In United States v. Motz., 2012 WL 147884 (2d Cir. Jan. 19, 2012), the Second Circuit Court of Appeals affirmed an eight year prison sentence for George Motz (“Motz”) but vacated a district court order requiring him to pay restitution of approximately $865,000 in connection with a fraudulent “cherry picking” scheme.  The court remanded the restitution issue back to the district court.

Motz was the mayor of Quogue, a small Long Island village, and President and CEO of Melhado, Flynn & Associates, Inc. (“MFA”), a Manhattan based broker-dealer and investment advisor firm.  Motz and MFA were indicted on August 27, 2008 and accused of operating a cherry picking scheme in violation of 18 U.S.C. § 1348(1), as enacted by § 807 of Sarbanes-Oxley (“SOX”).  According to the indictment, Motz engaged in cherry picking by placing trades in the morning, waiting until later in the day to determine the profitability of the trades and then allocating them to different accounts depending on their profitability.  In order to prove a § 1348 violation, the government must show “(1) fraudulent intent, (2) a scheme or artifice to defraud, and (3) a nexus with a security.”

On October 13, 2009, Motz pled guilty to one count of securities fraud under 18 U.S.C. § 1348 in connection to the cherry picking scheme.  His guilty plea was not part of any plea bargain.  He was subsequently sentenced to eight years in prison and ordered to pay approximately $865,000 in restitution to his victims.  Motz appealed both the length of the sentence and the restitution order. 

Motz attacked two sentencing enhancements applied by the district court under federal sentencing guidelines.  The first enhancement called for additional prison time when the aggregate loss is between $1 million and $2.5 million.  Motz argued that there was no loss sustained by his clients because although his clients overpaid for the securities that Motz allocated to them, most still realized a profit in the long term.  The Second Circuit disagreed and adopted the government’s method of calculating loss based on the difference between the price clients were charged for the security and its value at the time of allocation.  

The second enhancement called for additional prison time when the criminal activity harmed at least 50 victims.  Motz argued that the victim list was too broad because it contained individuals who were not harmed by the scheme and individuals harmed before the passage of SOX.  The court dismissed Motz’s arguments by noting that on several occasions after the passage of SOX, Motz had allocated losses to sixty or seventy distinct accounts.

Motz also appealed the order to pay approximately $865,000 in restitution because it failed to specifically identify the amount of each victim’s loss.  The Second Circuit agreed, vacated the order, and directed the district court to determine the amount of each victim’s loss. 

The primary materials for this case may be found on the DU Corporate Governance website.