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United States v. Callahan

United States District Court, E.D. New York

January 9, 2019

UNITED STATES OF AMERICA,
v.
BRIAN R. CALLAHAN and ADAM J. MANSON, Defendants.

          United States Attorney's Office, Eastern District of New York Attorneys for the United States By: Christopher Charles Caffarone, Assistant United States Attorney, By: Alicyn L. Cooley, Assistant United States Attorney, Brian D. Morris, Assistant United States Attorney, Karin K. Orenstein, Assistant United States Attorney, Shannon Cassandra Jones, Assistant United States Attorney, Of Counsel.

          Andrew James Frisch, Esq., Attorney for the Defendants

          MEMORANDUM OF DECISION & ORDER

          ARTHUR D. SPATT UNITED STATES DISTRICT JUDGE.

         Defendants Brian R. Callahan (“Callahan”) and Adam J. Manson (“Manson”) (collectively, the “Defendants”) pleaded guilty, pursuant to plea agreements, to crimes relating to the operation of a large-scale Ponzi scheme. The Court sentenced Callahan to 144 months incarceration, which he began serving in January 2018. Manson's sentencing hearing is upcoming.

         Presently before the Court are several motions by the Defendants pertaining to their sentencing, namely: (1) a motion by Callahan to vacate his sentence pursuant to 28 U.S.C. § 2255; (2) a motion by Manson to compel specific performance by the Government of his plea agreement; (3) a motion by Manson to disqualify the United States Attorney's Office for the Eastern District of New York, in favor of prosecution by another United States Attorney's office; and (4) a motion by Manson to preclude Jerry Ostry (“Ostry”), a victim, from testifying at his sentencing hearing.

         For the following reasons, the Court denies the Defendants' motions in their entirety, except it will permit the cross-examination of Ostry by defense counsel at Manson's sentencing hearing.

         I. BACKGROUND

         Between 2005 and 2012, Callahan operated a large-scale Ponzi scheme. He took money from investors purportedly to invest in hedge funds, stocks, bonds and other investment vehicles. However, unknown to investors, Callahan used those funds to pay redemptions to prior investors; to pay himself $6 million; and to purchase and renovate the Panoramic View, a cooperative development in Montauk, New York, for the sum of $38 million, in which he, personally, had a 50% ownership interest.

         Manson, Callahan's brother-in-law, assisted Callahan in carrying out the scheme by, among other things, handling the purchase of the Panoramic View with investor money; lying to banks in connection with that transaction; and lying to auditors in order to enable Callahan to continue defrauding investors.

         For their conduct, a grand jury sitting in the Eastern District of New York on July 31, 2013 returned a 19-count indictment charging Callahan and Manson variously with securities fraud, wire fraud, conspiracy to commit securities fraud, conspiracy to commit wire fraud and aggravated identity theft.

         On April 29, 2014, Callahan pleaded guilty, pursuant to a plea agreement, to securities fraud and wire fraud, in violation of 15 U.S.C. §§ 78j(b) and 78ff and 18 U.S.C. § 1343, respectively. Paragraph 2 provided the Government's estimate of the applicable United States Sentencing Guidelines (the “Guidelines”), including a loss enhancement of more than $50, 000, 000 but less than $100, 000, 000, resulting in a Guidelines range of imprisonment of 235 to 293 months. In exchange, the Government agreed (1) to dismiss the remaining counts in the indictment, (2) not to bring further criminal charges against Callahan for his defrauding investors, auditors, banks and the Internal Revenue Service, (3) to take no position concerning where within the Guidelines range determined by the Court the sentence should fall, and (4) to make no motion for an upward departure under the Guidelines.

         On May 12, 2014, Manson pleaded guilty, pursuant to a plea agreement, to one count of conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371. Similar to Callahan, Manson's plea agreement included, as part of its Guidelines estimate, a loss enhancement of more than $50, 000, 000 but less than $100, 000, 000, resulting in an estimated Guidelines range of imprisonment of 121 to 151 months imprisonment. However, because the statutory maximum for the offense of conviction was five years imprisonment, the advisory Guidelines range became 60 months.

         On December 16, 2015, the United States Probation Department (“Probation”) prepared and submitted the Presentence Investigation Report (“PSR”). Probation concluded that Callahan's advisory Guidelines offense level was 40 and he was in criminal history category I, resulting in a range of imprisonment of 292 to 365 months. Probation used Callahan's intended loss of $118.7 million as its benchmark for calculating the loss amount applicable to the scheme, ECF 181 ¶ 39, a decision that resulted in a higher advisory Guidelines range than what had been estimated in Callahan's plea agreement.

         On September 5, 2017, ten days prior to sentencing, Callahan raised three objections to Probation's calculation.

         On September 13, 2017, the Government filed a response to Callahan's sentencing submission, which, in relevant part, objected to Probation's loss figure:

Probation holds the defendant accountable for all the money that he took from investors-more than $100 million--on the theory that he was running a Ponzi scheme and therefore intended to cause that much loss. (PSR ¶ 39.) While that theory is viable, the government has decided to take a more conservative approach and will use the actual loss that the defendant caused. After giving the defendant credit for (1) net proceeds from the sales of the Panoramic and 47 Clock Tower, (2) investor monies recovered by the Receiver in the SEC action, (3) any legitimate market losses and (4) redemptions paid to investors, the government concluded that the defendant caused $19.7 million in loss--this is for Guidelines purposes only, the amount of restitution is $67.6 million. The government calculated the actual loss as follows:

Total money received from investors

$140.6 million

Redemptions paid to prior investors

$74 million

Monies recovered by the Receiver

$6.4 million

Net proceeds from sale of 47 Clock Tower

$139 thousand

Net proceeds from the sale of the Panoramic

$40.3 million

Actual Loss

$19.7

ECF 158 at 3.

         Following the filing of the Government's sentencing letter, on September 14, 2017, Probation issued an addendum to the PSR reducing the loss enhancement to $19.7 million.

         On September 15, 2017, Callahan appeared for sentencing. After hearing extensive arguments from defense counsel and the Government regarding the appropriate loss calculation, the Court rejected Callahan's argument and agreed with the Government and Probation that Callahan caused $19.7 million in loss. The Court then permitted Callahan's father, his wife, a family friend, defense counsel, Callahan, the Government and several victims to be heard regarding the appropriate sentence to be imposed. The Court examined each of the factors set forth in 18 U.S.C. § 3553(a), and sentenced Callahan to 144 months incarceration-a variance below the applicable advisory Guidelines range of 151 to 188 months.

         Callahan appealed from the Court's judgment and challenged his sentence, arguing, among other things, that the Government changed its theory of loss in violation of his plea agreement. On December 28, 2017, the Second Circuit dismissed Callahan's appeal on the ground that his 144 month sentence barred an appeal under the waiver of appellate rights for sentences of 327 months or below in his plea agreement.

         On September 28, 2018, Callahan filed a motion to vacate his sentence pursuant to 28 U.S.C. § 2255.

         On June 19, 2019, the Defendants filed a motion seeking (1) an order disqualifying the United States Attorney's Office from prosecuting this case; (2) recusal of the undersigned; (3) an order requiring enforcement of Manson's plea agreement; (4) permission to supplement Callahan's September 28, 2018 motion to vacate; and (5) Callahan's immediate release on bond.

         On July 31, 2019, the Court denied the Defendants' motion for recusal and Callahan's motion for bail pending habeas review, which the Second Circuit affirmed on October 9, 2019.

         II. DISCUSSION

         A. As to Whether the Government Breached the Plea Agreements.

         Although both defendants pleaded guilty, the procedural posture of their cases is different. The Court has already sentenced Callahan, who lost his appeal and now seeks habeas relief. The Court has not yet sentenced Manson. Consequently, Manson's claim is one that the Government will breach his plea agreement at his upcoming sentencing, whereas the alleged breach of Callahan's agreement has already occurred. Those agreements provided for an estimated loss enhancement at sentencing of more than $50, 000, 000 but less than $100, 000, 000, resulting in a Guidelines range of imprisonment of 235 to 293 months for Callahan, ECF 196-10 ¶ 2, and 121 to 151 months for Manson, ECF 206-6 ¶ 2.

         At Callahan's sentencing, Probation calculated an estimated loss of $118.7 million, by holding him accountable for all of the money received from investors, a figure representing the total intended loss. The Government objected that Callahan should only be responsible for $19.7 million in losses, representing the actual losses caused by his scheme, resulting in an applicable Guidelines range of 151 to 188 months. ECF ...


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