Ross Mandell, Six Years Later – Part 2

Ross Mandell Securities Fraud

Posted by Brenda Hamilton, Securities Lawyer

A few weeks ago, we wrote about U.S. v Ross Mandell, a complicated case involving securities fraud, conspiracy to commit securities fraud, wire fraud, and mail fraud. The action was tried in Federal Court in the Southern District of New York.  It ended in May 2012, when final judgments of conviction were entered against Mandell and a co-defendant, Adam Harrington. Mandell and Harrington filed a brief with the Second Circuit Court of Appeals in September 2012.

The appellate panel delivered its decision on May 14, 2014 ruling against Mandell and Harrington and upholding the lower court’s decision. The pair, believing justice had not been served, made use of the only option left to them, filing a writ of certiorari with the Supreme Court.  A writ of certiorari seeks judicial review of a case that has already been heard and, in this instance, already appealed. 

The Issues

The case had to do with Sky Capital Holdings, Ltd., a company founded by Mandell.  It was headquartered in New York, but traded on London’s AIM exchange, and conducted nearly all of its business in the United Kingdom. The original charges lodged against Mandell alleged securities fraud and conspiracy committed in connection with Sky’s activities. According to the U.S. Attorney’s Office, Sky had run a boiler room operation, and had defrauded investors of $140 million between 2001 and 2006.  Mandell was arrested by the FBI in 2009.

Between the time of the arrest and the trial, the Supreme Court had ruled on an important case called Morrison v National Australian Bank, Ltd.  It turned on a fraud largely committed outside the United States.  In its eventual ruling, the Court held that Rule 10b-5 of the Securities Exchange Act of 1934—under which Mandell was charged—is not extraterritorial.  That is, it applies only to violations of securities laws committed inside the U.S.  Upon reading the decision, Mandell’s counsel moved to dismiss the indictment, citing Morrison. Judge Paul Crotty, who was hearing the case, denied the motion.  The prosecution, perhaps concerned by Morrison‘s implications, filed a superseding indictment, adding counts of mail and wire fraud.

At the conclusion of the trial, Mandell asked Judge Crotty to instruct the jury of the need to base its decision on domestic, not foreign securities transactions.  The judge did not oblige.

These points and many more were raised in Mandell’s appeal brief, but the Second Circuit was not persuaded, and determined that to the extent that the jury instructions may have been flawed, it was a “harmless error” that had not ultimately affected the jury’s verdict.

In their writ of certiorari, Mandell and Harrington argued that the error was far from harmless, contending that because the jury was not specifically told the U.K. transactions and other actions undertaken in England—overwhelming in number compared to the U.S. transactions—should not, in the wake of Morrison, be considered central or even relevant to its deliberations, its verdict was based on a misconception. They added that the appellate court had applied the wrong standard for the determination of harmless error by citing the Brecht-Kotteakos rule, according to which that determination should be based on “whether a flawed instruction has a substantial and injurious effect or influence in deterring the jury’s verdict.” Instead, the defendants held, the more rigorous standard articulated in a case called Chapman v. California should have been applied. Chapman requires that for an error to be considered harmless, there must be no “reasonable doubt” that the jury was uninfluenced by it.

The government responded with its own brief opposing the grant of certiorari; contending that the Second Circuit had found “sufficient evidence” of domestic transactions to affirm the lower court’s ruling.  While it acknowledged that the appeals panel had not been entirely clear on the issue of the appropriate standard for determining harmless error, it sustained that in the end the panel had properly relied upon Chapman; though Chapman was nowhere cited in the decision.  It also argued that further judicial review was unnecessary and inappropriate because whatever the result, the length of the petitioners’ sentences was unlikely to be affected.

Mandell’s Reply Brief

Mandell and Harrington had a final opportunity to be heard before the Supreme Court decided whether to grant the petition for certiorari. They recently filed a short brief in reply to the government’s opposition.  In it they make two main points:

1) that the Second Circuit had applied the wrong harmless error standard, as even the government conceded; and

2) that the instructional error in this case was not harmless.

Mandell’s counsel clearly relished pointing out the government’s support of his own client’s arguments: “The Government agrees with the Petitioner, that the correct harmless error test is the more rigorous standard described in Chapman V. California… It also concedes that this same error has occurred on prior occasions in the Second Circuit, and in the Fifth Circuit as well…  Likewise, the Government does not seriously dispute that harmless error may not be established based upon a simple determination that there was legally sufficient evidence to support the valid theory.”  Given all that, the petitioners believe that the government’s request that the Court deny certiorari trivializes the nature and gravity of the error made by the Second Circuit.

Mandell and Harrington pointed out that it should not be the government’s role to explain what the Second Circuit meant; rather, “the Second Circuit should be presumed to have meant what it unambiguously said.  And here, the parties are in agreement that what the Court of Appeals actually said is wrong.”  The Supreme Court should therefore grant certiorari, vacate the judgment of the lower court, and remand the case to the Second Circuit, with instructions to apply the correct harmless error standard.  This is known as a “GVR order.”

The reply brief characterizes the government’s belief that the lower court would arrive at the same result as “speculation”, and adds that it is untrue, pointing out that a GVR is appropriate even where there is only “a reasonable probability that the decision below rests upon a premise that the lower could/or would reject if given the opportunity for further consideration, and where it appears that such a redetermination may determine the ultimate outcome of the litigation.”  Should the Court decide against a GVR, alternatively it should “grant plenary review in order to determine, on the merits, whether the lower court’s judgment was in error.”

Mandell’s second key point is that the lower court’s instructional error was not harmless. The government contends that it would have come to the same conclusion had the Chapman standard been applied, because the evidence of fraudulent domestic transactions was “uncontested.” Mandell objects that nothing could be further from the truth; that the petitioners have contested the sufficiency of the evidence at every turn.  In earlier pleadings, and now once again, the petitioners objected to the admission of testimony alleging that they manipulated the AIM exchange in London, but that testimony was nonetheless allowed. The lower court made no effort to determine whether the jury relied on that evidence in reaching its verdict.

Mandell and Harrington conclude that “the Government is unable to point to any evidence of domestic fraud which is either uncontested or overwhelming.  Instead, it engages in unadulterated speculation, in order to claim that a properly charged jury would nevertheless have convicted the Petitioners.” They criticize the government for presenting its own theory of the case, rather than real uncontested evidence.  For those reasons, they say, the instructional error cannot be deemed harmless under any standard.

The government contends that certiorari should not be granted because, even if the petitioners’ securities fraud convictions are overturned, their concurrent sentences for mail and wire fraud will ensure that their time in prison will remain the same. The petitioners accuse the government of speculating once again, and note that should the convictions for securities fraud be overturned, the likely outcome would be resentencing, “wherein the sentencing court would have the discretion—indeed the obligation—to sentence each Petitioner anew.” The securities fraud convictions brought with them level enhancements under the United States Sentencing Guidlines.  Absent those convictions, the enhancements would be inapplicable, and the recommended guidelines could be reduced by several years.

The Supreme Court  is expected to decide whether to grant certiorari to Mandell and Harrington within the next few weeks.  If the Court is persuaded by the petitioners’ arguments, the case will move on to a new phase, in which they hope the fundamental issues raised in the original appeal brief, the petition for certiorari, and the rebuttal to the government’s opposition will be addressed and resolved in their favor.

For further information about the Depository Trust Company, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real South, Suite 202 North, Boca Raton, FL, (561) 416-8956, or by email at [email protected].  This securities law Q & A is provided as a general or informational service to clients and friends of Hamilton & Associates Law Group, P.A. and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Going Public Attorney
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