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United States v. Gushlak

United States Court of Appeals, Second Circuit

August 29, 2013

UNITED STATES OF AMERICA, Appellee,
v.
MYRON L. GUSHLAK, Defendant-Appellant.

Argued: May 1, 2013.

Appeal from an order of restitution entered pursuant to the Mandatory Victims Restitution Act of 1996, 18 U.S.C. § 3663A, against Defendant-Appellant Myron Gushlak in the United States District Court for the Eastern District of New York (Nicholas G. Garaufis, Judge). We conclude that the district court had authority to enter the restitution order, that the restitution proceedings satisfied Gushlak's rights under the Due Process Clause of the Fifth Amendment, and that the district court's loss calculation was a reasonable estimate grounded in a sound basis for approximation of the full amount of identified victims' losses.

ELIZABETH BERNEY, Great Neck, New York, for Defendant-Appellant.

DANIEL A. SPECTOR, (David C. James, on the brief) for Loretta E. Lynch, United States Attorney for the Eastern District of New York, Brooklyn, New York, for Appellee.

Before: SACK, WESLEY, and CARNEY, Circuit Judges.

SACK, Circuit Judge.

Defendant-appellant Myron Gushlak challenges, on various grounds, the May 15, 2012, restitution order entered against him in the United States District Court for the Eastern District of New York (Nicholas G. Garaufis, Judge). The order, which was entered pursuant to the Mandatory Victims Restitution Act of 1996, 18 U.S.C. § 3663A, awarded a total of $17, 492, 817.45 to victims for losses stemming from Gushlak's role in the manipulation of the price of a publicly traded security. We affirm.

BACKGROUND

The Fraudulent Scheme

In late 1999, Gushlak, a controlling owner of a telecommunications company, GlobalNet, Inc., took the company public by reverse merging it into a publicly traded shell company, Rich Earth, Inc., which he also controlled. Over the course of the next year, he and his coconspirators engaged in a securities fraud in the form of a so-called "pump-and-dump" scheme. Gushlak, with the help of conconspirators at two broker-dealers, LCP Capital ("LCP") and Montrose Capital ("Montrose"), artificially inflated the price of GlobalNet's stock ("GBNE"). He then sold his own shares at a substantial profit.

The coconspirators accomplished their scheme through both misstatements and manipulative trading practices. According to Gushlak's later plea allocution in this case, [1] Gushlak induced his coconspirators at LCP and Montrose to convince their clients, through misrepresentations, to buy approximately one million GBNE shares for between $11.86 and $15.93 per share. The conspirators knew that these prices overvalued GlobalNet's worth.

Another tactic was for broker-dealers at LCP or Montrose to take funds that investors had invested in legitimate stocks and purchase GBNE shares with the funds instead. The conspirators further inflated GBNE's price and maintained the inflated price by discouraging investors from selling GBNE stock, or by simply failing to carry out sell orders. Gushlak paid kick-backs and commissions to his coconspirators for their efforts.

By the summer of 2000, however, the bottom had begun to fall out of the scheme. Some investors began to suspect that manipulative practices were being employed, so they short-sold GBNE in order to profit from its ultimate deflation. Around the same time, Montrose stopped pressuring its customers to purchase GBNE shares and began processing their sell orders. And also at about that time, there was a market-wide collapse of the price for tech stocks like GBNE, the so-called "bursting of the dot-com bubble."[2] According to an affidavit submitted by an FBI Agent present at a proffer session with Gushlak, Gushlak admitted that he made a last-ditch effort to "support[] the [stock] price" with his own money in June 2000. Aff. of Derrick Acker, Oct. 20, 2011, at ¶ 3, Joint App'x at 616. But this apparently did not work for long; by January 1, 2001, GBNE's stock price had fallen from a midsummer high of more than $25 per share to less than $3 per share.

Gushlak's Guilty Plea

In July 2003, Gushlak pleaded guilty in the United States District Court for the Eastern District of New York to an information charging one count of conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371, and one count of conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956. On November 18, 2010, the district court sentenced him to seventy-two months' imprisonment and a $25 million fine. The district court ordered the parties to submit briefing on the issue of restitution, pursuant to the Mandatory Victims Restitution Act of 1996, 18 U.S.C. § 3663A, stating that it would resolve the issue within ninety days.

The court entered judgment while the restitution issue remained pending in order to enable Gushlak to appeal his conviction and sentence immediately. Had the appeal been successful, Gushlak would have been relieved of his criminal responsibility in relatively short order and never have been required to complete the restitution inquiry. But a panel of this Court affirmed the judgment by summary order. United States v. Gushlak, 495 F.App'x 132 (2d Cir. 2012).

The Restitution Proceedings

The ninety-day estimate the district court gave for the restitution order, through no fault of the court's, proved optimistic. Nearly eighteen months would pass, during which time the government made four different restitution submissions, before the district court finally entered an order of restitution on May 15, 2012, based on the fourth submission.

The government's first submission seeking restitution was filed on December 20, 2010. In it, the government argued that victim loss amounts could be established by means other than so-called "affidavits of loss" -- forms filled out by victims attesting to losses they suffered -- and purported to rely upon trading records to determine that the losses attributable to fraud amounted to $20, 468, 876.29. The district court declined to enter a restitution order based on that submission, however, because the government had failed to explain its methodology or to provide a list of each victim and his, her, or its losses. United States v. Gushlak, No. 03-cr-833(NGG), 2011 WL 128359 at *2, 2011 U.S. Dist. LEXIS 3864 at *6 (E.D.N.Y. Jan. 14, 2011).

The government tried again on January 26, 2011. Again it argued that the appropriate loss calculation was $20, 468, 876.29. This time it attached the expert report of one Peter Melley, then the Assistant Director of the Criminal Prosecution Assistance Group at the Financial Industry Regulatory Authority. Gushlak opposed the restitution request on the grounds that the government was required to use affidavits of loss rather than trading records to establish victim losses, and that the government's methodology was in any event flawed. The district court agreed with the government that losses could be established through trading records, but it agreed with Gushlak that the government's methodology was deficient. United States v. Gushlak, No. 03-cr-833(NGG), 2011 WL 782295, 2011 U.S. Dist. LEXIS 18177 (E.D.N.Y. Feb. 24, 2011). This was because, the court concluded, it rested upon the unsupported assumption that GBNE had no value at all that had not been imparted to it by the fraud. Id. at *5-*7, 2011 U.S. Dist. LEXIS 18177 at *16-*23.

The government's third try to establish a restitution amount, filed April 15, 2011, fared no better. In this submission, the government requested a dramatically reduced sum of $8, 950, 032.54. But the methodological adjustment was relatively crude: The government essentially (1) subtracted the value of any shares victims still held at the time the trading records ended, which it had previously deemed worthless; and then (2) lopped 20% from that number, ostensibly to account for victim losses caused by declines in the stock market generally around this time.

The district court, again unsatisfied, denied the government's request on July 26, 2011. United States v. Gushlak, No. 03-cr-833(NGG), 2011 WL 3159170, 2011 U.S. Dist. LEXIS 81525 (E.D.N.Y. July 26, 2011). But the court granted the government leave "to try one last time, " providing relatively detailed guidance as to what sort of showing might suffice. Id. at *1, *6-*8, 2011 U.S. Dist. LEXIS 81525 at *1, *24-*30. The court expressed the view that it "would be unfortunate" if the government failed to obtain restitution for victims. Id. at *8, 2011 U.S. Dist. LEXIS 81525 at *30.

On October 24, 2011, nearly a year after Gushlak had been sentenced, the government filed its fourth restitution request. On April 20, 2012, the court issued a Memorandum & Order finding that Gushlak's fraud had caused losses to victims in the amount of $17, 492, 817.45. United States v. Gushlak, No. 03-cr-833, 2012 WL 1379627, 2012 U.S. Dist. LEXIS 56009 (E.D.N.Y. Apr. 20, 2012).

The government's first improvement from its previous efforts was the submission of three affidavits, two from coconspirators Salvatore Romano and Howard Appel, and the third from FBI Agent Derrick Acker. They, combined with Gushlak's plea allocution, placed before the district court a general picture of the nature and timing of the conspiracy much like the one we have drawn above. Specifically, the district court relied upon the affidavits to establish the mechanisms by which Gushlak and his coconspirators manipulated GBNE's price; the fact of manipulation throughout the year 2000; and that fraudulent activity had ceased by the end of 2000. Id. at *6-*7, 2012 U.S. Dist. LEXIS 56009 at *16-*18.

The government then relied upon a statistician named David DeRosa to fill in the numbers. DeRosa was at the time an instructor of a graduate level course in Financial Engineering at Columbia University and the president and owner of his own financial consulting firm. Decl. of David F. DeRosa, Ph.D. ("DeRosa Rep."), Oct. 24, 2011, at 2, Joint App'x at 620. His expert report and the testimony he gave at a hearing held on February 14, 2012, sought to provide the court with a model for calculating investor losses.

DeRosa's model -- to a non-expert, at least, an apparently complex exercise in statistics and corporate finance -- was in essence designed to determine what GBNE's share price would have been at the times investors bought and sold it had it not been manipulated by fraud. DeRosa labeled this GBNE's "fair market price." Id. at 5, Joint App'x at 623. By subtracting the fair market price from GBNE's actual closing price, DeRosa could determine what is sometimes referred to as the "inflationary component"[3] of the price -- the portion of the price that is the result of fraudulent factors. Id.

DeRosa then looked to the available trading records for transactions in GBNE stock during the time its value was manipulated to determine the number of shares purchased and prices paid by individual investors. DeRosa Rep. at 16-17, Joint App'x at 634-35. The rest was arithmetic: Each victim's loss was equal to the inflationary component paid -- the actual price paid less the fair market price DeRosa had calculated -- minus, in the event the investor sold GBNE stock before the entire inflationary component had dissipated, any inflationary component recouped by that sale. Id. By this method, he calculated total losses of $17, 492, 817.45. Id. at 19, Joint App'x at 637.

Gushlak attempted to refute DeRosa's analysis through testimony of experts of his own, David Juran, a senior lecturer at Columbia University's Graduate School of Business, and Robert Lowry, a retired twenty-three year veteran accountant at the Securities and Exchange Commission and the president of his own consulting firm. Juran testified before the district court at the same February 14, 2012, hearing at which DeRosa offered his testimony. The district court continued that hearing until April 13, 2012, to permit Lowry to testify. But eventually the court credited DeRosa's methodology virtually in its entirety.

The district court entered a final restitution order on May 15, 2012, based on the submission that was supported by DeRosa's methodology. Gushlak appeals.

DISCUSSION

"Federal courts have no inherent power to order restitution . . . ." United States v. Zangari, 677 F.3d 86, 91 (2d Cir. 2012). "A sentencing court's power to order restitution, therefore, depends upon, and is ...


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