defendants." The court understands this to mean that the United
States Attorney's office does not have immediate possession of
any such documents. The prosecution's response is silent as to
whether the SEC made a referral regarding this case, whether SEC
employees are providing assistance in the present prosecution,
and whether, even if not in their immediate possession, the
prosecutors have seen the SEC investigatory file and/or have
access to or control over it. The prosecution also contends
that, even if it had the documents, it should have no obligation
to provide them to defendants because defendants have been
granted the early return of subpoenas and therefore can obtain
any nonprivileged documents directly from the SEC and receiver.
Further, the prosecution contends that testimony of Quilling or
an SEC employee that he or she believed a defendant had not
committed a crime would not be admissible evidence.

On postjudgment, collateral, and appellate review, the
law is well established that "the suppression by the prosecution
of evidence favorable to an accused . . . violates due process
where the evidence is material either to guilt or to punishment,
irrespective of the good faith of the prosecution." Brady v.

Maryland, 373 U.S. 83, 87 (1963). See also Kyles v. Whitley, 514

U.S. 419 (1995); United States v. Bagley, 473 U.S. 667 (1985);

Giglio v. United States, 405 U.S. 150 (1972); United States v.

Reyes, 270 F.3d 1158, 1165 (7th Cir. 2001); Boss v. Pierce,

263 F.3d 734, 739 (7th Cir. 2001); United States v. Morris, 80

F.3d 1151, 1168-69 (7th Cir.), cert. denied, 519 U.S. 868 (1996).


On the information presently before the court, it cannot
be determined whether the SEC, any of its employees, or Quilling
are part of the prosecution team. Nor can it be determined
whether the prosecution team otherwise has knowledge or control
of the pertinent documents or potential witnesses. However, it
would appear that, with reasonable diligence, defendants will be
able to obtain all or most of the pertinent documents through the
use of subpoenas. Defendants' motion to compel will be denied
without prejudice to bringing any appropriate motion after they
have received responses to the subpoenas.? In the meantime,
however, the prosecution should also review the information and
evidence it has in light of the standards set forth above,

particularly those standards stated in Boss, 263 F.3d at 740-43,

and Sudikoff, 36 F. Supp. 2d at 1199-1201.
IT IS THEREFORE ORDERED that defendants Loutos's and

Paladino's motion to compel production [48-1] is denied without

?In the event there is a later Rule 16 or Brady motion,
any response by the prosecution must provide sufficiently
specific facts regarding both the prosecution's relationship with
other pertinent agencies and the prosecution's knowledge of any
documents or evidence at issue. To the extent the government has
knowledge or possession of potential Brady materials that are
withheld as privileged, it may have to provide such documents for
an in camera inspection. See Pennsylvania v. Ritchie, 480 U.S.
39 (1987); United States v. Hach, 162 F.3d 937, 947 (7th Cir.
1998), cert. denied, 526 U.S. 1103 (1999); United States v.
Bastanipour, 41 F.3d 1178, 1181-82 (7th Cir. 1994).



defense of the case; it must be potential exculpatory or
impeachment evidence. Id. at 1200-01.

As to the potential evidence presently in dispute, the
issue also arises as to the prosecution's obligation to provide
information that is in the possession of other government
entities. "As a general rule, the government's obligation to
disclose exculpatory or impeachment information under Brady is
limited to that information which is then known to the
government." Morris, 80 F.3d at 1169. While the prosecution is
not required to affirmatively seek out information not in its
possession, it is "improper for a prosecutor's office to remain
ignorant about certain aspects of a case or to compartmentalize
information so that only investigating officers, and not the
prosecutors themselves, would be aware of it." Id. Information
known by investigators that are considered to be members of the
prosecution team is deemed to be known by the prosecution. Id.
There is "a duty on individual prosecutors 'to learn of any
favorable evidence known to the others acting on the government's
behalf in the case, including the police.'" Id. (quoting Kyles,
514 U.S. at 437). The prosecutor's office, however, does not
have a duty "to learn of information possessed by other
government agencies that have no involvement in the investigation
or prosecution at issue." Morris, 80 F.3d at 1169.

Additionally, where the evidence is otherwise available
to the defendant through the exercise of reasonable diligence,

the prosecution does not violate Brady by failing to disclose the


Evidence is favorable if it "is either exculpatory in nature or
tends to impeach a prosecution witness." Reyes, 270 F.3d at
1167. "(E]vidence is material only if there is a reasonable
probability that, had the evidence been disclosed to the defense,
the result of the proceeding would have been different. A
‘reasonable probability’ is a probability sufficient to undermine
confidence in the outcome." Bagley, 473 U.S. at 682. Accord
Reyes, 270 F.3d at 1166 (quoting Lieberman v. Washington, 128
F.3d 1085, 1092 (7th Cir. 1997)).

The usual formulation of the Brady standard, however, is
designed for review after the trial or sentencing and
understandably considers the probable effect on the verdict or
sentence. On a pretrial discovery motion, however, the standard

is necessarily somewhat different. United States v. Glover, 1995

WL 151823 *2 (N.D. Ill. April 4, 1995); United States v.
Sudikoff, 36 F. Supp. 2d 1196, 1198-99 (C.D. Cal. 1999). In the
pretrial context, “the government is obligated to disclose all
evidence relating to guilt or punishment which might reasonably
be considered favorable to the defendant's case," with doubt as
to usefulness resolved in favor of disclosure. Sudikoff, 36

F. Supp. 2d at 1199. See also Glover, 1995 WL 151823 at *2.
Disclosure, however, is still limited to exculpatory or
impeachment evidence that would likely be admissible at trial
or be likely to lead to admissible evidence. Sudikoff, 36

F. Supp. 2d at 1199-1200. There is no obligation to disclose

information solely because it would be helpful in preparing the


prosecution team. Due to the lack of information, it also cannot
be determined whether Quilling is part of the prosecution team,
but it is highly doubtful that a receiver would be part of the
prosecution team. Additionally, without more information as to
their relationship with the prosecution, it cannot be determined
whether any statements of SEC employees or Quilling would, as
defendants contend, be admissible against the government under
Fed. R. Evid. 801(d) (2). But even if the statements themselves
are not admissible, the grounds for those persons concluding
Loutos and Paladino were not criminally culpable may be based on
or lead to exculpatory or impeachment evidence not otherwise
known to defendants. It is clear, however, that defendants’
broad request for all the SEC investigatory files and,
apparently, a substantial number of documents possessed by
Quilling goes beyond the requirements of Brady. As previously
discussed, Brady is limited to exculpatory or impeachment
evidence.* It is unlikely that all the documents requested by

defendants contain such material.

In their reply, defendants make passing reference to the
prosecution's obligations under Fed. R. Crim. P. 16(a) (1) (C).
While that Rule is not limited to exculpatory or impeachment
evidence, it is limited to documents in the prosecution's
possession and does not include information that is simply known
to the prosecution. See United States v. Hamilton, 107 F.3d 499,
509 n.5 (7th Cir.), cert. denied, 521 U.S. 1127 (1997).
Possession by the prosecution includes the entire prosecution
team, but not government agencies that are not part of the
prosecution team. See United States v. Volpe, 42 F. Supp. 2d
204, 221 (BE.D.N.Y. 1999). Since raised for the first time in the
reply, the applicability of Rule 16 will not be determined. It
is expected, however, that the prosecution will fully comply with
its obligations under Rule 16, including, in light of today's
ruling, reconsidering the possible application of Rule 16 to the
documents at issue.



womens

+ Minute Grder Form (06/97)

United States District Court, Northern District of Illinois

Name of Assigned Judge
or Magistrate Judge

Sitting Judge if Other

WILLIAM T. HART than Assigned Judge

CASE NUMBER 01 CR 852 - ALL DATE FEB. 13, 2002
CASE UNITED STATES OF AMERICA y. FRANK L. PEITZ, et al.
TITLE

[In the following box (a) indicate the party filing the motion, e.g. plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented. ]

MOTION:

DOCKET ENTRY:

(1) a Filed motion of [ use listing in “Motion” box above.]

(2) oO Brief in support of motion due

(3) Q Answer brief to motion due___. Reply to answer briefdue__

(4) (a) Ruling/Hearing on___set for____at

(5) gz Status hearing set for February 20, 2002 at 11:00 a.m.

(6) q Pretrial conference[held/continued to] [set for/re-set for] on set for at

(7) oO Trial{set for/re-set for}on at

(8) Qo [Bench/Jury trial] [Hearing] held/continued to___at

(9) oO This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) O General Rule21 OOFRCP41(a)(1) © FRCP41(a)(2).

(0) [Other docket entry] Defendants Loutos's and Paladino's motion to compel production [48-1]

is denied without prejudice.

ad 1)MMl [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required

Document

7 Number

nurnber of notices

¥ | Notices maited by judge’s staff.

Notified counsel by telephone.

Docketing to mail notices.

Mail AO 450 form.

Copy to judge/magistrate judge

courtroom
ew deputy’s
initials

60:5 Hd El

Dathhinerécaived in 1) 4
central Clerk's Office

FEB 14 2002

date docketed

“ocket

izes

2/13/2002

date maiied notice

ngan

mailing initials



prejudice. Status hearing will be held on February 20, 2002 at

11:00 a.m.
ENTER:

Yam orf —

Mame STATES DISTRICT JUDGE

DATED: FEBRUARY {3 , 2002

- 10-


evidence. Id. at 1170; Boss, 263 F.3d at 740. Reasonable

diligence, though, has its limits. As to documents obtainable by
the defendant through reasonable diligence, the prosecution
generally will have no duty to disclose. Boss, 263 F.3d at 741.
In Boss, though, the Seventh Circuit held that reasonable
diligence generally does not encompass the expectation that a
defendant who has the opportunity to interview a prosecution
witness will be able to obtain as much information about the
witness's potential testimony as would the prosecution. See id.
at 740-43. "In cases like the present one, the question is
whether defense counsel had access to Brady material contained in

a witness's head. See, e.g., Crivens v. Roth, 172 F.3d 991, 997

(7th Cir. 1999). Because mind-reading is beyond the abilities of
even the most diligent attorney, such material simply cannot be
considered available in the same way as a document." Boss,

263 F.3d at 741. Similarly, even if a government regulatory
agency is not part of the prosecution team itself, it may more
readily share information with the prosecution than with a
defendant.

In response to defendants’ motion to compel, the
prosecution has not explained its relationship with the SEC and
Quilling. The prosecution also has not stated whether it has any
knowledge of any SEC document stating the SEC's views as to
Loutos's and Paladino's criminal culpability. On the information
presently before the court, it cannot be determined whether the

SEC or any SEC employees should be considered part of the


judgment was obtained against all defendants and relief
defendants and Michael Quilling was appointed as receiver to
obtain and conserve funds on the investors’ behalf. When the
indictment was returned in the present case, the SEC issued a
litigation release stating "[t]he indictment is based on the same
conduct alleged in a civil action brought by the Commission's
Forth Worth District Office in June of 1998."

Loutos's current counsel represents that he has been
informed by the lead SEC attorney in the civil action that the
SEC attorney made written findings that certain conduct of Loutos
did not violate the securities laws. It is further represented
that the SEC attorney and Quilling told counsel that they had
established no criminal conduct on Loutos's part. Loutos and
Paladino also contend that it is likely that the SEC
investigators forwarded to the prosecution recommendations and/or
findings that Loutos and Paladino did not engage in criminal
conduct or at least that the SEC referred the case to the
Department of Justice for the Department of Justice's
consideration of criminal charges. Pending is Loutos's and
Paladino's motion to compel the prosecution to disclose documents
in the possession of Quilling as well as investigatory documents
and findings of the SEC.

In response, the prosecution represents: "the government
neither possesses nor conceals" any "documents relating to mental
impressions of the receiver and Securities and Exchange

Commission employees concerning the guilt or innocence of the


well as by repaying earlier, disgruntled

investors with funds from new investors.
Indictment { 3.

All six defendants are charged with eight substantive
counts of wire fraud in violation of 18 U.S.C. §$§ 1343 and 2.
The alleged wire communications underlying these counts occurred
from October 10, 1996 through May 22, 1997. Defendants Peitz,
Benson, Loutos, and Paladino are also charged with a conspiracy
in violation of 18 U.S.C. § 1956(h) under which they agreed to
(1) engage in wire fraud violations that were designed to conceal
the source and ownership of unlawful proceeds in violation of 18
U.S.C. § 1956(a) and (2) engage in monetary transactions in
criminally derived property with a value greater than $10,000 in
violation of 18 U.S.C. § 1957(a). The conspiracy allegedly began
no later than October 1994 and continued until at least June
1998. The four alleged conspirators are also charged with four
substantive counts of violating 18 U.S.C. §§ 1957 and 2 and two
substantive counts of violating 18 U.S.C. §§ 1956(a) (1) (B) (i)
and 2.

In June 1998, the Securities and Exchange Commission
("SEC") filed a civil action in the Northern District of Texas
alleging that certain defendants had defrauded investors
utilizing a fictitious "prime bank security" investment scheme
that never existed. Law, Iles, Peitz, and Benson were named as
defendants in that action, as well as was James Wardell.

Paladino and various entities were named as relief defendants. A


UNITED STATES OF AMERICA,

FRANK L. PEITZ, DANIEL B.
BENSON, ,
ROBERT D. PALADINO, RANDALL W.
and MONICA M. ILES,

LAW,

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

Plaintiff,

v. No. 01 CR 852

PETER A. LOUTOS, SR.

Defendants.

MEMORANDUM OPINION AND ORDER

The indictment in this case alleges:

defendants FRANK PEITZ, DANIEL BENSON, PETER
LOUTOS, ROBERT PALADINO, RANDALL LAW, MONICA ILES
and others, through FLP Capital, Active
International[{, Inc.] and Lennox [Investment
Group, Ltd.], sought to and did obtain and retain
funds from prospective investors and investors by
offering and selling investments purportedly in
the international trading of bank financial
instruments. In offering and selling these
investments, the defendants made and caused to be
made material misrepresentations and omissions
about, among other things: the risk involved

in the investment; the expected return on

the investment; the use of money raised from
investors; and the previous investment experience
and the criminal and regulatory background of
those offering and selling the investment. As a
part of the scheme, the defendants raised over
$11,000,000 from at least 30 investors and then
misappropriated almost all of the funds for their
own benefit. In order to retain the use of
investors' funds and obtain additional funds from
new investors and to conceal various parts of

the scheme from victim investors and others,
defendants continued to lull investors through a
series of misrepresentations and omissions about
the nature and status of their investments as

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