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United States v. Lattanzio

United States District Court, D. New Jersey

April 18, 2018

UNITED STATES OF AMERICA
v.
Nicholas LATTANZIO, Defendant

          OPINION

          KEVIN MCNULT United States District Judge.

         This matter comes before the Court on the post-trial motions of the defendant, Nicholas Lattanzio, for a judgment of acquittal, pursuant to Fed. R. Crim. P. 29(c), or in the alternative for a new trial, pursuant to Fed. R. Crim. P. 33. (ECF nos. 135, 143, 146) I have considered the proffered grounds separately and in combination. For the reasons expressed herein, the motions will be denied.

         A jury found Mr. Lattanzio guilty of two counts of wire fraud, and the evidence revealed fraud in its rawest form. Mr. Lattanzio ran an investment fund called Black Diamond Capital Appreciation Fund.[1] Black Diamond was entrusted with two deposits, each for $2 million. The deposits were held as security in anticipation of a larger credit financing transaction. Lattanzio represented to the depositors, BCM Energy, Inc. ("BCM" or "BCME") and HEI Investments, LLC ("HEI"), that the money would be placed in conservative investments. Instead, he quickly drained the accounts and used the money for personal expenses, while covering up that fact through various misrepresentations and omissions. Mr. Lattanzio testified that he believed two large credit financing transactions would close, permitting him to cover the withdrawals with his future fees and commissions. That excuse need not have been credited by the jury; nor would it constitute a defense to the wire fraud charges.

         The jury also found Mr. Lattanzio guilty of two counts of securities fraud, based primarily on false statements and manipulations in connection with solicitation of the investments. Here, the defense had a bit more to work with, as other persons were involved in structuring the transactions. But even setting that aside and focusing on the actual statements and conduct attributed to Lattanzio himself, there was sufficient evidence to support the verdict. In communications to representatives of BCM and HEI, Lattanzio misrepresented the Black Diamond fund's 2008-12 history of operations and profitability (which in fact were negligible). He also misrepresented the particular investments into which the depositors' money would be placed.

         Analyzing this as an ordinary case of material misstatements, however, would miss the larger point. The overall artifice and false statement was that BCM's and HEI's money would be placed in some sort of investment, as opposed to being stolen. Lattanzio's immediate diversion of funds, on the same day they were wired to the fund (and after), would easily support an inference that he received the funds with contemporaneous fraudulent intent.

         One theme of the defense was that the true fraudster was an associate of Mr. Lattanzio's, Pasquale ("Pat") Montesanti. As to the wire fraud charges, this evidence, even if credited, would have had little effect. Montesanti had no authority over the accounts, which were controlled solely by Lattanzio. The evidence demonstrated that Lattanzio himself looted the accounts for his personal benefit, spending the money on such items as jewelry, private school tuition, and a new home. As for the securities charges, there was evidence that Montesanti acted as Lattanzio's go-between or "finder, " and was involved in many of the communications to the potential investors, BCM and HEI. A jury could have drawn the commonsense inference that Montesanti acted in concert with Lattanzio, or with his knowledge; the $4 million in investments, after all, directly benefited Lattanzio, not Montesanti; the two sometimes met with the investors together; and Lattanzio at least once explicitly ratified Montesanti's emailed statements that the funds had been appropriately invested. More to the point, however, there was ample evidence that Lattanzio himself misrepresented the facts in direct communications with the investors.

         A second defense theme involved a shadowy group of would-be financiers, including individuals such as William Cloutier, Tom Thresher, and Jim Heifer, as well as entities known as Corban, Wall Street to Main Street, and Esquiroz Abogados. These persons and entities, said the defense, were supposed to supply a total of $28.5 million in credit financing for BCM and HEI. The role of Lattanzio and Black Diamond in the transaction, however, was not to obtain the credit financing. They were to conservatively invest the advance deposits of BCM and HEI. Each of the two $2 million advance deposits was agreed to be fully refundable if the financing was not obtained within a short period. Although the financing never materialized, Lattanzio never returned the deposit money to BCM and HEI.

         The defense strove to establish that the financing did not materialize because the various potential financiers were fraudulent, or at least shady. As a defense, that was implausible; the jury was asked to believe that these financiers, largely unconnected to Lattanzio, tricked him into receiving $4 million, receiving only much smaller sums, or nothing at all, themselves. The jury was not required to accept that inference; more to the point, under the Rule 29 standard, the Court may not presume that the jury did accept it. In the larger sense, however, it did not matter. This scenario, far from being exculpatory, was a massive diversion from the merits. Nothing about any fraud in the abortive financing end of the transaction would have entitled Lattanzio to misrepresent the nature of the fund and its investments or, a fortiori, to simply help himself to the deposit money.

         I. Procedural Background

         On September 3, 2015, Mr. Lattanzio was charged in a four-count Indictment. (ECF no. 9)

         Counts One and Two charged Lattanzio with wire fraud, in violation of 18 U.S.C. § 1343. As the principal of an investment fund and other entities named Black Diamond, Lattanzio was alleged to have conducted a scheme and artifice to defraud two victims (BCM and HEI, anonymized as Company A and Company B). The object of the scheme was to misappropriate the victim companies' funds for Lattanzio's personal benefit. The funds consisted of advance deposits, required as a prerequisite to the arrangement of a much larger credit facility. Instead of investing the funds as promised, Lattanzio allegedly spent them on personal items and expenses. To induce the investments, he allegedly made misrepresentations about the history and profitability of the Black Diamond investment fund.

         Count Three charged Lattanzio with securities fraud in relation to BCM, in violation of 15 U.S.C. §§ 78j(b) 8s 78ff, and 17 C.F.R. § 240.10b-5. Count Four charged him with securities fraud in relation to HEI.

         The case was tried for approximately three weeks. Jury selection began on January 24, 2018. The defense put on a case, and Lattanzio himself testified. On February 15, 2018, the jury returned verdicts of guilty on all four counts.

         II. Summary of Evidence

         As an aid to understanding, here is the essential structure of the transactions at issue:

         Two victim companies, BCM and HEI, sought credit financing for their operations. BCM sought approximately $20 million, and HEI approximately $8.5 million, in financing. Mr. Lattanzio was not involved, however, in the financing side of the transaction; he was on the investment/disbursing side. His fund, Black Diamond, was to hold and invest the funds, periodically disbursing them in response to draw requests by the borrowers. HEI and BCM were each required to make an up-front deposit or "compensating balance" of $2 million in the Black Diamond fund. Both HEI and BCM were entitled to a full refund of their deposits if the financing did not come through within 70 or 120 days. If and when the $20 million or $8.5 million in financing was obtained, those funds, too, were to be held and invested by Black Diamond. The borrowers would submit draw requests from time to time as funds were needed, and Black Diamond would disburse the funds. The initial $2 million deposits would be held as security, not to be disbursed until the final draw. In the meantime, all funds on deposit would be placed in specified low-risk, liquid, fixed-income investments. For his services, Mr. Lattanzio would earn a percentage fee.

         A. Representations in connection with investments of $2 million by BCM and HEI

         BCM invested through the vehicle of a limited partnership interest. BCM's private placement memorandum (PPM) provided that the fund would invest in "highly-liquid fixed income instruments using one of two proprietary investment strategies." (G201 at 6)[2] The first strategy involved fixed income investment grade instruments, with no risk to principal; the second involved AAA government securities such as Treasury or agency bonds trading in the secondary markets. (Id. at 7) HEI was a direct investor. HEI's investment management agreement ("IMA", G302) specified a similar investment strategy involving low-risk, liquid fixed-income investments. (IT 44-55)

         Both BCM and HEI explicitly agreed with Lattanzio that these $2 million investments would act as a kind of security deposit, i.e., earnest money in contemplation of the larger financing deal. BCM's letter of understanding (LOU) provided that BCM would be permitted to "withdraw its [capital deposit] after one hundred and twenty days (120) if BCME has not received a binding commitment from the designated lender." (G 204) HEI, too, was entitled to withdraw its $2 million deposit if it did not receive a binding financing agreement within 70 days. (G 302 at 5) This was a key, negotiated term for both investors. (See 2T 69:24, IT 55:17-22)

         At a meeting on December 11, 2013, Lattanzio presented BCM's representative, Mr. Beach, with historical investment returns from 2008 through early 2013. He did not reveal that the fund had only recently begun operating at all, had no significant prior investments, and had produced no returns. Lattanzio orally confirmed to Beach what the PPM said: that BCM's deposit would be placed in conservative, liquid, fixed-income investments. (IT 31:3-33:8)

         HEI received similar assurances. In a conference call in June 2014, Lattanzio told HEI's representative, Mr. Meroney, that HEI's $2 million deposit was one of the last that would go into an investment pool of $25 to $50 million; that the fund had $100 million under management; and that the fund had been formed seven or eight years previously. (IT 10:16-12:8) A Black Diamond "due diligence questionnaire" confirmed that the fund had $100 million under management and could manage up to $ 1 billion with its current staff and resources. (G 306)

         Both BCM and HEI received Black Diamond promotional materials before investing the companies' funds. These included a "tear sheet" (G 224, supplied to BCM) and a "due diligence questionnaire" (G306, supplied to HEI). These stated that Mr. Lattanzio's proprietary fixed-income investment strategy, though highly conservative, had produced eye-popping annual returns averaging 18% from 2008 through 2012 or early 2013. In fact, Black Diamond had no such historical performance results. The documents themselves will bear the interpretation that these figures were presented to the investors as real-world, historical data. Beach and Meroney both testified that, when they invested, they relied on these figures as representing actual, not theoretical, rates of return. (IT 27:20, 2T 45:14)

         B. Lattanzio's use of the $4 million for personal expenses

         BCM and HEI, in reliance on such representations, each deposited approximately $2 million up front, only to have it rapidly disappear.

         After the December 11, 2013 meeting, and after signing the necessary papers, BCM transferred just under $2 million to Black Diamond. On December 23, 2013, Lattanzio confirmed with Beach by email that the money had just "hit Barclays [Bank]." (G 213) The very same day, Lattanzio transferred $102, 000 of the money to a personal account and used it to buy a diamond ring for his fiancee. (G411, 507) A few days later, he withdrew another $124, 000 and used it to purchase a Range Rover. (G411, 506) Shortly thereafter, he transferred $182, 000 to another Black Diamond account. Of that money, $45, 000 went to pay his personal American Express bill, and some of the rest was applied to Black Diamond's payroll (including Lattanzio's own salary). Over the ensuing months, Lattanzio regularly transferred BCM's money out of the account. The funds went to pay his personal credit card bills, his children's private school tuition, and golf club dues, as well as to fund cash withdrawals. (G 411, G 430)[3] By August 2014, nearly all of the $2 million had been depleted. (G411, G 102(i))

         On August 21, 2014, HEI wired its $2 million deposit to Black Diamond. The very same day, Lattanzio wired $1 million of HEI's funds to a title company for the purchase of a personal residence in Montclair, New Jersey. (G 102(i), 508A-C) Over the following months, he used additional hundreds of thousands of dollars to fund renovations to the home. (G 411 at 9-14; 2T 5-19) As in the case of BCM, HEI's money was withdrawn for credit card bills, private school tuition, and general personal expenses. (Id.} By late November 2014, the Black Diamond fund had a balance of approximately $300, 000. This was lower than the balance that had been in the fund before BCM and HEI made their deposits. (G 411, 412)

         C. The Cover-up

         Mr. Lattanzio covered up his theft and avoided refunding the money by means of various false statements and stratagems.

         On behalf of BCM, Mr. Beach early on began requesting periodic statements, as would customarily be furnished for such an investment account. (2T 75:17-76:5) Lattanzio never sent them. (Id., ; G 242) When the credit funding failed to materialize, Beach requested a refund of BCM's money, to which BCM was entitled. (2T 82:23) The response was double-talk and delay. Lattanzio first said he could only return the funds to their source, BCM's Hong Kong investor. (G 216) Then he said BCM had "accept[ed] the term sheet and confirmation of the credit facility" and was not entitled to the refund. (G 218) Then he said that BCM should wait, because its money was tied up in investments, the liquidation of which would cause a large loss. (G 221) Then, in response to a lawyer's August 2014 demand letter, Lattanzio emailed back that he had "invested the funds, per the PPM" (which would imply a liquid, fixed-income investment). (G 241) The same Lattanzio email also stated that a recent email from Montesanti, which had stated inter alia that the money was in government-backed mortgages, was the "truth." (Id.; see also G222) What Lattanzio never revealed was that he had already spent the money. (2T 120:9)

         For BCM's investment, regular statements of net asset value (NAV) would have been prepared by the fund administrator, Custom House. Custom House repeatedly asked Lattanzio for brokerage statements as backup, so it could prepare the NAV statements. (3T 166:20) Lattanzio ignored those requests. Then, in September 2014, Lattanzio told Custom House there was essentially nothing to report, because the only investment of BCM's $2 million had consisted of a loan. At first Lattanzio stated it was an internal loan from the Black Diamond investment fund to another Black Diamond entity, and proffered a loan document as support. When Custom House questioned the propriety of such an insider loan, Lattanzio replied in an email, "I can fund mortgages. Should I paper this up that way?" (G 604, G 606; 8T 143:1-2) Shortly thereafter, Lattanzio presented Custom House not with a mortgage, but a $2 million promissory note to Black Diamond from Lattanzio's fiancee. (G 604) Lattanzio admitted that this "papering" occurred some nine months after BCM had invested the money, at a time when Lattanzio had already spent most of it. (8T 144:11-145:2) When Custom House eventually saw the brokerage account statements that revealed the true history of Lattanzio's withdrawals of BCM's money, it terminated its contract with Black Diamond. (3T 215:4)

         With HEI, Lattanzio was no more candid. In mid-December 2014, he responded to HEPs request for an account statement with a one-page letter. The letter stated that HEI's account had a balance of over $2 million, having earned $58, 000 in interest and capital gains. (G 304) At the time, the actual total amount in the Black Diamond fund was about $300, 000. (G 412) HEI's money had not been placed in any authorized investment that would have yielded $58, 000 in interest or capital gains. The letter said nothing about Lattanzio's having drained the account for, among other things, the purchase and refurbishment of his Montclair residence.

         In December 2014, the financing having failed to appear, Meroney sent a demand for return of the funds. (G 305) Lattanzio told him the money was invested in a "pool" of funds and would be returned when an equivalent amount of new money came in. (IT 74:21) Later, in January 2015, Lattanzio said the funds were "illiquid" because they were invested in two residential mortgages. (E.g., IT 75:9-20) Asked directly whether the mortgaged properties were either his or his girlfriend's personal home, Lattanzio replied, "Absolutely not." (IT 78:9-23)

         D. Lattanzio's testimony

         Mr. Lattanzio did not deny that he and his fund had been entrusted with the $4 million. Nor did he really deny that he had spent it on himself and his fiancee, as charged. He expressed a need to repay his fiancee, who had been financially and emotionally supporting him since his life had descended into turmoil following the death of his wife. (8T 73)

         Lattanzio testified that he, no less than BCM, expected the $20 million in financing to come through from the various putative financiers. And when it did, he said, he believed he would earn enough money in fees to cover the funds he had taken and spent for the benefit of his fiancee. Spending BCM's money, he conceded, was "unprofessional." (Id.)

         As for HEI's money, Lattanzio testified that the money spent on his personal residence was invested in a "fixed income instrument, " i.e., a mortgage, as authorized by the investment agreement. Lattanzio testified that such a mortgage had been "drafted." (8T 91:9-19) At any rate, however, he admitted that a residential mortgage is distinct from a liquid, fixed-income instrument, or a AAA rated government debt obligation (8T 111:7-112:9), the only investments that would have been permitted by the deal documents.

         On cross-examination, Lattanzio admitted many of the essential elements of the government's case regarding BCM:

(a) He never told Beach, either personally or via the PPM or LOU, that BCM's money would be used for personal expenses. (8T 114:2-18, 115:7)
(b) He continued to spend BCM's money even after it was clear that the financing had not come through. (8T132: 5)
(c) Because he "panicked, " he lied to Custom House about his having spent BCM's money. (8T 85:12, 140:20-145:2)
(d) When BCM asked for its money back, Lattanzio cited "liquidity" concerns but did not reveal that the money had been spent. He hoped that additional "projects in the pipeline" would produce enough fees to cover the withdrawals. (8T 84:6-20, 145:6-148:12)

         On cross-examination, Lattanzio also admitted many of the essential elements of the government's case regarding HEI:

         (a) The IMA signed by HEI did not state that Lattanzio could use HEI's money for personal expenses. (8T:110-10 to 111-6);

         (b) A personal residence was not listed as an authorized investment. (8T: 111-25)

         (c) Lattanzio sent HEI a letter stating that its capital account stood at over $2 million and had earned $58, 000 in capital gains and interest. (8T 148:19-149:20)

         Lattanzio also admitted that, even today, BCM and HEI "are absolutely due their money back." (8T 95:19)

         III. Motion for judgment of acquittal

         Mr. Lattanzio moves for an order setting aside the jury's verdict of guilty on all four counts and directing entry of a judgment of acquittal. He asserts that there was insufficient evidence that he made material misrepresentations or omissions with the requisite intent to defraud. I will deny die motion because it comes nowhere near the high threshold for entry of a judgment of acquittal notwithstanding the verdict.

         Federal Rule of Criminal Procedure 29(c) authorizes a post-guilty-verdict motion for a judgment of acquittal. Under Rule 29, a defendant who asserts that there was insufficient evidence to sustain a conviction shoulders "a very heavy burden." United States v. Anderson, 108 F.3d 478, 481 (3d Cir. 1997) (quoting United States v. Coyle, 63 F.3d 1239, 1243 (3d Cir. 1995)). The court cannot substitute its judgment for that of the jury. Hence it must view the evidence, and all reasonable inferences therefrom, in the light most favorable to the prosecution, resolving all credibility issues in the prosecution's favor. United States v. Hart, 273 F.3d 363, 371 (3d Cir. 2001); United States v, Scanzello, 832 F.2d 18, 21 (3d Cir. 1987). Having done so, the court must uphold the conviction if "any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt." Jackson v. Virginia, 443 U.S. 307, 319 (1979) (emphasis in original). Accord United States v. Caraballo-Rodriguez, 726 F.3d 418, 430-31 (3d Cir. 2013) (en banc) (reaffirming principle and reversing a line of drug conspiracy cases that seemingly undermined it); United States v. Silveus, 542 F.3d 993, 1002 (3d Cir. 2008) (issue for trial or appellate court is "whether any rational trier of fact could have found proof of guilt beyond a reasonable doubt based on the available evidence"); United States v. Smith, 294 F.3d 473, 476 (3d Cir. 2002).

         Lattanzio correctly states that wire fraud and securities fraud, the offenses of conviction, both have the element of intent to defraud. The jury was so instructed, without objection. (ECF no. 142, 2/13/18 Tr. 181, 185, 189, 194-96; see also Id. 204-06 ("good faith" is inconsistent with criminal intent).) I therefore review Mr. Lattanzio's contentions that the evidence did not prove, or even disproved, that he acted with intent to defraud.

         A. Securities fraud

         There is not a strict division between the evidence pertaining to securities fraud and that pertaining to wire fraud. For purposes of securities fraud, however, it is convenient to focus on misrepresentations made in and around the time that BCM and HEI made their investments.

         1. History and profitability of Black Diamond Fund

         Lattanzio denies that the Black Diamond promotional materials Beach and Meroney saw before investing were actually intended to represent historical returns.

         Government Exhibit 224 was presented to Beach and BCM. It contains a "tear sheet, " which presents "historical pro forma returns" to illustrate the Black Diamond Capital Appreciation Fund's performance from 2008 through March 2013:

         (Image Omitted)

         Beach testified that he understood the term "pro forma" to apply to the statements' being in the proper form. From his considerable experience in business and finance, Beach testified that every major investment fund presents data in a similar format to show actual, historical returns. In the context of past (as opposed to predicted) performance, pro forma would have signified the application of actual return rates to an arbitrary $1 million starting balance "to show pro forma what that $ 1 million would have generated." (2T 53:18-54:17) It would have made no sense to present past rates of return, which were already known, on a hypothetical basis. (2T 55:21-56:3) Lattanzio never indicated that these were hypothetical figures. Beach testified that in a face-to-face meeting with Lattanzio in December 2013, he was led to believe that the fund had been in existence since 2008, and that it had a history of profitability. (2T 31:3-32:14, 54:25-56:3) In fact the fund had almost no history, and very little money invested. Lattanzio admitted in testimony that the fund had only one prior investor, who had conducted a small currency trade. (8T 103:3-8)[4]

         Government Exhibit 306, the due diligence questionnaire, was presented to Meroney and HEI. It contains a chart entitled "Pro Forma Results For Fixed Income Investment Management Results As Per Every One Million Dollars of Capital Under Management Summary From January 1, 2008 Through June 28, 2013." It ...


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