Sales of Securities of U.S. Issuers by U.S. Market Makers = Domestic Transactions under Morrison — Point of Irrevocable Liability Is Key — OTCBB, Pink Sheets ≠ National Exchanges — Wire Fraud Statute Applies Extraterriorially
United States v. Georgiou, 2015 U.S. App. LEXIS 832 (3d Cir. Jan. 20, 2015):
A federal jury convicted Appellant George Georgiou ("Appellant" or "Georgiou") of conspiracy, securities fraud, and wire fraud for his participation in planned manipulation of the markets of four publicly traded stocks, resulting in more than $55,000,000 in actual losses. The District Court sentenced him to 300 months' imprisonment, ordered him to pay restitution of $55,823,398 and ordered that he pay a special assessment of $900. The Court also subjected Georgiou to forfeiture of $26,000,000.
For the first time on appeal, Georgiou argues that under Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), his securities and wire fraud convictions were improperly based upon the extraterritorial application of United States law. Thus, [*2] we must determine as a matter of first impression whether the purchases and sales of securities issued by U.S. companies through U.S. market makers acting as intermediaries for foreign entities constitute "domestic transactions" under Morrison. For the reasons set forth below, we find that these transactions are "domestic transactions," and that his conviction was not based upon the improper extraterritorial application of United States law. Georgiou also argues that the District Court erred in denying his motion for a new trial based on purported Brady and Jencks Act violations. He also asserts that the District Court erred on several evidentiary and sentencing issues. We find no error. Thus, we will affirm the District Court's Judgment of Conviction.
A. Factual Background
From 2004 through 2008, Georgiou and his co-conspirators engaged in a stock fraud scheme resulting in more than $55 million in actual losses. The scheme centered on manipulating the markets of four stocks: Neutron Enterprises, Inc. ("Neutron"), Avicena Group, Inc. ("Avicena"), Hydrogen Hybrid Technologies, Inc. ("HYHY"), and Northern Ethanol, Inc. ("Northern Ethanol") (collectively, "Target Stocks"). At all relevant [*3] times, the Target Stocks were quoted on the OTC Bulletin Board ("OTCBB")1 or the Pink OTC Markets Inc. ("Pink Sheets").2
1 The OTCBB is "[a]n interdealer quotation system for unlisted, over-the-counter securities. The OTC Bulletin Board or 'OTCBB' allows Market Makers to display firm prices for domestic securities, foreign securities, and [American Depository Receipts] that can be updated on a real-time basis." OTCBB Glossary, Financial Industry Regulatory Authority ("FINRA"), http://www.finra.org/Industry/Compliance/MarketTransparency/OTCBB/Glossary/P126264 (last visited Jan. 5, 2015).
2 The Pink Sheets, now known as OTC Market Group Inc., is "an electronic inter-dealer quotation system that displays quotes from broker-dealers for many over-the-counter (OTC) securities." OTC Link LLC, SEC, http://www.sec.gov/answers/pink.htm (last visited Jan. 5, 2015).
In order to facilitate their scheme, Georgiou and his co-conspirators opened brokerage accounts in Canada, the Bahamas, and Turks and Caicos. Once opened, the co-conspirators used these accounts to engage in manipulative trading in the Target Stocks. Specifically, by trading stocks between the various accounts they controlled, the co-conspirators artificially inflated the stock prices and created the false impression that there was an active market in each Target [*4] Stock.
As a result of this manipulation, Georgiou and his co-conspirators were able to sell their shares at inflated prices. In addition, these artificially inflated shares would be used as collateral to fraudulently borrow funds on margin and obtain millions of dollars in loans from Caledonia Corporate Management Group Limited ("Caledonia") and Accuvest Limited ("Accuvest"), both brokerage firms based in the Bahamas. Eventually, these accounts experienced severe trading losses since the assets purportedly serving as collateral proved to be worthless.3
3 Indeed, Caledonia was forced to liquidate its business, resulting in approximately $25 million in losses. These losses were sustained by the firm's clients, many of whom lost their entire retirement savings.
In June 2006, unbeknownst to Georgiou, Kevin Waltzer,4 one of his co-conspirators, began cooperating in an FBI sting operation. Through Waltzer's cooperation, the FBI monitored Georgiou's activities, including many of his emails, phone calls and wire transfers.
4 Waltzer pled guilty to one count of wire fraud, one count of mail fraud, and one count of money laundering, pursuant to a written plea agreement. He was sentenced to a term of imprisonment [*5] of 132 months, followed by a term of supervised release, and ordered to pay $40,675,241.55 in restitution.
1. Georgiou's Four Manipulation Schemes: Neutron, Avicena, HYHY, and Northern Ethanol
Georgiou and his co-conspirators manipulated the prices of the Target Stocks by creating matched trades,5 wash sales,6 and misleading email blasts. They used various alias accounts, nominees, and offshore brokerage accounts to conceal both their ownership of the Target Stocks and their involvement in the fraudulent scheme.
5 "A 'matched trade' is an order to buy or sell securities that is entered with knowledge that a matching order on the opposite side of the transaction has been or will be entered for the purpose of: (1) creating a false or misleading appearance of active trading in any publicly traded security; or (2) creating a false or misleading appearance with respect to the market for any such security." (Indictment ¶ 9.)
6 "A 'wash sale' is an order to buy or sell securities resulting in no change of beneficial ownership for the purpose of: (1) creating a false or misleading appearance of active trading in any publicly traded security; or (2) creating a false or misleading appearance with respect [*6] to the market for any such security." (Indictment ¶ 10.)
At least some of the manipulative trades were transacted through market makers7 located in the United States. Georgiou communicated via phone and e-mail with Waltzer about their plans, and also had occasional in-person meetings with Waltzer and others in the United States about these schemes. In these communications, Georgiou provided direction on how to implement the manipulative schemes, and demonstrated his role and culpability in orchestrating and perpetrating the fraud. After fourteen months, Georgiou wired $5,000 to the account of an undercover FBI agent as part of a test transaction. Six days later, Georgiou was arrested.
7 "A market maker is a firm that facilitates trading in a stock, provides quotes [for] both a buy and sell price for a stock, and potentially profits from the price spread." (Indictment ¶ 33.); see also 15 U.S.C. § 78c(38) (A "market maker means any specialist permitted to act as a dealer . . . and any dealer who, with respect to a security, holds himself out (by entering quotations in an inter-dealer communications system or otherwise) as being willing to buy and sell such security for his own account on a regular or continuous [*7] basis.")
2. The Caledonia Fraud
In December 2006, Georgiou opened a margin-eligible account in his wife's name at Caledonia. As a result, Georgiou was able to obtain loans and purchase stock without using his own funds. Georgiou represented to the principals at Caledonia that the margin in his account would be collateralized by approximately $15 million worth of Avicena and Neutron stock, but did not disclose that the value of these securities had been artificially inflated.
In March 2007, Georgiou borrowed approximately $3,394,000 from Caledonia to purchase 1,697,000 shares of Avicena from Waltzer. That loan was secured by Avicena and Neutron stock held in the name of Georgiou's wife at another brokerage firm, and was never repaid.
During the same month, Georgiou borrowed approximately $2.8 million from Caledonia to purchase Neutron stock and to provide financing to Neutron. The loan was ostensibly secured by Avicena and Neutron stock held in a different name at another brokerage firm. This loan was also never repaid. Caledonia was unable to cover the substantial deficits incurred as a result of Georgiou's activities. Ultimately, Caledonia suffered approximately $25 million in losses. [*8] The firm was later dissolved and liquidated.
3. The Accuvest Fraud
In June 2007, Georgiou met with representatives of Accuvest in the Bahamas to discuss opening a brokerage account. In September 2007, Georgiou opened an account at Accuvest in a different name. The trading in the account was handled through William Wright Associates ("Wright"), an Accuvest affiliate based in California. From October 2007 through February 2008, Georgiou deposited HYHY and Northern Ethanol stock into this account, and in return, Accuvest provided a margin loan of ten percent of the value of the account. Georgiou did not disclose that the value of these securities had been artificially inflated. On several occasions in 2008, Georgiou directed Wright, via email, to wire cash from this account to Avicena, or Team One Marketing, a Canadian company associated with Georgiou.
In August 2008, Georgiou instructed Wright to open a second Accuvest account, which was funded with 10 million shares of Northern Ethanol. As had happened before, Georgiou did not disclose that the value of these securities had been artificially inflated. Georgiou failed to repay the money that he had borrowed on margin and in cash loans from [*9] Accuvest. The artificially inflated stock did not cover the loans and Accuvest lost at least $4 million.
B. Procedural History
Following a three-week trial, a jury found Georgiou guilty of one count of conspiracy, in violation of 18 U.S.C. § 371, four counts of securities fraud, in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. §§ 78j(b) and 78ff, and four counts of wire fraud, in violation of 18 U.S.C. §§ 1343 and 1349.
Georgiou was sentenced to 300 months' imprisonment, and ordered to pay over $55 million in restitution.
The District Court had jurisdiction under 15 U.S.C. § 78aa and 18 U.S.C. § 3231. We have jurisdiction under 28 U.S.C. § 1291 and 18 U.S.C. § 3742(a).
A. Extraterritorial Effect of United States Securities Law
1. Standard of Review
For the first time on appeal, Georgiou argues that his securities fraud convictions are improperly based on an exterritorial application of United States law. He asserts that without proof that any securities transactions occurred in the United States, the jury lacked sufficient evidence upon which to convict him. He further asserts that the District Court erred in failing to require that the jury base it verdicts solely on domestic transactions. Georgiou relies on Morrison, which held that Section 10(b) of the Act only proscribes "deceptive conduct [*10] [made] 'in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.'" 561 U.S. at 266 (quoting 15 U.S.C. § 78j(b)).
Because Georgiou raised neither argument below, we review for plain error. Fed. R. Crim. P. 52(b); Henderson v. United States, 133 S. Ct. 1121, 1124-25 (2013); United States v. Riley, 621 F.3d 312, 321-22 (3d Cir. 2010).8 A finding of "plain error" is warranted if: "(1) there is an 'error'; (2) the error is 'clear or obvious, rather than subject to reasonable dispute'; (3) the error 'affected the appellant's substantial rights, which in the ordinary case means' it affected the outcome of the district court proceedings'; and (4) 'the error seriously affect[s] the fairness, integrity or public reputation of judicial proceedings.'" United States v. Marcus, 560 U.S. 258, 262 (2010) (quoting Puckett v. United States, 556 U.S. 129, 135 (2009)); see also United States v. Andrews, 681 F.3d 509, 517 (3d Cir. 2012). Georgiou bears the burden of showing that the error affected his substantial rights. Andrews, 681 F.3d at 517.
8 Although Morrison was decided after Georgiou's trial, the standard of review remains the same. See Griffith v. Kentucky, 479 U.S. 314, 328 (1987) ("[A] new rule for the conduct of criminal prosecutions is to be applied retroactively to all cases, state or federal, pending on direct review or not yet final, with no exception for cases in which the new rule constitutes a 'clear break' with the past."); see also United States v. Vilar, 729 F.3d 62, 70 (2d Cir. 2013) ("Plain error review applies equally where the defendant did not object before [*11] the trial court because he failed to recognize an error, and where the defendant did not object because the trial court's decision was correct at the time but assertedly became erroneous due to a supervening legal decision."); United States v. Asher, 854 F.2d 1483, 1487 (3d Cir. 1988).
2. Morrison and Extraterritoriality
Georgiou was convicted of securities fraud pursuant to Section 10(b) of the Act and Section 10(b)'s implementing regulation, SEC Rule 10b-5 ("Rule 10b-5"). 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; see also 15 U.S.C. § 78ff (prescribing penalties for willful violations of the Act). Section 10(b) makes it unlawful:
[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j(b).9
9 Rule 10b-5, promulgated pursuant to Section 10(b), makes it unlawful "for any person . . . (a) [t]o employ any device, scheme, or artifice to defraud . . . or (c) [t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5. "Rule 10b-5 . . . was promulgated under § 10(b), and 'does [*12] not extend beyond conduct encompassed by § 10(b)'s prohibition.'" Morrison, 561 U.S. at 261-62 (quoting United States v. O'Hagan, 521 U.S. 642, 651 (1997)).
The Supreme Court has limited the application of Section 10(b) to actors who employ "manipulative or deceptive device[s]" in two contexts: (1) transactions involving "the purchase or sale of a security listed on an American stock exchange," and (2) transactions involving "the purchase or sale of any other security in the United States." Morrison, 561 U.S. at 273. Indeed, Section 10(b) has no extraterritorial reach. Id. at 262, 266-67 (determining that Section 10(b) and Rule 10b-5 had no extraterritorial effect in civil context); see also Vilar, 729 F.3d at 74 (making the same determination in the criminal context, reasoning that "[a] statute either applies extraterritorially or it does not"). Thus, we consider here whether any of the relevant transactions Georgiou is charged with have the requisite nexus to the United States under Morrison to subject him to liability under Section 10(b).
It is undisputed that the Target Stocks were listed or traded on the OTCBB or Pink Sheets. However, whether the OTCBB or the Pink Sheets constitute "national securities exchange[s]" under Morrison, and whether the securities at issue were purchased or sold in the United States, are both disputed.10 The Supreme Court has not addressed either issue in this context, i.e., whether [*13] a foreign entity's purchase of securities listed on the OTCBB or Pink Sheets through American market makers ought be considered a "domestic transaction" for the purposes of Section 10(b).
10 The Indictment defines the Pink Sheets as "an inter-dealer electronic quotation and trading system in the over-the-counter ('OTC') securities market," (Indictment ¶ 2) and provides no definition of the OTCBB. The Indictment further states that "[t]he United States Securities and Exchange Commission (the 'SEC') was an independent agency of the United States which was charged by law with protecting investors by regulating and monitoring, among other things, the purchase and sale of publicly traded securities, including securities traded on the Pink Sheets and the OTCBB. Federal securities laws prohibited fraud in connection with the purchase and sale of securities . . ." (Indictment ¶ 8.)
a. "National Securities Exchange"
Under the first prong of Morrison, Section 10(b) applies to "the purchase or sale of a security listed on an American stock exchange." Morrison, 561 U.S. at 273. Securities listed on the OTCBB and the Pink Sheets are not within these parameters. According to the SEC, there are eighteen registered national security exchanges; the Pink Sheets [*14] and the OTCBB are not among them.11 See SEC Website, http://www.sec.gov/divisions/marketreg/mrexchanges.shtml (hereinafter "SEC Webpage on National Securities Exchanges") (last visited Jan. 5, 2015); see also 15 U.S.C. § 78f(b) (requiring that exchanges register with the SEC and comply with various requirements to constitute a "national securities exchange").
11 Indeed, the OTCBB is, by definition, a quotation service for "securities which are not listed or traded on NASDAQ or any other national securities exchange." OTCBB Frequently Asked Questions, FINRA, http://www.finra.org/Industry/Compliance/MarketTransparency/OTCBB/FAQ/index.htm ("OTCBB FAQ") (emphasis added) (last visited Jan. 5, 2015). Likewise, the Pink Sheets may include securities that "[have] been delisted from an exchange." Frequently Asked Questions, http://www.otcmarkets.com/learn/otc101-faq (last visited Jan. 5, 2015). Unlike companies listed on a national securities exchange, those quoted on the OTCBB and the Pink Sheets are not subject to "listing and maintenance standards, which are stringently monitored and enforced . . . . [and do not] have reporting obligations to the market." OTCBB FAQ.
Further, the stated purpose of the Act refers to "securities exchanges" and "over-the-counter markets" separately, which suggests that one is not inclusive of the other. See Securities Exchange Act of 1934, 48 Stat. 881, as amended, 15 U.S.C. § 78a et [*15] seq., (described as "[a]n Act [t]o provide for the regulation of securities exchanges and of over-the-counter markets . . . [and] to prevent inequitable and unfair practices on such exchanges and markets") (emphasis added).
Given that a "national securities exchange" is explicitly listed in Section 10(b)--to the exclusion of the OTC markets--and coupled with the absence of the Pink Sheets and the OTCBB on the list of registered national security exchanges on the SEC Webpage on Exchanges, we are persuaded that those exchanges are not national securities exchanges within the scope of Morrison.12
12 But see SEC v. Ficeto, 839 F. Supp. 2d 1101, 1108 (C.D. Cal. 2011) ("hold[ing] that Morrison does not bar the territorial application of § 10(b) to manipulative trading on the domestic over-the-counter market"); see also United States v. Isaacson, 752 F.3d 1291, 1299 (11th Cir. 2013) (securities traded on the OTCBB or Pink Sheets "meet Morrison's requirement for a U.S. nexus").
b. Domestic Transactions in Securities not Listed on Domestic Exchanges
In this case, foreign entities purchased and sold securities quoted on the OTCBB and the Pink Sheets. Several of these purchases were executed by market makers operating within the United States. In contrast, the Court in Morrison considered a "foreign cubed action . . . in which (1) foreign plaintiffs [were] [*16] suing (2) a foreign issuer in an American court for violations of American securities laws based on securities transactions in (3) foreign countries." Morrison, 561 U.S. at 283 n.11 (Stevens, J., concurring in the judgment) (internal quotation marks omitted).13 In that case, all aspects of the trades at issue occurred abroad, and thus, it was determined that Section 10(b) did not apply. There are two key distinctions between Morrison and the instant case: (1) the transactions in this case involve stocks of U.S. companies, (2) that were executed through American market makers.
13 In Morrison, Australian investors purchased shares of an Australian bank whose stock shares were listed on the Australian Stock Exchange Limited. 561 U.S. at 251-52. In 1998, the Australian bank purchased an American mortgage servicing company and for three years touted the success of the American company's business in its annual reports and public documents and statements. Id. at 251-52. But in 2001, the Australian bank wrote down the value of the American company's assets by more than $2 billion, which resulted in a drop in the value of the Australian bank's stock. Id. at 252. The Australian investors sued the bank in the Southern District of New York alleging violations of the Securities Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a). Id. at 253-54.
To determine [*17] whether the transactions at issue were "domestic transactions," under Morrison, id. at 267, we consider "not . . . the place where the deception originated, but [the place where] purchases and sales of securities" occurred. Id. at 266. It is the "location of the transaction that establishes (or reflects the presumption of) the [Security Exchange] Act's inapplicability." Id. at 268.
Several of our sister circuits interpret this to mean that "a securities transaction is domestic when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States." Absolute Activist Value Master Fund Ltd v. Ficeto, 677 F.3d 60, 69 (2d Cir. 2012); see also Quail Cruise Ship Mgmt Ltd. v. Agencia de Viagens, 645 F.3d 1307, 1310-11 (11th Cir. 2011) (allegation that closing in Florida precipitated transfer of title sufficient to satisfy Morrison at motion to dismiss); SEC v. Levine, 462 Fed. App'x 717, 719 (9th Cir. 2011) ("[T]he Securities Act governs the  sales because the actual sales closed in Nevada when [a defendant] received completed stock purchase agreements and payments."); United States v. Isaacson, 752 F.3d 1291, 1300 (11th Cir. 2013) (fund at issue "was 'run out of New York City' and  [defendant's] office was located in Florida, which support the inference that the  [f]und purchased the securities in the United States.")
We agree that "'[c]ommitment' is a simple and direct way of designating the point at which . . . the parties obligated [*18] themselves to perform what they had agreed to perform even if the formal performance of their agreement is to be after a lapse of time.'" Absolute Activist, 677 F.3d at 68 (quoting Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972)) (internal quotation marks omitted). Thus, "the point of irrevocable liability can be used to determine the locus of a securities purchase or sale." Id. Accordingly, territoriality under Morrison turns on "where, physically, the purchaser or seller committed him or herself" to pay for or deliver a security. Vilar, 729 F.3d at 77 n.11.
Facts that demonstrate "irrevocable liability" include the "formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money." Absolute Activist, 677 F.3d at 69, 70; see also Vilar, 729 F.3d at 78.14 In Vilar, the Second Circuit concluded that Section 10(b) applied where: (1) some victims entered into investment agreements in the United States; (2) another victim "executed the documents necessary to invest . . . in her own New York apartment and handed those documents to a New York messenger"; and (3) one victim sent the money required for opening her account from New York. 729 F.3d at 76-78 (internal quotation marks and citation omitted).
14 On the other hand, heavy marketing in the United States, a party's residency or citizenship, and the fact that the deception may have originated in the [*19] United States were insufficient to support a Section 10(b) claim. Absolute Activist, 677 F.3d at 70.
Here, at least one of the fraudulent transactions in each of the Target Stocks was bought and sold through U.S.-based market makers. Government witness and SEC employee Daniel Koster testified that all of the manipulative trades were "facilitate[d]" by U.S.-based market makers, i.e., an American market maker bought the stock from the seller and sold it to the buyer. (App. 1890-96, 1904-05, 1968); see also 15 U.S.C. § 78c(38). Therefore, some of the relevant transactions required the involvement of a purchaser or seller working with a market maker and committing to a transaction in the United States, incurring irrevocable liability in the United States, or passing title in the United States. The record also contains evidence of specific instances in which the Target Stocks were bought or sold at Georgiou's direction from entities located in the United States.15
15 For instance: (1) on November 3, 2005, Waltzer, who was located in Pennsylvania, sold 69,150 shares of Neutron stock from one of his accounts to another of his accounts; (2) on May 9, 2006, from within the United States, Waltzer sold 100,000 shares of Avicena stock from one of his accounts to another of his; [*20] (3) Georgiou deposited 2.5 million HYHY shares into an account in California; (4) on September 3, 2008, an undercover FBI agent purchased 16,000 shares of Northern Ethanol stock from within the United States; and (5) Georgiou wired $5,000 to a bank account in Philadelphia for the undercover FBI agent, in furtherance of the manipulative trading scheme.
We now hold that irrevocable liability establishes the location of a securities transaction. Here, the evidence is sufficient to demonstrate that Georgiou engaged in "domestic transactions" under the second prong of Morrison, i.e., transactions involving "the purchase or sale of any  security in the United States." See Morrison, 561 U.S. at 273. Thus, the District Court's application of Section 10(b) to Georgiou's transactions was proper.
B. Extraterritoriality of United States Wire Fraud Statute
Appellant also [*22] argues that his wire fraud convictions are improperly based on the extraterritorial application of United States law, and that these convictions are legally insufficient because the Government failed to demonstrate that his conduct violated foreign law. As Georgiou raises this argument for the first time on appeal, we apply plain error review. Henderson, 133 S.Ct. at 1124.
Unlike securities fraud, the statute governing wire fraud "prohibits 'any scheme or artifice to defraud,'--fraud simpliciter, without any requirement that it be 'in connection with' any particular transaction or event." Morrison, 561 U.S. at 271-72 (quoting 18 U.S.C. § 1343). Thus, a wire fraud offense is "complete the moment [a party] executed the scheme inside the United States. . . ." Pasquantino v. United States, 544 U.S. 349, 371 (2005). Moreover, unlike the Securities Exchange Act, Section 1343 applies extraterritorially. Id. at 371-72. Indeed, the explicit statutory language indicates that "it punishes frauds executed in 'interstate or foreign commerce,'" and "is surely not a statute in which Congress had only domestic concerns in mind." Id. (quoting 18 U.S.C. § 1343).
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