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Charges dropped in stock manipulation case

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Investigators relied heavily on wiretap evidence, which is rarely used in white-collar cases.
It is extremely rare for a criminal case to break down because of problems with a wiretap application.

Federal prosecutors in Los Angeles dismissed criminal charges against nine people in a $30-million stock-manipulation case after concluding that misstatements in obtaining court approval for key wiretap recordings made the evidence unusable at trial.

The dismissals were an embarrassing setback for prosecutors who were bursting with pride last year when they announced the indictments, the result of a three-year investigation.

U.S. Atty. Andre Birotte Jr. said investigators had relied heavily on wiretap evidence, which is rarely used in white-collar cases.

On Tuesday, prosecutors moved to dismiss the charges against Sherman Mazur and eight other defendants, concluding that the wiretap evidence was not admissible because of "omissions and misstatements" in an application to record the suspects' telephone calls.

It is extremely rare for a criminal case to break down because of problems with a wiretap application, said Loyola Law School professor Laurie Levenson, a former federal prosecutor.

She praised prosecutors for dismissing the case once the misstatements in the application were discovered.

"It doesn't mean that somebody intentionally lied, but they lost confidence in their investigators, and they lost confidence in their case," Levenson said.

The defendants were accused of heavily promoting worthless stocks, which they later sold for huge profits to more than 20,000 investors worldwide through a so-called pump-and-dump scheme.

Birotte had described Mazur as "a serial market manipulator" and said the scheme hurt "innocent victims who were looking at the market, seeing high-volume trading and thinking, 'This will be a good investment.'"

Mazur was convicted in 1993 of bankruptcy fraud and tax evasion and sentenced to six years in prison.

Mazur and his codefendants challenged the wiretap evidence, saying the government misstated the necessity for the recordings. Because the interception of telephone calls is a significant privacy intrusion, wiretaps are permitted only when all other investigative methods have been exhausted.

Mazur's attorney, Marc S. Harris, said an FBI agent told a judge that no reliable informants were available to provide information about the scheme, even though someone with knowledge of the scheme — a suspect — had cooperated with the prosecution in an earlier case.

"The key legal term was necessity, that the wiretap was a necessity," Harris said. "They failed to meet the necessity element, and they withheld information from the judge that could have been important in her assessment."

Thom Mrozek, a spokesman for the U.S. attorney's office in Los Angeles, declined to comment.

In its dismissal motion, the prosecutors said "any omissions and misstatements in the wiretap affidavits were neither material nor made with reckless disregard for the truth."

"The government's failure to earlier learn of this new information and the resulting shortcomings in the wiretap affidavits, when considered cumulatively, have led the government to determine it will no longer seek to rely on evidence gathered through the wiretaps," Assistant U.S. Atty. Robert E. Dugdale, chief of the criminal division, said in the dismissal motion.

"Without this wiretap evidence, the government does not believe that sufficient evidence exists at this time to support a conviction against the charged defendants in this matter."

Harris said this was not a mere technicality.

"The government chose to use a highly invasive law enforcement technique, one that the law dictates may only be used in extraordinary circumstances," he said.

"Not only were those circumstances not present here, but it appeared that the government deliberately withheld critical information from the issuing judge in the process of obtaining the wiretap," Harris said.

"The only meaningful sanction against such government overreaching is exclusion of the evidence and, if appropriate, dismissal of the case," he said.

A separate case involving some of the same defendants is pending. Prosecutors said they have not decided whether to proceed with that case.

stuart.pfeifer@latimes.com

Copyright © 2014, Los Angeles Times
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