The opinion of the court was delivered by: Matsumoto, United States District Judge:
On December 30, 2011, after a jury trial, defendant Courtney Dupree ("defendant") was convicted of a conspiracy to commit bank fraud, bank fraud, and two counts of making a false statement in connection with a complex $18 million scheme to defraud Amalgamated Bank by obtaining or attempting to obtain loans on the basis of false financial statements and other material misrepresentations between January 2007 and July 2010. Presently before the court are Mr. Dupree's motions for a judgment of acquittal pursuant to Federal Rule of Criminal Procedure 29 ("Rule 29"), or alternatively, a new trial pursuant to Federal Rule of Criminal Procedure 33 ("Rule 33"). For the reasons set forth below, Mr. Dupree's motions are denied.
I. The Charges Against Mr. Dupree
Mr. Dupree, a Wharton Business School graduate and the chief executive officer of GDC Acquisitions, LLC ("GDC"), was charged in all five counts of a five-count Second Superseding Indictment. (See ECF No. 295, Second Superseding Indictment ("S-2 Indictment").) Count One charged Mr. Dupree with Conspiracy to Commit Bank, Mail, and Wire Fraud in violation of 18 U.S.C. §§ 1349, 3551 et seq. (Id. ¶¶ 18-19.) Count Two charged Mr. Dupree with Bank Fraud in violation of 18 U.S.C. §§ 2, 1344, 3551 et seq. (Id. ¶¶ 20-21.) Counts Three and Four charged Mr. Dupree with Making a False Statement on or about January 6, 2010 and May 24, 2010, respectively, by "willfully overvalu[ing] property and security, for the purpose of influencing the action of Amalgamated Bank upon one or more loans" in violation of 18 U.S.C. §§ 2, 1014, 3551 et seq. (Id. ¶¶ 22-25.) Finally, Count Five charged Mr. Dupree with an additional count of Bank Fraud in violation of 18 U.S.C. §§ 2, 1344, 3551 et seq. (Id. ¶¶ 26-27.)*fn1
Thomas Foley, GDC's outside counsel and subsequently its general counsel and chief operating officer, was also charged in Counts One, Two, and Four of the S-2 Indictment. Rodney Watts, GDC's chief financial officer ("CFO") and chief investment officer, was charged in Counts One through Four of the S-2 Indictment. Mr. Foley went to trial with Mr. Dupree and was acquitted of all charges, and Mr. Watts' trial was stayed pending a Second Circuit appeal and is currently scheduled to begin on March 11, 2013.
The core of the fraud charges in the S-2 Indictment are that Mr. Dupree, together with others, deliberately engaged in a scheme to defraud Amalgamated Bank ("Amalgamated) by falsely overstating accounts receivable figures on borrowing base certificates provided to Amalgamated, which were used to determine the amount that GDC's subsidiaries could borrow from Amalgamated in any given month. (Id. ¶¶ 8-17.) Additionally, it was alleged that Mr. Dupree further defrauded Amalgamated by having GDC covertly purchase Image Lighting, Inc. in violation of the loan agreement with Amalgamated, and concealing the purchase from Amalgamated. (Id. ¶ 15.) Finally, the S-2 Indictment charged Mr. Dupree with attempting to obtain approximately $5 million in funding from C3 Capital, LLC ("C3 Capital"), a private equity investment firm, by submitting false financial statements and accounts receivable aging reports to C3 Capital that fraudulently inflated GDC's accounts receivable. (Id. ¶ 16.)
II.The Trial and Jury Verdict
After jury selection on December 5, 2011, trial commenced with opening statements the following day on December 6, 2011. The government presented evidence over the course of the next two weeks and rested its case on December 20, 2011.
Mr. Dupree then presented a defense case over the next week consisting of, inter alia, character witnesses as well as his own testimony, and Mr. Foley also presented an expert witness in legal ethics. After Mr. Dupree and Mr. Foley rested their cases on December 27, 2011, the parties gave their closing arguments on December 28 and 29, 2011. Finally, on December 29, 2011, the jury was charged and began deliberations.
On December 30, 2012, the jury returned its verdict finding Mr. Dupree guilty of Counts One through Four and acquitting Mr. Foley of all charges. (See ECF No. 506, Jury Verdict.) Specifically, with respect to Count One, the jury found that Mr. Dupree conspired to commit bank fraud but that he did not conspire to commit mail or wire fraud. (Id. at 1.) The jury was retained to determine issues of forfeiture in a separate phase of the trial following the guilty verdict. See Fed. R. Crim. P. 32.2(b)(5). On January 3, 2012, the jury found that Mr. Dupree was liable for a forfeiture money judgment in the amount of $18,157,000 as representing proceeds traceable to the offenses for which he was convicted, and that the funds in eight bank accounts and a tax refund were also subject to forfeiture as representing property traceable to those offenses. (See ECF No. 511, Special Verdict Sheet for Forfeiture.)
III.The Government's Case-in-Chief
The case against Mr. Dupree involved a month-long trial with the testimony of over 25 witnesses, hundreds of exhibits consisting of emails and lengthy financial documents, and recorded conversations made by a government cooperator. Given the complexity of the fraud scheme, the immense volume of evidence presented at trial, and the "heavy burden" faced by Mr. Dupree in challenging the sufficiency of the evidence supporting his conviction, the court will not attempt to summarize all the evidence supporting Mr. Dupree's conviction but will highlight the most compelling evidence -- which is quite extensive - from which the jury could find beyond a reasonable doubt the essential elements of the crimes charged. See United States v. Davis, 690 F.3d 127, 131-32 (2d Cir. 2012). In summarizing the evidence at trial, the court is mindful that "[i]n reviewing a challenge to the sufficiency of the evidence underlying a guilty verdict, [the court] 'must review the evidence in the light most favorable to the government, drawing all reasonable inferences in its favor.'" United States v. Cain, 671 F.3d 271, 302 (2d Cir. 2012) (quoting United States v. Gaskin, 364 F.3d 438, 459 (2d Cir. 2004)).
As discussed below, in addition to the physical and documentary evidence presented, the majority of the government's case is based on the testimony of three former employees of GDC who cooperated with the government and pleaded guilty to participating in a conspiracy to commit bank fraud with Mr. Dupree. These former employees include (1) Emilio Serrano, GDC's former assistant comptroller; (2) Irma Nusfaumer, GDC's former comptroller; and (3) Frank Patello, GDC's former CFO. All three of these former employees face a maximum prison sentence of 30 years at sentencing for their participation in the bank fraud conspiracy.
A. GDC and Its Subsidiaries
At all relevant times between January 2007 and July 2010, Mr. Dupree was the chief executive officer and nearly sole owner of GDC.*fn2 (Tr. 412, 1973, 2215.) GDC was a holding company that had three wholly-owned primary operating subsidiaries, all of which were acquired by GDC prior to 2007: (1) JDC Lighting, LLC ("JDC Lighting"), which sold commercial lighting fixtures for commercial property; (2) Unalite Electric and Lighting, LLC ("Unalite"), a lighting maintenance company for corporations and other large enterprises; and (3) Hudson Bay Environments Group, LLC ("Hudson Bay"), which sold commercial office furniture to schools, hospitals, and government entities (GDC, together with JDC Lighting, Unalite, and Hudson Bay, the "Company"). (Tr. 376-78, 416-417, 1367, 1974.) As of April 2007, GDC's offices were located in Long Island City in Queens, New York. (Tr. 1696-97.)
B. Obtaining the Loans from Amalgamated Bank
In or around April or May of 2008, George Jarvis, a loan officer for Amalgamated, first became aware of GDC and met with Mr. Dupree, Mr. Watts, and Mr. Patello regarding a possible loan to the Company. (Tr. 1971-73, 2229.) At the time of that meeting, Mr. Watts was GDC's chief investment officer and Mr. Patello was GDC's CFO. (Tr. 1973, 2229.) In connection with this meeting, Mr. Dupree and his employees provided Amalgamated with information concerning the financial condition of the Company, including audited financial statements, accounts receivable reports*fn3 , aging reports, backlog reports, and acquisition documents for companies acquired, such as Hudson Bay. (Tr. 1974, 2229-31.)
In connection with a loan application by the Company, Amalgamated was provided the draft consolidated financial statements of the Company for the period ending December 31, 2007, which were prepared by an independent auditor based on information provided by the Company (the "2007 Financial Statement"). (Government Exhibit ("GX") 148; Tr. 1975-77.) The 2007 Financial Statement represented that "[t]he Company recognizes revenue at the time products are delivered to customers or when maintenance services are provided" (the "Revenue Recognition Policy"). (GX 148 at 7.) Mr. Jarvis testified that the 2007 Financial Statement, particularly the Revenue Recognition Policy, the net income figures, and the availability of collateral, played an important role in Amalgamated's decision to loan money to the Company. (Tr. 1977-78, 1992.) Specifically, the Revenue Recognition Policy was important because when the Company booked a sale and recognized revenue, it created a receivable that was collateral for the Amalgamated loan. (Tr. 1978.) Additionally, net income was important because it showed that the Company was viable, was growing its equity base, and had the ability to generate cash flow to repay a loan. (Tr. 1978-79.)
Mr. Patello testified that the 2007 Financial Statement falsely reported the Company's net income to be approximately $1.547 million when it was only half that amount, or approximately $720,000, and that Mr. Dupree and Mr. Watts knew about this false figure prior to the submission of the 2007 Financial Statement to Amalgamated. (Tr. 2231-34, 2240-43.) Furthermore, Irma Nusfaumer testified that, at the direction of Mr. Patello, she submitted reports to Amalgamated personnel in connection with the loan application process that included accounts receivable for products that had not yet been delivered to customers, in violation of the Revenue Recognition Policy. (Tr. 1288-90.) Mr. Jarvis testified that, had he known in August 2008 that the Company was recognizing revenue before products were delivered, he would not have recommended a loan because such a practice would indicate that the books and records of the Company were not being maintained in accordance with Generally Accepted Accounting Principles ("GAAP"). (Tr. 2064-65.) In other words, according to Mr. Jarvis, the practice of recognizing accounts receivable for products that had not yet been delivered increased the risk of the bank relying on "false collateral." (Id.)
In or around November 3, 2008, after Amalgamated had extended the loans described below, Amalgamated received the final version of the 2007 Financial Statement, which contained the same Revenue Recognition Policy and net income figures as the draft statements provided in connection with the loan application. (Tr. 1980-81, 2245-46; GX 188.)
C. The Terms of the Loans
Mr. Dupree signed the loan agreement dated August 29, 2008 (the "Loan Agreement") on behalf of JDC Lighting, Unalite, and Hudson Bay (the "Borrower Subsidiaries"), and on behalf of GDC as guarantor, pursuant to which Amalgamated extended two loans to the Borrower Subsidiaries: (1) a $2.5 million three-year term loan, which was to be repaid via monthly payments of $41,666.67 plus interest with an approximate one million dollar balloon payment at the end of the three-year term (the "Term Loan"); and (2) an $18.5 million revolving loan or line of credit, pursuant to which the Borrower Subsidiaries could borrow up to $18.5 million (the "Revolving Loan"). (Tr. 1982-84; see generally GX 8 (the Loan Agreement).)
In connection with these loans, the Borrower Subsidiaries' accounts receivable and inventory served as collateral that Amalgamated could collect in the event the Borrower Subsidiaries failed to repay the loan in accordance with the Loan Agreement. (Tr. 1991-92.) The Loan Agreement also restricted the use of loan proceeds to (1) repay outstanding indebtedness to Steelcase, Inc., a creditor of the Company, and PNC Bank, the Company's former lender; (2) working capital to assist in financing the expansion of the principal businesses, capital expenditures, and general corporate purposes; and (3) payment of fees and expenses in connection with the loans. (Tr. 1993; Loan Agreement § 1.07.) Although GDC was not a borrower under the Loan Agreement, it guaranteed all the obligations of the Borrower Subsidiaries in connection with the Loan Agreement. (Tr. 1983; Loan Agreement § 1.08; see also GX 8 (the Guarantee Agreement (DOJ-GDC-000000637-44).)
The maximum amount that could be borrowed under the Revolving Loan was calculated using a formula based on the Borrower Subsidiaries' "eligible" accounts receivable ("Eligible A/R") and inventory ("Eligible Inventory"). (Tr. 1985-86.) The Loan Agreement defined "Account Receivable" as "any right of any Borrower to payment for goods sold or services rendered, whether now existing or hereafter arising," and "Inventory" as "all finished goods, raw materials and other merchandise of the Borrowers . . . held for sale." (Loan Agreement § 8.01.) Specifically, the Borrower Subsidiaries could borrow up to (1) 75% of the Eligible A/R, which excluded, inter alia, accounts receivable recognized from "bill and hold" or deferred shipment transactions and accounts receivable that had not been paid in full within 120 days after the invoice date, and (2) 50% of Eligible Inventory, which excluded, inter alia, obsolete, defective, or damaged inventory. (Tr. 1986-87; Loan Agreement §§ 1.01(a), 8.01.) The rationale underlying the exclusion of accounts receivable older than 120 days was that such accounts receivable were unlikely to be collected and could not serve as "healthy" collateral to secure the loan. (Tr. 1987-88.)
The total amount that could be borrowed on the Revolving Loan at any time pursuant to the formula described above is called the "Borrowing Base," which is essentially the amount of collateral available to secure the loan. (Tr. 1985-86; Loan Agreement § 8.01.) The minimum payment the Borrower Subsidiaries were required to make for the Revolving Loan consisted of the interest on the outstanding principal balance on a monthly basis, a payment the Borrower Subsidiaries made each month. (Tr. 1989-90.) If, at any given time, the outstanding balance exceeded the Borrowing Base, Amalgamated could require the Borrower Subsidiaries to repay the excess amount so that the outstanding balance would not exceed the Borrowing Base. (Id.)*fn4
The Borrower Subsidiaries were also required to provide a borrowing base certificate ("BBC") to Amalgamated on a monthly basis that calculated the Borrowing Base, reported the Eligible A/R and Eligible Inventory figures, and listed the amount available under the line of credit, which was the Borrowing Base less the outstanding balance. (Tr. 1990-91; Loan Agreement § 5.01(j); GX 11 (BBCs).) Every one of the BBCs submitted to Amalgamated was signed by either Mr. Patello, Mr. Dupree, and/or Mr. Watts, and stated in relevant part:
The Undersigned [Mr. Dupree, Mr. Patello, and/or Mr. Watts] of GDC Acquisitions, LLC (the "Company"), do hereby certify to Amalgamated Bank (the "Bank"), intending that the Bank rely on this [Borrowing Base] Certificate in extending credit to the Company, that based upon the books and records of the Company and its subsidiaries which are true and correct as of [the relevant date], the following items of the Company and its subsidiaries on a consolidated basis were as set forth below: (GX 11.) From the BBC, it could also be determined whether the outstanding balance on the Revolving Loan exceeded the Borrowing Base. (See id.) Attached to the BBCs was an aging report that showed the due date of each accounts receivable used to calculate the Borrowing Base and whether or not such accounts receivable were more than 120 days old. (Tr. 2039-40, 2048; see Loan Agreement § 5.01(j).)
Additionally, the Loan Agreement contained negative covenants stating that the Borrower Subsidiaries "shall not, directly or indirectly": (1) "[c]onsolidate with, be acquired by, or merge into or with any Person . . . except in the ordinary course of business" (Loan Agreement § 6.03); or (2) "[m]ake any loan or advance to, or enter into any arrangement for the purpose of providing funds or credit to, or make any other investment, by capital contribution or otherwise, in or with any Person" except for a money market or investment account at Amalgamated or "extensions of credit in the nature of accounts receivable or notes receivable" (id. § 6.04). Mr. Jarvis, who negotiated these provisions, testified that they prevented the Borrower Subsidiaries from buying or investing in any other companies without permission from Amalgamated. (Tr. 1997.) For example, if one of the Borrower Subsidiaries consolidated its business with that of a multi-million dollar company in another state, Mr. Jarvis testified that such a transaction would be a violation of § 6.03 of the Loan Agreement. (Tr. 2150.) Furthermore, if one of the Borrower Subsidiaries used $400,000 of loan proceeds to buy another company's intangible assets, Mr. Jarvis testified that such a transaction would violate § 6.04 of the Loan Agreement. (Tr. 2155.) Finally, the Loan Agreement required that the Borrower Subsidiaries maintain a Debt to Net Worth Ratio of not more than 3-to-1 and Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA") of $5.5 million or greater per fiscal year. (Loan Agreement § 6.08(a)-(b); see also Tr. 2473-74.)
D. The Image Lighting Acquisition Transaction
On June 30, 2008, Mr. Dupree sent an email to Mr. Foley, then GDC's outside counsel, attaching a letter of intent to purchase Image Lighting, Inc. ("Image Inc."), a lighting company owned by Jim McCarthy that was located in East Rutherford, New Jersey, for $800,000 (the "Image Transaction"). (Tr. 445, 449-50, 452; GX 53.) In this email, Mr. Dupree instructed Mr. Foley to draft a "simple asset purchase agreement" and stated that "[t]he only nuance is that we will acquire the company in two pieces": (1) a newly formed company called "TDC" will acquire the intangible assets of Image Inc., such as customer lists and goodwill; and (2) the employees of Image Inc. will be hired by GDC under a separate newly formed company called Image Lighting Services, LLC ("Image Lighting"). (GX 53; see also Tr. 452-53, 965.) Specifically, Mr. Dupree informed Mr. Foley that "[w]e are not taking the A/R and A/P [accounts payable], which will stay with the company," and explained that this acquisition structure "is not really as confusing as it sounds and there is a business reason behind the somewhat convoluted structure." (GX 53.) Mr. Serrano, at the instruction of Mr. Dupree, Mr. Watts, and Mr. Patello, conducted due diligence on Image Inc. prior to August 2008 to determine whether or not it was a good company to purchase. (Tr. 445-46, 2248-49, 2256-57.)
Consistent with the instructions in Mr. Dupree's June 30, 2008 email, Mr. Foley formed three new companies in New Jersey in November 2008 in connection with the contemplated Image Transaction: (1) TDC Acquisitions LLC ("TDC"), which is wholly-owned by GDC (Tr. 456; GX 4); (2) Image Lighting, which is wholly-owned by TDC (Tr. 454-55; GX 5); and Interconnect Lighting LLC ("Interconnect"), which is wholly-owned by Mr. Dupree's fiance, Stephanie Horton, who is listed as the sole member/manager of Interconnect despite not having any role in its management (Tr. 481-82; GX 85). The registered office for TDC, Image Lighting, and Interconnect all have the same address, which is the address of Mr. Foley's law firm, Foley, Perlman, and Campbell, LLC, in Hoboken, New Jersey. (Tr. 455-56, 481; GX 4, GX 5, GX 85.) Because Image Lighting was owned by TDC, which was owned by GDC, Mr. Dupree, as the owner of GDC, also owned Image Lighting. (Tr. 458.)
On December 5, 2008, approximately three months after the Amalgamated loans were executed, Mr. Foley's law firm sent a check to Image Inc. for the acquisition in the amount of $790,000, comprised of funds from the concentration account at Amalgamated in the name of Hudson Bay, one of the Borrower Subsidiaries of GDC (the "Concentration Account"), and from Mr. Dupree personally. (Tr. 459-62, 2871-75; GX 450.)*fn5
The Image Transaction was not disclosed on any of the Company's financial statements and Amalgamated was never informed of the Image Transaction because, after a conversation among Mr. Dupree, Mr. Patello, and Mr. Watts, it was determined that it would not be in the Company's best interest to inform Amalgamated of the transaction due to the fact that it was prohibited by the Loan Agreement. (Tr. 588, 2249-51, 2255, 2273-74, 2320.) Specifically, Mr. Patello testified that Mr. Dupree told him that the Image Transaction was not permitted under the terms of the Loan Agreement with Amalgamated and a prior loan agreement with another senior lender, MVC Capital. (Tr. 2255; see also Tr. 1297-98.) As a result, Mr. Dupree, Mr. Watts, and Mr. Patello told Mr. Serrano to keep the Image Transaction a "secret." (Tr. 446-47.)
Accordingly, several efforts were made to conceal the Image Transaction from Amalgamated and no public disclosure regarding the transaction was made. (Tr. 1478-80.) First, in an effort to conceal from outside auditors the fact that $400,000 in Amalgamated loan proceeds were used to purchase Image Inc., Mr. Patello and Ms. Nusfaumer arranged a convoluted series of four $400,000 transfers among various bank accounts, including that of Interconnect.*fn6 (Tr. 463-73, 479-80, 2874-78; GX 449.) The net effect of these four transactions was zero, with the Concentration Account still having contributed $400,000 in loan proceeds toward the purchase of Image Inc., and thus the sole purpose of these transactions was to conceal the Image Transaction from Amalgamated. (Tr. 2874-78; GX 449.) Second, Mr. Serrano, in consultation with Mr. Patello, altered the legal bills of Mr. Foley, GDC's attorney on the Image Transaction, to remove any references to Image Lighting or to an employment agreement between Jim McCarthy, Image Inc.'s former owner, and JDC Lighting, to ensure the Image Transaction would not be disclosed to outside auditors. (Tr. 491-95, 2276-77; GX 6.) Mr. Serrano later destroyed the altered legal bills after they had been reviewed by the auditors. (Tr. 495.)
Third, although the operations of Image Lighting were consolidated with that of JDC Lighting after the Image Transaction (Tr. 2349-50, 2443, 2610-11), Image Lighting was falsely portrayed as a customer of JDC Lighting to outside creditors, including Amalgamated, and was listed as a customer of JDC Lighting in its books (Tr. 485). Indeed, JDC Lighting falsely booked accounts receivable owed to it by Image Lighting to perpetuate the false depiction of Image Lighting as a customer of JDC Lighting, and Interconnect was used as a shell company to pay down JDC Lighting's accounts receivable for Image Lighting so that Amalgamated would not be alerted to Image Lighting's true ownership. (Tr. 485-86, 782-83, 1297-98.)*fn7
Due to concerns by expressed by Mr. Dupree, a Post Office Box ("P.O. Box") for Image Lighting was also established in Mt. Arlington, New Jersey to receive audit confirmations*fn8 so that it would be appear that Image Lighting had a separate office from GDC and JDC Lighting, like any other customer. (Tr. 500-02, 538-541, 786-88.) Both Mr. Dupree and Mr. Patello also signed checks on behalf of Image Lighting, and when a $500,000 check signed by Mr. Patello on behalf of Image Lighting bounced, Mr. Jarvis of Amalgamated immediately called Mr. Dupree to inquire why Mr. Patello was signing checks on behalf of Image Lighting, a purported customer. (Tr. 541-42, 547-49, 1297-1303.) In order to conceal Image Lighting's true ownership, Mr. Dupree lied to Mr. Jarvis and told him that Mr. Patello had accidentally signed the check after Mr. McCarthy left the check on Mr. Patello's desk during a visit to GDC's offices. (Tr. 548-49, 1301-03; see also GX 364 (Recording 3-5) (Mr. Watts stating that Mr. Dupree "had to come up with some cock-and-bull story, and I mean it was literally bullshit, it was literally outrageous," to explain the bounced check signed by Mr. Patello).)
Additionally, in August 2009, after being directed, prepared, and trained by Mr. Dupree and Mr. Watts, Mr. Serrano falsely portrayed himself as a fictional Image Lighting employee named "Ernest Sullivan" using a disposable cell phone in a call with a potential creditor, C3 Capital, whose representative wanted to speak with JDC Lighting's customers in connection with performing due diligence on the Company for a potential loan. (Tr. 610-15, 631-36, 1958-65; see GX 37, GX 124, GX 271.) Prior to the call with C3 Capital, Mr. Dupree and Mr. Watts called Mr. Serrano into Mr. Watts' office, which was more private than Mr. Serrano's cubicle in the middle of the office. (Tr. 613-15.)
Mr. Dupree and Mr. Watts then held a mock interview in which they pretended to be C3 Capital employees and questioned Mr. Serrano acting as an employee of Image Lighting to see what his answers would be to C3 Capital's questions regarding the business relationship between JDC Lighting and Image Lighting. (Id.) After the mock interview, Mr. Dupree and Mr. Watts "critiqued" Mr. Serrano's answers and instructed him to falsely tell C3 Capital that Image Lighting and JDC Lighting had a good relationship and that Image Lighting would continue doing business with JDC Lighting through 2009 and 2010. (Tr. 614-15.)
Subsequently, on August 5, 2009, using a telephone number for Ernest Sullivan provided by Mr. Patello via an email dated August 4, 2009 (GX 124), Jared Poland of C3 Capital called and spoke with Mr. Serrano believing that he was speaking with an individual named Ernest Sullivan of Image Lighting (Tr. 1960-63).*fn9 As documented in notes Mr. Poland took to memorialize the telephone conservation, Mr. Poland testified that "Mr. Sullivan" -- or Mr. Serrano - told him that Image Lighting had been a customer of JDC Lighting for two years, that JDC Lighting's management was "great" and responsive to Image Lighting's needs, and that Image Lighting's "pipeline in New York and New Jersey is still full." (Tr. 1964-65.) Mr. Serrano testified that, after he was asked to fake the identity of "Ernest Sullivan" to maintain the false appearance of Image Lighting as a customer of JDC Lighting, he "understood that [he] was committing fraud by doing all these lies for the company." (Tr. 637-38.)*fn10
Significantly, as discussed above, although the Company did not purchase any of Image Inc.'s accounts receivables but only its intangible assets, Mr. Serrano falsely recorded approximately $2 million of Image Inc. accounts receivables on the books of JDC Lighting, ultimately at the direction of Mr. Dupree. (Tr. 496-99, 902-03, 2325-27, 2267-70.) These false accounts receivable could never be collected by the Company because they were actually retained by Image Inc. and its former owner, Mr. McCarthy. (Tr. 496-97, 902-03, 2270, 2325-27; see also Tr. 1466-68.) The effect of this false listing of accounts receivable was to increase the Eligible A/R and thus the Borrowing Base under the Loan Agreement, thereby permitting the Borrower Subsidiaries to borrow approximately $1.5 million more under the Revolving Loan than they would have been able to without the additional $2 million in accounts receivable. (Tr. 498.)
E. Inflation of Accounts Receivable in 2009 and 2010
The government presented evidence that Mr. Dupree and his coconspirators falsely overstated the Eligible A/R on BBCs submitted to Amalgamated, which had the effect of maintaining the Borrowing Base at an artificially high level and thus falsely increasing the amount that could be borrowed under the Revolving Loan. Even if no additional borrowing was requested on the Revolving Loan after it was originally disbursed (see GX 11), by falsely maintaining the Borrowing Base at a higher level than the outstanding amount on the Revolving Loan, Mr. Dupree and his coconspirators ensured that the Borrowing Subsidiaries would not have to repay the principal amount on the loan when it would have otherwise fallen below the Borrowing Base.
Mr. Dupree was actively involved in the submission of the false BBCs to Amalgamated. In 2009, Mr. Patello provided Mr. Dupree, Mr. Watts, and Ms. Nusfaumer with handwritten summaries on an almost monthly basis reconciling the financial information reported to Amalgamated in the most recent BBC -- which contained overstated accounts receivable figures - with the true state of the financial affairs of the Company. (Tr. 2335-38; see GX 258 (07/31/09), GX 259 (05/31/09), GX 260 (04/30/09), GX 261 (03/31/09), GX 262 (02/28/09), GX 281 (01/31/09), GX 292 (08/31/09), GX 293 (09/30/09).)*fn11 For example, the handwritten summary dated January 31, 2009 (GX 281), which was provided to and discussed with Mr. Dupree, indicates, inter alia, that the Eligible A/R reported in the BBC for January 31, 2009 (GX 11 (DOJ-GDC-000005227)) was overstated to such an extent that the Company had borrowed $7.6 million in excess of what it would have been able to borrow had accurate accounts receivable figures been reported in the BBC. (Tr. 2338-45.) Mr. Patello also testified that the "All Accounts Receivable" figure of $24,903,342 reported in the BBC for November 30, 2009 was inflated by approximately $11 million. (Tr. 2376; GX 11 (DOJ-GDC-000005234).)
The evidence at trial established that the inflation of accounts
receivables in the BBCs and the back-up materials submitted to
Amalgamated was accomplished primarily via three methods: (1)
fictitious sales; (2) prebilling; and (3) reaging.*fn12
In the end, although each of these methods can be
distinguished from one another, the government's evidence established
that they all have the same purpose -- to falsely inflate the accounts
receivable figures submitted to Amalgamated in order to maintain or
increase the amount of money that could be borrowed on the Revolving
Loan. Each of these inflationary methods will be discussed in turn.
The government presented evidence at trial that millions of dollars of accounts receivables were recorded on BBCs submitted to Amalgamated for fictitious sales. (Tr. 2325.) First, as previously discussed, Mr. Dupree directed Mr. Patello to falsely book approximately $2 million of accounts receivables associated with Image Inc. on the books of JDC Lighting. (Tr. 2216, 2268.) Indeed, in the handwritten summary dated January 31, 2009 provided to Mr. Dupree, Mr. Patello indicated that there were $2,043,000 of fake Image Inc. accounts receivables on the books of JDC Lighting that were included on the BBC for January 31, 2009. (Tr. 2339; GX 281.) Mr. Serrano also testified that these fictitious Image Inc. accounts receivables were included in the accounts receivable figure of $23,549,332 reported in the consolidated financial statement for 2008 (GX 22 at 3), which, together with other inflationary practices, overstated the accounts receivable by approximately $5 million (Tr. 1057-58).
Second, in the last quarter of 2009, ultimately at the direction of Mr. Dupree, Mr. Patello instructed Ms. Nusfaumer to copy outdated School Construction Authority ("SCA") orders with Hudson Bay from years in the past, and to create new, fake invoices totaling more than approximately $3 million with the current date, even though SCA no longer owed Hudson Bay any money for those orders. (Tr. 1330-33, 1336-37, 2538-39.) Ms. Nusfaumer was also instructed to accomplish this task by herself so that others would not find out about the fake invoices. (Tr. 1331.) In order to create the invoices in the accounting system utilized by GDC and its subsidiaries -- known as "Hedberg" (Tr. 660) - without alerting Hudson Bay employees that had access to all of Hudson Bay's orders and would have known these new SCA invoices were fake, Ms. Nusfaumer listed a former Unalite employee named "Eric Leroy" as the salesperson associated with the orders rather than a current Hudson Bay employee. (Tr. 1332, 1804-06, 2711.)
After these fake invoices were created in Hedberg, Mark Jozefowski, the former senior vice president and general manager of Hudson Bay, recognized that certain of SCA's past orders with Hudson Bay were being replicated in the accounting system with a different order number and a different salesperson - Eric Leroy - who never worked at Hudson Bay. (Tr. 1804-09.)
Mr. Jozefowski thus sought an explanation from Mr. Patello regarding "what [Mr. Jozefowski] affectionately called 'garbage' in the system," and Mr. Patello then directed him to Mr. Dupree. (Tr. 1809.) Mr. Dupree explained that the invoices were created to "bring the sales from Image Lighting into our system" and were "needed to recognize the sales," and that the orders would be reversed once Image Lighting was more fully incorporated into the Company. (Tr. 1810.) During this conversation, Mr. Jozefowski voiced his concern to Mr. Dupree that these new fake invoices not be sent to SCA, one of Hudson Bay's best customer accounts, because he did not want to receive calls from SCA about orders it did not place and "the last thing we would want to do was upset that relationship." (Tr. 1811, 1859-60.)
Ultimately, the fake SCA invoices totaling approximately $3 million, which all bore dates from August 2009, appeared in the accounts receivable aging report for Hudson Bay as of November 30, 2009. (Tr. 591-92; GX 74 at 10-13 (Invoice Nos. 90199-90297).) Because the fake SCA invoices were less than 120 days old, they were included as Eligible A/R in the BBCs submitted to Amalgamated, enabling the Borrower Subsidiaries to borrow 75% of the total amount of the fake invoices. (Tr. 1337, 2327, 2358, 2538-39.) Diane Mendez of SCA testified at trial that SCA never received the August 2009 invoices created by Ms. Nusfaumer, which, except for the different date and invoice numbers, were the same as SCA invoices dating back to 2007 for which SCA had previously paid. (Tr. 2840-50; GX 454; see also Tr. 1811-12.)*fn13 Ms. Mendez's testimony thus corroborated that of Ms. Nusfaumer and Mr. Patello regarding their efforts to copy old SCA invoices and issue new, recent invoices that would not be sent to SCA for payment because they represented fictitious additional sales.
Additionally, Mr. Patello's handwritten summaries to Mr. Dupree dated August 31, 2009 (GX 292) and September 30, 2009 (GX 293) indicated that there were $3,076,000 in false ...