Executives at Risk: Summer 2023
White Collar Alert
Executive Summary & Key Takeaways
This edition of Executives at Risk focuses on noteworthy charges, sentencings, and extraditions of executives in the areas of cartel, Foreign Corrupt Practices Act (FCPA), securities enforcement, money laundering, sanctions and export controls, and other areas of fraud. We also discuss a Supreme Court ruling impacting the liability standard for False Claims Act (FCA) charges against individuals.
Highlights and key takeaways include:
- The Department of Justice's (DOJ) Antitrust Division suffered numerous trial losses in no-poach and wage-fixing cases in recent months, raising questions whether the Division will shift focus back to more traditional price-fixing cases.
- The Securities and Exchange Commission (SEC) continues its crackdown on cryptocurrency, targeting executives for allegedly operating unregistered exchanges. Meanwhile, a cryptocurrency founder pled guilty to tax fraud related to cryptocurrency sales.
- Sam Bankman-Fried, the founder of FTX Trading Ltd. (FTX), was charged with allegedly paying Chinese officials a $40 million bribe but succeeded in having all post-extradition charges severed.
- On the sanctions front, a New York attorney pled guilty to money laundering for assisting a sanctioned Russian national purchase multi-million-dollar properties.
- A Swiss banker pled guilty to a scheme to help wealthy Americans avoid taxes on more than $60 million.
Actions Against Individuals
Cartel & Government Contracts Fraud
Antitrust Division Continues to Suffer Trial Losses in Labor-Related Cases: The DOJ Antitrust Division continues to suffer blows to its record of prosecuting labor-related collusion cases. In March, a Maine federal jury acquitted four operators of home health agencies accused of conspiring to fix wages in United States v. Manahe. Prosecutors failed to show that a wage-fixing agreement, while drafted, was ever signed by the defendants or that wages were actually suppressed. In April, a Connecticut district court judge granted the defendants' motion for acquittal in United States v. Patel, finding the alleged no-poach agreement did not constitute a market allocation agreement as a matter of law. In so doing, the court noted "[t]he government has tried to expand the common and accepted definition of market allocation in a way not clearly used before." The Division has now suffered four straight trial losses in labor collusion-related cases, as previously discussed.
Despite this poor record, the Antitrust Division remains unfazed. After the Manahe loss, Assistant Attorney General (AAG) Jonathan Kanter emphasized in a speech before the antitrust law bar that wage-fixing and no-poach cases "are righteous cases and we will continue when the facts and the law support it to bring those cases." Soon thereafter, the Division indicted yet another executive in United States v. Lopez for allegedly conspiring with competing healthcare staffing companies to fix wages for nurses in Nevada.
Procurement Collusion Strike Force's (PCSF) Trial Record Splits the Difference: DOJ's PCSF, which investigates and prosecutes procurement-related bid-rigging, achieved a mixed trial record this past quarter. In March, a federal jury in the Northern District of Georgia convicted the former president and vice president of government contractor Envistacom LLC, along with the owner of another company, of defrauding the U.S. government by preparing sham "competitive" quotes and cost estimates in order to secure $7.8 million in contracts under the Small Business Administration's (SBA) set-aside program for small businesses. Envistacom pled guilty at the start of the trial against its executives. In May, a Minnesota federal jury found the owner of concrete repair company, Kamida, Inc., not guilty of conspiring to rig bids for concrete repair and constructions contracts in Minnesota. The loss occurred despite a co-conspirator, who had previously pled guilty, testifying at trial. As previously reported, the PCSF has steadily brought procurement-related bid-rigging charges since it was established in 2019, albeit in smaller scale, domestic investigations.
DOJ Drops FOREX Fraud Charges Against Former HSBC Exec, Citing SCOTUS ruling and Inability to Extradite: In June, prosecutors in the Eastern District of New York (EDNY) dropped all charges against former HSBC trader Stuart Scott that he allegedly defrauded a Scottish energy firm as part of $3.5 billion foreign currency exchange (FOREX) deal in 2011. Stuart Scott was first charged in the U.S. in July 2016 as part of DOJ's broader FOREX currency manipulation investigation, covered here. Despite securing a jury conviction of Scott's codefendant and former colleague, DOJ had been unsuccessful in its attempts to extradite Scott to the U.S. from the U.K. Given this, and the Supreme Court's decision in Ciminelli v. United States, 143 S. Ct. 1121 (2023) that invalidated the government's right-to-control wire fraud theory, DOJ requested that the court dismiss all charges against Scott, reasoning that "the vanishingly small probability of securing Mr. Scott's appearance" did not warrant keeping the matter on the Court's docket.
Bankman-Fried Charged in Chinese Bribery Scheme, Has Post-Extradition Charges Severed: In March, a Southern District of New York (SDNY) federal court unsealed a superseding indictment against Samuel Bankman-Fried, the founder of the now defunct cryptocurrency exchange FTX Trading Ltd. (FTX), charging him with allegedly bribing Chinese government officials with at least $40 million in FTX cryptocurrency in exchange for unfreezing accounts belonging to Alameda Research, a company affiliated with FTX. The bribery charge follows Bankman-Fried's initial indictment on 12 securities fraud and money laundering-related charges and subsequent extradition from the Bahamas in December 2022, as previously reported. Bankman-Fried has pled not guilty to all charges. In May, Bankman-Fried filed motions to dismiss the majority of the charges against him, but the court denied those motions in June. The court also severed the five charges levied against Bankman-Fried since he was extradited from the Bahamas, including the bribery charge, after Bankman-Fried argued that the Bahamian government had not consented to his extradition on those charges. The government will proceed to trial on the eight original charges in October and the remaining charges have been scheduled for a separate trial in 2024. However, the Bahamas has not decided whether it will consent to the additional charges.
Bribery-Related Charges Against Wealth Manager Dismissed for Second Time: In May, a court for the second time dismissed criminal charges against a Swiss wealth manager in connection with a bribery scheme involving Petróleos de Venezuela, S.A. (PDVSA), Venezuela's state-owned and state-controlled oil company. The indictment alleged that the wealth manager orchestrated multiple financial transactions in order to launder the proceeds of bribes that were paid to individuals at PDVSA by vendors seeking favorable treatment. After the first dismissal was reversed on appeal in February 2023, discussed in more detail in the FCPA Spring Review 2023, the district court dismissed the charges in May on the basis that the defendant's right to a speedy trial had been violated. The district court found that the government's failure to prepare for trial was "intentional" and "an act of bad faith." The government has appealed.
General Counsel of PDVSA Pleads Guilty for Role in Bribery Scheme: In March, the former General Counsel (GC) of PDVSA pled guilty to facilitating corrupt payments and receiving $11 million in bribes as part of a currency exchange scheme, previously reported on here and here. The scheme relied on Venezuela's favorable, fixed currency exchange rate, which differs from the exchange rate available on the open market. The co-conspirators formed loan contracts between private companies and PDVSA, and when PDVSA subsequently cancelled the debt, the co-conspirators reaped profits due to the difference between the two exchange rates. The former GC was sentenced to three years in prison and ordered to forfeit his profits from the scheme.
Securities and Accounting Fraud
SEC Sues Executives in Multiple Financial Reporting and Disclosure Cases: Over the past quarter, the SEC has brought civil charges against several executives for violating financial reporting and disclosure laws. In March, the SEC sued two former and one current executive of a subsidiary of Austal, an Australian shipbuilding company, for allegedly artificially reducing the company's cost estimates to inflate revenues and lying to its auditors. That same month, those executives were indicted on wire fraud charges in the Southern District of Alabama in a parallel criminal case. In May the Chief Financial Officer (CFO) of Gaia, Inc., a video streaming company, agreed to pay a $50,000 civil settlement to the SEC to resolve allegations that he misled investors about the number of paying subscribers on its platform, causing the company to violate the anti-fraud, periodic reporting, and record keeping provisions of the federal securities laws. The company reached a separate settlement agreement to pay a $2 million civil fine.
The SEC also entered into settlements with executives from two companies related to undisclosed perquisites they received. In March, the CEO and founder of The Greenbrier Companies, Inc. agreed to pay a $100,000 penalty to resolve civil charges that he failed to disclose travel-related and personal security expenses involving his personal aircraft. In June, a Stanley Black and Decker executive vice president agreed to pay a $75,000 civil penalty for failing to disclose chauffeur services, personal expenses, and use of the corporate aircraft. In both cases, the executives failed to respond fully to questionnaires upon which the companies relied to prepare proxy statements. In the Black and Decker matter, the company did not pay a civil penalty due to its cooperation with the SEC's investigation.
SEC Sues Mutual Fund Trustees for Alleged Oversight Failures: Continuing its scrutiny of gatekeepers such as lawyers, auditors, board members, and transfer agents, the SEC brought a rare case against three trustees of an investment fund, the NYSA Fund, in May. The SEC alleges that the trustees failed to execute their oversight duties by permitting the fund's advisor, Pinnacle Advisors, LLC, to misclassify a significant investment as "less liquid" instead of "illiquid" to circumvent the "Liquidity Rule," which prohibits a fund from holding more than 15 percent of its net assets in illiquid investments. One of the trustees settled the matter, paying a $20,000 civil penalty and consenting to the entry of an order finding that he caused the fund's violation of the Liquidity Rule. The remaining two trustees and two additional employees that managed the fund are litigating the matter.
SEC Charges Crypto Executives for Failing to Register, Fraud: Since March, the SEC has brought three civil actions against cryptocurrency trading platforms Beaxy, Bittrex, and Binance, and their executives for allegedly operating unregistered exchanges, brokers and clearing agencies, and, in some instances, engaging in self-dealing, misappropriation, or intentional attempts to circumvent SEC oversight. In the lawsuit against Beaxy executives, the SEC alleges that Beaxy's founder misappropriated $900,000 raised pursuant to an offer and sale of an unregistered crypto token. It further alleges that three Beaxy executives operated an unregistered exchange and clearinghouse and acted as unregistered brokers. In the case involving Bittrex, the SEC alleges that Bittrex's former CEO spearheaded a campaign to direct issuers seeking to trade their crypto assets on the platform to "scrub" problematic "investment-related terms" from public statements that would attract SEC scrutiny. The SEC charged the CEO with control person liability for Bittrex's alleged operation of an unregistered exchange, broker, and clearinghouse. In the lawsuit involving Binance, the SEC alleges that the platform's co-founder and CEO secretly allowed high-value customers to trade on the Binance platform while publicly stating that customers were restricted from doing so. The SEC also alleges that the CEO misled investors into believing that the platform had controls in place to prevent manipulative trading when it did not. At the same time, the SEC alleges that trading firms owned by the CEO were engaging in "wash" trading on Binance's U.S. platform, which resulted in fraudulently inflated trading volumes. All three actions are contested.
Anti-Money Laundering and Fraud
Three Health Tech Start-Up Executives Convicted in Billion-Dollar Fraud Scheme: In April, a federal jury in the Northern District of Illinois convicted three former executives of Chicago-based healthcare technology startup Outcome Health (Outcome) on a total of 47 fraud-related charges. Outcome sold advertising space on tablets and TV screens that the company installed in doctors' offices across the country. Between 2011 and 2017, the defendants led a scheme to defraud Outcome's clients by selling nonexistent advertising inventory, overcharging clients for under-delivered services, and lying about Outcome's success rates with inflated metrics. The three individuals were also convicted for defrauding Outcome's lenders and investors by overstating their revenue figures for two years and using those figures to raise nearly $1 billion in debt and equity financing. Three other Outcome Health employees pled guilty to wire fraud charges prior to trial. All six defendants will be sentenced at a date to be determined.
New York Attorney Pleads Guilty to Money Laundering Charge in Connection with Sanctioned Russian Businessman: In April, New York attorney Robert Wise pled guilty in the SDNY to one count of conspiring to commit international money laundering. Wise participated in a scheme to make payments to maintain properties owned by Viktor Vekselberg, a Russian national who was sanctioned in 2018 and 2022 by the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC), as previously reported. These properties included high-end apartments in New York and Florida valued at approximately $75 million. Prior to the 2018 sanctions, Wise assisted with the acquisition of the properties and managed all costs related to them, such as facilitating tax and insurance payments, through an interest on lawyers' trust account (IOLTA). Following OFAC's decision to sanction Vekselberg for the first time in 2018, Wise accepted $3.8 million into his IOLTA from Vekselberg-linked shell companies to maintain Vekselberg's properties, with the knowledge that he was promoting sanctions violations. In addition to pleading guilty, Wise agreed to a forfeiture of approximately $3.8 million. He is scheduled to be sentenced in November 2023.
Ten Airline Executives and Vendors Charged with Multi-million-Dollar Fraud and Money Laundering Scheme: In April, 10 individuals were indicted on charges of wire fraud and money laundering for their alleged role in defrauding Polar Air Cargo Worldwide, Inc. (Polar) between 2009 and 2021. Four of the defendants were senior executives at Polar and the other six were vendors and customers who worked with Polar. Prosecutors allege that the four Polar executives abused their positions within the company to secure favorable contracts and other preferential treatment for the six vendors and customers in exchange for approximately $23 million in kickbacks, which were often directed to separate shell companies controlled by the executives. Polar, which discovered evidence of the kickback arrangements in summer 2021 and reported the conduct, has claimed that the company lost approximately $52 million due to the fraudulent scheme.
Former JPMorgan Employee Charged with Fraud and Embezzlement Scheme: In May, Kevin Chiu, a former business relationship manager and private client banker at JPMorgan Chase & Co. (JPMorgan), was indicted for allegedly embezzling $1.6 million from his clients' accounts. According to the criminal complaint filed in March 2023, Chiu fraudulently transferred approximately $2.4 million from at least five client accounts into other accounts, including a brokerage account established under his mother's name, and used some of the stolen funds to repay earlier victims. Chiu allegedly used the embezzled money to play the market and lost most of it. The complaint claims that Chiu allegedly confessed to his crimes during JPMorgan's internal investigators in July 2022 and was subsequently fired.
False Claims Act, Kickbacks, and Other Fraud
Supreme Court Says FCA Liability Turns on Defendants' Belief: In June, the U.S. Supreme Court held in United States ex rel. Schutte v. SuperValu Inc. that the FCA's scienter requirement "refers to respondents' knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed." The FCA imposes liability on anyone who knowingly submits a false claim for payment to the federal government. The FCA defines the term "knowingly" as encompassing three different mental states: actual knowledge, deliberate ignorance of the falsity of the information, and reckless disregard of the falsity of the information. Because the FCA scienter element incorporates not just actual knowledge but also deliberate ignorance or reckless disregard of falsity, the Supreme Court said that the scienter element can be met by showing that defendants were aware of a "substantial and unjustifiable risk" that the claims were false. Under the Supreme Court's standard, defendants will not be able to rely upon the argument that their interpretation of the law is objectively reasonable if they had a different view of the law at the time of the alleged violation. This case is discussed in greater detail in this Miller & Chevalier alert.
CEO Pleads Guilty to Trafficking Counterfeit Computer Equipment: In June, Onur Aksoy, CEO of 19 companies and 25 virtual storefronts on Amazon and eBay, pled guilty to trafficking fraudulent and counterfeit Cisco Networking Equipment. The executive was indicted last year on allegations that he imported thousands of low-quality, modified computer networking devices with counterfeit Cisco labels, stickers, boxes, documentation, and packaging that made the goods falsely appear to be new, genuine, high-quality devices manufactured and authorized by Cisco. The devices allegedly have a resale value of hundreds of millions of dollars. Between 2014 and 2022, U.S. Customs and Border Protection (CBP) seized approximately 180 shipments of counterfeit Cisco devices being shipped to the executive's virtual storefront entities from China and Hong Kong. Between 2014 and 2019, Cisco sent seven letters to the executive asking him to cease and desist his trafficking of counterfeit goods. The executive responded to at least two of these letters allegedly causing his attorney to provide Cisco with forged documents.
Government Requests Eleventh Circuit Resentence Former Atlanta Human Services Director for Bribery Conviction: In June, the government informed the U.S. Court pf Appeals for the Eleventh Circuit that it intended to seek dismissal of four wire fraud counts against former City of Atlanta Director of Human Services Mitzi Bickers, following recent Supreme Court rulings, but argued that the dismissal of the wire fraud counts would not affect Bickers' overall sentence. In September, Bickers was sentenced to 168 months, or 14 years, on three money laundering counts, four wire fraud charges, and a single count of filing a false tax return, as previously discussed here. Following Bickers' sentencing, the Supreme Court found that the money or property requirement of wire fraud must be more than an "incidental byproduct" of the fraud, which cannot be premised on "intangible interests." Bickers requested a new trial, but the government has argued that Bickers' 168-month prison sentence was reasonable based on her other convictions and the sentencing guidelines, which recommended 292 to 365 months in prison for the non-wire fraud charges.
Economic Sanctions and Export Controls
Think Tank Co-Director Indicted for Brokering Illegal Arms and Oil Deals for China, Lying to Investigators: In July, New York federal prosecutors unsealed an eight-count indictment against Gal Luft, a dual U.S.-Israeli citizen and co-director of a Maryland-based energy think tank, charging him with operating as an unregistered Chinese agent in violation of the Foreign Agents Registration Act (FARA) and engaging in multiple criminal schemes in that role. In 2016, Luft allegedly conspired with representatives of Chinese state-owned energy companies and others to advance Chinese interests within the incoming Trump administration. For the scheme, Luft allegedly covertly recruited and paid a former high-ranking U.S. official who was advising the then-president-elect in return for publicly supporting positions favorable to China. Luft also allegedly brokered the sale of Chinese weapons and munitions to Libya, the United Arab Emirates, and Kenya without a license required under the Arms Export Control Act (AECA), while falsely listing the sold ordinance as "toys." Additionally, the indictment alleges that Luft illegally brokered the sale of Iranian oil – which, according to the indictment, he ordered an associate to falsely state was "Brazilian" – and arranged meetings between Iranian representatives and Chinese energy companies to discuss oil deals. Luft was also charged with making false statements to the government during its investigation into his alleged misconduct. Luft was arrested in Cyprus in February under the sealed indictment but fled while out on bail pending extradition hearings and is currently a fugitive. It remains to be seen whether the U.S. government will be able to successfully prosecute Luft given he remains outside their jurisdiction.
Senior Cosmetics Company Executive Settles with OFAC Over Iran Sanctions Violations: In May, a senior executive of Murad, LLC, a California-based cosmetics company, reached a rare civil settlement with OFAC for conspiring to circumvent U.S. sanctions on Iran, resulting in $11 million in illegal exports of goods and services. The executive agreed to pay a $175,000 fine. Between 2016 and 2017, the executive supervised cosmetic distribution agreements with a United Arab Emirates company, Murad's sole distributor in the Middle East, knowing that the distributor exported Murad's products to Iran. After Unilever acquired Murad in 2015, Unilever discovered Murad's Iran-related business and directed the executive to immediately order the United Arab Emirates distributor to cease exports to Iran. While the executive ultimately complied with Unilever's order, the executive's first move was to email another Murad officer to ensure that the United Arab Emirates distributor's CEO would not disclose that Murad's executives had authorized exports to Iran. Even after Unilever's directive, the senior executive continued to work closely with the distributor to export products to Iran. The Murad executive agreed to pay a $175,000 fine and Murad itself also settled with OFAC, agreeing to pay a more than $3 million civil penalty.
Oyster Pearl Cryptocurrency Founder Pleads Guilty to Multiple Tax Return Filing Failures: In April, Amir Bruno Elmaani, founder of the cryptocurrency Oyster Pearl, pled guilty to tax offenses, including secretly minting and selling his own cryptocurrency in a way that caused the tokens to plummet in price and failing to pay income tax on certain cryptocurrency profits. As outlined in the indictment, Elmaani used his access to the blockchain to create new tokens to use for himself, then selling his tokens, driving down the price of other tokens. In connection with the scheme, Elmaani avoided approximately $5.5 million in owed taxes. In 2017, Elmaani filed a false tax return representing that his income was only $15,000 from a "patent design" business and reported no income in 2018. However, according to the indictment, Elmaani spent over $10 million on multiple yachts, $1.6 million at a carbon-fiber composite company, and over $700,000 on property in 2018.
Owner of Marketing Company Indicted for $65 Million Tax Fraud: In April, a federal grand jury indicted the owner of Anjacor Marketing, Inc., for the filing of multiple false tax refunds and defrauding the COVID-19 Paycheck Protection Program (PPP). The 26-count indictment alleges that the executive filed at least 15 false income tax returns between 2017 and 2022 on behalf of himself, Anjacor, and two trusts, underreporting taxes by $65 million. The indictment also alleges that he evaded the collection of unpaid taxes from 2010 to 2014 by making false representations about tax payment and submitting fake financial documents to the Internal Revenue Service (IRS) and fraudulently claimed almost $230,000 in pandemic relief loans.
Swiss Banking Executive Pleads Guilty For Part in Foreign Tax Evasion Scheme: In March, Daniel Walchli, a Swiss banker and member of the executive board of Zurich's IHAG Holding AG, pled guilty to one count of conspiracy to defraud the U.S. in connection with his role in a scheme to aid affluent Americans in avoiding taxes on more than $60 million in income and assets. Walchli and his co-conspirators hid the income and assets of three Americans with undeclared accounts at Privatbank IHAG Zurich AG by moving funds through bank accounts in Hong Kong and returning them to IHAG accounts in the name of a Singapore-based asset management company Walchli helped to create. Walchli is among six named executives in the 2021 indictment.
Extradition & Extraterritoriality
Federal Prosecutors Drop LIBOR Charges Against Former SocGen Bankers After France Refuses to Extradite: In March, EDNY federal prosecutors filed a motion to dismiss charges brought in 2017 against two former Societe General SA (SocGen) bank managers for allegedly colluding to manipulate the London Interbank Offered Rate (LIBOR) benchmark interest rate, previously covered here and here. The bank managers allegedly instructed SocGen employees to submit inaccurately low LIBOR rates to make it look as if the bank had the ability to trade at more favorable rates than it could. The two French nationals reside in France and France does not extradite its own citizens. In August 2021, the Second Circuit overturned a district court's decision holding that one of the bank managers had fugitive status and could not seek the indictment's dismissal. The prosecutors did not provide an explanation for their decision to drop the charges, although the improbability of extradition from France likely was a factor.
Former Tech CEO Extradited from U.K. to Face Fraud Charges Following Contested Proceedings: In May, former CEO of the U.K. tech company Autonomy, Mike Lynch, was extradited to the U.S. to face federal charges that he defrauded Hewlett Packard into overpaying for its purchase of Autonomy. Lynch's extradition follows lengthy contested proceedings that resulted in an April decision by two high court judges in London rejecting Lynch's appeal of his extradition order. The U.K.'s then-Home Secretary Priti Patel had previously approved Lynch's extradition to the U.S. in January 2022, leading Lynch to contest the decision in U.K. court. Lynch was released to home confinement on $100 million bond where he awaits trial.
Lynch's extradition makes him one of two executives extradited by the U.K. to face U.S. charges in federal court in San Francisco this past quarter. In June, Li Zhang, the CEO of Chinese property developer Guangzhou R&F Properties Co Ltd (UK), consented to extradition to the Northern District of California to face charges that he engaged in a bribery scheme to secure real estate contracts in San Francisco from 2015 through 2020. Li was arrested in 2022 at Heathrow Airport attempting to board a plane to Singapore.
OneCoin GC Extradited from Bulgaria to Face Charges in $4B Cryptocurrency Fraud Scheme: In March, Bulgaria extradited Irina Dilkinska, the former head of Legal and Compliance for purported cryptocurrency company OneCoin, to face charges that she engaged in a multi-billion-dollar pyramid scheme that defrauded investors. According to the indictment, Dilkinska now joins OneCoin founder Karl Sebastian Greenwood and Ruja Ignatova in facing charges stemming from the OneCoin scheme, covered here.
Government Cooperation Results in Below-Guidelines Sentence for Former CFO in Embezzlement Case: In April, Cooper Morgenthau, the former CFO of two special purpose acquisition companies (SPACs), was sentenced to 36 months in prison after pleading guilty to one count of wire fraud in connection to his embezzling approximately $5 million. According to the government's Sentencing Memorandum, what started as the embezzlement of a small amount of funds from one SPAC spiraled as Morgenthau embezzled and lost over $1 million in failed securities trading trying to pay back the original funds he took. In a further effort to conceal the embezzlement, Morgenthau transferred funds from the second SPAC, which he continued to use to trade securities and cryptocurrencies, ultimately losing an additional $4 million. Morgenthau also created falsified account statements to conceal his withdrawals, which he provided to the SPAC's accountant and auditor, causing the SPAC to make material misstatements in SEC filings, which Morgenthau certified.
In pre-sentencing memorandums, both Morgenthau and the government advocated for a downward sentencing variance, agreeing that conduct appeared to be "aberrational," and that Morgenthau's mental health and addiction struggles and his cooperation with the government were appropriate considerations for the court. The government emphasized the importance of Morgenthau's acceptance of responsibility, saying: "the path he chose at the end – to face the consequences of his misconduct expeditiously and unconditionally – is one seldomly chosen by defendants, and the Government respectfully submits that the sentence imposed by the Court should recognize that Morgenthau took a less-trod path and encourage others to do that same."
Four-Year Sentence for CEO who Conducted Fraudulent Cryptocurrency Offering: In March, Michael Stollery, the CEO and founder of Titanium Blockchain Infrastructure Services (TBIS), was sentenced to four years of incarceration for his cryptocurrency fraud scheme. According to the charging document, Stollery conducted an initial coin offering for TBIS, enticing investors with false and misleading statements, including about corporate relationships, client testimonials, and the functionality of the cryptocurrency, and failed to register the offering with the SEC. The information alleges that Stollery raised approximately $21 million, which he then comingled with personal funds, "using at least a portion of the offering proceeds for expenses unrelated to TBIS, such as credit card payments and the payment of bills for [his] Hawaii condominium."
The government emphasized a need for general deterrence given that "fraudulent cryptocurrency offerings are rampant and growing," noting that "according to the FTC, since 2021, $575 million of all cryptocurrency fraud losses reported to the agency came from bogus investment opportunities, far more than any other fraud type." However, in accordance with Stollery's plea agreement, the government requested a downward variance based on Stollery's early acceptance of responsibility and turning over of illicit funds and unrelated crypto assets, did not request a "sophisticated means" enhancement, and asked the court sentence Stollery to 57 months, the low end of the applicable guidelines range of 57-71 months.
Former Nanotechnology Company CEO Sentenced for Defrauding Investors: In May, James Jeremy Barbera was sentenced to 48 months in prison after a jury convicted him in a multi-million-dollar securities fraud scheme. Barbera is the founder and former CEO of Nanobeak, a privately held nanotechnology company. According to the indictment, Barbera falsely told investors that Nanobeak "had developed a breathalyzer sensor technology that could detect cancer and narcotics in human breath, based on technology developed by NASA," and made additional false and misleading statements claiming Nanobeak held patents and had institutional partnerships and investors. Barbera subsequently misappropriated approximately half of the funds raised from investors for personal expenses including his children's school tuition, credit card bills, and his mortgage. The Court's sentence of 48 months fell well below the government's requested sentence of 87 months. In their sentencing memorandum, the government asked for a 22-level increase based on the amount of loss, the number of victims, and the defendant's violation of a prior judicial order that required him not violate certain anti-fraud provisions of the federal securities laws. In his sentencing memorandum, Barbera argued that he did not undertake a "fraudulent enterprise" and "had the best of intentions to deliver for his investors." He disputed the government's proposed sentencing enhancements and argued that "loss" is a "poor measure for the seriousness of the offense," especially for a first-time, non-violent offender.
Authors: Alexandra Beaulieu, Samuel B. Cutler, Connor W. Farrell, Nicole Gökçebay, Calvin Lee, Cody Marden, Sandeep A. Prasanna, Alexandra S. Prime, Jesse Schwab, Surur Fatema Yonce,* Igor dos Santos**
*Former Miller & Chevalier attorney
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