1

06
- 55 36
- cr U SA v. K el l ey 

### UN ITED STA TES C OUR T OF AP PE ALS F OR TH E S EC ON D C IR C U IT

_____________________ August Term, 2007 (Argued: May

12, 2008 Dec ided: J anuar y 5, 2009) Docke t No. 06-5536-c r

_____________________ United States of Amer ica,

Appellee , -v.- K e v i nO
. K e l l e y, Defendant- Appellant ,

_______________________ BEF ORE: FEI

NB ERG, MI

NER, and HAL L , Circuit Judges
.

______________________ Appea l from a judg ment of convic tion entere d Dec ember 4, 2006, in the United States District Court for the Southern D istrict of NewYork (Wood, C.J. ). Ke lley was c onvicted of f

our counts of sec urities fra

ud, in violation of 15 U.S.C. §§ 78j (b) a nd 78ff, a nd 17 C.F.R. § 240.10b-5; and thr e e c ounts of

wi re fr a ud in v iol atio n o f 1 8 U .S. C. § § 1 34 3 a nd 2. In th is o pin ion , w e a dd re ss whether the district court e rre d in admitting evidenc e of the bogus acc ount statements sent by the defe ndant to the victims on the g rounds that such e vidence is impermissibl e in the conte x t of the char g ed sec urities violations when the ac count statements we re se nt after the purc hases of

the secur ities and wer e not made in c onnection with the purc hase or sale of se curities. We hold that a lth ou g h th e us e of

bo gus a c c ount s tate me nts to l ull de fr a ud e d inve sto rs is n ot i n a

nd of its e lf su ff ic ie nt t o e sta

bli sha se c ur iti e s la

w v iol atio n, the us e of

su c h s tate me nts is r e le va nt a s e vid e nc e to prove, inte r a lia , the def

endant’ s intent to defra

ud and the e x tent of the sche me employ ed. Acc ording ly , for the r easons state d here in, and in an ac company ing summar

y order , we a ffirm the district court’s judg ment of convic tion.

______________________ FOR DEF ENDAN T-APPEL LANT: R I C HAR D B. L I ND , L aw Of fi ce of Ri char d B. L ind, New Yor

k, NY.2

FOR APPEL L EE: S TEVE N F EL DMAN , (Da niel A. B raun, on the brief ), Assistant United States Attorney s, for Michae l J . Gar cia, United States A ttorney for the Southern District of Ne w York, N ew Yor k, NY. PER CU RIAM : Def endant- appellant Ke vin O. Kelley appea ls from a judg ment of convic tion and sentenc e enter ed on De cembe r 4, 2006, in the Southern District of N ew Yor k (Woods, C.J. ). Ke lley

was convicted of

four c ounts of secur ities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78f f, and 17 C.F .R. § 2 40 .1 0b -5 ; and

thr e e c ounts of

wi re fr a ud in v iol atio n o f 1 8 U .S. C. § § 1 34 3 a nd 2. In th is opinion we addr ess whethe r the district cour t erre d in admitting evidenc e of bogus acc ount state me nts se nt b y

the de fe nd ant t o th e vic tim s o n th e g ro un ds that su c h e vid e nc e is i mpe rm iss ibl e in the context of the cha

rg ed sec urities violations when the ac count statements we re se nt after the purcha ses of the se curities and w ere not made in conne ction with the purcha se or sa le of sec urities. We hold that although the use of bogus acc ount statements to lull defraude d investors is not in and of itself a sec urities law violation, the use of suc h statements is releva nt as evidenc e to prove , inte r a lia , the def endant’ s intent to defra

ud and the e x tent of the sche me employ ed. In a sepa rate summary order filed alongwith this opi nion, we re solve the re maining issues on a ppeal. F or the re asons stated here in and in that summary order , the judg ment of convic tion is affirmed.

BACK GR OUND Fr om 1999 until 2004, Defenda nt-appe llant Kevin O. Ke lley operated Acor

n Resear ch & Mana g e me nt, Inc . ( “ Ac or n” ), wh e re he wo rk e d a s a sto c k b ro ke r. Ke lle y

wa s a lso e mpl oye d a s a reg istered r epre sentative of Royal Alliance , a broke r-de aler , and ser ved as the manag ing e x ecutive of its Stamf or d, Conne c tic ut o ff

ic e . K e lle y

too k a dv anta g e of

his po sit ion

a s a sto c k b ro ke r t o v iol ate3

se c ur iti e s la

ws and to d e fr a ud his sto c k b ro ke ra g e c lie nts thr ou g h s c he me s invo lvi ngfo ur se pa rate
secur ities: Coy ote Networ k Sy stems (“Coyote”) , First Ve nture L easing(“F VL ”), E- Tel Corporation (“E- Tel”) , and AusAm B iotechnolog ies (“AusAm”). In J anuar y 2000, Kelley

and two par

tners for med a c onsulting firm, KRJ, L L C, which enter ed into a consulting a g ree ment with Coy ote. As par t of the agree ment, KRJ rec eived 2 million shares of Coy ote stock, a por

tion of which wa s held in an esc row a ccount to be r elea sed to KRJ if ce rtain stock price targ ets wer e met and ma intained. The stock w as re lease d from esc row to KRJ in March 2000, and it was subseque ntly

exchang ed by

KRJ in April 2000 for $12.4 million. From Marc h 2000 thr ou g h Se pte mbe r 2 00 0, a tim e pe ri od

that ov e rl a

pp e d w ithKRJ’s c on su lti nga g re e me nt, Ke lle y , in his role as a

stock broker , purcha sed Coyote stock for some of his clients without their authorization
and e nc oura g e d o the r c lie nts to p ur c ha se Coyote sto c k w ith out di sc los ingto t he m hi s o wn

int e re sts in Coy ote. On De cembe r 14, 2000, Coyote filed for bankruptc y , resultingin approxim ately $1.4 mil lio n in los se s f or Ke lle y ’s c lie nt- inv e sto rs . Ar ound the same tim e a s th e Coyote sc he me oc c ur re d, Ke lle y

a lso e nc oura g e d h is c lie nts to purc ha se lim ite d p art

ne rs hip int e re sts in F VL , in wh ic h h e owne d a

ma jor ity int e re st. Ke lle y

tol d h is clients that FV Lwas a

safe , g overnme nt-secur ed investment. As with Coy ote, Kelley did not disclose to his clients his own personal intere st in the company . Also, Kelley did not invest in FVL all of the de posited funds intended for purcha sing inter ests in that entity ; instead he misappropr iated some of his clients’ funds f or his own use. F VL

stopped rec eivingany

reve nue by

May 2002, and the stock wa s prac tically

worthless by

J anuar y 2004. At least through J une 2004, howe ver, K elley
c ontin ue d to mis le a d h is c lie nts a bo ut t he ir inv e stm e nts , s e nd ingthe m bo gus a c c ount s tate me ntsSpe c if ic a lly , K e lle y

iss ue d a c c ount s tate me nts to t hr e e dif fe re nt c lie nts . T he se 1 statements over stated the va lue of their F VL investments: on J anuar

y 21, 2004, Kelley

faxed an ac count statement to Carol Ray bin which stated that he r investment in FVL was va lued at $250,000; on March 31, 2004, he issued an ac count statement to Michae l and B arba ra G rec o which showe d their investment in FVL to be worth $138,712; and on June 30, 2004, Kelley issued a stateme nt to Edward Wolak indicatingthat his investment was worth $50,000. For example, the J anuar

y 21, 2004 statement Ke lley issued to Ms. Ray

bin indicated 2 that he r i nv e stm e nt i n E -T e l w a s w or th $ 45 ,0 00 ; and

the June 30 , 2 00 4 s tate me nt i ssu e d to Mr. Wolak list ed his investment in E-Tel a s valued at $50,000. 4 w h i c ho v e r s t at e d

th e v a l u e o f

th e i r i n v e s tm e n t s i nF V L. 1 Kelley employ ed a similar sc heme with re spect to E-Te l, in which he held stock a nd serve d as a dire ctor. Ke lley

misappropriate d for his own use c lients’ funds meant f or investment in E-Te l. Testifying in his own de fense , Kelley asser ted that he ha d not misappropriated the funds, but that he had instead sold his own shar es to his clients. Kelley introduced no e vidence to support this claim. By mid-2003, E-Tel ha d g one out of business and the investments were essentially of no value
. Kelley continued, howe ver, to mislead his clients about their investments in E-Tel by

issuing bogus
acc ount statements throug h J une 2004. 2 Wit h respe ct to AusAm, Kelley serve d as a dire ctor of the company until 2001. As a director , Kelley had the oppor

tunity to purcha se shar es in AusAm, but the re cord c ontains no evidenc e that he exercised this option. Kelley encour ag ed his clients to send him funds to invest in AusAm, which Kelley then misappropriated for his own use . Kelley ag ain asser

ted in his own defe nse that he ha d sold his own personal holding s to his clients. There a re no r ecor ds of such sale s, nor ar e ther e
rec ords that show either

Kelley or any of his clients eve r owne d stock in AusAm. As with the other
sc he me s, Ke lle y

a g a in m isl e d h is c lie nts by fa lse ly re pr e se nti ngthe va lue of the ir inv e stm e nts inTh e Marc h 3 1, 20 04 state me nt i ssu e d to the Gr e c os sh ow e d th e ir inv e stm e nt i n 3 AusAm was va lued at $28,800. The J une 30, 2004 stateme nt issued to Mr. Wol ak showe d his investment in AusAm was worth $68,750. The super sedingindictment stated that “Ke lley repe atedly

misled investors as to the 4 value of their investments in FVL by sendingthem false a ccount state ments that over- valued their investments,”; “K elley hid E-Tel’s f

ailure f rom the clients by

failingto disclose E-Te l’s failure to them, and by

distributing fa lse and misleadingacc ount statements to them,” ; and
“ Ke lle y hid fr om h is c lie nts his fa ilure to i nv e st the ir fu nd s in Au sA m by

dis tr ibutin gfa lse and misleadingacc ount statements to them.” 5 bogus acc ount statements, even though no actua l investment had bee n made. 3 On Fe bruar

y 14, 2006, a super sedingindictment issued char g ing K elley with four counts of
se c ur iti e s f

ra ud and thr e e c ounts of

wi re fr a ud ste mmi ngfr om f

our s c he me s invo lvi ngse c ur iti e s in Coy ote, E-Te l, and AusAm and involvingthe limited partnership investments in FV L . As part of de sc ri bin gKe lle y ’s sc he me s to de fr a ud , th e su pe rs e din gind ic tme nt r e fe rr e d to a c c ount s tate me nts sent to Kelley ’s clients which misre prese nted the value of their investments in FV L , E-Te l, and Au sA m. 4 Prior to the start of the jury trial, Kelley

moved to strike the portions of the supe rseding indictment that refe rre d to bogus a ccount state ments, arguing that the use of bogus acc ount statements is insufficient to establish a se curities violation beca use the fa lse statements we re not made in conne ction with the sale or pur chase of sec urities. In a Mar ch 6, 2006 orde r, the district court de nied Kelley ’s motion to st rike the r efe renc es to the bogus acc ount statements, findinginstead that the statements we re r eleva nt to Kelley ’s intent and his attempts to evade detec tion. Duringthe trial, the g overnme nt presente d testimony from Ke lley ’s clients, executives and employ ees of

the four dif

fer ent companie s whose sec urities wer e involved in Kelley ’s sche mes, an executive of Roy al Alliance , Kelley ’s assistant at Ac orn, and a Postal I nspector. T he g overnme nt6

also introduced into evide nce the Acor n acc ount statements in which Kelley had over valued the clients’ investments in FVL , E-Te l, and AusAm. Ke lley testified in his own defe nse and c alled an additional client to testify on his behalf. In its closing ar gument, the g overnme nt asserte d that Kelley used the bogus acc ount statements as a me ans of e vadingdetec tion and to deter his clients fr om
se e kin gto s e ll the ir

inv e stm e nts . In r e sp on se , K e lle y argue d th at th e state me nts we re ins uf fi c ie nt t o establish a violation of sec urities laws bec ause the statements wer e issued only afte r the sec urities ha d b e e n p ur c ha se d a

nd we re no t ma de in c onne c tio n w iththe sa le or purc ha se of

se c ur iti e s. F oll ow ingjur

y de lib e ratio ns , K e lle y

wa s c onvic te d o f f

our c ounts of

se c ur iti e s f

ra ud in violation of 15 U.S.C. §§ 78j(b) and 78ff, a nd 17 C.F.R. § 240.10b-5; and thre e counts of w ire fr aud in violation of 18 U.S.C. §§ 1343 and 2. On November 29, 2006, Kelley

was sente nced to 170 months’ imprisonment, and the district court also orde red r estitution i n the amount of $4,332,517 and for feiture of $15 million. DI SCU SSIO N On appe al, Kelley

argues that the district cour t erre d in permitting e vidence of the bogus
a c c ount s tate me nts to b e a dmi tte d into e vid e nc e . In th e c ours e of int ro du c ing his argume nt o n th is point, Kelley

notes that the district court de nied his motion t o strike re fer ence s to the bogus acc ount statements from the indictment. B eca use Ke lley

conclude s this argument in his brief by asser ting that “the District Court er red in pe rmitting the g overnme nt to introduce such e vidence ,” we construe Kelley ’s ar gument solely

as a c halleng e to the district cour t’s evidentiar

y ruling s. We reviewevidentiar

y ruling s for a

buse of discr etion. United States v. Szur , 289 F.3d 200, 217 (2d Cir. 2002). We will find an abuse of discre tion only wher e “the trial judg e rule d in an arbitra ry or irrational fashion.” Un ite d S tates v . P ipo la , 8 3 F .3 d 5 56 , 5 66 (2 d Ci r. 19 96 ); se e als o7

United States v. Salame h , 152 F.3d 88, 110 ( 2d Cir. 1998) (“We will sec ond-guess a district cour t ‘only if there is a clea

r showingthat the cour

t abused its discretion or a cted a rbitrar ily or i rr at i o n al l y . ’” (qu o t i n g United States v. Valdez , 1 6 F .3 d 1 32 4, 13 32 (2 d Ci r. 19 94 )) ). Ge ne ra lly , “ a ll rele vant evidenc e is admissible under the F eder al Rules of Evidenc e unless spec ifically excluded.” United States v. Pe rez , 3 87 F .3 d 2 01 , 2 09 (2 d Ci r. 20 04 ) ( c iti ngF e d. R. E vid . 4 02 ). Ev ide nc e is rele vant if it has “a

ny tendenc y to make the e x istence of

any fac t that is of conseque nce to the deter mination of the ac tion more probable or less proba ble than it would be without the evidenc e.” Fe d. R. Evid. 401. Section 10(b) of

the Secur ities Ex chang e Ac t of 1934, of which K elley was c onvicted, make s it “unlawful for

any person . . . [t] o use or e mploy , in connec tion with the purchase or sale of any
secur ity . . ., any manipulative or de ceptive de vice or contrivanc e in contra

vention of such r

ules and
re gulatio ns a s th e [SEC] ma y pr e sc ri be .” 15 U. S.C. § 7 8j; se eals o 17 C.F .R. § 2 40 .1 0b -5 (m akin git “unlawf ul for any person . . . to employ

any device , scheme , or ar

tifice to def

raud . . . in c onnection with the purcha se or sa le of a ny secur ity ”). Afra

udulent statement made in violation of section 10(b) must there fore be a statement made “ in connec tion with the purchase or sale of any secur ity .” Se eSE C v . Za nd

for d , 5 35 U. S. 8 13 , 8 20 (2 00 2) (“ Whil e the statut e mus t no t be c on str ue d s o b ro a dly as to conve rt eve ry

common-law f

raud that happens to involve sec urities into a violation of § 10(b) . . . neither the SEC nor this C ourt has eve r held that ther e must be a misre prese ntation about the value of a pa rticular se curity

in order to r

un afoul of the Act.”)
. Kelley contends that be cause the bogus acc ount statements wer e cr eate d and disseminated tw o to fo ur

y e ars a ft e r t

he purc ha se s o f t

he re late d s e c ur iti e s, the y we re no t ma de in c onne c tio n w ith the sale or

purcha se of a

secur ity as re quired for

a sec tion 10(b) violation. In support of his position,8

Ke lle y c ite s tw o c a se s f

ro m th e dis tr ic t c ourt s: Fezzani v. Be ar, Stearns &Co. , 384 F. Supp. 2d 618, 639 (S.D.N.Y. 2004) ( findingin a civil action that conf irmation notices and monthly acc ount statements issued af

ter the pur chase of sec urities wer e not ac tionable statements under section 10(b) or Rule 10b-5 whe n they

occur red a fter the fac t and plaintiff did not rely on the statements in making the purc hase) , and Con no rs v . Le x ing ton In s. Co ., 666 F. Supp. 434, 443 (E.D.N .Y. 1987) (“Stateme nts made subseque ntly , even if fra udulent, do not make out a 10b- 5 violation.”). Ke lley ’s argument, howeve r, misses the point and disreg ards the pur pose for which the bogus acc ount statements wer e off

ere d into evidence
. Th e se c tio n 1 0( b) vio latio ns that w e re c ha rg e d s te m no t f

ro m th e bo gus a c c ount s tate me nts themselves, a sine qua non for Ke lley ’s ar gument to be per suasive, but instead stem fr om Kelley ’s larg e r s c he me s to ind

uc e his c lie nts to p ur c ha se the se c ur iti e s o r t o u se his c lie nts ’ f un ds to p ur c ha se the sec urities without their authorization. Refere nces to the bog us statements wer e admitted as evidenc e bec ause the y

tended to demonstrate Kelley ’s intent to defra ud his clients and the scope of the sche mes he e mploy ed. See P erez , 3 87 F .3 d at 20 9 ( “ Whil e fa lse ho od s to ld b y a de fe nd ant i n hope of e vadingprosec ution are not themselve s sufficient e vidence on which to base a convic tion, such fa lsehoods may

streng then an infe renc e of guilt suppl ied by other e vidence .”). The y

wer e neve r offe red a s proof of inde pendent violations of sec tion 10(b). The bogus acc ount statements wer e re levant evide nce w ith respec t to the char g ed sec urities law violations. See SE C v. Holschuh , 694 F.2d 130, 143 ( 7th Cir. 1982) (“[A] scheme to defr aud may well include late r ef

forts to avoid dete ction of the fr aud.” ( internal quotations omitted)). The statements provided the jury with evidence both that Kelley had intended to de fra

ud his clients and that he continued e ffor

ts to avoid detection by

dece iving his clients about the va lue of the9

investments, often up to two y ear s after a par ticular investment ce ased to have any value. The
a c c ount s tate me nts a lso ind ic ate that K e lle y ’s a c tio ns in d e fr a ud inghis c lie nts we re no t si mpl e mistakes but were instead par t of a lar g er, intentional sche me to defr aud. See id. at 144 (“ The c ourt
was e ntitled to consider the lulling a ctivities beca use they wer e evide nce of

a sche me which, view ed
as a whole, was suf

ficiently closely connec ted to the sale a

nd was re levant to the question of intent.” (f oo tno te omi tte d) ). We h old , th e re fo re , th at th e dis tr ic t c ourt did no t a bu se its dis c re tio n in admitting evide nce c oncer ning the bogus acc ount statements that wer e g ener ated a nd disseminated
se ve ra l y e ars a ft e r t

he vic tim s h a d b e e n in du c e d to inv e st.

CO NC LU SION For the re asons stated he rein a nd in an ac company

ing summar

y order , the judg ment of the district court is AFF I RMED.