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Second Circuit Clarifies Venue Requirements for Securities Fraud

On August 15, 2016, the Second Circuit issued a rare opinion on the subject of the sufficiency of evidence to establish venue in United States v. Lange, No. 14-2442-cr (Jacobs, Chin, Droney).  In this securities fraud and conspiracy case, the Court found there was sufficient evidence that the defendants committed a crime in the Eastern District of New York (“EDNY”) when they were aware of “cold call” lists including EDNY residents and where emails soliciting investment were sent to a Postal Inspector in Brooklyn.  This connection was sufficient even though the participants in the scheme operated out of Washington State and had little contact with EDNY. 

The opinion shows that proof of venue is required, but not very much proof.  This constitutional requirement remains under-emphasized by the courts and is infrequently litigated by defendants.  This is in part because it is often demonstrated without difficulty by the government.  In both the EDNY and SDNY, enterprising prosecutors have sometimes pushed the bounds of what is permitted, oftentimes because it is easier for a prosecutor to charge a case that he has investigated in his home district than it is to seek approval to indict the case in another district.  The Court has, over time and now again in Lange, encouraged this broad approach to venue by applying a relaxed standard for what is required.  See, e.g., United States v. Ramirez-Amaya, 812 F.2d 813 (2d Cir. 1987) (holding that venue for drug importation count was proper in SDNY even though drugs were flown to airport in EDNY; the course of the flight carried the airplane over the Narrows, a body of water that lies within the joint jurisdiction of SDNY and EDNY).  Still, given that some convictions have been reversed based on venue, see, e.g., United States v. Beech-Nut Nutrition Corp., 871 F.2d 1181 (2d Cir. 1989), defendants should continue to challenge thin cases of venue even if many of the challenges will, as in Lange, be unsuccessful.

Background

The charges in this case against defendants William Lange, Kristofor Lange, Brad Russell, and others, arose from two fraudulent investment schemes involving Harbor Funding Group, Inc. (“HFGI”) and Black Sand Mine, Inc. (“BSMI”).  The government alleged that both companies solicited investment with promises that the money would be used to fund a mortgage company and a mining operation, but in fact the money was used solely to pay employee salaries and personal expenses.  Investors lost in $9 million in HFGI and $780,000 in BSMI.

BSMI (which is at the core of the venue dispute) operated out of Washington state.  However, the government presented evidence that BSMI solicited investment nationwide by cold-calling potential investors.  The cold calls were made from a list which, in its fullest form, contained over 2,000 names of which 40 had addresses in the EDNY.  Later “scrubbed” versions of the list continued to include EDNY names.  A BSMI employee also emailed a federal agent, Postal Inspector Lucente, who resided in Brooklyn.  Inspector Lucente impersonated an interested potential investor, and received an email newsletter containing misrepresentations about BSMI.

Venue

Both Kristofor Lange and Brad Russell challenged the sufficiency of evidence establishing venue in the EDNY.  Under the Sixth Amendment, a criminal defendant has the right to be tried in the district where the crime was “committed.”  See also Fed. R. Crim. P. 18.  The Securities Exchange Act provides that the crime of securities fraud is committed “in the district wherein any act or transaction constituting the violation occurred.”  15 U.S.C. § 78aa(a). 

In Lange, the Court held that venue for securities fraud is proper in the district where fraudulent telephone calls or electronic communications originate, and in the district where they are received.  Proof of venue for a particular defendant can be shown by establishing that the acts within the district were committed by the defendant, foreseeable to the defendant or that the defendant aided and abetted the fraud which reached into the particular district.

Reversing the district court, the Second Circuit held that a reasonable juror could find that test met here because BSMI employees called and emailed EDNY residents to solicit investment.  BSMI cold-called investors “aggressively, on a national basis” and used a call list that included individuals in the EDNY.  The Court also noted the communications with Postal Inspector Lucente in Brooklyn.  Those calls (based on company-approved talking points) included fraudulent statements.  Lange and Russell’s involvement was established because they were present at strategy meetings where the cold call strategy was discussed, and they received a copy of the cold-call list.  Russell assisted in “scrubbing” the call list to remove people who were on the federal “do not call” list.  This established foreseeability with respect to involvement in the EDNY.

The Court also found that a reasonable juror could conclude that the defendants aided and abetted a securities fraud scheme that involved acts committed in EDNY.  Contrary to the district court’s ruling, the government was not required to prove that the defendants aided and abetted specific acts that took place in EDNY; it was enough that criminal acts were committed in the district and the defendants aided and abetted the overall scheme.

Finally, the same evidence would allow a reasonable juror to find that acts in furtherance of the conspiracy were committed (or caused to be committed) in the EDNY.  The Court also addressed the “substantial contacts” inquiry.  In cases where the defendant argues that the prosecution in a particular district caused him a hardship, prejudiced him, or undermined the fairness of the trial, the Second Circuit will conduct “substantial contacts” inquiry that asks whether the defendants had “substantial contacts” with the district of prosecution.  The Court noted that it was “questionable” whether the doctrine even applied where the defendants had made no request for a venue change on grounds of hardship.  Nevertheless, it concluded that even if the test applied, venue would still be proper because the evidence showed that BSMI had a website designed to attracted investors from all over, solicited investors in a nation-wide call campaign, and even emailed a potential investor in the EDNY.  The alleged criminal acts provided substantial contact with the EDNY.

Other Issues

The Court also addressed two challenges to the jury charge related to conscious avoidance and “no ultimate harm” instructions.

A conscious avoidance jury instruction allows the jury to conclude that the defendant acted with knowledge if the defendant intentionally avoided learning facts that would give rise to criminal liability.  Kristofor Lange made two arguments with respect to this charge—a common basis for reversal of a criminal conviction.  Lange first argued that the district court erred by not instructing the jury that conscious avoidance could not be used to satisfy the element that the defendant knowingly participated in a conspiracy.  The Second Circuit held, however, that the district court’s instructions on conspiracy were clear that the government had to prove that the defendants intentionally engaged in the conspiracy, even without the requested instruction.  Conscious avoidance may not substitute for evidence of intent, only for evidence of knowledge, and in a conspiracy case, that requires the government to prove that the defendant intended to help the conspiracy achieve its criminal purpose.  Here, the jury instruction accorded with the relevant law.

Russell argued that there was no factual predicate for the conscious avoidance instruction, but the Court easily batted this argument aside.  It noted the “ample evidence” that Russell was involved in the scheme and attempted to avoid specific knowledge, including evidence that he refused to respond to dissatisfied investors, referring them to other employees.  Moreover, the charge was warranted because Russell’s counsel argued in summation that he didn’t know about the fraud.

Russell also argued that the district court erred in giving a “no ultimate harm” instruction, i.e., an instruction that the defendant could be found guilty even if he acted in good faith, believing that ultimately everything would work out.  The Second Circuit quickly dismissed this argument as well, citing the evidence that Russell’s co-conspirators “intended to immediately deprive investors of capital through fraud,” even if they intended to make it up in the long term.  A defense of “no ultimate harm” can be difficult to sustain at trial, but it remains a defense of choice in some cases.  See, e.g., United States v. Tagliaferri, 15-536 (May 4, 2016).  This jury instruction, which is not a required charge, is sometimes requested by the government in response to the possibility that such a defense will be raised.

-By Stephanie Teplin and Harry Sandick