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Timestamp: 2019-04-18 13:39:39+00:00

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[*1] People v Thompson 2016 NY Slip Op 50777(U) Decided on May 16, 2016 Supreme Court, New York County Conviser, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.
Anthony J. Thompson, Eric Van Nguyen, Jay Fung, Joseph Dervali, Christopher Balseiro, Hanna Schmieder, Luz Rodriguez, Kenneth Oxsalida, Defendants.
New York County District Attorney Cyrus R. Vance Jr.
(v) the motion for a court-ordered Bill of Particulars is deferred for discussion on the next adjourned date.
The indictment arises from 9 alleged fraudulent "penny stock" "pump and dump" schemes. A penny stock is one which trades for less than $5 per share, is not listed on the NASDAQ and requires limited disclosure, making investments more risky and volatile. The company shares in this case traded for pennies or fractions of pennies but the conduct here also involved millions of shares. Those companies and their ticker symbols (the symbols which designated the companies on the market) were: Blast Applications (BLAP), Blue Gem Enterprises (BGEM), Recyle Tech (RCYT), Hydrogenetics (HGYN), Xynergy Holdings (XYNH), Mass Hysteria Entertainment Company Inc. (MHYS), Lyric Jeans (LYJN), SunPeaks Ventures (SNPK) and Smart Holdings (SMHS) (hereinafter sometimes referred to as the "subject companies").
The architect and orchestrator of the scheme was Kevin Sepe. The remaining defendants, as described infra, were either affiliates of Kevin Sepe or stock promoters who worked with him to implement the alleged frauds. The Defendants' work with the companies followed a similar pattern. A publicly traded "shell" company (a company with no substantial business) would be [*3]identified and Mr. Sepe and his affiliates would then act to merge a private company they controlled into the shell company. This allowed the shares of the new company to be freely traded without a waiting period. Money would be loaned to the company and then the loan would be converted into equity through the receipt of shares of the company stock as a substitute for the repayment of the debt. A stock promotion would then take place. Typically, there would have been very little trading in the company's stock prior to the promotion. Immediately prior to the beginning of the promotion, however, some shares might be leaked into the market so that regulators would not see that a company went immediately from having no shares traded to a large trading volume.
The shares held by Sepe and his affiliates would rise in value following the promotion. Sepe and his affiliates would sell the shares at huge profits. The promotional campaign would then end. The share price would then rapidly decline. Kevin Sepe and his affiliates knew, in advance, that the stocks would follow this pattern pursuant to the beginning and end of internet marketing campaigns and scheduled and coordinated their stock sales accordingly. In each case, the sales and profits followed the pre-arranged pattern.
A key part of the scheme was to conceal the fact that Kevin Sepe controlled a vast portion of the trading shares. To conceal his ownership, his shares were placed in the names of multiple loyal nominees including Defendants Luz Rodriguez and Joseph Dervali who then sold their shares and split the profits with Kevin Sepe. In addition to concealing his ownership and control, having shares held by these nominees allowed Sepe to evade requirements that persons who held more than 5% of the shares of a company be disclosed.
The People presented an extraordinary volume of evidence to the grand jury including financial analysis from federal regulatory agencies and the meticulous tracing of trades and profits of the subject companies. The People attempted to make this information comprehensible for the grand jury through the testimony of its own investigator and SEC personnel who prepared reams of flow charts and graphs tracing the financial gains made by the Defendants and their affiliates. The extensive data demonstrated the correlation of spikes in volume and price during promotional periods, the sale of stock by Kevin Sepe and his affiliates during those periods for large profits and the rapid decline of stock prices and volume as promotional periods ended. The data also demonstrated how stock splits, debt conversions, company name changes and the transfer of funds through multiple parties facilitated the sales and hid the fact that profits ultimately flowed to Kevin Sepe and his affiliates.
Data and analysis presented by the Financial Agency Regulatory Agency (FINRA) presented to the grand jury demonstrated some of the stock sale patterns with respect to the subject companies. For example, on December 9, 2009, 97% of the 515, 500 shares of Blue Gem sold on that date were sold by Kevin Sepe and his affiliates. On the following date, almost three million shares were sold, 60% by Sepe and his affiliates. These sales followed no trading in the stock in November and early December of 2009. The Blue Gem promotion began on December 13, 2009. The sales by Sepe and his affiliates on December 9 and 10 had the effect of showing the shares had an active market.
Sometimes it was alleged that the sellers would "mark the close". That is, they would sell stock to each other to create an artificially low share price. The purpose of this would be to show the share price rapidly rising the following day and attract buyers who would be excited about the [*4]stock's rapid increase in value. Intermediaries were sometimes used so that transactions would not be seen to go directly from one insider to another. Stock splits were used to increase the number of shares held by the participants in the schemes.
Defendant Luz Rodriguez was Kevin Sepe's assistant and participated in the selling of shares in her name for Kevin Sepe. Defendant Joseph Dervali was a trusted friend of Kevin Sepe who also had shares placed and sold in his name for Kevin Sepe. Hanna Schmieder was the president of one of the subject companies, Lyric Jeans and participated in the scheme regarding Lyric and a second company, Recyle Tech. Multiple additional persons participated in the transactions. Sepe would typically make an arrangement with a nominee where the nominee would retain roughly 20% of trading profits, roughly 40% would go to pay taxes and Sepe would receive roughly 40%. Sepe also split stock sold 50/50 between himself or his nominees and stock promoters, including Defendants Anthony Thompson, Eric Van Nguyen and Jay Fung.
Money which nominees sent to Sepe was either sent to one of Sepe's businesses or to his attorney. The purpose of sending the funds to his attorney first was to hide the transactions. This was also facilitated by having funds sent to one of Kevin Sepe's businesses rather than directly to Kevin Sepe. The Defendants earned huge profits from the stock sales. With respect to the sales of the stock of one "sub-penny" stock, Lyric Jeans, for example, the evidence indicated the stock had a 23 fold increase in its share price in the first hour of trading, that Kevin Sepe earned $4 million from the sales and that the promoters (including Defendant Thompson) collectively earned about $ 2 million. The total amount of time in which the sales occurred was generally three to five days.
Defendant Anthony Thompson was described during the grand jury presentment as the "quarterback" who connected Sepe to stock promoters who participated in the scheme by touting the stocks. The evidence also indicated that Thompson was involved in other aspects of planning and perpetrating the sales. Thompson was compensated with shares of stock in the subject companies which he then sold for significant profits. Thompson was affiliated with the penny stock newsletters OTC Solutions and Mircrocapster. Defendant Jay Fung was associated with the promotion firm Pudong LLC. Thompson worked closely with Sepe and others to facilitate the touting of the shares. Thompson and his companies OTC Solutions and Mircrocapster were associated with the stock promotions for eight of the subject companies.
The evidence indicated that the work of the promoters was key to realizing the profits and that without that work those profits would not have been earned. Sepe coordinated the sales with his affiliates in an attempt to maximize profits. Sepe and his nominees made a profit of $1.5 million solely from the sale of the Blue Gem shares. The evidence indicated that Thompson, Jay Fung, Eric Van Nguyen and a fourth person made over $4 million in total from sales of that company. Typically, the evidence indicated that Kevin Sepe would agree with the promoters, Defendants Thompson, Nguyen and Fung on how many shares the promoters would receive as compensation for a promotion before the shell companies were even purchased. After receiving subpoenas from the SEC regarding the sales of two companies, Hydrogenetics and Xynergy, the evidence indicated that Thompson and Kevin Sepe communicated through disposable cell phones which could not be tapped.
The evidence indicated that the value of the companies as reflected in their share prices bore little relationship to the value of the company's underlying businesses (although that, in [*5]itself, would obviously not be criminal). For example, Xynergy Holdings, at the time of its share sales, was a company which was purportedly developing a hydrogen power system for cars but the evidence indicated the company had no assets or revenues. Recyle Tech at the time it was sold to the Defendants in 2010 was described as having very little operations, no employees and operating at a loss. Companies were sometimes initially sold to an intermediary shell broker, Belmont Partners, and then sold to the Defendants who liquidated the company's shares.
Stocks were touted through internet newsletters through companies retained or directed by Thompson with exaggerated claims regarding a company's products and predictions of imminent steep share price rises. The newsletters included detailed disclaimers which indicated that the promoters were being compensated by the companies they were touting, that this compensation created a conflict of interest and that the compensating company might sell shares negatively impacting the company's share price. In his Omnibus motion, Defendant Thompson detailed the extensive efforts he made to provide the disclaimers with the advice of multiple expert counsel and his efforts to comply with SEC rules governing his promotions.
In fact, however, the evidence indicated that there was a clear and coordinated plan to dramatically inflate the subject company stock price, liquidate the shares earning profits in the hundreds of thousands or millions of dollars and leave the ordinary investors who purchased the shares at higher prices with stock which was practically worthless. The disclaimers did not disclose the fact that large portions of the shares were held by nominees who were not the actual share owners. It was also not disclosed that predictions of share value increases by multiple internet newsletters which appeared to be independent were actually being coordinated by the Defendant stock promoters.
The victims of the Defendant's conduct were the persons who bought stock in the subject companies and then realized significant losses. The People presented the testimony and associated financial records of 24 individual alleged victims (the "investors"). All of the investors testified that they purchased stock in the subject companies on the open market through brokerage accounts and that their purchases were due in part to promotional materials they had received, often through the internet. Some were able to identify the specific publications they had reviewed and publications linked to the Defendants while others were not. Many said they hoped to hold the stock for a long term. All of the alleged victims were what might be called ordinary investors, persons who earned most of their income from occupations other than stock trading.
Many investors testified that they reviewed trading patterns for the securities prior to purchasing them. Some said it was important to them that a stock had trading activity which indicated the stock was legitimate. Some of the investors also said they had reviewed multiple newsletters or email solicitations from ostensibly different promoters and believed these promoters were acting independently of each other. This indicated to some of the investors that the predictions about the companies were valid because they were being made by multiple independent promoters. Victims testified that facts such as the promise of marketing agreements with major retailers, the endorsements of football players or simply the business models outlined in the email solicitations were attractive and led them to invest in the stocks. The companies the alleged victims testified they purchased stock in were Recyle Tech, Blue Gem, Mass Hysteria, [*6]Smart Holdings, Blast Applications, SunPeaks Ventures and Lyric Jeans. Victim testimony regarding Hydrogenetics and Xnergy Holdings was not presented.
Many of the investors later sold their stock, some did not. Virtually all realized significant losses. In many cases, the shares they had purchased were virtually worthless when they were sold or at the time of their testimony. For example, one investor testified that he invested about $7800 in Mass Hysteria Entertainment Inc. in January of 2010 and sold the stock about a year later for $32. Another testified that he purchased Recycle Tech shares in February of 2010 for about $10,000 and sold the stock the following year losing virtually all of his money. A third investor bought a little less than $21,000 of Blast Applications stock in November of 2009 and subsequently sold his holdings for $660. A fourth said he purchased about $11,000 of Blue Gem shares in December of 2009; at the time of his grand jury testimony the stock had a value of $46. Invested amounts for the vast majority of the victims ranged from a few thousand dollars to a little more than $20,000.
That a small group of insiders controlled virtually all of the company's free trading shares and had designed a promotional campaign for the stock, which occurred at the time of the victim stock purchases, for the purpose of allowing all of those stock holdings to be liquidated by the insiders;That a person who was in fact in control of the company had concealed his identity and placed shares in the names of nominees who sold the securities for him;That promoters had received a significant portion of the company's free trading shares and intended to liquidate them during the promotion;That the promoters had not only been compensated with shares for their work but had been actively involved in issuing and structuring the stock sales; andThat all of these activities were coordinated with respect to the insiders and promoters.
Investors said that facts such as these would have indicated to them that the promotions were "scams" or a fraud designed to dupe investors out of their money. They uniformly testified that information such as this would have been very important to them and caused them not to purchase the securities.
(6) issuing a press release touting Blue Gem Enterprises with quotations from Allan Sepe (Kevin Sepe's brother), the CEO, with multiple statements which Allan Sepe did not, in fact, make;(7) filing SEC registration documents which falsely asserted that "Blue Gem Enterprise Inc." was a mining exploration company when in fact it did not engage in that business and was in fact a shell company used for a reverse merger;(8) delaying the required SEC disclosure that the control of Blue Gem enterprises had changed until after the commencement of the alleged "pump and dump" scheme with respect to Blue Gem;(9) with respect to the company Lyric Jeans, creating a fraudulent "Wraparound" debt agreement to conceal the fact that Kevin Sepe actually held 20-30% of the company's shares prior to the stock promotion;(10) with respect to Kevin Sepe, filing a fraudulent document with a brokerage company indicating that Mr. Sepe was not an affiliate of various companies when he was in fact such an affiliate;(11) with respect to Defendant Thompson, filing fraudulent Deposited Securities Request Questionnaires with a brokerage company indicating that Thompson's company, OTC Solutions, was not an affiliate or "control person" of the companies Blue Gem, Recyle Tech and Lyric Jeans when in fact OTC Solutions was such an affiliate;(12) touting, on February 24, 2010, the stock Recyle Tech as being poised for a further increase in price when in fact the promoters knew that the newsletter was issued on the last date of the promotion, that the Defendants\affiliates had already sold all of their shares and that the share price was therefore likely to fall precipitously rather than rise.(13) the fact that Kevin Sepe and Thompson also attempted to conceal their transactions with respect to the company Smart Holdings by pooling the stock and placing it in overseas entities prior to being sold.
A grand jury indictment is authorized when the evidence before the grand jury is "legally sufficient" to establish that a person committed a charged offense and when competent and admissible evidence provides reasonable cause to believe the person committed that crime. CPL 190.65 (1). The first prong of the statute requires that the People present prima facie evidence of an offense. The second prong describes the degree of certainty which grand jurors must have to sustain an indictment. On a motion to dismiss or reduce an indictment pursuant to CPL 210.20 (1) (b) the Court's review is limited to the first prong of the statute. People v. Swamp, 84 NY2d 725 (1995).
The question in such motions is whether "the evidence viewed in the light most favorable to the People, if unexplained and uncontradicted, would warrant conviction by a petit jury". People v. Bello, 92 NY2d 523, 525 (1998). "The reviewing court's inquiry is limited to whether the facts, if proven, and the inferences that logically flow from those facts supply proof of each [*8]element of the charged crimes and whether the grand jury could rationally have drawn the inference of guilt". People v. Ackies, 79 AD3d 1050, 1056 (2d Dept 2010). "[L]egal sufficiency means prima facie proof of the crimes charged, not proof beyond a reasonable doubt". Bello, supra, 92 NY2d at 526.
The Defendants raise a number of threshold issues relevant to all of the counts which deserve discussion. First, it is clear that much of the conduct the Defendants engaged in was not criminal. There is nothing criminal, for example, in executing a reverse merger into a shell company, touting a company's stock through forward looking opinion statements and puffery and selling stock for substantial profits. There is nothing unlawful about a stock promoter receiving shares of stock as compensation, particularly when that fact is disclosed to investors. The Court also agrees with the Defendants that the vast majority of the affirmative representations the Defendants made about the stocks they sold at most constituted exaggeration, not rising to the level of criminal conduct.
Thompson points out that while the People presented evidence to the grand jury of the disclaimers he and other defendants provided with their promotional solicitations, the documents the People submitted to the grand jury did not include the entire text of these disclaimers. The Court has reviewed differences between the written disclaimers submitted to the grand jury and the more expansive disclaimers subscribers to Thompson's emails received. The Court agrees that the People should have provided the full text of these disclosures to the grand jury. One example highlighted by Thompson comes from the newsletter "ExplicitPicks" regarding the subject company Blue Gem on December 14, 2009. The email provided by the People to the grand jury omits pictures provided in the newsletter given to investors and includes the disclaimer that ExplicitPicks is not an investment advisor, that investors should not invest in the stock unless they are able to lose all of their money and that investing in penny stocks is highly speculative.
The more complete disclosure which investors apparently received, however, included the assertion that ExplicitPicks was not unbiased because it was compensated for issuing newsletters by the companies it was touting; that ExplicitPicks had the right to buy and sell securities in the touted company and receive shares as compensation for its work; that, in the case of Blue Gem, ExplicitPicks had in fact received 1.5 million free trading shares as compensation for their promotions; that the use of the website meant viewers released ExplicitPicks from liability and that ExplicitPicks made no representations about the accuracy or completeness of the information provided in its newsletter. Thompson views the more expansive disclaimers as exculpatory and argues the People's failure to provide them should result in the dismissal of the entire indictment. The People, conversely, view the more expansive disclaimers as simply further evidence of the Defendants' fraud.
As the People point out, in presenting evidence to the grand jury they "are not obligated to search for evidence favorable to the defense or to present all evidence in their possession that is favorable to the accused even though such information undeniably would allow the Grand Jury to make a more informed determination." People v. Lancaster, 69 NY2d 20, 26 (1986) (internal [*9]citation omitted). But that is very different from the proposition that it is permissible for the People to present documentary evidence to the grand jury which omits significant material information contained in those documents particularly when, as here, the omitted information is at least facially exculpatory. "[A]s a public officer he [the prosecutor] owes a duty of fair dealing to the accused and candor to the courts". Id. (citation omitted).
Compounding the problem is that the People, on the record and over an extended period of time, have provided different and sometimes contradictory explanations to the Court for why these discrepancies occurred. The People initially asserted they did not provide the grand jury with the complete texts of the emails because they never had them. Thompson then pointed out that the full texts of the disclaimers had been provided to Thompson by the People in a document production. The People then said they did, in fact, have the full texts of the disclaimers, but that the database system in which they kept the emails produced them in a modified format, which they then presented to the grand jury. Most recently, in a letter dated May 10th, 2016, the People offered a new explanation: that the full text of the disclaimers (which the People admittedly produced to Thompson) were only available if the file in which they were contained was connected to the Internet (and that the People, presumably, accessed these files while not connected to the Internet). This May 10, 2016 explanation came almost four years after the final search warrant execution in which the People seized the emails (on June 21, 2012).
Thompson asserts that it was the People's obligation to process these documents correctly and present them to the grand jury in their original form and that the emails the People did provide the grand jury were "document[s] that had never been sent to individual subscribers by Mr. Thompson or any of his companies" [because they deleted significant material information].[FN3] The Court agrees with those assertions. Two questions remain. First, did the People attempt to deliberately mislead the grand jury or the Court, and second, should all or any portion of the indictment should be dismissed or should some other sanction be imposed because of the People's conduct. In the Court's view, the answer to both questions is no.
The Court does not believe the People deliberately misled the Court or provided the incomplete disclaimers to the grand jury in order to present a misleading picture of the Defendants' actions. Indeed, as noted supra, the People continue to view the omitted portions of the disclaimers as further evidence of the Defendants' crimes they had no reason to conceal. The People seized Thompson's emails through search warrants directed to his internet service providers and then compiled a database of these documents which included approximately 100,000 emails containing 6.5 million pages. This Court found those seizures overbroad in People v. Thompson, supra, 2016 NY SlipOp 26045 at 6-11. Numerous assistant district attorneys and support staff have worked with these documents for multiple years. The computer programs the People used to manage their database had impacts whose significance the People apparently did not initially fully understand. The People acted erroneously with respect to this issue. In the Court's view, however, the People did not act in bad faith.
intentionally engages in any scheme constituting a systematic ongoing course of conduct with intent to defraud ten or more persons or to obtain property from ten or more persons by false or fraudulent pretenses, representations or promises, and so obtains property from one or more of such persons while engaged in inducing or promoting the issuance, distribution, exchange, sale, negotiation or purchase of any securities or commodities . . .
GBL § 352-c (6) provides that a person or entity is guilty of a Class E felony where he: intentionally engages in fraud, deception, concealment, suppression, false pretense or fictitious or pretended purchase or sale, or who makes any material false representation or statement with intent to deceive or defraud, while engaged in inducing or promoting the issuance, distribution, exchange, sale, negotiation, or purchase within or from this state of any securities or commodities . . . and thereby wrongfully obtains property of a value in excess of two hundred fifty dollars.
"Fraud under the Martin Act includes all deceitful practices contrary to the plain rules of common honesty and all acts tending to deceive or mislead the public . . ." People v. Greenberg, 95 AD3d 474, 482 (1st Dept 2012) (citation omitted). The fraudulent practices targeted by GBL § 352-c (6) "need not constitute fraud in the classic common-law sense and reliance by the victim on the truth of fraudulent statements need not be shown . . ." People v. Taylor, 304 AD2d 434 (1st Dept 2003) (citation omitted). It is an essential element under both Martin Act provisions here, however, that "the defendant obtain property as a result of the alleged wrongdoing, i.e., that there be a causal link between the conduct in violation of the statute and the procurement of property." People v. Downey, 4 AD3d 233, 235 (1st Dept 2004) (citations omitted) (emphasis in original).
In the Court's view, the Martin Act counts were clearly legally sufficient. First, there is [*11]no question that the scheme here involved securities, that the Defendants each obtained well in excess of $250 and that more than ten persons were allegedly defrauded. The grand jury evidence was also sufficient, in the Court's view, to demonstrate a causal link between the proceeds the Defendants earned and their fraudulent conduct. The alleged victims in this case were certainly on notice that they were purchasing a speculative investment. But they relied upon the fact that the sales were essentially legitimate. The evidence indicated that reliance was misplaced. Rather, the evidence indicated the victims bought into to a fraudulent scheme. That is not something they bargained for.
The fraudulent conduct here did not primarily arise from affirmative misrepresentations. Many of the claims in the internet newsletters, as the Defendants argue, constituted "puffery" rather than fraud. In the Court's view, however, the underlying structure of the pump and dump schemes were fraudulent. Kevin Sepe's ownership and control of the companies was deliberately hidden. Investors to a person testified that had they known relevant information about the stock sales, including the fact that the shares they were purchasing came from insiders who had carefully timed stock liquidations in a predictable manner which would leave investors holding practically worthless securities, they would obviously not have purchased those shares.
Various counts allege the Defendants engaged in a Scheme to Defraud in the First Degree under Penal Law §§ 190.65 (1) (a) & (b). Both subdivisions are similar. Subdivision (a) is violated where a defendant "engages in a scheme constituting a systematic ongoing course of conduct with intent to defraud ten or more persons or to obtain property from ten or more persons by false and fraudulent pretenses, representations or promises" and obtains property from at least ten such persons. Subdivision (b) applies where the same conduct occurs directed to at least one person where more than one thousand dollars are obtained.
The evidence presented to the grand jury was clearly legally sufficient to support the Scheme to Defraud charges. There is no issue here that the Defendants' conduct was targeted to more than ten people and resulted in a monetary gain far exceeding one thousand dollars. The Scheme to Defraud statute was designed to be "sufficiently flexible in application to encompass the myriad schemes to defraud . . . " Practice Commentary to Penal Law § 190.60, William Donnino, McKinney's 2010. It requires the existence of a " plan or pattern' as opposed to isolated ad hoc acts". People v. Kaminsky, 127 Misc 2d 497, 501 (New York County Supreme Court 1985, [Rothwax, J.]) (internal quotation omitted); see also, People v. Linyan Zou, 92 AD3d 524 (1st Dept 2012), lv denied, 19 NY3d 865 (affirming judgment of this Court) (scheme to defraud trial evidence legally sufficient where People demonstrated "common techniques, misrepresentations and omissions of material facts employed in all transactions" (citation omitted)). Such a plan or pattern was clearly adequately alleged here. The Court also finds that the evidence adequately alleged the Defendants had the "intent to defraud" and that their omissions resulted in fraudulent pretenses under the Scheme to Defraud statute.
Hanna Schmieder was alleged to have played a much more limited role in the pump and dump schemes than the other defendants. Her actions are alleged to have concerned only two of the nine companies: Lyric Jeans and Recycle Tech and she is charged with a number of Martin Act and Scheme to Defraud counts. The Court is hereby ordering that certain of these counts be [*12]dismissed, but since that dismissal also implicates the multiplicity issue discussed infra, those dismissed counts are outlined there. Other than those dismissed counts, the Court finds the evidence against Ms. Schmieder was legally sufficient.
Ms. Schmieder was the former president of Lyric Jeans but the evidence indicated Kevin Sepe was the company's founder and a major shareholder and that Sepe's lawyer, Ronny Halperin, was the company's CEO. Schmieder was alleged to have been responsible for day-to-day decisions about the company and to have participated in organizing the stock promotion for the Lyric Jeans pump and dump. The People also alleged that Ms. Schmieder sold shares of Recyle Tech as part of the Recyle Tech pump and dump. It was alleged that the proceeds from the Recyle Tech sales were then used by Ms. Schmieder to fund Lyric Jeans. The People alleged Ms. Schmieder received a payment of approximately $546,000 from co-defendant Balseiro which came from his sale of Lyric Jeans stock. In the Court's view, the People adequately alleged that Ms. Schmieder was a participant in the alleged frauds concerning Lyric Jeans and Recyle Tech.
Defendant Schmieder has moved for severance. That motion is denied. Severance of the charges against one defendant in a multi-defendant indictment may be granted for good cause because the defendant will be "unduly prejudiced" by a joint trial. CPL 200.40 (1) (d) (3). "[W]here proof against the defendants is supplied by the same evidence, only the most cogent reasons warrant a severance. While that is particularly true where the defendants are charged with acting in concert, in all cases a strong public policy favors joinder, because it expedites the judicial process, reduces court congestion, and avoids the necessity of recalling witnesses." People v. Mahboudian, 74 NY2d 174, 183 (1989) (quotation omitted).
The potential for prejudice arises here, in the Court's view, from the fact that although the pump and dump schemes alleged in the indictment concerned nine companies, Ms. Schmieder's alleged involvement concerned only two of them. Jurors might find Ms. Schmieder guilty by association with the other Defendants even though the proof of her guilt might be lacking. On the other hand, the two schemes in which Ms. Schmieder allegedly participated shared common elements with the others including the fact that Kevin Sepe was at their heart, that they operated in essentially the same manner and concerned a cast of overlapping players. There is no claim here that Ms. Schmieder would have antagonistic defenses or that statements attributed to other defendants and admissible against them would not be admissible against her. See Bruton v. United States, 391 US 123 (1968).
Any trial in this case would likely also consume significant resources. Requiring the People to conduct two trials would impose a significant burden. Some degree of prejudice is inherent in any joint trial and this potential prejudice must be balanced against the need for judicial economy and witness convenience. People v. Snare, 216 AD2d 674 (3d Dept 1995), appeal denied, 86 NY2d 802 (citations omitted). Ms. Schmieder has not proffered a compelling justification for severance here.
The Defendants assert that multiple counts alleging Martin Act and Scheme to Defraud charges are duplicitous and multiplicitous. The Court holds that counts one, two and three are not duplicitous but that those counts are multiplicitous with respect to multiple remaining counts, [*13]as discussed infra.
CPL 200.30 requires that: "Each count of an indictment may charge one offense only." Defendants assert that count one of the indictment, alleging a Martin Act violation and counts two and three, both alleging a Scheme to Defraud in the First Degree (under two different subdivisions of that statute) fail to meet that requirement because the alleged conduct concerned pump and dump schemes perpetrated with respect to nine companies. The prohibition on duplicity is designed in part to "prevent the possibility that individual jurors might vote to convict a defendant of that count on the basis of different offenses, in effect, permitting a conviction even though a unanimous verdict was not reached". People v. Davis, 72 NY2d 32 (1988) (internal quotation omitted). Duplicitous counts are also prohibited because they impair a defendant's ability to assert a double jeopardy defense in a future proceeding and do not give a defendant adequate notice and an opportunity to defend. People v. Alonzo, 16 NY3d 267 (2011).
Count one charges all of the defendants with a Martin Act scheme and counts two and three charge all eight defendants with schemes to defraud. All of these counts, however, allege continuing crimes where multiple criminal acts can be properly alleged in a single count. The Court of Appeals analyzed the duplicity issue in a similar case in People v. First Meridian Planning Corporation, 86 NY2d 608 (1995). There, the Court analyzed whether a Scheme to Defraud in the First Degree under Penal Law § 190.65 (1) (a), the same crime alleged in Count 2, properly alleged fraud involving coin portfolios, art portfolios and condominiums in a single count. The Court found that "[w]here . . a crime by its nature as defined in the Penal Law may be committed either by one act or by multiple acts and can be characterized as a continuing offense over time, the indictment may charge the continuing offense in a single count". 86 NY2d at 615-616. (citations omitted).
In First Meridian, the Court found this count not duplicitous because it alleged a "unitary scheme to defraud", involving "common techniques, misrepresentations and omissions of material facts employed in all transactions". 86 NY2d at 617. First Meridian also featured a "common nucleus" through which contacts with investors were maintained. Those same features were evident here. Here, the nine alleged penny stock frauds were all carried out in essentially the same manner, using the same techniques and the same alleged misrepresentations and omissions. Kevin Sepe was the nucleus for the vast majority of the alleged frauds and the other defendants here (with the exception of Ms. Schmieder) were also common to multiple schemes. Counts one, two and three are not duplicitous.
Unlike duplicity, "multiplicity" is not prohibited by the Penal Law. An indictment is "multiplicitous" when "a single offense is charged in more than one count". People v. Alonzo, supra, 16 NY3d 267, 269 (2011). A multiplicitous indictment "creates the risk that a defendant will be punished for, or stigmatized with a conviction of, more crimes than he actually committed". Id. Where a proper motion to dismiss a multiplicitous count is made dismissal is required "only of those counts which may be deemed multiplicitous". People v. Smith, 113 AD2d 905 (2d Dept 1985), appeal denied, 66 NY2d 922. In Alonzo, the Court also held that "[w]here the evidence reasonably permits a grand jury to find that either one or two crimes occurred, an indictment charging two should not be dismissed. . . ." 16 NY3d at 271. That maxim is based on [*14]the fact that if a multiplicitous indictment is allowed to stand, a trial court can still not submit multiplicitous counts to a jury. Id.
Alonzo noted that there is no "infallible formula" for determining multiplicity. 16 NY3d at 269. The Second Department has repeatedly dismissed counts as multiplicitous where it found a defendant could not have committed one crime without necessarily committing a different crime charged in a different section of law. People v. Campbell, 120 AD3d 827 (2d Dept 2014), lv denied, 24 NY3d 1118 (2015); People v. Smalls, 81 AD3d 860 (2d Dept 2011), lv denied, 17 NY3d 809 (finding robbery and assault charges multiplicitous). On the other hand, applying a somewhat different test, the Fourth Department has held counts are not multiplicitous when "each count" requires proof of an "additional fact" that is not required in a second count. People v. Fulton, 133 AD3d 1194 (4th Dept 2015), lv denied, 26 NY3d 1109 (2016). The Third Department has applied a still third variation on this theme holding counts are not multiplicitous when "each count requires proof of an element not essential to the other". People v. Hoffman, 130 AD3d 1152, 1153 (3d Dept 2015), lv denied, 26 NY3d 1009.
Defendants assert that 18 pairs of Martin Act or Scheme to Defraud counts and 4 additional pairs of Criminal Possession of Stolen Property counts are multiplicitous. Since the Court is hereby dismissing the stolen property counts for other reasons, the multiplicity issue with respect to those counts is not addressed here. The multiplicity claims with respect to the Martin Act and Scheme to Defraud counts are essentially the same. The first three counts of the indictment allege general Martin Act and Scheme to Defraud violations involving all nine companies and all 8 defendants (the "general counts"). Each of these general counts allege conduct occurring between the same dates: April 3, 2009 through June 1, 2012. In 18 additional counts, identical violations of the same statutes are alleged (as further explained infra) with respect to one of those same nine companies (the "individual counts") and a subset of the 8 defendants. The date ranges for the individual counts are all subsets of the date ranges for the general counts.
Complicating matters further, some individual counts do not name a subject company. These counts are rather subsets of the general counts with respect to date ranges and defendants, but not companies. Count 78, for example, alleges the same Scheme to Defraud crime as count 2, distinguished by the fact that count 78 alleges conduct occurring from November 15, 2009 until December 31, 2010 rather than count two's broader date range and concerns a subset of the defendants charged in count two.
The final complication is that while these "non-company" individual counts do not name companies, they appear to be intended to be so limited. That is because the date ranges in the non-company individual counts correspond to the date ranges in other individual counts in which companies are named. Thus, count six is a subset of count three. Count six does not name any individual company. But the date range in count six is the same as the date range in count four which explicitly concerns Blast Applications (and is itself a subset of count one).
To simplify these permutations, 18 Martin Act or Scheme to Defraud counts are subsets of counts one, two or three. All of these crimes allege courses of conduct rather than discrete acts. It would seem impossible, however, for a defendant to be guilty of counts one, two or three and then not be guilty of all of the individual counts corresponding to the one, two or three general counts the defendants are charged under.
The People assert that even if these counts are multiplicitous, "dismissal is not required" because the duplicative conduct alleged in multiplicitous counts can be addressed by imposing concurrent sentences after trial.[FN6] But the leading case the People cite for that proposition, People v. Smith, supra, does not say that. The People argue the general Martin Act and Scheme to Defraud counts allege facts which are not alleged in the individual counts. Those "facts", however, according to the People, consist of the assertion that the general counts allege a "lengthy, single, unitary scheme" while the individual counts allege portions of that same scheme.[FN7] If I am guilty of "A", "B" and "C", however, I am also guilty of "A", "B" or "C". That, is what is alleged here. In Alonzo, the Court of Appeals defined a multiplicitous indictment as one where "a single offense is charged in more than one count". It is indisputable that the crimes charged in the individual counts are all also charged under the identical subdivisions of the same statutes in the general counts. In this Court's view, that is multiplicity.
Count one is thus a multiplicitous count with respect to counts four, twelve, 29, 46, 60 and 77. Count two is a multiplicitous count with respect to counts five, 13, 30, 47, 61 and 78. Count three is a multiplicitous count with respect to counts six, 14, 31, 48, 62 and 79.[FN8] That multiplicity may be cured in each of these groups of counts either by dismissing the one general count or by dismissing the 6 corresponding individual counts. The Court will leave it to the People to determine which counts or groups of counts should be dismissed in each of these three categories. The People may also make a different determination with respect to each group or for particular defendants, for example, by dismissing count one, but also not dismissing count two but dismissing counts five, 13, 30, 47, 61 and 78. The People have 90 days from the date of this Decision and Order to inform the Court and the Defendants which counts should be dismissed. If the People believe they need more time, they may apply for an extension. Any such dismissal by the People would not, in this Court's view, be an acknowledgment by the People that they agree with this Court's order, have waived their objections to it or waived any right to appeal.
As noted supra, Ms Schmieder was alleged to have committed crimes with respect to two of the subject companies, Lyric Jeans and Recycle Tech. The allegations concerning Lyric Jeans span the period March 1, 2010 to June 22, 2010. See count 60. The allegations concerning Recycle Tech cover the period from January 1, 2010 to April 1, 2010. See count 46. The general counts span the much longer period of April 3, 2009 to June 1, 2012 and cover nine companies. Count one explicitly covers nine companies. Counts two and three are obviously intended to cover the entire alleged course of conduct covering all nine companies as well. Counts one, two [*15]and three are dismissed with respect to Hanna Schmieder. There is no evidence she was involved in the vast bulk of the conduct alleged in these general counts. Since those counts have been dismissed with respect to her, however, no multiplicity issues arise with respect to the remaining charges against her. Therefore, those remaining charges need not be dismissed on multiplicity grounds with respect to Ms. Schmieder.
In the Court's view, the larceny and criminal possession of stolen property charges alleged in the indictment were legally insufficient because the grand jury evidence did not demonstrate the Defendants stole property from that property's owners, as required under the larceny statutes. The only defendants charged with those crimes are Anthony Thompson, Eric Van Nguyen and Jay Fung. Since, as outlined supra, the instant decision does not apply to defendants Van Nguyen and Fung, this Court's insufficiency ruling with respect to these counts applies only to Defendant Thompson.
"A person steals property and commits larceny when, with intent to deprive another of property or to appropriate the same to himself or to a third person, he wrongfully takes, obtains or withholds such property from an owner thereof". PL 155.05. (emphasis added) An "owner" under the Penal Law is a person who "who has a right to possession thereof superior to that of the taker, obtainer or withholder". As explained infra, the larceny theories in this case which were potentially viable, in this Court's view, were the assertions that the Defendants committed larceny by "false pretenses" or "false promise". See Penal Law §§ 155.05 (2) (a) & (d).
It is clear the People did not submit legally sufficient evidence to demonstrate the Defendants committed larceny under other theories. Larceny by trick occurs "where the owner of the property was induced to part with possession, but not title, due to some trick or artifice by the wrongdoer who subsequently misappropriates the property." People v. Churchill, 47 NY2d 151, 155 (1979). That did not happen here. The People do not allege the Defendants committed a larceny by trespassory taking. Nor were the theories of larceny by embezzlement, the acquisition of lost property or issuing a bad check applicable. See generally, Penal Law § 155.05.
Larceny by false pretenses generally requires proof "that defendant obtained title or possession of money or personal property of another by means of an intentional false statement concerning a material fact upon which the victim relied in parting with the property." People v. Drake, 61 NY2d 359, 362 (1984). A conviction for larceny by false pretenses has also been found valid where it is based on a material omission which the victim relied on. The false pretenses by omissions larceny theory was recognized by the Third Department in State v. First Merdian Planning, 201 AD2d 145, 153-154 (3d Dept 1994), affirmed, 86 NY2d 608 (1995), on remand, affirmed as modified, People v. Sala, 258 AD2d 182 (3d Dept 1999) (stating the same conclusion), affirmed, People v. Sala, 95 NY2d 254 (2000). The Court of Appeals in Sala, however, explicitly refused to determine whether a material omission could constitute larceny by false pretenses because the issue was not properly before it.
In First Meridian Planning the Court held that "although the mere failure to disclose information is not usually sufficient to establish larceny by false pretenses, the failure of a seller of securities to disclose every material fact may be the basis of a larceny conviction". The larceny counts in First Meridian, however, arose from the sale of coin portfolios directly to investors rather than the open market stock transactions which occurred here. In People v. [*16]Rohrberg, 22 AD3d 421 (1st Dept 2005), lv denied, 6 NY3d 852 (2006) the Court found a conviction of a former attorney who continued to work as a lawyer and collect fees from his client even after he was suspended and disbarred legally sufficient based in part on the Defendant's omission to inform his client of his disbarment. Larceny by false promise requires a false representation of an intent to do something rather than a false representation of a past fact. The crime is "limited to situations in which an individual has made a promise while harboring a present intention not to perform." People v. Norman, 85 NY2d 609, 619 (1995) (emphasis in original).
[P]eople buy and sell throughout the day. So if I sell a million shares into the market, whoever buys my million shares, they're free to do whatever they want and they can turn around and sell a portion of their holdings that day or sell all of it, and then the people who purchase from them can do the same thing. It's not unusual to see people day trading this stuff [re: penny stocks]. You know, they make their money and they sell a portion, cover their cost and let the other part ride and take an additional profit. . . . [Y]ou can have a market maker who's doing his job and making a market in the stock and he takes it into inventory. So there are shares being sold there and he turns around and fills a customer's order later on that day with the same shares. (Grand Jury Transcript, pp. 1858-1859).
The larceny statutes require that property be stolen from an owner. A larceny does not occur simply because a defendant acts wrongfully and earns a profit causing a victim with whom the defendant never transacted to suffer a concomitant loss. That principle has repeatedly been reaffirmed by New York courts, albeit in factual scenarios significantly different than this one. The principle is based on the plain language and clear legislative intent of the larceny statutes.
In People v. Hightower, 18 NY3d 249 (2011) the Court of Appeals considered whether a person who sold a "swipe" allowing entrance to the New York City subway from a lawfully purchased unlimited ride Metrocard which allowed unlimited subway access for a designated period could constitute larceny. The Court held it could not. That was true even though: (i) the defendant was not authorized to sell the swipe and indeed committed a different crime by doing so, and (ii) it could be inferred that the New York City Transit Authority (NYCTA) was deprived of the subway fare by virtue of the defendant's criminal conduct. The Court reasoned that no larceny occurred because the NYCTA "never acquired a sufficient interest in the money to become an owner'" under the larceny statutes. 18 NY3d at 255.
Another illustration of this principle occurred in People v. Bolden, 194 AD2d 834 (3d Dept 1993), lv denied, 82 NY2d 714. In that case the Defendant, Barry Bolden, attempted to obtain a home equity loan for a home he did not own and had no right to borrow against which was owned by Colleen Bolden and convicted after a jury trial of attempted grand larceny. The Court held that while this conduct was criminal, it was not attempted larceny. The Court found, inter alia, that although the intended victim, Colleen Bolden, certainly had a right to the home superior to the Defendant, she did not have "a greater right of possession of the proceeds of the [fraudulent] loan than defendant". 194 AD2d at 836. Again, the Defendant never attempted to obtain his ill-gotten gains from the owner.
As one commentator has noted, the concepts of "deprive" and "appropriate," which "are essential to a definition of larcenous intent," "connote a purpose * * * to exert permanent or virtually permanent control over the property taken, or to cause permanent or virtually permanent loss to the owner of the possession and use thereof" (Hechtman, Practice Commentaries, McKinney's Cons Laws of NY, Book 39, Penal Law § 155.00, p 103. 69 NY2d at 118 (emphasis added).
At common law, no less than today, the requirement that the victim of a theft be an "owner" of the stolen property was an indispensable element of the crime of larceny. The idea behind this requirement was that the property alleged to be stolen had to belong' to a party other than accused". 76 NY2d at 11 (citations omitted).
Here, the Defendants sold their stock and realized significant profits. There was no evidence these profits came directly from the victims, however. Rather, at some point the victims purchased stock and suffered losses. That does not mean the Defendants' conduct was not criminal. But the evidence did not indicate the Defendants committed the crime of larceny.
The People attempt to refute this argument, inter alia, by pointing out that the larceny statutes require an intent to deprive another of property and to appropriate that property to a wrongdoer "or a third person".[FN10] "Intent" means a "conscious objective or purpose".[FN11] The intent requirement regarding third-parties under the larceny statutes applies where a defendant's intent is to obtain ill-gotten gains for another person, rather than himself. There is no allegation here, however, that the Defendants' intentions were to benefit anonymous stock purchasers and sellers in the open market the Defendants never interacted with or even knew existed. The fact that Defendant "A" sold stock in the open market to Seller "B", who sold stock to Seller "C", who sold stock to Victim "D" who then suffered a loss does allow the inference that Defendant "A"'s intent was to provide a monetary gain for Seller "C". The Defendants perpetrated the alleged scheme here to benefit themselves.
The People's argument in this regard also conflates the larceny statute's intent requirement (which may be satisfied by the intent to benefit a third party) with the taking element which requires an item be taken by a defendant from an owner. It is possible for a Defendant to commit larceny by taking property from a victim for a third party. See Penal Law § 155.00 (2) (defining the word "obtain" as including the transfer of property to a third party). But a defendant who is not a participant in a transfer of property cannot commit larceny.
This principle can be illustrated by an example outside the stock sale context. Suppose I sell a car with a fraudulent odometer reading, causing the purchaser to pay more for the car than it is worth. I may commit larceny by false pretenses with respect to that purchaser. Suppose then, the purchaser keeps the car for two years and sells it a third person who later sells it to a fourth person, all of whom continue to rely on the fraudulent odometer reading in purchasing the car. In this Court's view, the initial seller could not be charged with larceny with respect to the final buyer he had never transacted with. Even this example, however, overstates what the evidence in the instant case indicated. As noted supra, there was no way to know in the instant case whether it was Anthony Thompson whose initial sale resulted in a subsequent purchase by an alleged victim or one of the co-defendants, who are not charged with larceny.
There is an argument that the People's position on the larceny charges here finds support in extensive dicta in the 3-2 decision of the First Department in People v. Napolitano, 282 AD2d 49 (1st Dept 2001), lv denied, 96 NY2d 866. Napolitano was an insider trading case. The People here in their charge to the grand jury on the elements of larceny by false pretenses by omission significantly expanded upon New York's pattern jury instructions for larceny by citing this dicta. The full relevant text of that legal instruction is provided in an Appendix to this decision. In this [*17]Court's view, however, while Napolitano is an important precedent here, it does not render the dismissed counts sufficient. This Court's dismissal ruling, as noted supra, is based on the fact that the Defendants did not steal property from that property's owners. In this Court's view, however, the People's legal instructions to the grand jury on the larceny by false pretenses by omission theory also asserted the Defendants had disclosure duties to stock purchasers in the open market which do not exist under New York law.
In Napolitano, an employee of a securities firm provided confidential non-public information to a second person who then supplied the information to the Defendant. The Defendant then traded on that information earning profits. The three justice majority found the trial evidence legally sufficient to sustain convictions for criminal possession of stolen property, Martin Act violations, a scheme to defraud and conspiracy to commit larceny while the two judges who dissented in part found the Martin Act charges valid but the remaining convictions insufficient.
The majority found the Defendant's insufficiency arguments unpreserved or procedurally barred and also declined to review them in the interests of justice. 282 AD2d at 53. The Court then made extended assertions concerning the application of the law of larceny to the facts in the case preceded by the proviso: "Were we to do so [i.e., determine the Defendant's unpreserved or procedurally barred claims] we would find the evidence to be legally sufficient . . . " 282 AD2d at 53.
[T]he core of the false pretenses larceny theory is that the victim surrenders property on the basis of misrepresentations attributable to the defendant; here, by his trading, defendant falsely communicated that he was permitted to trade even though he had a duty to disclose the confidential information or to abstain from such trading. Although he made no affirmative representation, an omission satisfies the elements of larceny by false pretenses where there is a duty, such as defendant's, not to trade absent disclosure of nonpublic material information.Indeed, as the People point out in their brief, there was concrete testimony by an owner of corporate stock, which defendant illegally purchased, that the owner's decision whether to sell his stock was greatly affected by his reliance on the integrity of the playing field, and therefore, defendant clearly came into possession of property sold by the stock owner as a result of his omission to disclose the material, nonpublic information. 292 AD2d at 56.
The Napolitano majority's assertions regarding the law of larceny were based on their construction of the insider trading jurisprudence of the federal courts 15 years ago, a construction the two dissenting justices in the case vigorously disputed at the time.
The two dissenting justices found the larceny charges legally insufficient, inter alia, because the Defendant, who was a corporate outsider, did not owe any duty to the sellers of his shares. They opined it was "too great a stretch to view an anonymous purchase of shares of stock as encompassing the implicit representation that the buyer has no wrongfully-obtained confidential inside information" and that the Defendant had "no duty toward the world in general, or the owners of the stock in particular, to disclose the information or refrain from trading'". 282 AD2d at 66. "To establish larceny by false pretenses based upon a failure to [*18]disclose, there must exist a duty requiring that the information at issue be provided to the party whose property is being obtained." 282 AD2d at 65. This Court's research reveals that the majority's assertions on the law of larceny have been previously cited favorably in support of a larceny conviction in one reported case, People v. D.H. Blair Inc., 2002 NY SlipOp 50152 (U) (New York County Supreme Court 2002, [Fried, J.]). That case, like this one, concerned a pump and dump scheme.
The first point about the majority's assertions in Napolitano is that they were clearly dicta. "Principles are not established by what was said, but by what was decided; and what was said is not evidence of what was decided, unless it relates directly to the question presented for decision . . . Dicta, while not without importance, is not required to be followed." Robinson Motor Express, Inc., v. HSBC Bank, USA, 37 AD3d 117, 123 (2nd Dept 2006). To identify dictum, it is useful to consider the proposition which the Court rejected (in this case, that would be the view that a person who purchases stock based on improperly obtained inside information does not "steal" his ill-gotten gains from a stock seller). If the rejected proposition "would not require a change in either the court's judgment or the reasoning that supports it, then the proposition is dictum. It is superfluous. It had no functional role in compelling the judgment". Rose Park Place, Inc. v. State of New York, 120 AD3d 8 (4th Dept 2014) (citations omitted). That is clearly what occurred in Napolitano. The Napolitano majority's assertions on the larceny issue were not "extraneous, gratuitous" or "casually expressed". People v. Bourne, 139 AD2d 210 (1st Dept 1988), appeal denied, 72 NY2d 955. They were the product of a carefully considered legal analysis. But that does not make them controlling.
The second important point is that while the Napolitano majority's assertions propounded an expansive view of New York's larceny statutes, they did not directly implicate the issue which has resulted in the Court's dismissal ruling here. In Napolitano, the defendant got inside information which he used to his benefit to buy shares at a price which would have been greater had the seller possessed the same information. What apparently did not occur in Napolitano, however, was the repeated buying and selling of stock among multiple parties which occurred here. Napolitano apparently concerned a series of singular transactions. The Defendant bought stock from single sellers, thereby "stealing" the money the sellers would have presumably earned had they known the inside information. Unlike what occurred here, the defendant in Napolitano "stole" his property directly from its owners.
It is also difficult, in this Court's view, to understand how a purchaser of stock who relies upon improperly obtained inside information steals property from a seller. The purchaser\defendant in Napolitano did not "steal" anything the sellers actually possessed. He obtained something the victims might have later obtained had they continued to hold their shares. Had the victims held their stock until the inside information Napolitano possessed became public, the victims' stock would have increased in value. But when the victims sold their stock it was presumably for a market price. Moreover, in a situation where a defendant purchases a stock based on improperly obtained inside information, there is no way to determine whether the seller, absent the defendant's purchase, would have continued to hold the stock until the inside information became public, when the stock price would increase. Thus, in such scenarios, not only has a defendant not "stolen" anything the victim possessed — it would be impossible to determine whether the defendant stole anything the victim might ever possess.
The final issue with respect to Napolitano's applicability here was the one identified by the dissenters. As the dissenters pointed out, stock buyers do not have a duty to the world in general which can be breached by failing to disclose information a stock seller [or buyer] might find material. The People instructed the grand jury here that the defendants could be convicted of larceny based on their omission to disclose facts to stock buyers in the open market with whom the Defendants had no relationship.
The Court held the trial court erred in that case in instructing the jury effectively that "petitioner owed a duty to everyone; to all sellers, indeed, to the market as a whole." Id., at 231. The absence of duty the Supreme Court found in Chiarella is similar to what occurred here: [T]he element required to make silence fraudulent — a duty to disclose — is absent in this case. No duty could arise from petitioner's relationship with the sellers of the target company's securities, for petitioner had no prior dealings with them. He was not their agent, he was not a fiduciary, he was not a person in whom the sellers had placed their trust and confidence. He was, in fact, a complete stranger who dealt with the sellers only through impersonal market transactions. Id., at 232-233.
See also, United States v. Newman, 773 F3d 438, 445-447 (2d Cir 2014) (asserting the same principles); Dirks v. SEC, 463 US 646, 657 (1983) ("[b]ecause the disclose-or-refrain [from stock trading] duty is extraordinary, it attaches only when a party has legal obligations other than a mere duty to comply with the general antifraud proscriptions in the federal securities laws") (citations omitted). Thompson here was not a complete stranger to all of the alleged victims because some had read his newsletters. Those newsletters, however, specifically indicated Thompson was not an impartial advisor and had an important financial interest in the stock promotions outlined in his solicitations. Thompson was certainly not a fiduciary of any of the alleged victims in this case.
Chiarella is not directly applicable to the People's theory here, because the defendant in that case was not a corporate insider. The People assert here that Thompson, although he was ostensibly only the publisher of internet newsletters, was an insider. Assuming that is true, Thompson would have a duty to the shareholders of the subject companies under the "classical" [*19]theory of insider trading. See, e.g., United States v. Newman, supra, 773 F3d at 445. The instant prosecution does not allege insider trading. Nor is it clear how Thompson could have breached fiduciary duties to his co-defendant subject company shareholders who were alleged to have perpetrated these frauds with him. But the more important point with respect to a larceny by false pretenses by omission theory is that Thompson, even presuming he was a corporate insider, did not owe a duty to the prospective open market stock purchasers in this case at the time he allegedly breached that duty by his silence.
Thompson's duty under the classical theory of insider trading would run to those alleged victims once they purchased the subject company stock. But the Court does not understand how Thompson could owe any such duty to those prospective purchasers under New York's larceny statutes before they became subject company shareholders. See, e.g., Badger v. Southern Farm Bureau Life Insurance Company, 612 F3d 1334, 1343 (11th Cir 2010), rehearing in banc denied, 409 FAppx 314 ("courts have uniformly declined to find a duty to disclose running from one party in an arm's-length securities transaction to the shareholders of the counterparty to the transaction, absent some fiduciary or other special relationship between them" ) (citing nine cases). Were this an insider trading case, presumably none of this would matter. Thompson, the insider, would breach his duty to the subject company shareholders by his trading. But the question here is whether Thompson had a disclosure duty under the larceny statutes to the open market prospective stock purchasers he had no fiduciary relationship with and did not sell shares to. This Court does not see how such a duty under New York's larceny statutes could be derived from the classical theory of insider trading.
The People argue that even though a seller of stock in the open market may not have a fiduciary relationship with a buyer, there is nevertheless a fiduciary duty to those persons. To support that proposition they cite a footnote from a 1991 Second Circuit case, United States v. Chestman, 947 F2d 551, n.2 (2nd Cir 1991). That footnote in turn cited to a footnote in Chiarella (n.8, supra) which noted that the SEC in the case of Cady, Roberts & Co., 40 SEC 907 (1961) had recognized such a duty in a civil insider trading case. It is also true that in summarizing Chiarella, some federal cases have described an insider's duties as running not only to its shareholders but to buyers or sellers in the open market. See, e.g., SEC v. Bauer, 723 F3d 758, 769 (7th Cir 2013) (describing the classical theory of insider trading as giving "rise to an affirmative duty to disclose to the trading counterparty or abstain from trading"). Chiarella, however, as noted supra, held that disclosure duties arise from "a relationship of trust and confidence between parties to a transaction". 445 US at 230. While an insider's duties to its shareholders may obviously be breached by trading with an unrelated counterparty using inside information, the breach of duty under Chiarella, as this Court understands that case, is to the shareholders, not a prospective stock seller or buyer.
Omissions under New York law may only result in criminal liability where there is a legal duty to disclose. See Penal Law § 15.00 (3) (describing an "omission" which may result in criminal culpability as "a failure to perform an act as to which a duty of performance is imposed by law"). Under New York law, however, even in civil cases, an omission cannot constitute actionable fraud in the absence of a fiduciary relationship. See SNS Bank v. Citibank, 7 AD3d 352, 356 (1st Dept 2004) ("an omission does not constitute fraud unless there is a fiduciary relationship between the parties") (citation omitted); Mobil Oil Corporation v. Joshi, 202 AD2d [*20]318 (1st Dept 1994) ("mere silence" without a deceptive act cannot constitute fraud in the absence of a confidential or fiduciary relationship); Martian Entertainment v. Harris, 2006 NY SlipOp51517 (U) at 6 (New York County Supreme Court 2006 [Cahn, J.] (collecting cases outlining the proposition). That principle, of course, is consistent with Chiarella and, in this Court's view, accurately states the rule which must be applied here.
The statutorily defined common-law based parameters of New York's larceny statutes stand in stark contrast to the range of frauds recognized under federal securities laws. As the SEC said in the seminal 1961 Cady, Roberts case (a civil proceeding and the holding which continues to be sometimes cited for the proposition that insiders owe a fiduciary duty to the general public) the anti-fraud provisions of the federal securities laws "are designed to encompass the infinite variety of devices by which undue advantage may be taken of investors and others" (p. 4). New York's larceny statutes have no such infinite reach.
The evidence presented to the grand jury in this case, in the Court's view, primarily alleged fraud through omissions, rather than affirmative misrepresentations or false promises. None of the 24 victims who testified in this case said that they purchased stock by virtue of specific affirmative representations which the grand jury evidence indicated were fraudulent. The victims testified that they were persuaded primarily by representations about company business plans, predictions of retail contracts or future growth, or celebrity endorsements. The People did not present evidence that these representations were deceptive or even false.
Mr. Thompson, Mr. Nguyen, and Mr. Fung, in coordination with the other defendants, each disseminated promotions touting the same stocks, using supposedly independent newsletters to hype them. The fact that this was a coordinated effort was not disclosed. The defendant synchronized the timing of the promotions. This fact was not disclosed to investors. The shares were divided up amongst themselves and nominees to hide the fact that most, if not all, of the tradable shares were controlled by people in on the scheme. This fact was not disclosed to investors. False documents were filed with the SEC to obscure who truly ran the companies. This fact was not disclosed to the investors. Defendants submitted false documents to their brokerage firms, claiming that they were unaffiliated with the various companies even though they were in complete control. This fact was not disclosed to investors. People's Response to Defendants' Omnibus Motion, p. 11 (emphasis added throughout).
The distinction between false representations and omissions is important although distinguishing between them, as in this case, is often not easy. Fraudulent representations can result in criminal liability in many contexts. The situations in which omissions to speak are sufficient to support criminal culpability under New York law are more limited. If I sell a product to you, there may be any number of significant facts I know about the product which you might also like to know and which might influence your decision to buy it. But that does not make my failure to disclose every material fact I know about the product felony larceny, even if my failure results in your purchasing a product you would otherwise not have bought.
The core of the false pretenses larceny theory is that the victim surrenders property on the basis of misrepresentations attributable to the defendant. A person who trades stock communicates by trading the stock that he or she has a duty to disclose prior to trading. If a person falsely communicated that he was permitted to trade even though he had a duty to disclose the confidential information or to abstain from such trading then even though he made no affirmative representation an omission satisfies the elements of larceny by false pretenses where, there is a duty such as defendant's not to trade absent disclosure of non-public material information." (Grand Jury transcript, p. 2588 [corrected version] [also in Appendix]).
Thus, the larceny counts here were not only premised on open market stock sales in which the Defendants did not directly transact with victim property owners. Those counts were also based largely on disclosure duties which, as the Napolitano dissenters argued, were inconsistent with federal securities laws even in 2001. Nor is silence in the absence of a fiduciary relationship sufficient to impose civil fraud liability under New York law. Moreover, the instant charges do not allege insider trading. Thus, it is not clear to the Court why the Napolitano majority's construction of the insider trading jurisprudence of the federal courts 15 years ago would be applicable to the Defendants' conduct in this case in any event.
As Defendant Thompson also points out, under federal law, market manipulation cases like this one are different from misstatement or omission cases like those which arise from alleged insider trading. In market manipulation cases, a defendant always fails to disclose his fraudulent conduct. But that does not transform these cases into misstatement or omission cases under federal law. See, e.g., Desai v. Deutsche Bank Securities Limited, 573 F3d 931, 940-941 (9th Cir 2009); Joseph v. Wiles, 223 F3d 1155, 1162 (10th Cir 2000).
The People here, as outlined in their legal instructions infra, first told the grand jury that Thompson as a matter of law was an "insider" who had a fiduciary duty to the subject companies (which were allegedly created by Thompson and the co-defendants for the sole purpose of defrauding the public). That asserted fiduciary duty, however, was then transformed into an equivalent fiduciary duty to the world in general. That duty was then breached resulting in larceny charges because Thompson failed to disclose "non-public material information" (a term which was not defined with respect to the larceny charges) to stock purchasers he never transacted with. The People correctly point out that the evidence here alleged not only larceny by false pretenses by omissions but larceny through affirmatively false statements and false promises. The Court does not believe the grand jury instructions regarding these other larceny theories were incorrect. But the Court does believe the instructions regarding the larceny by false pretenses by omissions theory were contrary to New York law.
Among the elements of the crimes of Criminal Possession of Stolen Property in its various degrees is the requirement that the property be stolen by someone, that is, that the property was obtained through a larceny. People v. Colon, 28 NY2d 1 (1971), cert denied, Colon v. New York, 402 US 905. If property was not obtained by larceny, it cannot be stolen property. "[T]here can be no receiving of stolen goods which have not been stolen." People v. Occhipinti, [*22]29 Misc 2d 361, 365 (New York County Supreme Court 1961), quoting People v. Jaffee, 185 NY 497 (1906). See also, Penal Law § 155.05 (1) ("a person steals property and commits larceny when . . . ) (emphasis added). The dismissal of the larceny charges here, therefore, must result in the dismissal of the stolen property charges as well.
Laws prohibiting larceny date back to ancient Rome and existed as early as 450 B.C.[FN12] The common-law of larceny developed in the 15th century (Id.) and was initially "narrowly circumscribed" to include only trespassory takings most of which threatened public order. People v. Norman, 85 NY2d 609, 617 (1995). The "false pretenses" and "false promise" theories of larceny were created later and incorporated in the 1965 Penal Law. People v. Churchill, 47 NY2d 151, 155 (1979). New York appellate courts (but not the Court of Appeals) have also determined that a defendant can commit larceny by false pretenses by omissions as well as affirmative misstatements.
The People's position here however, in the Court's view, would work a significant and unjustified expansion of the larceny statutes. The related problem is that this expansion would be juxtaposed upon a federal regulatory regime which has been the product of decades of administrative and federal judicial development where "the problems caused by misuse of market information have been addressed by detailed and sophisticated regulation". Chiarella v. United States, supra, 445 US at 233. Taking a hammer to a few selected market manipulations through statutes a half-step removed from centuries old prohibitions on trespassory takings would certainly have the salutary effect of further punishing and deterring such frauds. But New York's larceny statutes were not designed to regulate the securities markets. They were enacted to punish the modern-day equivalents of common law thefts.
That does not mean the People presented legally insufficient evidence to demonstrate the Defendants committed serious crimes under New York law. The People presented legally sufficient evidence of the crimes New York law provides for their alleged conduct. The Martin Act was designed to "protect the public from fraudulent exploitation in the offering and sale of securities". People v. Landes, 84 NY2d 655, 660 (1994). The Scheme to Defraud statute "was designed to overcome some of the shortcomings of the larceny statutes as applied to various forms of fraud, including consumer fraud". Practice Commentary to Scheme to Defraud in the Second Degree, Penal Law § 190.65, William C. Donnino, McKinney's 2010 (citation omitted).
Where a dispute arises between the parties with respect to a defendant's request for a Bill of Particulars, the Court must, subject to certain provisos, order the People to provide such a Bill of Particulars if it finds "such information is necessary to enable the defendant adequately to prepare or conduct his defense". CPL 200.95 (5). The Court has reviewed the requests for a court-ordered Bill of Particulars by Defendants Thompson, Schmieder and Dervali. The parameters of this case have been substantially changed by this decision. In addition, the motion practice leading up to this decision and the decision itself have provided additional information to the Defendants about the People's case. At the next adjourned date, to the extent the Defendants believe they are still entitled to a court-ordered Bill of Particulars, they may outline what information they believe they are entitled to either on that date or at a later time.
For all of those reasons, Defendants' motions are granted and denied as outlined in the "Summary of Court's Rulings" on page 2 of this Decision and Order.
"In addition, there is another way in which larceny by false pretenses may take place. There are certain circumstances when a larceny by false pretenses may be committed by an omission. As your legal advisor, I charge you that a person or entity that, by virtue of a fiduciary relationship with an issue of securities has knowledge of or access to material non-public information, insider is one who typically stands in possession of trust and confidence to the company and its shareholders such as an officer, director, controlling shareholder or employee of the company.
There are many people in entities that may not be direct employees of the corporation, but who still are considered insiders and who, therefore, have the same duty to disclose the information they possess to the market as a whole or abstain from trading or passing the information onto others who may trade while aware of material non-public information.
Thus, auditors, outside accountants, brokers, investment bankers, outside counsel and the like, all owe a similar duty to use information entrusted to them by their corporate client only for the corporation's interests. Such individuals are referred to as temporary insiders and they, too, are prohibited from trading their corporate client's security while aware the client's material non-public information.
A person in a fiduciary relationship may commit larceny by false pretense when he [*24]wrongly takes, obtains or withholds property from another by omitting to disclose a past or existing fact where his fiduciary relationship creates a duty to speak and he does obtains possession and title to property as a result of the owner's reliance upon such representation.
The core of the false pretenses larceny theory is that the victim surrenders property on the basis of misrepresentations attributable to the defendant. A person who trades stock communicates by trading the stock that he or she has a duty to disclose prior to trading. If a person falsely communicated that he was permitted to trade even though he had a duty to disclose the confidential information or to abstain from such trading then even though he made no affirmative representation an omission satisfies the elements of larceny by false pretenses where, there is a duty such as defendant's not to trade absent disclosure of non-public material information."
Footnote 1:The instant decision does not concern Counts 17, 18, 34 and 35 which assert charges solely against Defendants Nguyen and Fung.
Footnote 2:People v. Thompson, et. al., Indictment # 3853/14 (Unpublished Decision) (New York County Supreme Court, February 22, 2016).
Footnote 3:Thompson's May 11, 2016 Letter Submission, p. 3.
Footnote 4:People's September 16, 2015 response to Defendants' Omnibus motion, p. 13.
Footnote 5:No sanction other than a dismissal of the indictment has been sought with respect to this issue, but the Court could obviously impose some sanction short of dismissal if it chose to do so.
Footnote 6:People's Response to Defendant's Omnibus Motion, September 15, 2015, p. 38.
Footnote 7:Id., pp. 38 - 41.
Footnote 8:The Court has obviously attempted to accurately list all of the count numbers but the count numbers which are at issue here (as opposed to whether those counts are multiplicitous) are not in dispute. In the event the Court has erroneously listed any of these counts, the parties should inform the Court of any errors.
Footnote 9:Defendant Thompson's Omnibus motion, June 23, 2015, p. 5 (emphasis in original).
Footnote 10:People's Memorandum in Opposition to Defendant's Omnibus Motion, September 18, 2015 at p. 14, citing PL § 155.05 (1) (emphasis in People's Memorandum).
Footnote 11:New York Pattern Jury Instructions, definition of "intent".
Footnote 12:"The Right of Property and the Law of Theft", Michael E. Tigar, Texas Law Review, Vol. 62:1443, 1446 1984.
Footnote 13:New York Standard Pattern Criminal Jury Instructions ("CJI") "Alternate Theories of Larceny: Larceny by False Pretense".

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