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UNITED STATES v. REINHOLD

September 2, 1998

UNITED STATES OF AMERICA, -
v.
- ISAAC REINHOLD, JOSEF GOLDSTEIN, a/k/a "Yossie Goldstein," a/k/a "Joseph Goldstein," IRVING GOLDSTEIN, MICHAEL MENDLOVIC, HERBERT GREENFIELD, UNITED TALMUDICAL ACADEMY OF BORO PARK, Defendants.



The opinion of the court was delivered by: SCHWARTZ

OPINION AND ORDER

 ALLEN G. SCHWARTZ, DISTRICT JUDGE:

 Before the Court are the motions of defendants Isaac Reinhold, Josef Goldstein, Michael Mendlovic and Herbert Greenfield for new trials and/or judgments of acquittal pursuant to Federal Rules of Criminal Procedure ("Fed. R. Crim. P.") 29 and 33. For the reasons stated, these motions are denied.

 FACTUAL BACKGROUND

 Viewing the evidence at trial in the light most favorable to the Government, as is required for purposes of these motions, the Government has established the following facts.

 Defendant Irving Goldstein, together with his wife, owned and operated 47th Street Photo, Inc. ("47th Street"), a highly successful company that sold photographic equipment, consumer electronics, and computers. Goldstein was also the owner of Micro Innovation Computer Center ("Micro"), which was in the same business as 47th Street, and Maxum Systems, Inc. ("Maxum"), which manufactured "house brand" computers for sale by Micro. Though actually controlled by Goldstein, Micro and Maxum were both nominally run by others. When these businesses began to collapse, Goldstein, with the aid of certain of his relatives and employees, resorted to criminal means to try to salvage these companies.

 I. The Negotiation of the Fidelity Contract

 The relevant background traces to events in the early 1990s. In January 1992, 47th Street declared bankruptcy. In late 1993, a representative of Bank Hapoalim, Micro's major source of credit, told Micro's President, defendant Isaac Reinhold, that the bank preferred to cease funding certain businesses in New York and suggested that Micro begin to seek alternative sources of financing. (Tr. 1502-05, 2256.) Micro's other major source of financing at the time, a revolving "floor plan" line of credit from AT&T Capital Corp. ("AT&T"), was also at its limit. (Tr. 682-684, 2255-57.) In the fall of 1994, Micro, strapped for funds, needed money to complete a $ 1.3 million contract to supply computers to the New York State Department of Taxation and Finance (the "New York State Contract"). (Tr. 2268-69.) To secure such funding, Irving Goldstein turned to his brother-in-law, defendant Herbert Greenfield, owner of Thrifty Cosmetics & Sundries ("Thrifty"). Specifically, in October 1994, Irving's son, defendant Josef Goldstein, made arrangements for Micro to borrow over $ 600,000 from Thrifty in order to finance the New York State Contract. (Tr. 2269-73, 2903-05, GX 905, 908, 910.) Between October 28, 1994 and November 16, 1994, Greenfield loaned to Micro a total of $ 660,000 ("the Greenfield loan"). (Tr. 2928-31, 3232-33; GX 916, 1600-02.)

 In the course of seeking additional financing for Micro, in early December 1994, Josef Goldstein and William Jacob, Micro's relatively recently employed CEO, were referred to Fidelity Funding of California ("Fidelity"), an asset-based lender located in Dallas, Texas. The funds that Fidelity loaned to its customers were secured by the customers' assets, typically the customers' accounts receivable. Fidelity's general practice was to enter into a purchase and sale agreement with each customer, pursuant to which it would purchase the customer's accounts receivable and loan the customer money against those accounts receivable. In order to obtain financing, Jacob sent to Fidelity "aging" reports listing accounts receivable of both Micro and Maxum. (Tr. 383-86, 2292-98.) The Micro aging report listed, among others, two invoices purporting to reflect $ 600,000 in sales to Masel Supply Company ("Masel"), a photographic supply company owned by Irving Goldstein's brother-in-law, defendant Michael Mendlovic. (GX 1136 J.) The Maxum aging report listed six invoices purporting to reflect $ 470,000 in sales to Masel. (Tr. 387-92, 2294-97; GX 1136K.) Before the aging reports were sent to Fidelity, Reinhold wrote on both of them that Masel was a "major account" that exported computers to Europe and South America. (Tr. 2295-97 GX 1136J, 1136K.) However, Micro had never sold computers to Masel, and Masel did not export computers overseas. (Tr. 208-10, 2258-61, 3499-501.)

 Unaware of the fraudulent nature of the aging reports, Fidelity, as part of its due diligence, began to conduct an investigation of Micro as a potential customer. Specifically, two Fidelity representatives visited Micro in December 1994, and at that time, Jacob and Reinhold assured both of Fidelity's representatives that the Masel invoices listed on the aging reports represented legitimate transactions. (Tr. 495, 674-75, 706-14, 2304-06.) Similarly, when contacted by a Fidelity representative in December 1994, Mendlovic confirmed via facsimile the invoice amounts listed on the aging reports and confirmed that Masel would pay the invoices. (Tr. 1425-28, 3531-32; GX 262, 264, 265.) *fn1"

 Relying to a large extent on the assurances of Reinhold, Mendlovic and Jacob, Fidelity, by agreements executed January 12, 1995, agreed to purchase up to $ 6.25 million of Micro and Maxum accounts receivable and to advance to the companies 80% of the face value of those receivables, an amount up to $ 5 million. (Tr. 507-09; GX 63, 65.)

 II. The Submission of Fraudulent Invoices

 As a result of such devious conduct, Micro secured Fidelity's agreement to provide financing. Thereafter, Micro submitted to Fidelity numerous fraudulent invoices, each representing a non-existent account receivable. According to the trial testimony of William Jacob, the idea to defraud Fidelity in this way was first proposed by defendant Josef Goldstein in January 1995. (Tr. 2324-25.) Jacob testified that Josef Goldstein came into Micro's offices and announced that he and his father, Irving Goldstein, had an idea "to issue invoices for product that had not been shipped," and explained that "since Fidelity would advance funds on those particular invoices of 80 percent, we would collect that kind of money and put that in our account, and in turn pay off those people who were pressing us for payment . . . ." (Tr. 2324.) According to Jacob, he, Reinhold and Mendel Kotlarsky, the Secretary and Treasurer of Micro, opposed Goldstein's plan because they thought it would not work, and, as Jacob pointed out, could subject them to criminal liability. Nevertheless, Josef Goldstein prevailed and the plan was adopted. (Tr. 2325-26.)

 Mendlovic's company, Masel, Greenfield's company, Thrifty Cosmetics, and defendant United Talmudical Academy of Boro Park ("UTA"), a yeshiva with close ties to Irving Goldstein, all agreed to pose as Micro account debtors for purposes of the submission of fraudulent invoices to Fidelity. (Tr. 2343-45, 2366, 2387, 2389-90.) Almost every day between January 1995 and July 1995, Micro sent Fidelity schedules of accounts which included fraudulent invoices corresponding to wholly fictitious transactions with account debtors such as Masel, Thrifty and the UTA. (Tr. 1429, 2394, 2947-51, 2357; GX 412-461.) After receiving the schedules and supporting documentation, Fidelity advanced funds to Micro. (Tr. 904-06, 1430-31.) In order to verify the Micro receivables, Joanne Jernigan, a verifications specialist at Fidelity, called the account debtors responsible for the oldest and/or largest invoices to verify the validity of the invoices and to inquire as to when they would be paid. (Tr. 1416-22.) In response to Jernigan's inquiries, representatives of the various account debtors, including Herbert Greenfield's wife, Sylvia Greenfield, Thrifty's bookkeeper, Jeffrey Weiss, and two bookkeepers at Masel, Solomon Einhorn and Heshy Blum, assured her that they had received the invoices, that there was no problem with the underlying merchandise, and that the invoices would be paid. (Tr. 1421, 1443-50, 1453-60, 1466-70, 1720-29, 1782, 1876-77; GX 259, 275.)

 In order to conceal and perpetuate the fraud, both Thrifty and Masel paid some of the fraudulent Micro invoices with funds that had been provided to them surreptitiously by Micro. Thus, Micro transferred funds to Thrifty by issuing checks to another company owned by Greenfield, Joe Klein Dental Supply ("Joe Klein") (Tr. 2405-08, 2413-16, 3008-12, 3054-61, 3362-67; GX 18, 21-22, 801, 934, 938), and transferred funds to Masel by issuing checks to "MS Corp." and "SAR Enterprises" (Tr. 2416-20, 3270-73, 3290-94, 3298-301, 3356-62; GX 10, 13-17, 858, 864-65, 868, 870, 872, 875-78). Between April 24, 1995 and July 17, 1995, Thrifty issued five checks to Micro purporting to pay over $ 743,000 worth of past due invoices. (GX 918, 926, 929, 768, 280.) Between February 10, 1995 and July 13, 1995, Masel issued ten checks to Micro, all of which were signed by Mendlovic, totalling over $ 1.7 million in payment of Micro invoices. (Tr. 3268-89, GX 857, 833, 859, 861-63, 867, 869, 871, 269.)

 III. The Fraud Exposed

 In addition to the invoices addressed to Thrifty, Masel and the UTA, Micro also submitted to Fidelity fraudulent invoices addressed to actual Micro customers including Atlantic Logic, a computer company that paid Micro in advance for all merchandise that it purchased. (Tr. 1957, 2387-88.) It was this misstep that eventually caused the scheme to unravel.

 By July 1995, Micro's outstanding balance with Fidelity was over the $ 5 million amount set out in the agreements, and Reinhold asked Richard Fletcher, President and owner of Atlantic Logic, who had been hired by Micro as a consultant, to assist Micro in negotiating an extension of the agreement with Fidelity. (Tr. 960-61, 987-92, 999, 1952-56, 2440.) In a telephone conversation on July 18, 1995, Jim Johnson of Fidelity informed Fletcher that approximately $ 200,000 in Atlantic Logic invoices were approaching ninety days past due. (Tr. 1000-01, 1958-59.) Fletcher, knowing that Atlantic Logic had prepaid for all merchandise, was surprised by Johnson's comment. (Tr. 1959.) At the conclusion of the telephone conversation with Johnson, Fletcher confirmed with his accounting department that Atlantic Logic did not owe Micro anything, and then went to Micro's offices to confront Reinhold with the apparent discrepancy. (Tr. 1959.) Reinhold acknowledged to Fletcher that Atlantic Logic had no outstanding bills to Micro and also acknowledged certain "irregularities and problems" at Micro. (Tr. 1960-61.) At a meeting at Micro's offices later that day, Reinhold and Kotlarsky admitted to Fletcher that Micro had financed approximately $ 950,000 in fraudulent Atlantic Logic invoices. (Tr. 1962-63, 2432-34.) Reinhold then offered to provide Fletcher with the money to pay the Atlantic Logic invoices and also offered to "put money in [Fletcher's] pocket if [Fletcher] would play ball with him." (Tr. 1964.) Fletcher refused these offers and called Johnson and told him that all of Atlantic Logic's invoices had been prepaid and suggested that Johnson come to Micro's offices in New Jersey immediately because "he had a problem." (Tr. 1001, 1964-65.) Later that day, Kotlarsky admitted to Fletcher that Micro had submitted a total of approximately $ 5,500,000 in fraudulent invoices to Fidelity. (Tr. 1966.)

 The next day, July 19, 1995, Johnson met with Reinhold, Kotlarsky, Jacob and Fletcher at Atlantic Logic's offices. (Tr. 1004.) During the course of that meeting, Fletcher informed Johnson that Micro had submitted a total of approximately $ 5 million worth of fraudulent invoices. (Tr. 1004-07, 1974-75, 2439-40.) When Johnson asked Reinhold how this happened, Reinhold explained that "it just got away from him." (Tr. 1006-07, 1975.) Shortly thereafter, Kotlarsky reviewed with Johnson a Micro aging report and highlighted all of the fraudulent invoices. (Tr. 1015-1023, 1975-80; GX 243.) The outstanding invoices at that point included approximately $ 1,067,000 worth of invoices addressed to Masel, in excess of $ 707,000 in invoices addressed to Thrifty, and over $ 933,000 in invoices addressed to the UTA. (GX 1142, 1144, 1146.) Because of the 80% advance rate, Fidelity's loss attributable to these accounts was approximately $ 853,000, $ 565,000, and $ 746,000 respectively.

 IV. The Criminal Prosecution

 On May 14, 1997, Kotlarsky, who had been separately indicted (97 Cr. 0304 (JSR)), entered a plea of guilty to a one-count Information charging him with participating in a conspiracy to submit fraudulent invoices to Fidelity. In his plea allocution, Kotlarsky stated that he had been told that Micro needed to create fraudulent invoices in connection with a loan and stated that he assisted the scheme by signing fraudulent bills of lading and by taking information to Micro's data entry department. (Transcript of May 14, 1997 ("5/14/97 Tr.") at 14.) He also admitted that he had acted "in conjunction with other people" in this scheme. (5/14/97 Tr. at 15.)

 On July 15, 1997, all of the defendants in the captioned matter were indicated for conspiracy to commit wire fraud in connection with the Fidelity scheme. On December 16, 1997 the Grand Jury returned a second superseding indictment charging multiple conspiracies and numerous counts of wire fraud.

 On March 6, 1998, Irving Goldstein entered a plea of guilty to three separate conspiracy counts charged in a superseding Information, the first count of which charged him with participating in a conspiracy to submit fraudulent invoices to Fidelity. During his allocution, Irving Goldstein stated that, in order to help Micro get funds from Fidelity, he agreed "with others that UTA would accept false invoices from Micro Innovation, Inc." reflecting the shipment of computers "that were not shipped." He also admitted that he transferred funds from UTA for its use in paying the fraudulent invoices. (Transcript of March 6, 1998 ("3/6/98 Tr.") at 22.)

 On February 17, 1998, UTA also entered a plea of guilty to Count Four of the Indictment, which charged it with conspiracy to commit wire fraud in connection with the submission to Fidelity of fraudulent invoices addressed to UTA.

 On April 22, 1998, after a five week trial, Reinhold, Josef Goldstein, Mendlovic and Greenfield were convicted of all counts against them. Reinhold and Goldstein were convicted of Count One, which charged them with participating in a "hub" conspiracy to defraud Fidelity. Mendlovic and Greenfield were convicted of Counts Two and Three, respectively, which charged them with participating in separate "spoke" conspiracies to defraud Fidelity. In addition, Reinhold was convicted of Counts Five through Seventeen, Mendlovic was convicted of Counts Five through Eight, Josef Goldstein was convicted of Counts Nine through Seventeen, and Greenfield was convicted of Counts Nine through Twelve, all of which charged substantive counts of wire fraud. Jacob, having pled guilty pursuant to a plea and cooperation agreement with the Government, testified at trial as the Government's main witness.

 On April 22, 1998, immediately after the jury rendered its verdict, counsel for defendant Greenfield stated his intention to file a motion to set aside the verdict pursuant to Rule 33. (Tr. 4417.) The Court then granted all defendants until May 22, 1998 to file post-verdict motions and provided the Government two weeks within which to respond. (Tr. 4417-18.) Except for Reinhold, who filed his post trial motion on May 12, 1998, all defendants, prior to May 22, 1998, sought, and obtained, extensions of the date for the filing of post-trial motions. The Government consented to all such requests. Motions on behalf of Goldstein and Mendlovic were filed on June 5, 1998. Greenfield retained new counsel for all post-trial proceedings and his motion was filed on June 22, 1998. The Government also sought, and obtained, with the consent of defense counsel, two extensions of time to file its response, which was filed on July 20, 1998.

 DISCUSSION

 I. Alleged Lack of Jurisdiction

 As an initial matter, we reject the Government's contention that this Court is without jurisdiction to entertain the motions of defendants Goldstein, Greenfield and Mendlovic on the grounds that their motions were filed outside the permissible time limit set forth in the Federal Rules of Criminal Procedure.

 Rule 29 (c) states:

 
If the jury returns a verdict of guilty . . . a motion for judgment of acquittal may be made or renewed within 7 days after the jury is discharged or within such further time as the court may fix during the 7-day period.

 Rule 33 provides, in relevant part:

 
A motion for a new trial made on any other grounds [other than newly discovered evidence] shall be made within 7 days after the verdict or finding of guilty or within such further time as the court may fix during the 7-day period.

 Finally, Rule 45(b) provides, in relevant part, that "the court may not extend the time for taking any action under Rules 29, 33, 34 and 35, except to the extent and under the conditions stated therein." The Government contends that under these rules, if a motion pursuant to Rule 29(c) or Rule 33 is not filed within the 7-day period, or by a date set during the 7-day period, the district court no longer has jurisdiction to consider the motion.

 In addressing the issue of whether a district court may grant more than one extension for the filing of a Rule 33 motion, the Eleventh Circuit wrote "it would appear that the trial court is in the best position to consider the need for the extension, and to perhaps continue an extension if done before it expires. The rule seems to contemplate unlimited discretion in the trial judge, since no outside time limitation is fixed for the extension." United States v. DiBernardo, 880 F.2d 1216, 1224 n.3 (11th Cir. 1989). The purpose of the time limitations contained in the relevant rules "is to ensure that the motion comes promptly after the verdict, in order to avoid . . . imposition of sentence in advance of resolution of dispositive motions." United States v. Hocking, 841 F.2d 735, 736 (7th Cir. 1988). In this case, immediately upon entry of the verdict, counsel for Greenfield expressed his intention to file a post-verdict motion and all defense counsel were given extensions of time in which to file such motions. All subsequent requests for extensions were made within the relevant deadlines and with the consent of the Government and the motions were fully submitted approximately one month in advance of the scheduled sentencing date for all the moving defendants. Under such circumstances, to reject the motions on procedural grounds would elevate form over substance. See United States v. Galgano, 281 F.2d 908, 912 (2d Cir. 1960) (in applying Federal Rules of Criminal Procedure, courts should not "exalt form over substance"). Accordingly, we address the merits of the motions.

 II. The Goldstein and Kotlarsky Plea Allocutions

 Josef Goldstein, joined by his co-defendants, challenges his conviction on the grounds that (1) the introduction at trial of the plea allocutions of Irving Goldstein and Mendel Kotlarsky violated his Sixth Amendment right to confrontation, (2) Irving Goldstein's allocution was "suspect" and should not have been admitted due to his allegedly diminished mental capacity and (3) the allocutions should have been excluded as unfairly prejudicial under Federal Rule of Evidence 403.

 The admission of plea allocutions to prove a conspiracy clearly raises serious Sixth Amendment concerns. Nevertheless, as the Second Circuit has held, the Confrontation Clause is generally not violated by the admission of a statement that is sufficiently reliable to be covered by the "statement against penal interest" exception to the hearsay rule. United States v. Stratton, 779 F.2d 820, 830 (2d Cir. 1985). A declaration against interest is not excludable as hearsay provided that

 
(1) the declarant is unavailable as a witness; (2) the statement is sufficiently contrary to the declarant's pecuniary or penal interests that a reasonable person in his position would not have made the statement unless he believed it to be true; and (3) ...

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