U.s. V. David brooks, et al., Criminal Docket No. 06-550 (s-2) (js) is a remand to the eastern district of New York. In his objection letter, he repeats arguments that the Court has already denied. He also regurgitates arguments that he made in motions that are pending before the court.
U.s. V. David brooks, et al., Criminal Docket No. 06-550 (s-2) (js) is a remand to the eastern district of New York. In his objection letter, he repeats arguments that the Court has already denied. He also regurgitates arguments that he made in motions that are pending before the court.
U.s. V. David brooks, et al., Criminal Docket No. 06-550 (s-2) (js) is a remand to the eastern district of New York. In his objection letter, he repeats arguments that the Court has already denied. He also regurgitates arguments that he made in motions that are pending before the court.
Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 1 of 30 PageID #: 16436
By Hand and ECF .
The Honorable Joanna Seybert united States District Court Eastern District of New York Central Islip, New York 11722 u.s. Department of Justice United States Attorney Eastern District of New York 610 Federal Plaza Central Islip, New York 11722-4454 May 20, 2013 Re: United States v. David Brooks, et al. Criminal Docket No. 06-550 (S-2) (JS) Dear Judge Seybert: 1 The government writes in response to defendant David Brooks's letter to the Probation Department, dated February 25, 2013 ("Brooks Letter"), detailing his obj ections to his Presentence Investigation Report ("PSR"). Introduction: As he has done throughout the instant criminal prosecution, Brooks repeats arguments in his objection letter that the Court has already denied. He also regurgitates arguments that he made in motions that are pending before the Court. The government will not respond to those arguments, and instead, relies on its opposition to those motions and the Court's prior decisions. The government agrees that when there is a factual dispute, the Court must make its own finding. However, because the Court presided over the criminal trial, it is in a position to resolve those factual disputes based on the record already before it without the necessity of a Fatico hearing. See, e.g., United Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 2 of 30 PageID #: 16437 2 States v. Morrison, 04-CR-699 (E.D.N.Y. Jan. 29, 2010) (Hurley, J. ) . PART A - The Offense Charge{s) and Conviction{s) 1. Brooks does not object to the substance of paragraph 1 of the PSR, but instead selectively references the Court's August 24, 2012 Memorandum & Order, which correctly concluded that any jurisdictional defect in the First Superseding Indictment ("S-l") "was cured when the Second Grand Jury handed down the valid Second Superseding Indictment." 8/24/12 Order at 5. 2-4. Brooks improperly repeats the same meritless arguments contained in his motion to dismiss filed on October 26, 2012. Rather than respond again to these arguments, the government hereby incorporates by reference its memorandum of law in opposition to that motion filed on November 21, 2012 (Docket no. 1603). 2 (a), 2 (b) and 27. Brooks claims that PSR ~ ~ 2 (a), 2 (b) and 27 should be amended to reflect that the Court impermissibly permitted the jury to convict him of initially failing to disclose the relationship between DHB and TAP during the period 2000 to 2003 when such conduct was not charged in the indictment. Brooks Letter at 3. Brooks's objection is factually incorrect: the indictment does charge such conduct. Indeed, in response to Brooks's motion, the Court already explicitly made this finding on the record. Tr. 19259-19261. During the trial, Brooks argued that the Second Superseding Indictment ("S-2") failed to charge both aspects of the TAP scheme and that the "original TAP non-disclosure" was not charged. Tr. 19244-19245. Brooks explicitly argued that permitting the jury to consider both time periods constituted a variance and constructive amendment. Tr. at 19260. The Court ruled that S-2 set forth the two schemes. Tr. at 19261. Ignoring the Court's unambiguous ruling, Brooks later reargued the same points extensively. Tr. 19451-19455. The Court again reached the same conclusion: both TAP schemes were set forth in S-2. Tr. at 19455. Now, Brooks makes the same failed argument Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 3 of 30 PageID #: 16438 3 again. It fails for the same reasons set forth by the Court mUltiple times before. First, the Court expressly noted that "paragraph 49, the third sentence reads . 'such related party transactions had not been disclosed in any of DHB's SEC filings on forms 10-Q, 10-K or in DHB's proxy statement filings.' So it's in the indictment. It's clear." Tr. at 19454-19455. Similarly, paragraphs 50 through 54 explicitly detail Brooks's attempts to frustrate the SEC investigation into TAP. S-2 expressly lists multiple misleading communications with the SEC after the partial related party disclosure. See S-2 ~ ~ 52, 54. Moreover, when describing the schemes to impermissibly enrich Brooks, S-2 explicitly listed schemes to conceal "BROOKS'S use of DHB funds to pay bonuses to employees of TAP, a non-DHB corporation he controlled . [and] BROOKS'S de facto ownership of TAP and the unjust enrichment of BROOKS and TAP at the expense of DHB." S-2 ~ 31. The Court no doubt recalls that the related party disclosure only mentioned TAP's ownership by Brooks's wife, not his personal control. Because it called for broader disclosure than merely the related parties, S-2 was never confined to merely concealing the wife's related party transactions. Indeed, "Brooks's de facto ownership of TAP" necessarily embraces both the related party relationship with the wife, which was partially revealed in 2003, and Brooks's actual control of TAP, which Brooks actively concealed from the SEC. As to PSR ~ 27, Brooks also "exculpatory" facts should be added as TAP. Brooks Letter at 8. These facts, than to reiterate failed trial arguments, in the PSR. argues that certain to any description of which do little other do not merit inclusion 2(f). Brooks contends that the "government did not include in its court-ordered bill of particulars the two incidents on which the Court permitted the government to rely to make out the uncharged R&D scheme." Brooks Letter at 3-4. He is wrong and the Court already rejected this argument. See Tr. 19426, 19523- 24. Interestingly, Brooks only cites the government's initial Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 4 of 30 PageID #: 16439 4 bill of particulars. He does not cite to the government's supplemental bill of particulars, which included the two R&D incidents. See docket entry number 725. Brooks's failure to refer the Court to the government's supplemental bill of particulars is particularly puzzling in light of the fact that when Brooks raised this issue during the instant trial, the government cited its supplemental bill of particulars (see docket entry number 1203) and it was discussed in court (see Tr. 19402-04) . 4-6. Brooks argues that the jury was only permitted to consider three of the seven schemes--the two TAP schemes and the unauthorized and undisclosed executive compensation scheme--when determining whether Brooks was guilty of Counts Three, Four and Five. The government agrees. See Tr. 20749, 20758. 7-12 and 21. Brooks does not object to the substance of paragraphs 7-12, which correctly recite the charges set forth in Counts Six through Twelve of S-2. Instead, Brooks improperly digresses into a discussion of whether he believes the seizure and forfeiture ordered by the Court in this case were correct . Brooks argues that the Second Circuit's recent decision in United States v. Contorinis, 692 F.3d 36 (2d Cir. 2012), applies to this case and that it directs imposition of a lower forfeiture judgment. Whether Contorinis applies or not is hardly clear, but it is clear that application of Contorinis would result in a dramatically increased forfeiture judgment. How to define proceeds subject to forfeiture was hotly contested in this matter. Defendant Hatfield, in a motion for the release of restrained funds, argued that only net profits of her crimes were forfeitable under 18 U.S.C. 981(a) (2) (B). The government argued it should be permitted to forfeit gross proceeds pursuant to 18 U.S.C . 981(a) (2) (A). In a decision issued April 21, 2010, the Court concluded that the definition of proceeds found in 18 U. S. C. 981 (a) (2) (A) applied to this case. United States v. Hatfield, 2010 WL 1685826, at *3 (E.D.N.Y. April 21, 2010). That definition provides for the forfeiture of gross proceeds and does not limit forfeiture to the net gain or profit realized from the offense. The Court then held that, insofar as relevant here, the gross proceeds of the defendants' crimes equaled the "difference between the stock's inflated value, and what it would have sold for absent the fraud." Id. In its motion for reconsideration, the Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 5 of 30 PageID #: 16440 5 government argued that the definition, as applied by the Court, would result in a lower forfeiture than would the forfeiture of net profits because the defendants had paid little to nothing for the shares of stock they sold at artificially inflated prices. Letter dated July 16, 2010, Docket No. 1195, at p. 4 . The Court denied the government's motion for reconsideration and, after two forfeiture hearings and extended briefing, found that $61,444,967 of the assets seized pre-trial were subject to forfeiture as representing the proceeds of Brooks's insider trading, namely the difference between the stock's "true value" and inflated value. Since the Court issued the Preliminary Order of Forfeiture incorporating this analysis, the Second Circuit issued its decision in Contorinis. There, the Court of Appeals held that, in an insider trading case, 18 U.S.C. 981(a) (2) (B) 's net profit definition applies, and forfeitable proceeds constitute "the amount of money acquired through the illegal transactions resul ting in the forfeiture, less the direct costs incurred in providing the goods or services." Contorinis, 692 F. 3d at 145. See also id. at 145 n.3 ("it seems that the only money that should be subject to forfeiture in an insider trading case is money acquired when shares are traded based upon inside information at a gain") This decision does not lead to the result Brooks advocates. First, it is not clear that Contorinis governs this case because Brooks stands convicted of both fraud and insider trading. Mail, wire and securities frauds arising from a scheme to doctor accounting figures are inherently unlawful activities and therefore trigger the forfeiture of gross proceeds, not net profits. See Contorinis, 692 F.3d at 145, n.3; Hatfield, 2010 WL 1685826 at *3. Second, the application of 18 U.S.C. 981(a) (2) (B)'s net profit definition places the burden of proof regarding direct costs on the defendant. Finally, and perhaps most importantly, the definition of net profit adopted by Contorinis would require Brooks to forfeit nearly all, if not all, of the $186 million generated by his insider sales because he paid little to nothing to acquire the shares that he sold. 1 1 Brooks has not offered any credible evidence to demonstrate his costs, as he must if 18 U.S.C. 981(a) (2) (B) applies, but even a cursory review of the records in evidence demonstrate that, whatever he paid for the shares sold in the 2004 insider trading transactions, it was far less than the "trtie value" ascribed to Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 6 of 30 PageID #: 16441 those shares by the Court and used to calculate his forfeiture liability. First, 700,000 of the shares sold in the November 2004 insider trading transaction were acquired through the cashless exercise of options. GX 5069 at p. 5. Therefore, any proceeds traceable to the sale of those shares constitute net profit and are subject to forfeiture in their entirety under Contorinis. 6 Second, the 3,000,000 shares that Brooks sold out of his children's custodial accounts had been held in those custodial accounts since at least between 1996 and 1998. The remaining shares sold in the unlawful insider trading transactions were held by a corporation owned by Brooks through his company, David Brooks International. GX 5072 at p. 5; see also Affidavit of Robert M. Cappadona, dated October 25, 2007 (3500-RC-37). Aside from Brooks's bald assertion that his costs totaled $78 million, the record is not at all clear as to when those shares were acquired, at what price they were acquired, or when they were transferred to the children's account or to David Brooks International. However, the record is clear that Brooks held exercisable warrants to purchase millions of shares of DHB stock at advantageous prices. See, e.g., GX 5022; Tr. 4690 (noting that at end of 2001, Brooks held 9,575,000 shares acquirable under currently exercisable warrants: 3,750,000 shares at $2.33 per share, 25,000 shares at $3.25 per share, 25,000 shares at $2.00 per share, 25,000 shares at $7.11 per share and 1,500,000 shares at $1.00 per share). It is reasonable to assume that Brooks purchased the insider trading shares through the exercise of those warrants. Indeed, Brooks's claim that he paid $78 million for the shares is fantastical. As set forth above, 700,000 of the shares sold in the November and December 2004 insider trades were acquired via the cashless exercise of warrants, and the record is unclear as to how the remaining 8,798,025 shares were acquired. If Brooks really incurred $78 million to acquire those shares, then he paid an average price of $8.87 per share ($78 million/8,798,025). Given that he possessed millions of warrants to purchase shares at prices considerably less than that, this unsworn, unsupported claim regarding costs is simply incredible. Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 7 of 30 PageID #: 16442 7 Brooks suggests that the Supreme Court's decision in Southern Union Co. v. United States, U.S. 132 S.Ct. 2344 (2012) , . mandates application of a reasonable doubt standard for criminal forfeiture proceedings. Brooks ignores the long and well-established line of cases requiring that the government prove its forfeiture allegations using a preponderance standard. In Southern Union, the Supreme Court examined the imposition of criminal fines in light of Apprendi v. New Jersey, 530 U.S. 466 (2000), which held that "any fact that increases the penalty for a crime beyond the prescribed statutory maximum must be submitted to a jury, and proved beyond a reasonable doubt. /I Southern Union, 132 S. Ct. at 2350 (quoting Apprendi, 530 U.S. at 490). However, as the Second Circuit has repeatedly noted, Apprendi does not apply to forfeiture because forfeiture is an indeterminate scheme without a statutory maximum. United States v. Pfaff, 619 F.3d 172, 175 (2d Cir. 2010)i United States v. Fruchter, 411 F.3d 377, 382-83 (2d Cir. 2005). Accordingly, Southern Union, which interprets Apprendi, does not apply to forfeiture, and Brooks's argument that the Court incorrectly applied the preponderance standard is without merit. See United States v. Phillips, 704 F.3d 754, 770-71 (9th Cir. 2012) (Southern Union does not apply to forfeiture because forfeiture has no statutory maximum and because the decision does not suggest that the Court intended to overrule Libretti v. United States, 516 U.S. 29, 49 (1995)) i United States v. Day, 700 F.3d 713, 732-33 (4th Cir. 2012) (same). Brooks's argument that the Court cannot impose a money judgment representing the difference between the proceeds of the unauthorized compensation scheme and the assets seized traceable to that scheme is mistaken. Here, the Court found Brooks obtained over $6 million of proceeds arising from the unauthorized compensation scheme. By awarding the government a money judgment for the difference between the amount seized and the proceeds generated, the Court properly held Brooks accountable for his crimes. Regardless, even applying Contorinis and accepting Brooks's claim that he spent $78 million to acquire the shares sold in the insider trading transactions results in a significantly increased forfeiture judgment of $107,723,662 ($185,723,662 (gross)--$78,OOO,OOO (cost)). The government has no objection to the Court revising the Preliminary Order accordingly. Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 8 of 30 PageID #: 16443 8 However, citing united States v. Awad, 598 F.3d 76, 78 (2d Cir. 2010), Brooks suggests that, because he has ample monies to satisfy the forfeiture order, the Court cannot award a money judgment. 2 Contrary to Brooks' s argument that Awad authorized the imposition of money judgments only when a defendant lacks assets sufficient to satisfy the forfeiture order, Awad held "that the propriety of a [forfeiture money judgment] does not depend on a defendant' s assets at the time of sentencing." Id. (emphasis added). This "interpretation of the criminal forfeiture provision ensures that all eligible criminal defendants receive the mandatory forfeiture sanction Congress intended and ensures that there is a mechanism by which the government may disgorge their ill-gotten gains, even those already spent." Id. at 79 (citations and internal quotation marks omitted) . Regardless, Brooks's argument elevates form over substance: once third party claims to property have been resolved, the government intends to move to amend the forfeiture order to include substitute assets (once they are identified) in satisfaction of the outstanding money judgment. See Fed. R. Crim. P. 32.2 (e) (1) (B); 21 U.S.C. 853 (p) . See also United States v. Vampire Nation, 451 F.3d 189, 202 (3d Cir. 2006) (applying 853(p) to money judgment, noting that to do otherwise "would permit defendants who unlawfully obtain proceeds to dissipate those proceeds and avoid liability for their ill-gotten gains"); United States v. Casey, 444 F.3d 1071, 1077 (9th Cir. 2006) (" [t] he criminal forfeiture statute mandates imposition of a money judgment on substitute property"); Hall, 434 F.3d at 60 (interpreting forfeiture order awarding money judgment to permit the Government to move for substitute property). Accordingly, the Court should reject Brooks's attempt to escape a money judgment. Brooks complains that the government has improperly seized assets. However, without more context, the government cannot respond to Brooks's claim regarding shares of stock held by Like 2 Brooks does not specify to what monies he is referring when he states that he has sufficient assets to satisfy the forfeiture judgment. The assets restrained in this case are also subject to restraint in the parallel civil forfeiture and may not be available to him to satisfy other judgments. Brooks has not submitted a financial statement to Probation. Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 9 of 30 PageID #: 16444 9 a Prayer Trust. And Brooks's argument that assets purportedly belonging to his children cannot be seized is simply incorrect because: (1) a jury found, beyond a reasonable doubt, that Brooks committed insider trading with shares of stock held in his children's custodial account; and (2) criminal forfeiture "reaches any property that is involved in the offense," including property not owned by the defendant. De Almeida v. United States, 459 F.3d 377, 381 (2d Cir. 2006). The Brooks children have filed claims in the ancillary proceeding, and their claims to the assets will be resolved there. Id. (" [t] he likelihood that some property involved in an offense will be owned by persons other than the criminal defendant is reflected in the provision for an ancillary proceeding"). See also United States v. Dupree, _ F. Supp. 2d 2013 WL 311403 (E.D.N.Y. Jan. 28, 2013), *4 (discussing ancillary proceedings); In re Dreier LLP, 452 B.R. 391, 410-11 (S.D.N.Y. 2011) (same). Brooks therefore lacks standing to assert any claims on his children's behalf. See, e.g., united States v. Gallion, No. 2:07-39-DCR, 2009 WL 2242413, at *3 (E.D. Ky. July 24, 2009); United States v. Tremblay, 2008 WL 4571548, at *2 (S.D.N.Y. 2008); United States v. Armstrong, No. 05-130, 2007 WL 809508, at *4 (E.D. La. Mar. 14, 2007); United States v. Brown, 02CR159, 2006 WL 898043, at *5 (E.D.N.Y. Apr. 4, 2006). 15. Brooks obj ects to paragraph 15 arguing that Count 17 should be dismissed for lack of venue. Brooks Letter at 4-5. As the Court previously ruled, the jury need only find by a preponderance of the evidence that venue is established. Tr. 19185-19186. After the jury was charged on that issue, Brooks made an oral motion to dismiss Count 17 on the basis of venue. Tr . 20804. The Court reserved decision on the motion. For the clarity of the record, the Court should now expressly deny the motion to dismiss. By way of background, Count 17 relates to Brooks's lies to DHB's independent public auditors: Rachlin Cohen & Holtz ("Rachlin"). On March 7, 2006, Rachlin auditors confronted Dawn Schlegel about a "plug" of non-existent vests. Tr. 9061- 9062. Schlegel then testified that she called David Brooks on his mobile phone about this questioning and was instructed by Brooks to show the auditors certain misleading, non-representative black vests. Tr. 9062. The existence of these phone calls was established by introduction of Brooks's mobile phone records, which showed eleven phone calls between Schlegel and Brooks on March 7, 2006. GX 17012 (Brooks's mobile phone was billed to Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 10 of 30 PageID #: 16445 10 DHB's offices in the Eastern District of New York and bore an Eastern District of New York area code). On March 9, 2006, Rachlin emailed Brooks, among other DHB employees in the Eastern District of New York, a memorandum indicating Rachlin's intent to begin a 10-A examination into fraud in DHB's books and records. Tr. 11053. On March 10, 2006, Brooks participated in a meeting with Rachlin officials in Florida. Tr. at 11057. Although Brooks provides no citations for his motion to dismiss, it is helpful to work through the governing legal principles. Judge Joseph Bianco wrote extensively on the subject of venue in United States v. Abdallah, 840 F.Supp.2d 584 (E.D.N.Y. 2012). In that case, Judge Bianco explained how "[u]nder 18 U.S.C. 3237(a), venue properly lies in 'any district in which such offense was begun, continued, or completed. '" Abdallah, 840 F. Supp. 2d at 603. Evidence of a phone call giving instructions to another member of a scheme is sufficient to survive a Rule 29 motion to dismiss. Id. at 603- 606 (holding that evidence of one phone call sufficient to support venue for a securities fraud charge). Brooks's phone conversation with Schlegel included the instruction to give a false explanation of the missing vests. Brooks, however, argues that there was no evidence that tied this specific crime to the Eastern District of New York. As stated in Abdallah, "[a] defendant challenging a conviction on the basis of insufficient evidence bears a heavy burden. II Id. at 608 (citing United States v. Thomas, 377 F.3d 232, 237 (2d Cir. 2004) (citation omitted)). Moreover, it is axiomatic that the court must view the evidence in the light most favorable to the government and draw all permissible inferences in the government's favor. See United States v. Irving, 452 F.3d 110, 117 (2d Cir. 2006). "In examining the sufficiency of the evidence, the Court also should not analyze pieces of evidence in isolation, but rather must consider the evidence in its totality." Abdallah, 840 F.Supp.2d at 507 (citing United States v. Rosenthal, 9 F.3d 1016, 1024 (2d Cir. ' 1993). Finally, "[d] irect evidence is not required; '[i] n fact, the government is entitled to prove its case solely through circumstantial evidence, provided, of course, that the government still demonstrates each element of the charged offense beyond a reasonable doubt. '" United States v. Lorenzo, 534 F.3d 153, 159 (2d Cir. 2008) (quoting United States v. Rodriguez, 392 F.3d 539, 544 (2d Cir. 2004)). Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 11 of 30 PageID #: 16446 11 Against that legal backdrop, the government points the Court to the following facts . The facts clearly establish that Brooks and Schlegel talked multiple times over his mobile phone on March 7, 2006. See, e.g., GX 17012. Brooks's own examination of Dawn Schlegel established that Brooks flew to Florida from New York on March 9, 2006 . . Tr. 9099-9100, 9124- 9125 . DHB's corporate offices and Brooks's home office were located in the Eastern District. On March 9, 2006, Rachlin sent an email to Brooks and other DHB employees. Tr. 11053, 11057. The records of the private plane, which record Brooks's out-of - state travel, provide no evidence of Brooks leaving the Eastern District of New York between March 6 and March 9. The credit card records also provide no evidence of Brooks being anyplace but New York until the evening of March 9, 2006. Indeed, Brooks points to no evidence at all that Brooks was anyplace other than the DHB offices or his home office in the Eastern District of New York until the evening of March 9, 2006. See Brooks Letter at 4-5. The complete evidentiary picture in this case further supports a finding that Brooks was at work in the DHB offices or his home office in the Eastern District of New York when he made the relevant March calls. General Lawrence Ellis testified that Brooks was always at his desk. See Tr. 641-642. Brooks's own attorneys took pains to examine witnesses about how he was always in his home office when he was not at the DHB offices. See Tr. 367 (Bart Stasi, a landscaper, testifying about Brooks constantly working at his desk in his home office); Tr. 4127, 13769 (Irving Villalon testifying about how Brooks was always working); Tr. 7111, 7493 (Mary Kriedell testifying about how Brooks was working constantly out of his home). David Brooks's attorneys cross-examined a witness about how, even though David Brooks was in New York and the witness was in Florida, he was always reachable by phone. See Tr. 3032, 3037-3038 (Travis Brooks). In short, Brooks's own evidence emphasized that he was always at work in the Eastern District of New York. Therefore, Brooks's own evidence combined with Schlegel's testimony and phone records establishes his presence in New York on March 7, 2006. This circumstantial evidence is corroborated by the corporate credit card and travel records, which only show activities in the Eastern District of New York between March 6 and March 9, 2006. As the Court is well-aware, when Brooks Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 12 of 30 PageID #: 16447 12 traveled, even on vacation, he took his private jet and used the corporate credit cards. This evidence shows no travel. Moreover, DHB's corporate headquarters was located on Long Island, which independently establishes venue. See, e.g., United States v. Tucker, 495 F. Supp 607, 618 (E.D.N.Y. 1980) (Platt, J.) ("this district was a proper venue for a grand jury investigation into the dealings between defendant and Verner, inasmuch as Verner lived in this district and Sam Goody, Inc., the alleged ultimate recipient of defendant's counterfeit products, is headquartered in this district."). DHB maintained its books and records on Long Island and consolidated all of DHB's subsidiaries' financial statements into one financial statement. Those financial statements contained the fraudulent 62,000 non-existent vests. All of that information was kept in the Long Island headquarters. Those records were integral to the frauds and the sole reason for Brooks's lies to the audi tors. Therefore, as to this lying to auditors count, the facts "not only involve some activity in the situs district but also satisfy the 'substantial contacts'" test. United States v. Royer; 549 F.3d 886, 895 (2d Cir. 2008). Instead of referencing the evidence, Brooks points to the inherent "mobility" of Brooks's phone to cast doubt on venue. This argument cannot be reconciled with the controlling law, which requires the Court to view the evidence in the light most favorable to the government and draw all permissible inferences in the government's favor. All of those inferences, which are unchallenged in the evidentiary record, indicate that venue was proper in the Eastern District of New York. The venue motion and this PSR objection should both be denied. 20. As discussed above, the government agrees that only the TAP schemes and unauthorized and undisclosed executive compensation schemes apply to Count Three, and Count Three involves company loss only. Count Seventeen involves investor losses that are the result of Brooks's making materially false and misleading statements to independent public accountants in violation of 15 U.S.C. 78ff, which is an offense whose total offense level is calculated in part by determining loss under Uni ted States Sentencing Guidelines ("U. S. S. G. ,,) 2B1. 1. See U.S.S.G. 2Bl.l Commentary, Statutory Provisions. As discussed below, both the company and investors were victims who suffered losses as a result of Brooks's materially false and misleading statements to independent auditors Rachlin Cohen & Holtz. Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 13 of 30 PageID #: 16448 13 22. Again, Brooks improperly uses the PSR as a vehicle to reargue the Court's forfeiture decision in this case. He does not deny that his interest in the assets listed in paragraph 22 were forfeited by the Court. He also improperly attempts to reargue a statute of limitations issue previously raised in his motion to dismiss filed on October 26, 2012. As the government discussed in its response to that motion, the return of S-l on October 24, 2007, tolled the statute of limitations under 18 U.S.C. 3288, irrespective of the premature expiration of the first grand jury. See Govt. Opp. Br. at 24 (docket no. 1603). S-2, which was returned on July 9, 2009, was not barred by the statute of limitation because it was retuned during the time period in which the statute was still tolled. See United States v. Maklin, 535 F.2d 191 193 (2d Cir. 1976); United States v. Lauter, 92-258, 1994 WL. 116576 at *2 (E.D.N.Y. Mar. 16, 1994) (Sifton, J.). Therefore, the government is entitled to forfeiture and restitution with respect to all offenses of conviction because they occurred within or straddle the five years before the return of S-l. In any event, the Court has already rejected a nearly identical argument as applied to Brooks's liability to forfeit the proceeds of his conspiracy. United States v. Hatfield, 795 F. Supp. 2d 219, 227 (E.D.N.Y. 2011). United States v. Hatfield, 2010 WL 4177159, *6 (E.D.N.Y. Oct. 18, 2010) (forfeiture may be based on uncharged conduct and even on conduct on which the court granted a Rule 29 motion during the trial) . The "scheme argument" raised in Brooks's objections is merely an attempt to rehash this already decided point. Because Brooks was convicted of a conspiracy and of schemes to defraud, he must forfeit the proceeds of that conspiracy and those schemes, no matter when those proceeds were acquired. See United States v. Venturella, 585 F. 3d 1013, 1015, 1016 -17 (7th Cir. 2009) (forfeiture in a mail fraud case "is not limited to the amount of the particular mailing but extends to the entire scheme"); United States v. Capoccia, 503 F.3d 103, 117 (2d Cir. 2007) (noting in dicta that defendants convicted of a scheme to defraud are liable to forfeit proceeds of the entire scheme, no matter when acquired); United States v. Jennings, 487 F.3d 564, 584 (8th Cir. 2007) (affirming without discussion forfeiture of the proceeds of the entire mail fraud scheme based on a conviction on just two substantive counts); United States v. Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 14 of 30 PageID #: 16449 14 Kahale, 2010 WL 3851987, *31 (E.D.N.Y. Sept. 27, 2010) (applying Capoccia and concluding that the "properly forfeitable property in this case need not be limited to those funds obtained from the three investors specifically identified in the Indictment . , but rather should encompass all funds obtained as part of the overall scheme to defraud"); United States v. Boesen, 473 F. Supp. 2d 932, 952 (S.D. Iowa 2007) (defendant convicted of 82 substantive counts of health care fraud must forfeit the proceeds of the entire scheme, not just the proceeds involved in the 82 counts on which he was convicted). See also The United States' Memorandum of Law in Support of Its Motion for Entry of a Preliminary Order of Forfeiture, Docket No. 1422, at 52-54. Brooks's argument regarding his scheme liability therefore must be rejected. 23 and 51-62. This objection consists of two parts. First, Brooks argues that the PSR should be amended to include mention of the loans that he made to DHB. Second, Brooks argues that the PSR should be amended to include a discussion of the 1997 Resolution as a valid corporate document. Proceeding in order, the 10K public disclosure fiscal year stated that all of Brooks's personal were paid in full. See GX 5018; Tr. 5471. testimony or exhibits were ever admitted. therefore, add nothing to the PSR's narrative and should be denied. for the 2000 loans to DHB No contrary These loans, the obj ection Second, Brooks has long argued that a valid 1997 resolution absolves him of all looting sins. He explicitly (and repeatedly) argued this point to the jury. See, e.g., Tr. 19910 ("I will tell you this: By the time I finish speaking to you, I promise you one thing every dollar that the government alleges Mr. Brooks stole through compensation, looting, was authorized by the 1997 resolution, and, therefore, covered by the offsets that you heard talked about in this courtroom."). "The immense trial evidence" plainly established that Brooks was not entitled to charge personal expenses to DHB. Hatfield, 795 F. Supp. 2d at 241. Indeed, the Court explicitly found that Brooks must forfeit "the assets that Mr. Brooks obtained through the unauthorized compensation scheme." April 23, 2012 Mem. & Order at 20 (docket no. 1536). Consistent with the Court's findings, which came after months of trial and further months of forfeiture hearings, Brooks's objection should be denied. See United States v . Hatfield, 724 F. Supp. 2d 321, 328 (E.D.N.Y. Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 15 of 30 PageID #: 16450 2010) (" [A] reasonable jury could find that Mr. millions of dollars of shareholders' money on expenses, without proper authorization to do so. 63 07, GX 1510 - B . ") . 15 Brooks spent his personal See, e.g., Tr. While the Court has already found that the "immense trial evidence" established that Brooks was not permitted to charge personal expenses to the company, the government provides a non- exhaustive list of some of that evidence: Unlike valid DHB unanimous resolutions that contained signature lines for all the board members, the 1997 Resolution, which purports to be a unanimous resolution of the board, only had one signature line. Compare GX 18001 (legitimate DHB unanimous resolution, dated January 23, 1997 - -three months before the 1997 Resolution purportedly went into effect) with GX 18002 (fake 1997 Resolution) . None of the more than 70 witnesses who testified at trial saw the 1997 Resolution before the initiation of the SEC's investigation into Brooks's unauthorized compensation. Indeed, Schlegel never saw it (Tr. 6261-65, 6360); Kreidell, who was the Chief Financial Officer at the time that the 1997 Resolution was supposedly created, never saw it (Tr. 1042, 1048, 1241); Brooks's own witness Paul Donofrio, an Executive Vice President who worked closely with Brooks and signed an affidavit the subj ect of which was Brooks's compensation, never saw it (Tr. 14754-58) No one saw an original of the 1997 Resolution. The 1997 Resolution is replete with typos. It was not disclosed in any of DHB's public filings until the SEC's investigation was initiated. Brooks did not include income from the 1997 Resolution on his tax returns. If Brooks was entitled to charge personal expenses to DHB, he would not have had to ask Jay Chin to create fake invoices falsely claiming that expensive pens that he bought for his personal collection were actually office supplies. But that's exactly what he did. See Tr. 1553- 57; Compare GX 1233Z (real invoice) with GX 1233B (fake invoice) . If Brooks was entitled to charge personal expenses to DHB, he would not have had to worry about personal expenses passing as business expenses, but he was. See GX 5201 at Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 16 of 30 PageID #: 16451 16 5 ("a lot of personal charges, not high dollar value, some will pass [as business expenses] some won't."). If Brooks was entitled to charge personal expenses, he would not have had to buy back personal assets to get them off the books before Grant Thornton started auditing DHB in 2002, but he did. See GX 5173. If Brooks was entitled to charge personal expenses, there would have been no reason for him to improperly classify personal expenses as business expenses in the Audit Committee Report, but that is exactly what he did. See GX 1285-C (falsely classifying invitations for Brooks's son's Bar Mitzvah, plastic surgery for Brooks's wife, a plasma television installed in Brooks's son's bedroom, a burial plot for Brooks's mother and vitamins for Brooks's horses as business expenses rather than personal expenses). From 1997 to 2003, when the 1997 Resolution was supposedly in effect, he also misclassified personal expense on DHB' s books and records. See Tr. 5528-29, 6269, GX 1495-A (falsely classifying photography for Brooks's children's parties as advertising, payments to a nurse for Brooks's mother as repairs and maintenance and horse vitamins as supplies) . Brooks was also concerned that the auditors would find certain personal expenses that he had charged to DHB. See GX 5207 ("LIPA won't find will assume DHB" i "doctor payment [referring to the plastic surgery for Brooks's wife] won't find assume insurance medical."). Further, Brooks lied about the true purpose of a check from DHB's bank account that he wrote to Fred Marcus Photography. Brooks wrote that the check was for "catalogs," which was a lie. See GX 9052. Indeed, Andrew Marcus testified that the payment was for photographs taken at Brooks's son's Bar Mitzvah. Tr. 931. He further testified that Fred Marcus Photography did not sell catalogs to DHB or Point Blank. Tr. 932. In fact, they never sold catalogs to anyone. Tr. 932. Brooks continued to charge personal expenses to DHB, even after he relinquished all rights he had to the purported 1997 Resolution. Brooks scalped tickets to sporting events and concerts, for which the company paid, and pocketed the cash. Tr. 13209-13, 13215-30, 13242-44, 13246-58, 13264-75, 13280- 87 i GX . 1382-89, 1382A-89A, 1392-94, 1392A-94A, 1396, Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 17 of 30 PageID #: 16452 17 1396A, 1398, 13.98A, 1401, 1401A, 1403-04, 1403A-04A, 1406- 11, 1406A-11A, 1415-18, 1415A-18A, 1422-28, 1422A-28A, 1390 - 91 , 1395 , 1405 , 1430 - 31 , 1435 , 1438 , 1534 and 1542 - 45. In 1997, DHB did not have a compensation committee. In the face of that overwhelming evidence, Brooks quotes from Gary Nadelman's testimony before the SEC in support of his argument that the 1997 Resolution is valid. Brooks Letter at 7. Interestingly, Brooks fails to mention that Nadelman subsequently met with the government and admitted "he never signed the '1997 Resolution' and he knows that because he never saw the document prior to 2005. He never faxed the document in 1997, because he never saw it before." Nadelman proffer of April 28, 2009, FD-302 at 3, a copy of which was previously provided to both the Court and defense counsel. Nadelman further stated that he believed that the 1997 Resolution was a fraudulent document because no other board member signed it and it was supposedly a unanimous resolution. Id. at 3. Additionally, while Brooks had no burden of proof at trial, he called numerous witnesses and because the government gave Nadelman immunity, Brooks could have called Nadelman as a witness if he believed that Nadelman's testimony was going to be consistent with his SEC testimony. Tellingly, Brooks elected not to calJ Nadelman during his robust defense case. Brooks also reveals new, non-factual arguments about Internal Revenue Service Regulations on facelifts and bonuses. See Brooks Letter at 12-13. These arguments are irrelevant. Brooks further contends that the PSR distorts the record regarding his ownership of the Bentley. Brooks Letter at 12. His argument is misguided. The evidence plainly established that Brooks bought the Bentley for his own personal use. The records concerning the sale of the Bentley--GX 1130A--state that Brooks was the owner of the vehicle. See GX 1130Ai Tr. 12300- 05, 12317-25 . In addition, the car was registered in his name. Id. Moreover, the records from the car dealership say that Brooks intended to use the Bentley "for the purpose of pleasure." Tr. 12318. Although Ms . Jefferson testified that the words \\ for the purpose of pleasure" would not have been written by Brooks, but instead by an employee of the car dealership, Brooks still signed those records. Tr. 12318, 12340-41. Further, the Bentley was still in Brooks's possession on October 25, 2007 more than a year after Brooks left DHB. Tr. Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 18 of 30 PageID #: 16453 18 12371-75. In addition, General Ellis testified that the Bentley was Brooks's car. Tr. 18681-82. He also testified that because the Bentley was Brooks's car, he did not expect DHB to pay insurance for that car. Tr. 18682. Accordingly, Brooks's argument that the PSR distorted the record is belied by the actual record. Brooks further argues that the bull that Arthur DiModica made for him--GX 16--was a legitimate business expense rather than an example of his looting. Brooks Letter at 12. The Court already rejected this argument and concluded that Brooks had to forfeit the bull. See Hatfield, 795 F. Supp. 2d at 242 ("The Court finds that the immense trial evidence concerning [the unauthorized and undisclosed executive compensation] scheme more than suffice[s] to meet the Government's forfeiture evidentiary burden"); April 23, 2012 Mem. & Order at 20. Putting that aside, Brooks's argument is contradicted by the record. Indeed, like with the Bentley, the FBI recovered the bull in Brooks's possession on January 21, 2010, more than four years after Brooks left DHB. Tr. 13917. Brooks did not display the bull in his home office, which was on the second floor of his home; instead, it remained in the same place that Mr. DiModica left it, namely, on the first floor of Brooks's home in the foyer area. Tr. 1411, 13917. The Court should not entertain Brooks's meritless contention. Brooks takes issue with the PSR's statement that he took "numerous vacations" at company expense. Brooks Letter at 12- 13. The evidence adduced at trial, including logs for Brooks's private jet, credit card statements and other documents, as well as the testimony of Schlegel, Villallon, Paul Donofrio, Joseph Giaquinto, Elaine Pesky and General Ellis, makes plain that DHB paid expenses relating to Brooks's personal trips. Indeed, DHB paid. for every single flight that Brooks or his family members took on his private jet, despite that many of those flights were personal in nature. For example, DHB paid to fly Brooks's daughter and her friends to Madison, Wisconsin so that they could attend a Halloween party. Tr. 3734, 3827; GX 1333. DHB also paid for expenses associated with Brooks's family vacation to St. Barts. Brooks's travel agent, Elaine Pesky (Tr. 1805, 1810, 1812-15), Villallon (Tr. 3726, 3732, 3874-75), and Schlegel (Tr. 6422, 6434-35) testified regarding the personal nature of those trips. Brooks's own witness, Paul Donofrio, also confirmed that Brooks's trip to St. Barts was a "family Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 19 of 30 PageID #: 16454 19 vacation." Tr. 14728-29 ("I know he was on vacation with his family in the Caribbean, yes."). Further, Donofrio testified about a personal trip that he took with Brooks. Specifically, Mr. Donofrio testified that he flew on Brooks's private jet to attend a horse auction. Tr. 14710-12, 14727-28. However, Brooks's flight logs, which were included in the Audit Committee Report that was submitted in connection with the SEC Investigation, falsely stated that the purpose of that trip was to attend an investor meeting. See GX 1333, 5137; Tr. 14710-12, 14727-28. Another flight that DHB paid for was Brooks's family vacation to' St. Tropez. Brooks mentions that Schlegel testified that this was a vacation (Brooks Letter at 12), but fails to mention that Villallon (Tr. 3733, 3879-80, 4374), Pesky (Tr. 1810, 1817 - 18) and General Ellis (Tr. 18584, 18668-69) also testified that this trip was a personal one. Accordingly, the Court should reject Brooks's argument. The Offense Conduct 24. Brooks argues that all of the financial entities that he established were entirely innocent. Brooks Letter at 8. This argument is perplexing. The Court has already found that Brooks violated the terms of his bail through the concealment of money in a series of domestic and international financial entities. That finding has been affirmed by the Second Circuit in an interlocutory appeal. The objection should be denied. As set forth in the civil forfeiture action that parallels this case, the more recently formed entities that Brooks claims were for so-called "legitimate estate planning purposes" were actually charitable remainder annuity trusts ("CRATS"), which Brooks created and of which he was trustee in order to take large charitable deductions when, in fact, no money ever went to charity or was intended for charity. See United States v. All Assets, Complaint ~ 64, 10-CV-4750 (JS) (docket no. 1-2). Five CRATs, each created in late December 2004, were used to avoid the payment of taxes: Magic Moments Trust, Pathfinder Trust, Saving Lives Trust, Showtime Trust, and Like a Prayer Trust. Id. Donations were made to the CRATs by several corporate enti ties controlled by David Brooks and of which he was the president. Id. ~ 65. Brooks's family members were the nominal shareholders of these companies. Id. The companies' donations consisted solely of $142 million of insider trading proceeds. Id. ~ ~ 62, 65. Specifically, Brooks donated either: (a) DHB stock acquired through his 2004 exercise of warrants; or (b) the Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 20 of 30 PageID #: 16455 20 proceeds of the sale of DHB stock acquired through his 2004 exercise of warrants. Id. By donating the stock or the proceeds of its sale to the CRATs and by claiming chari table deductions stemming from those donations, Brooks and his family avoided the payment of significant taxes. Id. ~ 69. However, as set forth below, Brooks never honored the trusts. Id. Wi thin months, the CRAT accounts were emptied and the monies used for Brooks's personal benefit. Id. 30-31 and 63. Brooks does not object to paragraph 30 which sets forth a recitation of the methods and means by which Brooks and his co-conspirators defrauded the investing public, the SEC and the company. Rather, he quarrels with the Probation Department's characterization of one of the objects of Brooks's fraud- -to inflate the value of DHB stock. PSR ~ 31. Brooks contends that "the only scheme alleged in PSR ~ 30 which the jury could have relied on to convict Brooks of insider trading is the so-called 'R&D' scheme " Brooks Letter at 9. Brooks is wrong. In addition to having knowledge of the R&D scheme at the time he sold his shares, Brooks also knew about material non-public information regarding: (a) his control of TAP to earn exorbitant profits at DHB's expensei (b) his looting of DHB assets for the benefit of himself and his familYi and (c) the November 26, 2004 mailing and electronic filing of DHB's . Proxy Statement that contained numerous materially false and misleading statements and omitted material facts about Brooks's unauthorized compensation and his intentional failure to disclose TAP over the preceding years. See Hatfield, 724 F. Supp.2d at 328 ("Additionally, it should be noted that- -at this stage--even Mr. Brooks's 'looting' defense would support an insider trading conviction. Specifically, although Mr. Brooks argues that the 1997 Resolution entitled him to spend DHB money on his personal expenses, Mr. Brooks does not dispute that DHB never disclosed the full extent of his compensation to shareholders. Nor could he. [T]he 10-K does not disclose that Mr. Brooks charged $666,657 in personal expenses to a corporate credit card in 2002. [a] nd a reasonable jury could find that DHB1s failure to accurately report Mr. Brooks's executive compensation was material.) i see also United States v. Hatfield, 06-550 (JS), 2010 WL 2838525, at *2 (Jul. 19, 2010 E.D.N.Y.) ("Mr. Brooks is acquitted of the insider trading charges to the extent that those charges are predicated on DHB's allegedly overvalued inventory. The insider trading charges otherwise remain intact.") . Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 21 of 30 PageID #: 16456 21 Brooks challenges the PSR's conclusion that he used the proceeds of his insider trades to "purchase costly and lavish items and services for himself and his family" because: (1) there is no evidence of these purchases; and (2) if he had made those purchases, the government would not have been able to seize as much as it did. This argument is patently frivolous. Firstly, many of the items seized as traceable to the insider trading offenses are the very same costly and lavish items that Brooks claims do not exist. Summarized below is a list of luxury goods that the government identified as traceable to the $186 million generated by the insider trading sales. Luxury Items Purchased with Insider Trading Proceeds Asset Description Amount of Record No. 3 Monies Citation Traced 113 Ferrari 612 Scaglietti $280,464 . 00 GX13501 N/A Men's Patek Philippe Watch 18 $11,850.00 GX13503 k Manual Wind Plain Gondolo, Ref. 5111/J N/A Men's Patek Philipe Watch, 18k $20,400.00 GX13503 Rose Gold Manual Wind Plain Gondolo, Ref 5111/PR N/A Men's Patek Philippe Watch 18k $12,750.00 GX13503 Rose Gold Manual Wind Gondolo Silver Dial, Ref 5111/R N/A Men's Patek Philippe Watch $12,750.00 GX13503 18k-wg Manual Wind Gondolo Silver Dial, Ref. 5111/W 112 Men's Patek Philippe Watch 18k $83,250.00 GX15503 Rose Gold Manual Wind day-date Silver Dial, Ref 5970/R N/A Patek Phillipe Men's Watch 18k $32,750.00 GX13504 Rose Gold, Ref 5070R 3 "Asset No." refers to the in the Preliminary Order of seized are noted as "N/A." testified as to the tracing forfeiture hearing. numbers assigned to each seized asset Forfeiture. Assets that were not Special Agent Robert Cappadona also of these assets during the Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 22 of 30 PageID #: 16457 22 Asset Description Amount of Record No. 3 Monies Citation Traced N/A Patek Philipe Men's Watch $52,395 . 00 GX13505 Platinum Automatic Date GTs, Ref 5059P 107 Patek Phillipe Men's Watch $12,565.00 GX13505 18kwg Manual Wind Date GT's Ref 6000/W N/A Patek Phillipe Men's Watch $26,110.00 GX13505 Nautilus Power Reserve 18kwg Manual Wind Plain GTs , Ref 3711/1W N/A Fred Ladies Watch 18kwg Quartz $59,000.00 GX13506 Plain w/Brilliant Diamonds, Ref 7J0039 108 Fred Ladies 18kwg Necklace, $42,400.00 GX13506 Fancy Clasp and Brilliant, F W2 Diamonds, Ref 7J0039 109 Patek Philippe Ladies Watch $70,000.00 GX13506 18kwg Quartz Plain GTs, Ref 4910/51W N/A Patek Phillipe Men's Calatrava $17,000.00 GX13506 Watch 18kwg Automatic Date GTs, Ref 5109/W-010 106 Breitling Men's All Diamond $87,500 . 00 GX13507 Flying B Watch Automatic Date GTs, Ref J2836263/A636 N/A Second Chance Yellow/Black $46,085.00 GX13509 White Puzzle Diamond dial Stainless Steel Case with Diamonds ... , Invoice 251.471 110 Second Chance Splash Diamond $21,500.00 GX13509 Black Dial ... , Invoice 251. 471 111 Second Chance Splash Diamond $18,000.00 GX13509 Pink Dial ... , Invoice 251.471 Secondly and as noted above, while the government seized many of the assets traceable to Brooks's insider sales, it did not seize all of them. Many assets were not recovered, and other monies were dissipated. In addition to the unseized assets listed above, and by way of limited example only , the government did not recover the $3 million sent on September 16, 2006 from the True Grit account at Goldman Sachs to an attorney, Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 23 of 30 PageID #: 16458 23 GX 13501, or the $100,000 sent to Arlene Segal for expenses relating to a Bat Mitzvah.4 Without a doubt, Brooks spent considerable sums on luxuries and services for himself and his family. 32-34, 107 and 123. First, Brooks objects to the PSR's "wholesale acceptance of the word of Dawn Schlegel." Brooks Letter at 9. This obj ection is too vague to merit a response and should be denied. To the extent that Brooks objects to the PSR's accurate characterization of a particular witness's sworn trial testimony, the obj ection is without merit and should be denied. Second, as to PSR ~ ~ 32-34, Brooks argues that, because portions of the R&D scheme were not presented to the j ~ r y , he does not merit a leader or organizer role enhancement under the Guidelines. The government submits that Brooks's supervisory and management role in these crimes is clear from the record. See, e.g., Tr. 5789, 5796-97, 5801-03i Tr. 6479-80, 2622-24, 6480-81 (Brooks threatened Travis Brooks when he reported the overvalued inventory to auditors) i Tr. 6714 (Brooks attempted to cover up the inventory overvaluation scheme by ordering Dawn Schlegel to delete Travis' inventory summaries) i Tr. 6617-18, 2587-88 (Brooks used the Zylon write-down as an opportunity to cover up the overvalued Interceptor inventory scheme and the scheme to plug inventory with 62,975 non-existent vests). Brooks was the Chief Executive Officer of the company. Moreover, numerous witnesses testified regarding his controlling management style. Indeed, government points the Court to General Ellis's testimony about Brooks's control over DHB and his attention to detail. General Ellis described Brooks's management style as "[c]ontrolling, detailed." Tr. 821. General Ellis explained how controlling Brooks waSi General Ellis, who was the President of the Company and a member of the Board of Directors, was required to get Brooks's approval for all expenditures, even expenditures as small as $200. Tr. 466- 67, 472. Similarly, Mary Kreidell described Brooks as a "hands on manager . [who] was very involved in the business." Tr. 4 Of the $100,000, $40,000 was disbursed on June 30, 2005 from the Pathfinder Trust account, and $60,000 was disbursed on September 30, 2005 from the Like a Prayer Trust. Tr . 298-99 (Arlene Segal creates, designs and manufactures invitations) i Tr. 316-24 (Segal testimony about one of the checks). See also 3500-RC-23 at 51 . Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 24 of 30 PageID #: 16459 24 1014-15 . Likewise, Donofrio testified that he was a "hands-on CEO" who was "very involved in the business . " Tr. 14750. Additionally, the testimony of witnesses such as Geraldine Bongarzone, Elinore Kaye, Michael Duffy, Richard Carey and Marylou Segismundo showed Brooks's everyday oversight into TAP, looting and other criminal matters. See, e.g., Tr. 1264-65 and 1273-74 (Bongarzone) ; Tr. 1508-13, 1599-1600 and 1611-1614 (Kaye) ; Tr. 1311-13, 1319, 1322-27 and 1331-34 (Duffy) ; Tr. 11843-45, 11847-53 and 11871-72 (Carey) ; and Tr. 4769-4770 (Segismundo) . Many other witnesses and documents established the same principle: Brooks was an organizer and manager. In addition, the enhancement applies because there were five or more knowing participants. U.S.S.G. 3B1.1{a). Indeed, Schlegel, Brooks, Hatfield and Lennex were all convicted . Ronda Graves testified about her knowing commission of fraud. See Tr. 3189-3190. Other witnesses, such as Joseph Giaquinto (Tr. 4508-11, 4525-26, 4528-32, 4640), Jay Chin (Tr. 1556-1557), Carl Conte (Tr. 946-949) and others, described fraudulent acts that they committed at Brooks's direction. Moreover, as discussed above, Nadelman was a participant in the fraud as he falsely testified before the SEC and Jeffrey Brooks was involved in Brooks's attempted insurance fraud as set forth below. For all of these reasons, the objection should be denied. Even if the Court found that there were not five or more knowing participants, the enhancement applies because the fraudulent schemes were "otherwise extensive." U.S.S.G. 3B1.1 (a) . "In assessing whether an organization is \ otherwise extensive,' all persons involved during the course of the entire offense are to be considered. Thus, a fraud that involved only three participants but used the unknowing services of many outsiders could be considered extensive." Id. Application Note 3. Here, not only did Brooks use the knowing participants discussed above, he also used numerous unknowing participants such as lawyers, auditors and employees in furtherance of his fraudulent schemes. In addition, the fraudulent schemes went on for years. Indeed, Brooks's unauthorized compensation started in the 1990s and continued after he left the company. Brooks does not object to the Probation Department's recitation of the proof at trial with respect to the R&D scheme. He instead claims that the "district court's finding that the government failed to prove the charged overall R&D scheme is Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 25 of 30 PageID #: 16460 25 inconsistent with and contradicts the PSR's role enhancement based on the conclusion that Brooks was an organizer of the charged schemes." Brooks Letter at 9. Brooks conflates the Court's decision with his role in the R&D scheme. As proven at trial, Brooks was the leader of the R&D scheme as Dawn Schlegel needed and obtained his approval every time expenses were reclassified from research and development to cost of goods sold. The Court's decision to strike paragraph 22 of S-2 had nothing to do with Brooks's role in the scheme, but instead was predicated on the Court's finding that the R&D scheme alleged in S-2 was larger in scope--with $22 million in reclassifications occurring from 2003 through the first three quarters of 2005-- than actually proven at trial. See Hatfield, 724 F. Supp. 2d at 327 a reasonable jury could find Mr. Brooks guilty of insider trading based on DHB's failure to disclose two incidents where DHB reclassified the costs of goods sold as R&D to achieve a desired profit margin (supporting Superseding Indictment 19-21), the Government1s opposition papers do not support finding him guilty of the larger fraudulent reclassification scheme that the Superseding Indictment alleges (Superseding Indictment 22)") i see also United States v. Hatfield, 06-550 (JS), 2010 WL 2816326, at *2 (E . D.N.Y. Jul. 16, 2010). Significantly, the Court did find that Government's proof does establish a securities fraud, at least for Rule 29(a) purposes." Id. at 6-7 n.2. Finally, Brooks's argument that the R&D scheme is time-barred is improper and meritless for the reasons discussed above and in the government's opposition to Brooks's motion to dismiss filed on October 26, 2012. 35-36. Brooks contends that he was not a leader or organizer of the PACA overvaluation scheme. Brooks Letter at 9. The PSR does not state that he was. Neither the government, nor the Probation Department argue that Brooks organized the PACA fraud. Rather, the evidence adduced at trial demonstrated that Hatfield initiated the scheme. That being said, the evidence also demonstrated that once Travis Brooks complained about the inventory overvaluation, David Brooks stepped in. Brooks threatened Travis Brooks and ensured that the auditors would not uncover that DHB had been overstating the value of inventory . Regardless, Brooks does not need to be a leader or organizer in every single one of the fraudulent schemes to warrant an aggravating role enhancement. It is sufficient that he led the unauthorized and undisclosed executive compensation scheme, the Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 26 of 30 PageID #: 16461 26 two TAP schemes, the non-existent inventory scheme and the R&D scheme. The evidence adduced at trial plainly established that he led those schemes. Brooks argues that Patricia Lennex's probationary sentence necessarily means that Brooks's role has been overstated. Brooks Letter at 10. This argument is based upon multiple faulty assumptions. First, Brooks contends that Lennex was a major figure in the PACA fraud who received a low sentence for her participation in that same fraud. Id. Lennex pleaded guilty to a superseding information charging filing a fraudulent and false 2005 tax return, not anything to do with PACA or the numerous frauds for which the jury convicted Brooks. See Docket entry no. 1486. Second, the government has never claimed an aggravating role for Lennex in the PACA accounting fraud, just that she was involved with Brooks and Hatfield. See S-2 ~ ~ 23- 24. Third, even if Lennex did have an enhanced role, which she did not, it would not absolve Brooks of his own enhanced role. 37-40. Brooks is correct that the Court held that "Brooks [was] acquitted of the insider trading charges to the extent that those charges are predicated on DHB's allegedly overstated inventory." Docket entry no. 1199. His remaining arguments are repetitive and without merit as discussed above 44. Brooks lodges a number of obj ections to the description of TAP in this PSR paragraph. Brooks Letter at 10. First, Brooks argues that Terry Brooks did not "set up" TAP. He is correct. The government suggests that the PSR be amended to have "Jeffrey Brooks, David Brooks's brother," replace "Terry Brooks." Brooks other factual objections to this paragraph should be denied. Brooks argues that there .was evidence supporting the argument that Terry Brooks was an active manager of TAP . He is wrong. There was no evidence at trial that Terry Brooks ever had any actual involvement with TAP i instead, in addition to Schlegel's testimony, the overwhelming evidence established that David Brooks controlled TAP. See, e.g., Tr. 5510, 5515-23, 5589 , 5955 , 5985 , 5770 , 5901, 6740 - 41, 814 0 i GX 5135 , 6025 , 6042-45, 6063 and 6184-91. Indeed, Geraldine Bongarzone, an employee of TAP, testified that she reported to Schlegel and David Brooks and "never dealt with Terry Brooks [when it came to TAP matters]." Tr. 1264-65, 1273-74. Similarly, Michael Duffy, TAP's controller, testified that he was interviewed by Schlegel, Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 27 of 30 PageID #: 16462 27 he provided reports of TAP's inventory to David Brooks, and he reported to Schlegel and David Brooks . Tr. 1311-13, 1319, 1322- 27 and 1331-34 . Further, James Compton, TAP's plant manager, testified that he never met or spoke to Terry Brooks, but he did talk to David Brooks about TAP. Tr. 1418, 1431, 1459. Elinore Kaye, TAP's bookkeeper, testified that she was hired by Schlegel, she was initially paid by DHB, and she had no interaction with Terry Brooks regarding TAP. Tr. 1508-13, 1599- 1600. Carl Conte also testified that he never dealt with Terry Brooks regarding TAP. Tr. 949. In addition, Travis Brooks explained that Hatfield told him not to "concern [him]self with the TAP transactions at Point Blank and TAP. Don't ask any questions regarding the TAP. That's David's deal. Don't go any further. " Tr. 2568. Moreover, Richard Carey, a TAP employee, testified that he reported to David Brooks, he provided lists of TAP's inventory and cash balances to David Brooks, he prepared TAP's tax return and gave those returns to David, not Terry, Brooks, and he never talked to Terry Brooks regarding TAP. Tr . 11843-45, 11847-53, 11871-72; GX 6044-45. Finally, Brooks's own witness Moshe Yair testified he worked for TAP for approximately six years and he . never spoke to Terry Brooks regarding TAP, nor did he ever see her at TAP. Tr. 16880-81. In denying Brooks's Rule 29 motion, the Court stated that The record contains more than enough evidence for the jury to infer that Mr. Brooks knowingly facilitated DHB's nondisclosure concerning TAP. Among other things, the Government evidences that: (1) in 2002, Mr. Brooks, Ms. Hatfield and Ms. Schlegel discussed whether to include TAP on a list of DHB's top vendors; (2) Mr. Brooks engineered a $4 million \ sham' transaction with his wife, Terry Brooks, to prevent DHB's auditors from asking questions about TAP; (3) Mr. Brooks conspired with Ms. Hatfield and Ms. Schlegel to submit a list ofDHB's top vendors for an audit that omi t ted TAP; (4) to respond to a likely SEC inquiry, DHB, wi th Mr. Brooks' input, prepared binders concerning its TAP relationship that contained significant misrepresentations and omissions, including: (i) not disclosing that DHB paid some TAP Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 28 of 30 PageID #: 16463 employees' salaries; and (ii) forged backdated promissory notes attributed to TAP; and (iii) omitting TAP insurance policies that DHB paid for. Tr. 5515, 5770, 5889, 5904, 5905-06, 5921-22, 5954-5955, 10394-99, 12520. Hatfield, 724 F. Supp. 2d at 326. 28 Misleadingly, Brooks cites to an interview of Patricia Lennex, not to an exhibit at trial or any admissible testimony. Brooks Letter at 10. After the cited interview, the government indicted Lennex, who has never testified. Despite Brooks's bare argument, no evidence supports the obj ection, which should be denied. Brooks next argues that a series of mitigating facts should be added to the paragraph. To the extent that Brooks argues that Terry Brooks's ownership conveyed benefits upon TAP, such benefits were conveyed by fraud. TAP was not actually a "woman owned business" or a "small business." After all, PACA employees provided much of the TAP labor. Therefore, Brooks has actually identified aggravating sentencing factors. As to the "Mentoring Business Agreement," Brooks at tempts to revive a failed argument that TAP's existence and ownership were adequately disclosed. Tr. 20217-20218. The argument was rejected by the jury and, because Brooks has failed to identify an error in the PSR, this aspect of the obj ection should be denied . 45, 46 and 49. Brooks next provides a series of objections that seek to add legal arguments and mitigating facts to the PSR's discussion of TAP. Brooks Letter at 11. First, Brooks argues that the TAP schemes were either uncharged or time- barred. As discussed above, and repeatedly stated by the Court, both TAP schemes were set forth in the indictment. Moreover, the time-bar argument is the subject of a separate motion before the Court. Brooks next argues that the restitution losses must be limited by the failure to plead the failure to disclose TAP as a related party. Brooks Letter at 11. Because the Court has already repeatedly ruled that both TAP schemes were properly pleaded, this aspect of the objection to paragraph 45 should be denied. Tr. 19454-19455. Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 29 of 30 PageID #: 16464 29 Brooks also argues that the PSR should be amended to include the opinions of his expert witness, Gary Karlitz. Brooks Letter at 11. According to Brooks's argument to the jury, this testimony was adequate to warrant his acquittal on the TAP schemes. Tr. 19770. The jury rejected Karlitz's testimony. This aspect of the objection should also be denied. As to PSR ~ 46, Brooks argues that the PSR should be amended "to mention that TAP paid rent to PACA for the use of PACA's space." Brooks Letter at 11. There are multiple problems with this argument. First, testimony at trial established that the lease was fraudulently back-dated to give the impression of legitimate, arms-length relationships between PACA and TAP. Tr. 5917-5918. This testimony was later corroborated by a defense witness, who actually owned the property and never heard of any lease between PACA and TAP. See Tr. 16539. Also, mere citation to a factual argument that was rejected by the jury does not merit a change to the PSR. As to PSR ~ 49, Brooks argues that the PSR should be amended to make it clear that the Court cannot consider the "innocent conduct" of paying his own expenses. Brooks Letter at 11. In context, this argument makes little sense. First of all, all of those expenditures show Brooks's control of TAP--a fact that he still denies - -and are appropriately considered by the Court. Moreover, those personal expenses provide the corrupt motivation for Brooks's commission of this scheme. If the relationship between DHB and TAP were scrutinized, then Brooks would have to consider lowering his personal profits to better serve the shareholders of DHB. Instead, Brooks, from his perch controlling both TAP and DHB, was able set prices at whatever level he wanted and spent the TAP profits on himself and his family with abandon. The Court, just like the jury, can and should consider these expenditures. The objection should be denied. 64. Paragraph 64 should be revised to reflect that Brooks failed to report a total of in excess of $1.7 million on his IRS Form 1040 for the calendar year 2004. See S-2 ~ 119. 64-68 and 94. Brooks maintains that the Probation Department should be ordered to prepare a PSR for Dawn Schlegel prior to submitting its PSR. Brooks Letter at 13, 28. In addition, Brooks claims that Schlegel's role should be extensively discussed in the PSR. Brooks cites neither case Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 30 of 30 PageID #: 16465 30 law, nor any Rule in support of this argument, which runs counter to the district's custom in cases involving cooperators. The objection should be denied as baseless. Determination of Guideline Loss 69. Brooks argues that the PSR grouped his offenses arbitrarily "for the purposes of convenience." Brooks Letter at 13-14. In making this objection, Brooks misreads the PSR. Rather than grouping the offenses arbitrarily and conveniently, the PSR is listing the grouping in this paragraph for the "convenience" of the reader. In other words, the listing of the groups was made for convenience, not the actual grouping. This reading of the paragraph is further corroborated by the fact that the grouping was actually done correctly. Indeed, Brooks does not even suggest an alternative grouping of his offenses. The objection should be denied. 70. As discussed in ~ ~ 32-34 above and ~ 81 (c) below, Brooks's role in the schemes to reclassify Point Blank's cost of goods sold to R&D, overvalue Point Blank inventory at PACA, overvalue Intercept vest inventory, and plug inventory with 62,975 non-existent outershells was not "minimal or non- existent" and, contrary to the defendant's claim, the Court never made such a finding. Brooks's remaining arguments are repetitive and without merit. 71-75. Event study methodology is a helpful tool to assist the Court in determining investor loss particularly because the Guidelines provide that the "estimate of loss shall be based on available information, taking into account, as appropriate and practicable under the circumstances, factors such as . [t]he reduction that resulted from the offense in the value of equity securities or other corporate assets." U.S.S.G. 2Bl.l, app. note 3 (C) (iv) (Nov. I, 2005). As correctly noted in the PSR, investors in DHB's common stock suffered heavy losses conservatively estimated to be approximately $110 million by NERA Economic Consulting based upon institutional holdings data from SEC filings. See NERA report of June 22, 2012 (the "NERA Report") . Moreover, NERA recently refined its estimate of aggregate investor losses using the proof of claim data described below that was received by claims administrator Gilardi & Co. ("Gilardi") in this case. NERA's base case estimate of aggregate investor losses using this data is $109 . 2 Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 1 of 30 PageID #: 16466 31 million to $111.9 million. See Rebuttal Report of Jordan G. Milev, Ph.D dated May 20, 2013 ("NERA Rebuttal Report") ~ ~ 6-7, submitted herewith. NERA's $110 million loss figure is conservative for a number of reasons, but particularly because it does not include the price decline resulting from a January 11, 2005 Newsday article about the defendants' insider sales, which the defendant's trial expert found to be statistically significant. Including the market-adjusted decline on the date of the Newsday article as part of investor losses would add approximately $41 million to the Guidelines loss amount. NERA Rebuttal Report ~ ~ 16-17. Brooks's event study, authored by John F. Gould of Cornerstone Research and dated February 22, 2013 (the "Gould Report"), should be rejected by the Court as a matter of law for a number of reasons, but primarily because it is wholly divorced from the loss provisions of the U.S. Sentencing Guidelines that require the Court to reasonably estimate "the reasonably foreseeable pecuniary harm that resulted from the offense." See U.S.S . G. 2B1.1 app. notes 3 (A) (i), 3 (C) (Nov. 1, 2005) i i. "Pecuniary harm" is "harm that is monetary or that otherwise is readily measurable in money." Id. app. note 3(A)(iii). "Reasonably Foreseeable Pecuniary Harm" is "pecuniary harm that the defendant knew or, under the circumstances, reasonably should have known, was a potential result of ' the offense." Id. app. note 3 (A) (iv) . The Gould Report fails to apply these definitions in reaching its erroneous conclusion that DHB investors only lost $10 million in this case. The Gould Report asserts that a number of the statistically significant events that NERA found resulted from the fraud committed by Brooks and his co-conspirators are not "fraud related" because they are only associated with the "effects of fraud." For example, the Gould Report astoundingly concludes that the resignations of Director of Finance Lawrence Litowitz on May 4, 2006 and Director and Audit Committee Chairman Jerome Krantz on May 11, 2006, were not fraud-related even though Mr. Litowitz testified that he left in part because he "believe [d] there may have been illegal banking acts [at DHB] which I just wouldn't tolerate being involved with, and it was just an untenable situation," and Mr. Krantz testified that he resigned because he "did not trust the management of [DHB] any longer." Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 2 of 30 PageID #: 16467 32 NERA Report ~ 25 n.46i ~ 26. Similarly, the Gould Report claims that DHB's revelation on April 18, 2006 that its revolving line of credit lender, Lasalle Business , Credit, LLC, issued a notice of default was not a disclosure of fraud, but was associated with "the effects" of a fraud. Gould Report ~ 34. The Gould Report misses the point- - it is precisely the pecuniary effects of the fraud that the Court is entitled to consider in assessing evidence of loss. U.S.S.G. 2B1.1 app. note 3(A) (i) (Court must determine "reasonably foreseeable pecuniary harm that resulted from the offense") . Similarly absurd is the Gould Report's claim that the March 16, 2005 investor conference call had "nothing to do with fraud." Gould Report ~ 26. As the Court may recall, at trial the government proved that when confronted by analysts and investors on that call, both David Brooks and Sandra Hatfield attempted to cover up the ongoing inventory fraud at the company and lied about the reason they could not talk about their illegal insider stock sales that they had profited from just a few months earlier. Specifically, when asked by an analyst about high inventory levels and the potential of a write-down, Sandra Hatfield, rather than reveal she had conspired with Brooks to inflate the value of inventory to boost profit margin, deliberately diverted the discussion by pointing out that inventory values had not increased much if calculated as a percentage of year-over-year annual revenue. Gould Report ~ 26 n. 20. ). In reviewing the March 16, 2005 conference call, the Gould Report fails to acknowledge that the defendants lied to analysts about the reason for rising inventory levels. The company was not stock-piling raw ballistic materials as the defendants led analysts to believe. Ballistic materials were so scarce that upon their delivery to Point Blank, they were inserted into the Interceptor vests and shipped out immediately and never remained in inventory very long. Tr. 3308. Likewise, rather than admit that he and Hatfield had illegally traded on inside information when they unloaded over $180 million in DHB shares in November and December 2004, Brooks refused to explain why he had sold roughly one-third of his DHB holdings and would not comment on whether he thought DHB stock was still a "great buy" in the face of that massive insider Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 3 of 30 PageID #: 16468 sell-off or provide forward-looking guidance. Report ~ ~ 21-26. 33 See NERA Rebuttal Each of the foregoing events is a reasonably foreseeable result of Brooks's and his co-conspirators' criminal conduct. The Court can and should consider the statistically significant stock price declines resulting from these events in estimating Guidelines loss and restitution to investors in this case. The Gould Report also fallaciously claims that an additional event should be included in the loss analysis- -the day the company placed Brooks on administrative leave- -because it was "fraud-related." Gould Report ~ 54. This assertion stands logic and the loss provisions of the Sentencing Guidelines on their head. The company placed Brooks on administrative leave as a remedial measure to address the fraudi the positive stock price movement associated with this event is therefore the result of the company's remedial measure, not Brooks's criminal conduct. See U.S.S.G. 2Bl.l app. note 3 (A) (i) (Nov. I, 2005) (defining "Actual Loss" as "reasonably foreseeable pecuniary harm that resulted from the offense") i see also id. app. note 3(A)(ii)(defining "Intended Loss" as "pecuniary harm that was intended to result from the offense") . The Gould Report also criticizes NERA for using the multi- day event window of May 24 and May 25, 2006 to measure the stock price reaction to DHB's May 23, 2006 announcement that it was not in compliance with the American Stock Exchange's listing standards. Gould Report ~ 42. As discussed in the NERA Rebuttal Report, NERA correctly used an objective, unbiased, ex- ante specified methodology to evaluate price response subsequent to each disclosure. NERA Rebuttal Report ~ ~ 49-51. If significant abnormal daily returns continue past the first day, and no new information has been released, as occurred after DHB's May 23, 2006 announcement, it is appropriate to look at the stock price movements beyond just the first day following the announcement because statistical evidence shows that the market is continuing to process the information from the original disclosure. See id .. The Gould Report agrees that the SEC Wells Notice that DHB received on May 25, 2005 was caused by fraud, but claims that the resulting loss is only reflected in the 800 shares that were traded on the morning of May 26, before trading was halted until Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 4 of 30 PageID #: 16469 34 July 6, 2006. As discussed as length in the NERA Rebuttal Report, it is appropriate to include the price response through the stock halt as investor losses because the market price was not able to fully reflect the market reaction until after trading resumed following the halt. NERA Rebuttal Report ~ ~ 52- 61. The Gould Report attempts to impugn NERA's multi-sector multi-trader model ("multi-trader model") which is the current state of the art used to estimate aggregate investor loss in fraud on the market cases. NERA Rebuttal Report 66-72. Notably, Mr. Gould fails to inform the Court that his firm also employs a multi-trader model for corporate defendants in class action cases. See id. ~ 67 n.80 . Moreover, the loss calculated using NERA's multi-trader model is consistent with the actual proof of claim data that has been obtained by Gilardi & Co. in this case. Id. ~ ~ 75-78. Finally, contrary to the Gould Report's suggestion, NERA's multi-trader model has not been excluded on Daubert grounds. 5 See id. ~ 81. 76. As discussed below in ~ 81, the PSR's calculation of the company's loss of approximately $97 million resulting from the offenses of conviction is correct. 77-78. Brooks maintains that insider trading Guideline 2B1.4 is not the correct provision for calculating his total offense level for insider trading Counts 6 through 11 because 2B1.4 only applies to Title 15 violations, not Title 18 violations such as 18 U.S.C. 1348. Brooks Letter at 16-17. Brooks is incorrect. According to the U. S . Sentencing Commission, "[c] ertain other [non-Title 15] offenses, e. g., 7 u. S. C. 13 (e), that involve misuse of inside information for personal gain also appropriately may be covered by this guideline. " See U. S. S. G. 2B1. 4, App. Note 2. Moreover, the Court is authorized under the cross-reference provision of 2B1.1 (c) (3) to apply insider trading guideline 2B1.4 in this case because Brooks's conduct, as set forth in the allegations underlying Counts 6 through 11, establishes the elements of insider trading . 5 In any event, as this Court has correctly observed, Daubert does not apply in sentencing hearings . Hatfield, 795 F. Supp.2d at 229. Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 5 of 30 PageID #: 16470 35 The cross-reference provision of 2Bl.l(c) (3) applies when "the conduct set forth in the count of conviction establishes an offense specifically covered by another guideline in Chapter Two (Offense Conduct)." U.S.S.G. 2B1.1(c) (3) (2002) (emphasis added) ; United States v. Genao, 343 F.3d 578, 583 (2d Cir. 2003). The Second Circuit has interpreted this language to mean that 2Bl.l (c) (3) is applicable "only if the conduct alleged in the count of the indictment of which the defendant is convicted establishes the elements of another offense." See id . That is -- -- the case here. Brooks does not deny that the conduct underlying Counts 6 through 11 described in S-2 establishes the elements of insider trading. Since insider trading is "specifically covered by" 2Bl.4, the Probation Department correctly applied 2Bl . 4. See also U.S.S.G. 2Bl.4, App. Note. Contrary to Brooks's suggestion, he is not being impermissibly punished "twice for the same money, i.e., the loss to the investors and the gain to Brooks" because under Guideline 3Dl.2(d) the insider trading counts are grouped with the securities fraud, securities fraud conspiracy, mail fraud, wire fraud and mail and wire fraud conspiracy counts to arrive at a combined adjusted offense level which in this case is not increased by any additional units under 3Dl.4. See PSR ~ ~ 133-146. In any event, gain and loss are not "the same money" as Brooks claims. According to the U.S. Sentencing Commission, "[i]nsider trading is treated essentially as a sophisticated fraud" which measures a defendant's gain, "i.e., the total increase in value realized through trading in securities by the defendant and persons acting in concert with the defendant or to whom the defendant provided inside information, is employed instead of the victims' losses. U.S.S.G. 2Bl.4 (App. Note 2 - Background) . This Court also has recognized that insider trading gain is distinct from investor loss because gain is a function of the impact on stock price at the time the defendant traded. See Hatfield, 795 F. Supp. 2d at 236 n.12 . Brooks's argument that the forfeiture of insider proceeds overstates his true gain should be rej ected reasons discussed in paragraphs 7-12 and 21 above. 79-80. Gilardi was retained by the government to investor-victims to present their claims for restitution calculate the individual and aggregate amounts of those based on a methodology provided by NERA. Gilardi trading for the assist and to claims is the Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 6 of 30 PageID #: 16471 36 appointed claims administrator in the DHB Industries Inc. Securities Litigation, No. 2:05-cv-04296-JS-ETB ("DHB Securities Litigation") . Gilardi previously received and analyzed Proof of Claim data in the DHB Securities Litigation that are relevant to the issue of restitution in this case. The claims administration procedures and analysis that Gilardi employed to determine investor restitution in this case are summarized below and set forth in greater detail in Gilardi's letter to the Probation Department, dated May 8, 2013, submitted herewith. As part of the restitution claims process, Gilardi developed a plan to send an instructional cover letter and Proof of Claim form to every class member that had been identified in the DHB Securities Litigation. Additionally, a cover letter and Proof of Claim was sent to a list of securities brokers and other financial institutions maintained by Gilardi, seeking their assistance in identifying additional possible victims among their customers. The cover letter and Proof of Claim form were ultimately mailed to 136,445 persons and entities who were either previously identified as class members or were newly identified as possible victims in a recent solicitation of name and address information from various financial institutions. NERA established a relevant period during which the defendants' illegal actions artificially inflated the market price of DHB common stock, thereby potentially harming investors who purchased shares during an inflated period. That period, May 1, 2003 through August 18, 2006, substantially corresponds to the Class Period in the DHB Securities Litigation. Because the periods are not identical, however, potential victims were urged to file a claim in the restitution proceeding even if they had previously filed a class action claim. The restitution Proof of Claim asked investors to list the shares which they held immediately prior to the period of artificial inflation, those which they purchased and sold during that period and those which they held at the end of the period. Where an investor submitted a claim for restitution, those listed transactions were used by Gilardi to calculate the dollar amount of the harm caused to each victim and to all of the victims in aggregate. Additionally, if a class member submitted a claim in the DHB Securities Litigation but did not submit a claim for restitution, that investor's previously submitted list of transactions was used to calculate a restitution amount for the investor. A total of 9,637 new restitution Proofs of Claim were submitted to Gilardi and an additional 11,893 claims were Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 7 of 30 PageID #: 16472 processed using administration. 7 data collected during 37 the class action NERA supplied Gilardi with a table of artificial inflation amounts for the c o m ~ o n shares of DHB for each trading day during the relevant period. The inflation table is attached to Gilardi's letter as Exhibit B and is part of NERA's June 22, 2012 report previously supplied to Probation. That table and the transactions for each investor were entered into Gilardi's proprietary software, which then calculated a restitution amount for each share. As a result of these calculations, Gilardi determined that 6,360 claims were candidates for restitution, meaning that the investor suffered a financial loss directly attributable to purchasing the common shares of DHB while those shares were artificially inflated. A list of the 6,360 claims with a calculated aggregate restitution amount, together with the calculated amount for each claim is attached to Gilardi's letter as Exhibit C. The total aggregated restitution amount Gilardi calculated is $45,199,790.90. The average amount of the valid individual victim claims is $7,106.89, while the median is $1,000.00. 81(a). For the reasons discussed above in ~ 22, the Court should reject Brooks's argument that there should be no forfei ture or restitution for amounts he looted before July 9, 2004 or July 30, 2002. Brooks also argues that the government should forfeit any financial claim based upon looting because "it opposed so far successfully, the company's attempt to recover from the government the personal property constituting the bulk of the allegedly looted assets." Brooks Letter at 18. This argument is frivolous. Restitution to Point Blank is mandatory under the Mandatory Victim Restitution Act ("MVRA"). See 18 U.S.C. 3663, 3663A(a) (1) - (c) (1). There is no provision in the statute or authority in the case law enabling the government to waive or forfeit the victim's right to this mandatory restitution, and Brooks cites no such authority. While the government objected to the imposition of a constructive trust in the forfeiture proceedings because such a trust would create two classes of victims and operate to the 7 It is the government's position that investors who have submitted affidavits of loss directly to the Probation Department should still be considered by the Court in calculating restitution, even if they did not to submit a Proof of Claim Form to Gilardi. Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 8 of 30 PageID #: 16473 38 detriment of victims other recognizes Point Blank as a fully compensated for its restitution. than Point Blank, the government victim and believes it should be losses as part of court-ordered (b) TAP's $21.5 million in profits was reasonably foreseeable pecuniary harm to Point Blank Solutions, Inc. resulting from Brooks's offenses. "Actual loss is defined by the Sentencing Guidelines as 'the reasonably foreseeable pecuniary harm that resulted from the offense.'" United States v. Cummings, 189 F.Supp.2d 67, 76 (S.D.N.Y. 2002) (quoting U.S.S.G. 2B1.1, cmt. n. 2(A) (ii)). Reasonably foreseeable pecuniary harm means harm "that the defendant knew or, under the circumstances, reasonably should have known, was a potential result of the offense." U.S.S . G. 2B1.1 cmt. n.3 (A) (iv). Although the government bears the burden of proving by a preponderance of the evidence the amount of loss sustained by victims, "'the loss need not be determined with precision and the court need only make reasonable estimate of the loss given the available information.'" United States v. Gushlak, No. 03-CR-833 (NGG) , 2011 WL 782295 (E.D.N.Y. Feb. 24, 2011) (quoting United States v. Germosen, 139 F.3d 120, 129, 130 (2d Cir.1998)). In this case, the Court should find that it was reasonably foreseeable to Brooks that the pecuniary harm caused to Point Blank from his undisclosed manipulation of TAP's prices for goods and services was the $21.5 million in profits that TAP earned at Point Blank's expense. This loss amount is directly attributable to Brooks's manipulation of TAP's prices that resulted in profit margins as high as 54.3%. See Hatfield, 724 F. Supp. 2d at 325. The $21.5 million should therefore be included in the Court's 2B1.1 loss calculation and ordered as restitution. Under the U.S. Sentencing Guidelines definition of loss, it is irrelevant, as ineligible for some business designation, Brooks argues, that contracts if not for a fact that was never DHB may have been TAP's alleged small proven at trial. 8 It 8 On the contrary, the proof at trial established that the U.S. military was in dire need of armor plates and were buying them from any company that was selling them, irrespective of how large that company was. See Tr. 3677. Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 9 of 30 PageID #: 16474 39 is also irrelevant that the DHB/TAP relationship may have been disclosed in its contract work for the government. As the Court previously found, the record in this case contains "more than enough evidence for the jury to infer that Mr . Brooks knowingly facilitated DHB's nondisclosures regarding TAP." Hatfield, 724 F. Supp. 2d at 325-26. This evidence included the following: (1) in 2002, Mr. Brooks, Ms. Hatfield and Ms. Schlegel discussed whether to include TAP on a list of DHB' s top vendors; (2) Mr. Brooks engineered a $4 million "sham" transaction with his wife, Terry Brooks, to prevent DHB's auditors from asking questions about TAP; (3) Mr. Brooks conspired with Ms. Hatfield and Ms. Schlegel to submit a list of DHB's top vendors for an audit that omi t ted TAP; (4) to respond to a likely SEC inquiry, DHB, with Mr. Brooks's input, prepared binders concerning its TAP relationship that contained significant misrepresentations and omissions, including: (i) not disclosing that DHB paid some TAP employees' salaries; and (ii) forged and backdated promissory notes attributed to TAP; and (iii) omitting TAP insurance policies that DHB paid for. Id. at 326 (citing Tr. 5515, 5770, 5889, 5904, 5905- 06, 5921-22, 5954-5955, 10394-99, 12520). Brooks claims that restitution for losses after 2003 are time-barred because the TAP scheme was completed in 2003, more than five years before the return of S-2. Brooks Letter at 19. However, the TAP scheme was not completed in 2003 because, as the Court found, Brooks's failed to fully disclose to shareholders his control of TAP in the 2003 Amended 10- K. Specifically, the Court found that the government presented evidence that the 2003 Amended 10-K did not disclose to shareholders "among other things: (1) that Mr. Brooks, and not his wife, controlled TAP, including setting TAP's prices; (2) that DHB paid TAP employees' salaries and bonuses; (3) that Ms. Schlegel, DHB' s CFO, oversaw TAP's finances; and (4) that TAP earned significantly higher gross profit margins than DHB itself, including margins as high as 54.3%." Hatfield, 724 F . Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 10 of 30 PageID #: 16475 40 Supp. 2d at 324-25 (citing Tr. 5484, 5486-88, 5578-79, 5599, 5650-52, 5907, 5955j GX 6198) Brooks's statute of limitations argument also must fail because, as discussed in ~ 22 above, the return of S-l on October 24, 2007, tolled the statute of limitations with respect to his involvement in the TAP scheme. Moreover, as discussed in ~ 22 above, Brooks's complaint that he should not be required to forfeit the proceeds of his unauthorized compensation scheme that were acquired before July 2004 is meritless. (c) As proven at trial, Brooks and the other defendants conspired to misstate the company's financial statements. The intentional misstatements in the company's financials included misrepresenting Brooks's compensation, Brooks's control of TAP in its related-party transactions, inflating the company's inventory and fraudulently reclassifying costs of goods sold to research and development costs. As the Court found, "Mr. Brooks was convicted of conspiring with Ms. Hatfield to commit securities fraud, including by conspiring with her to inflate DHB's gross profits margins./I Hatfield, 795 F. Supp. 2d at 227. Because of Brooks's and his co-conspirators' conduct, the company's previously issued financial statements could not be relied upon and, in order to remedy the harm caused by the defendants, Point Blank incurred approximately $16.9 million in remediation costs. Declaration of T. Scott Avila dated April 12, 2013 ("Avila Decl./I)9 ~ 3j Point Blank's Affidavit of Loss, Venable Letter at 4-5j DHB Industries, Inc. 10-K filed 10/1/2007 ("DHB Restatement/l) at 42-43 (restating company's financials and detailing the company's remediation efforts). All of these remediation costs were expended as a direct result of Brooks's and his coconspirators' conduct and were a reasonably foreseeable consequence of their actions. See DHB Restatement, at 41-44 (stating that the errors and misstatements in previously issued financials were primarily the result of the defendants' conduct and that the company was actively implementing remediation measures). The $16.9 million in remediation costs should therefore be included in the Court's 2B1.1 loss calculation and ordered as restitution. The Avila Declaration was recently submitted to the Probation Department by the company's attorneys, Venable LLP, in further support of the company's Affidavit of Loss. A copy of the Avila Declaration is also submitted herewith. Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 11 of 30 PageID #: 16476 41 Brooks argues that it would be unlawful and unfair to "saddle" him with these costs when "he played such a small part or no part at all" in the underlying fraudulent misstatements in the company's financial statements. Brooks Letter at 19. Brooks grossly mischaracterizes his role in the securities fraud conspiracy. As discussed above in ~ ~ 32-34, Brooks played a substantial role in the unauthorized and undisclosed executive compensation scheme, the TAP schemes, the R&D scheme, the inflated Interceptor vest inventory scheme and the scheme to plug Point Blank's inventory with 62,975 non-existent outershells. And in addition to his conviction for securities fraud and conspiracy to commit securities fraud, Brooks was convicted of lying to the company's independent auditors about the 62,975 outershell inventory plug. In any event, even assuming Brooks's role in the securities fraud conspiracy was minimal, which it was not, he is jointly and severally liable for all losses that were a reasonably foreseeable consequence of the conspiracy. United States v. Nucci, 364 F.3d 419, 422 (2d Cir. 2004); see also United States v. Boyd, 222 F.3d 47, 50-51 (2d Cir.2000) (stating that restitution is payable "by all convicted co-conspirators in respect of damage suffered by all victims of a conspiracy, regardless of the facts underlying counts of conviction in individual prosecutions") Brooks also argues that "many of those remediation costs were due to unavoidable and necessary company expenses, e. g. , outside consultants hired to provide interim management services and to comply with Sarbanes-Oxley requirements, and not to Brooks's conduct." Brooks Letter at 19. It appears that Brooks is arguing that the company's internal controls were weak and any company expenses associated with hiring independent advisers and outside consultants would have been required regardless of Brooks's and his co-conspirator's actions. However, as the evidence presented at trial proved, Brooks and his co- conspirators were well aware of the company's weak internal controls, never disclosed them to the public, and then exploited them to their benefit. As this Court explained in the context of the R&D fraud: the trial evidence demonstrated that the Defendants: (1) knew that DHB possessed Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 12 of 30 PageID #: 16477 woefully inadequate internal controls to track R&D expenses; (2) in the absence of those controls, decided to account for R&D by reclassifying cost of goods expenses as R&D; (3) failed to publicly disclose either those inadequate internal controls, or their crude subs tit ute f or recording R&D; and (4 ) traded while possessing the material non- disclosed information . Indeed, it is inconceivable that DHB could have continued, in late-2004, to recklessly "account" for R&D if it had publicly announced, more than a year before, that: "The Company has barely any internal controls, much less a well- functioning accounting system. So, rather than disclose R&D expenses as are actually incurred, the Company instead reports whatever number its chief executives feel like, based on their subj ecti ve "guess" as to how much R&D the Company performed." Such a disclosure would, assuredly, have caused pressures that would, in turn, have forced DHB to adopt better business practices. Hatfield, 795 F.Supp. 2d at 228. 42 The company's expenditure of significant funds to engage independent advisers and consultants to remediate the defendants' exploitation of the company's weak internal controls was reasonably foreseeable pecuniary harm resulting from the defendants' criminal activities. These amounts should be included in the Court's 2B1.1 loss calculation and the company is entitled to recoup them. See United States v. Cummings, 189 F.Supp.2d 67 (S.D.N.Y. 2002) ("It was reasonably foreseeable that a restatement would be necessary when the underaccrual was eventually disclosed, and there were no intervening causes between [the defendant's] conduct and [the company's] need to file a restatement.") . (d) As discussed in the company's submission to the Probation Department (Avila Decl. ~ 3), the company is entitled to over $17,300,000 in advanced legal fees it paid to Brooks, Hatfield, Schlegel and other officers and directors in Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 13 of 30 PageID #: 16478 43 connection with this criminal matter and related investigations. This amount should be included in the Court/s 2Bl.l loss calculation and ordered as restitution. United States v. Skowron I 839 F. Supp. 2d 740 / 746 (S.D.N.Y. 2012) ("The substantial costs Morgan Stanley incurred in responding to the SEC investigation l launching its own internal investigation l and providing for the defense of Showron and other employees were a necessary I direct I and foreseeable result of Skowron l s offense of conviction. II) (e) Brooks contends that the company/s bankruptcy was not the direct result of his wrongdoing and thus he is not responsible for the bankruptcy costs of approximately $22 million. Brooks Letter at 20-21. As discussed above and in further detail in the company/s submission to the Probation Department (Avila Decl. ~ ~ 5-11) I it was reasonably foreseeable to Brooks and his co-conspirators that disclosure of the defendants I accounting frauds would wreak havoc on the company I creating a crisis in which the company was unable to timely file its 2005 10K with the SECI was forced to withdraw reliance on its 2003 and 2004 10Ks and its 2005 interim financial statements I was delisted from the American Stock Exchange and had its trading halted. The company I s inability to raise cash through the sale of its own securities on a major stock exchange combined with the cash drain of over $45 million in continuing restatement I remediation l and legal costs from 2006 through 2010 1 and the looting of $6.4 million and siphoning off of $21.5 million to TAP caused a liquidity crisis and a bankruptcy that was the reasonably foreseeable consequence of defendants I six years of criminal activities. See Avila Decl. ~ ~ 8-9. The approximate $22 million in bankruptcy administrative costs should therefore be included in the Court/s 2Bl.l loss calculation and ordered as restitution. (f) Point Blank may recover as part of court-ordered restitution approximately $11 million in costs incurred in responding to government subpoenas and otherwise participating in the investigations and proceedings stemming from Brooks/s fraud pursuant to the MVRAI 18 U.S.C. 3663A(b) (4) I which covers "necessary other expenses incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense. II United States v. Gupta I 2013 WL 662954 1 at *1 (S.D.N.Y. Feb. 25 1 2013) ("It is now settled in the Second Circuit that the Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 14 of 30 PageID #: 16479 \ necessary... other expenses' contemplated by include attorneys' fees.") (citing u.s. v. Amato, 159-60 (2d Cir. 2008)). 44 3 6 6 3 A (b) (4 ) may 540 F.3d 153, (g) It is appropriate to hold Brooks jointly and severally liable for the approximate $1.9 million in unpaid payroll taxes, interest, and penalties incurred by the company. Brooks caused the company not to pay any payroll taxes on certain compensation that he, Hatfield, and Schlegel received. As a result of that tax fraud conspiracy, charged in Count 18, the Company was required by the Internal Revenue Service to pay not only the company's portion of the unpaid payroll taxes (i.e., the employer's portion), but also the employee portion, along with penalties and interest that rightfully should have been paid by Brooks, Hatfield, and Schlegel. The Court should therefore order restitution to the company in the amount of $1.9 million. 82-83. The PSR's total loss calculation of $272,324,023 is correct and Brooks's objections to paragraphs 82-83 should be overruled. As discussed above, the investors' and company's losses are accurate. When added to the tax loss of $2,883,056 to which Brooks stipulated in his plea agreement and the $61,444,967 in insider trading gain adjudicated by the Court, the total loss in connection with Counts 1 through 11 and 17 through 20 is $272,324,023. 84, 102-04 and 108. Brooks objects to every single enhancement. Brooks Letter at 22. The first enhancement has to do with loss. Brooks maintains that the investor loss cannot be more than $10 million. Id. However, after years of trial and hearings, the Court has already set forth an insider trading investor loss number in connection with forfeiture, which is much higher than Brooks's suggested number. See April 23, 2012 Mem. & Order at 20 ($61,444,967). The Court's investor loss number does not include the company losses for any of the illegal schemes. Point Blank claims a loss of more than $90 million. Brooks only articulates one argument why the company loss number should be reduced: that his family collectively owned 50% of the DHB shares and that all loss numbers should therefore be reduced by that amount. Brooks Letter at 22. This argument makes no sense. Even assuming arguendo that the Court could treat his family as a monolithic unit that disregarded losses to the value of their stock, which it cannot, the company's 50% of the company's asserted losses would be more Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 15 of 30 PageID #: 16480 45 than $48 million. Thus, even if Brooks's obj ection were taken seriously, there would be more than $100 million in losses. Brooks next objects to the "sophisticated means" enhancement. Brooks Letter at 22. Application Note 8 to U.S.S.G. 2B1.1 defines sophisticated means as "especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense." Even "where 'each step in [a] scheme was not elaborate,' a scheme as a whole may be sophisticated where 'all the steps were linked together . [to] exploit different vulnerabilities in different systems in a coordinated way. "' United States v. Ojemen, No. 11-727-cr, 465 Fed. Appx. 69, 71-72 (March 21, 2012) (quoting United States v. Jackson, 346 F.3d 22, 25 (2d Cir. 2003)). In the instant case, Brooks orchestrated a dizzying array of fraudulent schemes, many of which individually involved sophisticated means. By way of example, Brooks submitted dozens of fraudulent documents to conceal or minimize the true nature of his relationship with TAP. These facts alone support application of the enhancement consistent with Application Note 8 to U.S.S.G. 2B1.1. Brooks did not stop there, however. Brooks also coordinated all of these frauds as the CEO of the company. It is clear that the facts support the application of this enhancement. Brooks also argues that the application of enhancements for more than 250 victims and being an officer or director of a publicly traded company is duplicative because the officer and director of a public company who commits fraud will by definition necessarily cause a loss to more than 250 victims. Brooks Letter at 22. Brooks's argument is without merit. In support of this argument, Brooks cites to no case or rule. Moreover, although application of both enhancements occurred in the instant case, a fact that Brooks does not dispute in paragraph 84, it does not necessarily follow that officers and directors of publicly traded companies who commit corporate fraud will necessarily cause loss to more than 250 shareholders. For example, companies that trade securities publicly on the OTC Markets Group Inc.'s OTC Bulletin Board quotation system are not required to have a minimum number of shareholders to be listed. See www.sec.gov/answers/pink.htm. Further, Brooks's argument is unsupported by law. As the Second Circuit explained, Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 16 of 30 PageID #: 16481 In January of 2003, created enhancements the Commission for the number of victims, so that a six-level increase is now required for frauds involv ing 250 or more victims. [See U. S.S.G.] 2B1.1(b) (2) [ ( S u p p ~ 2002)] . At the same time, the Commission added a new four-level enhancement if the offense involved a violation of the securities laws and the defendant was an officer or director of a publicly traded company . Id. 2B1.1 (b) (13) . 46 United States v. Kumar, 617 F.3d 612, 625 n. 10 (2d Cir.2010). Rather than seeing a conflict between these specific enhancements, the Second Circuit has held that "the Guidelines reflect Congress' judgment as to the appropriate national policy for such crimes." United States v. Ebbers, 458 F . 3d 110, 129 (2d Cir. 2006) (specifically discussing the interplay of these two enhancements) . With respect to Brooks's objection to the abuse of trust enhancement-- 3B1.3--the government believes that Probation correctly applied the abuse of trust enhancement to the insider trading counts, which are governed by 2B1. 4, because as set forth in the PSR, Brooks abused a position of special trust, i.e., as a corporate CEO he misused information to which he was privy based upon the position of special trust that he held with the company . See U. S. S. G. 2B1.4, App. Note 1 ("Section 3B1.3 (Abuse of position of Trust or Use of Special Skill) should be applied only if the defendant occupied and abused a position of special trust . ") . However, we do not believe that 3B1.3 applies to the counts governed by 2B1.1 because of application note 14 (C), which states "nonapplicability of 3B1.3 (abuse of position of trust or use of special skill)--if subsection (b) (18) [officer/director enhancement] applies, do not apply 3B1.3." Brooks also objects to an enhancement for endangering the solvency of a publicly traded company. Brooks Letter at 22 . The Guidelines give clear guidance to the Court. If DHB (later Point Blank): (1) became insolvent, (2) suffered a substantial reduction in the value of its assets , (3) filed for bankruptcy, (4) suffered a substantial reduction in the value of its stock, (5) substantially reduced its workforce , (6) substantially Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 17 of 30 PageID #: 16482 47 reduced its pension benefits or (7) was delisted from its exchange then the enhancement applies. See U. S . S . G. 2B1.1 (b) (15), Application Note 12 (B) (ii) (setting forth a non- exclusive list of factors to consider). As set forth in ~ 81(e) and the Avila declaration, the evidence establishes that factors 1, 3, 4, 5 and 7 all apply. Therefore, the enhancement is appropriate. Brooks may mean to argue that there is no causal connection between his crimes and DHB's ills. The government submits that evidence establishes the causal link as to all of these events . Moreover, it is clear that Brooks's crimes led directly to the delisting of DHB' s stock, Tr. 11122, which is an independent basis for the enhancement. 85. As discussed above, Guideline 2B1.4 is applicable to the insider trading offenses in this case and does not result in double-counting when grouping analysis is applied. 86, 95-98, 109, 119-21 and 124. Brooks objects to the eight-level obstruction of justice enhancement pursuant to 2J1.2 (b) (1) (B), which applies when "the offense involved causing or threatening to c ~ u s e physical injury to a person, or property damage, in order to obstruct the administration of justice." Brooks Letter at 23-24. To avoid this enhancement, Brooks unsuccessfully attempts to distance himself from the threatening and obstructive culture that he created. However, as noted by his own letter, Brooks actually did threaten people with violence. Brooks Letter at 23-24. In response, Brooks argues that these people were not actually intimidated by his violent outbursts and his threats were not actually carried out. Id. This argument makes little sense and is unsupported by the plain language of the applicable Guidelines . Per Guideline 2J1.2(b) (1) (B), even the attempt to intimidate or influence witnesses constitutes a violation. See U.S.S.G. 2J1.2 (b) (1) (B) (stating that the offense need only involve "threatening to cause physical injury to a person") i see also 3C1.1, Application Note 4(A). Brooks's threatening and bullying behavior clearly was intended to intimidate, no matter what its actual effect. Indeed, the record contains the testimony of Travis Brooks, who was the first to challenge the culture of fraud, greed and theft David Brooks had created. David Brooks's response to that challenge was to threaten, bully and eliminate Travis Brooks: Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 18 of 30 PageID #: 16483 A: I was in a conference call with Carol Dratell tell was sitting in front of the desk and Dawn Schlegel was on the phone. And David walked in to the of f ice with a gentleman behind himr not sure what that gentleman was. David was in shorts r T shirt r and asked me who was on the phone. I told him Dawn. And then he proceeded he had a water bottle in his hands r and flung itr and water went allover me and he proceeded into obscenities r calling me a fuckin' snake r what the hell r and just lashed out into obscenities. And Sandra and Carol are going through my belongings r all my grabbing my briefcase r the gentleman at the door r not sure who he was r but I was basically kind of trapped r like I am here r and could not get out as David's throwing things at my office. I had a plaque on my desk that he proceeded to throw across the room r and thought I was going to get my ass kicked r to be honest with you. Q: You had mentioned yelling expletives at you. anything about future job for you? that he was Did he say opportunities A: Yes r he did. He basically told me I would not work I would not work ever again in the state of Florida as long as he could help it. He said how could you do this to your familYr you fuckin snake r you fuckin snake. Tr. 2622-2623. 48 The trial testimony of Nicole Mannarino also supports an enhancement under Guideline 2J1.2(b) (1) (B) Ms. Manarino testified that Brooks made a threatening remark directed at Bart Sacher r attorney for DHBrs independent public auditors Rachlin r Cohen & Holtz. According to Ms. Mannarino r during a meeting with the auditors r Mr. Sacher and others r Brooks remarked r "lrd like to shoot that mother fucker rll in response to Mr. Sacher r s Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 19 of 30 PageID #: 16484 49 request that DHB produce TAP's books and records that would have disclosed Brooks's control of TAP. Tr. 11149. In addition, Brooks also attempted to erase Schlegel's memory. Brooks contends that his sentence should not be enhanced for alleged obstruction based on his request of veterinarian Seth Fishman to erase Schlegel's memory to keep her from cooperating against Brooks in instant criminal case. Brooks argues that because "the purported conversation between [him] and Fishman allegedly occurred in the summer of 2006, it could have nothing to do with charged obstruction of the SEC's investigation. II Brooks Letter at 24. Brooks is wrong. By erasing Schlegel's memory, he sought to prevent her from being able to assist the government in its investigation into his unauthorized compensation and his TAP scheme (i.e., the subject of the SEC investigation). At the time that he had this conversation with Fishman, Brooks had not been charged by the SEC or the U. S. Attorney's Office. He hoped that by erasing Schlegel's memory, he could avoid being charged and ultimately convicted of the conduct that was the subj ect of the SEC's investigation. Each of these despicable incidents alone support an obstruction of justice enhancement under Guideline 2J1. 2 (b) (1) (B) . Brooks also objects to the three-level enhancement under 2J1.2 (b) (2) predicated upon his submission of a falsified email during the trial and his smuggling of narcotics into the courtroom and the jail during the trial. Brooks Letter at 25. Section 2J1.2 (b) (2) applies when "the offense resulted in substantial interference with the administration of justice. II Application Note 1 to 2J1.2 (b) (2) provides that substantial interference with the administration of justice includes "the unnecessary expenditure of substantial governmental or court resources. II As discussed below, Brooks's introduction of the false email and the smuggling of pills into the courtroom and his detention facility meet that standard. As to the email, Brooks questioned Schlegel extensively about an email withoutshowingittoher.Tr. 7124-7138. Brooks initially declined to show the email to the witness, the Court or the government. Tr. 7138. Brooks even delayed when the Court asked to view the email. Tr. 7138. When the email Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 20 of 30 PageID #: 16485 50 was finally shown to Court's question as to copy to the government. Court ordered Brooks to the Court, Brooks the origin of the Tr. 7139, 7142. refused to answer the email or to provide a On March 19, 2010, the provide the Court and the Government with a copy of the alleged e-mail that Ms . Schlegel wrote to Mr. Adar in October 2003. Mr. Brooks's counsel is further ordered to show this e-mail to Ms. Schlegel at the beginning of cross-examination on March 22, 2010, and ask her to authenticate it. If Mr. Brooks cannot authenticate this alleged e-mail through Ms. Schlegel, or by other means, the Court will order Ms. Schlegal's cross- examination testimony concerning her sexual relationship with Mr. Adar struck from the record, and further order the jury to disregard it. March 19, 2010 Order. Brooks eventually provided a copy of the email to the government on March 31, 2010. See Tr. 7158-7160. At that time, the government noted that Brooks was withholding metadata information about the email and requested the same information. Tr. 8497. On April I, 2010, the Court ordered Brooks to provide that metadata. Tr. 8675. Brooks declined. Tr. 8675. On April 5, 2010, the Court issued a written order directing Brooks to provide the metadata. See AprilS, 2010 Order i see also Tr. 8918. On April 7, 2010, Brooks invoked his Fifth Amendment rights and declined to produce the metadata to the government. Tr. 9327. The Court produced a printed sheet purporting to contain the metadata to the government on April 7, 2010. Tr. 9441-9442. Upon review, the government noted that the email, although it purported to be mailed, was undeliverable and not reflected in the DHB servers. Tr. 9568. Therefore, the provenance of the email was still in question. The Court ordered Brooks to hand over the source hard drive and server. Tr. 9571. On April 12, 2010, Brooks filed a letter indicating that he would not comply with the Court's order. See docket item 947. On April 16, 2010, the Court found Brooks in contempt. See April 16, 2010 order (docket entry no. 967). Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 21 of 30 PageID #: 16486 51 Brooks argues that he is entitled to certain procedural protections that are afforded in a criminal contempt proceeding before he can receive any enhancement of his sentence in this criminal case. First, he asks for an evidentiary hearing on the subject. The government submits that all of the relevant facts have been established: Brooks frivolously invoked the Fifth Amendment and refused to comply with Court orders. See id. (describing Brooks's arguments as "frivolous"). Also, there has been no testimony indicating that this email was a genuine document. See, e.g., Tr. 7209 (stating that the email was altered in multiple ways). In addition, it is axiomatic that, where they do not increase the statutory maximum sentence, discretionary sentencing factors do not require jury findings or separate trials. Finally, no hearing is necessary for the Court to determine that Brooks' s frivolous intransigence has wasted substantial governmental and court resources. Similarly, Brooks's ongoing attempts to smuggle drugs into the courtroom clearly wasted the Court's and the government's time and money. As correctly noted in the PSR, Brooks caused an unnecessary expenditure of substantial governmental and court resources when, during the trial on July 20, 2010, he concealed a total of nine pills in ink pens located in front of his legal papers in the courtroom. See also U.S.S.G. 2J1.2 (b) (2), Application Note 1 (providing for enhancement where substantial interference with the administration of justice includes "the unnecessary expenditure of substantial governmental or court resources"). This incident forced the Court to halt the trial and clear the courtroom, which then needed to be searched for contraband. The incident also caused the u.S. Attorney's office to launch an investigation into Brooks's procurement and transportation of the pills that involved two Assistant U. S. Attorneys and multiple Deputy U.S. Marshals. Against that backdrop, the conclusion that Brooks's conduct unnecessarily wasted the Court's and the government's resources cannot be seriously disputed. See United States v. DeSalvo, 26 F.3d 1216,1223-1224 (2d Cir. 1994) (holding that Judge Sifton's similar findings "need not detain us long" because Judge Sifton presided over the Eisen trial, and explained that his findings reflected not only the expenses associated with DeSalvols trial, but also the expenditures associated with the Eisen trial."). The government therefore respectfully requests that the Court make specific findings as to the wastefulness of Brooks's Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 22 of 30 PageID #: 16487 52 behavior at the sentencing hearing and deny the obj ection to a Guideline 2J1.2(b) (2) enhancement. Brooks appears to argue that it is impermissible to enhance his sentence for destroying and altering documents during the schemes under Guideline 2J1.2(b) (3) Section 2J1.2(b) (3) requires a 2-level level increase when the offense (A) involved the destruction, alteration, or fabrication of a substantial number of records, documents, or tangible obj ects; (B) invol ved the selection of any essential or especially probative record, document, or tangible obj ect, to destroy or alter; or (C) was otherwise extensive in scope, planning, or preparation. Brooks objects to the two-level enhancement under 2J1. 2 (b) (3) (A) on the ground that "destruction or alteration of documents was the offense for which Brooks was prosecuted, not an enhancement of his offense conduct. II Brooks Letter at 26 (emphasis in original). In other words, Brooks claims that the destruction and alteration of documents in this case "had nothing to do with obstruction. II Id. This argument does not merit lengthy discussion. The destruction and alteration of documents provided evidence of Brooks's various fraud offenses but did not constitute the actual crimes. The trial transcript is replete with such instances. For example, documents which Brooks sent to the SEC about DHB' s payment of salaries and bonuses intentionally omitted payments to TAP employees and horse trainers in order to make it appear to SEC staff that TAP was an independent private company owned by Terry Brooks that was dealing at arms-length with DHB. Likewise, at Brooks's direction, a substantial number of probative documents sent to the SEC were deliberately altered to make it appear to SEC staff that looted funds were either authorized compensation to Brooks or legitimate business expenses. These documents included the phony 1997 ' Resolution, the phony Brooks employment agreement that supposedly predated it, the fabricated American Express spreadsheets that misclassified Brooks's personal expenses as business-related and the destroyed travel records that would have revealed Brooks's company-funded family trips. Significantly, these documents and others like them were enclosed as part of the Venable Report and the Audit Committee Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 23 of 30 PageID #: 16488 53 Report which ultimately formed the basis of the false Proxy Statement filed with the SEC in November 2004 which Brooks used in an attempt to end the SEC's inquiry. The PSR correctly applies a 2-level adjustment under Guideline 3Cl.l for obstructing or impeding the administration of justice with respect to the investigation, prosecution or sentencing of the instant count of conviction. PSR ~ ~ 95-97. Per Application Note 7, this adj ustment is not to be applied "except if a significant further obstruction occurred during the investigation, prosecution, or sentencing of the obstruction offense itself." In this case, a significant further obstruction occurred during the course of the trial when Brooks willfully and intentionally failed to produce the email metadata. See April 16, 2010 order (docket entry no. 967) (describing Brooks's invocation of the production privilege as "frivolous") see also Tr. 12306. Moreover, the record establishes that Brooks suborned perjury (from Schlegel and Nadelman during the SEC proceedings), produced false or altered documents as set forth above and destroyed records as set forth above. If anything, the enhancement under-represents the seriousness of Brooks's obstructions. Standing alone, each of these facts support the enhancement. Accordingly, the 2 -level adjustment under 3Cl.l is appropriate in this case. 87. resulting guilty. agreement The PSR accurately sets forth the total tax loss from Counts 18 through 20 to which Brooks pleaded Brooks accurately summarizes the provisions of the plea into which he entered with the government. 99. Brooks objects to any mention of this case being the longest trial in the history of the Eastern District of New York. Brooks Letter at 30. In support of this objection, Brooks cites to a case that took over 8 months and had a 25,000 page transcript. Id. at 30 n. 5. Brooks has indeed cited to another long case and, given the length and complexity of the pretrial hearing in the instant case, it would be difficult to declare the "winner." The government submits that the Court should amend the PSR to read "among the longest jury trials." Brooks's suggestion that the government somehow intentionally lengthened the trial merits no response. Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 24 of 30 PageID #: 16489 54 101. As discussed above in ~ ~ 81-83, the PSR accurately calculates the total loss as a result of the offenses committed by the defendant on all counts to be $272,324,023. 126, 127, 130 and 132. As discussed above, the government adheres to the total offense level it calculated with respect to Counts 18 through 20 as set forth in its plea agreement with the defendant. 136. The government's plea agreement with Brooks is silent on the issue of grouping Counts 18 through 20 with any of the other offenses of conviction. 149 -151. Brooks obj ects to any increase in his sentence based upon his internal drug smuggling, which he characterizes as "self -medication. " As mentioned earlier, application Note 1 to sections 2J1.2 (b) (2) provides that substantial interference with the administration of justice includes "the unnecessary expenditure of sUbstantial governmental or court resources." Brooks's efforts to feed his addictions, without relying upon his army of lawyers and doctors, wasted enormous amounts of time. Brooks may want to recast his smuggling adventures as "self-medication," but they are the actions of a desperate addict. The objection is baseless. 152 and 202. Brooks perplexingly argues that he has never violated a Court order with regard to his financial holdings in Europe. Brooks Letter at 33-34. Brooks's bail was revoked for hiding unmonitored funds in Europe. Tr. 125. This determination was made by the Court by a preponderance of the evidence, id., and was affirmed on interlocutory appeal. There is no reason for a hearing, which has already occurred and been affirmed. The objections should be denied as frivolous. 153 and 230. Brooks obj ects to the PSR's claims that he "damaged inventory and reported false information on inventory insurance claims following Hurricane Irene." Brooks Letter at 33. He claims that Giaquinto, not Brooks, damaged the inventory and that the government was unable to establish that Brooks played any role in the damaged caused to the inventory. Id. Brooks is correct that he did not spray water on the inventory damaging it, but he is incorrect that he did not playa role in this insurance fraud. Giaquinto testified that after Hurricane Irene, he visited the warehouse. Tr. 4508. The inventory had Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 25 of 30 PageID #: 16490 55 not been damaged by the hurricane. Tr. 4509-10. Giaquinto participated in a conversation with a representative of the insurance company and Brooks. Tr. 4511. During that conversation, the insurance representative told Brooks that he had "free rein to do what was needed with regard to the claim, what we needed to do with the claim." Tr. 4511. A few days later, Brooks's brother and Giaquinto " [d) amaged the NDL inventory [w]ith hoses, with water." Tr. 4640. Giaquinto explained that they "wet the boxes to make it look like the water came in from the roof." Tr. 4640. Brooks would have the Court believe that Jeffrey Brooks, who was not employed by DHB or any of DHB' s subsidiaries, damaged the inventory on his own without any direction from Brooks. That is ridiculous. David, not Jeffrey, Brooks was the one who was employed . by DHB. David, not Jeffrey, Brooks stood to benefit from the fraudulent claim. It is reasonable to infer that Brooks directed his brother to damage the inventory so that Brooks could submit a higher insurance claim. That inference is particularly reasonable when considering all the evidence adduced during the criminal prosecution regarding Brooks's relationship with his brother and the things that Jeffrey was willing to do for his brother, like hiding assets overseas. Brooks states that Emanuel Gold testified that there was damage caused to the physical structure of the warehouse as a result of Hurricane Irene. Brooks Letter at 33-34. Mr. Gold's testimony did not refute Giaquinto's testimony regarding the damaged inventory. In fact, Mr. Gold conceded that he did not know whether the damaged inventory was caused by water from the hurricane or a hose. Tr. 15352-53. with respect to Hurricane Wilma, Brooks does not contest that he directed Giaquinto to damage nearly $4 million worth of inventory to make it appear that said inventory was damaged by Hurricane Wilma. Instead, Brooks argues that he did not submit a claim with respect to the Point Blank inventory. Brooks Letter at 34. That is not entirely accurate. Brooks did submit lists to the insurance company containing the fraudulently damaged inventory. Tr. 4530. It wasn't until the insurance company began a forensic investigation and General Ellis intervened that Brooks withdrew the fraudulent claim. Tr. 4530- 32. The government believes that a short summary of the uncontroverted testimony regarding Brooks's attempted insurance fraud after Hurricane Wilma is warranted. After Hurricane Wilma, Brooks directed Giaquinto to damage the inventory at NDL. Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 26 of 30 PageID #: 16491 56 Tr. 4525-26 (Brooks told Giaquinto to "make [the] inventory as bad as possible."). At Brooks's behest, Giaquinto damaged the NDL inventory. Tr. 4526. Brooks did not stop there. Days later, two 40- foot tractor trailers containing undamaged Point Blank inventory arrived at the NDL facility. Tr. 4527. Brooks ordered Giaquinto to damage that inventory and present it to the insurance company as if it had been damaged during Hurricane Wilma. Tr. 4528-29. Giaquinto complied. Shortly thereafter, they provided a list containing the fraudulently damaged Point Blank and NDL inventory to the insurance company. Tr. 4530. The value of the damaged NDL inventory reported on that list was $500,000, while the Point Blank inventory was $3.5 to $4 million. Tr. 4530. The insurance company informed DHB that it was going to conduct a forensic investigation. Tr. 4530. General Ellis then intervened and DHB withdrew the claim relating to the Point Blank inventory and reduced the value of the damaged NDL inventory to $14,000. Tr. 4531-32. For the . foregoing reasons, Brooks's objections should be rejected. Those frauds constitute evidence of Brooks's additional bad acts that the Court may consider at sentencing as "relevant conduct" because both frauds were part of the "same type of criminal activity over time" that Brooks repeated. United States v . Silkowski, 32 F.3d 682, 687 (2d Cir. 1994) (citing reference and internal quotation marks omitted). In other words, the falsification and inflation of the cost of company inventory that Brooks attempted to claim was damaged in hurricanes, like Brooks's offense conduct, involved falsification of DHB's books and records that constitutes "an identifiable behavior pattern of specified criminal activity." Id. (citing reference and internal quotation marks omitted) . 209. Brooks argues that there is no evidence to support the factual conclusion that he has ever been delinquent in paying his attorneys. Brooks Letter at 34. One of Brooks's trial attorneys has already taken his fees dispute to the Court, who ruled in the attorney's favor, and to the Second Circuit, where the Court was af firmed. See Levi t tv. Brooks, 669 F. 3 d 100 (2d Cir. 2012). The objection should be denied as frivolous. 212. As discussed above, the PSR's total offense level of 57 and criminal history category of I are accurate, resulting in a Guidelines recommended range of life in prison. Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 27 of 30 PageID #: 16492 57 216 and 218-219. As discussed in ~ ~ 7-12 above, the Second Circuit has expressly distinguished criminal restitution from fines in the context of the Apprendi rule. "Apprendi is not implicated where district courts order criminal restitution or forfeiture based on court-determined loss or gain amounts [C]riminal restitution and forfeiture are indeterminate schemes without statutory maximums." Pfaff, 619 F. 3d at 175. See also Anderson v. United States, 2013 U.S. Dist. LEXIS 35749 (S.D.N.Y. February 21, 2013) ("Apprendi does not apply to determinations of restitution, where no statutory maximum exists. The Second Circuit Court of Appeals extended Apprendi to criminal fines even prior to the Supreme Court's holding in Southern Union, but expressly distinguished orders of restitution from fines and other punishments.") . Brooks's obj ection to restitution on the ground that the issue was not submitted to the jury should therefore be overruled. 221. Brooks argues that "[b] ecause fines are a criminal penalty, and the issue was not submitted to the jury, the maximum fine that can be imposed on Brooks upon his conviction on Counts 1-3 and 6-11 is $250,000 per count." Brooks Letter at 35. The government agrees. 224-225. Brooks objects to any forfeiture order because he will also be required to pay restitution. In support of this argument, he relies upon dicta which has since been distinguished, and he ignores recent Second Circuit case law. Brooks--and indeed any defendant--may be properly held liable for both restitution and forfeiture. United States v. Torres, 703 F.3d 194 (2d Cir . 2012). The authority for forfeiture and restitution corne from two separate statutory provisions, and represent two separate, yet mandatory, obligations. Compare 18 U.S.C. 981 and 982, 21 U.S.C. 853 with 18 U.S.C. 3664(A); see also Torres, 703 F.3d at 196, 203- 04. Forfeiture is typically intended to disgorge ill-gotten gains from the defendant, while restitution is intended to recompense victims for their losses. United States v. Pescatore, 637 F.3d 128, 137 - 38 (2d Cir. 2011). See also The Uni ted States' Memorandum of Law in Support of Its Motion for Entry of a Preliminary Order of Forfeiture, Docket No. 1422, at pp. 18-19). Therefore, to the extent that Brooks complains of being required to pay both forfeiture and restitution, his complaint is without merit: forfeiture is expressly authorized Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 28 of 30 PageID #: 16493 58 by statute and is not " impermissibly duplicative of [a] concurrent restitution order." Torres, 703 F.3d at 205. 228. Brooks states that he intends to move for a downward departure on the ground of diminished capacity, pursuant to U. S. S . G. 5K2 .13 . Brooks claims that his medical conditions "contributed substantially to the commission of his alleged offenses." Brooks Letter at 36. The Court should deny such a motion because Brooks cannot prove that he had "a significantly impaired ability to (A) understand the wrongfulness of the behavior comprising the offense or to exercise the power of reasoni or (B) control behavior that the defendant knows is wrongful." U.S . S.G. 5K2 . 13 cmt. n.li see United States v. McBroom, 124 F.3d 533, 548 (3d Cir. 1997) (recognizing that "reduced mental capacity" includes cognitive impairments as well as volitional impairments) . In this case, the Court had ample opportunity to observe Brooks's behavior and demeanor in the courtroom on a daily basis over the seven-and-a-half month trial, as well as during additional appearances concerning questions of competency and civil matters. United States v. Brooks, 06-CR-0550 (JSjAKT), 2012 WL 2000792, at *7 (E.D.N.Y. Jun. 4, 2012). During this period Brooks did not exhibit any unusual behavior that led the Court to question his competence or mental facilities. Id. The Court found that Brooks was readily able to assist in his own defense at trial and that he "underst[ood] the nature and the consequences of the proceedings." Id. at *6. Even when Brooks was experiencing benzodiazepine withdrawal, medical personnel at the Nassau County Correctional Center and the Queens Private Detention Facility "repeatedly observed his cognitive functioning to be unimpaired and no decline in his mental status," and that Brooks was "attentive, demonstrated intact abstraction and calculation, and had good insight and judgment." Id. The Court summarized its impression of Brooks by observing that he was "an intelligent, controlling, and highly successful businessman." Id . at *9. On Brooks's motion for a new trial pursuant to Rule 33 on grounds that he was incompetent, the Court was also presented with conflicting m ~ d i c a l evaluations that were prepared by both parties in regards to Brooks's mental health. The Court came to the conclusion that "the value of Brooks's experts' opinions in this case [was] minimal." Brooks, 2012 WL 2000792, at *10. The Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 29 of 30 PageID #: 16494 59 Court questioned the absence of contemporaneity in defense experts' diagnoses, the reliance placed on partisan information provided by Brooks and his family, as well as the fact that Dr. Liebowitz, Brooks's long-time doctor, only diagnosed him with panic disorder and anxiety disorder. Id. These identical facts and circumstances would be present with respect to any motion for downward departure that Brooks may elect to file on diminished capacity grounds. As it did in connection with Brooks's Rule 33 motion, the Court is free to rely on its own observations of the defendant, counsel's arguments and the proven criminal conduct to make its findings, even if those findings are inconsistent with expert opinion, to deny Brooks's downward departure motion. United States v. Valdez, 426 F. 3d 178, 186 (2d Cir. 2005); United States v. Piervinanzi, 23 F.3d 670, 684 (2d Cir. 1994) (noting that the defendant had provided some evidence to substantiate his claim, but the judge, "as the finder of fact, was in the best position to evaluate this information") . Contrary to the defendant's assertion, he has not entered into a binding settlement agreement with the victims. The purported settlement agreement between the defendant and victims (who likely include a significant portion, but not all of the defendant's victims for restitution purposes pursuant to the MVRA) will not become an enforceable settlement agreement unless and until, among other things, the government, an essential party to the proposed settlement, agrees to the terms of the proposed settlement, and the Court approves the proposed settlement. As previously reported to the Court, the government could not meaningfully assess the terms of the proposed settlement until it obtained and evaluated the victim and loss data it required to ascertain the amount of restitution owed by the defendant. As set forth above, Gilardi recently wrote the Probation Department a letter documenting the claims administration procedures and analysis that it employed to determine investor restitution in this case. Based upon the Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 30 of 30 PageID #: 16495 60 data provided by Gilardi, the government continues to to reach a resolution of restitution in this case. attempt By: Encls. Respectfully submitted, LORETTA E. LYNCH United States Attorney /s/ Christopher Ott Richard T. Lunger Christopher C. Caffarone Assistant U.S. Attorneys cc: Defense counsel (Via ECF and Email) Probation Officer Linda Fowle (Via Email) Case 2:06-cr-00550-JS-AKT Document 1661-2 Filed 05/20/13 Page 1 of 4 PageID #: 16496 r , . 1 1 ~ r d i ~ 3301 Kerner Blvd. San Rafael, CA 94901 VIA OVERNIGHT DELIVERY May 8, 2013 Ms. Linda Fowle Supervising Probation Officer U.S. Probation Department - EDNY 202 Federal Plaza Central Islip, N.Y. 11722 RE: United States v. David Brooks Restitution Process Dear Ms. Fowle: Gilardi & Co. ("Gilardi") was retained by the office of the United States Attorney for the Eastern District of New York to help victims in this matter present their claims for restitution, and to calculate the individual and aggregate amounts of those claims based on a methodology provided by the Government. This letter will explain how Gilardi gathered the information from victims needed to perform those calculations, how the calculations were performed, and what the results of those calculations are. Background on Gilardi Since our founding in 1984, Gilardi has managed more than 4,500 legal administrations and distributed more than $25 billion in assets. We are the nation's largest private full-service claims administrator and are solely dedicated to matters related to legal settlements and administrations. On an annual basis, we provide administration services for over 600 Qualified Settlement Funds and manage assets in excess of $1.5 billion. Gilardi has served as the claims administrator for some of the largest and most complex private settlements, with notices provided to more than 26 million class members and settlements of more than $7 billion. Throughout our history, we have also partnered with countless government entities, including the DOJ, SEC, FINRA, CFTC, the Attorneys General of every state and numerous local and county offices, to perform legal administration services. For more than a quarter-century, we have been a national contract holder with the FTC, during which time we have partnered closely with the FTC to develop, refine, and continuously hone the standards for cost-effective redress administration. Gilardi was also recently awarded a ten-year contract by the Department of Justice to perform administrative services in matters related to redress and asset forfeiture. Case 2:06-cr-00550-JS-AKT Document 1661-2 Filed 05/20/13 Page 2 of 4 PageID #: 16497 United States v. David Brooks Restitution Calculation Page 2 of3 May 8, 2013 Methodology for Collecting Restitution Claim Information Among the private litigation settlements Gilardi has administered is a securities class action that was filed and litigated in the United States District Court for the Eastern District of New York, in which DHB Industries, Inc. ("DHB") was a defendant (Case No. 2:05cv-04296-JS-ETB). In connection with that case, Gilardi received claims from class members that included a list of those class members' transactions in the publically traded securities of DHB between November 18, 2003 and November 30, 2006 (the "Class Period"). The database of those private class members and their submitted claims provided a good starting point for compiling victims' claims for restitution in this matter and for calculating the losses associated with those claims. After consulting with the Government, Gilardi developed a plan to send an instructional cover letter and Proof of Claim form to every class member that had been identified in the private civil litigation. Additionally, a cover letter and Proof of Claim was sent to a list of securities brokers and other financial institutions maintained by Gilardi, seeking their assistance in identifying additional possible victims among their customers. The cover letter and Proof of Claim form were ultimately mailed to 136,445 persons and entities who were either previously identified as class members or were newly identified as possible victims in a recent solicitation of name and address information from various financial institutions. The cover letter and Proof of Claim are attached as Exhibit A to this letter. The Government's economic consultant in this matter established a relevant period during which the defendants' illegal actions artificially inflated the market price of DHB common stock, thereby potentially harming investors who purchased shares during an inflated period. That period, May 1, 2003 through August 18, 2006, substantially corresponds to the Class Period. Because the periods are not identical, however, potential victims were urged to file a claim in the restitution proceeding even if they had previously filed a class action claim. The restitution Proof of Claim asked investors to list the shares which they held immediately prior to the period of artificial inflation, those which they purchased and sold during that period and those which they held at the end of the period. As more fully explained below, where an investor submitted a claim for restitution, those listed transactions were used by Gilardi to calculate the dollar amount of the harm caused to each victim and to all of the victims in aggregate. Additionally, if a class member submitted a claim in the private matter but did not submit a claim for restitution, that investor's previously submitted list of transactions was used to calculate a restitution amount for the investor. A total of 9,637 new restitution Proofs of Claim were submitted to Gilardi and an additional 11,893 claims were processed using data collected during the class action administration. Methodology for Processing and Calculating Restitution Claims The Government's economic consultant supplied Gilardi with a table of artificial inflation amounts for the common shares of DHB for each trading day during the relevant period. The inflation table is attached to this letter as Exhibit B. That table and the transactions for each Case 2:06-cr-00550-JS-AKT Document 1661-2 Filed 05/20/13 Page 3 of 4 PageID #: 16498 United States v. David Brooks Restitution Calculation Page 3 of3 May 8, 2013 investor were entered into Gilardi's proprietary software, which then calculated a restitution amount for each share as follows: If an investor's shares were sold during the relevant period, the per share loss is the difference between total inflation per share on the date of purchase minus total inflation per share on the date of the sale. If shares are still held as of August 18, 2006, the per share loss equals total inflation on the date of purchase. For the purposes of calculating loss under the plan of allocation, the "last-in, first-out" pairing methodology was applied, meaning that sales were matched first against any shares purchased or acquired during the relevant period, and then against any shares held at the beginning of the relevant period in reverse chronological order. For each paired transaction that resulted in a calculated loss, the dollar amount of that loss was added to the investor's total calculated restitution amount. For each paired transaction that resulted in a calculated gain, the dollar amount of that gain was subtracted from the investor's total calculated restitution amount. Sales that were matched against shares held at the beginning of the relevant period were not used in the calculation of the net loss. As a result of these calculations, Gilardi determined that 6,360 claims were candidates for restitution, meaning that the investor suffered a financial loss directly attributable to purchasing the common shares of DHB while those shares were artificially inflated. Gilardi concluded that a number of claims were submitted in the restitution claims process which had no financial loss attributable to artificial inflation, were substantively deficient in some way, or were duplicative of another submitted claim. Notification letters have been sent to all of those investors informing them of the determination and providing them with a 20-day period in which to supplement or cure their claim with additional information. After processing all information and amendments received as of the date of this letter, Gilardi has concluded that 15,170 claims remain ineligible for restitution at this time. A list of the 6,360 claims with a calculated restitution amount, together with the calculated amount for each is attached to this letter as Exhibit C. Calculated Restitution Claim Amounts The total aggregated restitution amount Gilardi calculated is $45,199,790.90. The average amount of the valid individual victim claims is $7,106.89, while the median is $1,000.00. Sincerely, Michael Joaquin Director of Securities Gilardi & Co. LLC cc: Richard A. Greenberg, Newman & Greenberg Case 2:06-cr-00550-JS-AKT Document 1661-2 Filed 05/20/13 Page 4 of 4 PageID #: 16499 VENABLE:LP 575 SEVENTH STREET NW WASHINGTON, DC 20004 T 202.344.4000 F 202.344.8300 wwwVenable.com George Kostolampros T 202.344-8071 F 202.344.8300 Gkostoiampros@venabie.com May 7, 2013 VIA FEDERAL EXPRESS Ms. Linda 1. Fowle Supervising United States Probation Officer 202 Federal Plaza Central Islip, New York 11722 Re: United States v. Brooks, Cr. No, 06-550 Dear Ms. Fowle: We represent Point Blank Solutions, Inc., f/k/a DHB Industries, Inc. ("Point Blank"), a victim in the above-referenced matter, Enclosed please find a declaration by T. Scott Avila, the Chief Restructuring Officer for Point Blank, in further support of the Affidavit of Loss of Point Blank Solutions, Inc., which was previously submitted in this matter. cc: Nancy R. Grunberg, Esquire Richard Lunger, Esquire vChristopher Caffarone, Esquire Christopher Ott, Esquire Richard A. Greenberg, Esquire Respectfully Submitted, .,. . . _5(!/ /"r ~ ) /' y / ~ ~ ~ V - George Kostolampros Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 1 of 15 PageID #: 16500 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK -----------------------------------------------------)( UNITED STATES OF AMERICA -v- DA YID H. BROOKS, ET AL. , Defendants. -----------------------------------------------------)( Cr. No. 06-550 (S-I) (JS) DECLARA TION OF T. SCOTT AVILA IN FUR'rHER SUPPORT OF POINT BLANK'S RESTITUTION CLAlM T. SCOTT AVILA, declares as follows, pursuant to 28 U.S.c. 1746: I. r am the Chief Restructuring Officer ("CRO") of the companies formerly known as Point Blank Solutions, Inc., Point Blank Body Armor, Inc. and Protective Apparel Corporation of America (collectively referred to herein as "Point Blank" or the "Company"). I have been the CRO since March 27, 2010. I am also currently a Principal at Deloitte Financial Advisory Services LLP. My duties to Point Blank have included general supervision of, and responsibility fot, Point Blank's business and financial affairs and activities and reviewing, formulating and assisting with Point Blank's business plans and strategies in bankruptcy. In my capacity, r have general knowledge of the books and records of the Company. 2. 1 submit this declaration in further support of the Affidavit of Loss of Point Blank Solutions, Inc. dated June 28, 2011, which was submitted to the probation officer in this matter. I make this declaration based upon my own personal knowledge, my review of the Company's books and records, and other information prepared by the Company' s employees . . _ .. _ .... -_ .._-------------_. ___ --_00 ______ - Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 2 of 15 PageID #: 16501 3. Set forth as Exhibit A to this Declaration is a true and correct copy of a spreadsheet further detailing celiain of Point Blank's restitution claims. Specifically, as detailed in the attached spreadsheet, from 2005 through 20 I 0, Point Blank expended the following in costs as a result of the defendants' criminal conduct- $15.8 million in advancing legal defense fees for Brooks, Schlegel and Hatfield; $1.5 million in advancing legal defense fees to directors of the company; $16.9 million in remediation costs; $1. 9 mill ion in back taxes; and $11.4 million in SEC and class action defense costs. 4. In addition to the above, the Company lost approximately $6.4 million in Company funds Brooks used to pay for his own personal items and another $21 .5 million through Brooks' siphoning of Company funds from DHB to TAP. 5. From 2006 through 2010, the Company's debt obligations increased significantly as a result of expending these enormous amounts of cash as a direct result of Brooks' conduct-
$38.9 million in 2006;
$40 million in 2007;
$70.3 million in 2008;
$61.4 million in 2009; and
$75.3 million in 2010. 6. In early 2010, because of its considerable debt, the Company received a letter from Bank of America providing notice of default of the Company's revolving credit line because the Company's EBITDA fell below $1.3 million for the three months ended Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 3 of 15 PageID #: 16502 December 3 I, 2009 and failed to have a net worth of at least $5 million as of December 31, 2009. 5,'ee February 23, 2010 Point Blank Solutions SEC Form 8-K attached as Exhibit B. 7. Attached as Exhibit C is an April 14,2010 8-K issued by the Company attaching a press rel ease di sclosing that the Company filed a voluntary petition in bankruptcy. The press release specifically sets forth that ' " [t]he decision to file for Chapter 11 protection was driven primarily by continued expenses associated with legacy issues from former management, and the lack of financing available to the Company given the state of the credit markets . .. . Without a financing facility and with mounting legacy expenses, however, we had to take this step to reorganize." 8. At the time of the Company' s bankruptcy in April 2010, the Company owed approximately $28.2 million in trade debt. The Company's total debt, however, at that time was $68.4 million and the Company was expending over $600,000 in legal fees each month in actions and/or governmental investigations concerning the defendants' criminal conduct. 9. Based on my review of the Company' s books and records, from 2006 through 2010, the Company spent approximately $45.8 million in restatement , remediation, and legal costs, and an additional $1.9 million in back taxes. Taken together with the amounts he directly stole from the Company (over $6 million in unauthorized compensation and the siphoning of $21 .5 million in cash from DHB to TAP), the total cash drain from the Company amounted to over $75 million. If the Company had not suffered this $75 million cash loss, it would not have filed for bankruptcy because it would not have had this large debt and cash drain. Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 4 of 15 PageID #: 16503 10. In addition to the enormous cash drain on the Company, the legacy issues were a major distraction to the Company's efforts to emerge from the mounting debt and controls issues caused by defendants' conduct. 11. As of June 28, 2011 , the date of Point Blank' s Affidavit of Loss submitted in this matter, Point Blank had suffered losses of $22.5 million representing costs expended in bankruptcy that would not have been spent if the Company had not been in bankruptcy. I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge information and belief. Executed on this Eth day of April, 2013. C a s e
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1 6 5 0 4 Year of Expense USA ltr Category Company Category Item Description 2005 2006 2007 2008 2009 2010 Total Back Taxes Back Taxes - Employee Payroll Tax Payment for Former officer's payroll taxes 1,054,322 40,000 1,094,322 Back Taxes Back Taxes - Employee Payroll Reduction of refund for carryback to 2005 852,417 852,417 Back Taxes Total 1,054,322 892,417 1,946,739 BHS Defense legal- Brooks 2006 MILLBANK, TWEED, LEVIN BROOK'S ATTORNEY'S 715,825 4,353,407 (452,390) 4,616,843 BHS Defense legal- Hatfield 2006 SERCARZ &RIOPELLE -HATFIELD'S ATTORNEYS 213,396 213,396 404,848 265,791 397,318 1,894,872 3,389,621 BHS Defense legal- Brooks 2006 MINTZ LEVIN COHEN & FERRIS BROOK'S ATTORNEY'S 1,S4D,402 300,607 296,330 211,732 244,445 2,593,516 BHS Defense legal- Brooks BAKER BOTTS 1,814,428 1,814,428 BHS Defense legal- Schlegel 2006 KOBRE & KIM 44,701 562, 219 480,987 123,577 133,543 282,517 1,627,543 BHS Defense legal- Brooks MORRIS, NICKELS, ARSHT & TUNNELL 10,000 11,159 378,084 3,536 402,780 BHS Defense legal- Brooks PEPPER HAMILTON LLP 308,175 308,175 BHS Defense legal- Brooks AKERMAN SENTERFITT 52,519 226,141 278,660 BHS Defense legal- Brooks Schlam, Stone & Dolan 149,443 149,443 BHS Defense legal- Brooks Goodwin Procter 106, 773.40 19,880 126, 654 BHS Defense legal- Brooks Ferber Frost Chan & Essne 116,460 116,460 BHS Defense legal - Brooks Robert & Holland 104,479 104,479 BHS Defense legal- Brooks Kasowitz, Benson 95,000 95,000 BHS Defense legal- Brooks Gibson & Dunn 91,000 91,000 BHS Defense legal- Hatfield 2006 BOUCHARD, MARGULES & FRIEDLANDER - HATFIELD 28,430 28,430 4,108 60,968 BHS Defense legal- Hatfield RITCHIE, DILLARD & DAVIES 4,797 29,977 34,774 BHS Defense legal- Brooks SILVERMAN PERLSTEIN & ACA 26,500 26,500 BHS Defense legal- Brooks Sullivan, Ward, Asher & P 25, 961 25,961 BHS Defense legal- Brooks Ferber Frost Chan & Essne 15,000 15,000 BHS Defense legal - Brooks PAUL HASTINGS BHS Defense legal- Brooks STERN BHS Defense Total 1,939,168 8,522,282 831,815 1,289,923 852,903 2,441,713 15,877,805 legal D&05 legal- O&Os RICHARDS, KIBBE & ORBE 169,116 207,620 121,456 91,523 96,247 685,961 legal 0&05 legal- O&Os COVINGTON & BURLING 3,751 12,987 149,237 220,003 66,440 452,418 legal 0&05 legal- O&Os HELLER EHRMAN 257,865 257,865 legalo&Os legal- 0&05 DLA PIPER 20,192 106,443 1,504 128,138 legalD&Os legal- O&Os CARTER LEDYARD & MILBURN LLP legal O&Os Total 193,058 327,049 530,061 311,526 162,687 1,524,382 Remediation Interim executive management AliX PARTNERS 4,118,525 (253,408.54) 3,865, 117 Remediation Forensic Accounting Huron 1,757,985.52 1,689, 642 106,875 3,554,502 Remediation Interim executive management Robert Half 554,371 1,174,854 308,313.74 2,037,539 Remediation Tax Restatement oeloitte & Touche tax advisor and revised income tax returns 1,114,024 370,006 14,009 1,498,039 Remediation Financial Restatement MarcumRachlin, a division of MARCUM llP 826,744 171,736 998,479 Remediation legal 2007 McDERMOTT, WILL & EMERY 948,938 948,938 Remediation Financial Restatement FTI Consulting Inc 316,053 612,793 12,761 941,607 Remediation Interim executive management Scott Burke 95,680.60 469,037 244,709.30 809,427 Remediation Financial Restatement RACHLIN 605,279 19,213 624,492 Remediation Financial Restatement Steven Douglas consolidation 31, 055 317,413 79,495.00 182,020 609, 983 Jefferson Wells consultants completing restatements of 2003 thru Remediation Financial Restatement 2005 10Q's and 10K's 354,515.74 123,076 477,591 Remediation Interim executive management MARCIA WIERSMA 166,978.88 101,591 268,570 Remediation Tax Restatement Oeloitte work on Payroll taxes 14,009 162,098 176,107 Remediation Forensic Accounting MARGOLIN, WINER & EVENS LLP 124,112 124,112 Remediation Interim executive management TATUM, TSF' D FROM P88A 9,000.00 11,541 (5,000) 15,541 Remediation Total 316052.5 9,892,435.88 4,846,096 1,351,587 210,038 333,834 16,950, 042 5EC & CA legal- SEC, Class Action Venable 371,862 2, 020,264 3,886,887 761,890 7,040,903 5EC & CA legal- Class Action Bryan Cave, SEC investigation 1,927,511 1,927,511 5EC & CA legal- Class Action BRYAN CAVE 354,238 1,426,771 1,781,009 SEC & CA legal- Class Action CLIFFORD & CHANCE 441,378 196,856 53,158 11,829 703,221 SEC & CA Total 1,167,477 2,020,264 5,510,514 1,980,669 773,719 11,452,643 - --_.- Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 6 of 15 PageID #: 16505 8-K I form8k0760 I 022320 10.htm UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Rep0l1 (Date of earliest event reported) : February 23, 20 10 Delaware (State or other jurisdiction of incorporation) POINT BLANK SOLUTIONS, INC. (Exact name of registrant as specified in its charter) 001-13112 (Commission File Number) 2102 SW 2nd Street, Pompano Beach, Florida (Address of principal executive offices) 11-3129361 (IRS Employer Identification No.) 33069 (Zip Code) Registrant's telephone number, including area code: (954) 630-0900 N/A (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below) : o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 7 of 15 PageID #: 16506 Item 2.04. Triggering Events that Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement. On February 23, 20 I 0, Point Blank Solutions, Inc. (the "Company"), and its subsidiaries Protective Apparel Corporation of America and Point Blank Body Armor, Inc. (collectively, the "Borrowers"), received a letter (the "Letter") from Bank of America, N.A. ("Bank of America") providing notice that events of default occurred and are continuing under that certain Amended and Restated Loan and Security Agreement, dated as of April 3, 2007 (the "Loan Agreement"), by and among the Borrowers, as borrowers, the Company, as guarantor, and Bank of America (as successor by merger to LaSalle Business Credit, LLC), as administrative agent and collateral agent for itself and all other lenders party to the Loan Agreement. The Letter provides that, as a result of the ongoing events of default, (i) all of the Borrowers' liabilities under the Loan Agreement have been accelerated and are immediately due and payable and (ii) Bank of America' s commitments under the revolving credit line provided for under the Loan Agreement have been terminated. The Loan Agreement, the terms of which were previously disclosed in reports filed with the Securities and Exchange Commission, provided the Borrowers with financing through a revolving credit line and a term loan. As of February 23, 2010, $0 was outstanding under the revolving credit line and $10,000,000 in principal was outstanding under the term loan. The events alleged by Bank of America to constitute an event of default under the Loan Agreement include the failure of the Borrowers to comply with their financial covenants under the Loan Agreement to have a minimum EBITDA of at least ($1,300,000) for the three months ended December 31, 2009 and to have a net worth of at least $5,000,000 as of December 31, 2009. Pursuant to the terms of the Loan Agreement, in case of an event of default, Bank of America is also entitled in its sole and absolute discretion to (i) institute a default rate of interest of 2% per annum in excess of the interest rate otherwise payable with respect to any or all liabilities outstanding under the Loan Agreement, (ii) commence any legal or other action to coll ect any or all of the liabilities outstanding under the Loan Agreement from the Company or the Borrowers, (iii) foreclose or otherwise realize on any or all of the collateral and appropriate, set-off or apply to the payment of any or all of the liabilities, any or all of the collateral , and (iv) take any other enforcement action or otherwise exercise any and all rights and remedies provided for under the Loan Agreement or applicable law. Bank of America indicated in the Letter that it reserves its right to exercise at any time its default-related rights and remedies under the Loan Agreement and applicable law. The Company is considering all alternatives available to it in response to the matters set forth in the Letter. Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 8 of 15 PageID #: 16507 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this repOIi to be signed on its behalf by the undersigned hereunto duly authorized. POINT BLANK SOLUTIONS, INC. Dated: March 1,2010 By: /s/ Michelle Doery Name: Michelle Doery Title: Chief Financial Officer Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 9 of 15 PageID #: 16508 8-K I form8k0760 I 04 1220 I O.htm UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): April 12,2010 Delaware (State or other jurisdiction of incorporation) POINT BLANK SOLUTIONS, INC. (Exact name of registrant as specified in its charter) 001- 13 I 12 (Commission File Number) 2 I 02 S W 2nd Street, Pompano Beach, Florida (Address of principal executive offices) 11-3129361 (IRS Employer Identification No.) 33069 (Zip Code) Registrant's telephone number, including area code: (954) 630-0900 N/A (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) o Soliciting material pursuant to Rule 14a- I 2 under the Exchange Act (17 CFR 240. I 4a- I 2) o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240. 14d-2(b o Pre-commencement communications pursuant to Rule 13e-4( c) under the Exchange Act (17 CFR 240. 13e-4(c Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 10 of 15 PageID #: 16509 Item 1.01. Entry into a Material Definitive Agreement. The information contained in Item 2.03 regarding the DIP Financing Agreement (as defi ned below) and the Lender Relationships (as defined below), and the information contained in Item 5.02 regarding the Henderson Agreement (as defined below) is incorporated by reference into this Item 1.0 I . Item 1.02. Termination of a Material Definitive Agreement. The information contained in Item 2.03 regarding the Lender Relationships and the information contained in Item 5.02 regarding the Management Services Agreement (as defined below) is incorporated by reference into this Item 1.02. Item 1.03. Bankruptcy or Receivership. Chapter 11 Petitions On April 14, 20 I 0, Point Blank Solutions, Inc. (the "Company"), a Delaware corporation, and its subsidiaries Protective Apparel Corporation of America, a New York corporation, Point Blank Body Armor, Inc., a Delaware corporation, and PBSS, LLC, a Delaware limited liability company (the " Subsidiaries", and together with the Company, the "Debtors"), filed voluntary petitions (the "Chapter II Petitions") for relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The Chapter 11 Petitions are being jointly administered under the caption "In re Point Blank Solutions, Inc., et. at." Case No. 10- 11255 (the "Case"). The Debtors will continue to operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. On April 14,20 I 0, the Company issued a press release relating to the foregoing, a copy of which is attached hereto as Exhibit 99.1 and is incorporated herein by reference. Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant. DIP Financing Agreement On April 12, 20 I 0, in connection with the Chapter 11 Petitions, the Debtors obtained a commitment from Steel Partners II, L.P. (the "Lender"), subject to approval by the Bankruptcy Court and the satisfaction of certain other conditions, to provide the Debtors with post-petition financing pursuant to a Debtor-in-Possession Financing Agreement (the "DIP Financing Agreement"). The DIP Financing Agreement provides for a revolving loan facility of up to an aggregate amount of $20,000,000 (the "DIP Revolving Loan"). The DIP Revolving Loan will be used for, among other things, working capital and the repayment of all amounts outstanding under the Loan Agreement (as defined below) . The maximum amount of availability under the DIP Revolving Loan at any particular time is based on a percentage of the Debtors' eligible accounts receivable and eligible inventOlY, plus the amount of the Third Party Guaranty (as defined below), minus certain reserves established by the Lender in its sole discretion. The principal outstanding under the DIP Revolving Loan will bear interest at a rate of7.50% per annum plus the greater of 0) 3.25% per annum or (ii) the prime rate. The interest due and payable under the DIP Revolving Loan as of any required payment date, however, wi ll not be less than the interest that would have accrued and been payable if the principal balance under the DIP Revolving Loan was $ 10,000,000. After the occurrence and during the continuance of an event of default under the DIP Financing Agreement, the interest rate will increase to 9.50% per annum plus the prime rate. Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 11 of 15 PageID #: 16510 The Debtors' obligations under the DIP Financing Agreement are secured by a first perfected security interest and lien on all of the Debtors' assets and constitute a super-priority administrative claim under Section 364(c)(I) of the Bankruptcy Code. The Debtors' obligations under the DIP Financing Agreement are partially supported by a $10,000,000 third pa11y guaranty (the "Third Party Guaranty"). The guarantor providing the Third Party Guaranty is the same guarantor that provided a $10,000,000 third party guaranty in support of the Term Loan (as defined below) and is the beneficiary of the Subordinated Note (as defined below) . All obligations under the DIP Financing Agreement will be due and payable on the earliest of (i) September 30, 20 I 0, (ii) the occurrence of an event of default under the DIP Financing Agreement and the acceleration of the Debtors' obligations under the DIP Financing Agreement by the Lender, (iii) the closing of a sale of all or substantially all of the assets of the Debtors pursuant to Section 363 of the Bankruptcy Code, or (iv) the effective date of a confirmed plan of reorganization in the Case. The DIP Financing Agreement also contains certain customary representations, covenants, indemnifications, and events of default. Other events of default include, but are not limited to (i) a change in control of any Debtor's board of directors, (ii) any person or "group" (within the meaning of the Securities Exchange Act of 1934, as amended) becoming the beneficial owner, directly or indirectly, of25% or more of any Debtor's capital stock, (iii) the termination or attempted termination of the Third Party Guaranty, and (iv) certain customary events of default. In connection with the DIP Financing Agreement, the Debtors will pay the Lender (i) a commitment fee of 0.75% per annum of the average daily difference between the maximum amount available under the DIP Revolving Loan and the outstanding loans during the calendar month just ended and (ii) a telmination fee of $400,000 upon the termination of the DIP Financing Agreement. In connection with the DIP Financing Agreement, the Debtors will also pay Steel Partners, LLC, an affiliate of the Lender ("Steel Partners") , a non-refundable fee of $400,000. Additionally, the Debtors are required to reimburse the Lender for all costs and expenses, including reasonable attorneys' fees, incurred by the Lender in connection with the DIP Financing Agreement. Relationships with the Lender and its Affiliates As of April 14, 2010, based on information provided by the Lender, the Lender owned 2,360,146 shares, or approximately 4.6%, of the Company's outstanding common stock. As of April 14,2010, based on information provided by the Lender, the Lender and its affiliates also own approximately 38.2% of IPS Industries, Inc. ("IPS"), a supplier of ballistic materials from whom the Company has historically made and continues to make purchases of materials . For the year ended December 31, 2009, the Company made purchases from IPS with an aggregate value of approximately $24,700,000. Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 12 of 15 PageID #: 16511 SP Corporate Services LLC, an affiliate of Steel Partners ("SP Corporate Services"), was a party to the Management Services Agreement (as defined below), which is described in Item 5.02. James R. Henderson, the Company's Chief Executive Officer and Chairman of the Board, is a Managing Director and operating partner of Steel Partners, and Terry R. Gibson, another member of the Company's Board of Directors, is a Managing Director of SP Corporate Services. Steel Partners is the manager of the Lender. The relationships between the Debtors and the Lender and its affiliates discussed above are referred to herein as the "Lender Relationships". Item 2.04. Triggering Events that Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement. Effect a/Chapter 11 Petitions The filing of the Chapter 11 Petitions constituted an event of default under that certain Amended and Restated Loan and Security Agreement, dated as of April 3, 2007 (the "Loan Agreement"), by and among the Company, its subsidiaries Protective Apparel Corporation of America and Point Blank Body Armor, Inc. (collectively, the "Borrowers"), and Bank of America, N.A. ("Bank of America"). As a result of such an event of default, all obligations under the Loan Agreement have become due and payable. As of April 14, 2010, $0 was outstanding under the revolving credit line, $525,654 was outstanding under certain letters of credit, and $10,000,000 in principal was outstanding under the term loan (the "Term Loan") provided for under the Loan Agreement. As previously reported in the Company's Form 8-K filed on March 1,2010, on February 23, 2010, Bank of America provided notice that events of default occurred and were continuing under the Loan Agreement, and a result, (i) all of the Borrowers' liabilities under the Bank of America Loan Agreement were accelerated and became immediately due and payable and (ii) Bank of America's commitments under the revolving credit line provided for under the Loan Agreement were terminated. Additionally, the filing of the Chapter II Petitions may constitute an event of default under that certain Subordinated Note, dated October 29, 2009 (the "Subordinated Note"), made by the Borrowers for the benefit of the third party guarantor of the Term Loan, and may trigger the acceleration of the Borrowers' obligations under the Subordinated Note. The Subordinated Note evidences indebtedness of the lesser of (i) $10,000,000 or (ii) such amount as may be advanced by the third party guarantor to Bank of America on behalf of the Borrowers and the Company to satisfy their obligations under the Term Loan, which amount was $0 as of April 14,2010. Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 13 of 15 PageID #: 16512 The Debtors believe that any efforts to enforce such payment obligations against the Debtors under the Loan Agreement and the Subordinated Note are stayed as a result of the filing of the Chapter II Petitions in the Bankruptcy Court. Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. Henderson Transitions to Employment on "At Will" Basis On April 12, 2010, the Company and James R. Henderson, the Company's Chief Executive Officer, enter.ed into an oral agreement pursuant to which Mr. Henderson became an employee of the Company (the "Henderson Agreement"). Pursuant to the Henderson Agreement, Mr. Henderson is now employed as the Company' s Chief Executive Officer on an " at will" basis and receives an annual salary of $77 ,000 per month. Pursuant to the Henderson Agreement, Mr. Henderson will no longer receive additional compensation for his service on the Company's Board of Directors or as Chairman of the Board, and will no longer receive a monthly stipend for living expenses. Termination of Management Services Agreement Mr. Henderson had previously been serving as the Company's Chief Executive Officer pursuant to a management services agreement, dated as of September 1, 2009 (the " Management Services Agreement"), by and between the Company and SP Corporate Services. Pursuant to the Management Services Agreement, the Company paid SP Corporate Services $37,500 per month as consideration for Mr. Henderson's services and provided Mr. Henderson with a stipend of$8,000 per month for living expenses. On April 12,2010, in connection with Mr. Henderson's transition to employment on an "at will" basis, the Company terminated the Management Services Agreement. Item 8.01. Other Events. The Debtors retained CRG Partners Group, LLC, a financial advisory firm specializing in operational improvement and financial restructuring services ("CRG Partners"), to serve as their financial advisor in connection with the restructuring process. Each of the Debtors has appointed Scott A vila, a Managing Partner with CRG Partners, as its Chief Restructuring Officer. Item 9.01. Financial Statements and Exhibits. (d) Exhibits Exhibit No. Description 99.1 Press release, dated April 14,20 I O. Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 14 of 15 PageID #: 16513 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this repOIt to be signed on its behalf by the undersigned hereunto duly authorized. POINT BLANK SOLUTIONS, INC. Dated: April 14,2010 By: lsi Michelle Doery Name: Michelle Doery Title: Chief Financial Officer Case 2:06-cr-00550-JS-AKT Document 1661-3 Filed 05/20/13 Page 15 of 15 PageID #: 16514 Exhibit No. 99.1 EXHIBIT INDEX Description Press release, dated April 14,20 10. -1- REBUTTAL REPORT OF JORDAN G. MILEV, PH.D. I. Summary of Assignment 1. At the request of the U.S. Attorneys Office for the Eastern District of New York, I previously submitted to the Supervising U.S. Probation Officer a letter attaching a report dated June 22, 2012 (Milev Report) in relation to the matter of U.S.A. v. Sandra Hatfield and David H. Brooks. The letter and report present my analysis of the losses caused to investors in the common stock of DHB Industries, Inc. (DHB) as a result of the actions that are the basis of defendants David H. Brookss and Sandra Hatfields convictions in September 2010 of several counts in the Superseding Indictment (Offenses of Conviction). 2. The U.S. Attorneys Office has informed me that Mr. Brooks has recently submitted a report by John F. Gould dated February 22, 2013 (Gould Report) which comments on the Milev Report. I have been asked by the U.S. Attorneys Office to respond to the Gould Report. 3. The U.S. Attorneys Office has also informed me that additional proof of claim data are available for this matter and has asked me to update my estimate of aggregate investor losses taking into account the available proof of claim data. II. Summary of Opinion 4. I have refined my estimate of aggregate investor losses as a result of the Offenses of Conviction using recent proof of claim data submitted to the claims administrator for this matter. My base case estimate of aggregate investor losses using these data is $109.2 million to $111.9 million. I note that the midpoint of that range is $110.6 million, while the previous base case estimate calculated in the Milev Report using institutional holdings data from SEC filings was $110.8 million and was calculated without the benefit of any proof of claim data for this particular case. Additionally, inclusion of investor losses associated with the market-adjusted stock price decline on one additional date with news about defendants illegal insider sales can lead to further $41.8 million in losses not captured by my base case estimate. In addition, inclusion of investor losses associated with the market-adjusted stock price decline on one additional date with news about Tactical Armor Products, Inc. (TAP) can lead to further $1.4 million in losses not captured by my base case calculation. 5. My response to the Gould Report can be summarized as follows: a. Criticisms in the Gould Report of the dates used in my event study are flawed and unfounded. Specifically: i. Event dates that were a result of the Offenses of Conviction and caused investor losses should be included in any investor losses estimate because this is the proper methodology according to the Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 1 of 25 PageID #: 16515 -2- 2006 United States Sentencing Guidelines Manual (Sentencing Guidelines); ii. Criticism regarding the length of the event window for two of the event dates is without merit as the event window is determined using an unbiased, ex-ante specified objective criterion applied consistently throughout the Milev Report; iii. It is improper to include DHBs price increase associated with the July 10, 2006 event date as an offset to any estimate of losses as that is contrary to the Sentencing Guidelines. b. Criticisms in the Gould Report of NERAs Multi-Sector Multi-Trader (MSMT) model are flawed and unfounded. Specifically: i. Without the availability of complete trading data for all investors, use of a trading model is necessary to calculate the aggregate investor losses as a result of the Offenses of Conviction; ii. NERAs trading model is consistent with the scientific method and is appropriate to use to estimate aggregate losses to all DHB investors in this case; iii. The fact that the trading model calculation does not match claimed losses for some claimants is expected and does not invalidate the overall loss number; iv. Aggregate investor losses estimates using NERAs trading model are consistent with the available proof of claim data; v. The court cases cited in the Gould Report do not address NERAs trading model or support the opinions in the Gould Report. III. Refined Estimate of Base Case Aggregate Investor Losses Using Additional Proof of Claim Data 6. The U.S. Attorneys Office has informed me that additional proof of claim data have been filed in this matter and asked me to update my estimate of aggregate investor losses taking into account the available proof of claim data. 7. My base case estimate of the range of aggregate investor losses using the available proof of claim data is $109.2 million to $111.9 million. 1 I note that the midpoint of that range is $110.6 million. My previous base case estimate using
1 This estimated range is a refinement of my previous estimated range for the base case estimate of investor losses using the proof of claim data of $107.2 million to $112.7 million (see fn. 66 in the Milev Report). Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 2 of 25 PageID #: 16516 -3- institutional holdings data from SEC filings was $110.8 million and was calculated prior to having the proof of claim data for this particular case. 2 Additionally, inclusion of investor losses associated with the market-adjusted stock price decline on one additional date with news about defendants illegal insider sales can lead to further $41.8 million in losses not captured by my base case calculation of investor losses. 3 In addition, inclusion of investor losses associated with the market-adjusted stock price decline on one additional date with news about TAP can lead to further $1.4 million in losses not captured by my base case calculation. 4
IV. Criticisms in the Gould Report of My Event Date Selection Are Flawed and Unfounded A. Requiring That Loss Be Directly Caused by Curative Disclosures Is Erroneous and Contrary to the Sentencing Guidelines 8. The Gould Report rests most of its criticisms of my event date selection on a mistaken belief that I must rely on curative disclosures as a basis for my calculation of investor losses. The Gould Report states, In my opinion, the calculation of losses to investors should include only stock price decreases that are associated with a disclosure of fraud and not include decreases that simply follow the disclosure of an event that may later be deemed to be the possible effects of a fraud. Events where the investors could not have discerned any link between the information revealed to the market on that day and any alleged fraud cannot provide a basis for calculating losses caused by fraud. 5
9. As discussed below, this opinion in the Gould Report is contrary to the instructions provided in the Sentencing Guidelines for the calculation of investor losses. The Gould Report provides no support for excluding from the calculation of investor losses dates that are a result of the Offenses of Conviction. 6
10. As described in the Milev Report, my analysis of loss is informed by the Sentencing Guidelines that defines loss as the greater of actual loss or intended loss and
2 Note that in the Milev Report I did not have proof of claim data gathered specifically for this matter and based my estimate of investor losses on a calculation using institutional holdings from SEC filings. I also performed a calculation using proof of claim data from the In re DHB Industries, Inc. Class Action Litigation as a robustness check. In this report, I am able to use the additional proof of claim data that have been submitted to the claims administrator in the current matter. 3 This estimate is a refinement of my previous estimate of $42.1 million (see 46 and fn. 69 in the Milev Report). 4 This estimate is a refinement of my previous estimate of $1.3 million (see 47 in the Milev Report). 5 Gould Report, 19. 6 Even if the Gould Report were correct in requiring that a loss must be directly caused by a curative disclosure, which I believe to be incorrect and against the Sentencing Guidelines, several of the dates on which the fraud was not explicitly disclosed by DHB may still have been a partial disclosure. For example, DHB announced on May 4, 2006 that Lawrence Litowitz was resigning from his position as DHBs Director of Finance, less than a month after DHB announced CFO Dawn Schlegels resignation. Upon this news, market participants may have interpreted this as a signal of further problems with DHBs financials. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 3 of 25 PageID #: 16517 -4- further states that actual loss is the reasonably foreseeable pecuniary harm that resulted from the offense and that intended loss is the pecuniary harm that was intended to result from the offense, including intended pecuniary harm that would have been impossible or unlikely to occur. 7 A calculation of losses consistent with the Sentencing Guidelines requires that losses that are a result of the fraud should be included in a loss calculation regardless of whether the market knew about the reason for the price decline at the time. To use an illustration, when an arsonist starts a fire, the arson causes loss at the time the fire is discovered; the loss is independent of whether the criminal nature of the fire is disclosed then or remains unknown until a formal investigation into the fire is complete. 11. As I state in the Milev Report, my analysis of loss resulting from the Offenses of Conviction is based on events that represent a disclosure of new information related to the Offenses of Conviction. 8 While such disclosure needs to be a result of the fraud and lead to a pecuniary harm to the investors holding DHB stock, such a disclosure does not need to be curative of the fraud itself. In the language of the Sentencing Guidelines, The estimate of the loss shall be based on available information, taking into account, as appropriate and practicable under the circumstances, factors such as the following: (iv) The reduction that resulted from the offense in the value of equity securities or other corporate assets 9 (emphasis added). 12. One example of a date that the Gould Report improperly excludes from the calculation of investor losses is April 18, 2006. On that date DHB announced after market hours that it had been notified by one of its lenders, Lasalle Business Credit, LLC (Lasalle), that events of default had occurred under the terms of DHBs loan agreement. 10 This date was a result of the Offenses of Conviction because the events of default noted by Lasalle were all due to the Offenses of Conviction, as I stated in the Milev Report and with which the Gould Report appears to agree. 11 Therefore, the Sentencing Guidelines would require that this date be included in any calculation of investor losses.
7 Sentencing Guidelines, 2B1.1 Application Note 3A, available at the following URL: http://www.ussc.gov/Guidelines/2006_guidelines/Manual/gl2006.pdf. See also the 2005 United States Sentencing Guidelines Manual containing identical language, available at the following URL: http://www.ussc.gov/Guidelines/2005_guidelines/Manual/GL2005.pdf. 8 See my letter to Supervising U.S. Probation Officer dated June 22, 2012. Further, as I state in the Milev Report, 12, My base case estimate of losses is based only on DHBs price movements that are statistically significant and associated with disclosure of defendants criminal conduct or effects thereof. 9 Sentencing Guidelines, 2B1.1 Application Note 3C. 10 The events of default were a result of DHBs withdrawal of reliance on its 2005 interim financial statements, DHBs delay in filing its annual report for 2005, and DHBs failure to satisfy certain continued listing standards of the Amex. See DHB SEC Form 8-K filed on April 18, 2006. 11 Gould Report, 34. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 4 of 25 PageID #: 16518 -5- B. My Calculation of Investor Losses Is Conservative Because the Event Study Methodology May Not Capture All Fraud-Related Price Declines 13. The Gould Report states that I disagree with Dr. Milevs characterization of his decision to exclude dates that were not significant under his model from his investor loss analysis as conservative. 12 The Gould Report misses the point. As I state in the Milev Report, The traditional event study methodology may not capture losses to investors related to price declines that are due to the Offenses of Conviction but are not followed individually by a statistically significant price decline, or losses to investors in cases when the Offenses of Conviction harm the company and its shareholders but the harm is not disclosed or is disclosed only partially and gradually over time (so that these partial disclosures are not followed individually by a statistically significant price decline). 13
14. My base case estimate of aggregate actual losses uses only the seven events with news related to the Offenses of Conviction that were followed by a statistically significant stock price decline. However, as I note in the Milev Report, there are other days and sequences of days with news related to the Offenses of Conviction where the declines are not statistically significant using my market model, yet they are statistically significant using the market model presented by the defendants expert at trial. 15. As an example, the Milev Report stated that [i]nvestor losses tied to DHBs common stock price decline between the insider selling ending in December 2004 and the March 16, 2005 conference call can be substantial. Equity analysts commenting during and after DHBs March 16, 2005 investor call attributed a portion of the decline in DHBs stock price from approximately $19 per share to approximately $12 per share over the January March 2005 timeframe to loss in investor confidence due to the large insider sales and lack of explanation or assurance from management. 16. On January 11, 2005, one of the many days during that overall decline, Newsday carried a story about the insider sales. 14 That date is not included in my base case investor losses estimate, however, because my event study shows that there is approximately 12 percent probability that a price movement of such magnitude could have been observed at random, even absent the Newsday article. On the other hand, the event study of the defendants expert at trial showed that this probability is less than 5 percent. 15 In light of such economic evidence that can be used to argue both for and against inclusion of this date in an estimate of aggregate investor losses, I chose to be
12 Gould Report, 6. 13 Milev Report, fn. 5. 14 Execs get $200M in stock sale, Newsday, January 11, 2005. 15 When performing an event study of the Newsday article, my market model is more conservative for purposes of assessing statistical significance than the one that the defendants expert presented at trial and using my model will result in a conservative estimate of loss. For a more detailed discussion, see 20-23 in the Milev Report. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 5 of 25 PageID #: 16519 -6- conservative and to exclude that date from my base case estimate of investor losses even though defendants own expert at trial provided a basis for its inclusion. 17. I provide this complete information and leave it to the finder of fact to decide whether the price decline on January 11, 2005 should be counted toward investor losses. Including the market-adjusted decline on the date of the Newsday article as part of investor losses due to the Offenses of Conviction would add $41.8 million to any estimate of actual investor losses. 16 I also note that the total market-adjusted price decline from December 30, 2004 to March 16, 2005 was $7.54 per share, and the $41.8 million estimate above assumes that only $1.08 per share of this price decline is due to the Offenses of Conviction. V. Response to Specific Arguments in the Gould Report Regarding Each Date Used in My Investor Losses Calculation A. March 16, 2005 18. After the market close on March 16, 2005, DHB management held a conference call to discuss earnings results for the fourth quarter of 2004. 17 This was the first conference call following Mr. Brookss and Ms. Hatfields insider sales. The conference call transcript and subsequent analyst commentary revealed that the focus of the analysts concern was the loss of confidence in management due to managements refusal to provide future guidance or explain the reasons for their recent insider sales. The jury convicted Mr. Brooks and Ms. Hatfield of insider trading with respect to these same insider sales. 19. The Gould Reports conclusions regarding this date are erroneous. In summary: a. The Gould Report disputes that the cause of the investor losses following the conference call was reputational harm resulting from the Offenses of Conviction. 18 This is incorrect. See V.A.i below, and Milev Report V.A.1-2.
16 My previous estimate of this loss using quarterly institutional holdings data from SEC filings was $42.1 million. See 46 and fn. 69 in the Milev Report. 17 DHB Industries Posts Record Fourth Quarter Results - Fourth Quarter EPS Increases 200% to Record $0.18 - - Fourth Quarter Revenues Climb 24% to Record $90.2 Million - - Full-Year 2004 Revenues Increase 48% to a Record $340 Million - - DHB Announced Approximately $544 Million in New Orders in 2004, PR Newswire (U.S.), March 16, 2005, 4:05 PM. 18 For example, the Gould Report states that DHB management and Mr. Brooks were controversial well before 2005 Therefore it is inappropriate for Dr. Milev to suggest that large reputational damage occurred on March 16, 2005. Gould Report, 28. The Gould Report also states that [o]nly the lack of guidance and financial issues can be considered to be new news on this day. Gould Report, 27. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 6 of 25 PageID #: 16520 -7- b. The Gould Report mischaracterizes my position on investor losses caused by reputational factors related to the Offenses of Conviction. 19
See V.A.ii below. c. The Milev Report states that the first investor question on the conference call was about the high inventory levels and asked if there was a potential write-down of that inventory. The Gould Report states that this question was addressed satisfactorily, 20 but the Gould Report fails to acknowledge that the answer provided by Ms. Hatfield was false and misleading because it was based on inventory levels that were inaccurate due to the Offenses of Conviction. See V.A.iii below. d. The Gould Report argues that the price decline following the conference call is due to lack of guidance and financial issues, 21
including a shortage of raw materials, rather than to any reputational impact as a result of the Offenses of Conviction. This is incorrect. I demonstrate in V.A.i below that fraud-related lack of guidance caused severe reputational damage to DHB, and I show in V.A.iv below that financial issues were not a major concern to analysts. e. The Gould Report is incorrect to exclude this date from the calculation of investor losses simply because DHB did not explicitly reveal the fraud at that time. 22 The stock price decline associated with this date was the result of the Offenses of Conviction and is properly included in an estimate of investor losses. See IV.A above. i. Investors suffered losses due to the reputational harm to DHB resulting from the Offenses of Conviction 20. The Gould Report disputes that the stock price declined due to reputational harm on this date, and that the reputational harm was related to the fraud. 23 Instead, the Gould Report seems to attribute the stock price decline following the March 16, 2005 conference call to non-fraud related factors. The Gould Report states, Only the lack of guidance and financial issues can be considered to be new news on this day. Neither of these pieces of news was related to fraud... 24 I do not agree. Given that the defendants were found guilty of securities fraud with respect to the companys financials and had recently committed insider trading fraud, DHB managements refusal to provide financial
19 The Gould Report incorrectly asserts that Dr. Milev notes that any price declines attributable to loss in investor confidence due to the insider sales would have occurred before March 2005. Gould Report, 24. 20 Gould Report, 26. 21 Gould Report, 24. 22 Gould Report, 5, 20. 23 Gould Report, 24. 24 Gould Report, 24. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 7 of 25 PageID #: 16521 -8- guidance caused reputational damage related to the Offenses of Conviction. I note that DHB competitors Armor Holdings and Ceradyne were continuing to provide guidance. 25
21. Importantly, the Gould Report ignores the fact that analysts themselves identified the reason for the sell-off after the investor call. In fact, in the words of the analyst from Feltl and Company, The selling pressure continued this morning due, we believe, to the absence of guidance along with the earlier insider sales at much higher prices (emphasis added). Similarly, a Roth Capital Partners report stated, [F]rustrated retail and institutional shareholders alike fixated on the guidance issue (or lack thereof) and investors also responded angrily to managements unsatisfactory comments over insider selling in December. 26
22. In addition, while investors were generally aware of the insider sales prior to the conference call, they were not aware that management would not provide any explanation regarding these sales and that management would, inexplicably and to the dismay of virtually all analysts, simultaneously refuse to provide guidance going forward and refuse to agree that DHB is a good stock to invest in. One participant on the conference call stated to Brooks, You sold basically half, a third of your holding. Thats why the market is getting fidgety. Theyre, like, If the CEO thinks the companys going to go a lot higher in the next couple of years, and he really has confidence in his own stock, he wouldnt unload a third of his holdings.[] Another participant stated, I think the more it seems like youre not forthcoming, really I think it hurts stock performance, it hurts investors confidence (emphasis added). 23. Frustration over the lack of explanation for the massive insider selling was further evidenced by other questions from the conference call such as the following: Noting that the stock is - subsequent to December has gone from a basically [$23] spike, down to [$12]; why would somebody want to buy this at the face if youre continuing to sell? Youre not willing to say that you wont sell any more? And youre unwilling to give any forward revenue guidance? (emphasis added)
25 Armor Holdings provided FY2005 guidance in its 4Q 2004 earnings announcement on February 10, 2005. On April 21, 2005, Armor Holdings revised its FY2005 guidance provided on February 10, 2005 and initiated preliminary FY2006 guidance. See Armor Holdings, Inc. Reports Record Revenues and 4th Quarter Results - 4th Quarter Earnings Per Share Increase to $0.74 Per Diluted Share vs. Prior Year Loss of $(0.17) Per Diluted Share - - FY05 Guidance of $2.75 to $3.00 Per Diluted Share After $0.06 to $0.07 Anticipated Integration and Other Charges, PR Newswire (U.S.), February 10, 2005, 4:09 PM, and Armor Holdings, Inc. Reports Record Revenues and 1st Quarter Results - 1st Quarter Earnings Per Share Increase 107.1% to $0.87 Per Diluted Share vs. Prior Year $0.42 Per Diluted Share - - Revises FY05 Guidance to $3.30 to $3.60 Per Diluted Share After $0.06 to $0.07 Anticipated Integration and Other Charges- - Initiates Preliminary, FY06 Guidance of at least $3.00 Per Diluted Share Before Acquisitions, PR Newswire (U.S.), April 21, 2005, 4:05 PM. Ceradyne raised its 2005 earnings guidance on March 4, 2005 and later reiterated its guidance on April 28, 2005. See Q4 2004 Ceradyne Earnings Conference Call - Final, FD (FAIR DISCLOSURE) WIRE, March 4, 2005, and Q1 2005 Ceradyne Earnings Conference Call Final, FD (FAIR DISCLOSURE) WIRE, April 28, 2005. 26 Truth & Consequence: Record Q404 Results, But Investor Call Fails to Inspire, Roth Capital Partners, March 17, 2005. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 8 of 25 PageID #: 16522 -9- 24. Similarly, John Winslow, an analyst with DuPont Funds, had the following exchange with David Brooks during the same conference call: <Q John Winslow>: In general, as far as the price of the stock now, would you consider it a great buy? <A David Brooks>: Well, thats thats a question I dont believe I should answer. I dont believe I should answer that question. <Q John Winslow>: But you always want to say this, because you know, with you know, to show some sort of support for the shareholders, why not I mean, seeing that the levels went from 20 [dollars] and change to right now 12 [dollars] and change, why not invest not the companys money, but your own insider money 25. Investors lost confidence in management as a result of the conference call. The following exchange reflects the sentiment of the call with regard to management credibility concerning what had been happening and was continuing to happen at DHB: <Q>: What do you guys feel that youre going to do to basically put confidence in investors going after all of the selling weve seen from you as far as other shareholders and insiders coming into 05? <A David Brooks>: Well Jason, I dont know who youre with, or who you work with, but I believe that the results will speak for themselves. That the intrinsic value of the company will also speak for itself and we believe that in the end the companys results and the progress of the company will speak for itself. <Q>: Okay. Thank you. I dont believe a word . <A David Brooks>: All right. (emphasis added) 26. In summary, as the quotes above illustrate, the defendants unsatisfactory responses regarding their insider trading, which has now been deemed illegal, and refusal to provide financial guidance, which has now been deemed to be based on inflated gross profit margins, caused losses to investors related to reputational effects, losses that are related to the Offenses of Conviction. ii. The Gould Report mischaracterizes my position on investor losses caused by reputational factors related to the Offenses of Conviction 27. The Gould Report asserts that Dr. Milev notes that any price declines attributable to loss in investor confidence due to the insider sales would have occurred before March 2005. 27 On the contrary, the page specifically cited in the Milev report contains no such statement or inference. Furthermore, language in the Milev Report on the page previous to the one cited plainly contradicts the above assertion. Specifically, I
27 Gould Report, 27. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 9 of 25 PageID #: 16523 -10- state, The conference call caused analysts and investors to doubt managements credibility, motives and ability to run the company. 28
28. To make it clear, my position is that following the conference call there are investor losses due to reputational damage as managements credibility was damaged in the eyes of investors and analysts. However, reputational damage likely occurred even earlier. The Milev Report contained a discussion of the investor losses that are likely due to a loss in investor confidence prior to the March 2005 conference call, which is in addition to investor losses due to loss in investor confidence following the conference call. 29
29. The Gould Report cites a Roth Capital Partners analyst report that states that the conference call did little to restore investor confidence 30 and claims that this quote implies that confidence [in DHB management] was already low 31 prior to the investor call and therefore no large reputational damage occurred in connection with the call. This claim is contradicted by the remaining part of that same sentence in the Truth & Consequence section of that analyst report. The complete sentence, including the part that the Gould Report omits, reads: This call probably did very little to restore investor confidence and to the contrary most likely did more damage than good 32 (emphasis added). iii. Managements answer about inventory levels was based on inaccurate financial information that was a result of the Offenses of Conviction 30. In the Milev Report, I pointed out that the increases in inventory in the fourth quarter of 2004 prompted an analyst question given the lower levels of raw materials reported. The inventory issue, the Gould report claims, appears to have been addressed satisfactorily during the conference call. 33 However, the Gould Report ignores the fact that Ms. Hatfields answer to the question about raw material shortages and inventory levels was false and misleading because it relied on the very same inventory levels that were inaccurate due to the Offenses of Conviction. 34
28 Milev Report, 17. 29 See Milev Report, 20-23. See also Milev Report, 46, Incorporating DHBs market-adjusted price decline following one day with specific reports [prior to the March 2005 conference call] about the insider sales, January 11, 2005, would add $42.1 million to any estimate of investor losses. Note that my refined estimate of this number using additional proof of claim data in this matter is $41.8 million, as described in Section III. 30 Truth & Consequence: Record Q404 Results, But Investor Call Fails to Inspire, Roth Capital Partners, March 17, 2005. 31 Gould Report, 28. 32 Truth & Consequence: Record Q404 Results, But Investor Call Fails to Inspire, Roth Capital Partners, March 17, 2005. 33 Gould Report, 26. 34 DHB SEC Form 8-K filed on August 18, 2006. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 10 of 25 PageID #: 16524 -11- iv. The Gould Report mischaracterizes the overall tone of analysts commentary about DHBs 4Q2004 earnings 31. In an attempt to attribute the price decline on March 17, 2005 to the fourth quarter revenues and the limited supply of raw materials, the Gould report states that [a]rticles that appeared on March 17, 2005 indicate that DHBs fourth quarter revenues were below some analysts expectations 35 and that [o]ne of the reasons mentioned [for the shortfall] is a limited supply of raw material. 36
32. The Gould Report ignores commentary from analysts themselves that attributes the price decline to the absence of guidance and to the insider sales. For example, as cited in the Milev Report 15, a Feltl and Company analyst observed, The stock has been under heavy selling pressure since large insider sales were reported late in the year. The selling pressure continued this morning due, we believe, to the absence of guidance along with the earlier insider sales at much higher prices. 37
33. In addition, the Gould Report mischaracterizes the overall tone of analysts commentary about DHBs 4Q2004 earnings. In general, analysts remarked on the investor call that DHB had had a great quarter and congratulated management on a good year given the record $90.2 million of quarterly net sales reported and the near tripling of income available to common stockholders to $8.2 million. As one analyst observed in a subsequent report, Aided by a lower tax rate, reported EPS beat our estimate by a penny, 38 another analyst reported that EPS [would have] missed by a penny when using a normal tax rate. Results well ahead of prior year, 39 and a third stated that Q404 EPS results were in-line with our estimate and ahead of consensus views by a penny. 40 None of the analysts covering DHB revised their recommendation of Buy or Strong Buy and all continued to have a price target for the stock above its current price. 34. Further, the Gould Report specifically identifies the shortage of raw materials as an issue discussed during the investor call. 41 Statements by DHB
35 Gould Report, 21. 36 Gould Report, 21. 37 Year-End Results in Line, Feltl and Company, March 17, 2005. Similarly, as cited in the Milev Report 15, a Roth Capital Partners analyst summed up the call as a venting session where frustrated retail and institutional shareholders alike fixated on the guidance issue (or lack thereof) and investors also responded angrily to managements unsatisfactory comments over insider selling in December. From our experience as sell side analysts, this was the most bizarre conference call in which we have ever participated. This call probably did very little to restore investor confidence and to the contrary most likely did more damage than good. Truth & Consequence: Record Q404 Results, But Investor Call Fails to Inspire, Roth Capital Partners, March 17, 2005. 38 Year-End Results in Line, Feltl and Company, March 17, 2005. 39 4Q04 Results Below Estimates; Reducing Price Target, Miller Johnson Steichen Kinnard, March 17, 2005. 40 Truth & Consequence: Record Q404 Results, But Investor Call Fails to Inspire, Roth Capital Partners, March 17, 2005. 41 Gould Report, 23. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 11 of 25 PageID #: 16525 -12- management during the conference call reveal that the issue was expected to ease over the coming quarters, and that DHB had been able to sustain [its] growth in spite of material shortages. Indeed, analysts commented that they expected increased supply of raw materials in the second half of the year to alleviate the current shortage. 42
B. April 18, 2006 35. After the market close on April 18, 2006, DHB announced that it had been notified by one of its lenders, Lasalle, that events of default had occurred under the terms of DHBs loan agreement. The Gould Report states, The only information in the April 18, 2006 8-K filing that was new to the market was the default notice from Lasalle Business Credit Dr. Milev selects April 18, 2006 without taking into account that all of the fraud related news had already been disclosed in a series of announcements in March through April 7, 2006. 43
36. I do not disagree with the Gould Report that the new information released that day was that DHB had received a default notice. However, the reasons that DHB received the notice of default were all a result of the Offenses of Conviction the reasons stated by DHB were DHBs withdrawal of reliance on its 2005 interim financial statements, DHBs delay in filing its annual report for 2005, and DHBs failure to satisfy certain continued listing standards 44 of the Amex. 37. As I discussed in IV.A above, the Gould Report is incorrect to exclude this date from the calculation of investor losses simply because DHB did not explicitly reveal the fraud on this date. This event and the associated stock price decline resulted from the Offenses of Conviction. My inclusion of the stock price decline associated with this date is consistent with the Sentencing Guidelines requirement for inclusion of losses that are due to the Offenses of Conviction in the loss calculation. C. May 4, 2006 38. After the market close on May 4, 2006, DHB announced that its recently hired Director of Finance, Mr. Litowitz, had resigned 45 within a month of his hiring after the resignation of the prior CFO, Ms. Schlegel. The Gould Report states, Dr. Milevs
42 See, for example, Year-End Results in Line, Feltl and Company, March 17, 2005: DHB production has been constrained by raw material shortages; however, production of these materials is expected to increase and alleviate the shortages by the second half of 2005. Our quarterly revenue profile reflects increased ballistic material availability and rising sales as the year progresses. See also, Truth & Consequence: Record Q404 Results, But Investor Call Fails to Inspire, Roth Capital Partners, March 17, 2005: We also point out the fabric constraints in the industry are contributing to the company purchasing and stockpiling raw material when it becomes available and approximately $31.7 million or 36.7% of the inventory balances are uncut fabrics. 43 Gould Report, 33-34. 44 DHB SEC Form 8-K filed on April 18, 2006. 45 DHB SEC Form 8-K filed on May 4, 2006. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 12 of 25 PageID #: 16526 -13- inclusion of May 4, 2006 as an event date is flawed because there was nothing in the 8-K filing that would suggest that Mr. Litowitzs resignation was due to fraud at DHB. 46
39. As I stated in the Milev Report, the transcript testimony of Mr. Litowitz before the SEC shows that the resignation was due to the Offenses of Conviction. Specifically, responding to the question, And why did you resign from DHB? Mr. Litowitz stated, There were several reasons, one I believe I wasnt getting - I wasnt being allowed to do my job. The rhetoric with which David Brooks conducted himself was just inappropriate, and I wouldnt tolerate it anymore. I felt personally threatened by him. I believe there may have been illegal banking acts [at DHB] which I just wouldnt tolerate being involved with, and it was just an untenable situation. He wouldnt allow us to really help him 47 (emphasis added). 40. As I discussed in IV.A above, the Gould Report is incorrect to exclude this date from the calculation of investor losses simply because DHB did not explicitly reveal the fraud on this date. This event and the associated stock price decline resulted from the Offenses of Conviction. My inclusion of the stock price decline associated with this date is consistent with the Sentencing Guidelines requirement for inclusion of losses that are due to the Offenses of Conviction in the loss calculation. D. May 11, 2006 41. A week after Mr. Litowitzs resignation, and one month after Ms. Schlegels resignation, DHB announced that Jerome Krantz was resigning from its Board of Directors, including his role as the Chairman of the Boards Audit Committee. 48
Similar to Mr. Litowitzs resignation, Mr. Krantzs resignation was likely due to the Offenses of Conviction as I stated in the Milev Report. Mr. Krantz testified before the SEC that he resigned because he did not trust the management of [DHB] any longer and he refused to participate in any actions at that point with [DHB]. 49
42. The Gould Report states, Dr. Milevs inclusion of May 11, 2006 as an event date is flawed because the 8-K filed on this day only mentions that Mr. Krantz resigned for personal reasons. The quote that Dr. Milev cites that Mr. Krantz did not trust the management of [DHB] any longer was taken from a transcript dated two years later, on March 20, 2008. This information was not available to the public at the time of this price drop 50 (footnotes omitted). 43. As I discussed in IV.A above, the Gould Report is incorrect to exclude this date from the calculation of investor losses simply because DHB did not explicitly
46 Gould Report, 35. 47 Lawrence R. Litowitz testimony to the SEC in the matter of DHB Industries, Inc., May 15, 2006. 48 DHB SEC Form 8-K filed on May 11, 2006. DHB simultaneously announced that Senator William Campbell had been elected to the Board of Directors. 49 Jerome Krantz testimony to the SEC in the matter of DHB Industries, Inc., March 20, 2008, p. 78. 50 Gould Report, 38. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 13 of 25 PageID #: 16527 -14- reveal the fraud on this date. This event and the associated stock price decline resulted from the Offenses of Conviction. My inclusion of the stock price decline associated with this date is consistent with the Sentencing Guidelines requirement for inclusion of losses that are due to the Offenses of Conviction in the loss calculation. 44. The Gould Report states that it is important to note that on the same day there was a Newsday article that described an increase in competition from Armor Holdings and Ceradyne. 51 However, the Gould Report does not mention that this is not new news. The Newsday article that the Gould Report references describes a recent Army [statement that] it wants ideas from companies by May 31 to improve on and replace DHBs Interceptor Body Armor. 52 This same information was published in a Defense Daily article titled Army Looks For Information On Next Generation Body Armor System on May 8, 2006, three days before May 11, 2006. 53 Further, there is a notice posted on May 1, 2006 on the U.S. Governments Federal Business Opportunities website that contains substantially the same information. 54
E. May 23, 2006 45. After the market close on May 23, 2006, DHB announced that it had been notified by Amex, the national stock exchange that held the principal listing for DHBs common stock, that DHB was not in compliance with Amexs continued listing standards. As I describe in the Milev Report, this was due to the fraud, and the Gould Report does agree that this event caused investor losses. 55
46. The Gould Report states, Dr. Milev has chosen to use the cumulative negative stock price decrease for both May 24, 2006 and May 25, 2006 in his calculation of aggregate investor losses. Dr. Milev includes the stock price decrease on May 25, 2006 because the stock price decrease was statistically significant and no additional news regarding DHB was released during that time. I find this rationale for including a third day to be unreasonable. 56
47. The way the Gould Report characterizes my opinion is incorrect. Specifically, I do not include the price movement on May 25, 2006 only because it is a
51 Gould Report, 37. 52 DHB Industries gears up for competition as Army calls for body-armor redesign - A new vested interest, Newsday, May 11, 2006. 53 Army Looks For Information On Next Generation Body Armor System, Defense Daily, May 8, 2006. The article states, for example, By May 31 the Army wants potential sources for a Next Generation Body Armor System to improve on and replace the current Interceptor Body Armor (IBA). 54 The notice is available at the following URL: https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&id=3494a7322677318aa0ac9f256cafee 5b. 55 See Milev Report, 27 and Gould Report, 40. 56 Gould Report, 41. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 14 of 25 PageID #: 16528 -15- decline. 57 In other words, I do not require that the second day of price movements after the disclosure be a decline in order to include it. I follow an ex-ante defined, unbiased methodology for event window selection that was originally published by NERA almost ten years ago and not developed for purposes of this particular litigation. 58
48. The Gould Report advocates a seemingly ad-hoc approach. The Gould Report examines the intra-day price movement on the second day and, in this particular situation, makes the subjective choice to ignore the evidence that price continued to adjust through market close on the second day after the disclosure. References in the Gould Report to intraday price movements are not accompanied by any objective and scientific intra-day analysis of statistical significance. The Gould Report provides no basis to ignore the evidence that the decline on the second day after the announcement was statistically significant. 49. In contrast, I use an objective, unbiased, ex-ante specified methodology to evaluate the price response subsequent to each disclosure. The methodology considers the price movements through the last consecutive day that has a statistically significant abnormal daily price return. 59 If significant abnormal daily returns continue past the first day, and no new information has been released, then the statistical evidence suggests that the market is continuing to process the information from the original disclosure. Note that using my methodology, if there are significant abnormal daily returns for only the first day, I would not consider the following days as part of investor losses, and if there are no significant abnormal daily returns following the disclosure, I would not include that date in my base case estimate of investor losses. 50. It is appropriate to look at the stock price movements beyond just the first day following an announcement because it may take more than one trading day for the market to fully react to new information. The efficient market hypothesis does not necessitate that the market react immediately or within one trading day. 60 In fact, when NERA examined 120 stocks involved in class action lawsuits in 2001, we found that the average number of days that a stock took to react to the disclosure at the end of the alleged class period was greater than one day. 61 The studys authors stated, The average
57 Note that the methodology I use to measure the complete price response to the news may also result in my measuring a smaller overall reaction or, even, a complete reversal of the first-day movement (if it happens that a decline on the first day is followed by a statistically significant increase the day after). 58 Tabak, David, Robert Patton, Erica Rose, and Dmitry Krivin, Determination of the Appropriate Event Window Length in Individual Stock Event Studies, NERA Economic Consulting Working Paper, November 4, 2003. 59 In this report, when I refer to a reaction being statistically significant, I am referring to statistical significance at the 5% level. This is consistent with the Milev Report (see Milev Report, 11). It is my understanding that the Gould Report also agrees with using this threshold for statistical significance. 60 See Fama, Eugene, The Behavior of Stock-Market Prices, The Journal of Business, Vol. 38, No. 1. (January 1965), p. 39. 61 Tabak, David, Robert Patton, Erica Rose, and Dmitry Krivin, Determination of the Appropriate Event Window Length in Individual Stock Event Studies, NERA Economic Consulting Working Paper, November 4, 2003. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 15 of 25 PageID #: 16529 -16- estimated event window being over a day long is therefore not a wholly unexpected result, as long as one recognizes that the no-arbitrage formulation of the efficient market hypothesis requires that the market begin to impound information immediately, not that it complete the process even within the course of a trading day. 62
51. In sum, contrary to the implication in the Gould Report that I employed this methodology in order to calculate artificially high negative stock price reactions, 63
this method does not bias the size of the price reaction to be either higher or lower than the size of the reaction using a single day event window. Rather, the Gould Reports failure to follow a defined ex-ante methodology allows for subjectivity and bias. F. May 25, 2006 52. After the market close on May 25, 2006, DHB announced that it had received a Wells Notice from the SEC that indicates that the Staff has preliminarily determined to recommend that the SEC bring a civil injunctive action against the Company alleging violations of the antifraud, reporting and books and records provisions of the Securities Exchange Act of 1934, as amended. 64 DHB stated that the SEC action related to allegations of false journal entries in 2005 relating to inventory, which had the effect of inflating DHBs gross profit margin and net income. 65 As I describe in the Milev Report, this event was a result of the fraud, and the Gould Report agrees that this event is reasonable to include in a calculation of investor losses caused by the fraud. 66
53. Following DHBs announcement that it had received the Wells Notice, DHBs stock was halted so that the vast majority of investors were unable to sell their shares and the market price was unable to reflect the markets revised expectations. As I state in the Milev Report, just 800 shares of DHB stock appear to have changed hands following the announcement, and all other shareholders were unable to trade the common stock of DHB throughout the halt that lasted from May 26, 2006 until July 6, 2006. 67
54. The market did not fully react to the Wells Notice news on May 26, 2006 because only 800 shares changed hands in the morning before the halt. The volume of 800 shares is anomalous in several respects, as I explain below. 55. First, to put the 800 shares in context, for the two other dates that the Gould Report includes in its estimate of investor losses, May 24, 2006 and August 18, 2006, the trading volume on the day following the disclosure was 701,800 and 543,334, respectively. The 800 shares traded on May 26, 2006 represent less than 0.15% of the
62 Tabak, David, Robert Patton, Erica Rose, and Dmitry Krivin, Determination of the Appropriate Event Window Length in Individual Stock Event Studies, NERA Economic Consulting Working Paper, November 4, 2003. 63 Gould Report, 5. 64 DHB SEC Form 8-K filed on May 25, 2006. 65 DHB SEC Form 8-K filed on May 25, 2006. 66 See Milev Report, 28-29 and Gould Report, 44. 67 Milev Report, fn. 57 and exhibit 4 fn. 7. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 16 of 25 PageID #: 16530 -17- volume on these days with full-day trading. The claim in the Gould Report that the price at which 800 shares appear to have changed hands on the morning of May 26, 2006 fully reflects the markets response to the Wells Notice is without merit or support. 56. Further, according to NYSEs Trade and Quote (TAQ) database, the 800 shares of DHB reportedly changed hands in eight trade blocks of 100 shares each, at a price of $1.57, all trades occurring within 20 seconds of each other, between 9:44:06 and 9:44:25 in the morning. It is notable that there were no trades in DHB between the market open at 9:30 a.m. and 9:44 a.m. (or after 9:45 a.m., for that matter). As a comparison, on May 24, 2006, another date that the Gould Report includes in the estimate of investor losses, the NYSE TAQ database reports a trading volume of 94,400 shares between the market open, 9:30 a.m. and 9:44 a.m. 68
57. Last, I note that the NYSE TAQ data show that all eight trade blocks are listed as being reported by the National Association of Securities Dealers (ADF). ADF stands for Alternative Display Facility. No shares traded on DHBs principal listed exchange, Amex, on May 26, 2006. As a comparison, TAQ data report 329,000 shares of DHB traded on the Amex on another date that the Gould Report includes in its estimate of investor losses, May 24, 2006. 58. According to FINRA, The Alternative Display Facility (ADF) is an SRO [Self-Regulatory Organization] display only facility that is operated by FINRA. The ADF provides members with a facility for the display of quotations, the reporting of trades, and the comparison of trades As an SRO display only facility, ADF does not provide automated order routing functionality, execution facilities, or linkages between ADF trading centers. 69 Note that unlike exchanges such as Amex and NASDAQ, the ADF does not provide automated order routing and execution. The NYSE Amex defines the Alternative Display Facility as [a]n entity independent of a registered securities exchange that collects and disseminates securities quotes and prints. These organizations exist to capture some of the value of this information (which has historically been captured by exchanges) for the ADFs information suppliers, usually ECNs. 70
59. Due to all of the above considerations, the 800 shares traded on May 26, 2006 represent anomalous volume, and consequently the price at which the 800 DHB shares are reported to have changed hands in the morning of May 26, 2006 cannot be said to have incorporated the news of the Wells Notice. For that reason, in order to measure the complete price response to the news, I extended my event window to look to the next available closing price, which was the closing price immediately following the halt. It is appropriate to include the price response through the stock halt as investor losses because, as the Gould Report acknowledges, the stock halt itself was a result of the Offenses of
68 Note that I cannot compare the trading volume to the other date that the Gould Report includes in the estimate of investor losses, August 18, 2006, because TAQ data are not available for this date since DHB was no longer listed on an exchange. 69 http://www.finra.org/Industry/Compliance/MarketTransparency/ADF/ 70 See definition at: http://www.amex.com/servlet/AmexFnDictionary?pageid=display&titleid=253. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 17 of 25 PageID #: 16531 -18- Conviction 71 and the market price was not able to reflect the market reaction until after trading resumed following the halt. To the extent that other unrelated factors impacted the stock during the halt, those should be included as investor losses because the halt itself was a result of the fraud. 60. In other words, take an investor who held the shares on May 25, 2006, just prior to the Wells Notice announcement. Following the announcement, the investor was unable to sell because of the halt (in fact, only 800 shares were reported to have changed hands), and the investor was locked into holding DHB shares through the halt. The trading halt caused by the Offenses of Conviction took away from investors the ability to sell their shares. The trading halt, a result of the Offenses of Conviction, made it impossible for investors to avoid the price declines that occurred while the trading halt was in effect. In fact, a Newsday article during the halt states that several investors were frustrated by the still unexplained trading halt[and] they want to see what action they can take to force an explanation from the company, the government or the American Stock Exchange. 72
61. In addition, the Gould Report states that an important negative development in this period, again having nothing to do with fraud, was the announcement that Armor Holdings (a competitor of DHB Industries) had licensed the technology for new, more advanced body armor, as well as news of plans to withdraw troops from Iraq. None of these events that occurred during Dr. Milevs six-week event window were taken into account by him. 73 This is false. When I calculate investor losses, I use a market model that controls for market and industry effects. The market-adjusted price drop in response to the May 25, 2006 event is net of the impact of market events and industry events such as the ones identified in the Gould Report. In fact, the Gould Report acknowledges that I used market and industry factors in my event study and that it is my opinion that [Dr. Milevs] regression analysis was reasonable for evaluating the statistical significance of DHBs stock price movements. 74
G. August 18, 2006 62. The Gould Report agrees with my conclusion that the stock price decline associated with August 18, 2006 represents loss to investors due to the Offenses of Conviction. 75
71 Gould Report, 44. 72 DHBs restless shareholders [:] Some are forming committee to find out why the stock hasnt been trading amid several investigations, Newsday, June 24, 2006. 73 Gould Report, 46. 74 Gould Report, 15. 75 Gould Report, 48. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 18 of 25 PageID #: 16532 -19- H. The Gould Reports Inclusion of the Price Increase on July 10, 2006 as an Offset to Investor Losses Is Improper and Contrary to the Sentencing Guidelines 63. The Gould Report states, Dr. Milev fails to consider the benefit to investors resulting from the increase in DHBs stock price when Mr. Brooks was placed on administrative leave on July 10, 2006 pending the outcome of federal, state and internal investigations. 76 I disagree that the price increase following this event should be included as a credit to any calculation of loss because this date is not relevant to the calculation of loss under the Sentencing Guidelines. 64. As discussed in IV.A, the Sentencing Guidelines define loss as the greater of actual loss or intended loss. 77 Actual loss is the reasonably foreseeable pecuniary harm that resulted from the offense and that intended loss is the pecuniary harm that was intended to result from the offense, including intended pecuniary harm that would have been impossible or unlikely to occur. 78
65. The July 10, 2006 event was a remedial measure taken by DHBs Board designed to address the harm caused by the Offenses of Conviction. 79 For this reason, it is improper to include the price increase on July 10, 2006 as an offset in a calculation of investor losses in this case. VI. Criticisms in the Gould Report of My Trading Model Are Flawed and Unfounded A. Without Complete Data on All Investors, Use of a Trading Model Is the Current State of the Art for Calculating Aggregate Investor Losses 66. A trading model is commonly used to model investor behavior. It is necessary to use a trading model to estimate the shares which suffered a loss because there is no complete set of data on DHB trading by all entities who are eligible for a loss. The Milev Report estimates aggregate investor losses due to the Offenses of Conviction, not only the investor losses that may be claimed through a proof of claim process in this case. 67. In order to calculate all investor losses due to the fraud one needs to observe all trading. However, in practice, trading records are typically unavailable for a large number of, if not most, investors. Economists have developed models that estimate
76 Gould Report, 5. 77 Sentencing Guidelines, 2B1.1 Application Note 3A. 78 Sentencing Guidelines, 2B1.1 Application Note 3A. 79 DHB Industries, Inc. Places CEO on Administrative Leave; General (Ret.) Larry Ellis, DHBs President will assume the role of acting CEO and Senator William Campbell will serve as Chairman of the Board of Directors; Companys securities listed on the OTC Pink Sheets, effective July 6, 2006, PR Newswire (U.S.), July 10, 2006, 9:00 AM. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 19 of 25 PageID #: 16533 -20- trading by investors that is not observed (i.e., trades that are not provided in proof of claim forms, or that cannot be inferred from SEC filings of insider transactions or quarterly institutional holdings). Indeed, economists at Dr. Goulds firm, Cornerstone Research, Inc., have themselves advocated the use of trading models. 80 These models generally use actual trades or holdings records if available and a model for the remaining trading. 68. The Gould Report states that the investor losses for just the entities who submitted proof of claim data in the civil securities litigation against DHB provides a lower estimate of investor losses than my aggregate estimate of investor losses. 81 This does not invalidate my calculation of aggregate losses, as the Gould Report erroneously seems to imply. It is well-established that typically the majority of eligible entities do not submit proof of claim forms as a result of receiving a proof of claim notice. For institutional investors, for example, who are arguably among the most informed types of investors that also frequently have a fiduciary duty to pursue recovery in securities class actions, published studies show that in general less than thirty percent of institutional investors with provable losses file a claim. 82 Therefore, any estimate of investor losses using only proof of claim data from the civil securities litigation involving DHB is an underestimate of total investor losses. 69. In what may be an acknowledgement that proof of claim data do not represent all losses, the Gould Report uses a trading model to estimate the amount of loss. 83
B. NERAs Multi-Sector Multi-Trader Model Is Consistent with the Scientific Method and Is Appropriate to Use to Estimate Aggregate Investor Losses in This Case 70. The Gould Report claims that because the parameters used in NERAs MSMT model are based on an average over a sample of securities, and not derived from
80 As stated by an economic expert in the In re Countrywide Financial Corporation Securities Litigation, Several researchers have advanced and advocated the use of a multi-trader model to be more representative of actual trading behavior, including researchers associated with defendant-oriented firms such as NERA and Cornerstone Research. See W. H. Beaver and J. K. Malernee, Estimating Damages in Securities Fraud Cases, Cornerstone Research I note that J.K. Malernee is a cofounder of Cornerstone Research, Inc. See http://www.countrywidesecuritiesclassaction.com/PDFs/DeclarationOfFrankCTorchiowithExhibitsandAppx .pdf 81 Gould Report, 7. 82 See, for example, Cox , James D., and Randall S. Thomas, Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in Securities Class Action Settlements, 58 Stanford Law Review 411-454 (2005). 83 Gould Report, 64. The Gould Report calculation inappropriately uses only a subset of the fraud-related dates. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 20 of 25 PageID #: 16534 -21- DHB itself, they cannot be used to make estimates of the behavior of investors who invested in DHB. 84
71. There are numerous peer-reviewed studies that calculate statistics on a sample and then use the average over that sample to make a prediction on a different sample. 85 In fact, this is a primary use of any scientific work: scientists routinely use sampling techniques to estimate model parameters on data they can observe, and then apply these same parameters to perform estimates on a different sample where data are not available or harder to observe. It is common in finance to take parameters estimated in a study on a set of companies and to then form opinions, conclusions, or estimates of the effect of the issue studied on a different company or set of companies. 72. Furthermore, when scientists do obtain data on a new sample, it is common to examine whether the newly available data confirm the conclusions from the prior sample, which I describe in VI.D below. C. The Fact That the Trading Model Calculation Does Not Match Exactly Claimed Losses for Some Claimants Is Expected and Understandable; This Does Not Invalidate the Aggregate Investor Losses Estimate 73. The Gould Report states that my model overstated losses for one entity, Harbinger Capital Partners, and was unreliable for other entities that it examined. 86 In comparing losses using the proof of claim data to the losses using the model, the Gould Report assumes that all shares reported by an entity are held in its own name. If this is not the case, and an entity trades DHB for its own account as well as in accounts managed for other persons and entities, this may explain part of the discrepancy, as that entity may file only for its own account. 74. Furthermore, I do not agree with the statement in the Gould Report that inability to predict a single entitys loss invalidates the overall loss number calculated by the model. The trading model was developed to explain trading behavior in the aggregate. Scientists routinely use models to predict the overall behavior of a population and the benchmark of such models is not whether they predict the behavior of a particular individual. As an illustration, statistical models are routinely used to predict the overall voting result in elections; evidence that these statistical models may not accurately predict the actual vote cast by any single individual does not cause scientists to discard election result polls altogether.
84 Gould Report, 59. 85 To take an example from one recent edition of the Journal of Finance, Spiegel and Tookess paper uses the estimated parameters to predict rivals returns near merger announcements. (Spiegel, Matthew and Heather Tookes, Dynamic Competition, Valuation, and Merger Activity, Journal of Finance, Vol. 86, No. 1, February 2013). 86 Gould Report, 61. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 21 of 25 PageID #: 16535 -22- D. NERAs Trading Model Produces Aggregate Investor Losses Estimates Consistent with the Available Proof of Claim Data 75. The Gould Report states that proof of claim submissions account for $36.4 million in losses to investors. The Gould Report then claims that my estimated range using the proof of claim data does not provide support for using NERAs MSMT model [s]ince Dr. Milevs estimate of investor losses using the proof of claim data ranges from $107.2 million to $112.7 million. 87 I disagree. 76. First, to avoid any possible ambiguity, the range of $107.2 million to $112.7 million in investor losses is the range of investment losses to all victims of the fraud if one were to use as an input in NERAs MSMT model the actual proof of claim data themselves, rather than institutional holdings data that are publicly available. 88 As I noted in III above, recently filed additional proof of claim data have enabled me to refine my estimate of aggregate investor losses to a range of $109.2 million to $111.9 million. In the remainder of this section only (77-78), I will address the criticisms in the Gould Report using the numbers in the Milev Report that were originally challenged in the Gould Report. I note that my conclusions also hold if I were to use the refined estimate instead. 77. The Gould Report seems to imply that there is an inherent contradiction between that range and the calculated investor losses of $36.4 million for the proof of claim entities. However, these two calculations are entirely consistent with published peer-reviewed literature, as I show below. 78. According to the literature on claim rates, e.g., the Stanford Law Review article by Cox and Thomas, in a typical proof of claim process, 28.09% of all eligible entities file a claim. 89 Therefore, given that the investor losses for the civil action proof of claim entities that the Gould Report itself calculates are $36.4 million, this would imply that the $36.4 million number represents 28.09% of all investors that could have potentially filed a claim, assuming that DHB is like the average case examined in the Cox and Thomas paper. A back of the envelope calculationwithout the use of a trading modelsuggests that, assuming a 28.09% filing rate for this case, consistent with the typical case, total investor losses are approximately $36.4 million/28.09% = $129.6 million. My estimate of the aggregate investor losses of $110.8 million (based on a trading model and institutional data from 13F filings), and my estimated range for the
87 Gould Report, 60. 88 See Milev Report, fn. 66, referring to the range of $107.2 million to $112.7 million as an alternative to the calculation of a base case estimate of aggregate actual losses of $110.8 million. Both estimates use NERAs MSMT model, the $110.8 million estimate uses publicly available institutional holdings data on DHB, while the range of $107.2 million to $112.7 million uses the DHB proof of claim data from the civil action instead. 89 See, for example, Cox, James D., and Randall S. Thomas, Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in Securities Class Action Settlements, 58 Stanford Law Review 411-454 (2005), p. 424. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 22 of 25 PageID #: 16536 -23- aggregate investor losses of $107.2 million to $112.7 million (based on a trading model and proof of claim data from the civil securities litigation) are consistent with, if not lower than those projected from, peer-reviewed literature on claim rates and the proof of claim data for DHB. 90
E. The Cases Cited in the Gould Report Do Not Actually Address NERAs Trading Model 79. The Gould Report states that in Broadcom Corporation Securities Litigation, proposed expert testimony that performed an analysis applying NERAs multi-trader model for determining aggregate damages, was excluded 91 Notably, the citation in the Gould report referring to NERAs multi-trader model comes from the report of Scott Hakala, Ph.D., who is not, and has never been, employed by NERA. It appears that Dr. Hakala at the time used a model that he chose to label as NERAs multi- trader model. To my knowledge, it is not substantiated that Dr. Hakalas multi-trader model is a correctly implemented version of NERAs MSMT model. 92
80. The Gould Report ignores the question before the court at the time the decision was handed down in Broadcom. The Broadcom court stated that the question at issue was whether, under the particular circumstances of this case, a prove-up of aggregate damages is appropriate, or an alternative method is better. Plaintiffs suggest use of a trading model to prove aggregate damages, while Defendants suggest final prove- up through the claims administration process is more appropriate. 93 Importantly, the Broadcom court noted that Plaintiffs argue the public is entitled to know the full amount of the harm; but, the lawsuits purpose is to compensate claims lawfully made, not to declare a degree of harm (emphasis added). 94 While in Broadcom that was a true statement, in this particular matter it is not. The Sentencing Guidelines are clear that for purposes of calculating loss under 2B1.1, the Court needs to determine a reasonable estimate of pecuniary harm resulting from the Offenses of Conviction. 81. Furthermore, the Broadcom court explicitly noted that it does not need to finally decide whether the trading model technique passes the Daubert test. 95 Indeed, on that general issue, the Broadcom opinion noted precedent that aggregate damages
90 The conclusion also holds if I were to use the refined estimate of the range of aggregate investor losses of $109.2 million to $111.9 million based on recently filed additional proof of claim data. 91 Gould Report, 57. 92 I note that the Gould Report, fn. 51, cites as the source an Expert Report of Scott D. Hakala, In re Broadcom Corporation Securities Litigation, August 2, 2004, page 64. The docket for that case, however, does not show any expert reports by Dr. Hakala filed in August 2004. 93 In re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (C.D.Cal.), p. 1. 94 In re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (C.D.Cal.), p. 3. 95 In re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (C.D.Cal.), p. 3. Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 23 of 25 PageID #: 16537 testimony is admissible 96but also cautioned the unique facts ofthis particular case 97 made none ofthe cited cases controlling or dispositive. 98 82. Separately, the Gould Report states that several Courts have excluded testimony that employed a single-trader model, which is a special case of the multi- trader model used by Dr. Milev and cites to two cases that explicitly refer to the single- trader model. 99 The Gould Report identifies no specific criticisms in these decisions of the single-trader model that would also apply to NERAs MSMT model. Nevertheless, the Gould Report appears to imply that the cases affect NERAs MSMT model because a single-trader model [] is a special case ofthe multi-trader model used by Dr. Milev. It is not logical to say that an exclusion ofthe single-trader model would implicate NERAs MSMT model. According to the same erroneous logic, the Gould Report would appear to support the argument that, because inebriated people will fail a sobriety test, and they are a special case of all people, one should then conclude that all people will fail a sobriety test. VII. Miscellaneous 83. My conclusions are subject to revision based on additional information or data I may receive. Dated: May 20, 2013 - 7) cE%t/c/ I Jordan G. Milev, Ph.D. 96 re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (C.D.Calj, p. 1, citing In re OxfordHealth Plans, Inc. Securities Litigation, 244 F.Supp.2d 247, 249-52 (S.D.N.Y.2003). 97 A variant ofthat qualification appears six times in the decisions three pages of text. 98 In re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (C.D.Cal.), p. 2. 99 Gould Report, 57 and fn. 50. 100 Gould Report, fn. 50. -24- Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 24 of 25 PageID #: 16538 testimony is admissible,,96 but also cautioned "the unique facts of this particular case,,97 made none of the cited cases "controlling or dispositive.,,98 82. Separately, the Gould Report states that "several Courts have excluded testimony that employed a 'single-trader' model, which is a special case of the multi- trader model used by Dr. Milev" and cites to two cases that explicitly refer to the single- trader model. 99 The Gould Report identifies no specific criticisms in these decisions of the single-trader model that would also apply to NERA's MSMT model. Nevertheless, the Gould Report appears to imply that the cases affect NERA's MSMT model because "a 'single-trader' model [] is a special case of the multi-trader model used by Dr. Milev."IOO It is not logical to say that an exclusion of the single-trader model would implicate NERA's MSMT model. According to the same erroneous logic, the Gould Report would appear to support the argument that, because inebriated people will fail a sobriety test, and they are a special case of all people, one should then conclude that all people will fail a sobriety test. VII. Miscellaneous 83. My conclusions are subject to revision based on additional information or data I may receive. Dated: May 20, 2013 Jordan G. Milev, Ph.D. 96 In re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (CD.Cal.), p. 1, citing In re Oxford Health Plans. Inc. Securities Litigation, 244 F.Supp.2d 247,249-52 (S.D.N.Y.2003). 97 A variant of that qualification appears six times in the decision's three pages of text. 98 In re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (CD.Cal.), p. 2. 99 Gould Report, ~ 5 7 and fn. 50. 100 Gould Report, fn. 50. -24- Exhibit 1 Additional Materials Relied Upon Number Item (1) (2) Expert Reports 1 Expert Report of John F. Gould dated February 22, 2013, and cited materials. Legal Documents 2 2005 United States Sentencing Guidelines Manual, available at the following URL: http://www.ussc.gov/Guidelines/2005_guidelines/Manual/GL2005.pdf 3 In re Broadcom Corporation Securities Litigation docket. 4 In re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (C.D.Cal.). 5 http://www.countrywidesecuritiesclassaction.com/PDFs/DeclarationOfFrankCTorchiowithExhibitsandAppx.pdf News, Data, and Miscellaneous 6 Proof of claim data submitted by DHB investors to the claims administrator in this case. 7 https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&id=3494a7322677318aa0ac9f256cafee5b 8 Additional news stories from Factiva and Bloomberg News. Academic Literature and Industry Publications 9 Fama, Eugene, The Behavior of Stock-Market Prices, The Journal of Business, Vol. 38, No. 1. (January 1965). 10 http://www.amex.com/servlet/AmexFnDictionary?pageid=display&titleid=253 11 http://www.finra.org/Industry/Compliance/MarketTransparency/ADF/ 12 Spiegel, Matthew and Heather Tookes, Dynamic Competition, Valuation, and Merger Activity, Journal of Finance, Vol. 86, No. 1, February 2013. 13 Tabak, David, Robert Patton, Erica Rose, and Dmitry Krivin, Determination of the Appropriate Event Window Length in Individual Stock Event Studies, NERA Economic Consulting Working Paper, November 4, 2003. Page 1 of 1 Case 2:06-cr-00550-JS-AKT Document 1661-4 Filed 05/20/13 Page 25 of 25 PageID #: 16539
Giles E. Bullock and Katherine D. Bullock v. Dana Latham, Commissioner of Internal Revenue, and E. C. Coyle, JR., District Director of Internal Revenue, 306 F.2d 45, 2d Cir. (1962)
Bernard Damsky, Olga Damsky and Henry Birns v. Honorable Joseph C. Zavatt, United States District Judge For The Eastern District of New York, 289 F.2d 46, 2d Cir. (1961)