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United States v. Georgiou

December 7, 2009

UNITED STATES OF AMERICA
v.
GEORGE GEORGIOU



The opinion of the court was delivered by: Robert F. Kelly, Sr. J.

MEMORANDUM

Presently before this Court are the following Motions filed by the Defendant George Georgiou ("Georgiou"): (1) Motion to Dismiss Count One of the Indictment for Failure to Charge an Offense and as Impermissibly Duplicitous ("Mot. to Dismiss Count One"); (2) Motion to Dismiss Wire Fraud Counts and Strike Surplusage from the Indictment ("Mot. to Dismiss and Strike"); (3) Motion to Dismiss the Indictment for Outrageous Government Conduct in Violation of the Due Process Clause ("Mot. to Dismiss for Outrageous Gov't Conduct"); and (4) Motion to Suppress Evidence ("Mot. to Suppress"). For the reasons set forth below, the Motion to Dismiss Wire Fraud Counts and Strike Surplusage from the Indictment will be granted in part and denied in part, and the remaining Motions will be denied.

I. FACTS

On February 12, 2009, a federal grand jury entered an indictment against Georgiou, charging him with leading an international securities fraud conspiracy involving the manipulation of the stocks of four publicly traded companies from 2004 through 2008 (the "Indictment"). Kevin Waltzer ("Waltzer") is a cooperating witness who will likely testify at trial about his role in the alleged conspiracy and his active cooperation with the Government from July 2007 to the present, during which time he recorded numerous conversations with Georgiou.

The Indictment alleges that Georgiou manipulated the stocks of the following companies:

(1) Neutron Enterprises, Inc., a publicly traded Nevada corporation based in Ontario, Canada ("Neutron"); (2) Avicena Group, Inc., a publicly traded Delaware corporation based in Palo Alto, California ("Avicena"); (3) Hydrogen Hybrid Technologies, Inc., a publicly traded Nevada corporation based in Ontario, Canada ("HYHY"); and (4) Northern Ethanol, Inc., a publicly traded Delaware corporation based in Ontario, Canada ("Northern Ethanol" or "NOET"). The Indictment charges that Georgiou and his co-conspirators sought to manipulate the markets for Neutron, Avicena, HYHY and NOET stock (collectively, the "Target Stocks") by artificially inflating the demand for, and prices of, the Target Stocks, thus allowing Georgiou and his co-conspirators to profit on their significant holdings of the Target Stocks by selling their holdings and using the artificially inflated prices of the Target Stocks as margin*fn1 to obtain loans.*fn2

The Indictment further asserts that Georgiou and his co-conspirators obtained the loans from two Bahamian brokerage firms, Caledonia Corporate Management Group Limited ("Caledonia") and Accuvest Limited ("Accuvest"). Regarding Caledonia, Paragraph Eleven of Counts Six through Eight of the Indictment states:

As a result of the false representations of defendant GEORGE GEORGIOU and his co-schemers concerning the collateral for the Caledonia account and their failure to provide additional assets, Caledonia was unable to cover the substantial deficits in the RW account. Defendant GEORGIOU and his co-schemers thus caused Caledonia to suffer approximately $25 million in losses. Because Caledonia was unable to cover those massive losses, the firm could no longer operate and was liquidated. (Indictment at 41.) Regarding Accuvest, Paragraph Eight of Count Nine states that Georgiou "and his co-schemers did not repay the money that they had borrowed on margin and in cash loans from Accuvest, and their artificially inflated stock did not cover the loans. As a result, defendant GEORGIOU and his co-schemers caused Accuvest to lose at least $4 million." (Id. at 43.) Counts Six through Nine of the Indictment charge Georgiou with wire fraud. Specifically, the Indictment alleges that Georgiou used wire communications in interstate and foreign commerce to defraud Caledonia and Accuvest. The pertinent portions of these Counts state that Georgiou "devised and intended to devise a scheme to defraud . . . ." (Id. at 39, 42.)

The Indictment also alleges that on August 13, 2008, Georgiou met with Waltzer and the undercover government agent (the "UC") in Philadelphia and discussed Georgiou's scheme to manipulate NOET stock. The Indictment states:

Defendant GEORGIOU told the UC that he had total control of Northern Ethanol and that the stock was "really tight," meaning that defendant GEORGIOU already had substantial control over the total number of shares that could be traded.

Defendant GEORGIOU said that his plan was to increase the share price to approximately $2.50 to $3.00. He said that he wanted to make sure, though, that the stock was "revved up" properly. Defendant GEORGIOU said that they would work the price up slowly for the first 60 days and then "ramp to a sling shot thereafter." Defendant GEORGIOU stated that he wanted the UC's brokers to purchase at least $5 million to $10 million in Northern Ethanol stock and that he would pay the UC a 25-percent kickback for the purchases that he generated as part of this scheme. Defendant GEORGIOU and the UC agreed that the UC would make an initial small purchase in Northern Ethanol stock as a test to make sure that the process for the buying campaign was in place. (Id. at 26.) The Indictment alleges that this "test" purchase occurred "[o]n or about September 3, 2008," when, "at the direction of defendant GEORGE GEORGIOU, the UC caused purported retail purchases to be made of 16,000 shares of Northern Ethanol stock at an average price of $1.11 per share, for a total of approximately $17,760. In reality, the FBI made those purchases with its undercover funds." (Id. at 28.) The Indictment further states:

On or about September 11, 2008, defendant GEORGE GEORGIOU and his co-conspirators caused $5,000 to be wired from a Canadian bank account in the name of Starport to an undercover bank account maintained by the FBI in Philadelphia, Pennsylvania. This $5,000 wire was a kickback for the shares purchased by the FBI on or about September 3, 2008. (Id.)

Georgiou, however, presents a different version of the events which transpired on August 13 and September 3, 2008. Georgiou states:

Nearly two hours into the [August 13th] meeting[,] Mr. Georgiou was still asking "Charlie" to explain his business model. No "test trade" occurred after the meeting until the government directed the unsolicited purchase of September 3 which it then deemed as the "test trade". It is this backdrop of fourteen (14) months of failure to get Mr. Georgiou to do something that the Government could call a crime that produces the trick undertaken by Mr. Waltzer and the Government in September 2008. Unable to convince Mr. Georgiou to willfully "bribe" Charlie, the Government allowed Mr. Waltzer to deceive Mr. Georgiou and to arrange monies being sent that Mr. Georgiou thought were for Mr. Waltzer entirely unrelated to the Government's share purchase. (Mem. Supp. Mot. to Dismiss for Outrageous Gov't Conduct at 15.) Georgiou further asserts that "Waltzer called and e-mailed [him] on dozens of occasions," referring to Georgiou as "my friend" in numerous communications. (Id. at 9-10.) Georgiou also contends that Waltzer lied to him and sought to "trick [him] into believing that legitimate business steps were being undertaken." (Id. at 9.) Georgiou finally alleges that Waltzer called him on the day after his father passed away. (Id. at 10.)

Georgiou was arrested on September 17, 2008 at the Ritz Carlton Hotel in Philadelphia. The Government asserts that he had come to the hotel to meet with the UC. After initially meeting in the restaurant of the hotel, the UC asked Georgiou to meet him in a suite upstairs for a more confidential discussion. The discussion between Georgiou and the UC continued to take place in the suite upstairs at the hotel until the UC excused himself and Georgiou was confronted by other government officials.

At the time Georgiou was taken into custody, Georgiou possessed an IBM Lenovo Thinkpad laptop computer, a BlackBerry telephone and a Motorola cellular telephone (collectively, the "devices"). Government officials seized the devices from Georgiou several hours after he was placed into custody. (Mem. Supp. Mot. to Suppress at 5-6.) The Government asserts that following his arrest, Georgiou negotiated with the Government regarding "various pretrial issues, including detention or release and whether defendant would consent to the search of his computer, BlackBerry, and cell phone. . . . However, the defendant chose not to consent to the search of the electronic items, after which the government promptly obtained a search warrant." (Gov't's Resp. at 34.) The warrant was issued on or around September 22, 2008. (Mem. Supp. Mot. to Suppress at 1.)

Paragraph Two of the warrant authorized the seizure of "all documents and records, including opened or unopened emails, and internet history, pertaining to any securities or other financial holdings or transactions from 2004 through the present." (Mot. to Suppress, Ex. A, Attach. A ¶ 2.) Paragraph Three of the warrant called for the seizure of:

Stored electronic information and communications, including but not limited to: telephone or address directory entries consisting of names, addresses and telephone numbers; records of telephone numbers dialed, telephone numbers of incoming calls, schedule entries, stored memoranda, stored voice mail messages, and stored photographs from 2004 through the present.

(Id. ¶ 3.) Furthermore, Paragraph Five allowed for the seizure of "records which evidence ownership of use of [the devices], including, but not limited to, correspondence, sales receipts, bills for internet access, financial records, tax records, personal photographs, or other personal items . . . ." (Id. ¶ 5.)

In the affidavit, Special Agent Corey Riley ("Agent Riley") of the Federal Bureau of Investigation ("FBI"), one of the agents originally assigned to the investigation of Georgiou, states:

Based on my experience, I know that computer hardware, software, and electronic files may be important to a criminal investigation in two distinct ways: (1) the objects themselves may be contraband, evidence, instrumentalities, or fruits of crime, and/or (2) the objects may be used as storage devices that contain contraband, evidence, instrumentalities, or fruits of crime in the form of electronic data. . . . Based on my experience and information gathered in this investigation from Individual A and other sources, GEORGIOU uses his lap top computer, BlackBerry and cellular telephone to communicate with his co-schemers and other participants in the scheme. . . . Based on my experience, and information gathered in this investigation from Individual A and other sources, records relating to GEORGIOU's securities and financial activities are stored on his electronic storage devices, including his lap top computer and BlackBerry. (Mot. to Suppress, Ex. B, Riley Aff. ¶¶ 24, 30-31.)

On July 13, 2009, Georgiou filed his Motion to Dismiss Count One of the Indictment for Failure to Charge an Offense and as Impermissibly Duplicitous. On July 14, 2009, Georgiou filed his Motion to Dismiss Wire Fraud Counts and Strike Surplusage from the Indictment, Motion to Dismiss the Indictment for Outrageous Government Conduct in Violation of the Due Process, and Motion to Suppress Evidence. On August 17, 2009, the Government filed its "Omnibus Response" to Georgiou's Motions. On September 9, 2009, ...


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