United States v. Bergstein ( 2019 )

18‐1966‐cr (L)
United States v. Bergstein
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURTʹS LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST
CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
ʺSUMMARY ORDERʺ). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second
Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in
the City of New York, on the 16th day of September, two thousand nineteen.
PRESENT: RICHARD C. WESLEY,
DENNY CHIN,
JOSEPH F. BIANCO,
Circuit Judges.
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UNITED STATES OF AMERICA,
Appellee,
v. 18‐1966‐cr (L); 18‐2908‐cr
(Con)
DAVID BERGSTEIN,
Defendant‐Appellant.*
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FOR APPELLEE: EDWARD A. IMPERATORE, Assistant United
States Attorney (Elisha J. Kobre and Daniel B.
Tehrani, Assistant United States Attorneys, on
the brief), for Geoffrey S. Berman, United States
* The Clerk of the Court is directed to amend the official caption to conform to the above.
Attorney for the Southern District of New
York, New York, New York.
FOR DEFENDANT‐APPELLANT: ALEXANDRA A.E. SHAPIRO (Eric S. Olney
and Jacob S. Wolf, on the brief), Shapiro Arato
LLP, New York, New York.
Appeal from the United States District Court for the Southern District of
New York (Castel, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED.
Defendant‐appellant David Bergstein appeals from a judgment entered
June 28, 2018, convicting him, following a jury trial, of conspiratorial and substantive
counts of investment advisory fraud, securities fraud, and wire fraud, in violation of 18
U.S.C. §§ 371, 1343, and 1349 and 15 U.S.C. §§ 78j(b), 78ff, 80b‐6, and 80b‐17. Bergstein
was sentenced principally to a term of 60 monthsʹ imprisonment for the investment
advisor fraud counts and 96 monthsʹ imprisonment for the securities and wire fraud
counts, the sentences on all counts to run concurrently, followed by three years of
supervised release. Bergstein was also ordered to forfeit $22,584,897.00 and pay
$15,155,797.27 in restitution.
The evidence at trial established that, from 2011 to 2012, Bergstein
participated in a fraudulent scheme to conceal from investors in Weston Capital Asset
Management (ʺWestonʺ) information about impermissible financial transactions;
transferred funds from one pool of Westonʹs investors to benefit another pool of
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Westonʹs investors without disclosing conflicts of interest; and converted a portion of
misappropriated Weston funds for his personal benefit. On appeal, Bergstein
challenges (1) the admissibility of certain evidence; (2) the district courtʹs decision to
quash his subpoenas to third parties; (3) the sufficiency of the evidence as to the
securities fraud offenses; (4) the governmentʹs use of alternative theories of guilt to
prove a violation of the Investment Advisors Act; and (5) the district courtʹs factual
conclusions with respect to sentencing. We assume the partiesʹ familiarity with the
underlying facts, procedural history, and issues on appeal.
I. Admissibility of Evidence
Bergstein disputes the district courtʹs admission, pursuant to Federal Rule
of Evidence 404(b), of evidence relating to: first, his tax returns; second, his prior
transactions with an investor, Jerome Swartz, and an investment firm, Stephens Inc.
(ʺStephensʺ); and third, his casino debts. Under Rule 404(b), ʺ[e]vidence of a crime,
wrong, or other actʺ may be admissible to prove ʺmotive, opportunity, intent,
preparation, plan, knowledge, identity, absence of mistake, or lack of accident.ʺ Fed. R.
Evid. 404(b). The district court did not abuse its discretion in admitting the evidence for
these purposes, and thus Bergsteinʹs evidentiary challenges fail. See United States v.
Litvak, 889 F.3d 56, 67 (2d Cir. 2018).
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A. Tax Returns
The government properly introduced Bergsteinʹs 2011 and 2012 tax
returns to show that even though Bergstein maintained that his income was legitimate,
shell companies under his control did not report or pay taxes on income from Weston
transactions during the years in question. The evidence demonstrated Bergsteinʹs intent
and absence of mistake, was relevant to his claim that his transactions were legitimate,
and was not unfairly prejudicial. See United States v. Valenti, 60 F.3d 941, 946 (2d Cir.
1995).
Moreover, the Internal Revenue Service agent did not improperly testify
as an expert witness when he authenticated the tax documents in evidence,
communicated the contents of Bergsteinʹs 2011 and 2012 tax returns to the jury,
identified which required records the agency lacked , and explained certain basic
concepts. See United States v. Cuti, 720 F.3d 453, 458 (2d Cir. 2013) (holding that
accountantsʹ testimony was proper fact‐opinion and not expert testimony in part
because witnessesʹ reasoning ʺwas based on undisputed accounting rulesʺ).
B. Swartz and Stephens Investment Transactions
While Bergstein argues that the government introduced evidence of his
prior investment transactions with Swartz and Stephens only to degrade his character,
the evidence was admissible under Rule 404(b). The government introduced evidence
to show that between 2007 and 2008, Bergstein made false representations to Swartz
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and Stephens to solicit their investments as he funneled the money through attorney
trust accounts and shell companies to cover personal debts. This evidence was relevant
to show, inter alia, that because of his prior losses, Swartz would not have backed
Swartz IP, a shell company Bergstein created to secure a $17 million loan from Westonʹs
Wimbledon Class TT Portfolio (ʺTTʺ); Bergstein misappropriated portions of the TT
funds; and Bergsteinʹs motive was to use the misappropriated funds from Weston to
repay Swartz and Stephens. Moreover, Bergsteinʹs ability to replicate his prior scheme
to borrow money from Swartz and Stephens for the purpose of diverting Westonʹs
money was evidence of opportunity, plan, absence of mistake, or lack of accident in his
commission of the frauds in question. See Fed. R. Evid. 401(b)(2).
C. Casino Debts
The evidence of Bergsteinʹs casino debts plainly reflects his motive to
misuse Westonʹs money in efforts to repay Swartz and Stephens after misusing their
investments to satisfy those debts. The evidence also demonstrated that Bergstein
controlled the attorney trust accounts and shell companies that he used to facilitate the
frauds because he used those same means to pay his casino debts and transfer money to
himself. See United States v. Carboni, 204 F.3d 39, 44 (2d Cir. 2000) (ʺ[E]vidence of
uncharged criminal activity is not considered other crimes evidence . . . if it is
inextricably intertwined with the evidence regarding the charged offense, or if it is
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necessary to complete the story of the crime on trial.ʺ (citation and internal quotation
marks omitted)).
II. Third‐Party Subpoenas
Bergstein argues that the district court erroneously applied United States v.
Nixon, 418 U.S. 683, 700 (1974), in quashing his subpoenas to third parties, including
subpoenas issued to those who cooperated against him ‐‐ Albert Hallac, Westonʹs
founder, and Keith Wellner, one of Westonʹs chief officers. Under the Nixon standard, a
party seeking the issuance of subpoenas must show (1) relevancy, (2) admissibility, and
(3) specificity. Nixon, 418 U.S. at 700.
Bergstein maintains that we should apply the more lenient standard set
forth in United States v. Tucker, 249 F.R.D. 58, 66 (S.D.N.Y. 2008), which requires a
defendant to demonstrate only ʺan articulable suspicionʺ that the request for documents
ʺis (1) reasonable, construed as material to the defense, and (2) not unduly oppressive
for the producing party to respond.ʺ Id. (internal quotation marks omitted). We have,
however, applied the Nixon standard to Rule 17(c) subpoenas requested by a defendant,
United States v. Ulbricht, 858 F.3d 71, 109 (2d Cir. 2017) (seeking documents from the
government), as have district courts in this Circuit, see United States v. Skelos, No. 15‐CR‐
317 (KMW), 2018 WL 2254538, at *1 (S.D.N.Y. May 17, 2018) (ʺ[C]ourts in the Second
Circuit have almost unanimously applied Nixon to subpoenas served on third‐parties.ʺ).
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Whether under the Nixon standard or the standard articulated in Tucker,
we conclude that the district court did not abuse its discretion in quashing the
subpoenas. The district court may quash a Rule 17(c) subpoena ʺif compliance would
be unreasonable or oppressive.ʺ Fed. R. Crim. P. 17(c)(2). Assuming the documents
were relevant and admissible, Bergsteinʹs request for ʺ[a]ll e‐mails or other
communications [Hallac and Wellner] authored . . . or receivedʺ relating to almost thirty
paragraphs from Bergsteinʹs indictment was overly broad. Appʹx at 185, 222. Further,
Bergsteinʹs subpoenas plainly constituted a fishing expedition for ʺdocuments the
government did not obtainʺ and that he admittedly ʺcannot identify.ʺ Def. Appellantʹs
Br. at 45; see Ulbricht, 858 F.3d at 109. Accordingly, the district court did not abuse its
discretion in quashing the subpoenas to third parties.
III. Sufficiency of Evidence
Bergstein argues that the government failed to present sufficient
evidence that notes from Westonʹs Partners 2 Fund (ʺP2ʺ) and TT loans were securities
within the meaning of the Securities Exchange Act, 15 U.S.C. § 78c(10). Construing the
evidence in the light most favorable to the government, we are not persuaded. See
United States v. Baker, 899 F.3d 123, 129 (2d Cir. 2018).
An ʺinvestment contractʺ is a ʺsecurity,ʺ 15 U.S.C. § 78c(10), concerning
(1) ʺan investment of money,ʺ (2) ʺin a common enterprise,ʺ (3) ʺwith profits to be
derived solely from the efforts of others.ʺ Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d
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Cir. 1994). First, the government established that Bergstein invested funds from P2 and
TT in his shell companies, Arius Libra and Swartz IP, respectively. Second, ʺ[P2 and
TTʹs] fortunes [were tied] to the fortunes of the other investors [of Arius Libra and
Swartz IP] by the pooling of assetsʺ and ʺfortunes of [P2 and TT investors] were
interwoven with [Bergsteinʹs] fortunes.ʺ Id. at 87‐88 (requiring horizontal and strict
vertical commonality to find that there was a common enterprise). As to the third
factor, there was evidence that Bergstein had control of Arius Libra and Swartz IP.
Because there was sufficient evidence to show that the P2 and TT instruments were
investment contracts, we need not decide whether there was sufficient evidence to show
that they were also notes or whether the district courtʹs jury instruction on the meaning
of ʺsecurityʺ was plain error. See S.E.C. v. Thompson, 732 F.3d 1151, 1170 (10th Cir. 2013);
cf. United States v. Leonard, 529 F.3d 83, 87 (2d Cir. 2008). Accordingly, the juryʹs verdict
was supported by the evidence.
IV. Investment Advisers Act Theories of Guilt
Under 15 U.S.C. § 80b‐6, it is unlawful for any investment adviser to:
ʺemploy any device, scheme, or artifice to defraud any client or prospective client,ʺ §
80b‐6(1); ʺengage in any transaction, practice, or course of business which operates as a
fraud or deceit upon any client or prospective client,ʺ § 80b‐6(2); or ʺengage in any act,
practice, or course of business which is fraudulent, deceptive, or manipulative,ʺ § 80b‐
6(4). Bergstein contends that the government could not rely on the first two
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subsections, which require fraud on a ʺclient or prospective client,ʺ because Weston
advised only the individual investors and not the hedge funds. Consequently,
Bergstein argues that he is entitled to a new trial on the investment adviser fraud
offenses because at trial, two of the three theories of guilt the government presented
were legally invalid. See Skilling v. United States, 561 U.S. 358, 414 (2010). We are not
persuaded because the factual record indicates that Hallac advised the funds, as well as
the fundsʹ investors, and thus the funds were his clients as well. Hence, the jury could
convict Bergstein on any of the three theories charged. See United States v. Salmonese,
352 F.3d 608, 624 (2d Cir. 2003).
V. Sentencing
Bergstein contests the district courtʹs calculation of the loss amount,
application of the bankruptcy fraud enhancement, and calculation of forfeiture and
restitution. The district courtʹs factual findings with respect to Bergsteinʹs sentence,
however, were not clearly erroneous. See United States v. Afriyie, 929 F.3d 63, 70 (2d Cir.
2019).
First, we are not persuaded, as Bergstein argues, that the district court
should have reduced the $22.6 million loss amount on the ground that Weston
recovered portions of the collateral. While the loss amount must be reduced if the
defendant returns collateral that he provided, U.S.S.G. § 2B1.1 cmt. 3(E)(ii), here,
Bergstein did not provide any bona fide collateral of his own ‐‐ any amount Weston
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recovered on the P2 loan was money that it had originally provided. Moreover, to the
extent Weston recovered any of the collateral, the intended loss, which includes the
value of the P2 loan, exceeds the actual loss amount and is therefore the appropriate
measure of loss. See United States v. Lacey, 699 F.3d 710, 720 (2d Cir. 2012) (ʺ[A]lthough
Application Note 3(E)(ii) accurately describes the calculation of actual loss, the note
cannot be mechanically followed where intended loss is higher, since the larger intended
amount is a better measure for the defendantʹs culpability.ʺ (citation and internal
quotation marks omitted)); Carboni, 204 F.3d at 47 (ʺ[W]here the intended loss is greater
than the actual loss, the intended loss is to be used.ʺ (citation and internal quotation
marks omitted)). In any event, the Guidelines provide that if the loss amount exceeds
$9.5 million, then the defendantʹs offense level increases by 20 levels. U.S.S.G. §
2B1.1(b)(1)(K). The loss amount on the $17.7 million TT loan, less Swartz IPʹs
repayment of $1 million before the fraud was detected, still exceeds $9.5 million. See
United States v. Caltabiano, 871 F.3d 210, 219‐20 (2d Cir. 2017) (requested credit
insufficient to alter Guidelines range based on loss amount).
Second, the bankruptcy fraud enhancement was clearly applicable to
Bergsteinʹs offense. U.S.S.G. § 2B1.1(b)(9)(B) (providing that offense level increases by 2
if offense involves misrepresentation or fraud during a bankruptcy proceeding). In
2007 and 2008, Bergstein misappropriated funds from Stephens and later used $1
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million of misappropriated TT funds ‐‐ supplied by one of his shell companies ‐‐ to
purchase Stephensʹ claim in the bankruptcy.
Finally, the district court did not err in calculating the forfeiture and
restitution amount. For the purposes of forfeiture under 18 U.S.C. § 981(a)(1)(C),
ʺacquiredʺ property ʺneed not be personally or directly in the possession of the
defendantʺ as long as ʺat some point, [it had] been under the defendantʹs control.ʺ
United States v. Contorinis, 692 F.3d 136, 147 (2d Cir. 2012) (internal quotation marks
omitted). Bergstein effectively controlled the proceeds of the P2 and TT funds as he was
able to transfer the funds to shell companies and use the funds for personal expenses.
To the extent that Bergstein objects to the forfeiture of $22,584,897 and restitution of
$15,155,797.27 on the ground that neither amount accounts for the recovery of collateral,
his argument fails for the reasons stated above. Bergsteinʹs reliance on Honeycutt v.
United States, 137 S. Ct. 1626 (2017), is misplaced as the Supreme Court held that
forfeiture, under 21 U.S.C. § 853(a)(1), could not be imposed upon a defendant, jointly
and severally with his coconspirator, for proceeds he never acquired or controlled.
Here, the evidence established that Bergstein controlled the funds in question.
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We have considered Bergsteinʹs remaining arguments and conclude they
are without merit. Accordingly, the judgment of the district court is AFFIRMED.
FOR THE COURT:
Catherine OʹHagan Wolfe, Clerk
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