The opinion of the court was delivered by: Glasser, District Judge.
The defendants have moved the Court for an order that would (1)
suppress all evidence obtained through an investigation conducted
by the National Association of Securities Dealers ("NASD")
alleging that such evidence was obtained in violation of their
Fourth Amendment rights; (2) dismiss Count Five for the reason
that is exceeds the intended reach of the money laundering
statute; (3) require the government to elect between money
laundering objects; (4) require the government to proffer the
propriety of venue for Count Five; (5) compel the government to
comply with the mandates of Brady and Giglio; and (6) require
the government to provide particulars with respect to Count Five.
The defendants are named in a five count indictment which,
summarized as succinctly as an understanding of it would require,
charges as follows:
The first count charges them with conspiracy to commit
securities, mail and wire fraud based upon the following
abbreviated allegations. In July, 1996, Cluckcorp, a publicly
held company participated in an initial public offering ("IPO")
of 1,000,000 shares of its common stock and 2,000,000 of its
warrants. In this first of its IPOs, its stock was to be publicly
offered at $5.50 per share and its warrants at 12.5 cents per
warrant. Each warrant entitled its holder to purchase one share
of common stock at $4.00 per share exercisable after one year
from the date of the IPO and for four years thereafter.
In June, 1997, Cluckcorp participated in a second IPO of
500,000 shares of its preferred stock and 1,500,000 of its
preferred warrants. The preferred stock was publicly offered at
$10.00 per share and the preferred warrants at 10 cents per
warrant. Each warrant entitled its holder to purchase one share
of preferred stock at $10.50 per share exercisable after six
months from the date of this IPO and for four and a half years
Cluckcorp stock and warrants were traded on the National
Association of Securities Dealers Automated Quotation System
("NASDAQ") Small Cap stock market.
The defendants operated Global Equities Group, Inc. ("Global"),
a licensed brokerage firm for the primary purpose, it is alleged,
of earning money through the fraudulent manipulation of the price
of Cluckcorp securities, among other things.
The securities activities of the defendants, Global and
Cluckcorp, were subject to the rules and regulations of the
Securities and Exchange Commission ("SEC") and NASD.
The indictment alleges that the defendants opened nominee
accounts at Global over which they exercised control and through
which they purchased large blocks of warrants and preferred
warrants at the IPO prices. These purchases were not publicly
disclosed. It is further alleged that the defendants then caused
the artificial rise in the after market prices of Cluckcorp
Securities by giving Global brokers large financial incentives to
sell those securities to its customers. Those financial
incentives included giving the brokers the warrants to put in
their own nominee accounts without disclosure to the brokers'
customers. Warrants were thus aggressively sold to those
customers by misrepresentations of fact pertaining to Cluckcorp
and its prospects and by crossing the sell orders with matching
buy orders creating an illusion of demand and thus artificially
inflating the prices of the securities. When the prices were thus
artificially inflated, the defendants then sold their warrants
for between $2.00 - $4.00 per warrant and $3.00 - $5.00 per
preferred warrant. The profits thus realized, it is alleged, were
dispersed by the defendants through various foreign and domestic
accounts in the same names as their nominee accounts at Global.
The allegations of Count One spawn the charge of securities
fraud in Count Two, mail fraud in Counts Three and Four, and a
money laundering conspiracy in Count Five.
The defendants' motion to suppress is predicated upon their
assertion of ample cause to believe that the NASD acted
pretextually in conducting its investigation of Global in 1996,
1997, and 1998, and in requiring the defendants to produce
documents and submit to depositions under the guise of an inquiry
to determine whether its rules were violated. They also point to
the arrest of the defendant Paul in July, 1998, on a complaint
filed in the Southern District of New York, charging him with
violating currency reporting requirements and thus bolstering
their claim for suppression.
In its response, the government reveals that the aforementioned
complaint was not aimed at the defendants Shvarts, Kuvykin or
Global, but was aimed at the defendant Paul and his involvement
with two different brokerage firms, namely, White Rock Partners
and First Metropolitan Securities.
Shvarts and Kuvykin were indicted here in April, 1999, and in a
superseding indictment, Paul was added in June, 1999.
In its opposition to this prong of the motion, the government
urges the defendants' failure to provide any factual basis beyond
speculation that the NASD investigations were either directed by
the government or used in any way to advance its criminal
prosecution. In addition, the government emphasizes the
defendants' failure to make any connection, beyond simple
conjecture, between the NASD investigation of Shvarts, Kuvykin
and Global and Paul's arrest in the Southern District,
notwithstanding it is that arrest on which they stake their claim
that the NASD was operating at the request of the government. The
government also affirmatively represents that it played no role
in the investigation of Shvarts, Kuvykin or Global by the NASD,
an investigation that was initiated by the NASD years before the
government's investigation. Government's Memorandum of Law in
Opposition to the Defendants' Motions at p. 5.
The case most frequently cited in support of a motion to
suppress in this posture
is United States v. LaSalle National Bank, 437 U.S. 298, 98
S.Ct. 2357, 57 L.Ed.2d 221 (1978) which addressed the issue of
whether the District Court correctly refused to enforce an
Internal Revenue Service summons when it specifically found that
the special agent who issued it "was conducting his investigation
solely for the purpose of unearthing evidence of criminal
conduct." Id. at 299, 98 S.Ct. 2357.
At the outset it is important to bear in mind that the summons
there was issued by a governmental agency, the Internal Revenue
Service, pursuant to a statutory scheme not intended by Congress
to categorize "tax fraud investigations into civil and criminal
components." Id. at 311, 98 S.Ct. 2357. That scheme
notwithstanding, the Court observed that "the primary limitation
on the use of a summons occurs upon the recommendation of a
criminal prosecution to the Department of Justice." Id. The
policy interest served by such a limitation is the importance of
not infringing on the role of the grand jury as the principal
tool of criminal accusation. The likelihood of such infringement
is substantial if use of the summons were permitted after a
referral to the Justice Department for criminal prosecution.
Another limitation imposed by the Court upon the use of the
summons before a referral to the Department of Justice is that it
be used in good faith, in furtherance of a legitimate purpose,
and not to harass the taxpayer by pressuring ...