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APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. Nathaniel Gorton, U.S. District Judge.
Steven N. Fuller, with whom Allen-Fuller, P.A. was on brief, for appellant James Prange.
Inga L. Parsons for appellant John C. Jordan.
David M. Lieberman, Attorney, United States Department of Justice, with whom Carmen M. Ortiz, United States Attorney, Stephen E. Frank, Assistant United States Attorney, Sarah E. Walters, Assistant United States Attorney, Leslie R. Caldwell, Assistant Attorney General, and David M. Bitkower, Deputy Assistant Attorney General, were on brief, for appellee.
Before Kayatta, Baldock,[*] and Selya, Circuit Judges.
Baldock, Circuit Judge.
A jury convicted Co-Defendants James Prange and John Jordan of multiple fraud-related counts based on their participation in an FBI securities fraud " sting." The district court sentenced each defendant to 30 months in prison. Defendants' consolidated appeals raise multiple challenges to their convictions and sentences. Exercising jurisdiction under 28 U.S.C. § 1291 and 18 U.S.C. § 3742, we affirm Defendants' convictions but remand for resentencing because the district court procedurally erred when formulating their guideline sentencing ranges.
Penny stocks are stocks issued by small companies that trade at less than $5 per share. These stocks, generally speaking, are thinly traded and not listed on organized securities exchanges. As a result, their prices are often volatile and subject to manipulation.
To investigate fraud in the penny stock market, the FBI launched " Operation Penny Pincher." This sting operation posed an FBI agent as a corrupt hedge fund manager named " John Kelly" from a fictitious fund called " Seafin Capital." In this role, the agent proposed a particular investment deal to the executives of companies with low market capitalization. The agent offered to use up to five million dollars of his clients' money to overpay for restricted shares of the executives' companies in return for a fifty percent kickback disguised as a consulting fee to one of the agent's nominee companies.
The FBI created a New York address, website, and business cards, and rented a
Massachusetts office for Seafin Capital. It also used former stock broker E.H. as a cooperating witness willing to speak to executives interested in the kickback arrangement. E.H. had previously been convicted of wire fraud through this same operation and was seeking a lenient sentence.
A. Defendant Prange
Defendant Prange is a self-described financial consultant. A mutual acquaintance introduced E.H. and Prange over the phone in early 2011. In June 2011, Prange called E.H. asking for details about the kickback program. E.H. explained the program as a " program of last resort" where fifty percent would go right back to the agent-manager " and basically it's a kickback to him." E.H. also emphasized that the executives had to " fully understand the program" and that those who were uncomfortable could " just walk away." When Prange asked whether the manager had " a little one page term sheet" documenting the kickback arrangement, E.H. responded " no, no . . . he would never put anything in writing." Prange then replied " Exactly. Right."
Prange recommended a number of executives as participants in this scheme and later participated in conference calls where E.H. explained to these executives that the hedge fund did not know about the kickback because the manager " slip[ped] this money in" with his " legitimate business" deals. He also explained that the manager used " seven or eight different nominee names" to receive the consulting fee even though there was " no consulting work being done for the company." With Prange on the call, E.H. told one of these executives that the arrangement was " inappropriate . . . definitely inappropriate . . . in my mind illegal."
Prange met the undercover agent in Massachusetts on July 22, 2011. The agent explained that his fund's typical investments involved a great deal of due diligence. But alongside these " legitimate deals," the agent said he invested in longshot corporations in a way that made it look like he had done due diligence when, instead, he would simply " paper the file in order to get it through, and have the hedge fund, make the capital investment." The catch? He took " a fifty percent kickback, right off the top." The agent then offered Prange a choice: " if at the end of today . . . there's something about me you don't like, then, we decide to part ways." But if Prange decided to participate he would receive ten percent of each kickback, " so if . . . we do five million, I get two and a half, I can give you ten percent."
The agent then explained logistics. He would fund the companies " in tranches . . . just to make sure all the mechanics . . . work out." Each tranche would " overpay" for restricted shares of the company's stock. As for the kickback, the agent explained, " it's me, personally, and through my nominee company, that gets the money . . . so the fund doesn't know, they don't need to know." To " mask the payment," the agent would " execute a consulting agreement" with one of his nominee companies, but he made clear that " [the] consulting agreement . . . is in paper only, there's no consulting." The agent then told Prange " the ball is in your court . . . if you wanna continue these meetings." Prange responded, " [a]bsolutely . . . it's excellent." Prange then sat through two meetings where the agent repeated the kickback pitch to two of the executives Prange had recommended for participation in the scheme.
B. Defendant Jordan
Several weeks later, Defendant Prange suggested the undercover agent invest in
Vida Life International. On August 22, 2011, the agent met with Prange and Defendant Jordan--Vida Life's president, CEO, and CFO. The agent had a two-hour, face-to-face conversation with Jordan, during which he explained the kickback scheme. He then told Jordan " the decision now is yours whether you want . . . to continue." Jordan asked if Vida Life would need to report the kickback on " a 1099" tax form; the agent said no, because they would " mask[ the] payment through a consulting agreement" even though no one would ever perform any consulting. The agent then told Jordan, " my biggest concern . . . is your ability to . . . feel comfortable and . . . cover or hide the payment that you're making back to me." Jordan responded, " I have no issues." The agent also told Jordan, " I'm screwing my investors on the hedge fund side," but qualified that, " They have done so well in the past that anything I do like this is . . . not gonna really hurt them." He then asked if Jordan " had any pangs . . . of consc[ience] with that." Jordan responded simply: " No." Jordan then gave the agent materials the agent could use to " mislead" his partners on the nature of the investment. Jordan also pledged to make Vida Life's press releases say the cash was coming from the sale of fishmeal, and not from Seafin.
At the close of the meeting, Jordan proposed they sign the consulting and stock subscription agreements right then and there. The agent signed the consulting agreement, but directed Jordan (who lived in California) to take the subscription agreement home with him, fill in certain information, and then send it back. By August 31, 2011, Jordan had finalized these agreements.
Once the executives finalized the stock purchase agreements and the consulting agreements, which listed " Waters Edge" as the nominee corporation to receive the kickback, the FBI (posing as Seafin) wired the first tranche of approximately $30,000 to each company. Of the $32,000 Vida Life received, it sent $16,000 to Waters Edge. Vida Life then disbursed the remainder to Jordan, his credit card, his niece, his attorney, and his business partner. In anticipation of the next tranche, Jordan fabricated an invoice, dated September 8, 2011, justifying a $50,000 payment by Vida Life to Waters Edge for purported consulting services, technology assessments, travel expenses, and conference fees. Neither Waters Edge nor the agent ever provided these services.
The FBI stopped the investments in September 2011, adopting a cover story that Seafin had transferred John Kelly to its London office where he could no longer execute these fraudulent investments. The FBI arrested Prange, Jordan, and the other participants several months later. The three other executives indicted with Prange and Jordan--Stephen Berman, Richard Kranitz, and Karen Person--pled guilty. Prange and Jordan went to trial.
At trial, the government during its case in chief played in short segments video recordings of the agent's meetings and phone conversations with Prange, his meeting with Jordan, and his meetings with the other executives. After playing each segment, the government asked the agent to clarify particular statements made during these conversations. For example, after playing a clip where Prange asked the agent whether he would have " an open line of communication" to " [b]ring other things to you," the agent testified that he understood Prange's question to be referencing Prange's " ability and willingness to bring other companies to do these stock fraud deals." As to Jordan,
after playing the clip where the agent asked Jordan if he was comfortable hiding the kickback and Jordan responded " I have no issues," the government asked the agent what he thought Jordan's response meant. The agent answered: " It's my understanding that Mr. Jordan was clear that this was an illegal stock deal and he was willing to participate in it." Similarly, when asked why he told Jordan " I'm screwing my investors on the hedge fund side," the agent testified that this was so he could " make clear to Mr. Jordan that this is not a legitimate transaction." After playing the segment where the agent asked Jordan if he had any " pangs of consc[ience]" about what they were doing and Jordan responded " no," the agent testified his understanding from this response was that " Mr. Jordan had no problem with what I was doing by screwing my investors." Prange did not object to this line of questioning at trial. Jordan's repeated objections were, for the most part, overruled.
In their defense, Prange and Jordan claimed entrapment throughout trial and sought judgments of acquittal on this basis. The district court denied these motions, but instructed the jury on the defense of entrapment. The court told the jury that, to convict, " [it] must be convinced that the government has proven beyond a reasonable doubt that [the] defendant was not entrapped." The government could satisfy its burden in one of two ways, the court explained: It might demonstrate " that the cooperating witness or undercover agent did not persuade or talk the defendant into committing the crime." Alternatively, the government could establish " that the defendant . . . was ready and willing to commit the crime without any persuasion from the cooperating witness, undercover agent or any other government agent."
At the close of trial, the district court notified the parties that it planned to provide a copy of the superseding indictment to the jury but would redact the names of the three other executives who had pled guilty. The court refused, however, " to take out all of the references to the co-conspirators." Defendants objected. They urged the court to redact the superseding indictment's " Introduction" and " Background" sections because these sections contained " numerous representations including acts by individuals who are not on trial which are prejudicial." Defendants also complained that the indictment referenced the term " nominee companies" in quotations when referring to the agent's nominee companies. The court overruled these objections and submitted the indictment to the jury. But it also instructed the jury " [n]ot . . . to be concerned with the guilt of any other person or persons not on trial as a defendant in this case," and explained that " an Indictment is not evidence of any kind against the defendant."
Ultimately, the jury convicted both Defendants on all counts: Prange with three counts of conspiracy to commit securities fraud, in violation of 18 U.S.C. § 1349; and eight counts of wire fraud, in violation of 18 U.S.C. § § 1343, 1349, and 2; and Jordan with one count of conspiracy to commit securities fraud, in violation of 18 U.S.C. § 1349; four counts of wire fraud, in violation of 18 U.S.C. § § 1343, 1349, and 2; and one count of mail fraud, in violation of 18 U.S.C. § § 1341, 1349, and 2. Prange and Jordan then moved for judgment notwithstanding the verdict or, in the alternative, a new trial arguing that " no reasonable jury could find beyond a reasonable doubt that the government had disproven the defense of . . . entrapment . . . ." The district court denied these motions.