United States v. Castillero

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UNITED STATES OF AMERICA, Plaintiff, v. MICHAEL CASTILLERO et al., Defendants.

No. 23-CR-622 (JMF)

United States District Court, S.D. New York

November 18, 2024

OPINION AND ORDER

JESSE M. FURMAN, UNITED STATES DISTRICT JUDGE

Defendants Michael Castillero, Francine Lanaia, and Brian Martinsen are charged with securities fraud, wire fraud, investment adviser fraud, and conspiracy to commit those offenses, in connection with an alleged scheme between 2017 and April 2022 to defraud investors in a group of private funds known as the “StraightPath Funds.” ECF No. 1 (“Indictment”), at ¶¶ 1, 10-21. Castillero and Martinsen are additionally charged with obstruction of justice and conspiracy to obstruct justice. Id. ¶¶ 22-27. Defendants now move pursuant to Rule 12(b) of the Federal Rules of Criminal Procedure, to dismiss the Indictment (or at least the nonobstruction charges). ECF Nos. 40, 41, 42 (“Martinsen MTD Mem.”), 45. They also move for a bill of particulars and for other disclosures from the Government. ECF Nos. 37, 38 (“Lanaia Mem.”), 39 (“Allee Decl.”), 40, 43, 44 (“Martinsen Mem.”). Upon review of the parties' motion papers the motions are DENIED substantially for the reasons stated in the Government's memorandum of law, see ECF No. 48 (“Gov't Opp'n”), and set forth below.

BACKGROUND

The Indictment alleges that, from 2017 to April 2022, Defendants engaged in a scheme to defraud investors through their control of nine related private funds known as the “StraightPath Funds.” Indictment ¶¶ 1, 4, 7. More specifically, it alleges that they purported to offer investors a unique opportunity to invest early in private companies that were expected to go public in the future, or “pre-IPO” companies, which are far less accessible to individual, non-professional investors. Id. ¶¶ 1, 3, 5. Defendants allegedly did so through aggressive marketing tactics, including “boiler room”-style call centers where their referral agents cold-called potential investors and delivered aggressive sales pitches. Id. ¶¶ 1, 5.

The Indictment further alleges that Defendants misrepresented to investors that they and their agents would not make any money unless and until the investors profited from their investments. Id. ¶¶ 5-6. In reality however, the referral agents are alleged to have earned a commission based on the amount invested by each investor. Id. ¶ 5. Defendants also allegedly acquired shares in pre-IPO companies, then sold them to investors at arbitrarily inflated prices without disclosing the markups. Id. ¶¶ 2, 6. The Indictment asserts that Defendants profited at the expense of their investors in violation of their fiduciary duties as investment advisers. Id.

Defendants are also alleged to have misled investors about the structure and management of the StraightPath Funds. Id. ¶ 6. For example, Defendants allegedly overstated the number of pre-IPO shares that backed the interests sold to investors and falsely represented to investors that their investments were tied to specific shares of specific pre-IPO companies when, in fact, the investments were commingled across different series and funds. Id. The Indictment alleges that, although Defendants themselves managed and advised the StraightPath Funds, they falsely represented to investors that a particular individual, “Fund Manager-1,” was performing these functions. Id. The Indictment asserts that Defendants used an email address in Fund-Manager-1's name to correspond with investors and listed Fund Manager-1 as the manager in offering memoranda, communications, and other documents. Id. ¶¶ 6, 8. Defendants allegedly did so in part to conceal the involvement of Castillero and Lanaia, both of whom were suspended and later permanently barred from working in the securities industry. Id. The Indictment also alleges that Castillero and Lanaia remained involved in the scheme even when barred. Id. ¶ 8.

The Indictment charges Defendants with soliciting approximately $386 million from at least 2,000 investors over the course of the alleged scheme. Id. ¶ 7. It alleges that about 30% of these funds were diverted to pay Defendants and their associates, with Defendants themselves receiving over $74 million in investors' funds. Id. Defendants allegedly evaded regulatory scrutiny by providing false information during regulatory examinations, giving misleading sworn testimony, and destroying records subpoenaed by the U.S. Securities and Exchange Commission (“SEC”). Id. ¶ 9. The Indictment also asserts that Defendants discussed making Fund Manager-1 a scapegoat if the SEC identified any problems during its regulatory investigation. Id.

On May 13, 2022, the SEC filed a civil enforcement against Defendants and others involved in the scheme. See SEC v. Castillero, No. 22-CV-3897 (LAK), ECF No. 1. The Honorable Lewis A. Kaplan entered a preliminary injunction and appointed a Receiver for the StraightPath Funds. 22-CV-3897, ECF No. 55. On October 18, 2022, the U.S. Attorney's Office (“USAO”) intervened and successfully sought a stay of the civil action pending its criminal investigation. 22-CV-3897, ECF No. 102. Over thirteen months later, on November 28, 2023, a grand jury returned the Indictment in this case. See Indictment.

MOTIONS TO DISMISS THE INDICTMENT

First Defendants move to dismiss the Indictment - or, more precisely, the nonobstruction counts of the Indictment. See Martinsen MTD Mem. 3-9. “[A] defendant faces a high standard in seeking to dismiss an indictment.” United States v. Chastain, No. 22-CR-305 (JMF), 2022 WL 13833637, at *2 (S.D.N.Y. Oct. 21, 2022). That is because “[a]n indictment is sufficient when it charges a crime with sufficient precision to inform the defendant of the charges he must meet and with enough detail that he may plead double jeopardy in a future prosecution based on the same set of events.” United States v. Yannotti, 541 F.3d 112, 127 (2d Cir. 2008). Indeed, “[a]n indictment need do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime.” United States v. Wedd, 993 F.3d 104, 120 (2d Cir. 2021).

In light of this standard, Defendants' motion to dismiss is easily rejected. Defendants' motion rests primarily on their contention that Count Four, which charges Defendants with investment adviser fraud under the Investment Advisers Act, is “legally defective.” Martinsen MTD Mem. 3. All the other counts should be dismissed, they maintain, because the “same legal defect” in Count Four “is baked into the entire Indictment.” Id. at 4. Count Four, however, tracks the language of Section 206 of the Investment Advisers Act. Compare Indictment ¶ 21, with 15 U.S.C. §§ 80b-6(1), (2), (4). That is reason enough to reject Defendants' request to dismiss the charge. See e.g., United States v. Xu, No. 23-CR-133-5 (JMF), 2024 WL 1332548, at *2 (S.D.N.Y. Mar. 28, 2024); United States v. Chastain, No. 22-CR-305 (JMF), 2022 WL 13833637, at *2 (S.D.N.Y. Oct. 21, 2022).

In any event, Defendants' attack on Count Four is meritless for myriad other reasons. Defendants take issue with the Indictment's allegations that they violated their “fiduciary duties” because, they contend, the Indictment fails to “specify, explain, or provide the legal support for the existence of, the unidentified ‘fiduciary duties.'” Martinsen MTD Mem. 3. But the Investment Advisers Act itself imposes federal fiduciary duties on investment advisers. See e.g., SEC v. Rashid, 96 F.4th 233, 240 (2d Cir. 2024) (“[T]he Investment Advisers Act established federal fiduciary standards to govern the conduct of investment advisers[.]” (internal quotation marks omitted)); SEC v. DiBella, 587 F.3d 553, 568 (2d Cir. 2009) (“The ‘legislative history [of the Advisers Act] leaves no doubt that Congress intended to impose enforceable fiduciary obligations' on investment advisors.” (quoting Transamerica Mortgage Advisers, Inc. (TAMA) v. Lewis, 444 U.S. 11, 17 (1979)). Therefore, there is no merit to Defendants' contention that the “existence (or not) and the violations (or not) of fiduciary duties has no bearing on” the charges. Martinsen MTD Mem. 4. Moreover, the relevant fiduciary duties are far from “unidentified” in the Indictment. Id. at 3. To the contrary, the Indictment specifies ways in which Defendants are alleged to have “defrauded investors in the StraightPath Funds, for which they acted as fiduciaries,” including by “charging investors excessive and undisclosed markups on share prices of pre-IPO companies.” Indictment ¶¶ 6; see also id. ¶¶ 2, 6 (alleging various ways that Defendants violated their fiduciary duties).

Defendants' other principal argument - that references to “fiduciary duties” are “highly prejudicial” and “obscure the differences” between civil and criminal liability under the Investment Advisers Act - is similarly meritless (and, indeed, gives up the game on their contention that the Indictment fails to identify the fiduciary duties at issue). Martinsen MTD Mem 4. There is only one difference between civil and criminal liability under the Investment Advisers Act: To be criminally liable, an individual must “willfully violate[]” a provision of the Act. 15 U.S.C. § 80b-17; United States v. Tagliaferri, 820 F.3d 568, 573 (2d Cir. 2016). To the extent that Defendants acknowledge that the meaning of “fiduciary duties” under the Investment Advisers Act is clear for purposes of civil liability, therefore, it is a fortiori equally clear for purposes of criminal liability. And the Indictment indisputably alleges that Defendants acted “willfully” and charges them under the provision that describes criminal penalties under the Act. Indictment ¶ 21; see 15 U.S.C. § 80b-17. It follows that the Indictment's references to “fiduciary duties”...