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U.S. v. HANNA

April 22, 2002

UNITED STATES OF AMERICA,
V.
MARK HANNA, MARSHALL BERNSTEIN, SHANE FERRAS, JOHN BOSCO, STEVEN AREVALO, ANTONIO BOSCO, CHRISTINA CLASSIE, CHRISTOPHER FINKLE, STEVEN HANNA, PAUL KARKENNY, DOUGLAS POLLICINO, WILLIAM RICHMOND, COREY ROCKAFELER, RAYMOND SAULON, JAMES SCOTT, MICHAEL SPAGNOLI, AND ALAN STEINER, DEFENDANTS.



The opinion of the court was delivered by: Arthur D. Spatt, United States District Judge.

    MEMORANDUM OF DECISION AND ORDER
This case involves charges against the defendants Mark Hanna ("M. Hanna"), Marshall Bernstein ("Bernstein"), Shane Ferras ("Ferras"), John Bosco (" J. Bosco"), Steven Arevalo ("Arevalo"), Antonio Bosco ("A. Bosco"), Christina Classie ("Classie"), Christopher Finkle ("Finkle"), Steven Hanna ("S. Hanna"), Paul Karkenny ("Karkenny"), Douglas Pollicino ("Pollicino"), William Richmond ("Richmond"), Corey Rockafeler ("Rockafeler"), Raymond Saulon ("Saulon"), James Scott ("Scott"), Michael Spagnoli ("Spagnoli") and Alan Steiner ("Steiner") (collectively, the "defendants"). In particular, the Government alleges that the defendants participated in a scheme to defraud investors in the sale of securities.
Presently before the Court are pre-trial motions by the defendants made jointly and separately. The motions of the defendants involve five subjects: (1) dismissal of the indictment, counts of the indictment or language of the indictment; (2) severance; (3) disclosure of Brady, Giglio, 404(b) evidence, government informants and co-conspirators, agent notes and other memoranda; (4) disclosure of the grand jury minutes; and (5) production of bills of particulars.
I. BACKGROUND
In July of 1992, HGI Incorporated ("HGI") began operating as a registered securities broker-dealer. At HGI, M. Hanna was the secretary, chairman of the board and owner of about forty percent of the company. During its operation, HGI employed traders who purchased and sold securities on behalf of HGI's own accounts and brokers who purchased and sold securities on behalf of HGI's retail customers.
At HGI, Ferras was a broker, general securities principal and minority interest owner in the company. Arevalo, A. Bosco, Classie, Finkle, S. Hanna, Pollicino, Richmond, Rockafeler, Saulon, Scott, Spagnoli and Steiner were employed as brokers at HGI. J. Bosco and Karkenny allegedly held themselves out to investors as brokers at HGI, when in reality, this was not true.
In February of 1994, Maidstone Financial, Incorporated ("Maidstone") began operating as a registered securities broker-dealer. At Maidstone, Bernstein was the chairman of the board, principal controlling officer and owner of about sixty percent of the company. Maidstone also employed traders and brokers in the same manner as HGI.

From February 9, 1994 to April 24, 1997, HGI, usually along with Maidstone, underwrote initial public offerings ("IPOs") for the following corporations: (1) Modern Medical Modalities ("Modern Med"); (2) Tivoli Industries, Inc. ("Tivoli"); (3) Sims Communications, Inc. ("Sims"); (4) Natural Health Trends Corporation ("Natural Health"); (5) International Cutlery, Ltd ("Icut"); (6) Surge Components, Inc. ("Surge"); (7) Community Care Services, Inc. ("Community Care") and (8) Univec, Inc. ("Univec") (collectively, the "IPO Stocks").

After the underwriting of the IPOs, HGI and Maidstone acted as "market makers" for the IPO Stocks. As "market makers", HGI and Maidstone held themselves out to the public as ready, willing and able to buy and sell shares of the IPO Stock in subsequent transactions. Initially, HGI customers paid for their stock investments by mailing checks directly to HGI or by mailing or wiring funds to Hanifen Imhoff Clearing Corporation ("Hanifen Imhoff"), HGI's clearing agent. Maidstone customers generally paid for their stock investments by mailing checks directly to Maidstone. HGI and Maidstone sent customers, among other things, trade confirmations and account statements by mail.
During their operation, HGI and Maidstone also acquired other unspecified stock in bulk for resale to the public. The second superceding indictment S-2 ("Indictment S-2" or the "indictment") refers to the stock acquired in bulk and the IPO Stock as the "House Stocks". The National Association of Securities Dealers ("NASD") approved the House Stocks for trading on the NASD Automated Quotation System Small Capitalization Market ("NASDAQ Small Cap. Market").

Indictment S-2 alleges the following fraudulent acts with respect to the House Stocks and the IPO Stocks in particular. First, M. Hanna, Bernstein and other unnamed individuals created sham "lock up" agreements with respect to the IPO Stocks. Specifically, they required the initial investors (the "Lock-up Purchasers") to enter into an agreement not to sell the securities, absent written consent of the underwriter, for a certain period of time after the IPO offering (the date when the security was first offered for public sale).

M. Hanna, Bernstein and other unnamed individuals then allegedly agreed with certain Lock-up Purchasers before the IPO offering that these purchasers, in exchange for money or kickbacks, would sell their securities to HGI or Maidstone immediately after the IPOs became effective without disclosing this information to the investing public. M. Hanna, Bernstein and other unnamed individuals further directed the Lock-up Purchasers to sell their securities to HGI or Maidstone at prices substantially below the prevailing price of the stock in the secondary market (referring to the trading in existing or outstanding securities on exchanges and over the counter markets) which enabled HGI to earn substantial profits at the expense of investors.

Second, the defendants, except M. Hanna and Bernstein, artificially inflated the demand for the House Stocks through fraudulent and deceptive sales practices with respect to public customers. In particular, they falsely convinced customers to invest money in the House Stocks stating: (1) a big news announcement was coming out; (2) the broker was privy to inside information; (3) baseless price predictions; and (4) positive information only. They also executed unauthorized purchases of the House Stocks in their customers' accounts and then attempted to compel the customers to pay for the unauthorized purchases by persuading them that the House Stocks were a good investment.
In addition, they prevented the customers from selling the House Stocks by means of: (1) avoiding customer telephone calls; (2) transferring customer calls to another broker; (3) failing to write out a sell ticket; and (4) failing to provide the sell ticket to a trader for execution. Moreover, they allegedly refused to execute a customer's order to sell the House Stocks unless the sale was "crossed" with a purchase of the same or similar amount of the House Stocks by another customer.
In June of 1997, HGI ceased operations. Most of the HGI brokers allegedly went to work at Maidstone to continue to trade in the House Stocks. In December of 1997, Maidstone ceased operations.
Count one of Indictment S-2 alleges that between July of 1992 and March of 1998, the defendants engaged in a conspiracy to defraud investors in the sale of securities arising out of the operation of HGI and Maidstone. In particular, count one charges that the defendants conspired to commit securities fraud, mail and wire fraud in violation of 17 C.F.R. § 240.10b-5, 15 U.S.C. § 78j (b), 78f(f) and 18 U.S.C. § 371, 1341, 1343, 2326(1) & 3551.
Count two alleges that between February of 1995 and December of 1997, the defendants, except Pollicino and Rockafeler, committed fraud in connection with the purchase and sale of the securities of Sims in violation of 15 U.S.C. § 78j(b), 78f(f) and 18 U.S.C. § 2 & 3551. Count three charges that between June of 1995 and December of 1997, the defendants committed fraud in connection with the purchase and sale of the securities of Natural Health in violation of 15 U.S.C. § 78j(b), 78f(f) and 18 U.S.C. § 2 & 3551.
Count four alleges that between December of 1995 and December of 1997, the defendants committed fraud in connection with the purchase and sale of the securities of Icut in violation of 15 U.S.C. § 78j(b), 78f(f) and 18 U.S.C. § 2 & 3551. Count five charges that between July of 1996 and December of 1997, the defendants, except Classie, S. Hanna, Karkenny and Scott, committed fraud in connection with the purchase and sale of the securities of Surge in violation of 15 U.S.C. § 78j(b), 78f(f) and 18 U.S.C. § 2 & 3551.
Count six charges that between October of 1996 and December of 1997, the defendants, except A. Bosco and Scott, committed fraud in connection with the purchase and sale of the securities of Community Care in violation of 15 U.S.C. § 78j(b), 78f(f) and 18 U.S.C. § 2 & 3551. Count seven alleges that between October of 1996 and December of 1997, the defendants, except Arevalo, Pollicino, Scott and Steiner, committed fraud in connection with the purchase and sale of the securities of Univec in violation of 15 U.S.C. § 78j(b), 78f(f) and 18 U.S.C. § 2 & 3551.
Counts eight through thirty charge that between July of 1992 and December of 1997, the defendants committed mail fraud in violation of 18 U.S.C. § 1341, 2326(1), 2 & 3551. Counts thirty-one through seventy-six allege that between February 15, 1996 through April 15, 1997, M. Hanna transferred the sum of $2,865,600, proceeds derived from securities fraud, from HGI's account at the European American Bank ("EAB") into his personal account at Chemical Bank in violation of 18 U.S.C. § 1957, 2 & 3551.

Counts seventy-seven and seventy-eight charge that on January 14, 1997 and June 30, 1997, M. Hanna transferred the sum of $1,620,000, proceeds derived from securities fraud, from HGI's account at Hanifen Imhoff and EAB into his personal account at First Albany Corporation in violation of 18 U.S.C. § 1957, 2 & 3551. Count seventy-nine alleges that in or about January of 1997, M. Hanna transferred the sum of $1,500,000, proceeds derived from securities fraud, from his personal account at Chemical Bank to his account at United States Trust Company of New York in violation of 18 U.S.C. § 1957, 2 & 3551.

Indictment S-2 alleges further that if M. Hanna is convicted of the crimes of unlawful monetary transactions under counts thirty-one through seventy-eight, the sums transferred ($4,485,600) are subject to forfeiture. In addition, if Ferras is convicted of the crimes of unlawful monetary transactions under counts eighty through one hundred one, the sums transferred ($817,500) are subject to forfeiture. Finally, if J. Bosco is convicted of the crimes of unlawful ...

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