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U.S. v. RITTWEGER

April 23, 2003

UNITED STATES OF AMERICA,
v.
THOMAS M. RITTWEGER, DOUGLAS C. BRANDON, ROBERT S. DEHAVEN AND VICTOR M. WEXLER, A/K/A "FAT BOY", A/K/A "SCREW", DEFENDANTS.



The opinion of the court was delivered by: John G. Koeltl, United States District Judge.

OPINION AND ORDER

The defendants in this case — Thomas M. Rittweger ("Rittweger"), Douglas C. Brandon ("Brandon"), Robert S. DeHaven ("DeHaven") and Victor M. Wexler ("Wexler") — were charged in a thirteen-count indictment on January 31, 2002. The Grand Jury returned a superseding indictment on April 9, 2003 (the "Superseding Indictment" or the "Indictment").*fn1 While Richard J. Blech ("Blech") was charged as a defendant in certain counts of the original indictment, he subsequently pleaded guilty to certain counts in that indictment, and was named as a co-conspirator but not as a defendant in the superseding indictment. The First Count of the Indictment charges Rittweger and Brandon with conspiring with Blech and others known and unknown in violation of 18 U.S.C. § 371 to commit securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff and 17 C.F.R. § 240.10b-5; to commit wire fraud in violation of 18 U.S.C. § 1343, 1346; and to violate the Travel Act, 18 U.S.C. § 1952 (a)(3). Counts Two through Four charge Rittweger and Brandon with securities fraud in violation of 15 U.S.C. § 78j(b) and 78ff, 17 C.F.R. § 240.10b-5, and 18 U.S.C. § 2. Counts Five through Eight charge Rittweger and Brandon with wire fraud in violation of 18 U.S.C. §§ 1343, 1346, and 2. Count Nine charges that Rittweger, DeHaven, and Wexler, together with Blech and other co-conspirators not charged in Count Nine, conspired, in violation of 18 U.S.C. § 371, to commit securities fraud, wire fraud, and violations of the Travel Act in violation of 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. § 240.10b-5, 18 U.S.C. §§ 1343, 1346, and 18 U.S.C. § 1952 (a)(3). Counts Ten through Thirteen charge Rittweger, DeHaven, and Wexler with violations of the Travel Act, 18 U.S.C. § 1952 (a)(3) and 2, in order to carry on commercial bribery in violation of Sections 180.00 and 180.05 of the New York Penal Code. The defendants have now filed numerous pretrial motions.

The Indictment alleges the following facts. Blech, a resident of France and a United States citizen, was at all relevant times the owner, President, Chief Executive Officer, and Chairman of the Board of Credit Bancorp, Ltd. ("CBL"), a group of related United States and foreign business organizations that purported to provide "financial engineering" and investment services. (Ind. ¶¶ 1-2.) CBL is headquartered in Geneva, Switzerland, and has offices in the United States and elsewhere, including Tom's River, New Jersey, San Diego, California, and Lexington, Kentucky. (Ind. ¶ 1.) The Indictment alleges that Blech directed CBL's affairs from its Geneva headquarters and controlled numerous CBL bank and brokerage accounts in Europe and elsewhere. (Ind. ¶ 2.)

Rittweger was at all relevant times a resident of New Jersey and an employee and agent of CBL. (Ind. ¶ 3.) Rittweger managed the CBL office in New Jersey where he held the title of Managing Director for North America and had principal responsibility for CBL's marketing activities in the United States. (Ind. ¶ 3.) At all relevant times, the Indictment alleges, Brandon was a resident of Kentucky and an employee, attorney, and agent of CBL. (Ind. ¶ 4.)

The Indictment alleges two schemes. Counts One through Eight allege the "First Scheme" and Counts Nine through Thirteen allege the "Second Scheme." The schemes constitute two distinct but related conspiracies.

As part of the First Scheme, the Indictment charges that from about 1996 through in or about 1999, Rittweger and Brandon, together with Blech and other co-conspirators, participated in a scheme to defraud CBL customers of at least $210,000,000 by fraudulently inducing them to invest cash, securities, and other assets in two CBL investment programs — the "CBL Insured Credit Facility" and the "CBL Insured Securities Strategy." (Ind. ¶ 5.) The investors did so in the expectation of receiving dividend payments and loans on favorable terms. (Ind. ¶ 5.) However, the Indictment alleges, CBL was actually a Ponzi scheme in which proceeds of investments in the programs were paid to earlier investors to create the false impression that the investments were profitable in order to induce more people to invest with CBL. (Ind. ¶ 5.)

The Indictment alleges that in furtherance of the First Scheme, Rittweger and Brandon, together with Blech and other co-conspirators, made and caused others to make false and misleading representations to prospective customers. (Ind. ¶ 6.) The indictment alleges that Rittweger, Brandon, and Blech falsely represented that Brandon would serve as a trustee on behalf of those customers who invested in the CBL Insured Credit Facility and would hold the invested assets in custodial accounts under his control. (Ind. ¶¶ 4, 6(a).) In fact, Rittweger, Brandon, and Blech knew that Brandon had neither control over the accounts in which the CBL customer assets were invested, nor the ability to fulfill his duties as trustee. (Ind. ¶ 6(a).) Rittweger and Blech also represented that assets invested in the CBL Insured Securities Strategy would be used to invest in mutual funds and other investments, although they knew that a substantial portion of the investments were used instead to pay for unauthorized personal and business expenses. (Ind. ¶ 6(b).)

The Indictment describes some of the ways in which Rittweger and Brandon, together with Blech and other co-conspirators, distributed and caused others to distribute written marketing materials concerning CBL and the CBL Insured Credit Facility. (Ind. ¶ 7.) The marketing materials allegedly offered customers the opportunity to invest in custodial accounts controlled by Brandon in order to earn "custodial dividends" and to obtain loans on favorable terms. (Ind. ¶ 7.) The marketing materials allegedly contained numerous false representations, including that CBL had paid custodial dividends to customers since approximately 1991, when the company had in fact only been in business since approximately 1996: that CBL had conducted more than approximately $1,000,000,000 in financial transactions in approximately 1998, when in fact that representation vastly overstated the size of CBL's business; and that CBL made money through "riskless arbitrage" transactions conducted by foreign financial institutions although CBL did not make money in that way. (Ind. ¶¶ 7(a), (b), (c).)

The Indictment alleges that Rittweger, Brandon, Blech, and other co-conspirators knowingly misrepresented to prospective CBL customers 1) that Brandon would act as a trustee on their behalf and would hold any assets that they invested in a custodial account; 2) that neither CBL nor Brandon would sell, margin, pledge as collateral or otherwise encumber any assets invested by the customer without authorization; and 3) that any assets invested would be returned upon the customer's request, so long as the customer's debt obligations were satisfied. (Ind. ¶¶ 8-9.) The Indictment alleges that Rittweger, Blech, Brandon and other co-conspirators fraudulently induced approximately 80 customers to invest securities and other assets worth $200,000,000 in the CBL Insured Credit Facility through such misrepresentations. (Ind. ¶ 10.)

As part of the First Scheme, the Indictment alleges specific facts about the way in which Rittweger, Brandon, and Blech fraudulently induced Stephen N. Joffe ("Joffe"), Wolf Partners LP ("Wolf Partners"), and Stephenson Equity Company ("Stephenson Equity") to invest assets in the CBL Insured Credit Facility. (Ind. ¶¶ 11-37.) Each of these entities or their representatives were solicited by CBL representatives acting at Rittweger's direction to invest securities in a CBL Insured Credit Facility. (Ind. ¶¶ 13, 23, 32.) Each then executed a "Credit Facility Agreement" and a "Trust Engagement Letter" and deposited securities in an Insured Credit Facility. (Ind. ¶¶ 14-15, 24-25, 34-35.)

The Indictment also alleges that Rittweger, Blech and other co-conspirators offered customers the opportunity to earn income by investing cash, securities, and other assets in the CBL Insured Securities Strategy. (Ind. ¶¶ 38-42.) The Indictment alleges that Blech and Rittweger targeted individual investors including holders of individual retirement accounts ("IRAs") for the CBL Insured Securities Strategy. (Ind. ¶ 38.) Rittweger, Blech and other co-conspirators allegedly knowingly falsely represented to potential customers, among other things, 1) that cash, securities, and other assets invested in the CBL Insured Securities Strategy would be held in investment advisory accounts; 2) that such assets would be held in segregated accounts and would earn fee income for the customers; and 3) that such assets would be invested in mutual funds and other investments. (Ind. ¶ 39-40.) The Indictment charges that Rittweger and Blech caused approximately 100 customers to transfer at least $10,000,000 to bank accounts that they controlled, and that they used a substantial portion of these assets to pay unauthorized business and personal expenses. (Ind. ¶ 41.) Rittweger and Blech also allegedly caused fictitious account statements to be sent to the CBL Insured Securities Strategy customers which falsely stated that their assets had been used to purchase shares in mutual funds and other investments. (Ind. ¶ 42.)

The Second Scheme introduces the third and fourth defendants, DeHaven and Wexler. DeHaven, a resident of New Jersey, was an officer of Mitsui Trust Company ("Mitsui"), a Japanese financial institution with offices in New York, New York. (Ind. ¶ 53-54.) DeHaven worked in Mitsui's New York office and was responsible for Mitsui's participation in securities lending transactions. (Ind. ¶ 54.) The Indictment alleges that DeHaven owed fiduciary and other duties of trust and honest services to Mitsui. (Ind. ¶ 54.) Defendant Wexler, a/k/a "Fat Boy", a/k/a "Screw", was a New Jersey resident and an agent of CBL. (Ind. ¶ 55.) The Indictment alleges that Wexler, a personal friend of DeHaven, referred potential customers to CBL in return for payments from CBL, and also managed a foreign exchange trading business affiliated with CBL. (Ind. ¶ 55.)

In the Second Scheme, Rittweger, DeHaven, Wexler, Blech and other co-conspirators allegedly participated in a scheme from in or about 1997 through 1999 to defraud customers by fraudulently inducing them to invest cash, securities, and other assets in the CBL Insured Credit Facility. (Ind. ¶ 56.) To do so, the conspirators allegedly made and caused others to make numerous false and misleading representations, including that Mitsui had invested securities worth approximately $50,000,000 or more with CBL when in fact, as Rittweger, DeHaven, Wexler, and Blech well knew, Mitsui had made no such investment. (Ind. ¶ 57.)

The Indictment alleges that in or about 1997, Wexler introduced Rittweger to DeHaven. (Ind. ¶ 58.) The Indictment then alleges that on or about October 29, 1997, Rittweger and Wexler met with DeHaven and other Mitsui representatives in Mitsui's New York office and solicited Mitsui to enter into an investment transaction with CBL. (Ind. ¶ 59.) The Indictment alleges that from in or about 1997 through 1999, Rittweger continued unsuccessfully attempting to convince Mitsui to enter into an investment transaction with CBL. (Ind. ¶ 59.)

The Indictment charges that in or about 1998, Rittweger asked DeHaven to make false and misleading statements to prospective CBL customers including statements to the effect that Mitsui had entered into a large investment transaction with CBL in order to induce the customers to invest with CBL. (Ind. ¶ 60.) Rittweger, DeHaven, Wexler and Blech are alleged to have agreed to make secret payments to Wexler and DeHaven in exchange for DeHaven making such false and misleading statements. (Ind. ¶¶ 60, 62.) The Indictment charges that from in or about 1998 through 1999, Rittweger, DeHaven, Wexler, and Blech falsely represented to numerous prospective CBL customers that Mitsui had invested securities worth approximately $50,000,000 or more with CBL, and DeHaven served as a false reference for such customers and confirmed that the false statements were accurate. (Ind. ¶ 61.)

On February ¶, 2003, Blech pleaded guilty to Counts Two, Three, and Six of the Indictment. All remaining defendants now move to sever Counts Nine through Thirteen on the ground that they are improperly joined pursuant to Federal Rule of Civil Procedure 8(b). Alternatively, DeHaven, Brandon, and Wexler argue that Counts Nine through Thirteen should be severed under Rule 14 of the Federal Rules of Civil Procedure because joinder is unfairly prejudicial. The remaining defendants make the following additional motions: Defendant Wexler moves to dismiss Counts Nine through Thirteen pursuant to Federal Rule of Criminal Procedure 7(c) on the ground that they are legally insufficient; to dismiss Count Nine on the ground that it is duplicitous pursuant to Federal Rule of Criminal Procedure 8(a) and that 18 U.S.C. § 1346 is unconstitutionally vague on its face or, alternatively, as applied in this case; to strike allegedly irrelevant and prejudicial aliases as surplusage from the indictment; and for a bill of particulars pursuant to Rule 7(f) of the Federal Rules of Criminal Procedure. Defendant Rittweger moves for additional discovery, a request that Wexler joins. Defendant DeHaven moves to dismiss Counts Nine through Thirteen as legally insufficient pursuant to Rule 7(c); to dismiss Count Nine on the grounds that it is duplicitous pursuant to Rule 8(a); to dismiss Count Nine on the ground that it is unconstitutionally vague on its face or, alternatively, unconstitutional as applied in this case; for a bill of particulars pursuant to Federal Rule of Criminal Procedure 7 and for additional discovery; and to require the Government to strike unnecessary surplusage from the Indictment. Finally, defendant Brandon moves for a bill of particulars pursuant to Rule 7(f).

Defendants Rittweger, DeHaven, and Wexler also move to suppress various tape recorded telephone conversations recorded by Mitsui (the "Mitsui Tapes") pursuant to 18 U.S.C. § 2511 and New York State law. The Court conducted an evidentiary hearing on the suppression motion on April 15-16, 2003. The Court addresses the suppression motion in a separate opinion issued today.

I.

The defendants move to sever Counts Nine through Thirteen (the counts alleging the Second Scheme) from Counts One through Eight (those alleging events involved in the First Scheme) pursuant to Rule 8(b) of the Federal Rules of Criminal Procedure. Federal Rule of Criminal Procedure 8(b) provides:

The indictment or information may charge 2 or more defendants if they are alleged to have participated in the same act or transaction, or in the same series of acts or transactions, constituting an offense or offenses. The defendants may be charged in one or more counts together or separately. All defendants need not be charged in each count.*fn2
The defendants argue that the Indictment charges two separate conspiracies — the First Scheme and the Second ...

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