United States v. Sharma

UNITED STATES OF AMERICA, Plaintiff, v. SOHRAB SHARMA et al., Defendants.

18 Crim. 340 (LGS)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

March 8, 2021

OPINION & ORDER

LORNA G. SCHOFIELD, District Judge:

The Court is in receipt of the Ancillary Petition for Hearing to Adjudicate Validity of Legal Interest and Right to Forfeited Property Under 21 U.S.C. § 853(N)(1) filed by Jacob Zowie, Thomas Rensel, Wang Yun He, Chi Hao Poon, King Fung Poon, Jae J. Lee, Mateusz Ganczarek, and Rodney Warren (collectively, "Claimants"). The Government opposes. For the reasons set forth below, Claimants' petition is denied.

I. BACKGROUND

From July through October 2017, Defendants fraudulently solicited approximately $39 million in digital assets from investors in exchange for digital purchase "CTR" tokens that were issued by Defendants' company Centra Tech., Inc. ("Centra Tech") as part of an initial coin offering ("ICO"). Defendants generated interest in the ICO by engaging in market manipulation to artificially pump up the price of CTR tokens on a cryptocurrency exchange. CTR token prices remained artificially inflated as Defendants continued their market manipulations through their arrests in April 2018. The parties do not dispute that during this period, potentially thousands of individuals purchased CTR tokens in connection with the ICO, and those ICO investors sold CTR tokens to secondary market buyers at artificially inflated prices. At their peak, CTR tokens traded between $.33 and $4.11 per token, for a market capitalization of approximately $279 million. Following Defendants' arrests and exposure of the fraud, CTR token prices collapsed to $.01 to $.02. The total loss to victims of the scheme -- ICO investors and investors who purchased CTR tokens at artificially inflated prices on secondary markets -- may be in the hundreds of millions of dollars, well above the $39 million Defendants initially obtained from ICO investors. Those losses are due at least in part to Defendants' fraudulent inflation of the CTR token prices.

Defendants subsequently pleaded guilty to three conspiracy charges -- for securities fraud, wire fraud and mail fraud conspiracies -- and agreed to forfeit to the Government all fraud proceeds. In October and November, 2020, the Court issued preliminary orders of forfeiture against Defendants Farkas and Sharma. The majority of the forfeited proceeds was $36 million from Sharma, which included $33 million the Government obtained from selling 100,000 seized units of the Ether cryptocurrency (the "Ether Proceeds").

In advance of Farkas and Sharma's sentencings, the Court entered an order foregoing restitution under 18 U.S.C. § 3663A(c)(3) because the number of potentially identifiable victims in this case was so large as to make restitution impractical, and complex factual issues relating to the cause or amount of losses to victims -- particularly secondary market purchasers who bought CTR tokens at inflated prices -- would unduly complicate or prolong the sentencing process. The Government has represented that the Department of Justice Money Laundering and Asset Recovery Section will establish a remission program by which victims may petition for, and receive a pro rata share of, the $36 million recovered as compensation for the fraud, all pursuant to that Section's sole discretion under an enabling statute and regulation, see 21 U.S.C. § 853(i)(1), 28 C.F.R. § 9.1(b)(2).

In 2017, Claimants filed a civil securities fraud class action against Centra Tech in the Southern District of Florida. In June 2020, Claimants obtained default judgments against Centra Tech in the amount of $3.4 million representing (1) Claimants' losses due to Centra Tech's fraud and (2) pre- and post-judgment interest. The Government declined to release seized funds to Claimants in this amount, in part because there might be insufficient funds to reimburse fully all eligible victims' losses.

On January 19, 2021, following the Government's publication of forfeiture notices pursuant to the Court's preliminary forfeiture orders, Claimants filed the instant petition requesting that the Court (1) enter a restitution order on behalf of themselves "and their fellow Centra Tech Victims," rather than proceeding with the Government's remission plan and (2) initiate an ancillary proceeding to determine whether Claimants have a greater interest than the Government in unspecified portions of the 100,00 Ether units recovered.

II. STANDARD

Sentencing courts may simultaneously impose forfeiture and restitution orders. United States v. Bodouva, 853 F.3d 76, 78-79 (2d. Cir. 2017). Forfeiture of criminal proceeds to the Government is mandatory in federal criminal cases. See 28 U.S.C. § 2461(c) ("If the defendant is convicted of the offense giving rise to the forfeiture, the court shall order the forfeiture of the property as part of the sentence in the criminal case[.]"); 18 U.S.C. § 981; see also United States v. Torres, 703 F.3d 194, 204 (2d Cir. 2012). Forfeiture is designed to punish offenders by transferring their gains to the United States. Torres, 703 F.3d at 203.

Restitution is designed to compensate victims for harm resulting from criminal activity. Id. The Mandatory Victims Restitution Act, 18 U.S.C. § 3663A ("MVRA") states, "when sentencing a defendant convicted of an offense [including fraud], the court shall order . . . thatthe defendant make restitution to the victim of the offense." 18 U.S.C. § 3663(a)(1). "'[V]ictim' means a person directly and proximately harmed as a result of the commission of an offense for which restitution may be ordered." 18 U.S.C. § 3663(a)(2). A court ordering restitution must direct the probation officer to obtain and include in its presentence report, to the extent practicable, a complete accounting of victims and losses, and the Government must consult, to the maximum extent practicable, with all victims and provide the probation officer with a listing of the amounts subject to restitution. 18 U.S.C. §§ 3664(a), 3664(d)(1). If victims' losses are not ascertainable by ten days prior to sentencing, the Court may set a date for a final determination of victims' losses not to exceed 90 days after sentencing. 18 U.S.C. § 3664(d)(5). The Supreme Court held that a court that erroneously missed the deadline for entry of a restitution order by three months could still enter such order because, at the sentencing hearing, the court stated it would order restitution, and only the amount remained undetermined. Dolan v. United States, 560 U.S. 605, 609, 613 (2010); see also United States v. Qurashi, 634 F.3d 699, 705 (2d Cir. 2011). The deadline is primarily to help victims secure prompt restitution where possible. Dolan, 560 U.S. at 612.

The MVRA contains two exceptions to its requirement of mandatory restitution. Restitution is not required where the court finds from the record that "the number of identifiable victims is so large as to make restitution impracticable," 18 U.S.C. § 3663A(c)(3)(A), or "determining complex issues of fact related to the cause or amount of the victim's losses would complicate or prolong the sentencing process to a degree that the need to provide restitution to any victim is outweighed by the burden on the sentencing process." 18 U.S.C. § 3663A(c)(3)(B). This decision is within the sentencing court's discretion. See In re W.R. Huff Asset Mgmt. Co., LLC, 409 F.3d 555, 565 (2d Cir. 2005). The purpose of these exceptions is to prevent"sentencing courts [from] becom[ing] embroiled in intricate issues of proof," and "reflects Congress's intention that the process of determining an appropriate order of restitution be 'streamlined'" and that sentencings "not become fora for the determination of facts and issues better suited to civil proceedings." United States v. Reifler, 446 F.3d 65, 136-37 (2d. Cir. 2006) (quoting Senate report accompanying MVRA's passage).

III. DISCUSSION

A. Availability of Restitution

Claimants argue that they are entitled to immediate and mandatory restitution under the MVRA in the full amount of the default judgments.

1. Restitution for All Victims

First, Claimants argue that a restitution order is appropriate for all victims of the Centra Tech fraud because the set of victims and their losses are readily ascertainable, thus obviating the need to forgo restitution pursuant to 18 U.S.C. § 3663A(c)(3). This argument is unpersuasive because the set of victims is likely in the thousands, consisting of initial purchasers of CTR tokens in the ICO and purchasers in the secondary market. Defendant Sharma provided a spreadsheet identifying approximately 1,500 individuals who purchased CTR tokens in the ICO alone, not including victims in the secondary market. In their Florida class action, Claimants acknowledged that the number of victims runs to the thousands, representing to the court that Centra Tech had "thousands of investors" in CTR Tokens and received digital assets from "thousands of unique addresses."

Restitution is made more impractical by complex issues of fact surrounding causation and the amounts of victims' losses. 18 U.S.C. § 3663A(c)(3)(B). Determining the amount of each individual's loss is a fact-intensive query, involving a determination of when each victimpurchased and sold CTR tokens, the degree to which the value of the tokens was inflated by Defendants' fraudulent misrepresentations and whether that fraudulent inflation proximately caused the victim's purchase and/or sale of CTR tokens and concomitant loss. 18 U.S.C. § 3663A(a)(2). Taken together, the large number of victims and the difficulty of ascertaining their specific losses make restitution impractical in this case, particularly as any restitution order would need to be entered within 90 days of sentencing. This makes a remission program the better alternative.

In response, Claimants note that the Government bears the burden of identifying potential victims to the probation office, which is...