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U.S. v. GROSS

October 2, 2001

UNITED STATES OF AMERICA,
V.
ALLEN GROSS, PETER REBENWURZEL, AND DAVID MALEK, DEFENDANTS.



The opinion of the court was delivered by: Johnson, District Judge.

  MEMORANDUM AND ORDER

On February 12, 1998, Defendants Allen Gross ("Gross"), Peter Rebenwurzel ("Rebenwurzel"), and David Malek ("Malek"), (collectively "Defendants"), were indicted by a grand jury on charges of bank fraud and making false statements in connection with mortgage applications, in violation of 18 U.S.C. § 1344 and 1014. Defendants now move to dismiss the twenty-one count indictment in the above-captioned case, claiming, in part, that prejudicial pre-indictment delay has violated their due process rights under the Fifth Amendment.*fn1 For the reasons that follow, Defendants' motions to dismiss are granted.

BACKGROUND

Factual and Procedural History

In the indictment, the Government charges that between 1987 and 1989, Defendants intentionally made false representations to FNB in order to obtain loans for numerous properties in the Bronx section of New York City. The Government specifically alleges that Gelt engaged in various schemes to defraud FNB into providing Gelt with ten real estate loans and that Malek and Rebenwurzel submitted false applications, through Gelt as mortgage broker, for four such mortgage loans. As a part of this fraudulent scheme, Defendants allegedly made misrepresentations to FNB consisting of inflated underlying purchase prices, inflated down payments on properties, and inflated rent rolls reflecting the income being produced by the properties. The Government further claims that in some instances, Defendants breached a covenant not to obtain secondary financing on the properties without FNB's consent.

For a number of the properties at issue, Defendants are accused of submitting wholly fabricated documents to obtain mortgages, while in other instances, the misrepresentations were allegedly made by Defendants in conjunction with a series of "flip" transactions. In a flip transaction, the person who initially entered into a contract with the seller to buy property (the "flipper" or "initial purchaser") assigns the right to buy that property to another person who will ultimately seek the loan and actually purchase the property (the "flippee" or "subsequent purchaser"). The flipper profits from the transaction by selling the property to the flippee, at the time of assignment, for a price higher than that stated in the original contract between flipper and seller. The Government asserts that a mortgage application representing the higher price paid by the flippee as the purchase price for the real estate, rather than the lower price paid by the flipper, misrepresents the value of the property and defrauds the bank. Of added significance here is the Government's allegation that Gelt brokered numerous transactions wherein multiple flips resulted in the initial purchaser and the final flippee being the same individual.

Defendants filed pre-trial motions in January 1999, however, those motions were not fully briefed and before the Court until April 1999. This Court subsequently held a due process hearing on Defendants' motions. The hearing took place over the course of four days, commencing on September 15, 1999, continuing on February 22-23, 2000, and concluding on March 8, 2000. During the hearing, the Court heard testimony from ten witnesses and viewed evidence in order to determine both the reason for the delay in prosecution and whether the delay would in fact result in possible or actual prejudice, as argued in Defendants' motions. Between June 2000 and October 2000, the parties filed post-hearing memoranda to further clarify the issues that had been addressed at the hearing. After reviewing the record in this case, the Court makes the findings contained herein.

Prior Litigation

FNB previously brought federal and state civil actions against Defendants and numerous other parties which were based on the same theory of fraud on which the instant action is premised. All of these civil actions related to FNB's claims of fraud were eventually dismissed.

In January 1992, in the Southern District of New York, FNB filed a complaint against Defendants and others, pleading two causes of action under the Racketeer Influenced and Corrupt Organizations Act ("RICO") and seven pendent state law claims. Accepting all of FNB's allegations as true, the court dismissed FNB's complaint without prejudice for failure to state a claim upon which relief could be granted. First Nationwide Bank v. Gelt Funding, Inc., No. 92 Civ. 790, 1992 WL 358759 (S.D.N.Y. Nov. 30, 1992). FNB thereafter repled its claims in an amended complaint. However, the court again found that FNB had failed to state a cause of action. First Nationwide Bank v. Gelt Funding, Corp., 820 F. Supp. 89 (S.D.N.Y. 1993). The Second Circuit affirmed the dismissal of FNB's claims in the Southern District of New York and the United States Supreme Court declined to grant a writ of certiorari. First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763 (2d Cir. 1994), cert. denied, 513 U.S. 1079, 115 S.Ct. 728, 130 L.Ed.2d 632 (1995). In affirming the district court's dismissal, the Second Circuit stated that:

[t]he methodology employed by FNB in determining the magnitude of the defendants' alleged overstatements of income is so defective, and the conclusions reached so defy logic, that no "reasonable inferences" can be drawn therefrom. No amount of detail can save FNB's complaint when the detail is based on flawed and unreasonable methodologies that lead to unsupported conclusions.

First Nationwide Bank, 27 F.3d at 772.

Two similar actions were commenced by FNB in New York Supreme Court in 1993.*fn2 The state court actions alleged the same claims of fraud on which the unsuccessful federal litigation was based. The two state actions were consolidated and dismissed in their entirety. See First Nationwide Bank v. Gelt Funding Corp., Index No. 125305/93, Order (N.Y.Sup.Ct. June 12, 1995). Now, nearly three years after the dismissal of FNB's state and federal civil claims against Defendants, before this Court are criminal charges stemming from the same or similar transactions.

DISCUSSION

I. Statute of Limitations

The acts charged against Defendants and alleged in the indictment occurred during the period spanning December 1987 and August 1989. Defendants were not indicted on those acts, however, until February 12, 1998. Defendants move to dismiss the indictment as time-barred, arguing that the applicable statute of limitations to be applied to this case is the five year period prescribed by 18 U.S.C. § 3282 ("§ 3282").*fn3 The Government contends that the applicable ...


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