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United States v. Kuzmenko

United States District Court, E.D. California

December 12, 2014

UNITED STATES OF AMERICA, Plaintiff,
v.
VERA KUZMENKO, et al., Defendants.

ORDER RE DEFENDANTS' MOTION TO COMPEL PRODUCTION OF MATERIAL THAT WOULD BE HELPFUL TO THE DEFENSE

DALE A. DROZD, Magistrate Judge.

INTRODUCTION

On October 29, 2104, this matter came before the undersigned for hearing on defendants' motion for an order compelling the government to produce documents and information in discovery pursuant to Rule 16 of the Federal Rules of Criminal Procedure and Brady v. Maryland, 373 U.S. 83 (1963). (Doc. No. 329.) Assistant United States Attorney Lee Bickley appeared on behalf of the United States. Attorney Bruce Locke appeared on behalf of defendant Vera Kuzmenko; attorney Scott Tedmon appeared on behalf of defendant Nadia Kuzmenko; attorney Hayes Gable appeared on behalf of defendant Aaron New; attorney John Manning appeared on behalf of defendant Edward Shevtsov and attorney Michael Chastaine appeared on behalf of defendant Peter Kuzmenko.

The defendants are charged in a superseding indictment with wire fraud in violation of 18 U.S.C. § 1343, mail fraud in violation of 18 U.S.C. § 1344, money laundering in violation of 18 U.S.C. §§ 1956(a)(1)(B)(i) and (ii), engaging in prohibited monetary transactions in violation of 18 U.S.C. § 1957, and witness tampering in violation of 18 U.S.C. § 1512(b)(3) along with a criminal forfeiture allegation. (Doc. No. 123.) On its face, the indictment appears to present a garden variety mortgage fraud case in which it is alleged that the defendants recruited straw-buyers to purchase homes and submitted fraudulent loan applications on behalf of the straw buyers. Specifically, the loan applications allegedly misrepresented the applicants' income, occupations, assets, citizenship and intent to occupy the homes and were often accompanied by false documentation of the same. It is also alleged that some of the defendants would make a commission on the straw-buyer purchases and that the loan proceeds would be funneled out of escrow into a shell corporation controlled by the defendants. The straw-buyers would then default on the loans.

THE DEFENDANTS' DISCOVERY MOTION

I. Background

On January 27, 2014, counsel for defendant Vera Kuzmenko brought a motion to compel production of documents material and helpful to the defense. (Doc. No. 235.) Through that motion the defendants sought copies of documents in the possession of the Federal Housing Finance Agency (FHFA) related to a civil action FHFA had brought against Merrill Lynch & Co.[1] in the United States District Court for the Southern Division of New York, Case No. 11-cv-6202. (Id. at 2-4.) According to defendant Kuzmenko, in that lawsuit the FHFA alleged that Merrill Lynch and First Franklin committed fraud by issuing and selling mortgage backed securities that they knew, or recklessly failed to know, contained loans that were made based upon false loan applications. (Id. at 6.) She asserted that her defense to the pending charges is, at least in part, based upon the contention that none of the alleged misrepresentations in the loan applications at issue were "material" because decision-makers at First Franklin and Merrill Lynch did not care whether the information was accurate as long as the representations made in the applications qualified the applicant for the loans to be made. Accordingly, she sought discovery of the FHFA's forensic review of 2, 688 First Franklin loans referred to in the amended complaint filed in the Southern District of New York civil action, the report of Clayton Holdings Inc. to Merrill Lynch which was part of a due diligence audit of the First Franklin loans that Merrill Lynch was acquiring, the depositions of First Franklin employees taken by the FHFA in the government's civil action, and any FHFA expert reports that might be helpful to the defense in this case. (Id. at 7.)[2]

On February 25, 2014, defendant Kuzmenko's motion to compel came on for hearing before United States Magistrate Judge Kendall Newman who denied the motion, suggesting that defendant had not demonstrated the materiality of the discovery sought and, in any event, it was not in the possession of the government for purposes of this prosecution. (Doc. Nos. 245 and 246 at 22-23.)

II. Arguments of the Parties

On September 24, 2014, counsel for defendant Vera Kuzmenko filed a "renewed motion to compel production of material that would be helpful to the defense." (Doc. No. 262.) Defendants Peter Kuzmenko, Nadia Kuzmenko, Edward Shetsov and Aaron New joined in that motion. The motion was subsequently continued for hearing before the undersigned.

Although presented as a "renewed" motion, despite its similarities to the earlier discovery request denied by Magistrate Judge Newman, this motion is not a renewal of that motion. Rather, this time the defendants point to an August 21, 2014 press release from the United States Department of Justice announcing a $16.65 billion settlement with Bank of America. That civil resolution included settlement of a potential civil action in the United States District Court for the District of New Jersey involving government claims that Merrill Lynch had misrepresented to investors that loans it was securitizing were made to borrowers who were likely and able to repay their debts when Merrill Lynch knew that was not the case based upon the due diligence it had performed. (Doc. No. 262, Ex. A.) Based upon the Department of Justice announcement of that investigation and civil settlement, defense counsel in this criminal case now seeks an order compelling "the government to produce the documents that are referred to in [the Department of Justice press release] and that are in the possession of the United States Attorney's Office for New Jersey that would be extraordinarily helpful to Ms. Kuzmenko's defense." (Doc. No. 262 at 1-2.)

In support of the pending motion, defense counsel relies on short transcript excerpts of the August 2014 trial in the case of United States v. Charikov, et al., No. 12-cr-0003 LKK (E. D. Cal.). In those excerpts the trial judge, Senior United States District Judge Lawrence K. Karlton, expressed doubt about the proposition that documents (such as the Clayton report to Merrill Lynch regarding First Franklin loans), in the possession of one United States Attorney's Office were not in the possession of another United States Attorney's Office for purposes of criminal discovery. (Doc. No. 262 at Exs. C& D.) Defense counsel also argues that the United States Attorney's Office in New Jersey has obviously developed evidence that Merrill Lynch disregarded its own due diligence and continued to securitize loans that it knew were defective - having been made based on false information submitted on loan applications. (Doc. No. 262 at 5-6.) Defense counsel contends that the documents reflecting this evidence are in the possession of the United States Attorney's Office in New Jersey and would be helpful to the defense in this criminal prosecution because they would help prove that the defendants here defrauded neither First Franklin nor Merrill Lynch. The documents, they contend, would assist the defense in attempting to establish that First Franklin and Merrill Lynch did not care if the loan applications contained truthful information and therefore that any misstatements in those applications attributable to defendants were not material. (Id. at 5-8.) Defense counsel contends that the documents they seek produced are discoverable under both Rule 16 and Brady and that it is not reasonable to suggest that they can obtain the documents from third parties rather than from the government.

The government opposes the defense motion to compel on various grounds. First, the government argues that the documents sought are not material because they do not relate to an element of the charged offenses and they are therefore not discoverable under either Rule 16 or Brady. (Doc. No. 270 at 10.) In this regard, the government cites to a number of decisions in which courts have held that reliance by the victim on the alleged misrepresentation is not an element of either mail or wire fraud. (Id. at 5-6.) Rather, the element of materiality is established if the false statement was capable of having affected or influenced the decision maker. (Id.) Second, the government argues that the discovery sought is not material, and therefore not discoverable, because it relates solely to secondary market securitization which is not placed at issue by the allegations of the superseding indictment. Rather, the government asserts, this prosecution is simply about defendants arranging lies to be made on loan applications, not what others did or said later with respect to the securitization of those loans. (Id. at 9-10.) Third, the government contends that production of the discovery sought, involving more than 88.4 million pages turned over to the United States Attorney's Office in New Jersey by third parties, would be unduly burdensome. That is particularly true here, where according to the government, over 64, 000 pages of discovery have already been produced to the defense. Fourth, the government argues that documents in the possession of the civil division of the United States Attorney's Office in New Jersey are not "in the possession of" the criminal division of the United States Attorney's Office in this district for purposes of criminal discovery. (Id. at 11-14.) Finally, the government asserts that if the defense truly believes that the documents it seeks are material to the presentation of their defense, they may seek them by way of subpoena issue to third parties, which the defense has not done.

Below the undersigned will address the issues raised by the defense motion to compel and the seemingly broad discovery that it seeks to ...


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