The opinion of the court was delivered by: STANTON
Defendant Nicholas Rudi moves to dismiss an indictment charging him with securities fraud, mail fraud, extortion, and aiding and abetting recordkeeping violations arising out of his solicitation, receipt and concealment of a kickback while acting as independent financial advisor to the Camden County Municipal Utilities Authority ("the CCMUA").
The indictment alleges the following as facts.
Rudi founded Consolidated Financial Management ("CFM") and served as its president during the relevant time period. (Indictment P 1.) CFM provided financial advisory services to local governments and governmental authorities in New Jersey which sought to issue municipal bonds. (Id. P 2.) It held itself out as an independent advisor dedicated to obtaining for an issuer "the lowest rate feasible, together with the lowest issuance cost obtainable." (Id. P 7.)
The CCMUA, a wastewater treatment authority formed by Camden County, New Jersey, contracted with CFM for financial advisory services. Until 1989, CFM's fee from the CCMUA was $ 1.00 per $ 1,000 principal amount of bonds issued by CCMUA plus expenses. The parties called the arrangement "a buck-a-bond." (Id. P 6.) In 1989 and 1990, however, the CCMUA board of commissioners limited CFM's fees to $ 15,000, eliminating the "buck-a-bond" fee structure. (Id. P 7.)
In late 1988, First Fidelity Bank, N.A. ("First Fidelity"), which had underwritten bonds issued by the CCMUA in 1987, began discussing with CFM the possibility of refunding those bonds in order to take advantage of lower interest rates. Rudi "communicated to representatives of potential underwriters, in substance, that he was the Authority, and that he would decide which investment banks would be included as underwriters in any such refunding transaction." (Id. P 14.)
In early 1990, the CCMUA issued approximately $ 237.5 million in bonds in two series (the "1990 Bonds"), the proceeds from which were used to pay, among other things, principal and interest on bonds issued by the CCMUA in 1987. CFM served as the CCMUA's financial advisor on the 1990 Bond deal and Rudi assisted in the preparation of the official statement, selected First Fidelity as the lead underwriter, and negotiated the gross underwriting spread
with First Fidelity. The CCMUA paid CFM $ 15,000 plus expenses for those services. (Id. P 16.)
In late 1989, Rudi told George Tuttle, a vice president of First Fidelity, that the CCMUA was willing to pay CFM only $ 15,000 in connection with the 1990 Bond deal, and that Rudi wanted First Fidelity to make up the difference between the $ 15,000 fee and the amount CFM would have received under the "buck-a-bond" arrangement. Tuttle agreed to make the payment. (Id. P 21(a).)
In January 1990, Tuttle told Rudi that the underwriting syndicate's spread on the 1990 Bond deal was $ 19.50 per $ 1,000 principal amount. The $ 19.50 included a structuring fee to which Tuttle added $ 1 per bond (i.e., $ 237,000) to fund the payment to Rudi. Contrary to his usual practice, Rudi did not negotiate to reduce the spread, because the larger spread allowed First Fidelity to make the additional payment. (Id. P 21(b).)
Rudi, his CFM partner Joseph Salema, Tuttle, and the principal of Meadowlands Securities, Inc. ("Meadowlands"), a corporation which helped First Fidelity to obtain underwriting engagements, agreed that First Fidelity would not send the payment directly to CFM. Instead, First Fidelity would send the money to Meadowlands, disguising it as part of Meadowlands' finder's fee for the 1990 Bond deal. Then, Meadowlands would send the money to Armacon Investment Company ("Armacon"), of which Salema was president. Finally, Salema would transfer the payment from Armacon to CFM. (Id. P 21(c).)
From about December 1989 through December 1990, First Fidelity sent Meadowlands checks in a total amount of approximately $ 595,000, which were falsely recorded on First Fidelity's books as a finder's fee. The Meadowlands principal made three checks totalling $ 335,000 payable to Armacon and gave them to Salema. Salema then wrote six Armacon checks to CFM. (Id. P 21(d).)
Even after Tuttle forwarded the $ 595,000 payment to Meadowlands, he erroneously believed that First Fidelity still owed CFM $ 22,000. (Id. P 21(e).) Rudi sent First Fidelity a $ 22,000 invoice for consulting services supposedly (but not actually) performed by CFM on another securities transaction. First Fidelity paid the invoice at Tuttle's behest. (Id. P 21(f).)
In February 1990, Rudi certified to the CCMUA that the $ 15,300 fee and expenses paid by the CCMUA to CFM for services related to the 1990 Bond deal was "fair and reasonable, and that no bonus has been given or received, or promised to or by anyone to the knowledge of the deponent in connection therewith." (Id. P 21(g).)
Rudi argues that (1) the indictment should be dismissed because prosecutors misled the grand jury about the contractual relationship between CFM and the CCMUA; (2) count one fails to allege a violation of section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78a et seq. (the "'34 Act") and Rule 10b-5; (3) count two, which charges Rudi with extortion, should be dismissed because Rudi is not a government employee; (4) counts four and five fail to allege that Rudi aided and abetted recordkeeping violations; and (5) venue for counts four and five is not proper in the Southern District of New York.
I. PROSECUTORIAL MISCONDUCT
Paragraphs six and seven of the indictment state:
6. In or about February 1985, the CCMUA entered into a professional services contract with CFM, which was renewed annually on terms that varied from year-to-year. At all times relevant to this Indictment, the CCMUA hired CFM to be, among other things, its financial advisor on the CCMUA's issuances of securities. Until 1989, CFM's financial advisory fee from the CCMUA was $ 1.00 per $ 1,000 of the principal amount of the securities issued by the CCMUA, plus expenses. Thus, for example, if on a given deal, the CCMUA issued $ 100 million of securities, it would pay CFM a financial advisory fee for that deal of $ 100,000, plus expenses. The parties often referred to this fee as "a buck-a-bond."
7. On or about February 14, 1989, the CCMUA board of commissioners adopted a resolution authorizing CFM to continue to perform professional services for the CCMUA, but limiting CFM's fees for 1989 to $ 15,000. The CCMUA imposed this same $ 15,000 fee limitation on CFM for 1990. Thus, for the years 1989 and 1990, the CCMUA eliminated the lucrative "buck-a-bond" fee arrangement, and substituted a flat fee of $ 15,000 per year. The board of commissioners reinstated the "buck-a-bond" fee in February 1991 for the year 1991.
The argument misses the thrust of the indictment. Rudi's alleged loss of the "buck-a-bond" fee is background, and may supply motivation. The crime is the secret kickback from First Fidelity and the false denial of its receipt.
Thus, the claimed error or omission in the government's explanation of that fee arrangement did not "substantially influence the grand jury's decision to indict" or raise "'grave doubt' that the decision to indict was free from the substantial influence" of the inaccurate presentation. Bank of Nova Scotia v. ...