The press releases are questionable to say the least. I find it remarkable how they can continue to post their twisted version of the facts to their investors. They are putting up a bunch of smoke to hide the facts. Some of the facts will be coming out tomorrow when TM is sentenced. He delayed his last sentencing date by putting a motion for concederation. I have posted what the governement responded to his objections. There is no hiding, the facts are coming out.
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
UNITED STATES OF AMERICA :::
CRIMINAL ACTION
v. :
: NO. 1:04-CR-508-CAP
TIMOTHY C. MOSES :
GOVERNMENT'S SENTENCING MEMORANDUM
COMES NOW the United States of America, by and through its
counsel, David E. Nahmias, United States Attorney for the Northern
District of Georgia, and R. Joseph Burby, IV and Paul N. Monnin,
Assistant United States Attorneys, and hereby respectfully submits
this memorandum in connection with defendant Timothy C. Moses's
(the "Defendant") sentencing in the above-captioned criminal
action.
I. INTRODUCTION
After personally and directly causing a loss of more than $2.2
million to shareholders in International BioChemical Industries,
Inc. ("IBCL"), the Defendant's publicly-traded company –- which,
for the 539 investors who bought and held IBCL shares in reliance
on the Defendant's false press releases, equates to an average loss
of more than $4,100 per investor -- the Defendant now requests that
the Court overlook the substance and extent of his misconduct by
sentencing him to a term probation. (See Def.'s Sentencing Mem.
(Doc. 92) at 1). As shown below, the Defendant's thoroughly
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 1 of 29
2
anomalous sentencing recommendation not only flies in the face of
how the federal Sentencing Guidelines account for his criminal
conduct, but also how such criminal conduct –- and the significant
economic harm it visited upon literally hundreds of IBCL
shareholders –- is addressed by 18 U.S.C. § 3553.
At trial, the government proved, consistently with both
applicable Eleventh Circuit precedent and federal Sentencing
Guidelines precepts governing the computation of loss in federal
securities fraud prosecutions, that the Defendant's repeated and
systematic lies regarding the FBI's interest in IBCL directly
induced hundreds of investors to buy tens of millions of IBCL
shares at fraudulently inflated prices, thereby precipitating a
loss of more than $2.2 million once the truth was revealed that the
FBI's interest in IBCL was solely investigative. In particular,
through the testimony and exhibits offered at trial by Dr. Hugh
Cohen, the government proved: (1) that the Defendant's false press
releases, not the president's State of the Union Address, caused a
sharp spike in the price and trading volume of IBCL shares; (2)
that, as evidenced by actual trading data compiled by the SEC, 539
separate investors are known to have bought, and to have held, IBCL
shares between the first false press release on January 29, 2003
and the SEC trading halt on February 6, 2003 (hereinafter, the
"fraud period"); (3) that the Defendant's victims, defined as those
investors who bought and held IBCL shares in reliance on the
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 2 of 29
3
Defendant's lies, purchased approximately 29,500,000 IBCL shares
during the fraud period; and (4) that the difference between the
average, fraudulently inflated price at which these victims bought
their IBCL shares and the actual, non-fraud value of such shares
equates to an aggregate loss of more than $2.2 million.
In response, the Defendant asserts that the government's
evidence is faulty and that Dr. Cohen's methodology is flawed.
However, aside from the fact that the trading data upon which Dr.
Cohen relied was compiled by the SEC pursuant to its regulatory
authority and, further, was admitted at trial without objection,
applicable Eleventh Circuit law readily approves of loss
computations in criminal securities fraud prosecutions based
entirely on average share price and trading volume figures; i.e.,
where no actual, individuated trading data is used. Moreover, that
the Defendant himself repeatedly claims that the government should
have used actual trading data to calculate a fair market value
(i.e., a non-fraud price) for the IBCL shares acquired during the
fraud period and held by victim investors as of the February 6,
2003 trading halt, (see Def.'s Sentencing Mem. (Doc. 92) at 6-7),
clearly belies his competing assertion that such data is otherwise
unreliable.
Faced with the reality that the government performed a far
more exacting calculation of investor loss in this case than what
is legally required, the Defendant next argues that the Court
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 3 of 29
4
should excuse his crimes because, after all, he merely defrauded
"day traders" and should not be held accountable for the price and
volume momentum resulting from their trading in reliance upon his
lies. See id. at 2-3. This contention, however, overlooks that
the victim investors who lost more than $2.2 million as a result of
the Defendant's criminal conduct bought and held IBCL shares during
the fraud period and thus by definition were not "day traders."
The Defendant further asks that, in sentencing him, the Court
ignore (1) that he issued not one, but four false press releases in
furtherance of his fraud scheme; (2) that two of the false releases
were issued after he had been advised by the SEC to issue a
corrective release; (3) that the Defendant knew at the time of the
releases that IBCL's anti-anthrax product had been rejected by the
EPA; (4) that the releases themselves capitalized on the public's
fear of anthrax contamination and perception that any company with
an effective anti-anthrax product (again, a lie) was holding a
golden ticket; (5) that the Defendant exploited the fraudulent
releases to engage in insider trading; and (6) that he proceeded to
lie about his insider trades in sworn testimony before the SEC.
Accordingly, the contention, articulated throughout the
Defendant's sentencing memorandum, that his crimes are somehow less
serious –- and therefore less deserving of punishment -- because
IBCL was a penny stock company at the time of his offense conduct
whose shareholders were, according to the Defendant, decidedly less
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 4 of 29
5
than risk averse is wrong as a matter of both undisputed fact and
well-settled law. The Defendant was convicted of lying, not once,
but four separate times, to IBCL shareholders who had the legal
right to expect –- whether they be day traders or "buy and hold"
investors –- that the CEO of a publicly-traded company was being
forthright and honest with them. The federal securities laws, and
criminal prosecutions thereunder, exist to ensure the integrity of
the public markets, which in turn exist to facilitate investment in
publicly-traded businesses and, consequently, the growth of the
United States economy. These laws make no exception –- and neither
should the Court -- for the size or market capitalization of an
issuer in calibrating the seriousness of an offense, which, under
both the guidelines and 18 U.S.C. § 3553, is primarily a function
of the loss visited upon those investors who purchased stock in
reliance on an offender's misrepresentations.
In short, the Defendant committed a serious fraud offense in
this case (and then proceeded to lie about it to the SEC), which
caused a loss of more than $2.2 million to his victims. That this
case involves securities fraud affords him no relief, either as a
guidelines or discretionary sentencing proposition, because the
Defendant's lies caused not only substantial aggregate, but also
significant individual, economic harm to actual investors who
relied in good faith on the Defendant's false and fraudulent press
releases.
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 5 of 29
1The probation officer's offense level computations in this
case were made pursuant to the 2002 edition of the Sentencing
Guidelines Manual. (PSR at 19). Although Sentencing Guidelines
Amendment 617 both merged the former USSG § 2F1.1 into the
current USSG § 2B1.1 and endowed USSG § 2B1.1 with a more
detailed definition of loss, the concept that the sentencing
court need only make a reasonable estimate of harm in affixing
punishment is common to both guideline provisions. Compare USSG
§ 2F1.1 comment n.9 (2000) ("For the purposes of subsection
(b)(1), the loss need not be determined with precision. The
court need only make a reasonable estimate of the loss, given the
available information."), with USSG § 2B1.1 comment n.2(C) (2002)
("The court need only make a reasonable estimate of loss. The
sentencing judge is in a unique position to assess the evidence
and estimate the loss based upon that evidence. For this reason,
the court's loss determination is entitled to appropriate
deference."). Consequently, although the authorities cited
6
II. ANALYSIS
A. A Reasonable Estimate of Aggregate Victim Loss, Not the
Defendant's Gain, is the Appropriate Measure of Harm for
Sentencing Purposes
Although the guidelines are no longer mandatory post-Booker,
the Eleventh Circuit has ruled that sentencing courts must continue
to consult the guidelines in arriving at a sentence, and that
"[t]his consultation requirement, at a minimum, obliges the
district court to calculate correctly the sentencing range
prescribed by the Guidelines." United States v. Crawford, 407 F.3d
1174, 1178 (11th Cir. 2005) (emphasis deleted); accord United
States v. Jordi, 418 F.3d 1212, 1215 (11th Cir. 2005). Because
they primarily sound in pecuniary or economic harm, the offense
guideline governing federal securities fraud offenses is USSG §
2B1.1, or its predecessor prior to the 2001 guidelines amendments,
USSG § 2F1.1.1 See, e.g., United States v. Snyder, 291 F.3d 1291,
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 6 of 29
herein generally apply USSG § 2F1.1 to the computation of loss in
securities fraud prosecutions, such authority has equal
application to the computation of loss under USSG § 2B1.1.
7
1295-96 (11th Cir. 1999) (applying USSG § 2F1.1). USSG § 2B1.1
assigns a base offense level of 6 to most securities fraud offenses
(with the exception of insider trading, which is governed by USSG
§ 2B1.4), which is then stepped up in 2-level increments under USSG
§ 2B1.1(b)(1) to specifically account for the loss arising out of
the subject offense conduct. (See PSR ¶ 68 (upwardly adjusting the
Defendant's offense level by 16 levels under USSG § 2B1.1(b)(1)(I)
to correspond to the $2.2 million loss caused to IBCL investors)).
The Eleventh Circuit "has concluded that 'loss' under [USSG §
2B1.1(b)(1)] is a specific offense characteristic intended to
measure the actual, attempted, or intended harm of the offense."
United States v. Munoz, 430 F.3d 1357, 1369 (11th Cir. 2005)
(quoting United States v. Orton, 73 F.3d 331, 333 (11th Cir.
1996)); see also United States v. Olis, 429 F.3d 540, 545 (5th Cir.
2005) ("The guidelines measure criminal culpability in theft and
economic crimes according to their pecuniary impact on victims").
Although there are several means of measuring loss under USSG
§ 2B1.1, those most commonly employed involve calculating the
aggregate loss to victims or, alternatively, the defendant's net
gain. Munoz, 430 F.3d at 1369 (citing Orton, 73 F.3d at 334 &
n.6). Between the two, however, assessment of harm for sentencing
purposes should primarily focus on the victims' loss. United
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 7 of 29
2Even were the Court to deem the Defendant's gain the
appropriate measure of harm in this case -- a result universally
disfavored where, as here, victim loss can be reasonably
quantified, Snyder, 291 F.3d at 1295-96; Bracciale, 374 F.3d at
1003-04 -- the $11,600 profit he concedes resulted from his
insider trades significantly understates the true value of his
criminal proceeds. While the Defendant grossed $71,685.28 on the
1.2 million IBCL shares he sold during the fraud period, (PSR ¶
35), the weighted average sales price of these shares was 6.104
cents. Factoring the 2.39 cent post-fraud period price he would
otherwise have realized on these sales, his net gain is $44,570.
Even this gain, however, fails to account for the fact that, had
the Defendant not lied to the market, thereby precipitating a
8
States v. Wilson, 993 F.2d 214, 217 (11th Cir. 1993). This is
because, as is the case here, substitution of an offender's gain
"ordinarily underestimates the loss," and hence the offender's
degree of culpability. Snyder, 291 F.3d at 1295; Orton, 73 F.3d at
334; United States v. Bracciale, 374 F.3d 998, 1003 (11th Cir.
2004). Indeed, the commentary to USSG § 2B1.1 expressly provides
that the sentencing court "shall use the gain that resulted from
the offense as an alternative measure of loss only if there is a
loss but it reasonably cannot be determined." USSG § 2B1.1 comment
n.2(B) (2002).
Accordingly, the guidelines and authority interpreting the
guidelines make clear that, when it can be reasonably quantified,
victim loss (rather than an offender's gain) is the preferred
measure of assessing harm in fraud cases. Moreover, in the
securities fraud context, the Eleventh Circuit has expressly ruled
that sentencing courts are to use reasonably quantifiable market
impact in assessing loss, not the offender's gain.2 See Snyder,
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 8 of 29
veritable avalanche in the volume of IBCL shares transacted, he
may have been unable to sell 1.2 million shares over a six-day
trading period. Nor does it account for the fact that, at the
time of the SEC trading halt (and as proven at trial), the
Defendant was actively attempting to get more S-8 shares issued
to him that he then sought to dump into the rising tide for IBCL
securities.
9
291 F.3d at 1295-96 (11th Cir. 2002) (reversing the district
court's use of the defendants' gain from insider trading as an
appropriate measure of loss under USSG § 2F1.1 and holding that,
"t is fair to say that, as a result of the [defendants'] fraud,
a large number of individuals and institutions were induced to
purchase . . . stock at an artificially inflated price. Their
losses are substantially undervalued by utilizing the 'gain to
defendants' approach.") (emphasis added). This is because, as
aptly noted by one Eleventh Circuit judge, in securities fraud
offenses:
The type of crime committed . . . tends to provide a
relatively small and certain amount of expected gain to
defendants and a far larger and less certain loss to
innocent investors throughout the market. . . . [T]he
perpetrators seek something of value for themselves with
reckless disregard for their faceless victims. The
extent of their wrongdoing will usually greatly exceed
what they hoped to derive from their nefarious conduct.
Snyder, 291 F.3d at 1296-97 (Hill, J., concurring).
Victim loss, however, need not be determined with precision:
"The court need only make a reasonable estimate of loss, given the
available information." Bracciale, 374 F.3d at 1003; accord United
States v. Renick, 273 F.3d 1009, 1025 (11th Cir. 2001). Further,
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 9 of 29
10
"[w]hen precise figures are not ascertainable, the 'loss to the
losing victims' method generally prefers 'to calculate the victims'
loss by determining the approximate number of victims and
[estimating] the average loss to each victim.'" Munoz, 430 F.3d at
1370 (quoting Snyder, 291 F.3d at 1295). In the securities fraud
context, this means that "[j]ust because each individual's precise
loss cannot be ascertained does not mean that the district court
should abandon a loss calculation altogether." Snyder, 291 F.3d at
1296. Thus, "[w]hile the 'loss to losing victim' approach is not
required in every case, the district court should not abandon a
loss calculation in favor of a gain amount where a reasonable
estimate of the victims' loss based on existing information is
feasible." Bracciale, 374 F.3d at 1003-04 (internal quotations
omitted) (citing Snyder, 291 F.3d at 1296).
B. The $2.2 Million Loss to IBCL Investors Caused by the
Defendant's Fraud is Actual and Reliable
The government recognizes -- and indeed embraces -- its
obligation not to speculate as to loss in this case, United States
v. Sepulveda, 115 F.3d 882, 890 (11th Cir. 1997), and that, upon
challenge, it bears the burden "of supporting its loss calculation
with 'reliable and specific evidence.'" Renick, 273 F.3d at 1025
(quoting Sepulveda, 115 F.3d at 890). Although (as set forth
above) applicable law holds that the government's loss figure need
only constitute a reasonable estimate given the available
information, Snyder, 291 F.3d at 1295; Bracciale, 374 F.3d at 1003;
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 10 of 29
3Dr. Cohen's Rule 16 expert report, summarizing the loss
computations he offered trial, is attached hereto as Exhibit A.
His trial testimony, including direct and cross-examination, is
attached hereto as Exhibit B.
11
Munoz, 430 F.3d at 1370, in this case, as noted in the PSR and as
he testified (without contradiction) at trial, Dr. Cohen utilized
actual trading data, corresponding to 73 percent of the 118 million
IBCL shares traded after the Defendant issued his first false press
release on January 29, 2003 and before the SEC halted trading in
IBCL shares on February 6, 2003, to calculate a market loss (again,
for 73 percent of the market) of $1.65 million. (PSR ¶¶ 61-64).3
For the remaining 27 percent of the loss class where no actual
trading data was available, Dr. Cohen provided a reasonable
estimate of loss using an average loss differential of 7 cents and
assuming that 25 percent of traders bought and held shares through
the fraud period, yielding an additional loss of $560,000. Id. ¶
65.
The fact that Dr. Cohen utilized actual trading data to
calculate: (1) that approximately 25 percent of the 86 million
documented stock purchases during the fraud period were made by
investors who bought and held the shares throughout the fraud
period, (Ex. A, Cohen Rep. ¶¶ 19-20; Ex. B, Cohen Tr. at 34); (2)
that a total of 539 "buy and hold" investors purchased in reliance
upon the Defendant's false press releases, (Ex. A, Cohen Rep. ¶ 22;
Ex. B, Cohen Tr. at 33-34); (3) that these 539 "buy and hold"
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 11 of 29
4Derived by multiplying 7.5 cents (the price differential
between the 9.9 cent weighted average purchase price incurred by
the 539 "buy and hold" investors who acquired and held their IBCL
stock and the 2.4 cents these shares were otherwise worth) by the
approximately 22,000,000 shares these investors purchased during
the fraud period. (Ex. A, Cohen Rep. ¶ 22; Ex. B, Cohen Tr. at
35).
12
investors purchased their shares at a weighted average purchase
price of 9.9 cents, (Ex. A, Cohen Rep. ¶ 22; Ex. B, Cohen Tr. at
34-35); and (4) that these 539 "buy and hold" investors therefore
suffered an aggregate loss, again based upon actual trading data,
of $1.65 million,4 (Ex. A, Cohen Rep. ¶ 22; Ex. B, Cohen Tr. at
35), leads to a far more exacting and precise computation of victim
loss than what is otherwise required by applicable law.
Indeed, under the time-honored standard that the court "need
only make a reasonable estimate of loss," Bracciale, 374 F.3d at
1003, and that in the securities fraud context it is both feasible
and reasonable to compute market loss by "determining the
approximate number of victims and [estimating] the average loss to
each victim", Snyder, 291 F.3d at 1295, it would be fully and
legally sufficient to compute victim impact in this case simply by
reference to closing prices for IBCL shares during the fraud period
and for a reasonable period of time after the fraud period and
assuming that 1/5-1/3 of the shares acquired during the fraud
period were purchased by "buy and hold" investors. See, e.g.,
United States v. Grabske, 260 F. Supp. 2d 866, 873 (N.D. Cal. 2002)
("It is . . . appropriate to compute the loss based on the average
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 12 of 29
5While the Defendant belatedly criticizes the reliability of
this trading data, otherwise known as "Blue Sheet" trading
information (which he knew prior to trial had been compiled by
the SEC pursuant to its regulatory authority), he declined to
question its validity at trial, either on cross of Dr. Cohen or
through the four SEC enforcement attorneys who appeared as
government witnesses. Indeed, this data was admitted without
objection at trial as Government Exhibit 46. The government
additionally notes in this regard that applicable law merely
requires a reasonable estimate of loss "given the available
information," Snyder, 291 F.3d at 1295 (quoting Orton, 75 F.3d at
335), and that it is certainly reasonable for Dr. Cohen to have
relied upon trading information compiled by the SEC in connection
13
price during the fraud and the average price during a relevant
period after the fraud"). Under this "simple loss analysis,"
clearly sanctioned by the Eleventh Circuit, Snyder, 291 F.3d at
1296; Orton, 73 F.3d at 334, a spread of 7.4 cents between fraud
and post-fraud period closing prices, multiplied by a range of
approximately 23 to 39 million shares (corresponding to 20 to 33
percent of the shares acquired), yields a loss range of $1.7-$2.9
million. (Ex. A, Cohen Rep. ¶¶ 15-16; Ex. B, Cohen Tr. at 17-20).
Factoring in weighted average prices -- defined as the total amount
spent on IBCL stock during a particular day divided by the total
number of shares transacted -- yields a fraud versus non-fraud
weighted average price differential of 7 cents, which in turn
yields a loss range of $1.65-$2.75 million. (Ex. A, Cohen Rep. ¶¶
17-18; Ex. B, Cohen Tr. at 29-31).
As he testified at trial, however, because Dr. Cohen was
endowed in this case with actual trading data for approximately 73
percent of the market,5 he was able to calculate the weighted
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 13 of 29
with its authority to regulate those broker-dealers and clearing
firms that facilitate securities trading. In any event, should
the Court wish to take up the reliability of the trading
information relied upon by Dr. Cohen at sentencing, the
government expects to produce an SEC witness who can lay a
foundation establishing the sources and validity of this data.
14
average price for IBCL shares acquired by "buy and hold" investors
during the fraud period, a more precise measure of the prices paid
-- and accordingly the loss incurred -- by the Defendant's victims.
(See Ex. B, Cohen Tr. at 32 ("The loss class is different than
everybody who bought the stock. If you just wanted to know what
was the weighted average price of everyone who bought the stock, we
would have that. But what we are trying to calculate was what was
the weighted average price of the people who bought the stock and
held it. . . . Since we actually had the trading data for three
quarters of it, we used and actually calculated what their actual
loss was based on their buying.")). It necessarily follows that,
in utilizing actual trading data, and hence in deriving an actual
loss figure for 73 percent of the market, Dr. Cohen's loss
calculation is not only more accurate, but far more conservative
than it would otherwise be had he merely utilized closing prices or
weighted average prices for the market as a whole.
Dr. Cohen's computation of a $2.2 million loss to IBCL
investors attributable to the Defendant's fraud is additionally
quite conservative in that, aside from being based on actual
trading information, Dr. Cohen included as victims only those
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 14 of 29
15
investors who bought IBCL shares after the initial fraudulent press
release on January 29 and who then held their shares through the
February 6 trading halt. Accordingly, while the Defendant seeks to
make much of the fact that the market for IBCL securities was
purportedly comprised of "day traders" (whom he knew would make a
market for his insider trades, particularly if he issued a series
of false releases), Dr. Cohen explicitly excluded those traders who
bought and then sold IBCL shares during the January 29-February 6,
2003 fraud period from the class of victims in this case. (PSR ¶
62). In short, none of the $2.2 million market loss calculated by
Dr. Cohen was borne by an investor who bought and then sold during
the fraud period.
C. The Defendant is Directly and Personally Responsible for the
$2.2 Million Loss He Caused to IBCL Investors
In addition to the reliability of the trading data used by Dr.
Cohen, the Defendant also questions his methodology in arriving at
a $2.2 million victim impact. While the Defendant contends that
this loss figure is overstated, the grounds he raises in support of
this contention are both factually and legally inapposite.
1. The Defendant's False Press Releases Plainly Caused the
Spike in Trading Price and Volume that Harmed IBCL
Investors
First, as at trial, the Defendant claims that President Bush's
reference to a "Project Bioshield" in his 2003 State of the Union
address may have impacted the share price and trading volume for
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 15 of 29
6It is also worth noting Deidre Baker's recollection that
the shareholder calls IBCL received in the wake of the first
false press release concerned the substance of the releases, not
the president's speech. Moreover, neither Gary Toussaint nor
Adam Craft, the two victim witnesses called by the government at
trial, testified that they considered the State of the Union
Address in making their investment decisions. To the contrary,
16
IBCL stock. The government specifically rebutted this point at
trial, however, unequivocally showing that it was the Defendant's
first false press release, issued January 29, 2003 at 1:51 p.m.,
that precipitated an explosion in the price and trading volume of
IBCL shares, which was then sustained by the three false press
releases subsequently issued by the Defendant.
In particular, using intra-day share price and volume
information for January 29, 2003, the day after the president's
State of the Union Address, (Gov't Ex. 55), Dr. Cohen noted that,
while a fair number of shares exchanged hands in the first 45
minutes of trading, given that there was no corresponding price
impact, this suggests that there were as many sellers as buyers of
IBCL stock during this time period, negating any inference that
investors wanted to buy based on the president's speech. (Ex. B,
Cohen Tr. at 24). More importantly, while there was virtually no
volume in the two-and-a-half hours leading up to the first press
release, more than a million shares were bought in the fifteen
minutes encapsulating its issuance, followed by more than 11
million shares being acquired -- at ever-escalating prices --
through the remainder of the day.6 Id. at 24-26.
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 16 of 29
both asserted that the substance and tenor of the Defendant's
false press releases caused them to buy.
17
Given these undisputed (and indeed indisputable) facts, it is
laughable to contend that the president's State of the Union
Address factored into the frenzy for IBCL shares immediately
following issuance of the Defendant's first false press release.
In addition, while the government recognizes the legal obligation
in criminal securities fraud prosecutions to show "transaction
causation," i.e., that the offender's fraud was the "but for" cause
of the victim's harmful stock transactions, see, e.g., Olis, 429
F.3d at 545-46, this requirement is readily met here given: (1)
the explosive and sustained price and volume increases associated
with the Defendant's press releases and (2) the fact that a six-day
fraud period -- populated by the issuance of four separate false
press releases -- leaves little or no room for other variables to
factor into the rising tide for IBCL securities. See id. at 547
(noting that sentencing courts must "take[] seriously the
requirement to correlate the defendant's sentence with the actual
loss caused in the marketplace, exclusive of other sources of stock
price decline").
2. Even Making All Assumptions (Including Unreasonable
Assumptions) in the Defendant's Favor, the Loss Amount
Remains $2.2 Million
The Defendant next contends that Dr. Cohen erred in
purportedly failing to net the actual sales price victims may have
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 17 of 29
7Each of the computations set forth in this section were
disclosed to the Defendant pre-sentencing pursuant to Rule 16.
8This assumption is unreasonable not only because merely a
quarter of the more than 118 million IBCL shares acquired during
the fraud period were bought by "buy and hold" investors, but
also because Gary Toussaint and Adam Craft, the two victim
18
realized once trading in IBCL stock resumed on February 21, 2003
from the false premium paid during the fraud period. (Def.'s
Sentencing Mem. (Doc. 92) at 7). By way of example, he cites the
fact that 4.4 million shares were sold on that date and that the
share price rose as high as 8 cents. Id. What he neglects to
mention, however, is that the weighted average share price for
February 21, 2003 was a mere 3.2 cents, meaning that only a
distinct minority of shares were sold at or around 8 cents.
Moreover, at the government's request, Dr. Cohen recalculated his
loss figure using a weighted average sales price of 3.2 cents.7
Aside from the fact that this unreasonably presumes that each of
the Defendant's victims realized the highest weighted average sales
price available in the post-fraud period (when only 4.4 million
shares were sold that day), the resulting loss amount is still
$1.97 million (9.9 cents - 3.2 cents x 29,000,000 shares).
As an alternative measure, Dr. Cohen, again at the
government's request, also recalculated victim impact by making the
equally unreasonable assumption that the first 29,000,000 shares
sold in the post-fraud period were sold by the Defendant's
victims.8 In other words, assuming, per the Defendant's
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 18 of 29
witnesses called by the government at trial, both testified that,
as of the date of trial, they continued to hold the IBCL shares
they purchased in reliance on the Defendant's false press
releases.
19
recommendation, that the first sales after trading in IBCL stock
reopened were made by those shareholders who were left holding IBCL
stock as of the February 6, 2003 trading halt. Yet, even using
weighted average prices up to the day, May 1, 2003, the market
ultimately transacted 29,000,000 shares, which constitutes the
total number of shares held by documented and undocumented "buy and
hold" investors, the loss estimate is $2.24 million.
Accordingly, there is no guideline impact -- indeed there is
essentially no appreciable loss impact -- even if the Court were to
presume that all of the Defendant's victims were able to dump their
inflated stock as quickly and as profitably as possible once
trading reopened in IBCL shares.
3. There Are Well More than Fifty Victims in This Case
Along the same lines, in contesting whether there were more
than 50 victims in this case, thereby subjecting him to the 4-level
increase under USSG § 2B1.1(b)(2)(B), the Defendant claims that the
government has failed to prove that more than 50 IBCL investors
actually lost money in this case; that is, that more than 50
shareholders bought IBCL stock during the fraud period at a price
in excess of 8 cents, the highest share price realized by sellers
once trading in IBCL stock reopened on February 21, 2003. (Def.'s
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 19 of 29
20
Sentencing Mem. (Doc. 92) at 8). As with his other arguments, this
claim is easily refuted, specifically by reference to the actual
trading data supplied to Dr. Cohen by the SEC, which shows that a
total of 336 victim investors bought shares at weighted average
prices in excess of 8 cents, and that 56 of these investors bought
at weighted average prices in excess of 15 cents, nearly twice the
maximum value they could realize in the post-fraud period.
4. The Defendant's Remaining Arguments Regarding Offsetting
Gains and the Foreseeability of Loss Have Been
Universally Rejected
Under the general canard that he primarily defrauded "day
traders," the Defendant asserts that it was their day trading,
rather than his false press releases, that sustained an illicit
momentum in the volume and share price of IBCL stock for which he
is therefore purportedly unaccountable. He also makes the
companion argument that the offsetting gains realized by these
traders should be netted from the losses he caused to "buy and
hold" investors.
With regard to the latter argument, applicable law simply
makes no allowance for offsetting gains in securities fraud
matters. See, e.g., Orton, 73 F.3d at 333-34 (declining to offset
gains realized by early victims of an investment scam who partially
recovered at the expense of subsequent investors). As noted by one
sentencing court: "y offsetting one shareholder's gain against
another's loss, the loss calculation [proposed by the defendant]
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 20 of 29
21
rewards [the defendant] for inflating the price such that initial
investors were able to sell their stock for more than its actual
value. . . . The policy against rewarding a defendant for
continued concealment of the fraud that allows some victims to
prosper, cautions against using [the defendant's] calculation."
United States v. Bakhit, 218 F. Supp. 2d 1232, 1239 (C.D. Cal.
2002).
Similarly, applicable authority also rejects, as a matter of
law, the Defendant's claim that the loss he caused was not
otherwise foreseeable to him, and that he is therefore
unaccountable for its impact:
We reject [the defendant's] assertion that the amount of
loss that a sentencing court calculates under USSG §
2F1.1 can be no greater than the loss that the defendant
knew would be inflicted. Knowledge is not necessarily
relevant to the amount of loss that is attributed to a
defendant for sentencing purposes. We have previously
held that "[d]efendants sentenced under section 2F1.1
generally receive 'an offense level increase based on the
greater of: (1) the actual loss associated with a crime;
or (2) the intended loss.'" . . . Because the actual
loss [here] was greater than the loss [the defendant]
subjectively believed would result from the scheme, the
court correctly sentenced him based on the actual loss.
United States v. Hedges, 175 F.3d 1312, 1315 (11th Cir. 1999)
(emphasis added). This contention is also factually suspect,
given: (1) that the Defendant issued a series of false press
releases, well knowing that the resulting churning of IBCL shares
would sustain an upward velocity in volume and price; (2) that, as
proven at trial in connection with the perjury count, he regularly
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 21 of 29
22
conferred with his broker, Jack Stapleton, regarding volume, price
and the execution of his sell orders; and (3) that at the time he
was first contacted by the SEC regarding the validity of his
releases, he was actively trying to secure the issuance of still
more S-8 shares to dump into an ever-inflating market.
D. The Offense Level Corresponding to the $2.2 Million Loss
Suffered by IBCL Investors Does Not Overstate the Seriousness
of the Defendant's Offense Conduct
Faced with the reality that his investors' loss is the
appropriate measure of harm in this case, both as a guidelines
proposition as well as under well-settled securities law (that is
also binding upon the Court), see Snyder, 291 F.3d at 1295-96, the
Defendant argues that the 16-level increase under USSG §
2B1.1(b)(1)(I) (corresponding to a $2.2 million loss to IBCL
investors) substantially overstates the seriousness of his offense,
thereby warranting a downward departure under Application Note 15.B
to USSG § 2B1.1, or a variance from the otherwise applicable
guideline range under 18 U.S.C. § 3553.
In doing so, he revisits and restates certain of the factual
defenses he lodged at trial, principally his shopworn argument that
the subject releases were technically accurate or, to the extent
they were not, the fault lies with someone else, namely the
government, in the form of the FBI, SEC and EPA, or the Defendant's
reckless and greedy investors. (See Def.'s Sentencing Mem. (Doc.
92) at 13). Notwithstanding these defenses, that the jury
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 22 of 29
23
convicted the Defendant of securities fraud and perjury –- after
merely an hour of deliberation –- forecloses any residual
sentencing objection regarding his willfulness, knowledge and
intent in issuing patently false press releases and profiting from
these false releases via insider trading.
Because pecuniary or economic harm to victims is plainly taken
into account under USSG § 2B1.1 -- indeed it is the single most
important measure of culpability in fraud cases -- this Court may
depart only if loss is factored to an exceptional degree or its
computation in some other way makes this case different from the
ordinary case where victim loss is present and accounted for by
section 2B1.1. United States v. Pressley, 345 F.3d 1205, 1216
(11th Cir. 2003) (quoting Koon v. United States, 518 U.S. 81, 96
(1996)). As noted above, however, the loss computation in this
case was quite conservative, given that it factored only those
losses suffered by "buy and hold" investors whose actual purchases
were disclosed in the "Blue Sheet" data compiled by the SEC.
Further, the calculation itself was neither complex nor
particularly involved, as it covered only six days of trading where
the impact of the Defendant's misrepresentations on share price and
trading volume was both discreet and unequivocal.
Those authorities interpreting Application Note 15(B) to USSG
§ 2B1.1, which provides for a downward departure in those limited
instances "in which the offense level determined under this
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 23 of 29
24
guideline substantially overstates the seriousness of the offense,"
have found that essentially three circumstances trigger its
application in cases in which actual harm drives the computation of
loss:
The first is the "multiple causation" scenario, in which
the amount of loss is determined to be the product of
several sources (e.g., an economic downturn, a market
collapse, or negligence by the victims), in addition to
the defendant's conduct. . . . The second scenario,
logically related to the first, is when the defendant
plays a limited or inferior role in the scheme that bore
little relationship to the amount of loss determined
under the guideline. . . . The third situation occurs
when the defendant's effort to remedy the wrong merits
consideration, as, for example, where he makes
extraordinary restitution or, in a fraudulent loan case,
where he had sufficient unpledged assets to cover the
loss.
United States v. Roen, 279 F. Supp. 2d 986, 990-91 (E.D. Wis. 2003)
(citing supporting case law). The Defendant's criminal conduct
herein, however, comports with none of these situations. In fact,
just the opposite is true given: (1) that he alone issued a series
of demonstrably false press releases that directly and fraudulently
impacted the price and volume of IBCL securities; (2) that he did
so as the principal officer of a publicly-traded company; and (3)
that he has never accepted responsibility, including now at
sentencing, for the wrongfulness and significant harm caused by his
misconduct.
Finally, many of the same factors rendering the Defendant
ineligible for relief under Application Note 15(B) to USSG § 2B1.1,
militate against him receiving favorable consideration under 18
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 24 of 29
25
U.S.C. § 3553. While the government does not intend to examine
these factors in detail, it notes that section 3553 mandates
judicial consideration of both mitigating and aggravating factors
in arriving, post-Booker, at a reasonable sentence. Principal
among these considerations are the nature and circumstances of the
offense, the need for the sentence to reflect the seriousness of
the offense and to promote deterrence, and the kinds of sentences
available, specifically including the guideline sentencing range
established for the offense. 18 U.S.C. §§ 3553(a)(1), (2) & (4).
In this case, the Defendant personally and directly
perpetrated a sustained, yet concentrated, fraud upon his
investors, which, over a six-day period, caused more than 500
shareholders to part with more than $2.2 million. In furtherance
of this criminal conduct, the Defendant issued not one, but four
false press releases, including two false releases after he had
been warned by the SEC that his prior releases were false and
misleading. These releases preyed upon the public fixation --
indeed hysteria -- regarding anthrax contamination, which the
Defendant knew would dramatically inflate the share price and
trading volume for IBCL stock, thereby allowing him, and other IBCL
creditors, to dump their stock into an unsuspecting market.
Finally, when confronted by the SEC and placed under oath, the
Defendant lied about his trading, well knowing that he had engaged
in insider trades.
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 25 of 29
26
In seeking to mitigate the egregiousness of his criminal
conduct, the Defendant argues that IBCL was just a penny stock
company whose investing market was primarily comprised of day
traders. The federal securities laws fail to make such a
distinction, however, because criminally fraudulent conduct that
impacts the integrity of -- and hence investor confidence in -- the
public capital markets is wrong regardless of its context and the
degree of harm visited upon its victims -- both factors that have
historically been addressed by the guidelines and which are
adequately accounted for by the guidelines in this case. Whether
they be day traders or "buy and hold" investors, participants in
the United States capital markets are legally entitled to honesty
from issuers, and their rights are not checked at the door if the
subject shares are traded, as here, Over-the-Counter, rather than
being listed on the NYSE or the NASDAQ National Market System.
The victim investors here did not lose more than $2.2 million
due to market risk. Rather, they lost due to momentum in share
price and trading volume predicated upon a series of lies directly
attributable to the principal executive officer of a publiclytraded
company, who himself profited at their expense and then lied
about his profits to the SEC.
III. CONCLUSION
Based upon the foregoing, the government respectfully submits
that the $2.2 million loss visited upon the Defendant's victims in
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 26 of 29
27
this case warrants substantial punishment commensurate with the
guidelines' treatment of significant fraud offenses. His criminal
conduct, which includes securities fraud, insider trading and
perjury, and the $2.2 million loss he visited upon his investors
fall well within the heartland of misconduct addressed by the
guidelines, and he should be sentenced accordingly.
Dated: February 16, 2006 Respectfully submitted,
DAVID E. NAHMIAS
UNITED STATES ATTORNEY
/s/ R. Joseph Burby, IV /s/ Paul N. Monnin
R. JOSEPH BURBY, IV. PAUL N. MONNIN
ASSISTANT U.S. ATTORNEY ASSISTANT U.S. ATTORNEY
Georgia Bar No. 094503 Georgia Bar No. 516612
600 U.S. Courthouse
75 Spring Street, S.W.
Atlanta, Georgia 30303
(404) 581-6000
(404) 581-6181 (facsimile)
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 27 of 29
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CERTIFICATE OF COMPLIANCE WITH LOCAL RULE 5.1B
This is to certify that the foregoing document was formatted
in accordance with Local Rule 5.1B in Courier New font, 12 point
type.
CERTIFICATE OF SERVICE
This is to certify that I have this day served upon the person
listed below a copy of the foregoing document via the Electronic
Case Filing system of the United States District Court for the
Northern District of Georgia, which automatically forwards an email
notification of such filing to the following attorney of
record:
John R. Martin
Martin Brothers, P.C.
500 Grant Building
44 Broad Street, N.W.
Atlanta, Georgia 30303-2327
and by hand-delivery upon:
Thomas E. Thurmond
Sr. U.S. Probation Officer
Suite 900, Richard B. Russell Building
75 Spring Street, S.W.
Atlanta, Georgia 30303
This 16th day of February, 2006
/s/ Paul N. Monnin
PAUL N. MONNIN
ASSISTANT UNITED STATES ATTORNEY
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 28 of 29
Case 1:04-cr-00508-CAP-JMF Document 94-1 Filed 02/16/2006 Page 29 of 29
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