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United States v. Stein

United States Court of Appeals, Eleventh Circuit

January 18, 2017

UNITED STATES OF AMERICA, Plaintiff-Appellee,
v.
MITCHELL J. STEIN, Defendant-Appellant.

         Appeal from the United States District Court for the Southern District of Florida D.C. Docket No. 9:11-cr-80205-KAM-1

          Before WILLIAM PRYOR and JILL PRYOR, Circuit Judges, and STORY, [*] District Judge.

          JILL PRYOR, CIRCUIT JUDGE

         After a two-week trial, Mitchell Stein, a lawyer, was convicted of mail, wire, and securities fraud based on evidence that he fabricated press releases and purchase orders to inflate the stock price of his client Signalife, Inc., a publicly-traded manufacturer of medical devices. The district court sentenced Mr. Stein to 204 months' imprisonment, over $5 million in forfeiture, and over $13 million in restitution. Mr. Stein appeals his conviction and sentence.

         Regarding his conviction, Mr. Stein argues, among other points, that the government failed to disclose Brady material[1] to the defense before trial and knowingly relied on false testimony to make its case. As regards his sentence, Mr. Stein argues that the district court erred in calculating actual loss for the purposes of the Mandatory Victims Restitution Act of 1996 ("MVRA"), 18 U.S.C. § 3663A, and § 2B1.1 of the United States Sentencing Guidelines. In particular, he argues that in estimating actual loss the district court erroneously presumed that all purchasers of Signalife stock during the period when the fraud was ongoing relied on false information Mr. Stein promulgated. He also argues that the district court failed to take into account other market forces that likely contributed to the investors' losses. After careful consideration of the parties' briefs and with the benefit of oral argument, we affirm Mr. Stein's conviction but vacate his sentence.

         This opinion proceeds in three parts. We first provide background regarding Mr. Stein's fraudulent scheme, his subsequent indictment, his pretrial and post-trial motions, and his sentencing. Second, we address and reject Mr. Stein's challenges to his conviction. Mr. Stein identified only one potential Brady document, and it contained no information favorable to him and was accessible through reasonable diligence before trial. And, he failed to identify any suppressed material or any materially false testimony on which the government relied, purportedly in violation of Giglio.[2]

         Third, with respect to sentencing, we review the district court's actual loss calculation. We agree with Mr. Stein that to establish an actual loss figure under the guidelines or the MVRA based on investors' losses, the government must prove that, in deciding to purchase Signalife stock, investors relied on the fraudulent information Mr. Stein disseminated. The district court found that more than 2, 000 investors relied on Mr. Stein's fraudulent information, but the only evidence supporting this finding was the testimony of two individuals that they relied on Mr. Stein's false press releases and generalized evidence that some investors may rely on some public information. This evidence was insufficient to permit reliance to be inferred for over 2, 000 investors. Accordingly, the district court erred in calculating an actual loss figure based on the losses of all these investors. The district court also failed to determine whether intervening events caused the Signalife stock price to drop and, if so, whether these events were unforeseeable such that their effects should be subtracted from the actual loss figure. We remand so that the district court can remedy these errors.

         I. BACKGROUND

         A. The Fraudulent Scheme

         The evidence adduced at trial-including the testimony of Mr. Stein's two co-conspirators, Martin Carter and Ajay Anand-supported the following facts. In an effort to inflate artificially the value of Signalife stock, Mr. Stein drafted three press releases and three corresponding purchase orders touting more than $5 million in bogus Signalife sales.[3] The fraudulent period began on September 20, 2007, when Mr. Stein sent the first false press release to John Woodbury, Signalife's securities lawyer, with instructions to publish it. The press release reported that Signalife had sold $1.98 million worth of its products. Mr. Stein represented that the press release was "backed up by a purchase order." Trial Tr., Doc. 240 at 59.[4] Mr. Woodbury lacked any independent knowledge of the truth of the statements in the press release. He published it that day anyway, though, because Mr. Stein had told him that he and Signalife's Chief Executive Officer, Lowell T. Harmison, were traveling together visiting potential clients, and Mr. Woodbury believed that this sale was the fruit of those efforts.

         A few days later, Mr. Stein emailed Mr. Woodbury a second press release about an additional $3.3 million in sales and represented that Mr. Harmison had approved the press release. Mr. Woodbury published the release the next day despite lacking any supporting documentation.

         Mr. Stein emailed Mr. Woodbury a third press release about two weeks later. The press release reported an additional $551, 500 in sales orders. Mr. Woodbury issued the release early the next morning, again without supporting documentation.

         Mr. Woodbury later asked Mr. Stein for additional information regarding the sales that were described in the press releases. In response, Mr. Stein sent Mr. Woodbury three purchase orders. None of these purchase orders provided an address for shipment. Tracey Jones, Mr. Harmison's assistant, maintained that she "never received any backup or anything on" the purchase orders, and thus she considered them "phantom purchase orders." Doc. 241 at 117.

         The first purchase order, dated September 14, 2007, reflected an order by a company called Cardiac Hospital Management ("CHM"). The order reflected a sale of $1.93 million worth of product and noted a $50, 000 deposit. The signature block showed "Cardiac Hospital Management" and an illegible signature without a name. A week after the date of the purchase order, Thomas Tribou, a consultant who had worked with Signalife, paid Signalife $50, 000 for goods he expected to receive.

         The second and third purchase orders, dated September 24, 2007 and October 4, 2007, respectively, reflected sales to a company called IT Healthcare. One order reflected a sale of products at a cost of $3.3 million and noted a $30, 000 deposit. The other reflected a sale with a "net due" amount of $551, 500.

         The facts of these purchase orders resurfaced several times. Mr. Harmison incorporated information about them in a March 2008 memorandum to Signalife's auditors. Likewise, Signalife filed reports with the Securities and Exchange Commission ("SEC") that detailed these orders. According to Mr. Woodbury, who oversaw the drafting of the SEC filings, Mr. Stein was the sole source of information about the purchase orders and was intimately involved in the drafting process.

         Mr. Stein used the help of his personal assistant, Mr. Carter, and a Signalife contractor, Mr. Anand, to make the fake purchase orders appear legitimate. For example, Mr. Stein gave Mr. Carter a template to create bogus letters requesting a change of shipment address, one for IT Healthcare and another for CHM. Mr. Carter drafted a letter ostensibly from a man named Yossie Keret of IT Healthcare requesting that products be delivered to an address in Israel that Mr. Carter made up. Mr. Carter also prepared a letter appearing to come from CHM that asked for products to be delivered to an address in Tokyo, Japan. This letter purportedly was signed by "Toni Nonoy." Mr. Carter never spoke with Yossie Keret, Toni Nonoy, or anyone at IT Healthcare or CHM; indeed, he had no idea whether the companies or the individuals actually existed. He believed, however, that Mr. Stein had fabricated these names.

         Mr. Stein directed Mr. Carter to help him with the fraud in other ways as well. Mr. Stein asked Mr. Carter for two numbers he could use as fax numbers for purchase confirmation letters from Yossie Keret and Toni Nonoy. Mr. Carter provided Mr. Stein with two numbers unaffiliated with either company or person. Then, in June 2008, Mr. Stein told Mr. Carter to fabricate a letter from Yossie Keret purporting to cancel IT Healthcare's orders. Mr. Carter did as he was told and sent the letter to Mr. Woodbury. At one point, Mr. Stein arranged for Mr. Carter to travel to Israel ostensibly to find customers for Signalife even though Mr. Carter had no business contacts there. On another occasion, Mr. Stein sent Mr. Carter to Japan with a sealed envelope in a plastic bag, instructing him to mail the envelope back to the United States while wearing gloves and then return home the same day.

         Mr. Stein similarly relied on Mr. Anand for help in perpetrating the fraud. Once Mr. Stein asked Mr. Anand to travel to Texas to mail two IT Healthcare purchase orders to Signalife. When Mr. Anand asked whether the purchase orders were real, Mr. Stein responded that it did not matter. Mr. Anand declined to help, but later, on Mr. Stein's request, he agreed to draft two letters that would appear to come from Yossie Keret on behalf of IT Healthcare. The first letter requested a shipping address change to an Israeli address. The second letter cancelled the Signalife order. Mr. Anand sent these letters to Mr. Stein and Mr. Harmison.

         Mr. Stein also used Carter and Anand to take money or stock from Signalife. At Mr. Stein's direction, in January 2008, Mr. Carter executed an agreement with Signalife to provide consulting services, none of which he actually provided or was capable of providing. Pursuant to this agreement, Mr. Stein funneled money and Signalife stock from Signalife through Mr. Carter to himself. Mr. Stein also directed Mr. Carter to buy and sell Signalife stock and transfer most of the proceeds to him. Likewise, at Mr. Stein's direction, Mr. Anand established "The Silve Group, " ostensibly to sell Signalife products in India. But Mr. Anand sold only one unit (in Mexico). Mr. Stein nonetheless arranged for Signalife to pay Mr. Anand more than one million shares for his work. Mr. Anand then gave Mr. Stein a "kickback . . . [f]or the sweet deal [he] got from Mr. Stein." Doc. 243 at 71.

         On August 15, 2008, Signalife filed a Form 10-Q for the second quarter of 2008, which described the cancellation of an IT Healthcare purchase order. (GX 159 at 22.) This was the first public disclosure arguably signaling to stock market participants that Signalife's stock was overvalued based on the IT Healthcare purchase order, and thus, as the district court found, marked the end of the fraudulent period.

         B. Procedural Background

         1. The Investigation and Indictment

         The SEC began investigating Signalife in 2009. During its investigation, the SEC amassed a database of about 200 million records produced by Signalife. In 2010, the United States Department of Justice ("DOJ") began a criminal investigation of Mr. Stein. As a result of the DOJ's investigation, a grand jury indicted Mr. Stein on charges of money laundering; mail, wire and securities fraud; conspiracy to commit mail and wire fraud; and conspiracy to obstruct justice. The indictment also charged that Mr. Stein obstructed justice by giving false testimony to SEC investigators. Mr. Stein's two co-conspirators, Mr. Carter and Mr. Anand, also were indicted. Both pled guilty to conspiracy charges and testified against Mr. Stein at trial.

         2. The Motion to Compel

         Before trial, Mr. Stein sent the government nine letters requesting over 100 categories of documents, including documents in the SEC's files. The DOJ refused to produce information that was "not in the possession of or known to the prosecution, " which included the documents in the SEC's files. Mot. Compel Ex. B, Doc. 41-2 at 3. Mr. Stein responded with a motion to compel. The government opposed the motion, arguing that the DOJ lacked control over the SEC and that the DOJ and the SEC conducted no joint investigation. The magistrate judge denied the motion to compel as to documents "in the sole custody of the SEC, and which the DOJ is unaware of." Doc. 63 at 2.

         3. The Pretrial Motion to Dismiss the Indictment

About two months before trial, at Mr. Stein's direction, his attorney filed a motion to withdraw as counsel, which was granted. Mr. Stein then filed a motion to proceed pro se. The court held a Faretta[5] hearing and then granted Mr. Stein's motion. During the hearing, Mr. Stein learned that in the course of its investigation the DOJ had accessed a "very small subset" of documents in the SEC's database, which the DOJ had then provided to him. Tr. of Faretta Hrg. Proceedings, Doc. 146 at 41. Based on this revelation, Mr. Stein promptly filed a pro se motion to dismiss the indictment, alleging the suppression of unidentified "Brady material" in the SEC database. Mot. to Dismiss, Doc. 150 at 17-22. Mr. Stein also requested an evidentiary hearing. The district court denied the motion, concluding, among other things, that the motion was untimely and failed to identify any exculpatory Brady material.

         4. The Trial and Post-Trial Motions

         The trial lasted two weeks. The jury returned guilty verdicts against Mr. Stein on all charges.

         Mr. Stein filed several post-trial motions, including two motions for new trial based on newly discovered evidence. The newly discovered evidence included, among other documents, a publicly-filed SEC Form 8-K ("Exhibit X") regarding an unrelated company whose Chief Financial Officer was named "Yossi Keret." Mot. for New Trial Ex. J, Doc. 264-10. Mr. Stein alleged that Exhibit X was on the "SEC website." See Mot. for New Trial, Doc. 264 at 9. Mr. Stein argued this document proved that Yossie (with an "e") Keret, the man who purportedly signed the IT Healthcare purchase orders, was a real person, contrary to the government's representation at trial. He contended that his conviction thus "was based on the perjured testimony of key Government witnesses and exclusion of crucial exculpatory and impeachment evidence as a result of prosecutorial misconduct." Id. at 1; see also 2d Mot. for New Trial, Doc. 312 at 2, 8-9. Mr. Stein also filed a motion for an evidentiary hearing on his motions for new trial and a motion to compel documents from the SEC database. The district court summarily denied these motions.

         A little more than a year after the trial, in an SEC enforcement action against Signalife's successor company, the SEC produced about two million documents from its database. Within this collection, Mr. Stein found a copy of Exhibit X, the publicly-available SEC document containing the name "Yossi Keret." Based on this document, Mr. Stein filed a third motion for new trial and accompanying motion for a hearing, arguing that the document was exculpatory and had been withheld in violation of Brady.

         The district court denied the third motion for a new trial and the corresponding motion for an evidentiary hearing. The court found that there had been "no showing that the person named 'Yossi Keret' in [Exhibit X was] the same person connected to the [IT Healthcare purchase order confirmation and purchase order cancellation] upon which [Defendant's convictions] . . . are based." Doc. 388 at 2. The court further found there was no evidence showing that the prosecution team possessed this document and knowingly withheld it.

         5. The Sentencing

         Before Mr. Stein's sentencing, the probation office issued a presentence investigation report ("PSI"). Under the applicable Sentencing Guidelines, the PSI calculated a base offense level of 7 and recommended several enhancements and one reduction. Relevant to this appeal, the PSI recommended a 24-level increase under U.S.S.G. § 2B1.1(b)(1)(M) based on a loss calculation of more than $50 million but less than $100 million. Mr. Stein objected to this proposed calculation of loss, contending that there was no actual loss to any investor.

         The government proposed a method for calculating actual loss coined the "buyer's only" method, which was based on actual purchase and sales data. Tr. of Sentencing Proceedings, Doc. 429 at 30. Under this method, the court would consider only "those customers who only purchased Signalife shares during the fraudulent period, " defined as September 20, 2007 (the date of the first false press release) through August 15, 2008 (the date of Signalife's SEC filing noting that IT Healthcare had cancelled its purchase order). Tr. of Sentencing Proceedings, Doc. 428 at 25. The court would then "value the amount of those purchases . . . [and] subsequently subtract the value of those shares as of the end of the fraudulent period." Id. at 42. The government identified 2, 415 unique investors who bought Signalife stock during the fraudulent period and subsequently lost a total of $13, 186, 025.85.[6]

         Mr. Stein objected to this method, contending that the government needed to show both "but for" causation (reliance) and proximate causation ("that the causal connection between the conduct and the loss is not too attenuated"). Doc. 428 at 220. As regards "but for" causation, Mr. Stein argued there was no evidence that the 2, 415 investors actually relied on false press releases or other fraudulent information promulgated by Mr. Stein. He noted that only one investor testified at trial that he had relied on one of Mr. Stein's false press releases and only one investor provided a victim impact statement to the same effect. Although Mr. Stein acknowledged that a number of other investors provided victim impact statements, he emphasized that none of these investors specified that he or she relied on the false information he released.

         The government responded that many of the victims' impact statements showed they relied on press releases generally (albeit not necessarily the specific press releases Mr. Stein disseminated) in purchasing Signalife stock. The government urged that this evidence was enough to infer reliance for all 2, 415 investors identified. The government also relied on testimony that the only source for information about Signalife ...


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