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United States v. Mandell

May 3, 2010


The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge


Defendants Ross Mandell ("Mandell"), Stephen Shea, Adam Harrington, Arn Wilson, Robert Grabowski and Michael Passaro are charged with one count of conspiracy to commit securities fraud, mail fraud and wire fraud and one substantive count of securities fraud. The Indictment alleges that, from 1998 through 2006, Mandell and his co-defendants participated in a scheme to defraud investors by soliciting funds under false pretenses, manipulating the market for certain securities, and by misappropriating and failing to use investors' funds as promised. The Defendants, along with others under their control, allegedly used "boiler room" sales tactics to bilk investors out of millions of dollars.

Mandell moves to suppress all evidence seized pursuant to two search warrants executed in November, 2006, at the offices of Sky Capital Holdings Ltd. ("SKH"), Sky Capital LLC ("Sky LLC") and Sky Capital Enterprises ("SKE") (collectively, "Sky Capital"). The first warrant, which was executed on or about November 6, 2006, authorized the search of Sky Capital's offices at 110 Wall Street in New York, New York (the "Sky Offices"). The second warrant, which was executed on or about November 9, 2006, authorized the search of a basement storage area at 110 Wall Street. The search warrants were issued based on an affidavit (the "Affidavit") submitted on November 2, 2006 by Special Agent Kurt Dengler ("Dengler") of the Federal Bureau of Investigations ("FBI"). Mandell contends Dengler omitted material information from his Affidavit in reckless disregard for the truth and seeks suppression of the two searches under Franks v. Delaware, 438 U.S. 154 (1978). In the alternative, Mandell asks the Court to hold a Franks hearing to determine whether suppression is required.

A Franks hearing is required when the defendant makes a "substantial preliminary showing" that a false statement was made in the search warrant affidavit either "knowingly and intentionally" or with "reckless disregard for the truth," and that "the allegedly false statement is necessary to the finding of probable cause." Franks, 438 U.S. at 155-56. Upon review of Mandell's motion papers and memoranda of law, and after oral argument, the Court finds that Mandell has failed to make such a "substantial preliminary showing" and the motion to suppress and for a Franks hearing is DENIED.

Mandell also moves for a bill of particulars under Rule 7(f) of the Federal Rules of Criminal Procedure. Among other things, he seeks to compel the Government to particularize the allegations in the Indictment regarding misrepresentations allegedly made to investors and to identify the allegedly defrauded investors. The level of detail sought demonstrates that the request is nothing more than an "ill-disguised attempt[] at general pretrial discovery." United States v. Torres, 901 F.2d 205, 234 (2d Cir. 1990).

The indictment adequately apprises Mandell of the charges against him and his motion for a bill of particulars is DENIED.*fn1

I. Validity of the Warrants

There is a "presumption of validity with respect to the affidavit supporting a search warrant." Franks, 438 U.S. at 171; see also United States v. Awadallah, 349 F.3d 42, 66 (2d Cir. 2003). In certain limited circumstances, however, "a defendant may challenge the truthfulness of factual statements made in the affidavit, and thereby undermine the validity of the resulting search or seizure." United States v. Martin, 426 F.3d 68, 73 (2d Cir. 2005) (quoting Awadallah, 349 F.3d at 64.) "One such circumstance is where the affidavit in support of the search warrant is alleged to contain deliberately or recklessly false or misleading information." United States v. Canfield, 212 F3d 713, 717 (2d Cir. 2000).

Hearings under Franks are not freely granted. The defendant "must make a 'substantial preliminary showing' that: (1) the claimed inaccuracies or omissions [in the affidavit] are the result of the affiant's deliberate falsehood or reckless disregard for the truth; and (2) the alleged falsehoods or omissions were necessary to the judge's probable cause finding." United States v. Salameh, 152 F.3d 88, 113 (2d Cir. 1998) (citing United States v. Levasseur, 816 F.2d 37, 43 (2d Cir. 1987)). In Franks the Court explained that, [t]o mandate an evidentiary hearing, the challenger's attack must be more than conclusory and must be supported by more than a mere desire to cross-examine. There must be allegations of deliberate falsehood or of reckless disregard for the truth, and those allegations must accompanied by an offer of proof. They should point out specifically the portion of the warrant affidavit that is claimed to be false; and they should be accompanied by a statement of supporting reasons. Affidavits or sworn or otherwise reliable statements should be furnished, or their absence satisfactorily explained.

Franks, 348 U.S. at 171; see also United States v. Falso, 544 F.3d 110, 125-26 (2d Cir. 2008). If the requisite "substantial preliminary showing" is made, and a hearing is held, the defendant must establish that there were intentional or reckless material misstatements or omissions in the search warrant affidavit by a preponderance of the evidence. See Franks, 348 U.S. at 156; United States v. Klump, 536 F.3d 113, 119 (2d Cir. 2008); United States v. Ferguson, 758 F.2d 843, 848 (2d Cir. 1985).

"[E]very statement in a warrant affidavit does not have to be true," United States v. Martin, 426 F.3d 68, 73 (2d Cir. 2005), and "[a]llegations of negligence or innocent mistake are insufficient." Franks, 438 U.S. at 171; see also United States v. Tranquillo, 606 F. Supp. 2d 370, 379 (S.D.N.Y. 2009). Further, "the mere intent to exclude information is [likewise] insufficient . . . [since] every decision not to include certain information in the affidavit is 'intentional' insofar as it is made knowingly." Awadallah, 349 F.3d at 67-68 (quoting United States v. Colkley, 899 F.2d 297, 300-01 (4th Cir. 1990)). "[A]n affiant cannot be expected to include in an affidavit every piece of information gathered in the course of an investigation." Id. (quoting Colkley, 899 F.2d at 300-01).

While the meaning of "an intentional falsehood is self-evident," United States v. Kunen, 323 F. Supp. 2d 390, 395 (E.D.N.Y. 2004), the same cannot be said for the term "reckless disregard for the truth." Franks does not explain the term "beyond indicating that it is something more than mere negligence on the part of the affiant." Kunen, 323 F. Supp. 2d at 395 (citing Franks, 438 U.S. at 171). The Second Circuit has held that "recklessness may be inferred when omitted information was 'clearly critical' to assessing the legality of the search." United States v. Riley, 76 F.3d 1271, 1280 (2d Cir. 1996). "[M]ost circuits that have considered the question have embraced a subjective test for recklessness similar to that used in First Amendment libel cases . . . ." United States v. Vilar, No. S305CR621KMK, 2007 WL 1075041, at *26 (S.D.N.Y. Apr. 4, 2007) (collecting cases). Under the prevailing standard, "the question is not what a reasonably prudent person would have appreciated given the attendant circumstances but rather whether the defendant in fact entertained serious doubts as to the truth of the subject statements." Kunen, 323 F. Supp. 2d at 395 (quotation marks omitted) (collecting cases); see Vilar, 2007 WL 1075041, at * 26 ("one 'recklessly disregards' the truth when one makes allegations while entertaining serious doubts about the accuracy of those allegations."). In considering Franks challenges, lower courts in this Circuit have applied this "serious doubt" standard. See United States v. Goldenberg, No. 05 CR. 1034(DC), 2006 WL 266564, at *4 (S.D.N.Y. Feb. 3, 2006); United States v. Harper, No. 05-CR-6068L, 2006 WL 2873662, at *8 (W.D.N.Y. Oct. 6, 2006); Vilar, 2007 WL 1075041, at *27; Kunen, 323 F. Supp. 2d at 395; United States v. Markey, 131 F. Supp. 2d 316, 324 (D. Conn. 2001).

There is some authority for applying a different "reasonable person" test to omissions as opposed to false assertions. See, e.g., Wilson v. Ruso, 212 F.3d 781, 788 (3d Cir. 2000); United States v. Harding, 273 F. Supp. 2d 411, 426 (S.D.N.Y. 2003); United States v. Perez, 247 F. Supp. 2d 459, 474 (S.D.N.Y. 2003).*fn2 In Vilar, however, Judge Karas declined to apply the "reasonable person" test to omissions, explaining that "a test that invokes the mythical 'reasonable person' speaks the language of negligence. Yet, as noted, 'allegations that amount to negligence or innocent mistake do not constitute the required [Franks] showing.'" Vilar, 2007 WL 1075041, at *27 (quoting Kunen, 323 F. Supp. 2d at 395). Judge Karas' reasoning finds support in the Second Circuit's holding that "recklessness may be inferred when omitted information was 'clearly critical' to assessing the legality of the search." Riley, 76 F.3d at 1280 (2d Cir. 1996) (citing Rivera v. United States, 928 F.2d 592, 604 (2d Cir. 1991)). The Court joins Judge Karas in holding that, regardless of whether the defendant complains of false assertions or omissions, "'the question is not what a reasonably prudent person would have appreciated given the attendant circumstances but rather whether' the affiant at least had reason to seriously doubt the truth of the allegations." Vilar, 2007 WL 1075041, at *27 (quoting Kunen, 323 F. Supp. 2d at 395).

While under Franks, false assertions and omissions are governed by the same "serious doubt" standard, as a practical matter "the affirmative inclusion of false information in an affidavit is more likely to present a question of impermissible official conduct than a failure to include a matter that might be construed as exculpatory." Colkley, 899 F.2d at 301; see also United States v. Atkin, 107 F.3d 1213, 1217 (6th Cir. 1997). This is because allegations of omission "potentially open[] officers to endless conjecture about investigative leads, fragments of information, or other matter that might, if included, have redounded to defendant's benefit." Colkley, 899 F.2d at 301; see also Atkin, 107 F.3d at 1217. "'All storytelling involves an element of selectivity,' so it is not shocking that '[e]very affidavit will omit facts which, in retrospect, seem significant.'" Vilar, 2007 WL 1075041, at *27 (citations omitted).

"To determine if the false information was necessary to the issuing judge's probable cause determination, i.e., material, 'a court should disregard the allegedly false statements and determine whether the remaining portions of the affidavit would support probable cause to issue the warrant.'" Awadallah, 349 F.3d at 65 (quoting Canflied, 212 F.3d at 718). Omissions from a warrant affidavit "are not material unless they cast doubt on probable cause. The omitted information and the information in the affidavit must be considered as a whole in determining if probable cause continues to exist." United States v. Marin-Buitrago, 734 F.2d 889, 895 (2d Cir. 1984). As explained by the Fourth Circuit in Colkley, "[f]or an omission to serve as the basis for a hearing under Franks, it must be such that its inclusion in the affidavit would defeat probable cause . . . . Omitted information that is potentially relevant but not dispositive is not enough to warrant a Franks hearing." Colkley, 889 F.2d at 301. In the final analysis, "[i]f the corrected affidavit supports probable cause, the inaccuracies were not material to the probable cause determination and suppression is inappropriate." Canfield, 212 F.3d at 718.

In Illinois v. Gates, the Supreme Court explained that "probable cause is a fluid concept -- turning on the assessment of probabilities in particular factual contexts -- not readily, or even usefully, reduced to a neat set of legal rules." 462 U.S. 213, 232 (1983). "The task of the issuing magistrate [or judge] is simply to make a practical, common-sense decision whether, given all the circumstances set forth in the affidavit before him, . . . there is a fair probability that contraband or evidence of a crime will be found in a particular place." Falso, 544 F.3d at 117 (quoting Gates, 426 U.S. at 238). In assessing probable cause, courts consider the "totality of the circumstances," Gates, 462 U.S. at 230-31, and the evidence "must be seen and weighed not in terms of library analysis by scholars, but as understood by those versed in the field of law enforcement." Gates, 462 U.S. at 232.

SKH and SKE were both Delaware corporations whose stock was publicly traded on the Alternative Investment Market ("AIM") of the London Stock Exchange. (Affidavit ¶¶ 7, 4, Affirmation of Susan Wolfe ("Wolfe Aff."), Ex. A.) Sky LLC was a brokerage firm based in New York City. (Id. ¶ 7.) Prior to founding Sky Capital, Mandell worked at, and allegedly controlled, The Thornwater Company, L.P. ("Thornwater"), a venture capital firm and broker-dealer. (Id. ¶ 8.) In late August, 2006, Dengler submitted an affidavit in support of a warrant to search the Sky Offices. The affidavit was based primarily on recorded conversations between a cooperating witness who had worked with Mandell at Thornwater named Mario Figueroa ("Figueroa") and a Sky Capital broker named Philip Akel ("Akel"). (Defendant's Memorandum in Support ("Defendant's Mem. at 2, 4.) Figueroa had been convicted of securities fraud in an unrelated case and hoped to receive a more lenient sentence by cooperating with the Government. (Affidavit ¶ 9.) Based on Dengler's affidavit, Magistrate Judge Gabriel Gorenstein issued a search warrant for the Sky Offices on August 24, 2006. (Id. ¶ 4.) After the warrant issued, however, Akel agreed to cooperate with the Government upon being told he was under investigation. (Id.) In light of this, the Government decided not to execute the search warrant in order afford the FBI more time to gather information. (Id.)

On November 2, 2006, Dengler submitted the affidavit in question to Magistrate Judge Douglas Eaton. (Government's Memorandum in Opposition ("Government's Mem.") at 2; Defendants Mem. at 2; Affidavit at 38.) In the Affidavit, Dengler described, among other things, information conveyed by Figueroa (including information about three investors who dealt with Mandell and Sky Capital), Akel and an investor who claims he was defrauded by Mandell named Christopher Tappin ("Tappin"). Dengler also described a number of consensually recorded conversations, as well as information obtained by two undercover FBI agents. Based on this and other information, the Affidavit states that there is probable cause to believe that Mandell and others at Sky Capital are, and have been: disseminating materially false and misleading statements in order to induce investors to purchase securities; running a "ponzi" scheme; and manipulating the market for securities issued by SKH and SKE. (Affidavit ¶ 6.)

The Affidavit read by itself is more than sufficient to establish probable cause. At oral argument Mandell suggested that there was only one false statement -- that the level of commission paid on sales of SKE stock was 50%. See infra pp. 17-18; (Affidavit ¶ 18.) But even if that statement is incorrect, it is well short of a false statement knowingly and intentionally made. The Affidavit makes numerous references to a 10% commission; but if Dengler intended to deceive, he would not have referred to the 10% commission and he certainly would not have referred to the 10% commission on numerous occasions.

The primary basis for Mandell's attack on the Affidavit's sufficiency is not that it was deliberately false and misleading, but rather that Dengler omitted a vast array of information. According to Mandell, the omissions were of a magnitude and nature that made the Affidavit false. He argues that that the Dengler's sources of information were "fundamentally flawed." (Defendant's Mem. at 23.) According to Mandell, Figueroa's allegations "were not corroborated," and since he was cooperating with the Government in the hopes of leniency, his credibility "was necessarily suspect." (Id.) Further, Tappin was the only allegedly defrauded investor identified by Dengler, and that Tappin's story was suspect. (Id.) The recorded conversation involving Figueroa and Akel were not fairly represented; indeed, the recordings only implicate Figueroa and Akel in criminal behavior. (Id.) Finally, Akel's allegations were contradicted by tape recordings he helped to obtain after he agreed to cooperate. (Id.)

These omissions, Mandel claims, were critical to the finding of probable cause and were made with reckless disregard for the truth. As he sees it, if the omitted information is included in the Affidavit, probable cause for the search warrants vanishes, and so, the fruits of the FBI search of ...

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