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United States v. Finazzo

United States Court of Appeals, Second Circuit

March 7, 2017

United States of America, Appellee,
v.
Christopher Finazzo, Douglas Dey, Defendants-Appellants.

          Argued: September 17, 2015

          Appeal from the United States District Court for the Eastern District of New York. No. 10-cr-457 ― Roslynn R. Mauskopf, Judge.

         Consolidated appeal from judgments of conviction of the United States District Court for the Eastern District of New York (Mauskopf, J.) following a guilty plea to conspiracy by Dey and a jury verdict convicting Finazzo on one count of conspiracy to commit mail and wire fraud and to violate the Travel Act; fourteen counts of mail fraud; and one count of wire fraud. Finazzo contends that the district court's jury instructions regarding the "right to control" property under the mail and wire fraud statutes were erroneous and that there was insufficient evidence to support his convictions on the mail and wire fraud counts. Finazzo and Dey also appeal from the restitution order in the amount of $13, 690, 822.94 imposed by the district court jointly and severally against them, arguing that the district court improperly used Finazzo's gain as a measure of the victim's loss. We AFFIRM in part and VACATE and REMAND in part.

          Robert J.A. Zito (Alan S. Lewis, Karen E. Meara, Madelyn K. White, on the brief), Carter Ledyard & Milburn LLP, New York, New York, for Defendant-Appellant Christopher Finazzo.

          T. Barry Kingham (Jacques Semmelman, Rachel L. Cohn, on the brief), Curtis, Mallet-Prevost, Colt & Mosle LLP, New York, New York, for Defendant-Appellant Douglas Dey.

          Winston M. Paes, Assistant United States Attorney (Amy Busa, Claire S. Kedeshian, Assistant United States Attorneys, on the brief), for Loretta E. Lynch, United States Attorney for the Eastern District of New York, Brooklyn, New York, for Appellee.

          Before: Sack, Chin, and Droney, Circuit Judges.

          DRONEY, CIRCUIT JUDGE:

         Defendant-Appellant Christopher Finazzo is a former merchandising executive for teen apparel retailer Aéropostale, Inc. Defendant-Appellant Douglas Dey controlled South Bay Apparel Inc. ("South Bay"), a clothing vendor. Between 1996 and 2006, Finazzo caused Aéropostale to use South Bay as its supplier of T- shirts and fleeces in exchange for secret payments to Finazzo of portions of South Bay's profits. As a result of this scheme, Finazzo and Dey were charged in the United States District Court for the Eastern District of New York with one count of conspiracy to commit mail and wire fraud and to violate the Travel Act, as well as fourteen counts of mail fraud and one count of wire fraud.

          Dey pleaded guilty to conspiracy to violate the Travel Act and was sentenced to 42 months' imprisonment. Finazzo was convicted of all counts[1] after a three-week jury trial. The jury rendered a special verdict. On the conspiracy count, the jury found Finazzo guilty of conspiracy to commit mail fraud "[o]n the basis of intent to deprive Aéropostale of money" and "[o]n the basis of Aéropostale's right to control use of its assets." Dist. Ct. Dkt. No. 260, at 2. It found Finazzo guilty of conspiracy to commit wire fraud on the basis of Aéropostale's right to control use of its assets, but not on the basis of intent to deprive Aéropostale of money. On each of the fourteen substantive mail fraud counts and the substantive wire fraud count, the jury found Finazzo guilty on the basis of Aéropostale's right to control use of its assets, but not on the basis of intent to deprive Aéropostale of money.[2] The district court (Mauskopf, J.) sentenced Finazzo to 8 years' imprisonment on the substantive mail and wire fraud counts and 5 years' imprisonment on the conspiracy count, all to run concurrently. The court also imposed a $13, 690, 822.94 restitution order jointly and severally against Finazzo and Dey.

         Finazzo does not challenge his conspiracy conviction in this appeal. He challenges only his convictions on the mail and wire fraud counts. Both Finazzo and Dey also challenge the restitution order.

         In this opinion, we address: (1) Finazzo's challenge to the district court's jury instructions regarding the "right to control" property under the mail and wire fraud statutes, (2) the sufficiency of the evidence to support Finazzo's convictions for depriving Aéropostale of the "right to control" its assets, and (3) Finazzo's and Dey's challenge to the district court's restitution order. We affirm the district court's "right to control" jury instructions and conclude that there was sufficient evidence to support the challenged portions of the jury verdict. However, we vacate and remand the district court's restitution order as to Finazzo and Dey. In a summary order issued simultaneously with this opinion, we affirm the district court on the remaining issues on appeal.

         BACKGROUND

         Finazzo and Dey were first indicted on June 8, 2010. The original indictment alleged that Dey and Finazzo "agreed that Finazzo would cause Aéropostale to use South Bay as a vendor to purchase merchandise at rates that were less favorable to Aéropostale than the prevailing market rate." Dist. Ct. Dkt. No. 1, at 3. "In exchange, Dey covertly paid Finazzo approximately fifty percent of South Bay's profits" through C & D Retail Consultants, Inc. ("C&D")-a consulting business controlled by Finazzo-and through various joint ventures. Id. The indictment alleged that Finazzo and Dey did not disclose this scheme to Aéropostale. The indictment further stated that, between August 1996 and November 2006, Finazzo caused Aéropostale to pay South Bay more than $350 million in payments for its merchandise. Over that period, Dey paid Finazzo more than $14 million through bank transfers to C&D and transferred over $13 million to three jointly owned entities: Vertical Line Apparel, Inc., Vertical Line Apparel II, Inc., and Vertical Line Apparel III, Inc. (the "Vertical Line entities").

         The September 6, 2011 Second Superseding Indictment[3] added that Finazzo and Dey defrauded Aéropostale by:

(1) depriving Aéropostale of the opportunity to make informed decisions, thereby preventing Aéropostale from seeking lower prices for merchandise it purchased from South Bay and the opportunity to select other vendors based upon price, quality and timely delivery; and (2) causing Aéropostale to pay higher prices on merchandise it purchased from South Bay than were available from other vendors, thereby increasing South Bay's profits and the amounts Dey paid Finazzo.

         Dey App'x at 59. That indictment included seventeen counts. Count One alleged conspiracy to commit mail and wire fraud and to violate the Travel Act from August 1996 to November 2006 in violation of 18 U.S.C. § 371. Counts Two through Fifteen alleged mail fraud in violation of 18 U.S.C. § 1341. Count Sixteen alleged wire fraud, in violation of 18 U.S.C. § 1343, and Count Seventeen alleged a false statement in a report required to be filed with the Securities and Exchange Commission, in violation of 15 U.S.C. § 78ff(a).[4] Like the conspiracy charge, the scheme to defraud for the mail and wire fraud counts was also alleged to have taken place between August 1996 and November 2006. The mail and wire fraud counts were linked to fifteen specific payments by Aéropostale to South Bay between June 9, 2005 and November 1, 2006.

         On September 27, 2012, Dey pleaded guilty to conspiracy to violate the Travel Act. In his plea agreement, Dey agreed to a $7, 500, 000 forfeiture order, but specifically reserved the right to appeal any restitution order imposed by the court.

         A. Finazzo's Trial

         Finazzo's case proceeded to a three-week jury trial on the Second Superseding Indictment, beginning on April 8, 2013. At trial, the Government called fifteen witnesses-most of whom were current or former Aéropostale employees-and the defense called three witnesses. Because one of the issues on appeal is sufficiency of the evidence, we recount in some detail the evidence presented at trial.

         1. The Government's Case

         a. The Creation of the South Bay Relationship with Aéropostale

         In July 1996, Julian Geiger-Aéropostale's President and CEO-hired Finazzo as its Men's Divisional Merchandising Manager.[5]

          Prior to being hired by Aéropostale, Finazzo owned a small sports-clothing retailing business called C&E Marketing, at which Dey was an employee. Shortly after Finazzo was hired by Aéropostale, Peter Conefry-Finazzo's and Dey's former private accountant and a cooperating Government witness-attended a meeting with Finazzo and Dey in which Finazzo stated that he and Dey were going to a start a new company that would do business with Aéropostale.[6] Conefry testified that he told Finazzo that Finazzo "better be careful because if you have a relationship with a vendor as an employee of [a] company it could create a problem." Dey App'x at 1229. Conefry advised Finazzo to check with Aéropostale before proceeding with the new company. Finazzo responded that he "didn't think Aéropostale would go for it." Id. Nevertheless, in August 1996, Dey incorporated South Bay Apparel, Inc. South Bay's business with Aéropostale comprised approximately 99% of South Bay's total business from 1996 to 2006.

         In 1998, Finazzo started C&D. Finazzo told Conefry-who also acted as South Bay's and C&D's accountant-that he formed C&D so that he could receive "consulting fees" for directing Aéropostale's business to South Bay. Id. at 1232. Indeed, Conefry testified that C&D primarily received payments from South Bay.

         Initially, Finazzo and Dey had an informal agreement pursuant to which Finazzo simply told Dey to send funds to C&D. As the South Bay supply business with Aéropostale grew larger, Conefry was directed to split South Bay's net profits nearly evenly between South Bay-owned by Dey-and C&D-owned by Finazzo. Although these payments from South Bay to C&D were not for actual consulting, Conefry classified them as such on South Bay's books. Id. at 1234-36. The payments steadily increased from $355, 000 in 1998 to $5, 161, 550 in 2004. In 2005, the payments from South Bay to C&D totaled approximately $13 million, and Conefry classified them as cost of sales, because $13 million in consulting fees "would be a red flag." Id. at 1236. Conefry testified that, throughout this time period, he discussed these payments with Finazzo annually during the preparation and filing of Finazzo's tax returns. When Conefry pushed Finazzo to disclose the arrangement to Aéropostale, Finazzo responded that "it was too late at this time." Id. at 1238. In response to Conefry's concern that Aéropostale becoming a public company in 2002 could bring scrutiny from the Securities and Exchange Commission, Finazzo told Conefry "it's gone along so far so we will just continue." Id. at 1240.

         Finazzo and Dey also jointly owned the Vertical Line entities. These entities served as vendors to Aéropostale as well. In addition, Finazzo and Dey jointly owned other South Bay entities, including South Bay Sports Plex, South Bay Ticketing, and South Bay Knitting (the "related South Bay entities").

          Michael Cunningham-the Chief Financial Officer of Aéropostale during this time period-testified that once Aéropostale went public in 2002, Finazzo was required to regularly complete director and officer ("D&O") questionnaires and other related-party transaction documents. The D&O questionnaires asked whether Finazzo had a significant ownership interest in any Aéropostale vendor or received money from the vendor. Finazzo received training on multiple occasions to ensure that he understood his responsibility to disclose any such interests. Nevertheless, Finazzo stated on these questionnaires that he was not an officer, director, or partner of any other company; received no bribes or kickbacks from any third-party vendor; and did not engage in any related-party transactions.

         b. South Bay's Transactions with Aéropostale

         CEO Geiger testified that Aéropostale started using South Bay as a vendor on Finazzo's recommendation in either late 1996 or early 1997. South Bay sold Aéropostale graphic T-shirts and, eventually, fleeces. Various former and current employees of Aéropostale testified about the complete control Finazzo had over Aéropostale's vendor selection and pricing, and his use of that control to direct business towards South Bay.

         CFO Cunningham testified that the "quantities of goods" bought from particular vendors needed to be approved by Finazzo and that Finazzo was "responsible for the overall final price that was being negotiated with the vendors." Dey App'x at 615. Edward Slezak-Aéropostale's General Counsel-stated that Finazzo was "the number two person" at Aéropostale. Id. at 829. He testified that Finazzo "was responsible for all aspects of our product." Id. "[Finazzo] decided what type of product we would buy, how much of it, which vendors would manufacture the product, how it looked, [and] how it was merchandised in our stores." Id.; see also id. at 857 ("[Finazzo] was the one who directed all of our product placement, what we made, how much we made, . . . who got the orders, who made the Product.").

         i. Graphic T-Shirt Suppliers

         Regarding graphic T-shirts, Geiger testified that from 2002 through 2006 Finazzo was the executive primarily responsible for vendors, vendor selection, and vendor pricing. He also stated that Finazzo had "the final say" regarding the number of graphic T-shirts ordered by Aéropostale. Dey App'x at 1400-01.

         Cunningham and Geiger both recounted that, in early 2005, Geiger recommended to Finazzo that Aéropostale shift 25% of the T- shirts it was buying from South Bay to overseas vendors in order to achieve "significant cost savings." Id. at 639. Geiger believed that, for certain "core" graphic T-shirts with demand that was easy to predict, Aéropostale could accommodate the longer delivery time from overseas, [7] while taking advantage of lower costs. Id. at 639-40, 1384. Geiger estimated that Aéropostale could save $1.50 per T-shirt made overseas. Given the volume of T-shirts being sold, Cunningham estimated that this would have saved Aéropostale at least $5 million, while Geiger estimated savings of $6 million.

         Finazzo initially stated that "he would look into it." Id. at 640. As the year progressed, Finazzo became "agitated" that Geiger continued to press him on the matter. Id. At one meeting where the topic was discussed, Finazzo smacked the table, told Geiger that the meeting was over, and slammed the door shut as he left. Finazzo never moved 25% of the graphic T-shirt business overseas as Geiger had directed.

         Geiger also testified that Aéropostale's profit margin on graphic T-shirts during the time Finazzo was the head of merchandising tended to be less than the profit margin of other similar products Aéropostale sold. Geiger discussed these low margins at executive meetings attended by Finazzo. On many occasions, Finazzo would respond by hitting the table with his hands "and basically say[ing] why are people looking so closely at this?" Id. at 1381. Geiger recalled that Finazzo once declared that Geiger "wasn't allowed to ask [Finazzo] any questions about graphic T-shirts for a month." Id.

         Jennifer Heiser-an Aéropostale employee who merchandised graphic T-shirts and reported to Finazzo-testified that the graphic T-shirt business in particular "was [Finazzo's] baby" and that he was involved in that business "a lot more than [he was involved in] any other department." Id. at 708. She also testified that she "really was not allowed to bring in other manufacturers [besides South Bay]." Id. at 707. Heiser believed that bringing in additional manufacturers would allow Aéropostale to obtain "the best price and the best quality" because vendors would be forced to bid against each other for Aéropostale's business. Id. at 707-08. She stated that she therefore tried to place graphic T-shirt orders with vendors in Singapore. However, Finazzo "discouraged" Heiser from placing orders in Singapore, such that she "really felt that [she] had to put all of [her] business with South Bay." Id. at 707. On one occasion, when Heiser pushed Finazzo regarding the poor margins achieved by only using South Bay for graphic T-shirts, Finazzo "broke a pencil and said, we are using South Bay, end of story." Id. at 718. Heiser ultimately placed 97-99% of her graphic T-shirt orders with South Bay.

         Heiser also testified that Jody Green-an associate merchandiser in men's graphic T-shirts-often challenged Finazzo about the pricing of graphic T-shirts and asked why they could not use other manufacturers to get a better cost. Finazzo fired Green just three months after she started working at Aéropostale.

         John DiBarto-Aéropostale's Divisional Merchandising Manager for the Men's Division at the time of Finazzo's scheme- testified that Finazzo "was responsible for negotiating prices on the graphic tee products with South Bay." Id. at 1098. DiBarto stated that he did not try to negotiate prices with South Bay "[b]ecause . . . that was [Finazzo's] thing. He controlled production. And that was . . . his baby from the beginning, so . . . we did whatever he wanted." Id. Similarly, DiBarto never asked for an overall reduction in price from South Bay "[b]ecause it wasn't going to happen. . . . Those were variables that wouldn't change, because they were [Finazzo's] . . . he's in charge of that." Id. at 1128-29.

         When employees tried to "mess[] with [pricing] a little bit, it wasn't worth it, [Finazzo] would get angry." Id. at 1129. For instance, when DiBarto asked Dey for a price breakdown of South Bay's T-shirts by component to compare to another vendor, Finazzo and Dey yelled at him, saying "we're not going to do this, why are you doing this, we're not going to do business with anybody else but South Bay, don't waste your time." Id. at 1132-34. When Finazzo heard that Thomas Carberry-a new employee working under DiBarto-had questioned South Bay's costing structure, Finazzo emailed DiBarto: "John, I would like to let you know that I hear that Tom Carberry is talking about South Bay to other people in the company. I will not tolerate that, and I will be swift in my actions." Id. at 1144. In an October 21, 2006 email to DiBarto and others, Finazzo summarized his position on using South Bay as the primary graphic T-shirt supplier: "I will not change our vendor structure or the way we set up this business and I guess I can make that decision. I want South Bay to be the main T-shirt supplier." Id. at 1175-76.

         Jill Kronenberg-the former head of the Women's Division at Aéropostale-testified that prior to 2003, Aéropostale's women's graphic T-shirt business was split between South Bay and a vendor called Mias, with Mias having the majority of the business. Finazzo instructed Kronenberg to transfer business from Mias so that South Bay would have 50% of the women's graphic T-shirt business. Finazzo issued this instruction despite the fact that the graphic T- shirts made by Mias were of better quality and lower priced. Although she did not want to move business away from Mias, Kronenberg ultimately did so in 2004 "[b]ecause it reached a point where . . . basically [she] had no choice." Id. at 994-95. Kronenberg voiced concerns with Finazzo about the decision to transfer more business to South Bay but was unable to change his mind.

         ii. Fleece Suppliers

         Megan Lauritano-a senior product manager at Aerospostale from 2004 to 2006-testified that, in 2004, Finazzo made the decision to expand Aéropostale's use of South Bay as a supplier to fleece products as well.[8] South Bay was not a "known vendor" for fleece products at the time. Dey App'x at 1958. Lauritano testified that Finazzo determined the price and quantity of fleece orders with South Bay.

         She explained that South Bay's performance in the fleece business in 2004 was poor, including significant delivery delays that Aéropostale did not experience with other fleece vendors. Nevertheless, Finazzo dictated that Aéropostale continue buying fleece product from South Bay. When Lauritano informed Finazzo in 2005 that she had done a cost comparison analysis of South Bay and other fleece vendors and found that South Bay was not competitive, Finazzo nevertheless directed her to place an order with South Bay. South Bay continued to have delivery problems in 2005, and Lauritano proposed that South Bay give Aéropostale discounts to ...


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