TSX-V's Global client Elgindy blasts U.S. prosecutor
Lee M. Webb

Stockwatch
March 16, 2006

Amr (Anthony) Elgindy, a convicted securities fraudster who did much of his trading through Vancouver-based Global Securities Corp., says the U.S. government's arguments for locking him up for life are flawed, unsupported and just silly.

Mr. Elgindy was arrested in May of 2002 and convicted on 11 counts of a 32-count indictment for racketeering, securities fraud and extortion in January of 2005. His oft-postponed sentencing is now set for March 22.

Six other defendants have been convicted in the case and are also awaiting sentencing.

Jeffrey Royer, a corrupt former FBI agent who passed confidential law enforcement information on to the short seller, was tried along with Mr. Elgindy and convicted on nine of 15 counts including racketeering conspiracy, securities fraud and obstruction of justice.

Another Global client, Derrick Cleveland, a former U.S. broker and ex-convict who served time for drug trafficking, copped an early plea to racketeering and testified against co-accused Mr. Elgindy and Mr. Royer.

Robert Hansen, who operated a website for Mr. Elgindy, and trader Donald Kent Terrell both pled guilty to conspiracy to commit securities fraud and co-operated with the government.

Hedge fund manager Jonathan Daws also pled guilty to conspiracy to commit securities fraud.

Mr. Royer's girlfriend and former FBI agent Lynn Wingate pled guilty to obstruction of justice.

Mr. Elgindy, the central figure in the case, will also be sentenced on a separate conviction relating to his April 17, 2004, attempt to board an airplane using fake identification while on pretrial release.

As previously reported by Stockwatch, Mr. Elgindy's defence team argues that he should be sentenced to no more than two months in connection with the airport conviction and to no more than 41 months for the racketeering, securities fraud and extortion convictions.

The prosecution, on the other hand, claims that Mr. Elgindy's crimes should draw a life sentence.

Mr. Elgindy got the last written word on the matter ahead of the scheduled March 22 sentencing hearing in a 64-page Feb. 24 reply to the prosecution's sentencing memorandum.

Staggering revision

Mr. Elgindy's lawyer, Barry Berke of Kramer Levin Naftalis & Frankel LLP, opens his reply to the government's sentencing memorandum by claiming that the prosecution "wildly overstated" its profit figures in its forfeiture memorandum.

The amount of money involved could have a significant impact on the sentence, so the defence's concern over this calculation goes beyond a mere dispute over how much in ill-gotten gains the government should be able to wring out of Mr. Elgindy.

In its initial forfeiture memorandum, the government claimed that the short seller was responsible for more than $9.1-million in illegal trading profits as well as $2.7-million in AnthonyPacific.com (AP) membership fees. (All amounts are in U.S. dollars.)

"Now in its sentencing memorandum, the government concedes that its profit figures were wildly overstated by proposing three different calculations for the court to consider as illegal gains, each one successively smaller," Mr. Berke says.

"In fact, the government admits that if limited to the four stocks of conviction, even its own trading profits calculation comes all the way down to $670,000, of which only $216,000 is attributed to Mr. Elgindy's trading, representing a 93-per-cent reduction from the government's original forfeiture demand of $9.1-million," the lawyer continues.

"It is a staggering revision, yet the government barely acknowledges it in a footnote," Mr. Berke adds.

"In addition to highlighting that the government's figures are wholly unreliable, it provides further proof that the AP site and its members were engaged in overwhelmingly legitimate stock discussion and investing of which only a tiny fraction involved either Mr. Cleveland or Mr. Royer," Mr. Berke says.

Mr. Elgindy, who has been sharply criticized by the prosecution for his posttrial commentaries posted to Internet chat site Silicon Investor, had something to say about the "staggering revision," too.

Once again, Mr. Elgindy offered some thoughts on Silicon Investor regarding the prosecution's case and, in particular, the performance of former prosecutor Kenneth Breen who has moved on to private practice as a white collar criminal defence lawyer.

"As of this very second, the government has admitted that the former prosecutor's claims, gains of $12-million, were fictitious and bogus," Mr. Elgindy remarked in a Feb. 16 post.

Mr. Elgindy, who still insists that he did not earn "any illegal money," had more to say in a Feb. 18 post to Silicon Investor.

Among other things, Arab-American Mr. Elgindy rather pointedly suggested that he was being treated very differently than convicted co-accused Mr. Daws who pled guilty.

"Mr. Daws, who is white, American, didn't assist, didn't co-operate and fought tooth and nail, will be allowed to keep over 1/2 his money, and give up only $200,000, plus he will do no more than 18 months of incarceration," Mr. Elgindy wrote.

Mr. Elgindy went on to argue that even the prosecution's revised calculations overstated his "alleged" illegal gains.

"In any event, they are STILL seeking LIFE for me," Mr. Elgindy wrote.

"I have so many things to say and so much blazing around in my head right now that I think it's best that I say nothing for a while," Mr. Elgindy remarked. "Stay tuned."

According to Mr. Berke's calculations, Mr. Elgindy's actual trading profits in the four stocks on which he was convicted amount to less than $42,000.

"Yet Mr. Elgindy faces the prospect of years and years in prison when a co-defendant like Jonathan Daws, who had his own secret site and his own relationship with Agent Royer and who, by the government's own revised calculations, had personal trading profits of $397,707.20 and additional profits through his hedge fund (Gryphon) of $1,319,030.97, faces just 18 to 24 months," Mr. Berke says.

Mr. Berke claims that the variance between the recommended sentence for Mr. Daws and the lengthy sentence the government is seeking for Mr. Elgindy "represents the paradigm of 'unwarranted disparity'" that jurisprudence directs should be avoided.

Strange twist

"In a strange twist of irony, the government's sentencing memorandum accuses Mr. Elgindy of asking the court to 'ignore the convictions' and sentence the defendant without regard to 'the jury's verdict,'" Mr. Berke says.

According to Mr. Berke, the strange twist of irony lies in the fact that the government "ignores and seeks to subvert the verdict -- and in particular its acquittals on 18 of 29 counts."

"Beyond this acquitted conduct, the government seeks to hold Mr. Elgindy accountable for insider trading as to the stocks of 28 additional companies, notwithstanding the facts that there is no jury finding as to securities fraud with respect to any one of these additional companies and the government's proof -- such as it is -- cannot even satisfy the preponderance of evidence standard, much less a heightened clear and convincing beyond a reasonable doubt standard that should be applied to such uncharged and unproven conduct," the defence lawyer claims.

Mr. Berke says that the government's approach renders "Mr. Elgindy's right to a jury trial a nullity for sentencing purposes."

"If a defendant who has been acquitted of nearly two-thirds of the charges against him can be sentenced as if he were convicted on all counts -- resulting in a manifold increase in his sentence -- the right to a jury trial is meaningless, and the Sixth Amendment is but an empty shell that fails to offer a defendant any protection," Mr. Berke argues.

Turning up the heat

"Apparently not satisfied with its calculation of between many years and life in prison for Mr. Elgindy, the government attempts to turn up the heat even further by portraying this case as 'one of the most egregious instances of corruption of governmental functions in recent history,'" Mr. Berke says.

"But as with many of the government's claims throughout this prosecution, the grandiose rhetoric is not backed up with any evidence or any proof of any actual impact on a government investigation or a government agent," the defence lawyer claims.

According to Mr. Berke, the only evidence in the record shows that Mr. Elgindy "either assisted the government in a variety of securities investigations ... or, at worst, had no impact on the government's investigations."

Mr. Berke says that Mr. Elgindy "simply asks that he be sentenced based only on proven facts and not on matters rejected by the jury or theories and generalized assertions that cannot withstand scrutiny or empty and prejudicial labels such as 'RICO' and 'racketeering.'"

Just silly

After sketching the main themes of the defence's reply sentencing memorandum in his introduction, Mr. Berke turns to a more detailed analysis of the prosecution's claims.

According to Mr. Berke, the government's proof and theories of market manipulation are extremely weak and should be rejected.
"The government stubbornly refuses to accept that the price of a stock cannot be criminally manipulated by releasing accurate information or by making bona fide trades in reliance on that information," Mr. Berke says.

"The government's theory would expose all accurate reporting to charges of manipulation if it moved the price of a stock," the defence lawyer continues. "Included within that umbrella of liability would be whistleblowers, who would know (and often likely intend) that the information they release would have a detrimental effect on the stock price of the subject company.

"That dangerous expansion of the concept of manipulation cannot be, and is not, the law.

"The remainder of the government's market manipulation theories are just silly."

Unsupported nonsense

Mr. Berke claims that the government's profit calculation is nonsensical and unsupported by the record.

Among other things, the defence lawyer says that trading by non-testifying and unproven co-conspirators should be excluded from the calculation of illegal gains.

"As to the alleged 'downstream tippees' Jonathan Daws, Kendall McGreggor, David Slotnick and Jeffrey Thorpe, the government comes up short in providing any evidence that these people (other than Daws) were co-conspirators or that any of them received any confidential law enforcement information about any particular stock from Mr. Elgindy and then made trades 'informed by' that information," Mr. Berke says.

For example, Mr. Berke says that the government provides no evidence that Mr. Elgindy even knew of Mr. McGreggor's existence or that he was even a member of the AP site during the time when any law enforcement information was disseminated there.

"More egregious than including McGreggor's trading profits, however, is the government's inclusion of the trading profits in the 'Spinner' account," Mr. Berke claims. "The government now for the first time asserts that Jeffrey Thorpe is responsible for this account, but we believe that Spinner is the fund traded by Joseph Spiegel, not Thorpe."

According to Mr. Berke, Mr. Spiegel was an AP member for a short time in 1999, but apparently was not a member during the alleged conspiracy.

"As for Slotnick and Thorpe, the government provides only generalized evidence that Slotnick and Thorpe 'engaged in discussions concerning stocks about which confidential law enforcement information was disseminated,'" the defence lawyer says.

"Engaging in general discussion about a stock is insufficient to show that they were in possession of specific law enforcement information regarding those stocks, let alone that the information informed their trades in those stocks," Mr. Berke argues.

Interestingly, Mr. Thorp, whose trades Mr. Berke claims should not be included in a calculation of his client's responsibility for illegal profits, reportedly signed a non-prosecution agreement in connection with the Elgindy criminal case.

As an aside, Mr. Thorp (identified as Mr. Thorpe by Mr. Berke) and three hedge funds he managed recently settled an unrelated civil suit filed by the U.S. Securities and Exchange Commission involving alleged PIPE deals and a naked short selling scheme facilitated by an unidentified and perhaps entirely faultless Canadian brokerage.

Without admitting or denying the March 14 SEC allegations, Mr. Thorp agreed to ante up $2.3-million to settle the case. Similarly avoiding any admission of wrongdoing, his three hedge funds -- Langley Partners LP, North Olmsted Partners LP and Quantico Partners LP -- agreed to pay $13.5-million.

Flawed methodology

Continuing with his analysis of the prosecution's profit calculation, Mr. Berke claims that it is flawed because in tallying the insider trading gains the government pays no regard "to when or if the allegedly 'inside' information was disseminated to the 'public.'"

Mr. Berke points out that in the context of short selling, the insider sells stock short while in possession of non-public information and then profits by covering his position after the information becomes public and impacts the stock price.

The defence lawyer also takes issue with the government's approach to determining how long the information remained material and impounded the stock price following its public dissemination.

"We chose three days," Mr. Berke says. "The government chose infinity. Infinity is clearly not a rational or fair choice; we believe that three days is."

Among other things, Mr. Berke also argues that the government should not include all 32 stocks that it claims were the subject of insider trading by Mr. Elgindy and others. According to the defence lawyer, the insider trading profits should be restricted to the four stocks for which the jury convicted Mr. Elgindy.

Not a leader

Mr. Berke challenges the government's claim that Mr. Elgindy was the leader of a massive criminal enterprise.

According to the defence lawyer, "the only people the government has proved to be members of any enterprise are Mr. Elgindy, Mr. Royer and Mr. Cleveland."

"As we argued in our opening memorandum, this was not an extensive, hierarchical conspiracy with many members," Mr. Berke says. "Rather, it was a small group of people acting independently of each other in furthering their own aims.

"Moreover, if anyone was the leader, it was Cleveland, not Mr. Elgindy."

No victims

After disputing the prosecution's claim that Mr. Elgindy acted as an investment adviser, Mr. Berke goes on to take issue with the government's "theory that there were more than 250 victims" of the alleged insider trading.

"The government apparently contends that, because the site included many individuals who might have traded on inside information, there must be 'hundreds or thousands' of victims on the other side of those unidentified trades," Mr. Berke says.

According to the defence lawyer, however, there are no victims of the alleged insider trading.

Mr. Berke says that "the government has not been able to produce a single person who claims to have been victimized," nor has the prosecution offered any evidence to that effect.

"The government has not only failed its burden, but it is also just wrong about who was on the 'other side' of these trades," Mr. Berke claims. "The 'individual counterparties' to any improper trades were no some mom and pop 'individual' investors; the counterparties were a limited number of professional market-makers who set bid and ask prices as they see fit and hold blocks of shares in order to bridge the sporadic trading demand for these kinds of stocks and, in the process, absorb many of the spikes and drops in price.

"The trade tickets show that the counterparty to each trade was a market-maker.

"Yet again, no such market maker has come forward or been identified claiming to have been a victim of the conduct involved in this case."

Mr. Berke goes on to argue that the companies that Mr. Elgindy and his site members shorted "were overvalued and, often times, 'scams.'"

"Mr. Elgindy repeatedly warned the general public to that effect, through his InsideTruth reports and posts on SiliconInvestor.com," Mr. Berke says.

"If people chose to ignore Mr. Elgindy's warnings and bought stock in those overvalued companies nonetheless, it is inequitable to count those people as 'victims' in order to increase Mr. Elgindy's sentence when he warned them against that very conduct in the first place," the defence lawyer argues.

Unpersuasive

Nearing the end of his 64-page reply, Mr. Berke says that the government's upward departure arguments for increasing Mr. Elgindy's sentence are unpersuasive.

Among other things, the defence lawyer counters the prosecution's claim that Mr. Elgindy's actions disrupted government functions.

"While the government's submission on disruption of governmental function is long on rhetoric, it is short -- indeed, it is entirely empty -- on actual evidence," Mr. Berke says. "The government claims Mr. Elgindy's conduct harmed the reputation of the FBI and 'significantly impacted' the relationship between the FBI and the SEC.

"Yet, notwithstanding the facts that numerous FBI agents and close to a dozen SEC attorneys testified at trial, and that many, many more law enforcement agents interacted with Mr. Elgindy over the years, the government is not able to cite to a single witness or a single piece of actual evidence establishing any of the alleged damage or disruption or impact."

Mr. Berke also claims that, contrary to the government's assertion, Mr. Elgindy's criminal history is not understated.

The defence lawyer points out that Mr. Elgindy's "actual prior criminal history includes only one conviction -- for a $55,000 insurance fraud."

"If anything, Mr. Elgindy's criminal history category overstates, rather than understates, the seriousness of his criminal record," says Mr. Berke.

Not greater than necessary

Noting that "the statutory mandate is to determine a sentence 'sufficient, but not greater than necessary,'" Mr. Berke argues for a downward departure from the sentencing guidelines.

According to the defence lawyer, the court should impose a sentence of less than 41 months. Mr. Berke claims that mitigating factors "provide multiple grounds for leniency."

Once again, Mr. Berke points to "the gross disparity" between the government's calculation of a life sentence for Mr. Elgindy and the recommended sentence of 18 to 24 months for co-defendant Mr. Daws.

"The court therefore can and, we respectfully submit, should take account of this 'unwarranted disparity' in fashioning an appropriate sentence for Mr. Elgindy," Mr. Berke says.

Mr. Berke goes on to argue that "Mr. Elgindy's family's dire circumstances ... cry out for leniency."

Among other things, Mr. Berke says that Mr. Elgindy's children are "suffering under tremendous emotional distress" and "his wife is in dire financial straits, staving off foreclosure proceedings and living on loans from friends and relatives."

The lawyer also claims that Mr. Elgindy, who has had all of his assets frozen and has so far spent two years in prison, has already been severely punished.

"In addition to depriving him of his financial resources, this case has already probably permanently deprived Mr. Elgindy of his professional reputation and his ability to continue with the work he so loved," says Mr. Berke.

"In addition, as outlined in our opening memorandum, Mr. Elgindy has also been severely, even unimaginably punished through the unfair association of unproven and unfounded accusations relating to 9/11," the lawyer continues. "He has been denigrated, stigmatized and humiliated in the eyes of his children and family, his community and the world."

Barring some further delay, Judge Raymond J. Dearie will determine the appropriate sentence for Mr. Elgindy on March 22.

Comments regarding this article may be sent to lwebb@stockwatch.com.

(More information regarding the Elgindy case is available in Stockwatch articles published under the symbol *TSX on May 22, 23, 24, 28 and 29; June 3, 4, 6 and 17; July 18, 2002; March 25, 2003; Oct. 3, 2005; Jan. 26 and 27; and March 3, 2006.)