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Sentence in securities fraud case reversed because the government failed to show evidence that thousands of investors relied on the fraudulent information disseminated by the defendant


After a two-week trial, defendant in U.S. v Stein was convicted of mail, wire, and securities fraud based on evident that he fabricated press releases and purchase money orders to inflate the stock price of his client, Signalife, Inc, a publicly traded manufacturer of medical devices. The district court sentenced Stein to 205 months in prison, ordered $5 million in forfeiture, and $13 million in restitution. In his appeal Stein argued that the government failed to disclose Brady v. Maryland material to the defense before trial and knowingly relied on false testimony to make its case. As for the sentence, Stein argues that the district court erred in calculating actual loss for the purpose of the Mandatory Victims Restitution Act of 1996 (MVRA) and § 2B1.1 of the U.S. Sentencing Guidelines. He argued that in estimating actual loss the district court erroneously presumed that all purchasers of Signalife stock during the period the fraud was ongoing relied on false information advanced by Stein.   He also argued that the district court failed to take into account other market forces that likely contributed to the investors losses.

After the Department of Justin conducted a criminal investigation of Stein and his work with Signalife, he was charged with money laundering and wire and securities fraud. Prior to his trial Stein moved to produce documents in the Security and Exchange Commission’s (SEC) files. The government’s response was that is lacked control over the SEC and it did not conduct a joint investigation with the SEC. Prior to trial Stein learned that in the course of its investigation the DOJ had accessed a very small subset of documents in the SEC’s date base which the DOJ then provided to him. As a result he filed a motion to dismiss on the basis of this Brady violation. Following his conviction at trial, he obtained additional documents from the SEC that he believed were exculpatory and he filed motion for a new trial based on the Brady violation.

The court of appeals found the Brady evidence was neither favorable nor impeaching. It did not contradict the testimony of the government’s witness. But even if he were favorable to Stein, he failed to show that he was unable to locate the evidence with reasonable diligence. The document was a publicly available document filed with a public agency and he could not show that the document was unobtainable with reasonable diligence.

As for the loss amount at sentencing, the court of appeals held that the government’s burden was to show investors relied on Stein’s fraudulent information to satisfy the “but for” causation requirement under the U.S. Sentencing Guidelines § 2B1.1. The government must also show investor reliance to prove “but for” causation for restitution purposes.

In this cases involving numerous investors, the government may show reliance in a securities criminal fraud case either through direct evidence or specific circumstantial evidence. The government may instead offer specific circumstantial evidence from which the district court may reasonably conclude that all of the investors relied on the defendant’s fraudulent information. Here, the government failed to satisfy either of these options. The record contains no direct, individualized evidence of reliance for each investor. And the circumstantial evidence in the record is far too limited to support a finding that 2,415 investors relied on the fraudulent information that Stein disseminated. Therefor the district court’s actual loss calculation was in error.

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