to suppress the tape recordings between themselves and customers arguing that they were obtained in violation of 18 U.S.C. § 2511. These Defendants assert that they were unaware that their conversations were being recorded and that no evidence has been presented to them that customers were aware that such conversations were recorded. In the course of its investigation of Investors Associates, the Government came into possession of 135 Dictaphone tapes of tape recorded telephone conversations of Defendants and other employees of Investor Associates which had been recorded by Investors Associates during the years in question (1995-1997). All of the tape recordings, together with the equipment necessary to listen to the recordings, have been made available to the Defendant since about April 24, 2001.
Subsequent to the date of argument Defendant Jason Hunkler withdrew his motion.
The Government states that the Dictaphone system was connected to approximately 70 telephone lines at Investors Associates, all of which were taped for more than ten hours per day, every workday, for nearly two years; that the system recorded both telephone calls between brokers and customers, as well as internal phone calls made within the firm; and that each tape is approximately one-third the size of a cassette tape and possesses the capacity to store thousands of hours of calls. (Gov't's Mem. of Law in Resp. to Defs.' Pretrial Motions, at 9.) In total, these tapes have been estimated to contain hundreds of thousands of hours of conversations.
These Dictaphone tapes are described as quite different from ordinary cassette tapes; each Dictaphone tape consists of approximately 70 distinct channels (each corresponding to a different telephone line); each channel possesses the capacity to store tens of hours of information; and each channel is organized chronologically. It is therefore possible to find conversations of a defendant that were recorded at a particular time on a particular date, within a specific channel. (Id. at 10-11.)
The Court is informed that in order to listen to the tapes it is necessary to employ a Dictaphone computer system which consists of a Dictaphone machine, a computer, and specialized software and that the process of switching channels and moving within the tapes, as well as loading and unloading the tapes, is cumbersome and time-consuming; channel, date, and time are the only fields by which a listener can search; there are no means by which a listener could segregate calls by broker; customer, security, or any other field; and the only way one can locate a telephone call is to know the approximate time and the date of the telephone call, and then check each channel around that time. (Id. at 11-12.)
The Government has provided each defendant with copies of only one or two audiotapes of his recorded conversations as part of plea negotiations in this case. The Government has not listened to the vast majority of tapes and stated it has no plans to do so. (Id.) The Defendants have stated that they also do not wish to listen to all the tapes.
C. Documentary Evidence
The Government has also provided access to the Defendants to the 141 boxes of records of Investors Associates in its possession and, at the request of then lead counsel William Cunningham, has had a copy made of 50 boxes of documents available at a copy center since August 13, 2001. With respect to the 141 boxes, the Government has prepared an index stating the nature of the documents in each box including sales scripts used, prospectuses used, and detailed customer files arranged alphabetically with customer sales confirmation and order tickets containing the name or number of the registered representative involved. (Tr., at 27-29.)
As of November 19, 2001 the Defendants had not taken delivery of the documents or advised the Court of the delay in receipt. On November 19, 2001, the Court ordered that CJA funds pay for CJA counsels' share of the cost of the copy center's bill. See Fed.R.Crim.P. 16(a)(1)(C) of the Federal Rules of Criminal Procedure; Premises Known as 225, 1468 and 1470 Statler Towers v. United States 787 F.2d 796, 798 (2d Cir. 1986). A copy of the Government's index is appended to this opinion.
Transcript of November 19, 2001 hearing.
II. Court's Orders on November 19, 2001 Hearing
On November 19, 2001, the Court heard arguments on the above motions and issued several orders relating to discovery. The Government was ordered 1) to provide its index to the boxes by December 1, 2001 and has already done so; 2) to provide Defendants with a witness list on January 11, 2002; 3) to provide a list of the tapes it intends to use against each defendant on January 31, 2002; 4) to provide Rule 404(b) of the Federal Rules of Evidence material twenty days before trial; and 5) to provide material that falls under 18 U.S.C. § 3500 for each witness a week before he or she is scheduled to testify. The Government states it has found no Brady material and has agreed to provide any Brady material it finds on a continuing basis. The Defendants' list of tapes was ordered to be provided on March 29, 2002. The hearing on the suppression motion will start ten days thereafter, on April 8, 2002. Trial is scheduled for May 1, 2002.
The Court's orders of November 19, 2001 should provide the Defendants with the discovery required to prepare for trial and conduct a successful defense. The Government's index of documents provides the transaction information for all customers, including each customer witness, and where those documents will be found. The witness list to be provided on January 11, 2002 allows the defense to ascertain which customer's accounts are relevant. The tape recordings disclosure on January 31, 2002 will indicate the approximate date and time of the relevant acts of each defendant which will be part of the Government's case. The time period between January 31, 2002 and March 29, 2002 provides an adequate time period for the defense to locate any other telephone conversations on the Dictaphone system that may relate to the transactions between the customer and the defendant and production of § 3500 material a week before testimony should be sufficient for the defense to use any co-conspirator or customer conversations or other § 3500 material.
At the hearing, Defendants also asserted that Mr. Magnon was arrested in October, 1996, but continued to work at Investors Associates for approximately six more months and raised an issue as to whether Mr. Magnon was cooperating with the Government while he was still working at Investors Associates after his arrest. In view of this possible Fourth Amendment violation, the Government is required by January 3, 2002 to disclose to the Defendants the date when Mr. Magnon first started to cooperate with the Government and the date it first learned of the existence of the tape recordings. United States v. Mekjian 505 F.2d 11320, 1327 (5th Cir. 1975), Lustig v. United States, 338 U.S. 74, 78-9 (1949).
III. Motion to Compel the Government to Disclose Materials Pursuant to Brady and Its Progeny, the Jencks Acts and Rule 16
A. Disclosure Pursuant to Brady v. Maryland
Defendants contend that the Government has not satisfied its obligations under Brady and its progeny because the Government has not listened to the thousands of hours of tapes involved in this case to identify Brady material that might be contained therein.
Under Brady, the Government has an "affirmative duty" to disclose evidence favorable to a defendant. Brady v. Maryland, 373 U.S. 83, 86 (1963). The Government has made the tapes available to the Defendants and has stated that it would disclose any Brady material that it comes across within its own investigations. This disclosure is sufficient. The Defendants have pointed to no authority for the proposition that where there is a large mass of material that has been made available to the Defendants, it is the Government's duty to root out Brady material for the Defendants. Indeed the only authority is to the contrary. "As the district court correctly noted, there is no authority for the proposition that the government's Brady obligations require it to point the defense to specific documents within a larger mass of material that it has already turned over." United States v. Mmahat, 106 F.3d 89, 94 (5th Cir. 1997). United States v. Marrero, 904 F.2d 251, 261 (5th Cir. 1990),cert. denied 498 U.S. 1000 (1990) ("While the Supreme Court in Brady held that the [g]overnment may not properly conceal exculpatory evidence from a defendant, it does not place any burden upon the [g]overnment to conduct a defendant's investigation or assist in the presentation of the defense's case."). See also United States v. White 970 F.2d 328, 337 (7th Cir. 1992).
B. Government's Disclosure Obligations Under F. R. Crim. P. 16
Defendants, while admitting that the Government has not breached its obligations under Rule 16 in that it has made the documents and tape recordings available to the defense, maintain that the Government is obligated to identify which of the multitudinous documents and/or recordings it intends to use at trial and should be ordered to do so. Rule 16(a)(1)(C) requires, in relevant part, that:
the government shall permit the defendant to inspect and copy or photograph books, papers, documents, photographs, tangible objects, buildings or places, or copies or portions thereof, which are within the possession, custody or control or the government, and which are material to the preparation of the defendant's defense or are intended for use by the government as evidence in chief at the trial.
"The clear language of Rule 16(a)(1), however, does not require the Government to identify which documents fall in each category — it only requires the production of documents responsive to any category."United States v. Nachamie, 91 F. Supp.2d 565, 569 (S.D.N.Y. 2000). The court in Namachie recognized that nevertheless a problem does arise when the Government amasses a large number of documents "material to the preparation of the defendant's defense' and produces those documents along with the documents it intends to use in its case-in-chief. Id. "But a court has no license to rewrite the Federal Rules of Criminal Procedure. While it might be wise for the Advisory Committee on Criminal Rules to consider an amendment that would require a party to identify those documents it intends to use in its case-in-chief, no such requirement now exists in the plain language of the Rule." Id. Nevertheless, the Court inNachamie devised a discovery methodology which allowed the defendants to be fully apprised of the case against them to prepare an adequate defense, including a bill of particulars with specifics concerning each of the false and misleading claims that the government intended to prove at trial. Id. at 574. Here, the Court's orders on November 19, 2001, although not in the form of a bill of particulars, provide the Defendants with the witness list, the list of tapes to be used at trial and the index to the files which will enable each defendant to identify the alleged false and misleading statements or high pressure sales tactics, account information or other details required to prepare an adequate defense. Defendants' motion under Rule 16(a)(1)(C) is denied.
C. Disclosure Pursuant to 18 U.S.C. § 3500 18 U.S.C. § 3500, "the Jencks Act," requires the government, after the testimony of a witness, to produce any prior statements of the witness "in the possession of the United States which relate to the subject matter as to which the witness has testified. If the entire contents of any such statement relate to the subject matter of the testimony of the witness, the court shall order it to be delivered directly to the defendant for his examination and use." 18 U.S.C. § 3500(b). The Defendants request that if the Government is unable to produce all prior statements of its witnesses relating to the subject matter about which they are testifying, i.e. statements on the tapes, the testimony of such witnesses should be precluded.
The motion to preclude is denied with respect to any statement of a witness that is unknown to the Government but may be included in the Dictaphone tapes. The Jencks Act assumes a situation where the government is in sole possession of statements of a witness relating to the subject matter as to which the witness has testified. Here the Government has made the tape recorded conversations together with the listening equipment available to the Defendants since April 24, 2001. Accordingly, the tape recorded conversations have not been in the Government's sole possession but are in the joint possession of the parties. If any defendant wishes a copy of the 135 Dictaphone tape recordings delivered to him, he should so advise the Court by January 1, 2002 and the Court will order that a duplicate copy of the 135 tapes be provided to the defense, as provided under the literal terms of 18 U.S.C. 3500. It is suggested, however that such a course of action would incur an unnecessary expense in view of the availability of the tapes as presently provided for. "The purpose of the Jencks Act is to make any existing prior statement of a government witness concerning matters covered by direct examination equally available to the defense and the prosecution." United States v. Snow 537 F.2d 1166, 1168 (4th Cir. 1976), citing United States v. Cruz, 478 F.2d 408 (5th Cir.), cert denied, 414 U.S. 910 (1973); see Aleman v. United States, 414 U.S. 910 (1973); United States v. Borda, 1999 U.S. App. LEXIS 9031 (4th Cir. 1999); United States v. Head, 586 F.2d 508 (5th Cir. 1978) (The purpose of the Jencks Act is to reinforce the credibility of the criminal justice process by requiring the prosecution to furnish statements of any witness it calls so that the defense can conduct its cross-examination in the light of facts known to the prosecution and so that the defense is assured that the witness has made no secret contrary statements in the past).
Accordingly, the Government was ordered to produce all § 3500 statements of a witness known to the Government which relate to the subject matter on which the witness will testify, on a rolling basis starting one week before trial. As to any statements of a witness contained in the 135 Dictaphone tapes which the defense wishes copied the Government will promptly provide such a copy to the requesting defendant at government expense as provided under 18 U.S.C. § 3500.
Giglio v. United States 405 U.S. 150, 154 (1972) expands the rule inBrady that suppression of material evidence justifies a new trial "irrespective of the good faith or bad faith of the prosecution' to include impeachment material. "When the `reliability of a given witness may well be determinative of guilt or innocence,' nondisclosure of evidence affecting credibility falls within this general rule." Id. Accordingly, the Government is also required to disclose Giglio material a week before a witness is scheduled to testify.
D. Dismissal of the Indictment
Defendants' assert that "a shadow is cast upon the entire investigation by the Government's apparent conscience avoidance of its Brady obligations" and therefore the indictment should be dismissed. There is absolutely no evidence to warrant such a statement. Defendants also state if for any reason the Government continues to fail to comply with the obligations under Fed.R.Crim.P. 16 and 18 U.S.C. § 3500, or fails to abide by any order issued by this Court directing said compliance, the indictment should be dismissed. As there is no indication of any failure by the Government to comply with its obligations, Defendants' motion for dismissal of the indictment is denied.
IV. Request for a Bill of Particulars
Defendants assert that the allegations in the Indictment fail to provide the particulars that the defense needs to prepare for trial and that the situation is further aggravated by the Government's failure to provide more specific discovery in the matter. "`A bill of particulars should be required only where the charges of the indictment are so general that they do not advise defendant of the specific acts of which he is accused.'" United States v. Torres, 901 F.2d 205, 234 (2d Cir.),cert. denied, 498 U.S. 206 (1990) (citation omitted).
A bill of particulars is granted insofar as it requires the Government to identify the witnesses and tapes upon which it will rely at trial, otherwise a bill of particulars is not warranted in this case. The Government has provided access to the Defendants of all the documents of Investors Associates and to all the tape recordings in their possession. The Court's orders at argument on November 19, 2001 will provide the defense with sufficient details of the Government's case well in advance of trial to allow each defendant to prepare an adequate defense.
V. Request for Disclosure of Grand Jury Evidence
Defendants argue that the Court should order the Government to disclose to the Court evidence that was presented to the Grand Jury. Defendants contend that no specific evidence could have been presented against many of the Defendants and that therefore the proceedings may have been defective. Rule 6(e)(2) of the Federal Rules of Criminal Procedure provides that matters occurring before the grand jury are secret. Review of grand jury minutes is not appropriate without specific factual allegations of government misconduct. United States v. Torres, 901 F.2d 205, 233 (2d Cir. 1990). Defendants' claim "that it may well be that the Grand Jury proceedings were defective" does not constitute a specific allegation of government misconduct. Given the absence of any factual support for the allegations of misconduct, there is no reason to upset the presumption of regularity of grand jury proceedings by inspecting the minutes. United States v. Wilson, 565 F. Supp. 1416, 1436 (S.D.N.Y. 1983) ("Speculation and surmise as to what occurred before the grand jury is not a substitute for fact"); 8 J. Moore, Moore's Federal Practice Rules of Criminal Procedure § 6.05[3], at 6-141-43 (1992) (general allegations that the transcripts might indicate prosecutorial abuse, or conclusory allegations of misconduct without factual support have been held insufficient for Court review). Defendants' motion to compel the government to disclose to the court the evidence that was presented to the Grand Jury is denied.
VI. Request for Notice of Prior Acts and Criminal Convictions
Defendants seek to preclude, under Rules 404(b) and 403 of the Federal Rules of Evidence, the Government from introducing at trial evidence of any prior bad or illegal acts or criminal convictions. In the alternative, Defendants request the Court, pursuant to F. R. Crim. P. 16 (a)(1)(c), to direct the Government to disclose any and all bad acts which the government intends to introduce against each defendant in sufficient and reasonable time that each defendant will have a meaningful opportunity to preclude the introduction of such evidence. On November 19, 2001 the Court ordered the Government to provide evidence it intends to introduce under Fed.R.Evid. 404(b) twenty days prior to trial. In the event that the Government finds 404(b) evidence after that time and shows good cause for its failure to provide such evidence earlier, the Government will be permitted to provide notice during the trial.
VII. Suppression of Evidence Relating to Broker Compensation and Motion to Strike
Defendants also move for the suppression of any evidence relating to broker compensation. Their argument, however, is directed to certain allegations contained in paragraphs 51(a) and 58 of the indictment, which, they argue, implies that the Defendants had an obligation to disclose to their customers the extent of their own compensation and that failure to do so constitutes fraud. (Memorandum of Law in Support of Defendants Omnibus Pre-Trial Motions ("Defs.' Brief") at 25.) They also move to strike the allegations in the Indictment which imply that failure to disclose the Defendants' own compensation was fraud (Id. at 47; Tr., at 47.)
Both paragraphs 51(a) and 58 are included in a section of the indictment headed "Fraudulent Sales Practices," in which the defendants are charged with participation "in various means to manipulate the market prices of House Stocks and engaged in deceptive sales practices with respect to public customers, in violation of the fiduciary and other duties they owed to those customers." (Ind. at ¶ 50.)
In Paragraph 51, among the techniques used are:
(a) providing excessively high compensation to the brokers, which was not disclosed to the customers.
Paragraph 58, entitled "Extraordinary Undisclosed Compensation" charges that:
In return for participating in the conspiracy and engaging in the numerous violations summarized above, [defendants] were paid extraordinary and undisclosed compensation — occasionally referred to as sales credits or commissions. The brokers' compensation could be as high as approximately 15% of the price of the stock and encouraged brokers to tout aggressively the House Stocks to the public. Such commissions were not paid to brokers when selling non-House stock to customers or when buying House Stock from customers. Instead of disclosing these excessive commissions to the public, which would discourage customers from purchasing the stock at the artificially inflated purchase price, the defendants routinely informed their customers that a nominal fee or no commission would be charged.
Both of these paragraphs, since they are included under the heading, "Fraudulent Sales Practices," carry the strong implication that Defendants, as registered representatives, had a duty to disclose to the customers the extra compensation they would receive from Investors Associates for purchases of House Stocks.
The statement in the last sentence of Paragraph 58 of the indictment that, "a nominal fee or no commission would be charged" apparently refers to Investor Associates' fee or commission since registered representatives' commissions are not "charged." Only the broker/dealer commission is "charged" to a customer. Accordingly, Paragraph 58 confuses broker/dealer commissions with registered representatives' compensation and does not properly state that the Defendants would affirmatively lie about their over compensation as asserted by the government. (Gov. Mem. at 46.) Obviously, affirmatively lying about their own compensation on a transaction can result in criminal liability.
The Government correctly states that the fundamental question under the securities fraud, mail fraud and wire fraud laws is whether the defendant made untrue statements of material fact or omitted to state material facts necessary to make the statements made, in the light of the circumstances under which they were made, not misleading. See 15 U.S.C. § 78j(b), 78ff; 17 C.F.R. § 240 10b-5; Gov. Mem. at 43.
On their face, the allegations in Paragraphs 51(a) and 58 do not constitute "fraudulent sales practices." In ordinary circumstances, the compensation of a registered representative is not a material fact to the transaction being entrusted to him. Although the relationship between a brokerage house and its customer is fiduciary in nature and the registered representative as the brokerage house employee must use reasonable efforts to give the customer information relevant to the affairs that have been entrusted to him [see Restatement (Second) of Agency, § 381 (1958); Conway v. Icahn Co., Inc., 16 F.3d 504 (1994)], relevant information relates to the security being sold and the terms of the transaction entrusted to him, including the amount of the commission being charged by the brokerage house for the transaction. Since the registered representative's commission paid by the brokerage house is not charged to the transaction, it is not material to the customer's transaction and it need not be disclosed.
A registered representative purchasing a House Stock in a discretionary account could have a fiduciary duty to disclose extraordinary compensation being received for such purchases, since the extraordinary compensation could be material to the customer's decision to allow the registered representative to exercise that discretion.
The Government's reliance on Securities and Exchange Rule 10b-10(a)(2)(i)(D), 17 C.F.R. § 240.10(b)-10(a)(2)(i)(D) as supporting the illegality of non-disclosure of registered representatives' commission is misplaced. Rule 10b-b, properly interpreted, relates to the compensation of the broker/dealer as agent of the customer not the compensation that the registered representative receives from the broker/dealer. It is the broker/dealer that is the customer's agent in these security transactions.
Neither the SEC nor NASD have required registered representatives of broker/dealers to disclose their own compensation in a securities transaction, although both have been fully aware that registered representatives often received special incentives beyond the normal compensation to sell a particular product. (Report of the Committee on Compensation Practices, April 10, 1995, "Tully Report" at 16; NASD Notice to Members 97-50 and 99-81); see also Castillo v. Dean Witter Discover, 1998 WL 342050 at 9 (S.D.N.Y. 1998).
The allegations in Paragraphs 51(a) and 58 of the indictment are denominated "fraudulent sales practices" which, as currently drafted, they are not. A jury could be misled by paragraphs 51(a) and 58 of the Indictment. The Indictment is generally given to the jury for its deliberations. Accordingly, those paragraphs are stricken as prejudicial.
The defendants' motion to preclude evidence of the compensation paid to the defendants is denied, however. Such evidence is relevant to the means by which the managers of Investors Associates motivated the defendants to commit the other fraudulent sales practices charged in the indictment.
VIII. Motion to Strike Portions of the Indictment
Defendants assert that the "manner and means" section of the Indictment, paragraph 65(a) through (d), contains prejudicial and irrelevant paragraphs constituting surplusage and should be stricken pursuant to Rule 7(d) of the Fed.R.Crim.P. This paragraph does contain surplusage. However, a motion to strike surplusage will only be granted where it is clear that the allegation is both "not relevant to the crime contained in the indictment and is inflammatory and prejudicial." United States v. Ruiz 702 F. Supp. 1066, 1073 (S.D.N.Y. 1989), aff'd 894 F.2d 501 (2d Cir. 1990) (citation omitted). These allegations do not meet that test.
Defendants also argue that not all Defendants engaged in unlawful conduct with respect to all of the House Stocks as charged in paragraph 65(a) through (d) of the Indictment. However, as the Government points out, the "manner and means" section of the Indictment is relevant to show how Defendants and their co-conspirators carried out the conspiracy with which they are all charged. All Defendants are charged with belonging to a broad conspiracy to create a market demand for Investor's Associates' House Stocks and manipulating the price of the House Stocks by the fraudulent scheme set forth in paragraph 65(a) through (d). As paragraphs 65(a) through (d) are relevant to showing how the conspiracy was carried out, it may not be stricken. United States v. Scarpa, 913 F.2d 993, 1013 (2d Cir. 1993). Additionally, the individual Defendants are not prejudiced by paragraph 65(a) through (d) because the Indictment specifies the time period during which each Defendant was employed at Investors Associates, and the Indictment's substantive counts name those particular Defendants who allegedly participated in unlawful acts with respect to each House Stock.
Defendants' motion to strike paragraph 65(a) through (d) of the Indictment is denied.
Conclusion
For the above reasons, the Government is ordered to provide 18 U.S.C. § 3500 and Giglio material for each witness a week before he or she is scheduled to testify; the Government must provide evidence it intends to introduce under Fed.R.Evid. 404(b) twenty days prior to trial; the allegations in paragraphs 51(a) and 58 of the indictment are stricken; a bill of particulars is granted insofar as the Government is required to provide a list of the tapes and witnesses it intends to use against each Defendant; all other motions are denied. The Government is also ordered to disclose by January 3, 2002 the date Mr. Magnon began cooperating with the Government and when it first knew of the existence of the tapes. A status conference will be held on February 6, 2002 at 4 pm. A hearing on the motion to suppress audiotape evidence will be heard staffing on April 8, 2002.
IT IS SO ORDERED.