SECURITIES FRAUD CONVICTION REVERSED FOR LACK OF VENUE

Julian Tzolov and Eric Butler were charged in a three count indictment in the United States District Court for the Eastern District of New York with security fraud. Both in the trial court and on appeal they challenged venue in the Eastern District of New York. In Count I they were charged with Conspiracy to Commit Securities Fraud. In Count II they were charged with Securities Fraud in relation to the collapse of the auction rate securities (“ARS”) market in 2007. ARS were high grade securities backed by debt obligations, such as student loans, mortgages, municipal bonds, corporate debt and preferred stock issued by closed-end mutual funds. The government guaranteed 98 per cent of the value of student loan backed ARS. Investors had the choice of holding on to the securities until they matured in thirty years or auctioning them off as a short term investment–sometimes as short as seven days. Most chose the short term turn around.

The Sixth Amendment guarantees venue in the district in which the crime occurred. In some cases venue is defined by statute and in other cases venue is defined by the location of acts forming the crime. As to Count II, Security Fraud, 15 U.S.C. §§ 78j(b) and 78ff defines venue as “[a]ny criminal proceeding may be brought in the district wherein any act or transaction constituting the violation occurred.” The only act alleged to have occurred in the Eastern District of New York was that the defendants flew in and out of Kennedy International Airport. The Second Circuit had no problem finding that merely flying out of Kennedy International Airport was not an act constituting the crime and reversed the securities fraud conviction. On the other hand conspiracy venue exists wherever an overt act in furtherance of the conspiracy occurred. An overt act is any act performed by a conspirator in furtherance of the conspiracy. Flying through Kennedy International was an act in furtherance of the conspiracy and the Second Circuit upheld the conspiracy convictions alleged in Counts I and III.