Appeal from a judgment of conviction entered December 4, 2006, in the United States District Court for the Southern District of New York (Wood, C.J.). Kelley was convicted of four counts of securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78ff, and 17 C.F.R. § 240.10b-5; and three counts of wire fraud in violation of 18 U.S.C. §§ 1343 and 2. In this opinion, we address whether the district court erred in admitting evidence of the bogus account statements sent by the defendant to the victims on the grounds that such evidence is impermissible in the context of the charged securities violations when the account statements were sent after the purchases of the securities and were not made in connection with the purchase or sale of securities. We hold that although the use of bogus account statements to lull defrauded investors is not in and of itself sufficient to establish a securities law violation, the use of such statements is relevant as evidence to prove, inter alia, the defendant's intent to defraud and the extent of the scheme employed. Accordingly, for the reasons stated herein, and in an accompanying summary order, we affirm the district court's judgment of conviction.
BEFORE: FEINBERG, MINER, and HALL, Circuit Judges.
Defendant-appellant Kevin O. Kelley appeals from a judgment of conviction and sentence entered on December 4, 2006, in the Southern District of New York (Woods, C.J.). Kelley was convicted of four counts of securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78ff, and 17 C.F.R. § 240.10b-5; and three counts of wire fraud in violation of 18 U.S.C. §§ 1343 and 2. In this opinion we address whether the district court erred in admitting evidence of bogus account statements sent by the defendant to the victims on the grounds that such evidence is impermissible in the context of the charged securities violations when the account statements were sent after the purchases of the securities and were not made in connection with the purchase or sale of securities. We hold that although the use of bogus account statements to lull defrauded investors is not in and of itself a securities law violation, the use of such statements is relevant as evidence to prove, inter alia, the defendant's intent to defraud and the extent of the scheme employed. In a separate summary order filed along with this opinion, we resolve the remaining issues on appeal. For the reasons stated herein and in that summary order, the judgment of conviction is affirmed.
From 1999 until 2004, Defendant-appellant Kevin O. Kelley operated Acorn Research & Management, Inc. ("Acorn"), where he worked as a stock broker. Kelley was also employed as a registered representative of Royal Alliance, a broker-dealer, and served as the managing executive of its Stamford, Connecticut office. Kelley took advantage of his position as a stock broker to violate securities laws and to defraud his stock brokerage clients through schemes involving four separate securities: Coyote Network Systems ("Coyote"), First Venture Leasing ("FVL"), E-Tel Corporation ("E-Tel"), and AusAm Biotechnologies ("AusAm").
In January 2000, Kelley and two partners formed a consulting firm, KRJ, LLC, which entered into a consulting agreement with Coyote. As part of the agreement, KRJ received 2 million shares of Coyote stock, a portion of which was held in an escrow account to be released to KRJ if certain stock price targets were met and maintained. The stock was released from escrow to KRJ in March 2000, and it was subsequently exchanged by KRJ in April 2000 for $12.4 million. From March 2000 through September 2000, a time period that overlapped with KRJ's consulting agreement, Kelley, in his role as a stock broker, purchased Coyote stock for some of his clients without their authorization and encouraged other clients to purchase Coyote stock without disclosing to them his own interests in Coyote. On December 14, 2000, Coyote filed for bankruptcy, resulting in approximately $1.4 million in losses for Kelley's client-investors.
Around the same time as the Coyote scheme occurred, Kelley also encouraged his clients to purchase limited partnership interests in FVL, in which he owned a majority interest. Kelley told his clients that FVL was a safe, government-secured investment. As with Coyote, Kelley did not disclose to his clients his own personal interest in the company. Also, Kelley did not invest in FVL all of the deposited funds intended for purchasing interests in that entity; instead he misappropriated some of his clients' funds for his own use. FVL stopped receiving any revenue by May 2002, and the stock was practically worthless by January 2004. At least through June 2004, however, Kelley continued to mislead his clients about their investments, sending them bogus account statements which overstated the value of their investments in FVL.*fn1
Kelley employed a similar scheme with respect to E-Tel, in which he held stock and served as a director. Kelley misappropriated for his own use clients' funds meant for investment in E-Tel. Testifying in his own defense, Kelley asserted that he had not misappropriated the funds, but that he had instead sold his own shares to his clients. Kelley introduced no evidence to support this claim. By mid-2003, E-Tel had gone out of business and the investments were essentially of no value. Kelley continued, however, to mislead his clients about their investments in E-Tel by issuing bogus account statements through June 2004.*fn2
With respect to AusAm, Kelley served as a director of the company until 2001. As a director, Kelley had the opportunity to purchase shares in AusAm, but the record contains no evidence that he exercised this option. Kelley encouraged his clients to send him funds to invest in AusAm, which Kelley then misappropriated for his own use. Kelley again asserted in his own defense that he had sold his own personal holdings to his clients. There are no records of such sales, nor are there records that show either Kelley or any of his clients ever owned stock in AusAm. As with the other schemes, Kelley again misled his clients by falsely representing the value of their investments in bogus account statements,*fn3 even though no actual investment had been made.
On February 14, 2006, a superseding indictment issued charging Kelley with four counts of securities fraud and three counts of wire fraud stemming from four schemes involving securities in Coyote, E-Tel, and AusAm and involving the limited partnership investments in FVL. As part of describing Kelley's schemes to defraud, the superseding indictment referred to account statements sent to Kelley's clients which misrepresented the value of their investments in FVL, E-Tel, and AusAm.*fn4
Prior to the start of the jury trial, Kelley moved to strike the portions of the superseding indictment that referred to bogus account statements, arguing that the use of bogus account statements is insufficient to establish a securities violation because the false statements were not made in connection with the sale or purchase of securities. In a March 6, 2006 order, the district court denied Kelley's motion to strike the references to the bogus account statements, finding instead that the statements were relevant to Kelley's intent and his attempts to evade detection.
During the trial, the government presented testimony from Kelley's clients, executives and employees of the four different companies whose securities were involved in Kelley's schemes, an executive of Royal Alliance, Kelley's assistant at Acorn, and a Postal Inspector. The government also introduced into evidence the Acorn account statements in which Kelley had overvalued the clients' investments in FVL, E-Tel, and AusAm. Kelley testified in his own defense and called an additional client to testify on his behalf. In its closing argument, the government asserted that Kelley used the bogus account statements as a means of evading detection and to deter his clients from seeking to sell their investments. In response, Kelley argued that the statements were insufficient ...