Thursday, June 16th, 2011

Coffee, Tea or Venue?

United States v. Tzolov, No. 10-562-cr (2d Cir. June 15, 2011) (Feinberg, Parker, Wesley, CJJ)

Eric Butler, the appellant here, was one of the conspirators in a securities fraud scheme arising from the failure of the auction rate securities market. The scheme operated largely out of an office in Manhattan, but Butler was prosecuted in the Eastern District, where he was convicted of securities fraud and conspiracy to commit securities and wire fraud. The scheme’s ties to EDNY were, to put it mildly, scant – on occasion the defendants would fly out of JFK to meet with investors in other cities and try to scam them. But, apart from that, everything happened elsewhere.

On appeal, the circuit agreed that venue was improper in EDNY for the substantive securities fraud count, but affirmed as to the conspiracy counts. In light of the dismissal of one count, the court also remanded the case for resentencing.

Securities Fraud

The securities fraud statute has its own venue provision, 15 U.S.C. § 78aa, which provides that a criminal proceeding may be “brought in the district wherein any act or transaction constituting the violation occurred.” The circuit had “little difficulty concluding” that merely flying out of JFK did not satisfy this language. There was no evidence that those flights constituted an “act or transaction constituting” the securities fraud.

To the contrary, the conspirators made all of the fraudulent statements that constituted the fraud either in their Manhattan office or in meetings with investors. “None of this activity occurred in the Eastern District.” Nor did they commit securities fraud by boarding a plane at JFK. Those flights were not acts “constituting” securities fraud; they were merely “preparatory acts,” and, for a substantive crime, “venue is not proper in a district in which the only acts performed by the defendant were preparatory to the offense and not part of the offense.” Thus, venue was not proper in the Eastern District for the securities fraud count.

The Conspiracy Counts

The court reached a different conclusion for the conspiracy counts, because those counts “require[d] a different analysis.” For a conspiracy, “venue is proper in any district in which an overt act in furtherance of the conspiracy was committed.” That can be “any act performed by any conspirator for the purpose of accomplishing” the scheme’s objectives, even if not unlawful.

Here, a “reasonable jury” could have concluded that the defendants’ flights out of JFK to meet the investors that they were trying to con furthered the conspiracy because without the flights those face-to-face meetings would not have occurred. In addition, the flights showed the conspiracy “at work” and not just “a project still resting solely in the [conspirators’] minds.” Finally, the court reject the argument that the flights did not demonstrate “substantial contacts” with EDNY, such that venue there would be “unfair or prejudicial.” Although the court did not hold that any overt act in a situs district will constitute a “substantial contact,” it found that the flights out of JFK here were sufficient.

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