18‐1966‐cr (L)
United States v. Bergstein



                                  UNITED STATES COURT OF APPEALS
                                      FOR THE SECOND CIRCUIT

                                                  SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURTʹS LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST
CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
ʺSUMMARY ORDERʺ). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.


              At a stated term of the United States Court of Appeals for the Second
Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in
the City of New York, on the 16th day of September, two thousand nineteen.

PRESENT:            RICHARD C. WESLEY,
                    DENNY CHIN,
                    JOSEPH F. BIANCO,
                                         Circuit Judges.
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UNITED STATES OF AMERICA,
                    Appellee,

                                        v.                                           18‐1966‐cr (L); 18‐2908‐cr
                                                                                     (Con)
DAVID BERGSTEIN,
                                        Defendant‐Appellant.*

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FOR APPELLEE:                                                EDWARD A. IMPERATORE, Assistant United
                                                             States Attorney (Elisha J. Kobre and Daniel B.
                                                             Tehrani, Assistant United States Attorneys, on
                                                             the brief), for Geoffrey S. Berman, United States

*         The Clerk of the Court is directed to amend the official caption to conform to the above.
                                          Attorney for the Southern District of New
                                          York, New York, New York.

FOR DEFENDANT‐APPELLANT:                  ALEXANDRA A.E. SHAPIRO (Eric S. Olney
                                          and Jacob S. Wolf, on the brief), Shapiro Arato
                                          LLP, New York, New York.

              Appeal from the United States District Court for the Southern District of

New York (Castel, J.).

              UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,

ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED.

              Defendant‐appellant David Bergstein appeals from a judgment entered

June 28, 2018, convicting him, following a jury trial, of conspiratorial and substantive

counts of investment advisory fraud, securities fraud, and wire fraud, in violation of 18

U.S.C. §§ 371, 1343, and 1349 and 15 U.S.C. §§ 78j(b), 78ff, 80b‐6, and 80b‐17. Bergstein

was sentenced principally to a term of 60 monthsʹ imprisonment for the investment

advisor fraud counts and 96 monthsʹ imprisonment for the securities and wire fraud

counts, the sentences on all counts to run concurrently, followed by three years of

supervised release. Bergstein was also ordered to forfeit $22,584,897.00 and pay

$15,155,797.27 in restitution.

              The evidence at trial established that, from 2011 to 2012, Bergstein

participated in a fraudulent scheme to conceal from investors in Weston Capital Asset

Management (ʺWestonʺ) information about impermissible financial transactions;

transferred funds from one pool of Westonʹs investors to benefit another pool of

                                           ‐2‐
Westonʹs investors without disclosing conflicts of interest; and converted a portion of

misappropriated Weston funds for his personal benefit. On appeal, Bergstein

challenges (1) the admissibility of certain evidence; (2) the district courtʹs decision to

quash his subpoenas to third parties; (3) the sufficiency of the evidence as to the

securities fraud offenses; (4) the governmentʹs use of alternative theories of guilt to

prove a violation of the Investment Advisors Act; and (5) the district courtʹs factual

conclusions with respect to sentencing. We assume the partiesʹ familiarity with the

underlying facts, procedural history, and issues on appeal.

I.     Admissibility of Evidence

              Bergstein disputes the district courtʹs admission, pursuant to Federal Rule

of Evidence 404(b), of evidence relating to: first, his tax returns; second, his prior

transactions with an investor, Jerome Swartz, and an investment firm, Stephens Inc.

(ʺStephensʺ); and third, his casino debts. Under Rule 404(b), ʺ[e]vidence of a crime,

wrong, or other actʺ may be admissible to prove ʺmotive, opportunity, intent,

preparation, plan, knowledge, identity, absence of mistake, or lack of accident.ʺ Fed. R.

Evid. 404(b). The district court did not abuse its discretion in admitting the evidence for

these purposes, and thus Bergsteinʹs evidentiary challenges fail. See United States v.

Litvak, 889 F.3d 56, 67 (2d Cir. 2018).




                                             ‐3‐
         A.   Tax Returns

              The government properly introduced Bergsteinʹs 2011 and 2012 tax

returns to show that even though Bergstein maintained that his income was legitimate,

shell companies under his control did not report or pay taxes on income from Weston

transactions during the years in question. The evidence demonstrated Bergsteinʹs intent

and absence of mistake, was relevant to his claim that his transactions were legitimate,

and was not unfairly prejudicial. See United States v. Valenti, 60 F.3d 941, 946 (2d Cir.

1995).

              Moreover, the Internal Revenue Service agent did not improperly testify

as an expert witness when he authenticated the tax documents in evidence,

communicated the contents of Bergsteinʹs 2011 and 2012 tax returns to the jury,

identified which required records the agency lacked , and explained certain basic

concepts. See United States v. Cuti, 720 F.3d 453, 458 (2d Cir. 2013) (holding that

accountantsʹ testimony was proper fact‐opinion and not expert testimony in part

because witnessesʹ reasoning ʺwas based on undisputed accounting rulesʺ).

         B.   Swartz and Stephens Investment Transactions

              While Bergstein argues that the government introduced evidence of his

prior investment transactions with Swartz and Stephens only to degrade his character,

the evidence was admissible under Rule 404(b). The government introduced evidence

to show that between 2007 and 2008, Bergstein made false representations to Swartz



                                            ‐4‐
and Stephens to solicit their investments as he funneled the money through attorney

trust accounts and shell companies to cover personal debts. This evidence was relevant

to show, inter alia, that because of his prior losses, Swartz would not have backed

Swartz IP, a shell company Bergstein created to secure a $17 million loan from Westonʹs

Wimbledon Class TT Portfolio (ʺTTʺ); Bergstein misappropriated portions of the TT

funds; and Bergsteinʹs motive was to use the misappropriated funds from Weston to

repay Swartz and Stephens. Moreover, Bergsteinʹs ability to replicate his prior scheme

to borrow money from Swartz and Stephens for the purpose of diverting Westonʹs

money was evidence of opportunity, plan, absence of mistake, or lack of accident in his

commission of the frauds in question. See Fed. R. Evid. 401(b)(2).

       C.     Casino Debts

              The evidence of Bergsteinʹs casino debts plainly reflects his motive to

misuse Westonʹs money in efforts to repay Swartz and Stephens after misusing their

investments to satisfy those debts. The evidence also demonstrated that Bergstein

controlled the attorney trust accounts and shell companies that he used to facilitate the

frauds because he used those same means to pay his casino debts and transfer money to

himself. See United States v. Carboni, 204 F.3d 39, 44 (2d Cir. 2000) (ʺ[E]vidence of

uncharged criminal activity is not considered other crimes evidence . . . if it is

inextricably intertwined with the evidence regarding the charged offense, or if it is




                                            ‐5‐
necessary to complete the story of the crime on trial.ʺ (citation and internal quotation

marks omitted)).

II.    Third‐Party Subpoenas

              Bergstein argues that the district court erroneously applied United States v.

Nixon, 418 U.S. 683, 700 (1974), in quashing his subpoenas to third parties, including

subpoenas issued to those who cooperated against him ‐‐ Albert Hallac, Westonʹs

founder, and Keith Wellner, one of Westonʹs chief officers. Under the Nixon standard, a

party seeking the issuance of subpoenas must show (1) relevancy, (2) admissibility, and

(3) specificity. Nixon, 418 U.S. at 700.

              Bergstein maintains that we should apply the more lenient standard set

forth in United States v. Tucker, 249 F.R.D. 58, 66 (S.D.N.Y. 2008), which requires a

defendant to demonstrate only ʺan articulable suspicionʺ that the request for documents

ʺis (1) reasonable, construed as material to the defense, and (2) not unduly oppressive

for the producing party to respond.ʺ Id. (internal quotation marks omitted). We have,

however, applied the Nixon standard to Rule 17(c) subpoenas requested by a defendant,

United States v. Ulbricht, 858 F.3d 71, 109 (2d Cir. 2017) (seeking documents from the

government), as have district courts in this Circuit, see United States v. Skelos, No. 15‐CR‐

317 (KMW), 2018 WL 2254538, at *1 (S.D.N.Y. May 17, 2018) (ʺ[C]ourts in the Second

Circuit have almost unanimously applied Nixon to subpoenas served on third‐parties.ʺ).




                                            ‐6‐
              Whether under the Nixon standard or the standard articulated in Tucker,

we conclude that the district court did not abuse its discretion in quashing the

subpoenas. The district court may quash a Rule 17(c) subpoena ʺif compliance would

be unreasonable or oppressive.ʺ Fed. R. Crim. P. 17(c)(2). Assuming the documents

were relevant and admissible, Bergsteinʹs request for ʺ[a]ll e‐mails or other

communications [Hallac and Wellner] authored . . . or receivedʺ relating to almost thirty

paragraphs from Bergsteinʹs indictment was overly broad. Appʹx at 185, 222. Further,

Bergsteinʹs subpoenas plainly constituted a fishing expedition for ʺdocuments the

government did not obtainʺ and that he admittedly ʺcannot identify.ʺ Def. Appellantʹs

Br. at 45; see Ulbricht, 858 F.3d at 109. Accordingly, the district court did not abuse its

discretion in quashing the subpoenas to third parties.

III.   Sufficiency of Evidence

                Bergstein argues that the government failed to present sufficient

evidence that notes from Westonʹs Partners 2 Fund (ʺP2ʺ) and TT loans were securities

within the meaning of the Securities Exchange Act, 15 U.S.C. § 78c(10). Construing the

evidence in the light most favorable to the government, we are not persuaded. See

United States v. Baker, 899 F.3d 123, 129 (2d Cir. 2018).

              An ʺinvestment contractʺ is a ʺsecurity,ʺ 15 U.S.C. § 78c(10), concerning

(1) ʺan investment of money,ʺ (2) ʺin a common enterprise,ʺ (3) ʺwith profits to be

derived solely from the efforts of others.ʺ Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d



                                             ‐7‐
Cir. 1994). First, the government established that Bergstein invested funds from P2 and

TT in his shell companies, Arius Libra and Swartz IP, respectively. Second, ʺ[P2 and

TTʹs] fortunes [were tied] to the fortunes of the other investors [of Arius Libra and

Swartz IP] by the pooling of assetsʺ and ʺfortunes of [P2 and TT investors] were

interwoven with [Bergsteinʹs] fortunes.ʺ Id. at 87‐88 (requiring horizontal and strict

vertical commonality to find that there was a common enterprise). As to the third

factor, there was evidence that Bergstein had control of Arius Libra and Swartz IP.

Because there was sufficient evidence to show that the P2 and TT instruments were

investment contracts, we need not decide whether there was sufficient evidence to show

that they were also notes or whether the district courtʹs jury instruction on the meaning

of ʺsecurityʺ was plain error. See S.E.C. v. Thompson, 732 F.3d 1151, 1170 (10th Cir. 2013);

cf. United States v. Leonard, 529 F.3d 83, 87 (2d Cir. 2008). Accordingly, the juryʹs verdict

was supported by the evidence.

IV.    Investment Advisers Act Theories of Guilt

              Under 15 U.S.C. § 80b‐6, it is unlawful for any investment adviser to:

ʺemploy any device, scheme, or artifice to defraud any client or prospective client,ʺ §

80b‐6(1); ʺengage in any transaction, practice, or course of business which operates as a

fraud or deceit upon any client or prospective client,ʺ § 80b‐6(2); or ʺengage in any act,

practice, or course of business which is fraudulent, deceptive, or manipulative,ʺ § 80b‐

6(4). Bergstein contends that the government could not rely on the first two



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subsections, which require fraud on a ʺclient or prospective client,ʺ because Weston

advised only the individual investors and not the hedge funds. Consequently,

Bergstein argues that he is entitled to a new trial on the investment adviser fraud

offenses because at trial, two of the three theories of guilt the government presented

were legally invalid. See Skilling v. United States, 561 U.S. 358, 414 (2010). We are not

persuaded because the factual record indicates that Hallac advised the funds, as well as

the fundsʹ investors, and thus the funds were his clients as well. Hence, the jury could

convict Bergstein on any of the three theories charged. See United States v. Salmonese,

352 F.3d 608, 624 (2d Cir. 2003).

V.       Sentencing

              Bergstein contests the district courtʹs calculation of the loss amount,

application of the bankruptcy fraud enhancement, and calculation of forfeiture and

restitution. The district courtʹs factual findings with respect to Bergsteinʹs sentence,

however, were not clearly erroneous. See United States v. Afriyie, 929 F.3d 63, 70 (2d Cir.

2019).

              First, we are not persuaded, as Bergstein argues, that the district court

should have reduced the $22.6 million loss amount on the ground that Weston

recovered portions of the collateral. While the loss amount must be reduced if the

defendant returns collateral that he provided, U.S.S.G. § 2B1.1 cmt. 3(E)(ii), here,

Bergstein did not provide any bona fide collateral of his own ‐‐ any amount Weston



                                            ‐9‐
recovered on the P2 loan was money that it had originally provided. Moreover, to the

extent Weston recovered any of the collateral, the intended loss, which includes the

value of the P2 loan, exceeds the actual loss amount and is therefore the appropriate

measure of loss. See United States v. Lacey, 699 F.3d 710, 720 (2d Cir. 2012) (ʺ[A]lthough

Application Note 3(E)(ii) accurately describes the calculation of actual loss, the note

cannot be mechanically followed where intended loss is higher, since the larger intended

amount is a better measure for the defendantʹs culpability.ʺ (citation and internal

quotation marks omitted)); Carboni, 204 F.3d at 47 (ʺ[W]here the intended loss is greater

than the actual loss, the intended loss is to be used.ʺ (citation and internal quotation

marks omitted)). In any event, the Guidelines provide that if the loss amount exceeds

$9.5 million, then the defendantʹs offense level increases by 20 levels. U.S.S.G. §

2B1.1(b)(1)(K). The loss amount on the $17.7 million TT loan, less Swartz IPʹs

repayment of $1 million before the fraud was detected, still exceeds $9.5 million. See

United States v. Caltabiano, 871 F.3d 210, 219‐20 (2d Cir. 2017) (requested credit

insufficient to alter Guidelines range based on loss amount).

              Second, the bankruptcy fraud enhancement was clearly applicable to

Bergsteinʹs offense. U.S.S.G. § 2B1.1(b)(9)(B) (providing that offense level increases by 2

if offense involves misrepresentation or fraud during a bankruptcy proceeding). In

2007 and 2008, Bergstein misappropriated funds from Stephens and later used $1




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million of misappropriated TT funds ‐‐ supplied by one of his shell companies ‐‐ to

purchase Stephensʹ claim in the bankruptcy.

              Finally, the district court did not err in calculating the forfeiture and

restitution amount. For the purposes of forfeiture under 18 U.S.C. § 981(a)(1)(C),

ʺacquiredʺ property ʺneed not be personally or directly in the possession of the

defendantʺ as long as ʺat some point, [it had] been under the defendantʹs control.ʺ

United States v. Contorinis, 692 F.3d 136, 147 (2d Cir. 2012) (internal quotation marks

omitted). Bergstein effectively controlled the proceeds of the P2 and TT funds as he was

able to transfer the funds to shell companies and use the funds for personal expenses.

To the extent that Bergstein objects to the forfeiture of $22,584,897 and restitution of

$15,155,797.27 on the ground that neither amount accounts for the recovery of collateral,

his argument fails for the reasons stated above. Bergsteinʹs reliance on Honeycutt v.

United States, 137 S. Ct. 1626 (2017), is misplaced as the Supreme Court held that

forfeiture, under 21 U.S.C. § 853(a)(1), could not be imposed upon a defendant, jointly

and severally with his coconspirator, for proceeds he never acquired or controlled.

Here, the evidence established that Bergstein controlled the funds in question.

                                           *    *    *

              We have considered Bergsteinʹs remaining arguments and conclude they

are without merit. Accordingly, the judgment of the district court is AFFIRMED.

                                           FOR THE COURT:
                                           Catherine OʹHagan Wolfe, Clerk

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