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United States v. DeMizio

United States Court of Appeals, Second Circuit

January 28, 2014

UNITED STATES of America, Appellee,
v.
Darin DEMIZIO, Defendant-Appellant.

Argued: May 20, 2013.

Page 374

Winston M. Paes, Assistant United States Attorney, Brooklyn, NY, (Loretta E. Lynch, United States Attorney for the Eastern District of New York, Emily Berger, Assistant United States Attorney, Brooklyn, NY, on the brief), for Appellee.

David Spears, New York, N.Y. (Charlita Mays, Christopher Dysard, Spears & Imes, New York, NY, on the brief), for Defendant-Appellant.

Before: NEWMAN, KEARSE, and LIVINGSTON, Circuit Judges.

KEARSE, Circuit Judge:

Defendant Darin DeMizio (" DeMizio" or " Darin" ) was convicted in 2009, following a jury trial in the United States District Court for the Eastern District of New York, John Gleeson, Judge, on one count of conspiring to commit honest-services wire fraud and securities fraud, in violation of 18 U.S.C. §§ 1343, 1346, 1348, and 1349, and on one count of making a false statement, in violation of 18 U.S.C. § 1001(a)(2). He was sentenced principally to 38 months' imprisonment, to be followed by a three-year term of supervised release, and was ordered to pay $1.2 million in restitution. During the pendency of his original appeal from the judgment of conviction and from the denial of a posttrial motion for acquittal or a new trial, see United States v. Demizio, No. 08-CR-336, 2009 WL 2163099, at *2 (E.D.N.Y. July 20, 2009) (" Demizio I " ), the United States Supreme Court decided Skilling v. United States, 561 U.S. 358, 130 S.Ct. 2896, 2931, 177 L.Ed.2d 619 (2010), which interpreted narrowly the scope of § 1346's prohibition against honest-services wire fraud. This Court dismissed the appeal without prejudice and remanded to the district court to consider the effect of Skilling in the first instance. On remand, the district court concluded that the evidence to support DeMizio's wire-fraud conspiracy conviction was sufficient even in light of Skilling, and that although under Skilling there was an error in the jury charge, the error was harmless and did not warrant a new trial. See United States v. DeMizio, No. 08-CR-336, 2012 WL 1020045, at *7-*15 (E.D.N.Y. Mar. 26, 2012) (" DeMizio II " ).

On appeal, DeMizio contends principally (1) that the evidence presented at trial was insufficient to support his conviction of conspiracy to commit wire fraud in light of Skilling and that he is therefore entitled to a judgment of acquittal on the conspiracy count, or (2) that he is entitled to a new trial on that count because the court's instructions to the jury erroneously permitted conviction on an impermissible theory of honest-services fraud. For the reasons that follow, we affirm.

I. BACKGROUND

In the securities industry, financial institutions and their customers sometimes participate in transactions such as " short sales" — i.e., sales of stock not then owned by the seller— that require them to borrow securities from other financial institutions. The present prosecution charged DeMizio principally with conspiracy to commit securities fraud and wire fraud by causing his employer, Morgan Stanley & Co. Inc. (" Morgan Stanley" ), to conduct stock-loan transactions through intermediary firms in a manner that, at Morgan Stanley's expense, caused large sums of money to be paid to DeMizio's brother and father for little or no work.

Page 375

The government's evidence as to the stock-loan transactions included the testimony of former employees of Morgan Stanley or complicit intermediary firms. Taken in the light most favorable to the government, the evidence included the following.

A. Stock Loans

In a typical stock-loan transaction, the borrowing institution and the lending institution agree on, inter alia, the type and amount of collateral to be posted by the borrower. The collateral is cash or a cash equivalent that is typically 102% of the market value of the loaned security and is retained by the lender for the life of the loan, which ranges from one day to multiple years. The lender invests the collateral in an interest-bearing instrument; part of the resulting interest is retained by the lender, and part is " rebated" to the borrower; the amounts retained and rebated are subject to negotiation. ( See Trial Transcript (" Tr." ) 53-56.)

In order to obtain shares of the needed securities, a borrowing institution often uses an independent registered broker-dealer as an intermediary— sometimes referred to as a conduit broker-dealer (or " conduit" )— to locate an institution holding and willing to lend such shares. In addition, financial institutions interested in lending their stocks make that willingness known to other firms. Conduit broker-dealers call financial institutions each day to determine what stocks the institutions want to lend or need to borrow and then try to find matching borrowers or lenders. After making a match, the conduit broker-dealer receives the borrowed shares from the lender and delivers them to the borrower, and receives the cash collateral from the borrower and passes it to the lender. During the life of the loan, interest is earned on the collateral; the lender retains part and periodically sends the remainder (the " rebate" ) to the conduit broker-dealer; the conduit retains part of the received rebate and sends part to the borrower. ( See, e.g., Tr. 54-55, 584; Government Exhibit (" GX" ) 91.)

If the conduit broker-dealer cannot find the borrower or lender needed to complete a stock-loan transaction, it calls a " finder." Finder firms are not registered dealers and thus cannot deliver stock, but they can contact potential borrowers and lenders to try to find the missing component. If the finder succeeds, the conduit broker-dealer pays the finder firm a fee, consisting of part of the rebate that the conduit receives from the lender. ( See, e.g., Tr. 59-60, 844-45.)

To facilitate stock borrowing and lending, financial institutions frequently have securities lending departments. During the period relevant to this case, Morgan Stanley— the largest securities lender in the United States, controlling approximately 30 percent of the domestic short-selling volume— had such a department. DeMizio was employed in Morgan Stanley's stock-loan department from 1991 through 2005; between December 2001 and December 2005, he was head of the domestic stock-loan desk.

B. Payments to DeMizio's Relatives for Little or No Work

In its stock-loan transactions, Morgan Stanley used broker-dealers as intermediaries but did not pay fees directly to finders. ( See Tr. 85; id. at 899 (" Morgan Stanley wasn't allowed to deal with finders." ).) DeMizio made arrangements with several firms, including some that were finders, to make payments to his father and/or brother— as if they were finders— for little or no work, in exchange for those firms' receiving stock-loan business from Morgan Stanley. The firms included Garban

Page 376

Corporates LLC (" Garban" ) and Freeman Securities Company, Inc. (" Freeman" ), which were conduit broker-dealers, and Clinton Management Ltd. (" Clinton" ) and Tyde, Inc. (" Tyde" ), which were finder firms.

A former employee of Garban, Lisa Pompili, testified that that firm did a great deal of business with Morgan Stanley from about 1991 to 2002. In the early 1990s, " [t]o keep [its] Morgan Stanley business," Garban " would have to do [its] trades with Darin and add his father," Robert DeMizio (or " Robert" ), as " the finder, in on tickets [ i.e., the rudimentary transaction records] for rebate." (Tr. 851.) Putting Robert " in on tickets" meant " [a]dd[ing] him in for a rebate, a portion of [Garban's] profit." ( Id. at 852.) In connection with the stock-loan transactions for which he received commissions, Robert DeMizio, did " [v]ery little" work— " ten percent, if that much." (Id. at 852-53.)

In about 1994, Robert DeMizio ceased to be a finder and joined a different brokerage firm. DeMizio thereafter required Garban, in order to maintain its stock-loan business with Morgan Stanley, to share its rebates with CD Management, a finder firm started by DeMizio's brother Craig DeMizio (or " Craig" ). From then until about 2004, when Craig ceased to be a finder, the procedure at Garban was the same as it had been with DeMizio's father. Pompili testified that on Morgan Stanley transactions, whether Morgan Stanley was a borrower or a lender, " we would basically ... put Craig in on tickets for a rebate." ( Id. at 862; see, e.g., id. at 864-65.) Craig did little or no work on these transactions. ( See id. at 865, 873-74.)

Occasionally, Garban would be forced to " take Craig out of the ticket because" the " spread" between the rebate rate Garban received from the lender and the rate it was required to relay to the borrower was too small to share. (Tr. 877.) When this occurred, Craig would complain, and Garban " would call or get a call from Darin to see what happened, and then we would get our rate adjusted from Darin so we could" have enough of a profit to share with Craig, i.e., to " put Craig back in on our tickets." ( Id. at 878; see, e.g., id. at 863 (DeMizio would " pay [Garban] a little bit more" to have Garban " put his brother Craig on a ticket." ).)

A former vice president of Freeman, Richard Evangelista, testified that DeMizio approached him in the mid-1990s and offered to give Freeman more stock-loan business from Morgan Stanley if Freeman would " give a portion of the profits that [it] made to [DeMizio's] brother, Craig." ( Id. at 317.) DeMizio made it clear that, in return, Craig " wasn't going to participate in the day-to-day business that much." ( Id. at 318.) Evangelista agreed to DeMizio's proposal, despite knowing that the arrangement " was illegal. It was cheating ... Morgan Stanley out of profits." ( Id. ) Evangelista also testified that during the period when Freeman was sharing its finder fee profits with Craig, there were times when, although DeMizio was aware that the " going rate on the street" for lenders to pay on a particular stock was around one percent " Darin would call me and tell me he had" that stock to lend and would pay " a rate of four, five— five percent." ( Id. at 321.)

Freeman benefited from the agreement to share its profits with Craig because its business increased " immensely." (Tr. 319.) And as a result of the arrangement, Craig was paid between $30,000 and $50,000 a month as finder fees. ( See id. at 332.) He performed only about 20 percent of the work needed to earn such fees. ( See id. at 333.)

Robert Johnson testified that Tyde was a finder firm he started in about 1999 at

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the suggestion of DeMizio, his best friend, who promised to give him stock-loan business from Morgan Stanley. Peter Sherlock, a former Morgan Stanley stock-loan trader who was supervised by DeMizio, testified that " [DeMizio] asked me if I could do business with— with Bobby Johnson, you know, talk to him every day, try to do trades with him." ( Id. at 648.) Accordingly, Sherlock— like DeMizio himself— gave Johnson lists of stock that Morgan Stanley wanted to lend or borrow ( see id. at 648-49); since Morgan Stanley did not pay finders directly, it was incumbent upon Johnson (like any other finder) " to find a [conduit] broker-dealer who w[ould] pay and collect with them and then ... send it to [Morgan Stanley] through [a] broker-dealer" ( id. at 649).

Johnson testified that a majority of Tyde's business came from Morgan Stanley— some 50-60 percent in the beginning, increasing to 90 percent within a few years. Sherlock testified that there were occasions on which DeMizio identified stocks for Johnson to lend and caused Morgan Stanley to pay a higher rebate rate than necessary because Johnson was to be paid finder fees on the loan. ( See id. at 649-51.)

Johnson testified that in 2000 DeMizio asked him to hire DeMizio's father Robert and pay Robert commissions on the business from Morgan Stanley. DeMizio subsequently told Johnson that Johnson would have to do Robert's work " [b]ecause his father didn't have the drive or desire to do it any longer" (Tr. 75) but that Johnson would have to continue to pay Robert commissions. Thereafter, DeMizio's father would go to the Tyde office once or twice a week and spend his time chatting with family and friends on the telephone. Johnson paid DeMizio's father for Morgan Stanley stock-loan business in accordance with instructions from DeMizio as if Robert had brought in the Morgan Stanley business or had worked on the transactions, although Robert did " practically none of the work." ( Id. at 76; see id. at 77 (" wasn't doing any work" ); id. at 91 (when Johnson " passed on finder fees to Robert DeMizio," they were generally for transactions on which Robert did no work); id. (" in the beginning, [Robert] did about 25 percent, and then later on, he did virtually nothing" ).)

In 2001, DeMizio told Johnson that DeMizio's brother Craig " wasn't making a lot of money ... and he needed help." ( Id. at 98.) DeMizio asked Johnson to help Craig " [b]y putting him in on [stock-loan] tickets." ( Id. at 97.) DeMizio acknowledged that Craig was not knowledgeable about the stock-loan finder business and " was incapable of doing the transactions himself" ; DeMizio said Johnson would have to do all the work on those transactions as well. ( Id. at 97-99.) Johnson agreed because of his friendship with DeMizio and " because it would mean more money for [Johnson]." ( Id. at 99.)

DeMizio's arrangements with Clinton, another finder firm, were described by Sherlock. Sherlock first learned of Freeman's rebate-sharing with Craig from Evangelista. When Freeman went out of business in 2001, Sherlock told DeMizio he knew Evangelista had been " cutting Craig in" on the Morgan Stanley stock-loan rebates (Tr. 629); at Sherlock's suggestion, DeMizio made similar arrangements with Clinton's principal, Tony Lupo ( see, e.g., id.; see also id. at 726 (if " Tony makes 50,000 on the trades, he cuts a check for 25,000 to Craig DeMizio" ; Craig " was involved in getting paid" but " not" " involved in finding" the stocks)).

The government introduced exhibits showing that from January 2000 through January 2004, payments from Tyde to Robert ...


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