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United States v. Brooks

United States Court of Appeals, Second Circuit

September 20, 2017

United States of America, Appellee-Cross-Appellant,
David H. Brooks, Defendant-Appellant-Cross-Appellee, Dawn Schlegel, Patricia Lennex, Defendants, Terry Brooks, Victoria Brooks, Andrew Brooks, Elizabeth Brooks, Appellants.

          Argued: May 19, 2017

         Appeal from the United States District Court for the Eastern District of New York. No. 6-cr-550 - Joanna Seybert, Judge. [*]

          Richard C. Klugh, Law Offices of Richard C. Klugh, (Joseph A. DiRuzzo, III, Fuerst Ittleman David & Joseph, PL, on the brief) Miami, FL, for Defendant-Appellant-Cross-Appellee.

          Justine A. Harris, Sher Tremont LLP, (Lisa H. Bebchick, Fried, Frank, Harris, Shriver & Jacobson LLP, on the brief), New York, NY, for Appellant Terry Brooks.

          Judd Burstein, Judd Burstein, P.C., New York, NY, for Appellants Andrew, Victoria, & Elizabeth Brooks.

          (Michael J. Gilbert, (Andrew J. Levander, on the brief), Dechert LLP, New York, NY, for Appellants Andrew, Victoria, & Elizabeth Brooks.)

          David K. Kessler & Laura D. Mantell, Assistant United States Attorneys (David C. James, Amy Busa, Christopher A. Ott, Christopher C. Caffarone, Assistant United States Attorneys on the brief) for Robert L. Capers, United States Attorney for the Eastern District of New York, Brooklyn, NY, for Appellee-Cross-Appellant.

          Before: Winter and Droney, Circuit Judges, and Donnelly, District Judge. [†]


         Appeal from a judgment of the United States District Court for the Eastern District of New York (Seybert, J.) entered following a jury verdict finding defendant David Brooks guilty of offenses related to fraud and securities laws violations, and Brooks's guilty plea to tax evasion. After Brooks filed his appeal, he died while incarcerated and his estate and members of his family moved to abate his convictions. We conclude that Brooks's counts of conviction resulting from the verdict abated with his death, but not the counts resulting from his guilty plea; the bail bond subscribed by Brooks and his family remains forfeited; and the order of restitution related to the fraud and securities laws counts is abated but not the order of restitution related to the tax counts. Accordingly, the estate-appellant's motion for abatement is GRANTED in part and DENIED in part, Brooks's judgment of conviction for the non-tax counts is VACATED, the motion by Brooks's family members for abatement of the bail bond forfeiture is DENIED, the order denying the motion to set aside bond forfeiture is AFFIRMED, the Government's cross-appeal is DISMISSED, and the case is REMANDED for the dismissal of the non-tax counts of the indictment.

         On September 14, 2010, David H. Brooks was convicted in the United States District Court for the Eastern District of New York (Seybert, J.) after a jury trial on multiple counts of offenses relating to securities fraud, mail and wire fraud, and obstruction of justice. He was also convicted of related tax offenses based on his guilty pleas, which occurred after the jury's verdict. Shortly before trial, the district court found that Brooks had violated the terms of his release conditions and ordered the forfeiture of a substantial cash security on the bond executed by Brooks and members of his family as sureties.

         Following his convictions, Brooks was sentenced to 204 months' imprisonment, ordered to pay restitution and a fine, and ordered to forfeit assets. He appealed his convictions based on the jury verdict but not the tax counts. After the verdict, Brooks's ex-wife and their children moved to set aside the forfeited bail bond security. The district court denied the motion and the family members appealed that decision. Brooks died while he was incarcerated and while these appeals were pending.[1]

         As a result of Brooks's death, his estate has now moved for abatement of his convictions, the order of forfeiture, the orders of restitution, the fine, and the special assessment that accompanied the judgment of conviction.[2] His estate, as well as his ex-wife and their children, have also moved for abatement of the bail bond forfeiture.[3] The Government does not oppose the abatement of Brooks's convictions on the non-tax counts and accompanying order of forfeiture, fine, and special assessment, but opposes the abatement of the restitution obligations and the forfeiture of his bail bond.

         We conclude that the counts of conviction based on the jury verdict must abate as well as the orders of forfeiture, fine, special assessment, and restitution for the offenses Brooks contested at trial. We also hold, though, that the forfeiture of the bail bond does not abate, nor do the convictions and order of restitution imposed on the tax counts. Accordingly, Brooks's motion for abatement is GRANTED in part and DENIED in part, Brooks's judgment of conviction is VACATED in part, the motion for abatement by the other appellants is DENIED, the order denying the motion to set aside the bond forfeiture is AFFIRMED, the Government's cross-appeal is DISMISSED, [4] and the case is REMANDED for the dismissal of the indictment as to counts I-XI, XV-XVII.


         I. Brooks's Offense Conduct

         David Brooks was the founder, Chair of the Board of Directors, and CEO of DHB Industries, Inc., a publicly traded company that manufactured and sold body armor to law enforcement agencies and the U.S. military.[5]

         In October 2007, Brooks was indicted in a superseding indictment on charges of participating in several schemes to defraud shareholders, including overvaluing inventory of DHB and its subsidiaries, reclassifying costs to inflate DHB's profitability, falsely adding non-existent inventory to the company's books, and obstructing a Securities and Exchange Commission ("SEC") investigation.

         In addition to the allegations concerning manipulation of the DHB books and false SEC disclosures, the indictment alleged that Brooks also defrauded DHB shareholders by diverting DHB assets for the benefit of Brooks, the Brooks family, and other DHB executives. Brooks routinely used DHB funds to pay expenses for his personal horse-racing business, and gave company credit cards and checks to his family to cover their personal expenses including clothing, home renovations, plastic surgery, vacations and airfare, automobiles, entertainment, and gifts. These personal expenses totaled millions of dollars.

         Brooks also sold substantial shares of DHB stock while the stock price was artificially inflated, making hundreds of millions of dollars in profit. Finally, the indictment alleged that Brooks paid himself millions of dollars through DHB that were not reported as income to the Internal Revenue Service, and did not pay income taxes on those payments.

         A second superseding indictment (the "indictment") was returned in July 2009, with the same charges directed at Brooks.[6]

         The district court entered a pre-trial restraining order on fourteen bank and investment accounts held by Brooks and his family that the court found would be subject to forfeiture in the event of a conviction.

         Brooks pled not guilty to all of the charges. The court later granted Brooks's motion to sever the tax counts. Brooks proceeded to trial on the non-tax counts in January 2010.[7]

         II. Brooks's Forfeiture of Bail Bond

         After Brooks's arrest in October 2007, the Government sought to have Brooks detained or his release be subject to a substantial bond and the full disclosure of his financial holdings, and on Brooks returning all of his assets from overseas back to the United States. The district court held a hearing and determined that Brooks was a flight risk on the basis of his considerable wealth and the potential for access to foreign accounts if he fled the country. The district court was also concerned that undisclosed and unmonitored accounts could be used to facilitate witness tampering. The district court issued a Bail Release Order (the "Order") on January 3, 2008, granting Brooks's motion for pre-trial release. The Order included such restrictions as home detention monitored by a private security firm, monitored conversations, independent auditing of bank accounts and assets, and a prohibition on liquid assets being held overseas without the approval of the U.S. Attorney's office.

         Brooks and his family sureties also provided $48 million in cash as security for the $400 million bond the court ordered.[8] The Order provided that if Brooks concealed assets, that conduct would be grounds for revocation of Brooks's bail and for the forfeiture of the $48 million cash security.[9]

         The district court reviewed the terms of the Order with Brooks and the family sureties prior to its approval at a December 21, 2007, hearing. In particular, the district court asked at the hearing about "failure to disclose assets" and Brooks's counsel confirmed that any such failure "subjects him to immediate remand, and it subjects him to the loss of the . . . [security]." J.A. 481.[10] The district court canvassed Terry Brooks (Brooks's wife), Jeffrey Brooks (Brooks's brother), Victoria Brooks (Brooks's 23-year-old daughter), and Andrew Brooks (Brooks's 19-year-old son), who executed the bond along with Brooks. The court later modified the Order upon subsequent motions by Brooks, but these modifications did not affect the asset disclosure terms or the restriction on maintaining funds overseas.

         In January 2010, shortly before trial, the Government moved to revoke Brooks's bail on the basis that Brooks and his family had hidden substantial assets in violation of the terms of the Order. The Government sought forfeiture of the entire $400 million bond. The district court revoked Brooks's bail and ordered his detention, but ordered forfeiture of only the cash security of $48 million.

         The district court did not hold an evidentiary hearing for the forfeiture, over the objections of defense counsel, and proceeded by Government proffer.[11] The district court credited the extensive affidavit (with numerous exhibits) of FBI Special Agent Angela Jett, which described the results of her investigation into Brooks's concealment of assets abroad.

         According to the affidavit, prior to the entry of the bail bond Order, a confidential source had met with David and Jeffrey Brooks as well as other family members to create various corporations and bank accounts around the world to conceal millions of dollars in assets. The source set up a scheme called "Czerny Kot" (Polish for "black cat") using the passports of Jeffrey Brooks, Elizabeth Brooks, Andrew Brooks, and Victoria Brooks to open nominee accounts. Special Agent Jett also pointed to Grand Jury testimony of Brooks's personal pilot to show that Brooks, Jeffrey, and other family members (including Terry Brooks and the children) flew to Switzerland in a private plane to deposit assets in Swiss safe deposit boxes.

         Based principally on Special Agent Jett's affidavit, the district court found that David and Jeffrey Brooks violated the conditions of Brooks's release by clear and convincing evidence. Specifically, the court found that (1) the two Brooks brothers conspired to hide assets through the Czerny Kot scheme in the Republic of San Marino, [12] (2) that Jeffrey Brooks had concealed over $3 million in currency in a London safe deposit box, and (3) that David Brooks secretly transported an unknown amount of currency to Switzerland.

         Concluding that these actions constituted a violation of the Order, the district court ordered the forfeiture of the cash security. The amount of cash remaining as security on that bond (after the prior withdrawals, as permitted by the court) totaled approximately $22.5 million, of which Terry Brooks and the children claimed ownership of $17.7 million and Brooks claimed $1.8 million (the remaining $3 million went to legal fees, as permitted by the court). Brooks filed an emergency motion with this Court to reverse the district court's revocation of bond, which this Court denied.

         III. Convictions and Post-Trial Events

         On September 14, 2010, after an eight-month trial, a jury returned a guilty verdict against Brooks on all counts. Brooks subsequently pled guilty to one count of conspiracy to defraud the IRS and two counts of tax evasion in August 2011. Brooks also agreed, in his plea agreement regarding the tax counts, to pay $2.8 million in restitution to the IRS and waived his appeal rights as to the tax convictions and the sentence for them.

         On August 22, 2013, judgment was entered against Brooks, and he was sentenced to 204 months' imprisonment for all his counts of conviction. The August 2013 judgment also reflected the imposition of a special assessment of $1, 700, a fine of $8.7 million, restitution of $2.8 million on the tax counts, and also made final a preliminary order of forfeiture. Restitution on the fraud and securities laws counts of conviction was to be subsequently determined by the district court.

         a. Restitution Order on Fraud and Securities Laws Violations

         In March 2015, the district court issued an extensive opinion and accompanying final order of restitution, pursuant to the Mandatory Victim's Restitution Act ("MVRA"), for the non-tax counts. The amended judgment that followed reflected the imposition of $53.9 million in restitution to Point Blank Solutions (the then-successor to DHB, Inc.), plus $37.6 million to individual victims identified ...

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