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U.S. v. REDDY
January 7, 2002
UNITED STATES OF AMERICA,
MICHAEL REDDY, JOHN FASCIANA, AND JOSEPH AMATO, DEFENDANTS.
The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge
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.
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.
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.
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.
Defendants' Request For a Bill Of ...