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U.S. v. REDDY

January 7, 2002

UNITED STATES OF AMERICA,
V.
MICHAEL REDDY, JOHN FASCIANA, AND JOSEPH AMATO, DEFENDANTS.



The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge

    OPINION AND ORDER

Defendants Michael Reddy ("Reddy") and John Fasciana ("Fasciana") seek an order (i) compelling the United States of America (the "Government") to supplement the indictment in this case (the "Indictment")*fn1 with a bill of particulars; (ii) directing the Government to identify immediately all documents that it intends to rely on in its case-in-chief; (iii) directing the Government to supplement its Rule 16 discovery, as well as its disclosures pursuant to Brady v. Maryland, 373 U.S. 83 (1963); (iv) directing the early production of all materials subject to disclosure under Giglio v. United States, 405 U.S. 150 (1972) and/or 18 U.S.C. § 3500; and (v) requiring early notice of the Government's intent to offer evidence of prior bad acts under Federal Rule of Evidence 404(b). Defendant Joseph Amato ("Amato") joins in the motion. For the reasons set forth below, Defendants' motion is denied.

BACKGROUND

The Indictment charges Defendants with thirteen counts of mail and wire fraud in connection with an alleged scheme to defraud Electronic Data Systems, Inc. ("EDS"). The relevant facts alleged in the 31-page Indictment can be summarized as follows.

EDS' Acquisition of FCI

Pursuant to a stock purchase agreement executed on or about May 4, 1995 (the "Purchase Agreement"), EDS purchased FACS Corporation International ("FCI"). Reddy had owned approximately 70% of FCI's stock and also served as FCI's chairman and CEO. Amato was the CFO of FCI, and owned approximately 1.6% of FCI'stock. After the purchase, FCI became part of EDS's Global Financial Markets Group ("GFMG"). Reddy became the chairman and CEO of the GFMG, and at various times in 1995 and 1996, Amato served as the GFMG's CFO. Fasciana served as counsel to FCI and its shareholders in connection with FCI's purchase by EDS. Indictment ¶¶ 1-4, 7.

The Business of the Asset Research and Recovery Division

GFMG, through its Asset Research and Recovery division, assisted bank and brokerage firm clients of EDS in recovering funds that had been erroneously escheated to states as abandoned property. The Asset Research and Recovery division analyzed records to identify any funds belonging to such a client that had been escheated in error to a state. Upon identification of such funds, the Asset Research and Recovery division prepared claims documenting the client's ownership of the escheated funds and caused those claims ("Escheatment Claims") to be presented to the state for payment. Id. ¶ 6.

The Asset Research and Recovery division also analyzed clients' records relating to funds that such clients had earmarked for escheatment in the future, but which had not yet turned over to state authorities because the requisite number of years had not yet passed ("Pre-escheatment Funds"). When it determined that located Pre-escheatment Funds belonged to a client (rather than a third party), the Asset Research and Recovery division assembled documentation demonstrating the client's ownership of the funds and presented the documentation to the client. If the client agreed that the Asset Research and Recovery division had established the client's ownership of the Pre-escheatment Funds, it would keep the funds rather than escheating them to the state. Id.

Another aspect of the Asset Research and Recovery division's business was the analysis of records on behalf of clients to determine whether any funds owing to the client relating to its security holdings had been mistakenly paid to or retained by a third party. Upon identification of any such funds, the Asset Research and Recovery division prepared claims documenting the client's entitlement to the funds and caused the claims ("Streetside Claims") to be submitted to the third party for payment. Id.

The Asset Research and Recovery division typically was paid on a contingent fee basis, receiving 30% of any funds recovered for its clients from Escheatment, Pre-escheatment or Streetside Claims. Id.

The $2 Million Escrow Payment for 1995 Performance

The Indictment alleges that this fraud was accomplished as follows: Reddy instructed EDS employees to create a list of more than $7 million of the "dead" items and to record as GFMG income for 1995 75% of the fee that EDS would have earned if these Pre-escheatment claims had in fact been valid, or approximately $1.6 million. Reddy did this knowing full well that the Pre-escheatment claims on the list were not valid. The Indictment alleges that Reddy knew that EDS could not document ownership of the funds, and that the funds should have been escheated to the State of Delaware. Id. ¶ 15-17. By booking this $1.6 million in additional revenue in December 1995, Reddy boosted the GFMG's performance figures sufficiently to make it appear to have met its performance target specified in the EDS-FCI purchase agreement. Because, as of December 1995, EDS had not completed all of the work necessary to establish Kidder's ownership of the funds, it was, however, improper to recognize as 1995 income the fees attributable to those Pre-escheatment Funds. Id. ¶ 18. Based on the reported performance and pursuant to its obligations under the Purchase Agreement, EDS authorized Fasciana to pay the FCI shareholders the 1995 performance payment of $2 million, plus interest, from his escrow account. Id. ¶ 19.

The Indictment alleges that, in order to conceal the improper accrual of $1.6 million in revenue Reddy, with the assistance of Fasciana, attempted in 1996 to convince Kidder and GECC to approve the $7 million in Pre-escheatment claims on the list, move those funds from the Pre-escheatment accounts to the Kidder/GECC accounts, and pay a 30% fee to EDS as if these were valid Pre-escheatment claims. Id. ¶ 20-21. As part of that effort, Reddy falsely told Kidder and GECC, in substance, that EDS's expert personnel had determined that the items should not have been earmarked for escheatment and that, where records were incomplete, Kidder and GECC should take the items back into income because there was "enough information, documented patterns of behavior and knowledge of street practice" to conclude that they should not have been earmarked for escheatment in the first place. The Indictment asserts that, because EDS's personnel had researched these items and in fact determined that they were proper Pre-escheatment items, "reasonable business judgment and street practice, as well as Delaware law" actually required Kidder and the GECC to escheat the funds. Id. ¶ 21.

The 1997 $5 Million ICP Payment

In the Indictment, the Government alleges that the Defendants and others allegedly defrauded EDS by fraudulently representing to EDS that the GFMG had met the 1997 year-end performance targets under the ICP, and therefore that the key employees included in the ICP had earned a $5 million payment when, in truth and in fact, the GFMG had not met its performance targets in 1997, and the employees therefore were not entitled to share in the $5 million ICP payment.

The Government asserts in the Indictment that, as the end of 1997 approached, it became clear to Reddy that the GFMG would not meet the ICP performance targets for 1997, and therefore that the key employees would not receive the $5 million payment available under the ICP for 1997. Rather than truthfully report to EDS that the GFMG had not met its performance targets, Reddy and others decided to record as revenue approximately $7 million that the GFMG had not earned. The anticipated revenues related to work the Asset Research and Recovery division was performing for Cigna Investments, Inc. and Prudential Investments. By year-end 1997, Asset Research and Recovery had only identified potential claims for those clients; it had not completed the research on those potential claims for those clients to determine if they were valid and none of the claims had been submitted for payment. Because the work necessary to substantiate the potential claims had not been completed in 1997, the Indictment alleges, it was not proper under EDS's accounting rules and generally accepted accounting principles ("GAAP") for the GFMG to record as 1997 income revenues associated with these potential claims, Id. ¶ 25.

Notwithstanding the fact that the GFMG had not earned revenue relating to these potential claims, Reddy and others decided to book approximately $7 million in 1997 revenue relating to these claims so that it would appear (falsely) that the GFMG had met its performance targets for year-end 1997. As a result, EDS made the $5 million ICP payment to the key employees of the GFMG. Id. (Reddy's share of the payment amounted to approximately $3.6 million).

To conceal the improper 1997 recording of income associated with these potential Cigna and Prudential claims, Reddy and Fasciana instructed the head of the Asset Research and Recovery division to "substitute" later-researched valid claims for the improperly booked claims. Thus, during 1998, the GFMG substituted valid claims that it had identified in 1998 for the improperly invalid claims booked for 1997, making it appear that income earned in 1998 was really earned in 1997. Id. ¶¶ 26-28.

Fraudulent Escrow Claim Relating to Pre-Acquisition Receivables

In November 1996, more than $500,000 of the Pre-Acquisition Receivables remained uncollected, and a corresponding amount of money remained in the escrow account, held by Defendant Fasciana, that had been established when EDS purchased FCI. Under the Purchase Agreement, these funds were to remain in escrow or revert to EDS unless the GFMG recovered receivables that were outstanding on the books of FCI at the time of the purchase.

The Indictment charges that, from about November 1996 to February 1997, Defendants Reddy, Fasciana and Amato falsely made it appear that they had collected approximately $111,870 of the Pre-Acquisition Receivables by making it appear that a check from a post-acquisition client was actually a payment in respect of a Pre-Acquisition Receivable. By so doing, they fraudulently induced EDS to authorize Fasciana to release approximately $111,870 from the escrow account to the FCI shareholders. Id. ¶ 29.

By late 1997, more than $350,000 in Pre-Acquisition Receivables remained uncollected and a corresponding amount of money remained in the Fasciana escrow account. The Indictment charges that Defendants Reddy and Fasciana deceived EDS into believing they had collected the Pre-Acquisition Receivables. According to the Indictment, Defendants Fasciana and Reddy laundered, through Fasciana's bank accounts, more than $350,000 that EDS had received from other sources, and then represented to EDS that the funds were attributable to the collection of Pre-Acquisition Receivables. Based on Reddy and Fasciana's false representations, EDS approved the release of approximately $350,000 from the escrow account to the FCI shareholders. Id. ¶ 30.

DISCUSSION

Defendants' Request For a Bill Of ...


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