NEW YORK — A federal appeals court Friday overturned the racketeering convictions of six defendants in a case that marked the first time prosecutors had used the organized crime law in a securities fraud case.
In a case involving a defunct securities firm, Princeton/Newport Partners, the U.S. 2nd Circuit Court of Appeals in New York also threw out numerous counts of tax fraud. But it upheld the six defendants' convictions on a conspiracy count, as well as securities fraud charges against two.
Defense lawyers in the case hailed the victory as a vindication of their stand that the federal racketeering law, known as the Racketeer Influenced and Corrupt Organizations Act, or RICO, shouldn't have been applied in the case.
In recent months, the federal appeals court in New York has thrown out a number of guilty verdicts in celebrated white-collar criminal cases such as this one that were brought under former U.S. Atty. Rudolph Giuliani.
The defendants affected by the Princeton/Newport appellate decision are James Sutton Regan, the former managing partner of the firm; Bruce Lee Newberg, a former Drexel Burnham Lambert trader, and four former Princeton/Newport executives: Jack Z. Rabinowitz, Charles M. Zarzecki, Paul A. Berkman and Steven B. Smotrich.
The Princeton/Newport case, filed in 1988, was an off-shoot of federal prosecutors' investigation into wrongdoing by Drexel and its former junk bond chief, Michael Milken. Princeton/Newport, which did business with Drexel, had offices in New Jersey and Newport Beach. The firm folded shortly after its executives were indicted.
The defendants were convicted of creating illegal tax losses through fraudulent deals involving securities. They were accused of "parking" securities--arranging sham trades by selling securities at a loss, with a promise to buy them back a short time later at the same price or slightly more.
The tax losses they generated from the trades were then used to offset part of the partnership's income on tax returns. Prosecutors maintained that since the tax trades were part of a continuing pattern of illegal activity, they also fell afoul of the RICO law.
But in a 2-to-1 opinion by a three-judge panel of the appeals court, the court ruled that the applicable tax law was ambiguous and that there was evidence that defendants believed "in good faith" that what they had done was legal.
The court threw out the tax-count convictions and the RICO convictions because the trial judge had failed to instruct the jury to acquit the defendants if they found that the defendants had acted in good faith.
The appeals court noted that the defendants had cited a particular section of tax law as justifying the trades. "If this belief was held in good faith, they could not be held criminally liable for proceeding on that basis," the court wrote.
The court also noted that shortly after the Princeton/Newport case was brought, the Justice Department in Washington changed its internal guidelines to ban RICO cases based on the same type of tax law violations.
Defense lawyers said they will ask the appeals court to reconsider its decision to uphold the conspiracy count.
In a prepared statement, Theodore V. Wells Jr., the lawyer for Regan, said: "We view the reversal as a great victory, and we are highly optimistic that we will also obtain a reversal of the one remaining count (against most of the defendants) on rehearing. The court's opinion proves that the case, which began as a highly publicized RICO prosecution, was ill-conceived and never should have been brought."
Roger S. Hayes, the second-ranking official in the U.S. attorney's office in Manhattan, declined to comment on the decision or say whether the government will attempt to retry the defendants on the counts that were thrown out. "We will study the opinion and decide what our next steps are," he said.
The court upheld securities fraud convictions against Zarzecki and Newberg for a separate scheme involving stock of C.O.M.B. Corp. of Minneapolis.
A number of defense attorneys have accused Giuliani of overly zealous prosecution. In addition to the Princeton/Newport case, the court has now overturned guilty verdicts in the GAF Corp. stock manipulation case and in the Wedtech Corp. bribery case involving government contracts.
During oral arguments in May, an appeals panel also indicated that it had strong doubts about the stock manipulation conviction of securities speculator John A. Mulheren Jr. That appeal hasn't been decided.