moved to the second case this morning that's a united states versus new the government failed to prove fraud against eric blum under any of its three theories the fraud case against mr bloom is highly unusual he never stole a dime from his or from any of its customers in fact he lost most of his wealth when his firm collapsed no government witness had a bad word to say about  the chief compliance officer kiel who testified that bloom has a good character for honesty and high integrity the head salesman steadily who testified that bloom was always forthright and honest with customers t key witness of course was not called that was charles mosley he was the head six trader he ran daily operations the evidence showed that he was stealing from the firm he pleaded guilty cooperated with the government  certainly would have been in a position to know whether blum was involved in any fraudulent activity yet he was not called as a witness the government proceeded on three complex theories of fraud the first was that bloom committed fraud by manipulating customer rates to favor certain customers over other customers why he did this was not made clear in the record in fact it it had no conceivable benefit to mr bloom in fact it though the faulty rates actually harmed the house account  were being used to subsidize artificially higher rates for the one twenty five or so you want to kills them with the allegation but the exact reason why that would have been done was not clear would know tend to faulty rates there was no evidence linking bloom to this problem to make its case the government told the jury that any discussion of the race by bloom was per se fraud no matter how benign the discussion this was a faulty promise as we point out in the briefs the calculation of the daily rates i had first thought it had to be done every day it was a complicated matter there were a lot of variables there were a lot of different customer groups within the saves the mere fact that bloom was talking about where the rates were sat with his employees was not evidence of fraud at best the government's evidence showed that there was a problem with the rates no question about that it was brought to bloom's attention and he was slow to take action this is insufficient as a matter of law to prove fraud the government second theory was that bloom mishandled customer securities in various ways want to address the allegation that bloom improperly pledged customer securities as collateral for four with the government calls the house  loan on aug thirteenth two thousand and seven which is the day that bloom ceased operations the government argued that this was the basis for his conviction on counts one through five here again the government's case is based on a faulty promise the government told the jury that pledging customer securities as assets cust customer assets as collateral it was fraud this was not true the sentinel had a first of all it was not a house loan sentinel had a box loan that served both the house and customer accounts at all relevant times the customer it's part of the loan was about three times larger than the house's part of the loan thus it was both necessary and proper for sensible to pledge customers securities as were  were customer securities segregated as collateral or weren't worth the do the banks insist on a collateral on all those securities held by sentinel the bank set up one clearing or house or for other customers right well what i would say is that the what the evidence shows is that the house at all time it was heavily leveraged there's no question but at all time it was never underwater so the house always had sufficient assets to collateralize its portion of the loan so what i would say to answer your question just what's the point of segregated accounts well the rules of segregation were spelled out in at trial it's a little bit there was some dispute over it but the rules in fact i looked at them they see f t c rules on segregation but basically what the testimony was at trial was that segregation requires that sentinel keep customer assets in the segregated account sufficient to meet its liability to those customs that's the definition of of segregation that in our record in addition did it to them well there was no testimony about it there was no testimony about whether the segregation rules were followed and the only testimony was from keil that that there was regular custody audits and that the audit did not identify any deficiency in this case is i mean the company blew up nine years ago litigation has gone on since then and because of the small nearly seven hundred million dollars shortfall it sounds like you're telling us there was no problem well the reason for the shortfall your honor what half the reason the company collapsed is quite clear from this rock the sentinel was invested heavily invested in corporate securities as it was allowed to do under the the rules it was it guaranteed its customers daily liquidity which means that if they got the request in by three pm eastern time they could have all of their money back it lived up to this its promises to customers for more than twenty five years in august the testimony was that beginning august ninth but before that there was turmoil in the market but beginning august ninth two thousand and seven the securities market froze for a period of two weeks meaning that no corporate securities could be sold even the highest rated aaa double a under those conditions sentinel had no choice but to cease operations they declared eric bloom declared bankruptcy in order to protect customer assets and in fact judge hamilton no customer assets were lost in the collapse of the firm what happened is that the the bankruptcy trustee came in and took sixteen months before he got a liquidation order by that time the stock and bond market had crashed and when the assets were sol they they obtained a much lower price the sec three account i think lost approximately thirty percent of its value and the second was i'm sorry the second one lost about thirty percent in the second three something like sixty five or seventy percent yes the losses were huge and i would submit that eric bloom is very much a scapegoat for these large loss that somebody to blame so what was the bank of new york balance you know early august the numbers and well i have the numbers from august thirteenth which was the day the firm collapsed the loan the total loan that said one had none of the loan on august thirteenth say three had two hundred forty nine million dollars of the loan and the house had one hundred sixty six million of the loan against house assets worth one hundred seventy two million dollars the most clear misconduct with respect to pledging securities was committed by the c f o misurata on june twenty ninth while eric bloom was on a three week honeymoon trip out of the country she authorized the use of segue one securities to collateralize the loan this was improper because at that time say one had no part of the loan those securities should not have been pledged evidence shows that when blue learned of this on july thirtieth he ordered it to stop and in fact those second one securities were removed and sent back blum did authorize the use of say three securities but as i told you say three had at least on aug thirteenth sec three had almost two hundred fifty million dollars of the loan there is simply no evidence in the record that eric blum ever authorized perfect right that the this was like a mutual funds the securities were not customer own this was the testimony of bjornson also supported by kiel they had a perfect right to take securities out of say one in six three that's the way the law that's what was set up yes it would have been better if there was separate loans but judge this is the way the bank of new york set it up this is the way it was explained at trial they set up one account for the loan briefs the evidence shows that bloom believed sentinel would survive in fact he had most of his wealth in the firm it went down with the firm he was told as of august eighth which was the day before the market collapse that things were looking better also had gloom done what the government says he should have done which is continue paying out redemptions but stop taking deposits he would violated his fiduciary duty to the pool and we cited in our brief the case goldstein versus s and c the government doesn't respond to that argument because i don't know if if the company had sufficient assets on hand to redeem security early redemption requests as i thought it was supposed to i guess i don't understand why that would be a problem i'm sorry to could say one more time if the company the company was supposed to have on hand marketable securities available to meet or redemption requests right so if they if they were complying with that obligation i don't see why they would have to continue taking in new two possibles well you know order to meet those redemption requests i don't believe that that's correct the how it that they were required to have fun they did have a reserve account it was somewhere around one hundred thirty million at the time it collapsed it would not have been enough to meet all redemption requests and in fact the testimony was that the loan part of the purpose of the loan and why it why it was a benefit and marketed to customers that that we have this line of credit with bank of new york is that it allowed same day redemptions without having to wait to sell securities in order to  to get the client funds judge we recognize that if we have a high burden to on a sufficiency claim but the government's case we submit in its most favorable light shows that there were problems that were brought to mr bloom's attention during its especially during its final month he was sometimes slow to address those problems this evidence might support a simple case for mismanagement but not a criminal case of fraud and i would point out that the government in its brief cites not one case in response to the sufficiency argument and in fact there is no similar case that we could find where these types of theories in this types of evidence was found instruct the jury on a purely legal question whether rule one point two five permitted the use of leverage what rather than give the defense instruction the district court said the jurors will have the rule and can decide for themselves right rip a judge who's m but even a no i didn't i didn't see for example one state will mention rule one twenty five in leverage i don't see any objection to that the the objection to it is just moaning about a question of law again i can't recall whether there was an update there was not no i can't recall but the three witnesses gave their opinion that the rule did not i think there was i i  do recall objections to witnesses giving legal opinions about rule one twenty five it was error the rule is five pages check the jury simply was not equipped to give an opinion on that and finally the government's and mischaracterization of its output ends and blum's defense denied him his right to a fair trial i'd like to save the rest of my time for  omissions and false representations and one of those involved the manipulation of interest and defendants claim here and three that the defense there was no evidence that defendant ever stole a dime from customers by the record the evidence was clear and certainly the government's position at trial and it through our indictment was that the defendants had these different portfolios right the one twenty five portfolio was rich for the f c m's which was a low risk portfolio very didn't generate much interest the prime a little bit more the house higher risk so the prime and the house who generating much more interest but most of their clients were coming from this s c m these very low risk f c m traders you know businesses that were trading their clients money for their own benefit to get a little bit of interest over those margin rates that they could hold was we can do better we can do better than just putting this in treasury bonds so come to us because we'll protect it we'll make sure it's safe but we'll get you a little bit more interest that's how they brought in this money well the reality is they could do better they couldn't do better and the way they tried to show that they were doing better was by stealing and it was stealing interest earned by the prime portfolio investments of the other customers those say three customers whose were earning a little bit more interest and certainly they also took money from their house fives they definitely did and that was inside of funds but the problem there in all of this for but actually before i move on to that point so to say they never stole a dime from customers is not true it may not have gone personally into mr bloom's pocket he may have used it to attract more investments for his business but he stole from his customers and he stole for what he believed to be in the interest of his business but what's more is he also needed all these customer fun going in to support this very high risk trading that was going on in his house account he's a house account never had more than twenty million dollars in it but it was investing in at one point had over one hundred million dollars of these these very high risk invest investments that generated a lot of interest and yes he did give a lot of that to those interest payments to the prime and it particularly to one to five but that was all part of a rolling plan to kind of have more money and to keep supporting this business to keep investing that maybe would have paid off one day in the future but certainly did not that's what the evidence here showed about what was going on and and and the actually supplemented the record in this case with every single exhibit between the two sides so you have it all but exhibit government exhibit one thirty four and one thirty four a through q or are what the government was able to obtain of these spreadsheets and you can't look at these spreadsheets without seeing their fraud and that's what compliance officer keil when he finally got his hands on the document that was created by the defendant he created these master sheets that were then filled in by people you look at it and it shows the interest actually accrued from these interest bearing accounts for in the different portfolios the interest actually accrued that was entered off a computer by york or logan as they testified but then it shows how it was distributed and on each of these sheets you see that there was money is taken from the the six three and or the house the prime portfolio and or the house and g there from defend it from the defendant and moreover she starting october of two thousand might have eight days we were on that starting and earlier on in the scheme either two thousand and six or earlier in two thousand and seven i believe two thousand and six he defended told york i want you to send me these daily sheets every day i want to see exactly what's going on you have the phone call that the ory it's it's the july thirtieth two thousand and seven taped conversation and basically your kid completed the form showing the distribution of interest before she even spoke with  and she says to bloom well should i move out the crime should give them a little bit more should i give the one to five of the last mr bloom defended doesn't say i don't know what you're talking about you got to give him what the rates are he says no i want the crime i want the one to five to stay competitive i wanted to stay competitive with my competitors so we can move that around and after that conversation she sends him one thirty four and that exhibit which shows on its face the distribution so  the evidence really is overwhelming on the just on that manipulation and in addition to all of that the defendant admitted to mr kiel his his complete compliance officer that this is what we've always done we've always supplemented the one to five portfolio with the house with the sec three tell it's always operated and mr killen went to him twice because it didn't change and the defendant said i'll look into that but you know what you continued right up until the day on i believe the last of those worksheets that we have in the record might be cute when thirty four q were there about he's from august tenth and it's right there it's still months after his conversation with with keil in may they're still doing it defend it noted it's part of what how he's running this company you know the suggestion that the rates are complicated and that there was some complicated thing going int rates that testimony at ninety nine to one thousand and one is talking about the real rates the true rates the ones are getting off the computer no one york didn't know where these numbers how mosley and blue were coming up with these numbers because they were they were doing a fraud with these numbers basically moving on to the other parts of it the whole collateral you know your testify that is back far back as two thousand and four and on word she handle collateralize ing that said to the bank of new york loan at the end of each day and there is a stipulation i know mr goodman said there was confusion over the segregated accounts there is a stipulation in the record about how these accounts were handled and basically when monies came in from the different said groups they were supposed to go desegregated accounts but there was one account that was like a collateral account there ended up being also a second one later on some for treasuries some for you know triple you know rated securities that in the house counsel's house securities did sit in that they did but when you collateralized it that when they use the customer securities for collateral that's when they moved him into that world account it's not like they were all sitting in there all the time this was an intentional movement of customer securities customer funds to collateralized the low and not only does your say i don't have enough to collateralize alone i would just move said one sec to prime portfolio the twenty five portfolio customers i just move them in there and you know who taught me because i started to get trained by the person who was they are before me testified york but she left before i really understood it so when i had questions when i had problems i went to the defend it and i went to him a lot but beyond that even in addition to york you have the c f o urana she is a certified public accountant she's been an auditor with the chicago mercantile exchange she worked for f c m's its chief financial officer she testified that she told the defendant or she she knew prior to october of two thousand and six that customer securities were being used to collateralize the house loan the house trading and she put that in an e mail and she sent that to the defend astronomically and they can't use a lot of those studios that bank they can't sell up they can't use i'm a security and the bank will not release funds to wire out monies to customers until that the loan is collateralized so what happens they lose customers securities continue to collateralize the low a lot of which has grown because of these house c e o s coming back from the repo counterparts and now the defendant makes much of the fact that he was in in austria and australia in africa but during these months while he's there during these months during this eighteen day period when he's there he has consta conversations with mosley with his father with a rod out with york about what's going on about these repos going back about the loan going out of control and in fact or in one of the one of these directing on july twentieth that york and iran to move six one twenty five securities out of the collateral accounts and only use securities belonging to the crime crime in the house account and the defendant says he argues here today that the that the use  securities was proper because it was a large part of the law well that's really not supported by the record because if you look at and i cite each of the exhibits if you look at sort of sentinels internal documents they show that the porsche for example  hundred forty eight million of that one hundred ninety seven million was added was allocated to the prime portfolio yet they've moved securities totally two hundred eighty nine million into the into the collateral account similarly on july thirtieth july thirty first these are the dates that they moved two hundred eighty nine million of prime customers collaterals spirity to the it says that the prime portfolio has two hundred ten million a year two hundred four million of the loan but they move in two hundred eighty nine million of securities so even by their own records even by their own argument they are using customer to the prime portfolio is really suspect to start with because the reason this loan is escalating the reason it's going up so high is because the c d o those are being returned that's house securities those securities are too risky for any other carrier but the other reason defendants argument about these prime customers prime portfolio customers fails is because these customers were also promised customers like mr parker who testified at trial they were promise minimal risk securities yes a little bit riskier than one two five but they defend it personally told barker we don't we use these are this this loan from the bank of new york only thing i would say is that the defendant is is is incorrect in his in his belief that the fraud alleged was based on the defendant continuing to accept customer deposits story time it was based on his continuing to accept customer deposits without their understanding was that whatever whether technically it's a violation of rule one point two five or not the understanding of these witnesses based on representations directly from the defendant based on their marketing mean i understand that but i also see for example in the republic or surely governments clausing a lot of point counterpoint on the factual issue of whether rule one point two five prohibits leverage or not and why the jury should believe the victims instead of mr bjornson and it doesn't look like such a small issue well it you know i would say that even if i mean certainly the defendant tried to make that an issue i mean that's why a rape dealt with in our in our opening but even if the the posture of our position had always been that it didn't matter really even under his testimony it didn't allow even under his testimony it didn't allow sentinel to use customer securities and repo agreements for the benefit of the house account so don't think even if we misspoke in argument in the heat of a rebuttal argument that really changed the thrust of the case which really was what representations were made to the defend you know to these victims and the representation w this will be a low risk investment so and put but even beyond that judge there was just no basis in this record for the court to have instructed that one to one point two five permits it it would have been misleading to the jury to said that one because it would have made it seem like one point two five was the issue but moreover the fact was even if one point two five permitted the use of leverage it didn't permit the use of leverage for the benefit of sentinel records i mean you can look at the records all of which we submit and this was not a a beautiful record company at least what we were able to obtain so as i stand right now your honor i can't point to or know that it that's exactly there but here's what i can say is that they promised in their a t v agreements in their agreements with forgot that they were called the management agreement that customer funds would be kept segregated and that i trial really about whether there were enough funds in separate things but the reality is sentinel did not have enough money in its house account to cover its debt it did and to the extent the debt  was put off and said three it was largely not a matter of overnight loans to redeem as had been represented and not in the context of minimal risk investments as they promised even to said three even to the know it was in the context of high risk or higher leverage than had been promise tra on the issue of the rule one twenty five first of all it's simply not correct to say that the defendant made that an issue that was mentioned by the government in opening statement on page forty five the government clearly made the case that he was cheating he was boosting returns by illegally using leverage in violation of the one twenty five three witnesses were called to make that claim bjarnason testified in response to that evidence and the government took no position a as to whether johnson was correct but told the jury to disbelieve him because he had been a paid consultant at some point for sentence secondly statement that new york would sometimes get the rates from the defendant is simply not true but if you look at the call transcripts the smoking gun that the government relied on a trial was july thirtieth the government had almost an unlimited universe of phone calls from the sentinel trading desk that's the call that the government pointed to as the best evidence of defendants manipulation of rates but if you look at that call what it shows is the defendant asks york to explain her calculations she does he make some comments about them and tells her to leave them as as she calculated them if there is any ambiguity your testified that the call was absolutely innocent well as calculated the that the rates were based on a pro rata interest in the cusp in the in the funds and yes the rates were out of balance that if you look at those rate sheets it shows that they're out of balance however there is no testimony that bloom ever encouraged that in fact keels testimony was that that bloom didn't want that to happen that he was urging people to stop and if you look at the e mails which we cite in the in the reply brief it's clear that he's telling york that he doesn't like that he wants it to end up i just want to mention some other things from the government's closing argument your honor and i hope you'll take a close look at this because the government's point is basically he knew about it that's simply not enough to convict somebody of fraud closing argument repeatedly misled on the june the thirtieth call with an tiling innocent call as the witness testified yet the government told the jury that this with blue manipulating customer rates and committing fraud they told the jury that all the account statements on july thirtieth are false and that those counts of conviction they must convict on counts thirteen through seventeen that was a false argument they told the jury that the july seventeenth call where which was an absolutely innocent call was fraudulent they told the jury that his defense was with desperate and pathetic they told the jury that he was like a rat leaving the sinking ship because his father had taken his funds out in the summer of two thousand and seven something the bloom had absolutely nothing to do with these were indefensible arguments this was a close case you're on the scene just that he was denied a fair trial thank you