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11th Circuit Hears Appeal in Stock Fraud Scheme Targeting Vulnerable Investors

Three defendants found guilty in a stock telemarketing scheme that bilked 700 investors urged an 11th Circuit panel Tuesday to overturn their convictions on the grounds that prosecutors at trial improperly decried jury instructions and brought up irrelevant claims of marijuana dealing.

(CN) — Three defendants found guilty in a stock telemarketing scheme that bilked 700 investors urged an 11th Circuit panel Tuesday to overturn their convictions on the grounds that prosecutors at trial improperly decried jury instructions and brought up irrelevant claims of marijuana dealing.

Anita Sgarro, Charles Topping and Charles Smigrod were convicted of federal fraud charges in 2017 after a two-month trial that chronicled an alleged boiler room operation, which sold stock in infrared-thermometer company Sanomedics.

The CEO of Sanomedics, Keith Houlihan, was also convicted of federal charges in connection with the fraud.

Cold-calling dozens of people a day, sales agents in the boiler rooms used fake names. They made false claims that they were not making commissions, and that a former chief executive at Apple was heavily involved in Sanomedics, prosecutors alleged. Investors ended up receiving restricted Sanomedics shares, which they were unable to sell.  

Sgarro ran a call center in California, while Topping and Smigrod worked out of a Miami call center.

The more than 700 victims lost $23 million, according to the Department of Justice. Many of them were elderly and unsophisticated investors.   

On appeal, Sgarro's attorney in the 11th Circuit, Scott Sakin, is keying in on the trial exchange in which a prosecutor brought up tangential allegations of marijuana dealing.

On cross-examination, the prosecutor in 2017 asked a witness about a supposed marijuana dealing arrangement the witness had with Sgarro. After the prosecutor claimed the witness admitted the pot dealing to an FBI agent, the witness snapped back: "Absolutely not. That's a lie." The trial judge denied a mistrial motion that argued Sgarro had been prejudicially labeled as a drug dealer.

Sakin said in a phone interview Tuesday that the marijuana claims were irrelevant to the fraud charges brought against his client.

"There was no evidence of drug dealing. It has absolutely nothing to do with this case," he said.

Appellate counsel for the Department of Justice maintains that the cross-examination was not aimed at smearing Sgarro.  

"[The witness's] willingness to deny a statement that he made months earlier to the FBI established that he was not credible and harbored a strong bias in Sgarro’s favor," Assistant U.S. Attorney Jason Wu argued to the 11th Circuit.

"Any purported error would be harmless given the comprehensive evidence of guilt," Wu says in his brief.

The 11th Circuit further took up the matter of alleged prosecutorial impropriety during a closing argument rebuttal. In the rebuttal, the prosecution decried a theory-of-defense instruction given to the jury, which sought in part to distinguish between sales puffery and fraud.

The instruction opens with the line: "Defendants contend that there is a difference between deceiving and defrauding." It addressed a central argument in the defense: that although sales agents in the boiler room lied to investors in the sales process, they did not participate in the core fraud of misappropriating investor funds and originating false material information about the company.        

The prosecution criticized the defense-theory instruction in front of the jury, telling them that it is "not the law." The trial judge admonished the prosecution for the language but denied a related motion for mistrial.

"Under the court’s theory-of-defense instruction, those jury findings could well have resulted in an acquittal. Unfortunately, the prosecutor improperly intervened," Sakin argued to the appellate panel.

Lu counters that the prosecution's comments about the jury instruction did not constitute prosecutorial misconduct, and that the court "cured any possible misapprehension by ordering the jury to follow" the instruction.

"The jury rejected appellants’ claim to be unwitting pawns [in the fraud] based on the evidence, not the government’s criticism of the theory of defense," Lu argued.

The appeal was fielded Tuesday by U.S. Circuit Judge Charles Wilson, a Bill Clinton appointee, alongside U.S. Circuit Judges Barbara Lagoa and Andrew Brasher, both appointees of Donald Trump. 

Topping and Sgarro both received a nine-year sentence for their roles in the fraud. Sgarro was given a compassionate release last year.

Smigrod, who received a 48-month sentence, is still serving time, as is Topping.

The government, meanwhile, is trying to convince the appellate panel to reinstate guilty verdicts against two other sales agents who sold Sanomedics stock: Matthew William Wheeler and James Wayne Long.

Wheeler and Long won a post-trial motion for acquittal, with the judge finding that there was insufficient evidence they "knew about the scheme to defraud or agreed to participate in the scheme’s objective." The judge noted that unlike other defendants, Long used his real name while interacting with investors.

The government has argued on appeal that in granting Wheeler and Long's acquittal, the judge assumed a fact-finding role that should have been left in the hands of the jury.

Categories / Appeals, Criminal, Securities

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