United States v. Singhal

Court Case Details
  • Case Name: United States v. Singhal
  • Court: District Court for the District of Columbia
  • Filed: July 11, 2012
  • Precedential Status: Published
  • Docket #: Criminal No. 2011-0142
  • Judges: Chief Judge Royce C. Lamberth
  • Nature: criminal
Court Case Opinion

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

______________________________________

)

UNITED STATES OF AMERICA

)

)

v.

)

Criminal Case No. 11-142 (RCL)

)

SHELLY S. SINGHAL,

)

LORETTA FREDY BUSH,

)

DENNIS L. PELINO

)
)

Defendants.

)

______________________________________ )

MEMORANDUM OPINION

On May 10, 2011, a grand jury returned a ten-count Indictment against defendants Shelly

S. Singhal, Loretta Fredy Bush, and Dennis L. Pelino. The Indictment alleges that defendants

engaged in a conspiracy and scheme to defraud the United States Securities and Exchange

Commission (“SEC”), investors, and others through a series of undisclosed and disguised related

party transactions and insider trading that generated proceeds exceeding $50 million. Indictment

¶ 1. The Indictment reads like a typical U.S. securities fraud case, yet it does not expressly

charge any violations of U.S. securities laws, including failure to report related party transactions

or insider trading. Count One charges each defendant with conspiracy to commit mail fraud and

submit false statements, in violation of 18 U.S.C. § 371. Counts Two through Five charge each

defendant with mail fraud, in violation of 18 U.S.C. §§ 2 and 1341. Counts Six through Nine

charge each defendant with false statements, in violation of 18 U.S.C. §§ 2 and 1001. Count Ten

charges defendant Pelino with false statements, in violation of 18 U.S.C. § 1001.

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Before the Court are defendants’ Motions [39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49] to

dismiss the Indictment, defendants’ Motion [50] to strike surplusage from the Indictment, and

defendants’ Motions [51, 52, 53, 54] to compel.

I.

FACTS

A.

Background on Xinhua Finance and the Defendants

According to the Indictment, the alleged conspiracy and scheme to defraud related to

transactions involving Xinhua Finance Limited and its wholly-owned affiliate, Xinhua Financial

Network Limited (referred to collectively in the Indictment as “Xinhua Finance”). Xinhua

Finance provided information products focused on China’s financial markets, including market

indices, ratings, financial news and analysis, and investor relations. Indictment ¶ 2. Xinhua

Finance was organized under the laws of the Cayman Islands and headquartered in Shanghai,

China. Id.

In October 2004, Xinhua Finance’s shares began to trade publicly on the Tokyo Stock

Exchange’s Mothers Board (market of the high-growth and emerging stocks). Id. ¶ 3. Xinhua

Finance was the first Chinese Initial Public Offering in Japan, the first non-Japanese entity to list

on the Mothers Board, and the first time a foreign stock traded in Japan through an international

settlement agreement, which allowed investors globally to invest in Xinhua Finance. Id.

According to the Indictment, defendant Bush co-founded Xinhua Finance and was its

Chief Executive Officer and Vice Chairman of Xinhua Finance’s Board of Directors. Id. ¶ 5.

Defendant Pelino, Xinhua Finance’s other co-founder, served as an independent member of

Xinhua Finance’s Board of Directors, Chairman of its Compensation Committee, and a member

of its Audit Committee and Investment Committee. Id. ¶ 6. Defendant Singhal served as an

independent member of Xinhua Finance’s Board of Directors, Chairman of its Audit Committee,

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and a member of its Compensation Committee and Investment Committee. Id. ¶ 4. Singhal also

provided investment advisory services to Xinhua Finance through his company SBI USA, LLC.

Id. ¶ 7.

B.

Xinhua Finance’s Entry and Involvement in U.S. Capital Markets

According to the Indictment, starting in or around 2003 Xinhua Finance began to raise

funds from U.S. investors. Indictment ¶ 3. Rather than register these offerings with the SEC,

Xinhua Finance filed notices with the SEC to qualify for registration exemptions under U.S.

securities laws. Id. After obtaining its public listing in Japan in October 2004, Xinhua Finance

sought increased access to U.S. capital markets. In April 2005, Xinhua Finance began furnishing

the SEC with information to establish an exemption from registration for the offer and sale of

securities in the United States. Id. To sell ADRs on the U.S. over-the-counter market, Xinhua

Finance was required, pursuant to the exemption from the reporting requirements of the

Securities Exchange Act upon which it relied, to furnish to the SEC the information: (a) Xinhua

Finance made or was required to make public pursuant to the laws of Japan or the Cayman

Islands; (b) Xinhua Finance filed or was required to file with and which was made public by the

Tokyo Stock Exchange; or (c) Xinhua Finance distributed or was required to distribute to the

holders of its securities. Id. ¶ 24; see also 17 C.F.R. § 240.12g3-2(b)(1) (2005). In July 2005,

Xinhua Finance established in the United States a sponsored Level 1 American Depository

Receipt (“ADR”) facility. Id. Xinhua Finance’s ADRs traded on the U.S. over-the-counter

market using the stock trading symbol “XHFNY.” Id.

C.

The Alleged Scheme to Defraud

The Indictment identifies various nominees and nominee entities that the defendants used

to engage in a number of transactions involving Xinhua Finance. Indictment ¶¶ 8–22. The

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defendants used the nominees and nominee entities for the following alleged purposes: (1) to

obtain cash, warrants, stock, and other things of value from Xinhua Finance; (2) to sell shares of

Xinhua Finance stock owned directly and beneficially by Singhal, Bush, and Pelino; and (3) to

transfer assets off of Xinhua Finance’s balance sheet to minimize potentially negative impacts to

that balance sheet. Id. ¶¶ 25–57. The defendants’ alleged motivation for using the nominees and

nominee entities to engage in the transactions involving Xinhua Finance, rather than engaging in

them using their own names or the names of their own companies, was to misrepresent and avoid

disclosing the defendants’ involvement in the transactions and the sale of their Xinhua Finance

shares in statements furnished to the SEC, investors, and others. Id. ¶ 61. According to the

Indictment, the defendants and others used the nominees and nominee entities for those purposes

and with that alleged motivation to engage in the following transactions involving Xinhua

Finance: (1) the Entree Capital transaction; (2) the Bedrock Securities and Bedford transactions;

and (3) the Wiremill and Hyperion transactions.

1.

The Entree Capital Transaction

All three defendants were allegedly involved in the Entree Capital transaction. Singhal

and Pelino, allegedly through false representations and deceptive practices, obtained a warrant to

purchase 6,944 Xinhua Finance shares. Id. ¶¶ 25–27. The Indictment alleges that rather than

purchase the shares in their own names or in the name of one of their companies, they used a

nominee and a fictitious entity, Brightline Capital LLC, to buy the warrant. Id. ¶ 29. Singhal

used nominees, including Robert S. Brown, to exercise the warrant and deposit the 6,944 Xinhua

Finance shares into a brokerage account in the name of another nominee entity, Entree Capital

LLC (“Entree Capital”). Id. Following a request by Singhal and Pelino, Bush, as Xinhua

Finance’s CEO, authorized an acceleration of the lock-up period for the Xinhua Finance shares

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held by Entree Capital, which allowed Singhal—through Entree Capital—to begin selling the

Xinhua Finance shares approximately four weeks before investors who held similarly restricted

shares. Id. ¶¶ 31, 62(i)–(n).

Singhal and his company, SBI USA, paid Xinhua Finance $1,388,888 of the $5 million

exercise price for the 6,944 shares held by Entree Capital. Id. ¶ 32. The Indictment alleges that,

with Pelino’s assistance, Sinhal attempted to have the exercise price for the shares lowered from

$0.36 per share to $0.10 per share. Id. ¶ 62(h). If successful, the exercise price for the warrants

would have totaled $1,388,888. Although that effort to lower the exercise price of the shares

was unsuccessful, the Indictment alleges that Singhal used a nominee, Brown, to direct Xinhua

Finance to credit to Entree Capital $3,611,111, which Xinhua Finance purportedly owed

originally to Wire Mill Partners II, LLC, a nominee entity controlled by Singhal. Id. ¶¶ 33,

62(p)–(q).

At Singhal’s direction, Entree Capital sold the 6,944 Xinhua Finance shares for total

proceeds of approximately $21,700,000. Id. ¶ 34. One of Singhal’s associates allegedly kept

Bush and Pelino apprised of the Xinhua Finance share sales by Entree Capital. Id. ¶¶ 62(r),

62(t). Entree Capital, at Singhal’s direction, allegedly distributed the proceeds from the share

sales for the principal benefit of Singhal, Bush, and Pelino. Id. ¶ 35.

As a result of the Entree Capital transaction, the defendants allegedly caused Xinhua

Finance to furnish statements to the SEC that misrepresented and failed to disclose: (a) a related

party transaction between Xinhua Finance, its CEO (Bush), and members of its Board of

Directors (Singhal and Pelino) concerning the acquisition of the warrant, acceleration of the

lock-up period, and exercise of the Xinhua Finance shares held by Entree Capital; (b) Singhal,

Bush, and Pelino had an ownership interest in the Xinhua Finance shares held by Entree Capital;

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and (c) Singhal, Bush, and Pelino sold Xinhua Finance shares for proceeds of approximately

$21,700,000 through Entree Capital for their personal benefit. Id. ¶ 36.

2.

The Bedrock Securities and Bedford Transactions

The Indictment alleges that Singhal assisted Bush and Pelino to engage in undisclosed

trading of their Xinhua Finance shares through nominee entities, Bedrock Securities LLC

(“Bedrock Securities”) and Bedford Proprietary Trading, LLC (“Bedford”), which were

allegedly controlled by Singhal. Id. ¶¶ 15–16, 37–48. Between January 6, 2006 and May 2008,

according to the Indictment, Singhal assisted Bush in selling 36,736 Xinhua Finance shares

beneficially owned by Bush. Id. ¶¶ 39–44, 46–47. The share sales generated over $23,000,000

in proceeds. Id. ¶ 47. During the same time period, Singhal assisted Pelino in selling 3,914

Xinhua Finance shares owned by Pelino, which generated approximately $2,500,000 in

proceeds. Id. ¶ 45.

With regard to these share sales, Bush allegedly entered into backdated, written

agreements with Bedford and a nominee. Id. ¶ 42. The agreements were allegedly created to

give the false appearance that Bush had not sold any of her Xinhua Finance shares and that she

had merely pledged them to Bedford for purposes of securing a loan. Id. Bedford’s operations

allegedly consisted of receiving shares belonging to Bush, selling those shares at the direction of

Singhal and Bush, and distributing the proceeds for Bush’s primary benefit. Id. ¶¶ 42–43. As

part of this transaction, Singhal allegedly provided false and misleading testimony to the

National Association of Securities Dealers (“NASD”) during its investigation of Bedrock

Securities concerning, among other things, the sale of Bush’s Xinhua Finance shares. Id. ¶¶ 41,

62(gg).

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Singhal allegedly controlled and used the nominee and nominee entities to disguise his

involvement in the sale of Bush’s Xinhua Finance shares. Id. ¶ 42. Pelino allegedly did not

enter into written agreements with Bedford concerning the sale of his 3,919 Xinhua Finance

shares, but rather allegedly transferred the shares to Bedford, which sold the shares at Singhal’s

direction. Id. ¶ 45. Pelino allegedly used Bedford to conceal and disguise the sale of his Xinhua

Finance shares. Id.

3.

The Wiremill Transactions

The Indictment charges that Xinhua Finance entered into agreements with two nominee

entities controlled by Singhal, Wire Mill Partners II and Wiremill, in which Xinhua Finance

agreed to pay commissions to Wire Mill Partners II and Wiremill in return for them introducing

certain transactions to Xinhua Finance. Id. ¶ 49. The transactions introduced by Wire Mill

Partners II and Wiremill to Xinhua Finance included the receipt by Xinhua Finance of securities

assets in publicly traded companies in consideration for Xinhua Finance providing business

development services in China for the various publicly traded companies listed in the United

States. Id. According to the Indictment, in the short term, the securities assets received by

Xinhua Finance from the various publicly traded companies listed in the United States positively

affected Xinhua Finance’s balance sheet. Id.

Singhal, according to the Indictment, controlled and used Wire Mill Partners II and

Wiremill as nominees to disguise Singhal’s interest and involvement in the activities of Wire

Mill Partners II and Wiremill. Id. ¶ 50. As discussed earlier, Xinhua Finance credited

$3,611,111 to Wire Mill Partners II in return for transactions purportedly introduced by Wire

Mill Partners II to Xinhua Finance. Singhal, in turn, allegedly directed Wire Mill Partners II to

apply the $3,611,111 to the exercise price for the warrant held by Entree Capital for the benefit

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of the defendants. Id. ¶ 51. Singhal and Bush allegedly received $5,500,000 and $1,800,000,

respectively, from Xinhua Finance via Wire Mill Partners II and Wiremill. Id. ¶ 55. As a result

of the Wiremill transactions, the defendants allegedly caused Xinhua Finance to furnish

statements to the SEC that misrepresented and failed to disclose the transaction between Xinhua

Finance, its CEO (Bush), and members of its Board of Directors (Singhal and Pelino) concerning

the payment of monies from Xinhua Finance to Wire Mill Partners II and Wire Mill. Id. ¶ 57.

The Indictment further alleges that in February 2006, Singhal directed a “round trip” of

over $1 million originating from Xinhua Finance and paid back to Xinhua Finance via Singhal’s

nominee entities to purchase Xinhua Finance shares for Singhal’s benefit. According to the

Indictment, Xinhua Finance paid $1,368,463.42 to Wiremill, an entity allegedly controlled by

Singhal, which in turn wired $1,290,671.39 to another entity controlled by Singhal, SBI Advisors

LLC. Id. ¶¶ 13, 21, 52. To facilitate the transfer, the Indictment alleges that SBI Advisors

provided a bogus invoice to Wiremill. Id. ¶ 62(ll). SBI Advisors, in turn, wired $1,029,600 to

Singhal’s company, SBI USA. Id. ¶ 62(mm). SBI USA, in turn, wired $1,029,600 to Xinhua

Finance to purchase 3,900 Xinhua Finance shares. Id. ¶ 62(nn).

The Indictment also alleges that in May 2006, Singhal and Bush used Wire Mill Partners

II, Wiremill, an Israeli company, and an Austrian Bank account as conduits to make a

$1,000,000 payment from Xinhua Finance to Bush. Id. ¶ 53. According to the Indictment, in

May 2006, Xinhua Finance paid $1,050,000 to Wire Mill Partners II in return for transactions

purportedly introduced by Wiremill. Id. Wire Mill Partners II, in turn, wired $1,050,000 to

Wiremill at Singhal’s direction. Id. Wiremill, in turn, wired $1,000,000 at Singhal’s direction to

an account in Austria. The Austrian account then wired $1,000,000 to an account in China for

Bush’s benefit. Id. To paper the transaction, the Indictment alleges that, at Singhal’s direction,

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identical consulting agreements were executed between Wiremill and an Israeli company, and

between the Israeli company and Bush, which Bush allegedly signed in New York, New York.

Id. ¶¶ 62(rr)–(ss).

The Indictment additionally alleges that in December 2006, Singhal and Bush used

Wiremill as a conduit to make payments of $683,117 and $800,000 to Singhal and Bush,

respectively. Id. ¶ 54. Those payments originated from a payment of $1,883,197.50 from

Xinhua Finance to Wiremill, which Bush allegedly authorized. Id. ¶¶ 54, 62(vv). Wiremill, in

turn, wired $683,117 at Singhal’s direction to an account under Singhal’s control. Id. ¶¶ 54,

62(yy). Wiremill separately wired $800,000 at Singhal’s direction to a different nominee entity,

Tamarack partners LLC, which was also under Singhal’s control. Id. ¶¶ 22, 54, 62(zz).

Tamarack Partners then wired the $800,000 to an account in China for Bush’s benefit. Id. ¶¶ 54,

62(aaa).

4.

The Hyperion Transactions

In or around the end of 2005 and the end of 2006, the securities assets received by

Xinhua Finance via Wire Mill Partners II and Wiremill in consideration for Xinhua Finance

providing business development services in China for various publicly traded companies listed in

the United States posed a negative risk to Xinhua Finance’s balance sheet if the securities assets

declined in value. Id. ¶ 56. To minimize the potential impact to Xinhua Finance’s balance sheet

posed by those securities assets and other assets on Xinhua Finance’s balance sheet declining in

value, Xinhua Finance sold certain of the assets to Hyperion Investments Limited (“Hyperion”),

a Bahamian corporation controlled by Singhal. Id. ¶¶ 19, 56. The Indictment alleges that

Xinhua Finance announced publicly that it had issued a warrant to Hyperion and falsely

identified Hyperion as “a third party independent company.” Id. ¶ 62(kk). Singhal, according to

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the Indictment, used Hyperion as a nominee to purchase the assets to disguise Singhal’s interest

and involvement in Hyperion’s activities. Id. ¶ 56. As a result of the Hyperion transactions, the

defendants allegedly caused Xinhua Finance to furnish statements to the SEC that

misrepresented and failed to disclose the transaction between Xinhua Finance, its CEO (Bush),

and members of its Board of Directors (Singhal and Pelino) concerning the sale of assets from

Xinhua Finance to Hyperion. Id. ¶ 57.

II.

ANALYSIS

A.

Standard of Review

An indictment need only contain a “plain, concise and definite written statement of the

essential facts constituting the offense charged. . . .” Fed R. Crim. P. 7(c). However, “an

indictment is not required to set forth all the evidence the Government plans to present.” United

States v. Palfrey, 499 F. Supp. 2d 34, 45 (D.D.C. 2007) (citing United States v. Haldeman, 559

F.2d 31, 123–25 (D.C. Cir. 1976)). Rather, an indictment is sufficient if it (1) alleges the

elements of the offense charged and fairly informs the defendant of those charges so that he may

defend against them, and (2) enables the defendant to plead double jeopardy in any future

prosecution for the same offense. Hamling v. United States, 418 U.S. 87, 117 (1974).

A defendant may move to dismiss an indictment on the grounds that it “fails to invoke the

court’s jurisdiction or to state an offense.” Fed. R. Crim. P. 12(b)(3)(B). In ruling on a motion

to dismiss under Rule 12, the Court must view must assume the factual allegations stated in the

indictment as true. United States v. Syring, 522 F. Supp. 2d 125, 128 (D.D.C. 2007).

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B.

Defendants’ Motions to Dismiss Counts Six through Nine [39, 40, 44, 46, 47,
49]

Defendants challenge Counts Six through Nine of the Indictment—the false statement

counts—on a number of grounds. The Court will first consider Defendants’ Motion [46] to

Dismiss Counts Six through Nine for Failure to Allege a Duty to Disclose.

Counts Six through Nine charge defendants with making false statements in four Xinhua

Finance reports furnished to the SEC, in violation of 18 U.S.C. § 1001 and 18 U.S.C. § 2.

“Section 1001 proscribes two different types of conduct: concealment of material facts and false

representations.” United States v. Crop Growers Corp., 954 F. Supp. 335, 344 (D.D.C. 1997).

The Indictment contains three categories of alleged misconduct: the Entree Capital Transaction,

the Bedrock Securities and Bedford Transactions, and the Wiremill and Hyperion Transactions.

In describing charged false statements conduct in the Entree Capital Transaction, the

Indictment states:

As a result of the Entree Capital transaction, defendants SHELLY S. SINGHAL,
LORETTA FREDY BUSH and DENNIS L. PELINO caused Xinhua Finance to
furnish statements to the SEC that misrepresented and failed to disclose: (a) a
related party transaction between Xinhua Finance, its CEO (LORETTA FREDY
BUSH), and members of its Board of Directors (SHELLY S. SINGHAL AND
DENNIS L. PELINO) concerning the acquisition, acceleration of the lock-up
period
and exercise of the Xinhua Finance shares held by Entree Capital; (b)
SHELLY S. SINGHAL, LORETTA FREDY BUSH and DENNIS L. PELINO
had an ownership interest in the Xinhua finance shares held by Entree Capital;
and (c) SHELLY S. SINGHAL, LORETTA FREDY BUSH and DENNIS L.
PELINO sold Xinhua Finance shares through Entree Capital for their personal
benefit.

Indictment ¶ 36. The Indictment contains no factual allegations of affirmative conduct by

defendants in relation to the reporting of the Entree Capital transaction to or by Xinhua Finance,

nor does the Indictment allege affirmative action by defendants in the reporting of their

ownership of Xinhua Finance shares. Thus, the prosecution theory regarding the Entree Capital

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transaction is that defendants, by their inaction, caused Xinhua Finance to fail to disclose

information concerning that transaction.

In describing the Bedrock Securities and Bedford Transactions, the Indictment charges:

As a result of the Bedrock Securities and Bedford transactions, defendants
SHELLY S. SINGHAL, LORETTA FREDY BUSH and DENNIS L. PELINO
caused Xinhua Finance to furnish statements to the SEC that misrepresented and
failed to disclose: (a) a related party transaction between Xinhua Finance, its CEO
(LORETTA FREDY BUSH), and members of its Board of Directors (SHELLY
S. SINGHAL and DENNIS L. PELINO) concerning the sale of Xinhua Finance
shares belonging to LORETTA FREDY BUSH and DENNIS L. PELINO, and (b)
the number of Xinhua Finance Shares owned directly and beneficially by
LORETTA FREDY BUSH and DENNIS L. PELINO.

Indictment ¶ 48. The same concealment theory—premised on the inaction of the defendants—

underlies the alleged false statements with respect to this second category of transactions as well.

Finally, in regard to the alleged false statements concerning the Wiremill and Hyperion

Transactions, the Indictment charges:

As a result of the Wiremill and Hyperion transactions, defendants SHELLY S.
SINGHAL, LORETTA FREDY BUSH and DENNIS L. PELINO caused Xinhua
Finance to furnish statements to the SEC that misrepresented and failed to
disclose a related party transaction between Xinhua Finance, its CEO (LORETTA
FREDY BUSH), and members of its Board of Directors (SHELLY S. SINGHAL
and DENNIS L. PELINO) concerning the payment of monies from Xinhua
Finance to Wire Mill Partners II and Wiremill and the sale of assets from Xinhua
Finance to Hyperion.

Indictment ¶ 57. The Indictment does not allege facts showing an affirmative representation of

any kind regarding the Wiremill and Hyperion transactions.

Although the cited paragraphs repeat the statutory language of 18 U.S.C. § 1001 in

alleging that Xinhua Finance furnished statements that “misrepresented and failed to disclose”

information, the Indictment actually presents a failure to disclose, or concealment, theory only—

defendants allegedly engaged in these transactions, Xinhua Finance’s securities reports failed to

disclose them, and defendants somehow caused these nondisclosures. The Indictment’s bald

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allegations that Xinhua Finance furnished statements to the SEC that misrepresented the

existence of related party transactions and the number of shares owned by Bush or Pelino are not

sufficient to properly allege affirmative false statements by these defendants. Not only does the

Indictment fail to allege any affirmative false statements made by Xinhua Finance or any of the

defendants regarding the undisclosed related party transactions at issue, but the Indictment also

fails to allege any affirmative conduct by the defendants to cause Xinhua Finance to misrepresent

the number of shares owned by Bush and Pelino. Moreover, the facts in the remaining

paragraphs of the Indictment cannot support a misrepresentation theory of the false statements

charges. Counts Six through Nine involve statements made on four specific dates: September 1,

2006; January 19, 2007; July 11, 2007; and December 7, 2007. See Indictment ¶¶ 66, 68, 70, 72.

The Court refuses to save the flawed Indictment, as the government suggests it do, by looking to

alleged misrepresentations made on different dates that were not even charged or specifically

incorporated by reference into Counts Six through Nine. The absence of allegations of

affirmative false representations by defendants is fatal to the government’s false representations

theory of the false statement charges in the Indictment. See Crop Growers, 954 U.S. at 349.

The Court proceeds under this determination that the Indictment’s false statement charges

are based on a concealment theory only. In concealment cases, “there must be a legal duty to

disclose in order for there to be a concealment offense in violation of §1001(a)(1).” United

States v. Safavian, 528 F.3d 957, 964 (D.C. Cir. 2008). To comply with Fifth Amendment due

process, the defendant must have “fair notice . . . of what conduct is forbidden. . . . [T]his ‘fair

warning’ requirement prohibits application of a criminal statute to a defendant unless it was

reasonably clear at the time of the alleged action that defendants’ actions were criminal.” United

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States v. Kanchanalak, 192 F.3d 1037, 1046 (D.C. Cir. 1999) (citing United States v. Lanier, 520

U.S. 259, 266 (1997)).

The Indictment does not, however, allege that defendants had a legal duty under U.S. or

foreign law to disclose the information allegedly concealed in reports Xinhua Finance furnished

to the SEC. There are no relevant U.S. statutes or regulations that imposed a duty upon Xinhua

Finance, when it furnished its reports to the SEC pursuant to Rule 12g3-2(b), to conform to SEC

disclosure rules. Nor did Section 10(b) and Rule 10b-5 impose a legal duty to disclose on

Xinhua Finance—this was precisely the reason that Xinhua Finance furnished the SEC with

copies of its foreign filings to establish a Rule 12g exemption from the reporting requirements of

§ 13(a) of the Securities Exchange Act in the first place. Neither does 17 C.F.R. § 240.12g3-

2(b)(3) impose on Xinhua Finance a duty to disclose information material to an investment

decision. The government’s interpretation of this regulation contradicts the text of Rule 12g3-

2(b), which requires foreign issuers to furnish only those materials required by paragraph (b)(1).

Paragraph (b)(3) does not set forth additional requirements, but instead narrows the scope of

information required to be furnished under paragraph (b)(1). See 17 C.F.R. § 240.12g3-2(b)

(2005) (in effect during the relevant time period). Moreover, there is no adequate allegation in

the Indictment that any foreign law imposed a specific duty on either Xinhua Finance or the

defendants to disclose the particular transactions described in the Indictment or the resulting

number of shares held by Ms. Bush or Mr. Pelino. While this duty may very well exist under

foreign law, the government’s references to an “obligation,” without more, does not suffice to

allege a specific legal duty as required under D.C. Circuit law. See, e.g., Safavian, 528 F.3d at

964 (“Concealment cases in this circuit and others have found a duty to disclose material facts on

the basis of specific requirements for disclosure of specific information.”) Finally, the

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Indictment’s references to Xinhua Finance’s corporate policies regarding insider trading and

confidentiality do not give rise to a duty to disclose. “[T]o the extent that any duty to disclose is

predicated on professional standards not codified in any statute or regulation, there can be no

criminal liability.” Crop Growers, 954 F. Supp. at 348.

Because the Indictment does not give defendants fair notice of the basis of the false

statement charges against them, in violation of the Fifth Amendment, defendants’ Motion [46] is

GRANTED and Counts Six through Nine are DISMISSED. Additionally, Count One is

DISMISSED insofar as it alleges false statements. The Court therefore need not reach the merits

of the defendants’ remaining Motions to dismiss the false statement counts of the Indictment,

and DENIES AS MOOT the following Motions: Defendants’ Motion [47] to Dismiss Counts Six

through Nine for Lack of Materiality; Defendants’ Motion [40] to Dismiss Counts Six through

Nine for Failure to Allege a Matter within the Jurisdiction of the SEC; and Defendants’ Motions

[39, 44, 49] to Dismiss Counts Six through Nine for Failure to Allege a Crime Based on the

Supreme Court’s Recent Janus Decision.

C.

Defendants’ Motion to Dismiss Counts One through Nine Based on the
Impermissible Extraterritorial Application of 18 U.S.C. §§ 1341 and 1001
[41]

Defendants move to dismiss Counts One through Nine of the Indictment on the basis that

the 18 U.S.C. §§ 1341 and 1001 do not extend to the extraterritorial activity that constitutes the

alleged scheme to defraud. As the Court has already dismissed the false statements charges, this

Motion [41] to dismiss is DENIED AS MOOT as to Count One (insofar as it alleges false

statements) and DENIED AS MOOT as to Counts Six through Nine. The Court will consider

this Motion only insofar as it seeks to dismiss the mail fraud counts.

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Defendants argue that the mail fraud counts should be dismissed because they violate the

well-established principle that prohibits extraterritorial application of U.S. statutes unless

congressional intent to the contrary is reflected clearly in the statute. According to defendants,

the Court should rely on the Supreme Court’s recent decision in Morrison v. National Australia

Bank Ltd., 130 S.Ct. 2869 (2010), to find that the mail fraud statute, 18 U.S.C. § 1341, cannot be

applied extraterritorially.

The defendants’ reliance on Morrison is misguided. Morrison held that section 10(b) of

the Securities Exchange Act does not extend to extraterritorial conduct and applies only to

“transactions in securities listed on domestic exchanges, and domestic transactions in other

securities.” Morrison, 130 S.Ct. at 2884. The cases defendants cite that construe Morrison have

not extended its reasoning to a criminal case such as this one, which was not brought under §

10(b). Instead, the relevant analysis to determine a criminal statute’s extraterritorial application

is guided by United States v. Bowman, 260 U.S. 94 (1922), which cautioned that the presumption

against the extraterritorial application of a U.S. statute “should not be applied to criminal statutes

which are, as a class, not logically dependent on their locality for the Government’s jurisdiction,

but are enacted because of the right of the Government to defend itself against obstruction, or

fraud wherever perpetrated, especially if committed by its own citizens, officers or agents.

Bowman, 260 U.S. at 98.

However, this Court need not reach the question of whether 18 U.S.C. § 1341 was

enacted to protect the right of the government to defend itself against obstruction or fraud that

occurred territorially, because the transactions that form the basis of the charges here occurred in

the District of Columbia when defendants furnished statements to the SEC through the use of the

U.S. mails. The fact that those mailings originated in China or Japan is irrelevant for purposes of

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determining the sufficiency of the Indictment. Defendants attack this reasoning by pointing out

that because the mail fraud statute requires proof of a U.S. mailing, every alleged mail fraud is

automatically a domestic application. But that is precisely the point of the mail fraud statute:

once a person uses the U.S. mails, they are subject to the mail fraud statute pursuant to their

domestic activity—making an analysis of the statute’s extraterritorial application unnecessary in

a case such as this one.

Defendants’ Motion [41] to Dismiss is therefore DENIED as to Count One (insofar as it

alleges mail fraud) and DENIED as to Counts Two through Five.

D.

Defendants’ Motion to Dismiss the Indictment for Vagueness as to
Applicable Foreign Law and to Compel the Government to Produce the
Instructions Used before the Grand Jury [42]; Defendants’ Motion to
Dismiss Counts One through Nine Because these Charges are
Unconstitutionally Vague as Applied to these Defendants [45]

Defendants also move to dismiss the Indictment for vagueness as to the applicable

foreign law, and move to compel the government to produce the instructions used before the

grand jury. The Court will address that Motion [42] simultaneously with defendants’ Motion

[45] to dismiss Counts One through Nine on the basis that these charges are unconstitutionally

vague as applied to these defendants. Because the Court has dismissed the false statements

counts, these Motions [42, 45] are DENIED AS MOOT as to Count One (insofar as it alleges

false statements) and DENIED AS MOOT as to Counts Six through Nine. The Court proceeds

to address these Motions insofar as they seek to dismiss the mail fraud counts.

As alleged in the Indictment, the charged offenses are violations of U.S. criminal law, 18

U.S.C. § 1341. These offenses concern materials Xinhua Finance furnished to the SEC and do

not stem from, or depend upon, foreign law. Defendants miss the point in arguing that under

Rule 12g3-2(b), Xinhua Finance was simply required to furnish the SEC with English copies of

17

reports prepared for foreign regulators, and that the Indictment fails to identify what foreign law

mandated Xinhua Finance to disclose the related-party transactions and share sales that took

place. Regardless of whether defendants violated foreign securities laws, they are charged here

not with violating those laws, but with violating U.S. criminal law by causing Xinhua Finance to

mail to the SEC statements which contained falsifications and material omissions. Unlike in the

false statements counts, the mail fraud counts in the Indictment need not allege a legal duty

imposed on defendants under U.S. law, or a violation of that duty. Cf. Safavian, 528 F.3d at 964.

Additionally, defendants’ argument that Xinhua Finance was required only to furnish

translations of material it had already filed in foreign jurisdictions is incorrect, as evidenced from

the plain language of the SEC regulation. Under 17 C.F.R.§ 240.12g3-2(b)(1), to obtain a filing

exemption under Rule 12g3-2(b) Xinhua Finance was required to furnish the SEC with

information that it has made or is required to make public pursuant to the law of the country of

its domicile or in which it is incorporated or organized, has filed or is required to file with a

stock exchange on which its securities are traded and which was made public by such exchange,

or has distributed or is required to distribute to its security holders. 17 C.F.R. § 240.12g3-

2(b)(1) (2005) (emphasis added). The fact that the materials Xinhua Finance furnished to the

SEC were English translations of materials already filed with other countries’ regulators does not

necessarily lead to the conclusion that the materials were prepared in accordance with the foreign

law governing the filings in foreign jurisdictions. Nor did the regulatory language preclude

defendants from conforming Xinhua Finance’s foreign filings with U.S. law when they caused

Xinhua Finance to furnish those materials to the SEC. See id.

Moreover, the mail fraud statute is not unconstitutionally vague as applied to the facts

alleged in the Indictment: a continuing fraudulent scheme advanced in the United States through

18

mailings which contain material misrepresentations and omissions. In examining a statute for

vagueness, the Court must determine whether a person of average intelligence would reasonably

understand that the charged conduct is proscribed. United States v. Mazurie, 419 U.S. 544, 553

(1975). The Indictment alleges that defendants were engaged in a scheme to defraud and to

obtain money from Xinhua Finance by engaging in and concealing various related-party

transactions and sales of shares. When Xinhua Finance sought access to American capital

markets, which required the mailing of various materials to the SEC, and which materials

allegedly misrepresented and concealed the activity, “[a] person of ordinary intelligence would

reasonably understand that those actions were proscribed by a statute that criminalizes the use of

the mails . . . to perpetrate a fraud.” United States v. Williams, 441 F.3d 716, 724–25 (9th Cir.

2006).

Finally, the Court finds no basis here to compel the government to produce any

transcripts showing the grand jury’s legal charge. Federal Rule of Criminal Procedure 6(e)

permits the disclosure of grand jury materials in narrow circumstances. However, the

“indispensable secrecy of grand jury proceedings . . . must not be broken except where there is a

compelling necessity.” United States v. Proctor & Gamble, 356 U.S. 677, 682 (1958). A

defendant requesting disclosure of grand jury transcripts must show a “particularized need” for

such information. Douglas Oil Co. of California v. Petrol Stops Northwest, 441 U.S. 211, 222–

23 (1979). Defendants are unable to identify any portion of the Indictment that suggests that any

charge to the grand jury was legally erroneous, and resorts to speculation about what the grand

jury was instructed based on what is not stated in the Indictment. Where, as here, the Indictment

is facially valid and defendants’ claims do not justify dismissal of the Indictment, defendants

have not established any particularized need for the grand jury instructions to be disclosed. See

19

United States v. Espy, 23 F. Supp. 2d 1, 10 (D.D.C. 1998); United States v. Trie, 23 F. Supp. 2d

55, 62 (D.D.C. 1998). Moreover, “the mere suspicion that the grand jury may not have been

properly instructed . . . is insufficient to establish that [defendants are] entitled either to dismissal

of the indictment or to disclosure of grand jury materials.” Id.

Defendants’ Motions [42, 45] to dismiss and to compel are therefore DENIED as to

Count One (insofar as it alleges mail fraud) and DENIED as to Counts Two through Five.

E.

Defendants’ Motion to Dismiss Counts Two through Five for Failure to
Adequately Allege Mail Fraud under 18 U.S.C. § 1341 [43]

Defendants also move to dismiss Counts Two through Five of the Indictment—the mail

fraud counts—for failure to state a claim of mail fraud pursuant to 18 U.S.C. § 1341. Defendants

argue that these counts, which involve four separate mailings but refer to the same alleged

scheme to defraud, fail to properly allege mail fraud for four reasons.

First, defendants say that the Indictment’s alleged scheme to defraud is written so

ambiguously that the allegedly prohibited conduct cannot be discerned, and thus fail to provide

defendants with fair notice of the charges against them in violation of the Fifth and Sixth

Amendments. Although Counts Two through Five of the Indictment are admittedly poorly

worded and contain grammatical errors, the constitutional test is not whether the Indictment is

grammatically correct, but whether it “fairly informs a defendant of the charge against which he

must defend.” Hamling v. United States, 418 U.S. 87, 117 (1974). “Undoubtedly the language

of the statute may be used in the general description of an offence, but it must be accompanied

with such a statement of the facts and circumstances as will inform the accused of the specific

offence, coming under the general description, with which he is charged.” Id. at 117–18

(internal quotation and citation omitted). Combined with the allegations set forth in Paragraphs

1 through 57 of the Indictment—which were specifically incorporated by reference in Counts

20

Two through Five—the Indictment sufficiently alleges all of the elements of mail fraud to put the

defendants on notice of the mail fraud charges against them. The Court therefore chooses neither

to dismiss the Indictment, as defendants request, nor to amend the wording of Counts Two

through Five, as the government suggests.

Second, defendants claim that the Indictment fails to allege that the SEC or investors

suffered a loss of property or money and as a result, the portions of the scheme that purport to

allege that the SEC or investors were defrauded must be dismissed. The mail fraud statute

makes it a criminal offense to devise or intend to devise “any scheme or artifice to defraud, or for

obtaining money or property by means of false or fraudulent pretenses, representations, or

promises.” 18 U.S.C. § 1341. An indictment charging mail fraud is not required to allege actual

monetary loss. “It is only necessary to establish a scheme to defraud, and a mailing in

furtherance thereof; it is not necessary even to show that a loss took place.” United States v.

Reid, 533 F.2d 1255, 1261 (D.C. Cir. 1976). That is, “[i]t is the scheme to defraud and not actual

fraud that is required.” Id. at 1264. Moreover, victims of the fraud need not be identified in the

Indictment. See United States v. Mizyed, 927 F.2d 979, 981 (7th Cir. 1991). The Indictment

alleges that defendants engaged in a scheme to obtain things of value from Xinhua Finance

through undisclosed related party transactions and payments to defendants, and to obtain money

and/or property from the undisclosed sale of Xinhua Finance stock. Defendants have failed to

explain why, in light of these allegations, the mail fraud counts must allege that the SEC or

investors suffered a loss of property or money as a result of the alleged scheme to defraud.

Third, defendants argue that the mail fraud counts are duplicitous because each of the

four mailings is alleged in support of three separate and distinct prongs of a scheme to defraud,

which defendants claim to have additional sub-schemes. According to defendants, these

21

schemes constitute different offenses and must be charged in separate counts. However, it is

well established in the D.C. Circuit that “if a criminal statute disjunctively lists multiple acts

which constitute violations, the prosecution may in a single count of an indictment or

information charge several or all of such acts in the conjunctive and under such charge make

proof of any one or more of the acts, proof of one alone, however, being sufficient to support a

conviction.” United States v. Brown, 504 F.3d 99, 104 (D.C. Cir. 2007) (internal quotation and

citations omitted). The multiple schemes that defendants purport to find in the Indictment are

simply various means through which the alleged conspiracy and mail fraud offenses were

committed in furtherance of a unitary scheme. Any fears of jury confusion and prejudice that

defendants have could easily be addressed by appropriate jury instructions at trial.

Fourth, defendants say that none of the mailings identified in the Indictment is

sufficiently closely related to the alleged scheme to defraud to be “in furtherance” of the scheme.

To prove mail fraud, the government must prove “(1) a scheme to defraud, and (2) the mailing of

a letter, etc. for the purpose of executing the scheme.” United States v. Reid, 533 F.2d 1255,

1264 (D.C. Cir. 1976) (internal quotation omitted). To commit the offense, the defendant must

have fraudulent intent at the time of the charged mailing—that is, he must both have a fraudulent

scheme in mind and intend that the mailing further that scheme. See 18 U.S.C. § 1341; see also

Schmuck v. United States, 489 U.S. 705, 715 (1989). “The federal mail fraud statute does not

purport to reach all frauds, but only those limited instances in which the use of the mails is a part

of the execution of the fraud.” Schmuck, 489 U.S. at 710. But “[i]t is not necessary that the

scheme contemplate the use of the mails as an essential element.” Pereira v. United States, 347

U.S. 1, 8 (1954). Rather, “[i]t is sufficient for the mailing to be incident to an essential part of

the scheme, or a step in the plot.” Schmuck, 489 U.S. at 710–11 (internal quotations and

22

citations omitted.) Moreover, where, as here, the alleged scheme was an ongoing operation,

there is no requirement that the mailings precede the fraud. See, e.g., id.; United States v.

Sampson, 371 U.S. 75, 79–80 (1962). Under this standard, it is clear that the mailings to the

SEC were in furtherance of the alleged scheme as incident to an essential part of it. The mailings

allegedly helped defendants maintain their ongoing fraudulent scheme by avoiding detection by

existing investor-owners of Xinhua Finance to prevent the share value from being negatively

impacted, ensuring that Xinhua Finance continued to receive funds from prospective investors,

and that defendants could sell shares of Xinhua Finance to prospective buyers.

Defendants’ argument that the Indictment should be dismissed because it contains no

allegation that defendants wrote or reviewed the reports furnished to the SEC is equally

meritless. Proving mail fraud does not require the government to show that defendants

themselves made or directed the mailing, only that they caused the mailing to be made. Pereira

v. United States, 347 U.S. 1, 8 (1954).

Defendants’ Motion [43] to dismiss Counts Two through Five for failure to adequately

allege mail fraud under 18 U.S.C. § 1341 is therefore DENIED.

F.

Defendants’ Motion to Dismiss the Indictment for Lack of Venue [48]

Defendants also move to dismiss the Indictment for lack of venue pursuant to Federal

Rule of Criminal Procedure 18. Because the false statements counts have been dismissed,

defendants’ Motion [48] is DENIED AS MOOT as to Count One (insofar as it alleges false

statements) and DENIED AS MOOT as to Counts Six through Nine. The Court proceeds to

address defendants’ Motion [48] to dismiss for lack of venue insofar as it seeks to dismiss the

mail fraud and conspiracy counts.

23

Prosecution for mail fraud under 18 U.S.C. § 1341 is permissible only in those districts

where the defendant “places,” “deposits,” “causes to be deposited,” “takes,” or “receives” mail,

or “knowingly causes mail to be delivered.” 18 U.S.C. § 1341; see United States v. Morgan, 393

F.3d 192, 198 (D.C. Cir. 2004) (citing United States v. Brennan, 183 F.3d 139, 147 (2d Cir.

1999)). Defendants properly point out that the SEC’s receipt of Xinhua Finance reports does

not establish venue against them in the District of Columbia. However, the Indictment alleges

that defendants caused the mailings, and there is no requirement that the government allege that

defendants had actual knowledge of the mailings or specifically intended to use the mails.

Rather, “[w]here one does an act with knowledge that the use of the mails will follow in the

ordinary course of business, or where such use can reasonably be foreseen, even though not

actually intended, then he ‘causes’ the mails to be used.” Pereira, 347 U.S. at 8–9 (citing United

States v. Kenofskey, 243 U.S. 440 (1917)). Here, the proscribed use of the mails was the

defendants causing Xinhua Finance to furnish statements to the SEC in the District of Columbia

that misrepresented and failed to disclose certain allegedly material information. The Indictment

also alleges that defendants aided and abetted the mail fraud violation. These allegations are

sufficient to allege venue for mail fraud in the District of Columbia.

Additionally, it is well established that “a conspiracy prosecution may be brought in any

district in which some overt act in furtherance of the conspiracy was committed by any of the co-

conspirators.” United States v. Rosenberg, 888 F.2d 1406, 1415 (D.C. Cir. 1989) (citing Hyde v.

United States, 225 U.S. 347, 363–64 (1912)). The crime of conspiracy, 18 U.S.C. § 371, is a

continuing offense, the prosecution of which is proper “in any district in which such offense was

begun, continued or completed.” 18 U.S.C. § 3237(a). The Indictment sufficiently alleges venue

24

for conspiracy in the District of Columbia by alleging that defendants caused Xinhua Finance to

furnish reports to the SEC in the District of Columbia.

Defendants’ Motion [48] to dismiss the Indictment for lack of venue is therefore

DENIED as to Count One (insofar as it alleges mail fraud) and DENIED as to Counts Two

through Five.

G.

Defendants’ Motion to Strike Irrelevant and Prejudicial Surplusage from the
Indictment [50]

Defendants additionally move to strike certain language from the Indictment that they

argue is not necessary to support the charges and is prejudicial to defendants. An indictment

must give a “plain, concise, and definite written statement of the essential facts constituting the

offense charged.” Fed. R. Crim. P. 7(c). Federal Rule of Criminal Procedure 7(d) allows the

Court to strike surplusage from an indictment upon the defendant’s motion and provides

protection against irrelevant and prejudicial allegations in the indictment. Fed. R. Crim. P. 7(d).

“Surplusage” is defined as “redundant words in a statute or legal instrument,” “language that

does not add meaning,” and “extraneous matter in a pleading.” Black’s Law Dictionary 1581

(9th ed. 2009). “Motions to strike surplusage from an indictment are highly disfavored in this

Circuit.” United States v. Watt, 911 F. Supp. 538, 554 (D.D.C. 1995). A motion to strike

surplusage from an indictment “should be granted only if it is clear that the allegations are not

relevant to the charge and are inflammatory and prejudicial.” United States v. Rezaq, 134 F.3d

1121, 1134 (D.C. Cir. 1998).

Defendants move to: (1) ensure that “Xinhua Finance Limited” and “Xinhua Financial

Network Limited” are appropriately identified throughout the Indictment; (2) strike the

references to “related party transactions” from paragraphs 42, 43, 45, and 48; (3) strike the

phrase “insider trading” from paragraphs 1, 30, 37, 38, 42, 43, 60, and 61.c; (4) amend

25

paragraphs 2, 3, 23, and 59 to remove surplusage; and (5) strike, in their entirety, paragraphs 37,

38, 41, 62.a–62.d, 62.h, 62.z–62.ff, and 62.gg.

The Indictment refers collectively to “Xinhua Finance Limited” and “Xinhua Financial

Network Limited” as “Xinhua Finance,” thereby conflating a public, wholly-owned corporate

affiliate with its non-public parent corporation. The Indictment is premised on corporate

disclosure issues concerning the relationships between corporate entities and the defendants. At

trial, the jury will be tasked with understanding the relationships among these entities and their

involvement in the schemes alleged in the Indictment. The Indictment’s imprecision and failure

to properly attribute activity to specific entities adds to this complexity and the burden on the

jury. Such confusion is unfairly prejudicial to defendants. The Court therefore ORDERS the

government to revise the Indictment to ensure that the phrase “Xinhua Finance” is replaced by

either “Xinhua Finance Limited” or “Xinhua Financial Network Limited,” as applicable.

In describing the Bedrock Securities and Bedford Transactions, paragraphs 42, 43, 45,

and 48 of the Indictment refer to a “related party transaction”—defined by U.S. securities law to

be a transaction “in which the registrant was or is to be a participant . . . and in which any related

party had or will have a direct or indirect material interest.” 17 C.F.R. § 229.404(a). However,

in reference to the Bedrock Securities and Bedford Transactions, the government uses the term

“related party transaction” to refer to a transaction between officers or directors of a foreign

private issuer that must be disclosed to the SEC. There is no allegation in these paragraphs that

Xinhua Finance was in any way a participant in the purported stock sales. The government cites

no authority for its deviation from the definition under U.S. securities law. As no related party

transaction is properly alleged with respect to the Bedrock Securities and Bedford Transactions,

the repeated mention of the term is incorrect, confusing, misleading, and unfairly prejudicial to

26

defendants. The Court therefore ORDERS the government to strike the references to a “related

party transaction” from paragraphs 42, 43, 45, and 48.

Paragraphs 37 and 38 of the Indictment describe corporate insider trading and

confidentiality policies distributed to Xinhua Finance officers, directors, and employees.

Paragraphs 1, 30, 42, 43, 45, 60, and 61.c specifically use the term “insider trading.” These

references are highly prejudicial to defendants because they reference a current hot topic in U.S.

law that the defendants are not even charged with in this case. The Indictment’s references to

insider trading and corporate insider trading and confidentiality policies are also prejudicial to

defendants because these references could lead the jury to confuse the potential violation of a

corporate policy with the violation of law. Any obligation to disclose that defendants owed

under corporate policy was only an obligation under that policy—not a duty under U.S. securities

law. As previously explained, “to the extent that any duty to disclose is predicated on

professional standards not codified in any statute or regulation, there can be no criminal

liability.” Crop Growers, 954 F. Supp. at 348. The Court therefore ORDERS the government to

strike the references to “insider trading” from paragraphs 1, 30, 42, 43, 60, and 61.c and to strike

paragraphs 37 and 38 in their entirety.

The Court finds that the prejudicial effect of the remaining content of the Indictment that

defendants challenge does not outweigh its relevance, and therefore all other requests in

defendants’ Motion [50] to strike are DENIED.

H.

Defendants’ Motion to Compel Discovery of Rule 16 and Brady Material in
the Possession of the United States [51].

Defendants moved to compel seven categories of information from the government based

on Federal Rule of Criminal Procedure 16 and Brady v. Maryland, 373 U.S. 83 (1963). Federal

Rule of Criminal Procedure 16(a)(1)(E)(i) directs the government to produce documents that are

27

“material to preparing the defense.” Information is material under Rule 16 “as long as there is a

strong indication that it will play an important role in uncovering admissible evidence, aiding

witness preparation, corroborating testimony, or assisting impeachment or rebuttal.” United

States v. Lloyd, 992 F.2d 348, 351 (D.C. Cir. 1993). In addition, in the pretrial setting, Brady

requires disclosure of any information “‘favorable to the accused’ . . . without regard to whether

the failure to disclose it likely would affect the outcome of the upcoming trial.” United States v.

Safavian, 233 F.R.D. 12, 16 (D.D.C. 2005) (citing United States v. Sudikoff, 36 F. Supp. 2d

1196, 1198–99 (C.D. Cal. 1999). Information is favorable to the accused if it “relates to guilt or

punishment” and “tends to help the defense by either bolstering the defense case or impeaching

potential prosecution witnesses.” Id. “[C]ourts in this jurisdiction look with disfavor on narrow

readings by prosecutors of the government’s obligations under Brady.” United States v.

Edwards, 191 F. Supp. 2d 88, 89–90 (D.D.C. 2002) (citing United States v. Paxson, 861 F.2d

730, 737 (D.C. Cir. 1988)).

In its opposition [58], the government agreed to provide sufficient information or

documents regarding four categories of information requested by defendants in their Motion [51]

to compel. To the extent the government has not turned over information or documents that it

previously agreed to provide to defendants, the government is ORDERED to do so within 30

days of the date of this Order. Three categories of information remain pending before the Court.

First, defendants move to compel the government to identify the laws or regulations that

imposed an obligation on Xinhua Finance, or its officers or directors, to disclose certain

information in Xinhua Finance’s foreign filings. Although the laws or regulations that imposed a

duty to disclose on Xinhua Finance are relevant to the false statement claims against defendants,

these claims have been dismissed. And as discussed earlier, defendants can be charged with mail

28

fraud regardless of whether defendants had a duty to disclose. The Court therefore DENIES

defendants’ Motion [51] to compel insofar as defendants seek to compel the government to

identify the laws or regulations that impose a duty to disclose on Xinhua Finance, its officers, or

its directors.

Second, defendants seek the identity (by Bates number) of the specific witness statements

and documents evidencing that any of the defendants had an opportunity to review certain

Xinhua Finance public filings as alleged in paragraph 24 of the Indictment. Defendant Bush also

requests evidence that she did not review the filings. The specific witness statements and

documents requested, if any exist, are producible as Rule 16(a)(1)(E)(i) documents material to

preparing the defense, regardless of whether those documents are inculpatory or exculpatory.

See United States v. Marshall, 132 F.3d 63, 67 (D.C. Cir. 1998). Therefore, to the extent they

exist, the Court ORDERS the government to specifically identify and produce these requested

witness statements and documents at least 30 days before trial.

Third, defendants seek copies of any requests made to a foreign government or foreign

court for evidence located outside the United States during the course of the government’s

investigation into matters related to the Indictment. Although the results of these requests would

be material to preparing the defense, the requests themselves are not. The Court therefore

DENIES defendants’ Motion [51] to compel insofar as defendants seek copies of any requests

the government made to foreign entities for evidence located outside the United States.

I.

Defendant Singhal’s Motion to Compel Production of Documents and for an
Evidentiary Hearing to Determine the Extent of the Receipt and Use of
Privileged Information by the Government [52, 54]

Finally, defendant Singhal moves to compel the government to produce all documents

reflecting its communications, including e-mails and notes of telephone conversations or

29

meetings, with attorney Robert Brown or his attorneys. Singhal requests that these documents be

provided to the defense so that Singhal can properly gauge the extent to which his attorney-client

privilege has been violated. Singhal also argues that these documents should be provided to the

defense under Federal Rule of Criminal Procedure 16, Giglio v. United States, 405 U.S. 150

(1972), the Jencks Act, and as Brady material. Additionally, Singhal requests that the Court

order an evidentiary hearing to determine the full extent and scope of the receipt and use of

privileged information by the government from Brown.

The government’s communications with Brown—Singhal’s former attorney—are

producible under Brady and Federal Rule of Criminal Procedure 16(a)(1)(E)(i). The materials

sought by Singhal’s Motion [52, 54] to compel are directly tied to the knowledge and statements

of the government’s chief witness and could help the defense impeach Brown as a potential

prosecution witness. Safavian, 233 F.R.D. at 16. Additionally, Brown’s discussions with

government attorneys are material to the defense’s preparation of its case, as they will allow the

defense to uncover admissible evidence, prepare for its examination of witnesses (including

Brown), corroborate testimony, or assist with impeachment of witnesses at trial (including

Brown). Lloyd, 992 F.2d at 351.

As such, the Court GRANTS IN PART Singhal’s Motion [52, 54] to compel and

ORDERS that, within 30 days of the date of this Order, the government shall produce all

documents reflecting its communications, including e-mails and notes of telephone conversations

or meetings, with attorney Robert Brown. To the extent that defendant Singhal wishes to assert

the attorney-client privilege over those communications, he may do so at that time. The Court

therefore DENIES Singhal’s request for an evidentiary hearing to determine the extent of the

receipt and use of privileged information by the government. The Court also DENIES Singhal’s

30

Motion [52, 54] to compel the government to produce all documents reflecting the government’s

communications with Robert Brown’s attorneys, as this information is not material to the

defense’s preparation of its case under Rule 16.

III.

CONCLUSION

This case represents an attempt by the federal government to expand the legal duties

owed to the United States Securities and Exchange Commission by a corporate entity that is

organized under the laws of the Cayman Islands, headquartered in China, traded publicly in

Japan, and exempt from SEC reporting requirements—by charging the defendants with false

statements and mail fraud. On the face of the Indictment, however, many of these counts do not

pass constitutional muster. The Court therefore dismisses the false statement charges against

defendants in Counts Six through Nine, as well as the charges of conspiracy to make false

statements in Count One.

In light of the foregoing, this case shall proceed to trial on Count One insofar as it alleges

mail fraud, Counts Two through Five, and Count Ten. A separate Order consistent with this

Memorandum Opinion shall issue this date.

Signed by Royce C. Lamberth, Chief Judge, on July 11, 2012.

31

Referenced Cases

  1. United States v. Rezaq, Omar Mohammed
  2. United States v. Brown
  3. United States v. Wesley C. Paxson, Sr.
  4. United States v. Morgan, Jeffrey
  5. United States v. Safavian
  6. United States v. Robert C. Reid
  7. United States v. Susan Rosenberg
  8. United States v. Charles N. Lloyd, Jr.
  9. United States v. Marlon Marshall
  10. United States v. John Anthony Williams
  11. United States v. Ali I. Mizyed
  12. United States v. John Brennan
  13. United States, Piff. In Err. v. Solomon Kenofskey
  14. United States v. Bowman
  15. Pereira v. United States
  16. Giglio v. United States
  17. Douglas Oil Co. of Cal. v. Petrol Stops Northwest
  18. Brady v. Maryland
  19. United States v. Lanier
  20. United States v. Mazurie
  21. Hyde v. United States
  22. Schmuck v. United States
  23. United States v. Procter & Gamble Co.
  24. United States v. Sampson
  25. United States v. Espy
  26. United States v. Syring
  27. United States v. Crop Growers Corp.
  28. United States v. Palfrey
  29. United States v. Watt
  30. United States v. Edwards
  31. United States v. Trie
  32. United States v. Sudikoff