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Lawyers must scrutinize all documents associated with a securities fraud investigation February 26, 2010

Posted by jefhenninger in Articles.

You get a call from a client who is under investigation for securities fraud.  To make your job even easier, you are able to figure out (because you are told or you are good enough to piece  it together) the specific trades at issue.  So, you focus your attention on the circumstances and documents surrounding the trade itself.  You think that the Government has nothing and they will figure that out eventually (probably with your help).  Case closed right?  Not quite.

Consider the case of Kevin O. Kelley.   From 1999 until 2004, he operated Acorn Research & Management, Inc. (“Acorn”), where he worked as a stock broker. Kelley was also employed as a registered representative of Royal Alliance, a broker-dealer, and served as the managing executive of
its Stamford, Connecticut office.  He defrauded his stock brokerage clients through schemes involving four separate securities: Coyote Network Systems (“Coyote”), First Venture Leasing (“FVL”), E-Tel Corporation
(“E-Tel”), and AusAm Biotechnologies (“AusAm”).

While the schemes involved different companies, they all had a similar  pattern.  Kelley had an ownership (and/or other) interest in these companies but he failed to disclose this to his clients.  He advised his clients to buy the companies and that they were good and/or safe investments.  These companies failed and investors lost money.  In addition, Kelley misappropriated some funds for his own use that should been used for investments. 

To hide the fact that his investors had lost money or that their money was never used for investments to begin with, he started to issue bogus account statements.  Prior to the start of the jury trial, Kelley moved to strike the portions of the superseding indictment that referred to bogus account statements, arguing that the use of bogus account statements is insufficient to establish a securities violation because the false statements were not
made in connection with the sale or purchase of securities.  The motion was denied by the District Court.  On appeal, Kelley argued that because the bogus account statements were created and disseminated two to four years after the purchases of the related securities, they were not made in connection with the sale or purchase of a security.  Thus, they should not have been admitted into evidence.

However, the 2nd Circuit held that references to the bogus statements were admitted as evidence because they tended to demonstrate Kelley’s intent to defraud his clients and the scope of the schemes he employed. See Perez, 387 F.3d at 209 (“While falsehoods told by a defendant in hope of evading prosecution are not themselves sufficient evidence on which to base a conviction, such falsehoods may strengthen an inference of guilt supplied by other evidence.”). They were never offered as proof of independent violations but instead, they were relevant evidence with respect to the charged securities law violations. See SEC v. Holschuh, 694 F.2d 130, 143 (7th Cir. 1982) (“[A] scheme to defraud may well include later efforts to avoid detection of the fraud.” (internal quotations omitted)). The statements provided the jury with evidence both that Kelley had intended to defraud his clients and that he continued efforts to avoid detection by deceiving his clients about the value of the investments, often up to two years after a particular investment ceased to have any value. The account statements also indicate that Kelley’s actions in defrauding his clients were not simple mistakes but were instead part of a larger, intentional scheme to defraud. See id. at 144 (“The court was entitled to consider the lulling activities because they were evidence of a scheme which, viewed as a whole, was sufficiently closely connected to the sale and was relevant to the question of intent.” (footnote omitted)).

It is often  this “other crimes evidence” that is the most difficult to deal with.  It seems like Kelley was not prepared to meet this evidence at trial and that he had hoped that it would have been kept out.  Any lawyer handling this type of case must examine all evidence that can be connected with the investment at issue no matter how remote it may seem (in this case, years later).


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