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U.S. v. HEREDIA

July 2, 2003

UNITED STATES OF AMERICA,
v.
DAVID SCOTT HEREDIA, AND JEROME E. ROSEN DEFENDANTS.



The opinion of the court was delivered by: Shirley Kram, United States District Senior Judge

OPINION AND ORDER

Defendant Jerome E. Rosen moves for the following: (1) dismissal of Court One of the indictment, conspiracy to commit securities fraud and wire fraud; (2) dismissal of the indictment based upon lack of venue; (3) dismissal of the indictment as time barred; (4) dismissal of the indictment as predicated on false or misleading assertions; (5) a bill of particulars; and (6) early disclosure of prior bad acts and criminal convictions. Additionally, defendant David Scott Heredia moves for the following; (1) dismissal of the indictment based upon lack of venue; (2) dismissal of the indictment as time barred; and (3) dismissal of the indictment because of pre-indictment delay.*fn1 For the reasons set forth below, Rosen and Heredia's motions are denied in part and granted in part.

BACKGROUND

On September 24, 2002, defendants were charged with conspiring to commit securities fraud and wire fraud in violation of 18 U.S.C. § 371 (Count One); and 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 (Count Two). The indictment was initially filed under seal and subsequently unsealed on October 1, 2002.

The indictment alleges that defendants fraudulently manipulated the share price of H&R Enterprises, Inc. ("H&R"), a Delaware corporation with shares publicly traded through the National Association of Securities Dealers ("NASD") Automated Quotation System Over-The-Counter Market. In 1997, H&R purported to be an investment holding company with interests in vending and leasing industries. Prior to March 1997, H&R was a shell company with no purported business operations.

Heredia was president of Alexander Troy Consultants, Inc. ("Alexander Troy"), a company engaged in promoting the stock of public companies. Rosen was a trader at J. Alexander Securities, Inc. ("J. Alexander"), a securities broker-dealer registered with the SEC and a member of the NASD. Occasionally, J. Alexander was a market-maker in H&R securities.

The indictment alleges that from in or about January 1997 through September 1997, defendants and other co-conspirators engaged in a scheme to upwardly manipulate the market price and volume of H&R securities in order to personally profit from selling H&R stock that they had received at little or no cost. Beginning in July 1997, an unindicted co-conspirator ("CC-1"), an insider at H&R, caused the company to issue approximately 3 million shares to his nominees and associates at prices of between $.01 and $.50 per share. These shares were placed in securities brokerage accounts at different broker-dealers in the name of companies that CC-1 and Heredia controlled. Heredia and CC-1 agreed that Heredia would cause brokers in his control to create artificial trading volume and price increases in the public market for H&R stock in an effort to increase H&R's share price and create the opportunity for CC-1 and others to sell their holdings of H&R stock at the artificially inflated share price. In return, CC-1 agreed to convey a substantial number of H&R shares to Heredia.

The indictment further alleges that in or about June 1997, Rosen was recruited into the scheme to manipulate the price and volume of H&R stock. Rosen agreed to purchase and sell H&R stock in such amounts and at such prices as Heredia directed. In exchange, he secretly received 250,000 shares of H&R stock. To disguise his ownership of the stock, Rosen placed the shares in nominee brokerage accounts that he controlled. The purpose of this trading activity was to make it appear as though there was an active market for H&R stock, thereby increasing the share price. As a result, Heredia, Rosen and their co-conspirators could sell their H&R shares at inflated prices.

Between September 19, 1997 and September 24, 1997, the conspirators artificially increased H&R's stock price from $2 per share to over $6.75 per share. As the share price increased, the conspirators sold the large blocks of H&R shares that they had received at little or no cost, and reaped millions in profits. During the course of the conspiracy, Rosen personally generated gross profits of approximately $546,163.96 from the sale of his H&R stock.

On September 24, 1997, Heredia directed Robert J. Prager, a trader at Saperston Financial, Inc. ("Saperston") to sell approximately 1.2 million shares of H&R to defendant Timothy R. Chamberlain, a trader at Equitrade Securities, Inc. ("Equitrade"). Heredia fraudulently represented to Prager that purchasers affiliated with Heredia at Equitrade would accept delivery and pay for those shares, as they had done in the past. On the same date, Rosen, on behalf of, and using funds from J. Alexander, sold approximately 600,000 shares to Equitrade. In order to ensure that Saperston and J. Alexander would be left holding the H&R stock when the manipulative trading ended, Heredia, contrary to his representations to Prager, did not accept delivery or pay for all of the 1.2 million shares that Prager had sold to various Equitrade accounts controlled by Heredia. Heredia also did not accept delivery of the 600,000 shares that Rosen sold on behalf of J. Alexander. As a result, Saperston and J. Alexander were left with shares whose value rapidly declined. H&R's stock price fell below $2 within two days.

On November 14, 2002, the Government provided an initial disclosure of discovery to defendants' counsel pursuant to Rule 16 of the Federal Rules of Criminal Procedure. See Affirmation of AUSA Deirdre A. McEvoy, dated May 2, 2003 ("McEvoy Aff.") at ¶ 2. The Government supplemented the initial disclosure on two occasions; on December 4, 2002, and on January 14, 2003. See id. at ¶ 4.

DISCUSSION

I. Rosen's Motion to Dismiss The Conspiracy Charge Based Upon Insufficiency
Rosen moves to dismiss Count One of the indictment for failure to adequately charge him with conspiracy to commit securities fraud and wire fraud. Rosen argues that he had no knowledge of the conspiracy, and did not agree with or share an intent to manipulate the stock price of H&R in order to sell shares at an inflated price. Furthermore, Rosen claims that he suffered a financial loss as a result of the conspiracy.

Rule 7 of the Federal Rules of Criminal Procedure provides that "[t]he indictment . . . shall be a plain, concise and definite written statement of the essential facts constituting the offense charged." Fed.R.Crim.P. 7(c)(1). As the Supreme Court and the Second Circuit have repeatedly stated, "an indictment is sufficient if it, first, contains the elements of the offense charged and fairly informs a defendant of the charge against which he must defend, and, second, enables him to plead an acquittal or conviction in bar of future prosecutions for the same offense." Hamling v. United States, 418 U.S. 87, 117 (1974); see also United States v. Pirro, 212 F.3d 86, 91 (2d Cir. 2000). In order to satisfy these requirements, "an indictment need do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime." United States v. LaSpina, 299 F.3d 165, 177 (2d Cir. 2002) (quotation omitted).

The indictment in this matter cites to the applicable statutes for conspiracy to commit securities fraud and wire fraud. Moreover, the language of the indictment essentially tracks these statutes verbatim and also contains extensive factual allegations as to Rosen's alleged agreement to enter into the conspiracy and his alleged involvement in it. See United States v. Trochelmann, No. 98 Cr. 1276, 1999 WL 294992, *2 (S.D.N.Y. May 11, 1999). The indictment also identifies the approximate dates of Rosen's alleged crimes, and the approximate location of the conspiracy. See United States v. Hanna, 198 F. Supp.2d 236, 243 (E.D.N.Y. 2002). Accordingly, the Court finds that Count One of the indictment provides Rosen with the required adequate notice of the nature of the charged conspiracy.

Rosen also alleges that he was a victim of the fraudulent scheme and claims that during the period of September 19 through September 24, 1997, he experienced a personal financial loss. According to the indictment, in June 1997, Heredia recruited Rosen and other traders into a scheme to manipulate the price and volume of H&R. See Indictment ¶ 11. Rosen agreed to purchase and sell H&R stock in such amounts and at such prices as Heredia directed, and in return received 250,000 shares of H&R stock was traded in a circular fashion among various brokerage accounts. See Indictment ¶ 13.

The indictment alleges that as a result of the circular trading and H&R's issuance of a series of false and misleading press releases, H&R's stock price artificially increased from $2 per share on September 19 to over $6.75 per share on September 24. See Indictment ¶ 16. As the stock price increased, Rosen, Heredia, CC-1 and others allegedly sold the H&R stock they had obtained at little or no cost into the inflated market, thus reaping millions of dollars in profits. See id. Rosen allegedly realized gross profits of approximately $546,000 by selling his personal H&R stock. See Indictment ¶ 23.

On September 24, Rosen, on behalf of, and using funds from J. Alexander, sold approximately 600,000 shares of H&R stock to a brokerage account controlled by Heredia at Equitrade. See Indictment ¶ 19-20. The indictment alleges that in furtherance of the scheme, Heredia wanted J. Alexander, among others, to be left holding H&R stock when the daisy chain ended. See Indictment ¶ 20. Equitrade did not accept delivery of the shares, which caused J. Alexander to continue holding them at a cost of $5.625 per share. See id. With the daisy chain no longer in place, H&R's share price dropped below $2.00 within two days. See Indictment ¶ 21.

Rosen claims that because he was contractually obligated to reimburse J. Alexander for losses he incurred while trading on behalf of the firm's account, his personal financial losses exceeded any alleged financial gains. See Affirmation of Maranda E. Fritz, dated February 28, 2002, at ¶ 15-16. However, simply because Rosen incurred a financial loss in the end does not negate Rosen's culpability for his alleged participation in the conspiracy. See United States v. Finkelstein, 526 F.2d 517, 522 (2d Cir. 1975) ("That certain defendants were eager to cheat ...


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