United States v. Isaacson: Defendant's Conspiracy to Commit Wire Fraud Conviction Based on Mutual Fund Fraud Upheld, But Sentence Vacated

United States v. Isaacson, No. 12-14703, from SDFla

Circuit Judge Martin joined by Senior Circuit Judge Fay and Senior Circuit Judge Sentelle (D.C. Cir.)

Summary: The defendant was convicted of conspiracy to commit securities fraud and was sentenced to 36-months imprisonment and ordered to pay $8 million in restitution.  He challenged his conviction, his sentence, and the district court’s denial of his motion for a new trial.  

 

The defendant’s convictions arose out of the operation of a mutual fund that invested in publicly traded shell companies and then drove up the prices of those companies by buying their stock at artificially inflated prices.  Since the mutual fund did not disclose the companies in which it invested, investors were unaware of the scheme.  The investors relied upon the assurances of independent auditors that the mutual fund was solvent.  The defendant was a consultant who assisted in a fraudulent evaluation of the shell companies to deceive the auditors.  

First, the defendant argued that his convictions fell outside the scope of the wire fraud statute, 18 U.S.C. § 371, because the mutual fund made investments through a hedge fund based in the British Virgin Islands, and the wrongful transactions were accordingly based outside the United States.  The panel found this challenge without merit because, even assuming that Morrison v. National Australia Bank, 561 U.S. 247 (2010), applied to criminal liability (and not just civil liability), the transactions at issue here concerned securities that were traded on exchanges that were run in the United States.

Second, the defendant challenged the denial of his motion for acquittal based on the alleged violation of his right to a speedy trial.  The Speedy Trial Act generally requires a federal criminal trial to commence within 70 days of the defendant’s indictment or initial appearance, whichever is later.  Trial begins for purposes of the Speedy Trial Act when the court begins voir dire, and if the defendant fails to move for enforcement of his rights under the Act “prior to trial,” then he waives those rights. 

The panel affirmed the denial of his speedy trial motion because it found that it was filed after the trial had begun.  To reach this conclusion, the panel found that jury selection based on written responses is part of the voir dire process, at least once the district court begins ruling on challenges to particular jurors.  Since the district court in this case began excluding prospective jurors before the defendant filed his motion for a speedy trial, trial had already commenced for purposes of the Act at the time the motion was filed.

Third, the defendant raised a statute of limitations challenge, contending that the government failed to prove at least one overt act of the conspiracy within five years of the return of the indictment.  The panel found that a co-conspirator’s act of sending a letter to investors constituted an overt act within the period of limitations, because once a conspiracy is established and an individual is linked to that conspiracy, an overt act committed by any conspirator is sufficient for criminal liability.

 

Fourth, the defendant raised a general sufficiency of the evidence challenge, which the panel rejected in short order.

Fifth, and lastly, the defendant raised several challenges to his sentence.  The defendant primarily argued that a $15 million loss suffered by a broker that had invested in the mutual fund was not attributable to his conduct, and that it could not be counted in the amount of loss to enhance his sentence.  When the government seeks to apply an enhancement under the Sentencing Guidelines over a defendant’s factual objection, it has the burden of introducing sufficient and reliable evidence to prove the necessary facts by a preponderance of the evidence. 

For sentencing purposes, a defendant is responsible for the conduct of co-conspirators only if that conduct was in furtherance of the jointly undertaken criminal activity and reasonably foreseeable in connection with that criminal activity.  A district court must therefore find, first, the scope of criminal activity undertaken by a defendant, and, second, whether the conduct of his co-conspirators was in furtherance of and reasonably foreseeable in connection with that activity.  The panel found that the government had failed to establish that the broker’s losses were the result of the defendant’s conduct in furtherance of the part of the conspiracy in which he agreed to participate. The defendant’s criminal activity involved defrauding auditors, not investors.  The same error also affected the district court’s restitution award. 

Accordingly, the defendant’s conviction was affirmed, but his sentence was vacated and the case was remanded for resentencing without the amount of loss enhancement or the $8 million restitution order.

Note: The Second Circuit has held that Morrison applies to both criminal and civil liability.  The Eleventh Circuit panel in this case declined to join that holding.