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United States v. Brooks

October 27, 2009

UNITED STATES OF AMERICA,
v.
DAVID H. BROOKS, SANDRA HATFIELD, AND PATRICIA LENNEX, DEFENDANTS.



The opinion of the court was delivered by: Seybert, District Judge

MEMORANDUM AND ORDER

Pending before the Court is Defendant David H. Brooks*fn1 ("Brooks") Motion to Dismiss Counts Three, Four, and Five of the Second Superseding Indictment ("Indictment") pursuant to Rule 12(b) of the Federal Rules of Criminal Procedure. For the reasons set forth below, Defendant's motion to dismiss is DENIED.

BACKGROUND

The full facts have been set forth in detail in the numerous pre-trial orders previously filed in this case. Briefly, on August 16, 2006, the Government indicted Sandra Hatfield ("Hatfield"), the former Chief Operating Officer of D.H.B. Industries, Inc. ("DHB") for conspiracy to commit securities fraud, substantive securities fraud, and insider trading. On October 24, 2007, the Government filed a Superseding Indictment against Hatfield and added Brooks, the founder and former Chief Executive Officer of DHB, as a co-defendant. Then, on July 10, 2009, the Government filed a Second Superseding Indictment that added Patricia Lennex as a defendant in this action.*fn2 The Indictment is immaterially changed with respect to Brooks. Both Brooks and Hatfield were charged with securities fraud, conspiracy-to-commit mail and wire fraud, mail fraud, wire fraud, conspiracy to obstruct justice, obstruction of justice, and conspiracy to impair, impede, obstruct, and defeat the Internal Revenue Service ("IRS"). The Indictment separately charges Hatfield with three counts of insider trading and one count of tax evasion, and charges Brooks with six counts of insider trading, one count of making material misstatements to auditors, and two counts of filing false tax returns.

In his motion, Brooks contends that the Indictment is defective because the facts alleged are beyond the scope of the relevant criminal statutes. (Def.'s Mem. in Supp. 8.) Specifically, Brooks argues that the honest-services fraud prosecution must fail because he does not fit within the requirements of United States v. Rybicki, 354 F.3d 124 (2d Cir. 2003) (en banc). Brooks argues that no "scheme or artifice to defraud DHB" was alleged because the Indictment only alleges a scheme against the shareholders and the investing public, not DHB itself. (Def.'s Mem. in Supp. 10, 13.) Brooks maintains that not only does the Indictment fail to allege a scheme against DHB, but it implicates DHB in the scheme to defraud the shareholders. (Id. at 13.) Alternatively, Brooks contends that if any claims regarding his overcompensation exist, they only allege civil breaches of contracts, and facts constituting a tort are required for honest-services fraud. (Id. at 14.) Brooks also asserts that the honest-services fraud law will be drastically altered in the upcoming Supreme Court term because writs of certiorari have been granted in two honest-services fraud cases. (Def.'s Suppl. Mem. in Supp. 1-15.) In addition, Brooks argues that the Indictment is defective because it alleges Counts Three, Four, and Five in the conjunctive, rather than the disjunctive, as he alleges is required by the statute. (Def.'s Mem. in Supp. 11.) Moreover, Defendants argue that the dissemination of the 2004 DHB Proxy Statement ("Proxy Statement") was not in furtherance of the alleged scheme because the Proxy Statement did not defraud DHB. (Id. ¶¶ 16-23.) Brooks contends that if the Proxy Statement did defraud DHB, the alleged scheme was already complete, preventing the Proxy Statement from being "in furtherance of" the alleged scheme, thus depriving this Court of jurisdiction. (Id. ¶¶ 16-23.)

DISCUSSION

I. Standard of Review

A. Motion to Dismiss Standard

A motion to dismiss an indictment must satisfy a "high standard." United States v. Kerik, 615 F. Supp. 2d 256, 262 (S.D.N.Y. 2009). "As long as the indictment meets the constitutional requirements mandated by the Fifth and Sixth Amendments, it is sufficient." United States v. Lasky, 967 F. Supp. 749, 751 (E.D.N.Y. 1997). "[T]he sufficiency of the evidence is not appropriately addressed on a pretrial motion to dismiss an indictment." United States v. Alfonso, 143 F.3d 772, 777 (2d Cir. 1998); see also United States v. Villanueva Madrid, 302 F. Supp. 2d 187, 192 (S.D.N.Y. 2003) ("so long as an indictment count is facially valid, a trial court may not look beyond it to examine the sufficiency of the evidence supporting that count." (citing Alfonso, 143 F.3d at 776)). Therefore, the Court accepts the facts alleged in the indictment as true and determines only whether the indictment is "valid on its face." Costello v. United States, 350 U.S. 359, 363, 76 S.Ct. 406, 100 L.Ed. 397 (1956).

The Supreme Court of the United States has held that an indictment is sufficient if it: (1) "contains the elements of the offense charged and fairly informs a defendant of the charge against which he must defend," and (2) "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, 117-18, 94 S.Ct. 2887, 41 L.Ed. 2d 590 (1974) (internal citations omitted). Moreover, the Court held that "[i]t is generally sufficient that an indictment set forth the offense in the words of the statute itself, as long as 'those words of themselves fully, directly, and expressly, without any uncertainty or ambiguity, set forth all the elements necessary to constitute the offence intended to be punished.'" Id. (quoting United States v. Carll, 105 U.S. 611, 612, 15 Otto 611, 26 L.Ed. 1135 (1882)). And while "the language of the statute may be used in the general description of an offence, [] it must be accompanied with such a statement of the facts and circumstances as will inform the accused of the specific offence, coming under the general description, with which he is charged." Hamling, 418 U.S. at 117-18 (quoting United States v. Hess, 124 U.S. 483, 487, 8 S.Ct. 571, 31 L.Ed. 516 (1888)). Essentially, the indictment must meet the requirements of Rule 7(c)(1), which provides, in pertinent part, "[t]he indictment or information must be a plain, concise, and definite written statement of the essential facts constituting the offense charged . . . ." Fed. R. Crim. P. 7(c)(1); see also Lasky, 967 F. Supp. at 751.

B. Mail, Wire, and Honest-Services Fraud

The mail fraud statute, 18 U.S.C. § 1341, and the wire fraud statute, 18 U.S.C. § 1343, are treated in an identical manner. See United States v. Slevin, 106 F.3d 1086, 1088 (2d Cir. 1996) ("Because these statutes [18 U.S.C. § 1341 and § 1343] use the same relevant language, they are analyzed in the same way."). These statutes "prohibit the use of the mails or wires in furtherance of 'any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.'" Id. (quoting 18 U.S.C. §§ 1341, 1343); see also United States v. Reifler, 446 F.3d 65, 95 (2d Cir. 2006) ("In interpreting § 1343, we look not only to cases decided under that section but also to cases involving 18 U.S.C. § 1341, the mail fraud statute, as § 1341 uses the same relevant language in prohibiting the furtherance of fraudulent schemes by use of the mails.").

Three main elements constitute mail or wire fraud violations: (1) a scheme to defraud; (2) money, property, or honest services; and (3) use of the mails or wires in furtherance of the scheme. See United States v. Wallach, 935 F.2d 445, 461 (2d Cir. 1991) (providing the elements for mail fraud)*fn3 ; United States v. Bortnovsky, 879 F.2d 30, 39 (2d Cir. 1989) (discussing Congress's actions in passing 18 U.S.C. § 1346). Also, the government must prove that defendants acted with intent. Id. ("To establish the existence of a scheme to defraud, the government must present proof that the defendants possessed a fraudulent intent."). No actual injury is required. Id. ("the government is not required to show that the intended victim was actually defrauded." (citations omitted)). It is only necessary that defendants "contemplated some actual harm or injury." Id.; see also United States v. Gotti, 459 F.3d 296, 331 (2d Cir. 2006) ("this Circuit has held that in wire fraud cases, it is the scheme itself, rather than its success, that is the required element for conviction."). Moreover, defendants do not have to personally dispatch the fraudulent information via the mails or wire. Slevin, 106 F.3d at 1089 ("The mailings do not need to be done by the defendant personally . . . ."). Instead, the government only has to prove "that the defendants 'caused' the mailing, namely that they must have acted 'with knowledge that the use of the mails will follow in the ordinary course of business, or where such use can reasonably be foreseen, even though not actually intended . . . .'" Bortnovsky, 879 F.2d at 36 (quoting Pereira v. United States, 347 U.S. 1, 8-9, 74 S.Ct. 358, 98 L.Ed. 435 (1954)); see also Slevin, 106 F.3d at 1089 (quoting Bortnovsky with approval). Additionally, the government must prove "that the mailing was for the purpose of executing the scheme or, in other words, 'incident to an essential part of the scheme.'" Bortnovsky, 879 F.2d at 36 (citing Pereira, 347 U.S. at 8-9); see also Slevin, 106 F.3d at 1089 (quoting Bortnovsky with approval).

There is no strict timing requirement for the mailing or wire; the mailing need not precede the fraud. Slevin, 106 F.3d at 1089. When there is a fraudulent pattern, even post-fraud mailings or wires can satisfy the "in furtherance of" requirement. Slevin, 106 F.3d at 1089-90 ("[w]here the frauds are not isolated or unrelated swindles, postfraud mailing[s] . . . may further the scheme by, for example, lulling the victims into believing they received the services fraudulently promised, or by helping to keep the scheme in operation by preserving a needed business relationship between a fraud victim and the defendant." (citations omitted)).

In addition to money and property, a scheme to defraud another of the "intangible right to honest services" violates the mail and wire fraud statutes. 18 U.S.C. § 1346 (2009). Congress passed the honest-services fraud statute, 18 U.S.C. § 1346, in response to the Supreme Court's decision in McNally v. United States.*fn4 See Bortnovsky, 879 F.2d at 39 ("Section 1346, adopted in 1988, ensures that mail fraud encompasses 'scheme[s] . . . to deprive another of the intangible right of honest services' and thereby overrules McNally v. United States . . . ."). As a result, the mail and wire fraud statutes now prohibit a "scheme or artifice to deprive another of the intangible right of honest services". 18 U.S.C. §§ 1341, 1343, and 1346 (2009); Reifler, 446 F.3d at 95 ("In addition to encompassing schemes to obtain money and property, 'the term "scheme or artifice to defraud" includes a scheme or artifice to deprive another of the intangible right of honest services.'" (quoting 18 U.S.C. § 1346)). Under § 1346, the focus is on the scheme; the "'crime [is] to devise a scheme to deprive another of the right of honest services' and this scheme to defraud is an essential element of the crime." United States v. Middlemiss, 217 F.3d 112, 120 (2d Cir. 2000) (emphasis in original) (quoting United States v. Sancho, 157 F.3d 918, 920 (2d Cir. 1998) (per curiam), cert. denied, 525 U.S. 1162, 119 S.Ct. 1076, 143 L.Ed. 2d 79 (1999)).

II. The Indictment Adequately Alleges a Scheme or Artifice to Defraud

Brooks argues that the Government failed to allege a scheme or artifice to defraud. Defendants put forth several different arguments in support of this claim. Each argument is addressed individually in the following sections.

A. The Government Properly Alleges a Fraudulent Scheme Against DHB

Brooks argues that the Government flip-flops between the identity of the targets of the alleged fraud. (Def.'s Mem. in Supp. 10-13.) At times, Brooks argues, the Government cites "the shareholders of DHB and the investing public" as the fraud's target. (Id.) But in the Mail and Wire Fraud Counts, he notes that the Government cites DHB itself as the victim. (Id.) And according to Brooks, the Indictment "fails to identify any scheme or artifice directed at DHB, or to affirmatively reference any fraudulent pretense, representation or promise made by Mr. Brooks to DHB with a view toward obtaining its money or property." (Id. at 13; see also Def.'s Reply, 4.) Brooks is incorrect.

The Government's response letter, which is quite sparse, simply points out that Brooks cites no caselaw to support his contention, and the Government's independent research discovered none. Rather, the Government only argues that fraud is criminalized "in connection with any security of an issuer with a class of securities . . . ." (Id. (quoting 18 U.S.C. § 1348(1), (2).*fn5 ) And since DHB is an issuer of securities, the Government argues that the Indictment sets forth the factual elements to support the fraud offenses. But Brooks's arguments concern different sections of Title 18 than the Government's response.

It is possible to commit fraud against a corporation itself. See, e.g., Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 456 (7th Cir. 1982) ("Fraud on behalf of a corporation is not the same thing as fraud against it."); In re Maxwell Newspapers, Inc., 164 B.R. 858, 869 (Bankr. S.D.N.Y. 1994) ("The fraud which the Maxwells committed was one against Maxwell Newspapers, not on its behalf.").*fn6 The Government has alleged that Brooks perpetrated his fraudulent scheme against DHB---the corporation.

The Government here has set forth the challenged offenses in the words of the statutes themselves, and set forth all of the necessary elements to constitute the offenses intended to be punished (conspiracy to commit, mail, and wire fraud). The Government has thus met Hamling's requirements. Hamling, 418 U.S. at 117-18; (see also 2d Sup. Indict. ΒΆΒΆ 92, 94, 96). The Government has alleged that Brooks defrauded DHB, depriving it of: the intangible right to the honest services of Brooks and Hatfield (among others), money, and property. Defendants did this by, for example: overstating DHB's quarterly and annual gross profit margins, inventories, and earnings; fraudulently adjusting DHB's subsidiary Point Blank's quarterly reports; fraudulently inflating the value of DHB's and Point Blank's inventories; lying to independent auditors; and diverting millions of dollars worth of DHB assets to ...


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