DOJ Letter With Exhibits

Case 2:06-cr-00550-JS-AKT Document 1661 Filed 05/20/13 Page 1 of 30 PageID #: 16436
By Hand and ECF .

The Honorable Joanna Seybert
united States District Court
Eastern District of New York
Central Islip, New York 11722
u.s. Department of Justice
United States Attorney
Eastern District of New York
610 Federal Plaza
Central Islip, New York 11722-4454
May 20, 2013
Re: United States v. David Brooks, et al.
Criminal Docket No. 06-550 (S-2) (JS)
Dear Judge Seybert:
1
The government writes in response to defendant David
Brooks's letter to the Probation Department, dated February 25,
2013 ("Brooks Letter"), detailing his obj ections to his
Presentence Investigation Report ("PSR").
Introduction: As he has done throughout the instant
criminal prosecution, Brooks repeats arguments in his objection
letter that the Court has already denied. He also regurgitates
arguments that he made in motions that are pending before the
Court. The government will not respond to those arguments, and
instead, relies on its opposition to those motions and the
Court's prior decisions.
The government agrees that when there is a factual dispute,
the Court must make its own finding. However, because the Court
presided over the criminal trial, it is in a position to resolve
those factual disputes based on the record already before it
without the necessity of a Fatico hearing. See, e.g., United
2
States v. Morrison, 04-CR-699 (E.D.N.Y. Jan. 29, 2010) (Hurley,
J. ) .
PART A - The Offense
Charge{s) and Conviction{s)
1. Brooks does not object to the substance of paragraph 1
of the PSR, but instead selectively references the Court's
August 24, 2012 Memorandum & Order, which correctly concluded
that any jurisdictional defect in the First Superseding
Indictment ("S-l") "was cured when the Second Grand Jury handed
down the valid Second Superseding Indictment." 8/24/12 Order at
5.
2-4. Brooks improperly repeats the same meritless
arguments contained in his motion to dismiss filed on October
26, 2012. Rather than respond again to these arguments, the
government hereby incorporates by reference its memorandum of
law in opposition to that motion filed on November 21, 2012
(Docket no. 1603).
2 (a), 2 (b) and 27. Brooks claims that PSR ~ ~ 2 (a), 2 (b)
and 27 should be amended to reflect that the Court impermissibly
permitted the jury to convict him of initially failing to
disclose the relationship between DHB and TAP during the period
2000 to 2003 when such conduct was not charged in the
indictment. Brooks Letter at 3. Brooks's objection is
factually incorrect: the indictment does charge such conduct.
Indeed, in response to Brooks's motion, the Court already
explicitly made this finding on the record. Tr. 19259-19261.
During the trial, Brooks argued that the Second Superseding
Indictment ("S-2") failed to charge both aspects of the TAP
scheme and that the "original TAP non-disclosure" was not
charged. Tr. 19244-19245. Brooks explicitly argued that
permitting the jury to consider both time periods constituted a
variance and constructive amendment. Tr. at 19260. The Court
ruled that S-2 set forth the two schemes. Tr. at 19261.
Ignoring the Court's unambiguous ruling, Brooks later reargued
the same points extensively. Tr. 19451-19455. The Court again
reached the same conclusion: both TAP schemes were set forth in
S-2. Tr. at 19455. Now, Brooks makes the same failed argument
3
again. It fails for the same reasons set forth by the Court
mUltiple times before.
First, the Court expressly noted that "paragraph 49, the
third sentence reads . 'such related party transactions had
not been disclosed in any of DHB's SEC filings on forms 10-Q,
10-K or in DHB's proxy statement filings.' So it's in the
indictment. It's clear." Tr. at 19454-19455.
Similarly, paragraphs 50 through 54 explicitly detail
Brooks's attempts to frustrate the SEC investigation into TAP.
S-2 expressly lists multiple misleading communications with the
SEC after the partial related party disclosure. See S-2 ~ ~ 52,
54.
Moreover, when describing the schemes to impermissibly
enrich Brooks, S-2 explicitly listed schemes to conceal
"BROOKS'S use of DHB funds to pay bonuses to employees of TAP, a
non-DHB corporation he controlled . [and] BROOKS'S de facto
ownership of TAP and the unjust enrichment of BROOKS and TAP at
the expense of DHB." S-2 ~ 31.
The Court no doubt recalls that the related party
disclosure only mentioned TAP's ownership by Brooks's wife, not
his personal control. Because it called for broader disclosure
than merely the related parties, S-2 was never confined to
merely concealing the wife's related party transactions.
Indeed, "Brooks's de facto ownership of TAP" necessarily
embraces both the related party relationship with the wife,
which was partially revealed in 2003, and Brooks's actual
control of TAP, which Brooks actively concealed from the SEC.
As to PSR ~ 27, Brooks also
"exculpatory" facts should be added as
TAP. Brooks Letter at 8. These facts,
than to reiterate failed trial arguments,
in the PSR.
argues that certain
to any description of
which do little other
do not merit inclusion
2(f). Brooks contends that the "government did not include
in its court-ordered bill of particulars the two incidents on
which the Court permitted the government to rely to make out the
uncharged R&D scheme." Brooks Letter at 3-4. He is wrong and
the Court already rejected this argument. See Tr. 19426, 19523-
24. Interestingly, Brooks only cites the government's initial
4
bill of particulars. He does not cite to the government's
supplemental bill of particulars, which included the two R&D
incidents. See docket entry number 725. Brooks's failure to
refer the Court to the government's supplemental bill of
particulars is particularly puzzling in light of the fact that
when Brooks raised this issue during the instant trial, the
government cited its supplemental bill of particulars (see
docket entry number 1203) and it was discussed in court (see Tr.
19402-04) .
4-6. Brooks argues that the jury was only permitted to
consider three of the seven schemes--the two TAP schemes and the
unauthorized and undisclosed executive compensation scheme--when
determining whether Brooks was guilty of Counts Three, Four and
Five. The government agrees. See Tr. 20749, 20758.
7-12 and 21. Brooks does not object to the substance of
paragraphs 7-12, which correctly recite the charges set forth in
Counts Six through Twelve of S-2. Instead, Brooks improperly
digresses into a discussion of whether he believes the seizure
and forfeiture ordered by the Court in this case were correct .
Brooks argues that the Second Circuit's recent decision in
United States v. Contorinis, 692 F.3d 36 (2d Cir. 2012), applies
to this case and that it directs imposition of a lower
forfeiture judgment. Whether Contorinis applies or not is
hardly clear, but it is clear that application of Contorinis
would result in a dramatically increased forfeiture judgment.
How to define proceeds subject to forfeiture was hotly
contested in this matter. Defendant Hatfield, in a motion for
the release of restrained funds, argued that only net profits of
her crimes were forfeitable under 18 U.S.C. 981(a) (2) (B). The
government argued it should be permitted to forfeit gross
proceeds pursuant to 18 U.S.C . 981(a) (2) (A). In a decision
issued April 21, 2010, the Court concluded that the definition
of proceeds found in 18 U. S. C. 981 (a) (2) (A) applied to this
case. United States v. Hatfield, 2010 WL 1685826, at *3
(E.D.N.Y. April 21, 2010). That definition provides for the
forfeiture of gross proceeds and does not limit forfeiture to
the net gain or profit realized from the offense. The Court
then held that, insofar as relevant here, the gross proceeds of
the defendants' crimes equaled the "difference between the
stock's inflated value, and what it would have sold for absent
the fraud." Id. In its motion for reconsideration, the
5
government argued that the definition, as applied by the Court,
would result in a lower forfeiture than would the forfeiture of
net profits because the defendants had paid little to nothing
for the shares of stock they sold at artificially inflated
prices. Letter dated July 16, 2010, Docket No. 1195, at p. 4 .
The Court denied the government's motion for reconsideration
and, after two forfeiture hearings and extended briefing, found
that $61,444,967 of the assets seized pre-trial were subject to
forfeiture as representing the proceeds of Brooks's insider
trading, namely the difference between the stock's "true value"
and inflated value.
Since the Court issued the Preliminary Order of Forfeiture
incorporating this analysis, the Second Circuit issued its
decision in Contorinis. There, the Court of Appeals held that,
in an insider trading case, 18 U.S.C. 981(a) (2) (B) 's net
profit definition applies, and forfeitable proceeds constitute
"the amount of money acquired through the illegal transactions
resul ting in the forfeiture, less the direct costs incurred in
providing the goods or services." Contorinis, 692 F. 3d at 145.
See also id. at 145 n.3 ("it seems that the only money that
should be subject to forfeiture in an insider trading case is
money acquired when shares are traded based upon inside
information at a gain")
This decision does not lead to the result Brooks advocates.
First, it is not clear that Contorinis governs this case because
Brooks stands convicted of both fraud and insider trading.
Mail, wire and securities frauds arising from a scheme to doctor
accounting figures are inherently unlawful activities and
therefore trigger the forfeiture of gross proceeds, not net
profits. See Contorinis, 692 F.3d at 145, n.3; Hatfield, 2010
WL 1685826 at *3. Second, the application of 18 U.S.C.
981(a) (2) (B)'s net profit definition places the burden of proof
regarding direct costs on the defendant. Finally, and perhaps
most importantly, the definition of net profit adopted by
Contorinis would require Brooks to forfeit nearly all, if not
all, of the $186 million generated by his insider sales because
he paid little to nothing to acquire the shares that he sold.
1
1 Brooks has not offered any credible evidence to demonstrate his
costs, as he must if 18 U.S.C. 981(a) (2) (B) applies, but even
a cursory review of the records in evidence demonstrate that,
whatever he paid for the shares sold in the 2004 insider trading
transactions, it was far less than the "trtie value" ascribed to
those shares by the Court and used to calculate his forfeiture
liability.
First, 700,000 of the shares sold in the November 2004
insider trading transaction were acquired through the cashless
exercise of options. GX 5069 at p. 5. Therefore, any proceeds
traceable to the sale of those shares constitute net profit and
are subject to forfeiture in their entirety under Contorinis.
6
Second, the 3,000,000 shares that Brooks sold out of his
children's custodial accounts had been held in those custodial
accounts since at least between 1996 and 1998. The remaining
shares sold in the unlawful insider trading transactions were
held by a corporation owned by Brooks through his company, David
Brooks International. GX 5072 at p. 5; see also Affidavit of
Robert M. Cappadona, dated October 25, 2007 (3500-RC-37). Aside
from Brooks's bald assertion that his costs totaled $78 million,
the record is not at all clear as to when those shares were
acquired, at what price they were acquired, or when they were
transferred to the children's account or to David Brooks
International. However, the record is clear that Brooks held
exercisable warrants to purchase millions of shares of DHB stock
at advantageous prices. See, e.g., GX 5022; Tr. 4690 (noting
that at end of 2001, Brooks held 9,575,000 shares acquirable
under currently exercisable warrants: 3,750,000 shares at
$2.33 per share, 25,000 shares at $3.25 per share, 25,000
shares at $2.00 per share, 25,000 shares at $7.11 per share and
1,500,000 shares at $1.00 per share). It is reasonable to
assume that Brooks purchased the insider trading shares through
the exercise of those warrants.
Indeed, Brooks's claim that he paid $78 million for the
shares is fantastical. As set forth above, 700,000 of the
shares sold in the November and December 2004 insider trades
were acquired via the cashless exercise of warrants, and the
record is unclear as to how the remaining 8,798,025 shares were
acquired. If Brooks really incurred $78 million to acquire
those shares, then he paid an average price of $8.87 per share
($78 million/8,798,025). Given that he possessed millions of
warrants to purchase shares at prices considerably less than
that, this unsworn, unsupported claim regarding costs is simply
incredible.
7
Brooks suggests that the Supreme Court's decision in
Southern Union Co. v. United States, U.S. 132 S.Ct. 2344
(2012) , . mandates application of a reasonable doubt standard for
criminal forfeiture proceedings. Brooks ignores the long and
well-established line of cases requiring that the government
prove its forfeiture allegations using a preponderance standard.
In Southern Union, the Supreme Court examined the
imposition of criminal fines in light of Apprendi v. New Jersey,
530 U.S. 466 (2000), which held that "any fact that increases
the penalty for a crime beyond the prescribed statutory maximum
must be submitted to a jury, and proved beyond a reasonable
doubt. /I Southern Union, 132 S. Ct. at 2350 (quoting Apprendi,
530 U.S. at 490). However, as the Second Circuit has repeatedly
noted, Apprendi does not apply to forfeiture because forfeiture
is an indeterminate scheme without a statutory maximum. United
States v. Pfaff, 619 F.3d 172, 175 (2d Cir. 2010)i United States
v. Fruchter, 411 F.3d 377, 382-83 (2d Cir. 2005). Accordingly,
Southern Union, which interprets Apprendi, does not apply to
forfeiture, and Brooks's argument that the Court incorrectly
applied the preponderance standard is without merit. See United
States v. Phillips, 704 F.3d 754, 770-71 (9th Cir. 2012)
(Southern Union does not apply to forfeiture because forfeiture
has no statutory maximum and because the decision does not
suggest that the Court intended to overrule Libretti v. United
States, 516 U.S. 29, 49 (1995)) i United States v. Day, 700 F.3d
713, 732-33 (4th Cir. 2012) (same).
Brooks's argument that the Court cannot impose a money
judgment representing the difference between the proceeds of the
unauthorized compensation scheme and the assets seized traceable
to that scheme is mistaken. Here, the Court found Brooks
obtained over $6 million of proceeds arising from the
unauthorized compensation scheme. By awarding the government a
money judgment for the difference between the amount seized and
the proceeds generated, the Court properly held Brooks
accountable for his crimes.
Regardless, even applying Contorinis and accepting Brooks's
claim that he spent $78 million to acquire the shares sold in
the insider trading transactions results in a significantly
increased forfeiture judgment of $107,723,662 ($185,723,662
(gross)--$78,OOO,OOO (cost)). The government has no objection
to the Court revising the Preliminary Order accordingly.
8
However, citing united States v. Awad, 598 F.3d 76, 78 (2d
Cir. 2010), Brooks suggests that, because he has ample monies to
satisfy the forfeiture order, the Court cannot award a money
judgment.
2
Contrary to Brooks' s argument that Awad authorized
the imposition of money judgments only when a defendant lacks
assets sufficient to satisfy the forfeiture order, Awad held
"that the propriety of a [forfeiture money judgment] does not
depend on a defendant' s assets at the time of sentencing." Id.
(emphasis added). This "interpretation of the criminal
forfeiture provision ensures that all eligible criminal
defendants receive the mandatory forfeiture sanction Congress
intended and ensures that there is a mechanism by which the
government may disgorge their ill-gotten gains, even those
already spent." Id. at 79 (citations and internal quotation
marks omitted) .
Regardless, Brooks's argument elevates form over substance:
once third party claims to property have been resolved, the
government intends to move to amend the forfeiture order to
include substitute assets (once they are identified) in
satisfaction of the outstanding money judgment. See Fed. R.
Crim. P. 32.2 (e) (1) (B); 21 U.S.C. 853 (p) . See also United
States v. Vampire Nation, 451 F.3d 189, 202 (3d Cir. 2006)
(applying 853(p) to money judgment, noting that to do
otherwise "would permit defendants who unlawfully obtain
proceeds to dissipate those proceeds and avoid liability for
their ill-gotten gains"); United States v. Casey, 444 F.3d 1071,
1077 (9th Cir. 2006) (" [t] he criminal forfeiture statute
mandates imposition of a money judgment on substitute
property"); Hall, 434 F.3d at 60 (interpreting forfeiture order
awarding money judgment to permit the Government to move for
substitute property). Accordingly, the Court should reject
Brooks's attempt to escape a money judgment.
Brooks complains that the government has improperly seized
assets. However, without more context, the government cannot
respond to Brooks's claim regarding shares of stock held by Like
2 Brooks does not specify to what monies he is referring when he
states that he has sufficient assets to satisfy the forfeiture
judgment. The assets restrained in this case are also subject
to restraint in the parallel civil forfeiture and may not be
available to him to satisfy other judgments. Brooks has not
submitted a financial statement to Probation.
9
a Prayer Trust. And Brooks's argument that assets purportedly
belonging to his children cannot be seized is simply incorrect
because: (1) a jury found, beyond a reasonable doubt, that
Brooks committed insider trading with shares of stock held in
his children's custodial account; and (2) criminal forfeiture
"reaches any property that is involved in the offense,"
including property not owned by the defendant. De Almeida v.
United States, 459 F.3d 377, 381 (2d Cir. 2006). The Brooks
children have filed claims in the ancillary proceeding, and
their claims to the assets will be resolved there. Id. (" [t] he
likelihood that some property involved in an offense will be
owned by persons other than the criminal defendant is reflected
in the provision for an ancillary proceeding"). See also United
States v. Dupree, _ F. Supp. 2d 2013 WL 311403 (E.D.N.Y.
Jan. 28, 2013), *4 (discussing ancillary proceedings); In re
Dreier LLP, 452 B.R. 391, 410-11 (S.D.N.Y. 2011) (same). Brooks
therefore lacks standing to assert any claims on his children's
behalf. See, e.g., united States v. Gallion, No. 2:07-39-DCR,
2009 WL 2242413, at *3 (E.D. Ky. July 24, 2009); United States
v. Tremblay, 2008 WL 4571548, at *2 (S.D.N.Y. 2008); United
States v. Armstrong, No. 05-130, 2007 WL 809508, at *4 (E.D. La.
Mar. 14, 2007); United States v. Brown, 02CR159, 2006 WL 898043,
at *5 (E.D.N.Y. Apr. 4, 2006).
15. Brooks obj ects to paragraph 15 arguing that Count 17
should be dismissed for lack of venue. Brooks Letter at 4-5.
As the Court previously ruled, the jury need only find by a
preponderance of the evidence that venue is established. Tr.
19185-19186. After the jury was charged on that issue, Brooks
made an oral motion to dismiss Count 17 on the basis of venue.
Tr . 20804. The Court reserved decision on the motion. For the
clarity of the record, the Court should now expressly deny the
motion to dismiss.
By way of background, Count 17 relates to Brooks's lies to
DHB's independent public auditors: Rachlin Cohen & Holtz
("Rachlin"). On March 7, 2006, Rachlin auditors confronted Dawn
Schlegel about a "plug" of non-existent vests. Tr. 9061- 9062.
Schlegel then testified that she called David Brooks on his
mobile phone about this questioning and was instructed by Brooks
to show the auditors certain misleading, non-representative
black vests. Tr. 9062. The existence of these phone calls was
established by introduction of Brooks's mobile phone records,
which showed eleven phone calls between Schlegel and Brooks on
March 7, 2006. GX 17012 (Brooks's mobile phone was billed to
10
DHB's offices in the Eastern District of New York and bore an
Eastern District of New York area code). On March 9, 2006,
Rachlin emailed Brooks, among other DHB employees in the Eastern
District of New York, a memorandum indicating Rachlin's intent
to begin a 10-A examination into fraud in DHB's books and
records. Tr. 11053. On March 10, 2006, Brooks participated in
a meeting with Rachlin officials in Florida. Tr. at 11057.
Although Brooks provides no citations for his motion to
dismiss, it is helpful to work through the governing legal
principles. Judge Joseph Bianco wrote extensively on the
subject of venue in United States v. Abdallah, 840 F.Supp.2d 584
(E.D.N.Y. 2012). In that case, Judge Bianco explained how
"[u]nder 18 U.S.C. 3237(a), venue properly lies in 'any
district in which such offense was begun, continued, or
completed. '" Abdallah, 840 F. Supp. 2d at 603. Evidence of a
phone call giving instructions to another member of a scheme is
sufficient to survive a Rule 29 motion to dismiss. Id. at 603-
606 (holding that evidence of one phone call sufficient to
support venue for a securities fraud charge). Brooks's phone
conversation with Schlegel included the instruction to give a
false explanation of the missing vests.
Brooks, however, argues that there was no evidence that
tied this specific crime to the Eastern District of New York.
As stated in Abdallah, "[a] defendant challenging a conviction
on the basis of insufficient evidence bears a heavy burden. II
Id. at 608 (citing United States v. Thomas, 377 F.3d 232, 237
(2d Cir. 2004) (citation omitted)). Moreover, it is axiomatic
that the court must view the evidence in the light most
favorable to the government and draw all permissible inferences
in the government's favor. See United States v. Irving, 452
F.3d 110, 117 (2d Cir. 2006). "In examining the sufficiency of
the evidence, the Court also should not analyze pieces of
evidence in isolation, but rather must consider the evidence in
its totality." Abdallah, 840 F.Supp.2d at 507 (citing United
States v. Rosenthal, 9 F.3d 1016, 1024 (2d Cir. ' 1993). Finally,
"[d] irect evidence is not required; '[i] n fact, the government
is entitled to prove its case solely through circumstantial
evidence, provided, of course, that the government still
demonstrates each element of the charged offense beyond a
reasonable doubt. '" United States v. Lorenzo, 534 F.3d 153, 159
(2d Cir. 2008) (quoting United States v. Rodriguez, 392 F.3d
539, 544 (2d Cir. 2004)).
11
Against that legal backdrop, the government points the
Court to the following facts . The facts clearly establish that
Brooks and Schlegel talked multiple times over his mobile phone
on March 7, 2006. See, e.g., GX 17012. Brooks's own
examination of Dawn Schlegel established that Brooks flew to
Florida from New York on March 9, 2006 . . Tr. 9099-9100, 9124-
9125 . DHB's corporate offices and Brooks's home office were
located in the Eastern District. On March 9, 2006, Rachlin sent
an email to Brooks and other DHB employees. Tr. 11053, 11057.
The records of the private plane, which record Brooks's out-of -
state travel, provide no evidence of Brooks leaving the Eastern
District of New York between March 6 and March 9. The credit
card records also provide no evidence of Brooks being anyplace
but New York until the evening of March 9, 2006. Indeed, Brooks
points to no evidence at all that Brooks was anyplace other than
the DHB offices or his home office in the Eastern District of
New York until the evening of March 9, 2006. See Brooks Letter
at 4-5.
The complete evidentiary picture in this case further
supports a finding that Brooks was at work in the DHB offices or
his home office in the Eastern District of New York when he made
the relevant March calls. General Lawrence Ellis testified that
Brooks was always at his desk. See Tr. 641-642. Brooks's own
attorneys took pains to examine witnesses about how he was
always in his home office when he was not at the DHB offices.
See Tr. 367 (Bart Stasi, a landscaper, testifying about Brooks
constantly working at his desk in his home office); Tr. 4127,
13769 (Irving Villalon testifying about how Brooks was always
working); Tr. 7111, 7493 (Mary Kriedell testifying about how
Brooks was working constantly out of his home). David Brooks's
attorneys cross-examined a witness about how, even though David
Brooks was in New York and the witness was in Florida, he was
always reachable by phone. See Tr. 3032, 3037-3038 (Travis
Brooks). In short, Brooks's own evidence emphasized that he was
always at work in the Eastern District of New York. Therefore,
Brooks's own evidence combined with Schlegel's testimony and
phone records establishes his presence in New York on March 7,
2006.
This circumstantial evidence is corroborated by the
corporate credit card and travel records, which only show
activities in the Eastern District of New York between March 6
and March 9, 2006. As the Court is well-aware, when Brooks
12
traveled, even on vacation, he took his private jet and used the
corporate credit cards. This evidence shows no travel.
Moreover, DHB's corporate headquarters was located on Long
Island, which independently establishes venue. See, e.g.,
United States v. Tucker, 495 F. Supp 607, 618 (E.D.N.Y. 1980)
(Platt, J.) ("this district was a proper venue for a grand jury
investigation into the dealings between defendant and Verner,
inasmuch as Verner lived in this district and Sam Goody, Inc.,
the alleged ultimate recipient of defendant's counterfeit
products, is headquartered in this district."). DHB maintained
its books and records on Long Island and consolidated all of
DHB's subsidiaries' financial statements into one financial
statement. Those financial statements contained the fraudulent
62,000 non-existent vests. All of that information was kept in
the Long Island headquarters. Those records were integral to
the frauds and the sole reason for Brooks's lies to the
audi tors. Therefore, as to this lying to auditors count, the
facts "not only involve some activity in the situs district but
also satisfy the 'substantial contacts'" test. United States v.
Royer; 549 F.3d 886, 895 (2d Cir. 2008).
Instead of referencing the evidence, Brooks points to the
inherent "mobility" of Brooks's phone to cast doubt on venue.
This argument cannot be reconciled with the controlling law,
which requires the Court to view the evidence in the light most
favorable to the government and draw all permissible inferences
in the government's favor. All of those inferences, which are
unchallenged in the evidentiary record, indicate that venue was
proper in the Eastern District of New York. The venue motion
and this PSR objection should both be denied.
20. As discussed above, the government agrees that only
the TAP schemes and unauthorized and undisclosed executive
compensation schemes apply to Count Three, and Count Three
involves company loss only. Count Seventeen involves investor
losses that are the result of Brooks's making materially false
and misleading statements to independent public accountants in
violation of 15 U.S.C. 78ff, which is an offense whose total
offense level is calculated in part by determining loss under
Uni ted States Sentencing Guidelines ("U. S. S. G. ,,) 2B1. 1. See
U.S.S.G. 2Bl.l Commentary, Statutory Provisions. As discussed
below, both the company and investors were victims who suffered
losses as a result of Brooks's materially false and misleading
statements to independent auditors Rachlin Cohen & Holtz.
13
22. Again, Brooks improperly uses the PSR as a vehicle to
reargue the Court's forfeiture decision in this case. He does
not deny that his interest in the assets listed in paragraph 22
were forfeited by the Court. He also improperly attempts to
reargue a statute of limitations issue previously raised in his
motion to dismiss filed on October 26, 2012. As the government
discussed in its response to that motion, the return of S-l on
October 24, 2007, tolled the statute of limitations under 18
U.S.C. 3288, irrespective of the premature expiration of the
first grand jury. See Govt. Opp. Br. at 24 (docket no. 1603).
S-2, which was returned on July 9, 2009, was not barred by the
statute of limitation because it was retuned during the time
period in which the statute was still tolled. See United States
v. Maklin, 535 F.2d 191 193 (2d Cir. 1976); United States v.
Lauter, 92-258, 1994 WL. 116576 at *2 (E.D.N.Y. Mar. 16,
1994) (Sifton, J.). Therefore, the government is entitled to
forfeiture and restitution with respect to all offenses of
conviction because they occurred within or straddle the five
years before the return of S-l.
In any event, the Court has already rejected a nearly
identical argument as applied to Brooks's liability to forfeit
the proceeds of his conspiracy. United States v. Hatfield, 795
F. Supp. 2d 219, 227 (E.D.N.Y. 2011). United States v.
Hatfield, 2010 WL 4177159, *6 (E.D.N.Y. Oct. 18, 2010)
(forfeiture may be based on uncharged conduct and even on
conduct on which the court granted a Rule 29 motion during the
trial) . The "scheme argument" raised in Brooks's objections is
merely an attempt to rehash this already decided point.
Because Brooks was convicted of a conspiracy and of schemes
to defraud, he must forfeit the proceeds of that conspiracy and
those schemes, no matter when those proceeds were acquired. See
United States v. Venturella, 585 F. 3d 1013, 1015, 1016 -17 (7th
Cir. 2009) (forfeiture in a mail fraud case "is not limited to
the amount of the particular mailing but extends to the entire
scheme"); United States v. Capoccia, 503 F.3d 103, 117 (2d Cir.
2007) (noting in dicta that defendants convicted of a scheme to
defraud are liable to forfeit proceeds of the entire scheme, no
matter when acquired); United States v. Jennings, 487 F.3d 564,
584 (8th Cir. 2007) (affirming without discussion forfeiture of
the proceeds of the entire mail fraud scheme based on a
conviction on just two substantive counts); United States v.
14
Kahale, 2010 WL 3851987, *31 (E.D.N.Y. Sept. 27, 2010) (applying
Capoccia and concluding that the "properly forfeitable property
in this case need not be limited to those funds obtained from
the three investors specifically identified in the Indictment .
, but rather should encompass all funds obtained as part of
the overall scheme to defraud"); United States v. Boesen, 473 F.
Supp. 2d 932, 952 (S.D. Iowa 2007) (defendant convicted of 82
substantive counts of health care fraud must forfeit the
proceeds of the entire scheme, not just the proceeds involved in
the 82 counts on which he was convicted). See also The United
States' Memorandum of Law in Support of Its Motion for Entry of
a Preliminary Order of Forfeiture, Docket No. 1422, at 52-54.
Brooks's argument regarding his scheme liability therefore must
be rejected.
23 and 51-62. This objection consists of two parts.
First, Brooks argues that the PSR should be amended to include
mention of the loans that he made to DHB. Second, Brooks argues
that the PSR should be amended to include a discussion of the
1997 Resolution as a valid corporate document.
Proceeding in order, the 10K public disclosure
fiscal year stated that all of Brooks's personal
were paid in full. See GX 5018; Tr. 5471.
testimony or exhibits were ever admitted.
therefore, add nothing to the PSR's narrative and
should be denied.
for the 2000
loans to DHB
No contrary
These loans,
the obj ection
Second, Brooks has long argued that a valid 1997 resolution
absolves him of all looting sins. He explicitly (and
repeatedly) argued this point to the jury. See, e.g., Tr. 19910
("I will tell you this: By the time I finish speaking to you, I
promise you one thing every dollar that the government
alleges Mr. Brooks stole through compensation, looting, was
authorized by the 1997 resolution, and, therefore, covered by
the offsets that you heard talked about in this courtroom.").
"The immense trial evidence" plainly established that Brooks was
not entitled to charge personal expenses to DHB. Hatfield, 795
F. Supp. 2d at 241. Indeed, the Court explicitly found that
Brooks must forfeit "the assets that Mr. Brooks obtained through
the unauthorized compensation scheme." April 23, 2012 Mem. &
Order at 20 (docket no. 1536). Consistent with the Court's
findings, which came after months of trial and further months of
forfeiture hearings, Brooks's objection should be denied. See
United States v . Hatfield, 724 F. Supp. 2d 321, 328 (E.D.N.Y.
2010) (" [A] reasonable jury could find that Mr.
millions of dollars of shareholders' money on
expenses, without proper authorization to do so.
63 07, GX 1510 - B . ") .
15
Brooks spent
his personal
See, e.g., Tr.
While the Court has already found that the "immense trial
evidence" established that Brooks was not permitted to charge
personal expenses to the company, the government provides a non-
exhaustive list of some of that evidence:
Unlike valid DHB unanimous resolutions that contained
signature lines for all the board members, the 1997
Resolution, which purports to be a unanimous resolution of
the board, only had one signature line. Compare GX 18001
(legitimate DHB unanimous resolution, dated January 23,
1997 - -three months before the 1997 Resolution purportedly
went into effect) with GX 18002 (fake 1997 Resolution) .
None of the more than 70 witnesses who testified at trial
saw the 1997 Resolution before the initiation of the SEC's
investigation into Brooks's unauthorized compensation.
Indeed, Schlegel never saw it (Tr. 6261-65, 6360);
Kreidell, who was the Chief Financial Officer at the time
that the 1997 Resolution was supposedly created, never saw
it (Tr. 1042, 1048, 1241); Brooks's own witness Paul
Donofrio, an Executive Vice President who worked closely
with Brooks and signed an affidavit the subj ect of which
was Brooks's compensation, never saw it (Tr. 14754-58)
No one saw an original of the 1997 Resolution.
The 1997 Resolution is replete with typos.
It was not disclosed in any of DHB's public filings until
the SEC's investigation was initiated.
Brooks did not include income from the 1997 Resolution on
his tax returns.
If Brooks was entitled to charge personal expenses to DHB,
he would not have had to ask Jay Chin to create fake
invoices falsely claiming that expensive pens that he
bought for his personal collection were actually office
supplies. But that's exactly what he did. See Tr. 1553-
57; Compare GX 1233Z (real invoice) with GX 1233B (fake
invoice) .
If Brooks was entitled to charge personal expenses to DHB,
he would not have had to worry about personal expenses
passing as business expenses, but he was. See GX 5201 at
16
5 ("a lot of personal charges, not high dollar value, some
will pass [as business expenses] some won't.").
If Brooks was entitled to charge personal expenses, he
would not have had to buy back personal assets to get them
off the books before Grant Thornton started auditing DHB
in 2002, but he did. See GX 5173.
If Brooks was entitled to charge personal expenses, there
would have been no reason for him to improperly classify
personal expenses as business expenses in the Audit
Committee Report, but that is exactly what he did. See GX
1285-C (falsely classifying invitations for Brooks's son's
Bar Mitzvah, plastic surgery for Brooks's wife, a plasma
television installed in Brooks's son's bedroom, a burial
plot for Brooks's mother and vitamins for Brooks's horses
as business expenses rather than personal expenses). From
1997 to 2003, when the 1997 Resolution was supposedly in
effect, he also misclassified personal expense on DHB' s
books and records. See Tr. 5528-29, 6269, GX 1495-A
(falsely classifying photography for Brooks's children's
parties as advertising, payments to a nurse for Brooks's
mother as repairs and maintenance and horse vitamins as
supplies) .
Brooks was also concerned that the auditors would find
certain personal expenses that he had charged to DHB. See
GX 5207 ("LIPA won't find will assume DHB" i "doctor
payment [referring to the plastic surgery for Brooks's
wife] won't find assume insurance medical.").
Further, Brooks lied about the true purpose of a check
from DHB's bank account that he wrote to Fred Marcus
Photography. Brooks wrote that the check was for
"catalogs," which was a lie. See GX 9052. Indeed, Andrew
Marcus testified that the payment was for photographs
taken at Brooks's son's Bar Mitzvah. Tr. 931. He further
testified that Fred Marcus Photography did not sell
catalogs to DHB or Point Blank. Tr. 932. In fact, they
never sold catalogs to anyone. Tr. 932.
Brooks continued to charge personal expenses to DHB, even
after he relinquished all rights he had to the purported
1997 Resolution.
Brooks scalped tickets to sporting events and concerts,
for which the company paid, and pocketed the cash. Tr.
13209-13, 13215-30, 13242-44, 13246-58, 13264-75, 13280-
87 i GX . 1382-89, 1382A-89A, 1392-94, 1392A-94A, 1396,
17
1396A, 1398, 13.98A, 1401, 1401A, 1403-04, 1403A-04A, 1406-
11, 1406A-11A, 1415-18, 1415A-18A, 1422-28, 1422A-28A,
1390 - 91 , 1395 , 1405 , 1430 - 31 , 1435 , 1438 , 1534 and 1542 -
45.
In 1997, DHB did not have a compensation committee.
In the face of that overwhelming evidence, Brooks quotes from
Gary Nadelman's testimony before the SEC in support of his
argument that the 1997 Resolution is valid. Brooks Letter at 7.
Interestingly, Brooks fails to mention that Nadelman
subsequently met with the government and admitted "he never
signed the '1997 Resolution' and he knows that because he never
saw the document prior to 2005. He never faxed the document in
1997, because he never saw it before." Nadelman proffer of
April 28, 2009, FD-302 at 3, a copy of which was previously
provided to both the Court and defense counsel. Nadelman
further stated that he believed that the 1997 Resolution was a
fraudulent document because no other board member signed it and
it was supposedly a unanimous resolution. Id. at 3.
Additionally, while Brooks had no burden of proof at trial, he
called numerous witnesses and because the government gave
Nadelman immunity, Brooks could have called Nadelman as a
witness if he believed that Nadelman's testimony was going to be
consistent with his SEC testimony. Tellingly, Brooks elected
not to calJ Nadelman during his robust defense case.
Brooks also reveals new, non-factual arguments about Internal
Revenue Service Regulations on facelifts and bonuses. See
Brooks Letter at 12-13. These arguments are irrelevant.
Brooks further contends that the PSR distorts the record
regarding his ownership of the Bentley. Brooks Letter at 12.
His argument is misguided. The evidence plainly established
that Brooks bought the Bentley for his own personal use. The
records concerning the sale of the Bentley--GX 1130A--state that
Brooks was the owner of the vehicle. See GX 1130Ai Tr. 12300-
05, 12317-25 . In addition, the car was registered in his name.
Id. Moreover, the records from the car dealership say that
Brooks intended to use the Bentley "for the purpose of
pleasure." Tr. 12318. Although Ms . Jefferson testified that
the words \\ for the purpose of pleasure" would not have been
written by Brooks, but instead by an employee of the car
dealership, Brooks still signed those records. Tr. 12318,
12340-41. Further, the Bentley was still in Brooks's possession
on October 25, 2007 more than a year after Brooks left DHB. Tr.
18
12371-75. In addition, General Ellis testified that the Bentley
was Brooks's car. Tr. 18681-82. He also testified that because
the Bentley was Brooks's car, he did not expect DHB to pay
insurance for that car. Tr. 18682. Accordingly, Brooks's
argument that the PSR distorted the record is belied by the
actual record.
Brooks further argues that the bull that Arthur DiModica made
for him--GX 16--was a legitimate business expense rather than an
example of his looting. Brooks Letter at 12. The Court already
rejected this argument and concluded that Brooks had to forfeit
the bull. See Hatfield, 795 F. Supp. 2d at 242 ("The Court
finds that the immense trial evidence concerning [the
unauthorized and undisclosed executive compensation] scheme
more than suffice[s] to meet the Government's forfeiture
evidentiary burden"); April 23, 2012 Mem. & Order at 20.
Putting that aside, Brooks's argument is contradicted by the
record. Indeed, like with the Bentley, the FBI recovered the
bull in Brooks's possession on January 21, 2010, more than four
years after Brooks left DHB. Tr. 13917. Brooks did not display
the bull in his home office, which was on the second floor of
his home; instead, it remained in the same place that Mr.
DiModica left it, namely, on the first floor of Brooks's home in
the foyer area. Tr. 1411, 13917. The Court should not
entertain Brooks's meritless contention.
Brooks takes issue with the PSR's statement that he took
"numerous vacations" at company expense. Brooks Letter at 12-
13. The evidence adduced at trial, including logs for Brooks's
private jet, credit card statements and other documents, as well
as the testimony of Schlegel, Villallon, Paul Donofrio, Joseph
Giaquinto, Elaine Pesky and General Ellis, makes plain that DHB
paid expenses relating to Brooks's personal trips. Indeed, DHB
paid. for every single flight that Brooks or his family members
took on his private jet, despite that many of those flights were
personal in nature. For example, DHB paid to fly Brooks's
daughter and her friends to Madison, Wisconsin so that they
could attend a Halloween party. Tr. 3734, 3827; GX 1333. DHB
also paid for expenses associated with Brooks's family vacation
to St. Barts. Brooks's travel agent, Elaine Pesky (Tr. 1805,
1810, 1812-15), Villallon (Tr. 3726, 3732, 3874-75), and
Schlegel (Tr. 6422, 6434-35) testified regarding the personal
nature of those trips. Brooks's own witness, Paul Donofrio,
also confirmed that Brooks's trip to St. Barts was a "family
19
vacation." Tr. 14728-29 ("I know he was on vacation with his
family in the Caribbean, yes."). Further, Donofrio testified
about a personal trip that he took with Brooks. Specifically,
Mr. Donofrio testified that he flew on Brooks's private jet to
attend a horse auction. Tr. 14710-12, 14727-28. However,
Brooks's flight logs, which were included in the Audit Committee
Report that was submitted in connection with the SEC
Investigation, falsely stated that the purpose of that trip was
to attend an investor meeting. See GX 1333, 5137; Tr. 14710-12,
14727-28. Another flight that DHB paid for was Brooks's family
vacation to' St. Tropez. Brooks mentions that Schlegel testified
that this was a vacation (Brooks Letter at 12), but fails to
mention that Villallon (Tr. 3733, 3879-80, 4374), Pesky (Tr.
1810, 1817 - 18) and General Ellis (Tr. 18584, 18668-69) also
testified that this trip was a personal one. Accordingly, the
Court should reject Brooks's argument.
The Offense Conduct
24. Brooks argues that all of the financial entities that
he established were entirely innocent. Brooks Letter at 8.
This argument is perplexing. The Court has already found that
Brooks violated the terms of his bail through the concealment of
money in a series of domestic and international financial
entities. That finding has been affirmed by the Second Circuit
in an interlocutory appeal. The objection should be denied. As
set forth in the civil forfeiture action that parallels this
case, the more recently formed entities that Brooks claims were
for so-called "legitimate estate planning purposes" were
actually charitable remainder annuity trusts ("CRATS"), which
Brooks created and of which he was trustee in order to take
large charitable deductions when, in fact, no money ever went to
charity or was intended for charity. See United States v. All
Assets, Complaint ~ 64, 10-CV-4750 (JS) (docket no. 1-2). Five
CRATs, each created in late December 2004, were used to avoid
the payment of taxes: Magic Moments Trust, Pathfinder Trust,
Saving Lives Trust, Showtime Trust, and Like a Prayer Trust.
Id. Donations were made to the CRATs by several corporate
enti ties controlled by David Brooks and of which he was the
president. Id. ~ 65. Brooks's family members were the nominal
shareholders of these companies. Id. The companies' donations
consisted solely of $142 million of insider trading proceeds.
Id. ~ ~ 62, 65. Specifically, Brooks donated either: (a) DHB
stock acquired through his 2004 exercise of warrants; or (b) the
20
proceeds of the sale of DHB stock acquired through his 2004
exercise of warrants. Id. By donating the stock or the
proceeds of its sale to the CRATs and by claiming chari table
deductions stemming from those donations, Brooks and his family
avoided the payment of significant taxes. Id. ~ 69. However,
as set forth below, Brooks never honored the trusts. Id.
Wi thin months, the CRAT accounts were emptied and the monies
used for Brooks's personal benefit. Id.
30-31 and 63. Brooks does not object to paragraph 30 which
sets forth a recitation of the methods and means by which Brooks
and his co-conspirators defrauded the investing public, the SEC
and the company. Rather, he quarrels with the Probation
Department's characterization of one of the objects of Brooks's
fraud- -to inflate the value of DHB stock. PSR ~ 31. Brooks
contends that "the only scheme alleged in PSR ~ 30 which the
jury could have relied on to convict Brooks of insider trading
is the so-called 'R&D' scheme " Brooks Letter at 9.
Brooks is wrong. In addition to having knowledge of the R&D
scheme at the time he sold his shares, Brooks also knew about
material non-public information regarding: (a) his control of
TAP to earn exorbitant profits at DHB's expensei (b) his looting
of DHB assets for the benefit of himself and his familYi and (c)
the November 26, 2004 mailing and electronic filing of DHB's
. Proxy Statement that contained numerous materially false and
misleading statements and omitted material facts about Brooks's
unauthorized compensation and his intentional failure to
disclose TAP over the preceding years. See Hatfield, 724 F.
Supp.2d at 328 ("Additionally, it should be noted that- -at this
stage--even Mr. Brooks's 'looting' defense would support an
insider trading conviction. Specifically, although Mr. Brooks
argues that the 1997 Resolution entitled him to spend DHB money
on his personal expenses, Mr. Brooks does not dispute that DHB
never disclosed the full extent of his compensation to
shareholders. Nor could he. [T]he 10-K does not disclose
that Mr. Brooks charged $666,657 in personal expenses to a
corporate credit card in 2002. [a] nd a reasonable jury
could find that DHB1s failure to accurately report Mr. Brooks's
executive compensation was material.) i see also United States v.
Hatfield, 06-550 (JS), 2010 WL 2838525, at *2 (Jul. 19, 2010
E.D.N.Y.) ("Mr. Brooks is acquitted of the insider trading
charges to the extent that those charges are predicated on DHB's
allegedly overvalued inventory. The insider trading charges
otherwise remain intact.") .
21
Brooks challenges the PSR's conclusion that he used the
proceeds of his insider trades to "purchase costly and lavish
items and services for himself and his family" because: (1)
there is no evidence of these purchases; and (2) if he had made
those purchases, the government would not have been able to
seize as much as it did. This argument is patently frivolous.
Firstly, many of the items seized as traceable to the
insider trading offenses are the very same costly and lavish
items that Brooks claims do not exist. Summarized below is a
list of luxury goods that the government identified as traceable
to the $186 million generated by the insider trading sales.
Luxury Items Purchased with Insider Trading Proceeds
Asset Description Amount of Record
No.
3
Monies Citation
Traced
113 Ferrari 612 Scaglietti $280,464 . 00 GX13501
N/A Men's Patek Philippe Watch 18 $11,850.00 GX13503
k Manual Wind Plain Gondolo,
Ref. 5111/J
N/A Men's Patek Philipe Watch, 18k $20,400.00 GX13503
Rose Gold Manual Wind Plain
Gondolo, Ref 5111/PR
N/A Men's Patek Philippe Watch 18k $12,750.00 GX13503
Rose Gold Manual Wind Gondolo
Silver Dial, Ref 5111/R
N/A Men's Patek Philippe Watch $12,750.00 GX13503
18k-wg Manual Wind Gondolo
Silver Dial, Ref. 5111/W
112 Men's Patek Philippe Watch 18k $83,250.00 GX15503
Rose Gold Manual Wind day-date
Silver Dial, Ref 5970/R
N/A Patek Phillipe Men's Watch 18k $32,750.00 GX13504
Rose Gold, Ref 5070R
3 "Asset No." refers to the
in the Preliminary Order of
seized are noted as "N/A."
testified as to the tracing
forfeiture hearing.
numbers assigned to each seized asset
Forfeiture. Assets that were not
Special Agent Robert Cappadona also
of these assets during the
22
Asset Description Amount of Record
No.
3
Monies Citation
Traced
N/A Patek Philipe Men's Watch $52,395 . 00 GX13505
Platinum Automatic Date GTs,
Ref 5059P
107 Patek Phillipe Men's Watch $12,565.00 GX13505
18kwg Manual Wind Date GT's
Ref 6000/W
N/A Patek Phillipe Men's Watch $26,110.00 GX13505
Nautilus Power Reserve 18kwg
Manual Wind Plain GTs , Ref
3711/1W
N/A Fred Ladies Watch 18kwg Quartz $59,000.00 GX13506
Plain w/Brilliant Diamonds,
Ref 7J0039
108 Fred Ladies 18kwg Necklace, $42,400.00 GX13506
Fancy Clasp and Brilliant, F
W2 Diamonds, Ref 7J0039
109 Patek Philippe Ladies Watch $70,000.00 GX13506
18kwg Quartz Plain GTs, Ref
4910/51W
N/A Patek Phillipe Men's Calatrava $17,000.00 GX13506
Watch 18kwg Automatic Date
GTs, Ref 5109/W-010
106 Breitling Men's All Diamond $87,500 . 00 GX13507
Flying B Watch Automatic Date
GTs, Ref J2836263/A636
N/A Second Chance Yellow/Black $46,085.00 GX13509
White Puzzle Diamond dial
Stainless Steel Case with
Diamonds ... , Invoice 251.471
110 Second Chance Splash Diamond $21,500.00 GX13509
Black Dial ... , Invoice 251. 471
111 Second Chance Splash Diamond $18,000.00 GX13509
Pink Dial ... , Invoice 251.471
Secondly and as noted above, while the government seized
many of the assets traceable to Brooks's insider sales, it did
not seize all of them. Many assets were not recovered, and
other monies were dissipated. In addition to the unseized
assets listed above, and by way of limited example only , the
government did not recover the $3 million sent on September 16,
2006 from the True Grit account at Goldman Sachs to an attorney,
23
GX 13501, or the $100,000 sent to Arlene Segal for expenses
relating to a Bat Mitzvah.4 Without a doubt, Brooks spent
considerable sums on luxuries and services for himself and his
family.
32-34, 107 and 123. First, Brooks objects to the PSR's
"wholesale acceptance of the word of Dawn Schlegel." Brooks
Letter at 9. This obj ection is too vague to merit a response
and should be denied. To the extent that Brooks objects to the
PSR's accurate characterization of a particular witness's sworn
trial testimony, the obj ection is without merit and should be
denied.
Second, as to PSR ~ ~ 32-34, Brooks argues that, because
portions of the R&D scheme were not presented to the j ~ r y , he
does not merit a leader or organizer role enhancement under the
Guidelines. The government submits that Brooks's supervisory
and management role in these crimes is clear from the record.
See, e.g., Tr. 5789, 5796-97, 5801-03i Tr. 6479-80, 2622-24,
6480-81 (Brooks threatened Travis Brooks when he reported the
overvalued inventory to auditors) i Tr. 6714 (Brooks attempted to
cover up the inventory overvaluation scheme by ordering Dawn
Schlegel to delete Travis' inventory summaries) i Tr. 6617-18,
2587-88 (Brooks used the Zylon write-down as an opportunity to
cover up the overvalued Interceptor inventory scheme and the
scheme to plug inventory with 62,975 non-existent vests).
Brooks was the Chief Executive Officer of the company.
Moreover, numerous witnesses testified regarding his controlling
management style. Indeed, government points the Court to
General Ellis's testimony about Brooks's control over DHB and
his attention to detail. General Ellis described Brooks's
management style as "[c]ontrolling, detailed." Tr. 821.
General Ellis explained how controlling Brooks waSi General
Ellis, who was the President of the Company and a member of the
Board of Directors, was required to get Brooks's approval for
all expenditures, even expenditures as small as $200. Tr. 466-
67, 472. Similarly, Mary Kreidell described Brooks as a "hands
on manager . [who] was very involved in the business." Tr.
4 Of the $100,000, $40,000 was disbursed on June 30, 2005 from
the Pathfinder Trust account, and $60,000 was disbursed on
September 30, 2005 from the Like a Prayer Trust. Tr . 298-99
(Arlene Segal creates, designs and manufactures invitations) i
Tr. 316-24 (Segal testimony about one of the checks). See also
3500-RC-23 at 51 .
24
1014-15 . Likewise, Donofrio testified that he was a "hands-on
CEO" who was "very involved in the business . " Tr. 14750.
Additionally, the testimony of witnesses such as Geraldine
Bongarzone, Elinore Kaye, Michael Duffy, Richard Carey and
Marylou Segismundo showed Brooks's everyday oversight into TAP,
looting and other criminal matters. See, e.g., Tr. 1264-65 and
1273-74 (Bongarzone) ; Tr. 1508-13, 1599-1600 and 1611-1614
(Kaye) ; Tr. 1311-13, 1319, 1322-27 and 1331-34 (Duffy) ; Tr.
11843-45, 11847-53 and 11871-72 (Carey) ; and Tr. 4769-4770
(Segismundo) . Many other witnesses and documents established
the same principle: Brooks was an organizer and manager.
In addition, the enhancement applies because there were
five or more knowing participants. U.S.S.G. 3B1.1{a).
Indeed, Schlegel, Brooks, Hatfield and Lennex were all
convicted . Ronda Graves testified about her knowing commission
of fraud. See Tr. 3189-3190. Other witnesses, such as Joseph
Giaquinto (Tr. 4508-11, 4525-26, 4528-32, 4640), Jay Chin (Tr.
1556-1557), Carl Conte (Tr. 946-949) and others, described
fraudulent acts that they committed at Brooks's direction.
Moreover, as discussed above, Nadelman was a participant in the
fraud as he falsely testified before the SEC and Jeffrey Brooks
was involved in Brooks's attempted insurance fraud as set forth
below. For all of these reasons, the objection should be
denied.
Even if the Court found that there were not five or more
knowing participants, the enhancement applies because the
fraudulent schemes were "otherwise extensive." U.S.S.G.
3B1.1 (a) . "In assessing whether an organization is \ otherwise
extensive,' all persons involved during the course of the entire
offense are to be considered. Thus, a fraud that involved only
three participants but used the unknowing services of many
outsiders could be considered extensive." Id. Application Note
3. Here, not only did Brooks use the knowing participants
discussed above, he also used numerous unknowing participants
such as lawyers, auditors and employees in furtherance of his
fraudulent schemes. In addition, the fraudulent schemes went on
for years. Indeed, Brooks's unauthorized compensation started
in the 1990s and continued after he left the company.
Brooks does not object to the Probation Department's
recitation of the proof at trial with respect to the R&D scheme.
He instead claims that the "district court's finding that the
government failed to prove the charged overall R&D scheme is
25
inconsistent with and contradicts the PSR's role enhancement
based on the conclusion that Brooks was an organizer of the
charged schemes." Brooks Letter at 9. Brooks conflates the
Court's decision with his role in the R&D scheme. As proven at
trial, Brooks was the leader of the R&D scheme as Dawn Schlegel
needed and obtained his approval every time expenses were
reclassified from research and development to cost of goods
sold.
The Court's decision to strike paragraph 22 of S-2 had
nothing to do with Brooks's role in the scheme, but instead was
predicated on the Court's finding that the R&D scheme alleged in
S-2 was larger in scope--with $22 million in reclassifications
occurring from 2003 through the first three quarters of 2005--
than actually proven at trial. See Hatfield, 724 F. Supp. 2d at
327 a reasonable jury could find Mr. Brooks guilty of
insider trading based on DHB's failure to disclose two incidents
where DHB reclassified the costs of goods sold as R&D to achieve
a desired profit margin (supporting Superseding Indictment
19-21), the Government1s opposition papers do not support
finding him guilty of the larger fraudulent reclassification
scheme that the Superseding Indictment alleges (Superseding
Indictment 22)") i see also United States v. Hatfield, 06-550
(JS), 2010 WL 2816326, at *2 (E . D.N.Y. Jul. 16, 2010).
Significantly, the Court did find that Government's proof
does establish a securities fraud, at least for Rule 29(a)
purposes." Id. at 6-7 n.2. Finally, Brooks's argument that the
R&D scheme is time-barred is improper and meritless for the
reasons discussed above and in the government's opposition to
Brooks's motion to dismiss filed on October 26, 2012.
35-36. Brooks contends that he was not a leader or
organizer of the PACA overvaluation scheme. Brooks Letter at 9.
The PSR does not state that he was. Neither the government, nor
the Probation Department argue that Brooks organized the PACA
fraud. Rather, the evidence adduced at trial demonstrated that
Hatfield initiated the scheme. That being said, the evidence
also demonstrated that once Travis Brooks complained about the
inventory overvaluation, David Brooks stepped in. Brooks
threatened Travis Brooks and ensured that the auditors would not
uncover that DHB had been overstating the value of inventory .
Regardless, Brooks does not need to be a leader or organizer in
every single one of the fraudulent schemes to warrant an
aggravating role enhancement. It is sufficient that he led the
unauthorized and undisclosed executive compensation scheme, the
26
two TAP schemes, the non-existent inventory scheme and the R&D
scheme. The evidence adduced at trial plainly established that
he led those schemes.
Brooks argues that Patricia Lennex's probationary sentence
necessarily means that Brooks's role has been overstated.
Brooks Letter at 10. This argument is based upon multiple
faulty assumptions. First, Brooks contends that Lennex was a
major figure in the PACA fraud who received a low sentence for
her participation in that same fraud. Id. Lennex pleaded
guilty to a superseding information charging filing a fraudulent
and false 2005 tax return, not anything to do with PACA or the
numerous frauds for which the jury convicted Brooks. See Docket
entry no. 1486. Second, the government has never claimed an
aggravating role for Lennex in the PACA accounting fraud, just
that she was involved with Brooks and Hatfield. See S-2 ~ ~ 23-
24. Third, even if Lennex did have an enhanced role, which she
did not, it would not absolve Brooks of his own enhanced role.
37-40. Brooks is correct that the Court held that "Brooks
[was] acquitted of the insider trading charges to the extent
that those charges are predicated on DHB's allegedly overstated
inventory." Docket entry no. 1199. His remaining arguments are
repetitive and without merit as discussed above
44. Brooks lodges a number of obj ections to the
description of TAP in this PSR paragraph. Brooks Letter at 10.
First, Brooks argues that Terry Brooks did not "set up" TAP. He
is correct. The government suggests that the PSR be amended to
have "Jeffrey Brooks, David Brooks's brother," replace "Terry
Brooks." Brooks other factual objections to this paragraph
should be denied.
Brooks argues that there .was evidence supporting the
argument that Terry Brooks was an active manager of TAP . He is
wrong. There was no evidence at trial that Terry Brooks ever
had any actual involvement with TAP i instead, in addition to
Schlegel's testimony, the overwhelming evidence established that
David Brooks controlled TAP. See, e.g., Tr. 5510, 5515-23,
5589 , 5955 , 5985 , 5770 , 5901, 6740 - 41, 814 0 i GX 5135 , 6025 ,
6042-45, 6063 and 6184-91. Indeed, Geraldine Bongarzone, an
employee of TAP, testified that she reported to Schlegel and
David Brooks and "never dealt with Terry Brooks [when it came to
TAP matters]." Tr. 1264-65, 1273-74. Similarly, Michael Duffy,
TAP's controller, testified that he was interviewed by Schlegel,
27
he provided reports of TAP's inventory to David Brooks, and he
reported to Schlegel and David Brooks . Tr. 1311-13, 1319, 1322-
27 and 1331-34 . Further, James Compton, TAP's plant manager,
testified that he never met or spoke to Terry Brooks, but he did
talk to David Brooks about TAP. Tr. 1418, 1431, 1459. Elinore
Kaye, TAP's bookkeeper, testified that she was hired by
Schlegel, she was initially paid by DHB, and she had no
interaction with Terry Brooks regarding TAP. Tr. 1508-13, 1599-
1600. Carl Conte also testified that he never dealt with Terry
Brooks regarding TAP. Tr. 949. In addition, Travis Brooks
explained that Hatfield told him not to "concern [him]self with
the TAP transactions at Point Blank and TAP. Don't ask any
questions regarding the TAP. That's David's deal. Don't go any
further. " Tr. 2568. Moreover, Richard Carey, a TAP employee,
testified that he reported to David Brooks, he provided lists of
TAP's inventory and cash balances to David Brooks, he prepared
TAP's tax return and gave those returns to David, not Terry,
Brooks, and he never talked to Terry Brooks regarding TAP. Tr .
11843-45, 11847-53, 11871-72; GX 6044-45. Finally, Brooks's own
witness Moshe Yair testified he worked for TAP for approximately
six years and he . never spoke to Terry Brooks regarding TAP, nor
did he ever see her at TAP. Tr. 16880-81.
In denying Brooks's Rule 29 motion, the Court stated that
The record contains more than enough
evidence for the jury to infer that Mr.
Brooks knowingly facilitated DHB's
nondisclosure concerning TAP. Among other
things, the Government evidences that: (1)
in 2002, Mr. Brooks, Ms. Hatfield and Ms.
Schlegel discussed whether to include TAP on
a list of DHB's top vendors; (2) Mr. Brooks
engineered a $4 million \ sham' transaction
with his wife, Terry Brooks, to prevent
DHB's auditors from asking questions about
TAP; (3) Mr. Brooks conspired with Ms.
Hatfield and Ms. Schlegel to submit a list
ofDHB's top vendors for an audit that
omi t ted TAP; (4) to respond to a likely SEC
inquiry, DHB, wi th Mr. Brooks' input,
prepared binders concerning its TAP
relationship that contained significant
misrepresentations and omissions, including:
(i) not disclosing that DHB paid some TAP
employees' salaries; and (ii) forged
backdated promissory notes attributed to
TAP; and (iii) omitting TAP insurance
policies that DHB paid for. Tr. 5515, 5770,
5889, 5904, 5905-06, 5921-22, 5954-5955,
10394-99, 12520.
Hatfield, 724 F. Supp. 2d at 326.
28
Misleadingly, Brooks cites to an interview of Patricia
Lennex, not to an exhibit at trial or any admissible testimony.
Brooks Letter at 10. After the cited interview, the government
indicted Lennex, who has never testified. Despite Brooks's bare
argument, no evidence supports the obj ection, which should be
denied.
Brooks next argues that a series of mitigating facts should
be added to the paragraph. To the extent that Brooks argues
that Terry Brooks's ownership conveyed benefits upon TAP, such
benefits were conveyed by fraud. TAP was not actually a "woman
owned business" or a "small business." After all, PACA
employees provided much of the TAP labor. Therefore, Brooks has
actually identified aggravating sentencing factors.
As to the "Mentoring Business Agreement," Brooks at tempts
to revive a failed argument that TAP's existence and ownership
were adequately disclosed. Tr. 20217-20218. The argument was
rejected by the jury and, because Brooks has failed to identify
an error in the PSR, this aspect of the obj ection should be
denied .
45, 46 and 49. Brooks next provides a series of objections
that seek to add legal arguments and mitigating facts to the
PSR's discussion of TAP. Brooks Letter at 11. First, Brooks
argues that the TAP schemes were either uncharged or time-
barred. As discussed above, and repeatedly stated by the Court,
both TAP schemes were set forth in the indictment. Moreover,
the time-bar argument is the subject of a separate motion before
the Court.
Brooks next argues that the restitution losses must be
limited by the failure to plead the failure to disclose TAP as a
related party. Brooks Letter at 11. Because the Court has
already repeatedly ruled that both TAP schemes were properly
pleaded, this aspect of the objection to paragraph 45 should be
denied. Tr. 19454-19455.
29
Brooks also argues that the PSR should be amended to
include the opinions of his expert witness, Gary Karlitz.
Brooks Letter at 11. According to Brooks's argument to the
jury, this testimony was adequate to warrant his acquittal on
the TAP schemes. Tr. 19770. The jury rejected Karlitz's
testimony. This aspect of the objection should also be denied.
As to PSR ~ 46, Brooks argues that the PSR should be
amended "to mention that TAP paid rent to PACA for the use of
PACA's space." Brooks Letter at 11. There are multiple
problems with this argument. First, testimony at trial
established that the lease was fraudulently back-dated to give
the impression of legitimate, arms-length relationships between
PACA and TAP. Tr. 5917-5918. This testimony was later
corroborated by a defense witness, who actually owned the
property and never heard of any lease between PACA and TAP. See
Tr. 16539. Also, mere citation to a factual argument that was
rejected by the jury does not merit a change to the PSR.
As to PSR ~ 49, Brooks argues that the PSR should be
amended to make it clear that the Court cannot consider the
"innocent conduct" of paying his own expenses. Brooks Letter at
11. In context, this argument makes little sense. First of
all, all of those expenditures show Brooks's control of TAP--a
fact that he still denies - -and are appropriately considered by
the Court. Moreover, those personal expenses provide the
corrupt motivation for Brooks's commission of this scheme. If
the relationship between DHB and TAP were scrutinized, then
Brooks would have to consider lowering his personal profits to
better serve the shareholders of DHB. Instead, Brooks, from his
perch controlling both TAP and DHB, was able set prices at
whatever level he wanted and spent the TAP profits on himself
and his family with abandon. The Court, just like the jury, can
and should consider these expenditures. The objection should be
denied.
64. Paragraph 64 should be revised to reflect that Brooks
failed to report a total of in excess of $1.7 million on his IRS
Form 1040 for the calendar year 2004. See S-2 ~ 119.
64-68 and 94. Brooks maintains that the Probation
Department should be ordered to prepare a PSR for Dawn Schlegel
prior to submitting its PSR. Brooks Letter at 13, 28. In
addition, Brooks claims that Schlegel's role should be
extensively discussed in the PSR. Brooks cites neither case
30
law, nor any Rule in support of this argument, which runs
counter to the district's custom in cases involving cooperators.
The objection should be denied as baseless.
Determination of Guideline Loss
69. Brooks argues that the PSR grouped his offenses
arbitrarily "for the purposes of convenience." Brooks Letter at
13-14. In making this objection, Brooks misreads the PSR.
Rather than grouping the offenses arbitrarily and conveniently,
the PSR is listing the grouping in this paragraph for the
"convenience" of the reader. In other words, the listing of the
groups was made for convenience, not the actual grouping. This
reading of the paragraph is further corroborated by the fact
that the grouping was actually done correctly. Indeed, Brooks
does not even suggest an alternative grouping of his offenses.
The objection should be denied.
70. As discussed in ~ ~ 32-34 above and ~ 81 (c) below,
Brooks's role in the schemes to reclassify Point Blank's cost of
goods sold to R&D, overvalue Point Blank inventory at PACA,
overvalue Intercept vest inventory, and plug inventory with
62,975 non-existent outershells was not "minimal or non-
existent" and, contrary to the defendant's claim, the Court
never made such a finding. Brooks's remaining arguments are
repetitive and without merit.
71-75. Event study methodology is a helpful tool to assist
the Court in determining investor loss particularly because the
Guidelines provide that the "estimate of loss shall be based on
available information, taking into account, as appropriate and
practicable under the circumstances, factors such as . [t]he
reduction that resulted from the offense in the value of equity
securities or other corporate assets." U.S.S.G. 2Bl.l, app.
note 3 (C) (iv) (Nov. I, 2005). As correctly noted in the PSR,
investors in DHB's common stock suffered heavy losses
conservatively estimated to be approximately $110 million by
NERA Economic Consulting based upon institutional holdings data
from SEC filings. See NERA report of June 22, 2012 (the "NERA
Report") . Moreover, NERA recently refined its estimate of
aggregate investor losses using the proof of claim data
described below that was received by claims administrator
Gilardi & Co. ("Gilardi") in this case. NERA's base case
estimate of aggregate investor losses using this data is $109 . 2
Case 2:06-cr-00550-JS-AKT Document 1661-1 Filed 05/20/13 Page 1 of 30 PageID #:
16466
31
million to $111.9 million. See Rebuttal Report of Jordan G.
Milev, Ph.D dated May 20, 2013 ("NERA Rebuttal Report") ~ ~ 6-7,
submitted herewith.
NERA's $110 million loss figure is conservative for a
number of reasons, but particularly because it does not include
the price decline resulting from a January 11, 2005 Newsday
article about the defendants' insider sales, which the
defendant's trial expert found to be statistically significant.
Including the market-adjusted decline on the date of the Newsday
article as part of investor losses would add approximately $41
million to the Guidelines loss amount. NERA Rebuttal Report ~ ~
16-17.
Brooks's event study, authored by John F. Gould of
Cornerstone Research and dated February 22, 2013 (the "Gould
Report"), should be rejected by the Court as a matter of law for
a number of reasons, but primarily because it is wholly divorced
from the loss provisions of the U.S. Sentencing Guidelines that
require the Court to reasonably estimate "the reasonably
foreseeable pecuniary harm that resulted from the offense." See
U.S.S . G. 2B1.1 app. notes 3 (A) (i), 3 (C) (Nov. 1, 2005) i i.
"Pecuniary harm" is "harm that is monetary or that otherwise is
readily measurable in money." Id. app. note 3(A)(iii).
"Reasonably Foreseeable Pecuniary Harm" is "pecuniary harm that
the defendant knew or, under the circumstances, reasonably
should have known, was a potential result of ' the offense." Id.
app. note 3 (A) (iv) . The Gould Report fails to apply these
definitions in reaching its erroneous conclusion that DHB
investors only lost $10 million in this case.
The Gould Report asserts that a number of the statistically
significant events that NERA found resulted from the fraud
committed by Brooks and his co-conspirators are not "fraud
related" because they are only associated with the "effects of
fraud." For example, the Gould Report astoundingly concludes
that the resignations of Director of Finance Lawrence Litowitz
on May 4, 2006 and Director and Audit Committee Chairman Jerome
Krantz on May 11, 2006, were not fraud-related even though Mr.
Litowitz testified that he left in part because he "believe [d]
there may have been illegal banking acts [at DHB] which I just
wouldn't tolerate being involved with, and it was just an
untenable situation," and Mr. Krantz testified that he resigned
because he "did not trust the management of [DHB] any longer."
16467
32
NERA Report ~ 25 n.46i ~ 26. Similarly, the Gould Report claims
that DHB's revelation on April 18, 2006 that its revolving line
of credit lender, Lasalle Business , Credit, LLC, issued a notice
of default was not a disclosure of fraud, but was associated
with "the effects" of a fraud. Gould Report ~ 34. The Gould
Report misses the point- - it is precisely the pecuniary effects
of the fraud that the Court is entitled to consider in assessing
evidence of loss. U.S.S.G. 2B1.1 app. note 3(A) (i) (Court must
determine "reasonably foreseeable pecuniary harm that resulted
from the offense") .
Similarly absurd is the Gould Report's claim that the March
16, 2005 investor conference call had "nothing to do with
fraud." Gould Report ~ 26. As the Court may recall, at trial
the government proved that when confronted by analysts and
investors on that call, both David Brooks and Sandra Hatfield
attempted to cover up the ongoing inventory fraud at the company
and lied about the reason they could not talk about their
illegal insider stock sales that they had profited from just a
few months earlier. Specifically, when asked by an analyst
about high inventory levels and the potential of a write-down,
Sandra Hatfield, rather than reveal she had conspired with
Brooks to inflate the value of inventory to boost profit margin,
deliberately diverted the discussion by pointing out that
inventory values had not increased much if calculated as a
percentage of year-over-year annual revenue. Gould Report ~ 26
n. 20. ).
In reviewing the March 16, 2005 conference call, the Gould
Report fails to acknowledge that the defendants lied to analysts
about the reason for rising inventory levels. The company was
not stock-piling raw ballistic materials as the defendants led
analysts to believe. Ballistic materials were so scarce that
upon their delivery to Point Blank, they were inserted into the
Interceptor vests and shipped out immediately and never remained
in inventory very long. Tr. 3308.
Likewise, rather than admit that he and Hatfield had
illegally traded on inside information when they unloaded over
$180 million in DHB shares in November and December 2004, Brooks
refused to explain why he had sold roughly one-third of his DHB
holdings and would not comment on whether he thought DHB stock
was still a "great buy" in the face of that massive insider
16468
sell-off or provide forward-looking guidance.
Report ~ ~ 21-26.
33
See NERA Rebuttal
Each of the foregoing events is a reasonably foreseeable
result of Brooks's and his co-conspirators' criminal conduct.
The Court can and should consider the statistically significant
stock price declines resulting from these events in estimating
Guidelines loss and restitution to investors in this case.
The Gould Report also fallaciously claims that an
additional event should be included in the loss analysis- -the
day the company placed Brooks on administrative leave- -because
it was "fraud-related." Gould Report ~ 54. This assertion
stands logic and the loss provisions of the Sentencing
Guidelines on their head. The company placed Brooks on
administrative leave as a remedial measure to address the fraudi
the positive stock price movement associated with this event is
therefore the result of the company's remedial measure, not
Brooks's criminal conduct. See U.S.S.G. 2Bl.l app. note
3 (A) (i) (Nov. I, 2005) (defining "Actual Loss" as "reasonably
foreseeable pecuniary harm that resulted from the offense") i see
also id. app. note 3(A)(ii)(defining "Intended Loss" as
"pecuniary harm that was intended to result from the offense") .
The Gould Report also criticizes NERA for using the multi-
day event window of May 24 and May 25, 2006 to measure the stock
price reaction to DHB's May 23, 2006 announcement that it was
not in compliance with the American Stock Exchange's listing
standards. Gould Report ~ 42. As discussed in the NERA
Rebuttal Report, NERA correctly used an objective, unbiased, ex-
ante specified methodology to evaluate price response subsequent
to each disclosure. NERA Rebuttal Report ~ ~ 49-51. If
significant abnormal daily returns continue past the first day,
and no new information has been released, as occurred after
DHB's May 23, 2006 announcement, it is appropriate to look at
the stock price movements beyond just the first day following
the announcement because statistical evidence shows that the
market is continuing to process the information from the
original disclosure. See id ..
The Gould Report agrees that the SEC Wells Notice that DHB
received on May 25, 2005 was caused by fraud, but claims that
the resulting loss is only reflected in the 800 shares that were
traded on the morning of May 26, before trading was halted until
16469
34
July 6, 2006. As discussed as length in the NERA Rebuttal
Report, it is appropriate to include the price response through
the stock halt as investor losses because the market price was
not able to fully reflect the market reaction until after
trading resumed following the halt. NERA Rebuttal Report ~ ~ 52-
61.
The Gould Report attempts to impugn NERA's multi-sector
multi-trader model ("multi-trader model") which is the current
state of the art used to estimate aggregate investor loss in
fraud on the market cases. NERA Rebuttal Report 66-72.
Notably, Mr. Gould fails to inform the Court that his firm also
employs a multi-trader model for corporate defendants in class
action cases. See id. ~ 67 n.80 . Moreover, the loss calculated
using NERA's multi-trader model is consistent with the actual
proof of claim data that has been obtained by Gilardi & Co. in
this case. Id. ~ ~ 75-78. Finally, contrary to the Gould
Report's suggestion, NERA's multi-trader model has not been
excluded on Daubert grounds.
5
See id. ~ 81.
76. As discussed below in ~ 81, the PSR's calculation of
the company's loss of approximately $97 million resulting from
the offenses of conviction is correct.
77-78. Brooks maintains that insider trading Guideline
2B1.4 is not the correct provision for calculating his total
offense level for insider trading Counts 6 through 11 because
2B1.4 only applies to Title 15 violations, not Title 18
violations such as 18 U.S.C. 1348. Brooks Letter at 16-17.
Brooks is incorrect. According to the U. S . Sentencing
Commission, "[c] ertain other [non-Title 15] offenses, e. g., 7
u. S. C. 13 (e), that involve misuse of inside information for
personal gain also appropriately may be covered by this
guideline. " See U. S. S. G. 2B1. 4, App. Note 2. Moreover, the
Court is authorized under the cross-reference provision of
2B1.1 (c) (3) to apply insider trading guideline 2B1.4 in this
case because Brooks's conduct, as set forth in the allegations
underlying Counts 6 through 11, establishes the elements of
insider trading .
5 In any event, as this Court has correctly observed, Daubert
does not apply in sentencing hearings . Hatfield, 795 F. Supp.2d
at 229.
16470
35
The cross-reference provision of 2Bl.l(c) (3) applies when
"the conduct set forth in the count of conviction establishes an
offense specifically covered by another guideline in Chapter Two
(Offense Conduct)." U.S.S.G. 2B1.1(c) (3) (2002) (emphasis
added) ; United States v. Genao, 343 F.3d 578, 583 (2d Cir.
2003). The Second Circuit has interpreted this language to mean
that 2Bl.l (c) (3) is applicable "only if the conduct alleged in
the count of the indictment of which the defendant is convicted
establishes the elements of another offense." See id . That is
-- --
the case here. Brooks does not deny that the conduct underlying
Counts 6 through 11 described in S-2 establishes the elements of
insider trading. Since insider trading is "specifically covered
by" 2Bl.4, the Probation Department correctly applied 2Bl . 4.
See also U.S.S.G. 2Bl.4, App. Note.
Contrary to Brooks's suggestion, he is not being
impermissibly punished "twice for the same money, i.e., the loss
to the investors and the gain to Brooks" because under Guideline
3Dl.2(d) the insider trading counts are grouped with the
securities fraud, securities fraud conspiracy, mail fraud, wire
fraud and mail and wire fraud conspiracy counts to arrive at a
combined adjusted offense level which in this case is not
increased by any additional units under 3Dl.4. See PSR ~ ~
133-146. In any event, gain and loss are not "the same money"
as Brooks claims. According to the U.S. Sentencing Commission,
"[i]nsider trading is treated essentially as a sophisticated
fraud" which measures a defendant's gain, "i.e., the total
increase in value realized through trading in securities by the
defendant and persons acting in concert with the defendant or to
whom the defendant provided inside information, is employed
instead of the victims' losses. U.S.S.G. 2Bl.4 (App. Note 2 -
Background) . This Court also has recognized that insider
trading gain is distinct from investor loss because gain is a
function of the impact on stock price at the time the defendant
traded. See Hatfield, 795 F. Supp. 2d at 236 n.12 .
Brooks's argument that the forfeiture of insider
proceeds overstates his true gain should be rej ected
reasons discussed in paragraphs 7-12 and 21 above.
79-80. Gilardi was retained by the government to
investor-victims to present their claims for restitution
calculate the individual and aggregate amounts of those
based on a methodology provided by NERA. Gilardi
trading
for the
assist
and to
claims
is the
16471
36
appointed claims administrator in the DHB Industries Inc.
Securities Litigation, No. 2:05-cv-04296-JS-ETB ("DHB Securities
Litigation") . Gilardi previously received and analyzed Proof of
Claim data in the DHB Securities Litigation that are relevant to
the issue of restitution in this case. The claims
administration procedures and analysis that Gilardi employed to
determine investor restitution in this case are summarized below
and set forth in greater detail in Gilardi's letter to the
Probation Department, dated May 8, 2013, submitted herewith.
As part of the restitution claims process, Gilardi
developed a plan to send an instructional cover letter and Proof
of Claim form to every class member that had been identified in
the DHB Securities Litigation. Additionally, a cover letter and
Proof of Claim was sent to a list of securities brokers and
other financial institutions maintained by Gilardi, seeking
their assistance in identifying additional possible victims
among their customers. The cover letter and Proof of Claim form
were ultimately mailed to 136,445 persons and entities who were
either previously identified as class members or were newly
identified as possible victims in a recent solicitation of name
and address information from various financial institutions.
NERA established a relevant period during which the
defendants' illegal actions artificially inflated the market
price of DHB common stock, thereby potentially harming investors
who purchased shares during an inflated period. That period,
May 1, 2003 through August 18, 2006, substantially corresponds
to the Class Period in the DHB Securities Litigation. Because
the periods are not identical, however, potential victims were
urged to file a claim in the restitution proceeding even if they
had previously filed a class action claim. The restitution
Proof of Claim asked investors to list the shares which they
held immediately prior to the period of artificial inflation,
those which they purchased and sold during that period and those
which they held at the end of the period. Where an investor
submitted a claim for restitution, those listed transactions
were used by Gilardi to calculate the dollar amount of the harm
caused to each victim and to all of the victims in aggregate.
Additionally, if a class member submitted a claim in the DHB
Securities Litigation but did not submit a claim for
restitution, that investor's previously submitted list of
transactions was used to calculate a restitution amount for the
investor. A total of 9,637 new restitution Proofs of Claim were
submitted to Gilardi and an additional 11,893 claims were
16472
processed using
administration.
7
data collected during
37
the class action
NERA supplied Gilardi with a table of artificial inflation
amounts for the c o m ~ o n shares of DHB for each trading day during
the relevant period. The inflation table is attached to
Gilardi's letter as Exhibit B and is part of NERA's June 22,
2012 report previously supplied to Probation. That table and
the transactions for each investor were entered into Gilardi's
proprietary software, which then calculated a restitution amount
for each share. As a result of these calculations, Gilardi
determined that 6,360 claims were candidates for restitution,
meaning that the investor suffered a financial loss directly
attributable to purchasing the common shares of DHB while those
shares were artificially inflated. A list of the 6,360 claims
with a calculated aggregate restitution amount, together with
the calculated amount for each claim is attached to Gilardi's
letter as Exhibit C. The total aggregated restitution amount
Gilardi calculated is $45,199,790.90. The average amount of the
valid individual victim claims is $7,106.89, while the median is
$1,000.00.
81(a). For the reasons discussed above in ~ 22, the Court
should reject Brooks's argument that there should be no
forfei ture or restitution for amounts he looted before July 9,
2004 or July 30, 2002. Brooks also argues that the government
should forfeit any financial claim based upon looting because
"it opposed so far successfully, the company's attempt to
recover from the government the personal property constituting
the bulk of the allegedly looted assets." Brooks Letter at
18. This argument is frivolous. Restitution to Point Blank is
mandatory under the Mandatory Victim Restitution Act
("MVRA"). See 18 U.S.C. 3663, 3663A(a) (1) - (c) (1). There is no
provision in the statute or authority in the case law enabling
the government to waive or forfeit the victim's right to this
mandatory restitution, and Brooks cites no such
authority. While the government objected to the imposition of a
constructive trust in the forfeiture proceedings because such a
trust would create two classes of victims and operate to the
7 It is the government's position that investors who have
submitted affidavits of loss directly to the Probation
Department should still be considered by the Court in
calculating restitution, even if they did not to submit a Proof
of Claim Form to Gilardi.
16473
38
detriment of victims other
recognizes Point Blank as a
fully compensated for its
restitution.
than Point Blank, the government
victim and believes it should be
losses as part of court-ordered
(b) TAP's $21.5 million in profits was reasonably
foreseeable pecuniary harm to Point Blank Solutions, Inc.
resulting from Brooks's offenses. "Actual loss is defined by
the Sentencing Guidelines as 'the reasonably foreseeable
pecuniary harm that resulted from the offense.'" United States
v. Cummings, 189 F.Supp.2d 67, 76 (S.D.N.Y. 2002) (quoting
U.S.S.G. 2B1.1, cmt. n. 2(A) (ii)). Reasonably foreseeable
pecuniary harm means harm "that the defendant knew or, under the
circumstances, reasonably should have known, was a potential
result of the offense." U.S.S . G. 2B1.1 cmt. n.3 (A) (iv).
Although the government bears the burden of proving by a
preponderance of the evidence the amount of loss sustained by
victims, "'the loss need not be determined with precision and
the court need only make reasonable estimate of the loss
given the available information.'" United States v. Gushlak,
No. 03-CR-833 (NGG) , 2011 WL 782295 (E.D.N.Y. Feb. 24, 2011)
(quoting United States v. Germosen, 139 F.3d 120, 129, 130 (2d
Cir.1998)).
In this case, the Court should find that it was reasonably
foreseeable to Brooks that the pecuniary harm caused to Point
Blank from his undisclosed manipulation of TAP's prices for
goods and services was the $21.5 million in profits
that TAP earned at Point Blank's expense. This loss amount is
directly attributable to Brooks's manipulation of TAP's prices
that resulted in profit margins as high as 54.3%. See Hatfield,
724 F. Supp. 2d at 325. The $21.5 million should therefore be
included in the Court's 2B1.1 loss calculation and ordered as
restitution.
Under the U.S. Sentencing Guidelines definition of loss, it
is irrelevant, as
ineligible for some
business designation,
Brooks argues, that
contracts if not for
a fact that was never
DHB may have been
TAP's alleged small
proven at trial.
8
It
8 On the contrary, the proof at trial established that the U.S.
military was in dire need of armor plates and were buying them
from any company that was selling them, irrespective of how
large that company was. See Tr. 3677.
16474
39
is also irrelevant that the DHB/TAP relationship may have been
disclosed in its contract work for the government. As the Court
previously found, the record in this case contains "more than
enough evidence for the jury to infer that Mr . Brooks knowingly
facilitated DHB's nondisclosures regarding TAP." Hatfield, 724
F. Supp. 2d at 325-26. This evidence included the following:
(1) in 2002, Mr. Brooks, Ms. Hatfield and
Ms. Schlegel discussed whether to include
TAP on a list of DHB' s top vendors; (2) Mr.
Brooks engineered a $4 million "sham"
transaction with his wife, Terry Brooks, to
prevent DHB's auditors from asking questions
about TAP; (3) Mr. Brooks conspired with Ms.
Hatfield and Ms. Schlegel to submit a list
of DHB's top vendors for an audit that
omi t ted TAP; (4) to respond to a likely SEC
inquiry, DHB, with Mr. Brooks's input,
prepared binders concerning its TAP
relationship that contained significant
misrepresentations and omissions, including:
(i) not disclosing that DHB paid some TAP
employees' salaries; and (ii) forged and
backdated promissory notes attributed to
TAP; and (iii) omitting TAP insurance
policies that DHB paid for.
Id. at 326 (citing Tr. 5515, 5770, 5889, 5904, 5905-
06, 5921-22, 5954-5955, 10394-99, 12520).
Brooks claims that restitution for losses after 2003 are
time-barred because the TAP scheme was completed in 2003, more
than five years before the return of S-2. Brooks Letter at
19. However, the TAP scheme was not completed in 2003 because,
as the Court found, Brooks's failed to fully disclose to
shareholders his control of TAP in the 2003 Amended 10-
K. Specifically, the Court found that the government presented
evidence that the 2003 Amended 10-K did not disclose to
shareholders "among other things: (1) that Mr. Brooks, and not
his wife, controlled TAP, including setting TAP's prices; (2)
that DHB paid TAP employees' salaries and bonuses; (3) that Ms.
Schlegel, DHB' s CFO, oversaw TAP's finances; and (4) that TAP
earned significantly higher gross profit margins than DHB
itself, including margins as high as 54.3%." Hatfield, 724 F .
16475
40
Supp. 2d at 324-25 (citing Tr. 5484, 5486-88, 5578-79, 5599,
5650-52, 5907, 5955j GX 6198)
Brooks's statute of limitations argument also must fail
because, as discussed in ~ 22 above, the return of S-l on
October 24, 2007, tolled the statute of limitations with respect
to his involvement in the TAP scheme. Moreover, as discussed in
~ 22 above, Brooks's complaint that he should not be required to
forfeit the proceeds of his unauthorized compensation scheme
that were acquired before July 2004 is meritless.
(c) As proven at trial, Brooks and the other defendants
conspired to misstate the company's financial statements. The
intentional misstatements in the company's financials included
misrepresenting Brooks's compensation, Brooks's control of TAP
in its related-party transactions, inflating the company's
inventory and fraudulently reclassifying costs of goods sold to
research and development costs. As the Court found, "Mr. Brooks
was convicted of conspiring with Ms. Hatfield to commit
securities fraud, including by conspiring with her to inflate
DHB's gross profits margins./I Hatfield, 795 F. Supp. 2d at
227. Because of Brooks's and his co-conspirators' conduct, the
company's previously issued financial statements could not be
relied upon and, in order to remedy the harm caused by the
defendants, Point Blank incurred approximately $16.9 million in
remediation costs. Declaration of T. Scott Avila dated April
12, 2013 ("Avila Decl./I)9 ~ 3j Point Blank's Affidavit of Loss,
Venable Letter at 4-5j DHB Industries, Inc. 10-K filed 10/1/2007
("DHB Restatement/l) at 42-43 (restating company's financials and
detailing the company's remediation efforts). All of these
remediation costs were expended as a direct result of Brooks's
and his coconspirators' conduct and were a reasonably
foreseeable consequence of their actions. See DHB Restatement,
at 41-44 (stating that the errors and misstatements in
previously issued financials were primarily the result of the
defendants' conduct and that the company was actively
implementing remediation measures). The $16.9 million in
remediation costs should therefore be included in the Court's
2B1.1 loss calculation and ordered as restitution.
The Avila Declaration was recently submitted to the Probation
Department by the company's attorneys, Venable LLP, in further
support of the company's Affidavit of Loss. A copy of the Avila
Declaration is also submitted herewith.
16476
41
Brooks argues that it would be unlawful and unfair to
"saddle" him with these costs when "he played such a small part
or no part at all" in the underlying fraudulent misstatements in
the company's financial statements. Brooks Letter at
19. Brooks grossly mischaracterizes his role in the securities
fraud conspiracy. As discussed above in ~ ~ 32-34, Brooks played
a substantial role in the unauthorized and undisclosed executive
compensation scheme, the TAP schemes, the R&D scheme, the
inflated Interceptor vest inventory scheme and the scheme to
plug Point Blank's inventory with 62,975 non-existent
outershells. And in addition to his conviction for securities
fraud and conspiracy to commit securities fraud, Brooks was
convicted of lying to the company's independent auditors about
the 62,975 outershell inventory plug.
In any event, even assuming Brooks's role in the securities
fraud conspiracy was minimal, which it was not, he is jointly
and severally liable for all losses that were a reasonably
foreseeable consequence of the conspiracy. United States v.
Nucci, 364 F.3d 419, 422 (2d Cir. 2004); see also United States
v. Boyd, 222 F.3d 47, 50-51 (2d Cir.2000) (stating that
restitution is payable "by all convicted co-conspirators in
respect of damage suffered by all victims of a conspiracy,
regardless of the facts underlying counts of conviction in
individual prosecutions")
Brooks also argues that "many of those remediation costs
were due to unavoidable and necessary company expenses, e. g. ,
outside consultants hired to provide interim management services
and to comply with Sarbanes-Oxley requirements, and not to
Brooks's conduct." Brooks Letter at 19. It appears that Brooks
is arguing that the company's internal controls were weak and
any company expenses associated with hiring independent advisers
and outside consultants would have been required regardless of
Brooks's and his co-conspirator's actions. However, as the
evidence presented at trial proved, Brooks and his co-
conspirators were well aware of the company's weak internal
controls, never disclosed them to the public, and then exploited
them to their benefit. As this Court explained in the context
of the R&D fraud:
the trial evidence demonstrated that the
Defendants: (1) knew that DHB possessed
16477
woefully inadequate internal controls to
track R&D expenses; (2) in the absence of
those controls, decided to account for R&D
by reclassifying cost of goods expenses as
R&D; (3) failed to publicly disclose either
those inadequate internal controls, or their
crude subs tit ute f or recording R&D; and (4 )
traded while possessing the material non-
disclosed information . Indeed, it is
inconceivable that DHB could have continued,
in late-2004, to recklessly "account" for
R&D if it had publicly announced, more than
a year before, that: "The Company has barely
any internal controls, much less a well-
functioning accounting system. So, rather
than disclose R&D expenses as are actually
incurred, the Company instead reports
whatever number its chief executives feel
like, based on their subj ecti ve "guess" as
to how much R&D the Company
performed." Such a disclosure would,
assuredly, have caused pressures that
would, in turn, have forced DHB to adopt
better business practices.
Hatfield, 795 F.Supp. 2d at 228.
42
The company's expenditure of significant funds to engage
independent advisers and consultants to remediate the
defendants' exploitation of the company's weak internal controls
was reasonably foreseeable pecuniary harm resulting from the
defendants' criminal activities. These amounts should be
included in the Court's 2B1.1 loss calculation and the company
is entitled to recoup them. See United States v. Cummings, 189
F.Supp.2d 67 (S.D.N.Y. 2002) ("It was reasonably foreseeable
that a restatement would be necessary when the underaccrual was
eventually disclosed, and there were no intervening causes
between [the defendant's] conduct and [the company's] need to
file a restatement.") .
(d) As discussed in the company's submission to the
Probation Department (Avila Decl. ~ 3), the company is entitled
to over $17,300,000 in advanced legal fees it paid to Brooks,
Hatfield, Schlegel and other officers and directors in
16478
43
connection with this criminal matter and related
investigations. This amount should be included in the Court/s
2Bl.l loss calculation and ordered as restitution. United States
v. Skowron I 839 F. Supp. 2d 740
/
746 (S.D.N.Y. 2012) ("The
substantial costs Morgan Stanley incurred in responding to the
SEC investigation
l
launching its own internal investigation
l
and
providing for the defense of Showron and other employees were a
necessary I direct I and foreseeable result of Skowron
l
s offense
of conviction. II)
(e) Brooks contends that the company/s bankruptcy was not
the direct result of his wrongdoing and thus he is not
responsible for the bankruptcy costs of approximately $22
million. Brooks Letter at 20-21. As discussed above and in
further detail in the company/s submission to the Probation
Department (Avila Decl. ~ ~ 5-11) I it was reasonably foreseeable
to Brooks and his co-conspirators that disclosure of the
defendants I accounting frauds would wreak havoc on the company I
creating a crisis in which the company was unable to timely file
its 2005 10K with the SECI was forced to withdraw reliance on
its 2003 and 2004 10Ks and its 2005 interim financial
statements I was delisted from the American Stock Exchange and
had its trading halted. The company I s inability to raise cash
through the sale of its own securities on a major stock exchange
combined with the cash drain of over $45 million in continuing
restatement I remediation
l
and legal costs from 2006 through
2010
1
and the looting of $6.4 million and siphoning off of $21.5
million to TAP caused a liquidity crisis and a bankruptcy that
was the reasonably foreseeable consequence of defendants I six
years of criminal activities. See Avila Decl. ~ ~ 8-9. The
approximate $22 million in bankruptcy administrative costs
should therefore be included in the Court/s 2Bl.l loss
calculation and ordered as restitution.
(f) Point Blank may recover as part of court-ordered
restitution approximately $11 million in costs incurred in
responding to government subpoenas and otherwise participating
in the investigations and proceedings stemming from Brooks/s
fraud pursuant to the MVRAI 18 U.S.C. 3663A(b) (4) I which
covers "necessary other expenses incurred during
participation in the investigation or prosecution of the offense
or attendance at proceedings related to the offense. II United
States v. Gupta I 2013 WL 662954
1
at *1 (S.D.N.Y. Feb. 25
1
2013) ("It is now settled in the Second Circuit that the
16479
\ necessary... other expenses' contemplated by
include attorneys' fees.") (citing u.s. v. Amato,
159-60 (2d Cir. 2008)).
44
3 6 6 3 A (b) (4 ) may
540 F.3d 153,
(g) It is appropriate to hold Brooks jointly and severally
liable for the approximate $1.9 million in unpaid payroll taxes,
interest, and penalties incurred by the company. Brooks caused
the company not to pay any payroll taxes on certain compensation
that he, Hatfield, and Schlegel received. As a result of that
tax fraud conspiracy, charged in Count 18, the Company was
required by the Internal Revenue Service to pay not only the
company's portion of the unpaid payroll taxes (i.e., the
employer's portion), but also the employee portion, along with
penalties and interest that rightfully should have been paid by
Brooks, Hatfield, and Schlegel. The Court should therefore
order restitution to the company in the amount of $1.9 million.
82-83. The PSR's total loss calculation of $272,324,023 is
correct and Brooks's objections to paragraphs 82-83 should be
overruled. As discussed above, the investors' and company's
losses are accurate. When added to the tax loss of $2,883,056
to which Brooks stipulated in his plea agreement and the
$61,444,967 in insider trading gain adjudicated by the Court,
the total loss in connection with Counts 1 through 11 and 17
through 20 is $272,324,023.
84, 102-04 and 108. Brooks objects to every single
enhancement. Brooks Letter at 22. The first enhancement has to
do with loss. Brooks maintains that the investor loss cannot be
more than $10 million. Id. However, after years of trial and
hearings, the Court has already set forth an insider trading
investor loss number in connection with forfeiture, which is
much higher than Brooks's suggested number. See April 23, 2012
Mem. & Order at 20 ($61,444,967). The Court's investor loss
number does not include the company losses for any of the
illegal schemes. Point Blank claims a loss of more than $90
million. Brooks only articulates one argument why the company
loss number should be reduced: that his family collectively
owned 50% of the DHB shares and that all loss numbers should
therefore be reduced by that amount. Brooks Letter at 22. This
argument makes no sense. Even assuming arguendo that the Court
could treat his family as a monolithic unit that disregarded
losses to the value of their stock, which it cannot, the
company's 50% of the company's asserted losses would be more
16480
45
than $48 million. Thus, even if Brooks's obj ection were taken
seriously, there would be more than $100 million in losses.
Brooks next objects to the "sophisticated means"
enhancement. Brooks Letter at 22. Application Note 8 to
U.S.S.G. 2B1.1 defines sophisticated means as "especially
complex or especially intricate offense conduct pertaining to
the execution or concealment of an offense." Even "where 'each
step in [a] scheme was not elaborate,' a scheme as a whole may
be sophisticated where 'all the steps were linked together .
[to] exploit different vulnerabilities in different systems in a
coordinated way. "' United States v. Ojemen, No. 11-727-cr, 465
Fed. Appx. 69, 71-72 (March 21, 2012) (quoting United States v.
Jackson, 346 F.3d 22, 25 (2d Cir. 2003)). In the instant case,
Brooks orchestrated a dizzying array of fraudulent schemes, many
of which individually involved sophisticated means. By way of
example, Brooks submitted dozens of fraudulent documents to
conceal or minimize the true nature of his relationship with
TAP. These facts alone support application of the enhancement
consistent with Application Note 8 to U.S.S.G. 2B1.1. Brooks
did not stop there, however. Brooks also coordinated all of
these frauds as the CEO of the company. It is clear that the
facts support the application of this enhancement.
Brooks also argues that the application of enhancements for
more than 250 victims and being an officer or director of a
publicly traded company is duplicative because the officer and
director of a public company who commits fraud will by
definition necessarily cause a loss to more than 250 victims.
Brooks Letter at 22. Brooks's argument is without merit. In
support of this argument, Brooks cites to no case or rule.
Moreover, although application of both enhancements occurred in
the instant case, a fact that Brooks does not dispute in
paragraph 84, it does not necessarily follow that officers and
directors of publicly traded companies who commit corporate
fraud will necessarily cause loss to more than 250 shareholders.
For example, companies that trade securities publicly on the OTC
Markets Group Inc.'s OTC Bulletin Board quotation system are not
required to have a minimum number of shareholders to be listed.
See www.sec.gov/answers/pink.htm.
Further, Brooks's argument is unsupported by law. As the
Second Circuit explained,
16481
In January of 2003,
created enhancements
the Commission
for the number of
victims, so that a six-level increase is now
required for frauds involv ing 250 or more
victims. [See U. S.S.G.] 2B1.1(b) (2)
[ ( S u p p ~ 2002)] . At the same time, the
Commission added a new four-level
enhancement if the offense involved a
violation of the securities laws and the
defendant was an officer or director of a
publicly traded company . Id.
2B1.1 (b) (13) .
46
United States v. Kumar, 617 F.3d 612, 625 n. 10 (2d Cir.2010).
Rather than seeing a conflict between these specific
enhancements, the Second Circuit has held that "the Guidelines
reflect Congress' judgment as to the appropriate national policy
for such crimes." United States v. Ebbers, 458 F . 3d 110, 129
(2d Cir. 2006) (specifically discussing the interplay of these
two enhancements) .
With respect to Brooks's objection to the abuse of trust
enhancement-- 3B1.3--the government believes that Probation
correctly applied the abuse of trust enhancement to the insider
trading counts, which are governed by 2B1. 4, because as set
forth in the PSR, Brooks abused a position of special trust,
i.e., as a corporate CEO he misused information to which he was
privy based upon the position of special trust that he held with
the company . See U. S. S. G. 2B1.4, App. Note 1 ("Section 3B1.3
(Abuse of position of Trust or Use of Special Skill) should be
applied only if the defendant occupied and abused a position of
special trust . ") . However, we do not believe that 3B1.3
applies to the counts governed by 2B1.1 because of application
note 14 (C), which states "nonapplicability of 3B1.3 (abuse of
position of trust or use of special skill)--if subsection
(b) (18) [officer/director enhancement] applies, do not apply
3B1.3."
Brooks also objects to an enhancement for endangering the
solvency of a publicly traded company. Brooks Letter at 22 .
The Guidelines give clear guidance to the Court. If DHB (later
Point Blank): (1) became insolvent, (2) suffered a substantial
reduction in the value of its assets , (3) filed for bankruptcy,
(4) suffered a substantial reduction in the value of its stock,
(5) substantially reduced its workforce , (6) substantially
16482
47
reduced its pension benefits or (7) was delisted from its
exchange then the enhancement applies. See U. S . S . G.
2B1.1 (b) (15), Application Note 12 (B) (ii) (setting forth a non-
exclusive list of factors to consider). As set forth in ~ 81(e)
and the Avila declaration, the evidence establishes that factors
1, 3, 4, 5 and 7 all apply. Therefore, the enhancement is
appropriate.
Brooks may mean to argue that there is no causal connection
between his crimes and DHB's ills. The government submits that
evidence establishes the causal link as to all of these events .
Moreover, it is clear that Brooks's crimes led directly to the
delisting of DHB' s stock, Tr. 11122, which is an independent
basis for the enhancement.
85. As discussed above, Guideline 2B1.4 is applicable to
the insider trading offenses in this case and does not result in
double-counting when grouping analysis is applied.
86, 95-98, 109, 119-21 and 124. Brooks objects to the
eight-level obstruction of justice enhancement pursuant to
2J1.2 (b) (1) (B), which applies when "the offense involved causing
or threatening to c ~ u s e physical injury to a person, or property
damage, in order to obstruct the administration of justice."
Brooks Letter at 23-24. To avoid this enhancement, Brooks
unsuccessfully attempts to distance himself from the threatening
and obstructive culture that he created. However, as noted by
his own letter, Brooks actually did threaten people with
violence. Brooks Letter at 23-24. In response, Brooks argues
that these people were not actually intimidated by his violent
outbursts and his threats were not actually carried out. Id.
This argument makes little sense and is unsupported by the plain
language of the applicable Guidelines . Per Guideline
2J1.2(b) (1) (B), even the attempt to intimidate or influence
witnesses constitutes a violation. See U.S.S.G.
2J1.2 (b) (1) (B) (stating that the offense need only involve
"threatening to cause physical injury to a person") i see also
3C1.1, Application Note 4(A). Brooks's threatening and bullying
behavior clearly was intended to intimidate, no matter what its
actual effect. Indeed, the record contains the testimony of
Travis Brooks, who was the first to challenge the culture of
fraud, greed and theft David Brooks had created. David Brooks's
response to that challenge was to threaten, bully and eliminate
Travis Brooks:
16483
A: I was in a conference call with Carol
Dratell tell was sitting in front of the
desk and Dawn Schlegel was on the phone.
And David walked in to the of f ice with a
gentleman behind himr not sure what that
gentleman was. David was in shorts
r
T shirt
r
and asked me who was on the phone. I told
him Dawn. And then he proceeded he had a
water bottle in his hands
r
and flung itr and
water went allover me and he proceeded into
obscenities
r
calling me a fuckin' snake
r
what the hell
r
and just lashed out into
obscenities. And Sandra and Carol are going
through my belongings r all my grabbing my
briefcase r the gentleman at the door r not
sure who he was
r
but I was basically kind of
trapped
r
like I am here
r
and could not get
out as David's throwing things at my office.
I had a plaque on my desk that he proceeded
to throw across the room
r
and thought I was
going to get my ass kicked
r
to be honest
with you.
Q: You had mentioned
yelling expletives at you.
anything about future job
for you?
that he was
Did he say
opportunities
A: Yes
r
he did. He basically told me I
would not work I would not work ever
again in the state of Florida as long as
he could help it. He said how could you
do this to your familYr you fuckin snake
r
you fuckin snake.
Tr. 2622-2623.
48
The trial testimony of Nicole Mannarino also supports an
enhancement under Guideline 2J1.2(b) (1) (B) Ms. Manarino
testified that Brooks made a threatening remark directed at Bart
Sacher
r
attorney for DHBrs independent public auditors Rachlin
r
Cohen & Holtz. According to Ms. Mannarino
r
during a meeting
with the auditors
r
Mr. Sacher and others
r
Brooks remarked
r
"lrd
like to shoot that mother fucker rll in response to Mr. Sacher
r
s
16484
49
request that DHB produce TAP's books and records that would have
disclosed Brooks's control of TAP. Tr. 11149.
In addition, Brooks also attempted to erase Schlegel's
memory. Brooks contends that his sentence should not be
enhanced for alleged obstruction based on his request of
veterinarian Seth Fishman to erase Schlegel's memory to keep her
from cooperating against Brooks in instant criminal case.
Brooks argues that because "the purported conversation between
[him] and Fishman allegedly occurred in the summer of 2006, it
could have nothing to do with charged obstruction of the SEC's
investigation. II Brooks Letter at 24. Brooks is wrong. By
erasing Schlegel's memory, he sought to prevent her from being
able to assist the government in its investigation into his
unauthorized compensation and his TAP scheme (i.e., the subject
of the SEC investigation). At the time that he had this
conversation with Fishman, Brooks had not been charged by the
SEC or the U. S. Attorney's Office. He hoped that by erasing
Schlegel's memory, he could avoid being charged and ultimately
convicted of the conduct that was the subj ect of the SEC's
investigation.
Each of these despicable incidents alone support an
obstruction of justice enhancement under Guideline
2J1. 2 (b) (1) (B) .
Brooks also objects to the three-level enhancement under
2J1.2 (b) (2) predicated upon his submission of a falsified email
during the trial and his smuggling of narcotics into the
courtroom and the jail during the trial. Brooks Letter at 25.
Section 2J1.2 (b) (2) applies when "the offense resulted in
substantial interference with the administration of justice. II
Application Note 1 to 2J1.2 (b) (2) provides that substantial
interference with the administration of justice includes "the
unnecessary expenditure of substantial governmental or court
resources. II As discussed below, Brooks's introduction of the
false email and the smuggling of pills into the courtroom and
his detention facility meet that standard.
As to the email, Brooks questioned Schlegel extensively
about an email withoutshowingittoher.Tr. 7124-7138.
Brooks initially declined to show the email to the witness, the
Court or the government. Tr. 7138. Brooks even delayed when
the Court asked to view the email. Tr. 7138. When the email
16485
50
was finally shown to
Court's question as to
copy to the government.
Court ordered Brooks to
the Court, Brooks
the origin of the
Tr. 7139, 7142.
refused to answer the
email or to provide a
On March 19, 2010, the
provide the Court and the Government with a
copy of the alleged e-mail that Ms . Schlegel
wrote to Mr. Adar in October 2003. Mr.
Brooks's counsel is further ordered to show
this e-mail to Ms. Schlegel at the beginning
of cross-examination on March 22, 2010, and
ask her to authenticate it. If Mr. Brooks
cannot authenticate this alleged e-mail
through Ms. Schlegel, or by other means, the
Court will order Ms. Schlegal's cross-
examination testimony concerning her sexual
relationship with Mr. Adar struck from the
record, and further order the jury to
disregard it.
March 19, 2010 Order.
Brooks eventually provided a copy of the email to the
government on March 31, 2010. See Tr. 7158-7160. At that
time, the government noted that Brooks was withholding metadata
information about the email and requested the same information.
Tr. 8497. On April I, 2010, the Court ordered Brooks to provide
that metadata. Tr. 8675. Brooks declined. Tr. 8675. On April
5, 2010, the Court issued a written order directing Brooks to
provide the metadata. See AprilS, 2010 Order i see also Tr.
8918. On April 7, 2010, Brooks invoked his Fifth Amendment
rights and declined to produce the metadata to the government.
Tr. 9327. The Court produced a printed sheet purporting to
contain the metadata to the government on April 7, 2010. Tr.
9441-9442. Upon review, the government noted that the email,
although it purported to be mailed, was undeliverable and not
reflected in the DHB servers. Tr. 9568. Therefore, the
provenance of the email was still in question. The Court
ordered Brooks to hand over the source hard drive and server.
Tr. 9571. On April 12, 2010, Brooks filed a letter indicating
that he would not comply with the Court's order. See docket
item 947. On April 16, 2010, the Court found Brooks in
contempt. See April 16, 2010 order (docket entry no. 967).
16486
51
Brooks argues that he is entitled to certain procedural
protections that are afforded in a criminal contempt proceeding
before he can receive any enhancement of his sentence in this
criminal case. First, he asks for an evidentiary hearing on the
subject. The government submits that all of the relevant facts
have been established: Brooks frivolously invoked the Fifth
Amendment and refused to comply with Court orders. See id.
(describing Brooks's arguments as "frivolous"). Also, there has
been no testimony indicating that this email was a genuine
document. See, e.g., Tr. 7209 (stating that the email was
altered in multiple ways). In addition, it is axiomatic that,
where they do not increase the statutory maximum sentence,
discretionary sentencing factors do not require jury findings or
separate trials. Finally, no hearing is necessary for the Court
to determine that Brooks' s frivolous intransigence has wasted
substantial governmental and court resources.
Similarly, Brooks's ongoing attempts to smuggle drugs into
the courtroom clearly wasted the Court's and the government's
time and money. As correctly noted in the PSR, Brooks caused an
unnecessary expenditure of substantial governmental and court
resources when, during the trial on July 20, 2010, he concealed
a total of nine pills in ink pens located in front of his legal
papers in the courtroom. See also U.S.S.G. 2J1.2 (b) (2),
Application Note 1 (providing for enhancement where substantial
interference with the administration of justice includes "the
unnecessary expenditure of substantial governmental or court
resources"). This incident forced the Court to halt the trial
and clear the courtroom, which then needed to be searched for
contraband. The incident also caused the u.S. Attorney's office
to launch an investigation into Brooks's procurement and
transportation of the pills that involved two Assistant U. S.
Attorneys and multiple Deputy U.S. Marshals.
Against that backdrop, the conclusion that Brooks's conduct
unnecessarily wasted the Court's and the government's resources
cannot be seriously disputed. See United States v. DeSalvo, 26
F.3d 1216,1223-1224 (2d Cir. 1994) (holding that Judge Sifton's
similar findings "need not detain us long" because Judge Sifton
presided over the Eisen trial, and explained that his findings
reflected not only the expenses associated with DeSalvols trial,
but also the expenditures associated with the Eisen trial.").
The government therefore respectfully requests that the Court
make specific findings as to the wastefulness of Brooks's
16487
52
behavior at the sentencing hearing and deny the obj ection to a
Guideline 2J1.2(b) (2) enhancement.
Brooks appears to argue that it is impermissible to enhance
his sentence for destroying and altering documents during the
schemes under Guideline 2J1.2(b) (3) Section 2J1.2(b) (3)
requires a 2-level level increase when
the offense (A) involved the destruction,
alteration, or fabrication of a substantial
number of records, documents, or tangible
obj ects; (B) invol ved the selection of any
essential or especially probative record,
document, or tangible obj ect, to destroy or
alter; or (C) was otherwise extensive in
scope, planning, or preparation.
Brooks objects to the two-level enhancement under
2J1. 2 (b) (3) (A) on the ground that "destruction or alteration of
documents was the offense for which Brooks was prosecuted, not
an enhancement of his offense conduct. II Brooks Letter at 26
(emphasis in original). In other words, Brooks claims that the
destruction and alteration of documents in this case "had
nothing to do with obstruction. II Id. This argument does not
merit lengthy discussion. The destruction and alteration of
documents provided evidence of Brooks's various fraud offenses
but did not constitute the actual crimes. The trial transcript
is replete with such instances. For example, documents which
Brooks sent to the SEC about DHB' s payment of salaries and
bonuses intentionally omitted payments to TAP employees and
horse trainers in order to make it appear to SEC staff that TAP
was an independent private company owned by Terry Brooks that
was dealing at arms-length with DHB. Likewise, at Brooks's
direction, a substantial number of probative documents sent to
the SEC were deliberately altered to make it appear to SEC staff
that looted funds were either authorized compensation to Brooks
or legitimate business expenses. These documents included the
phony 1997 ' Resolution, the phony Brooks employment agreement
that supposedly predated it, the fabricated American Express
spreadsheets that misclassified Brooks's personal expenses as
business-related and the destroyed travel records that would
have revealed Brooks's company-funded family trips.
Significantly, these documents and others like them were
enclosed as part of the Venable Report and the Audit Committee
16488
53
Report which ultimately formed the basis of the false Proxy
Statement filed with the SEC in November 2004 which Brooks used
in an attempt to end the SEC's inquiry.
The PSR correctly applies a 2-level adjustment under
Guideline 3Cl.l for obstructing or impeding the administration
of justice with respect to the investigation, prosecution or
sentencing of the instant count of conviction. PSR ~ ~ 95-97.
Per Application Note 7, this adj ustment is not to be applied
"except if a significant further obstruction occurred during the
investigation, prosecution, or sentencing of the obstruction
offense itself." In this case, a significant further
obstruction occurred during the course of the trial when Brooks
willfully and intentionally failed to produce the email
metadata. See April 16, 2010 order (docket entry no. 967)
(describing Brooks's invocation of the production privilege as
"frivolous") see also Tr. 12306. Moreover, the record
establishes that Brooks suborned perjury (from Schlegel and
Nadelman during the SEC proceedings), produced false or altered
documents as set forth above and destroyed records as set forth
above. If anything, the enhancement under-represents the
seriousness of Brooks's obstructions. Standing alone, each of
these facts support the enhancement. Accordingly, the 2 -level
adjustment under 3Cl.l is appropriate in this case.
87.
resulting
guilty.
agreement
The PSR accurately sets forth the total tax loss
from Counts 18 through 20 to which Brooks pleaded
Brooks accurately summarizes the provisions of the plea
into which he entered with the government.
99. Brooks objects to any mention of this case being the
longest trial in the history of the Eastern District of New
York. Brooks Letter at 30. In support of this objection,
Brooks cites to a case that took over 8 months and had a 25,000
page transcript. Id. at 30 n. 5. Brooks has indeed cited to
another long case and, given the length and complexity of the
pretrial hearing in the instant case, it would be difficult to
declare the "winner." The government submits that the Court
should amend the PSR to read "among the longest jury trials."
Brooks's suggestion that the government somehow
intentionally lengthened the trial merits no response.
16489
54
101. As discussed above in ~ ~ 81-83, the PSR accurately
calculates the total loss as a result of the offenses committed
by the defendant on all counts to be $272,324,023.
126, 127, 130 and 132. As discussed above, the government
adheres to the total offense level it calculated with respect to
Counts 18 through 20 as set forth in its plea agreement with the
defendant.
136. The government's plea agreement with Brooks is silent
on the issue of grouping Counts 18 through 20 with any of the
other offenses of conviction.
149 -151. Brooks obj ects to any increase in his sentence
based upon his internal drug smuggling, which he characterizes
as "self -medication. " As mentioned earlier, application Note 1
to sections 2J1.2 (b) (2) provides that substantial interference
with the administration of justice includes "the unnecessary
expenditure of sUbstantial governmental or court resources."
Brooks's efforts to feed his addictions, without relying upon
his army of lawyers and doctors, wasted enormous amounts of
time. Brooks may want to recast his smuggling adventures as
"self-medication," but they are the actions of a desperate
addict. The objection is baseless.
152 and 202. Brooks perplexingly argues that he has never
violated a Court order with regard to his financial holdings in
Europe. Brooks Letter at 33-34. Brooks's bail was revoked for
hiding unmonitored funds in Europe. Tr. 125. This
determination was made by the Court by a preponderance of the
evidence, id., and was affirmed on interlocutory appeal. There
is no reason for a hearing, which has already occurred and been
affirmed. The objections should be denied as frivolous.
153 and 230. Brooks obj ects to the PSR's claims that he
"damaged inventory and reported false information on inventory
insurance claims following Hurricane Irene." Brooks Letter at
33. He claims that Giaquinto, not Brooks, damaged the inventory
and that the government was unable to establish that Brooks
played any role in the damaged caused to the inventory. Id.
Brooks is correct that he did not spray water on the inventory
damaging it, but he is incorrect that he did not playa role in
this insurance fraud. Giaquinto testified that after Hurricane
Irene, he visited the warehouse. Tr. 4508. The inventory had
16490
55
not been damaged by the hurricane. Tr. 4509-10. Giaquinto
participated in a conversation with a representative of the
insurance company and Brooks. Tr. 4511. During that
conversation, the insurance representative told Brooks that he
had "free rein to do what was needed with regard to the claim,
what we needed to do with the claim." Tr. 4511. A few days
later, Brooks's brother and Giaquinto " [d) amaged the NDL
inventory [w]ith hoses, with water." Tr. 4640. Giaquinto
explained that they "wet the boxes to make it look like
the water came in from the roof." Tr. 4640. Brooks would have
the Court believe that Jeffrey Brooks, who was not employed by
DHB or any of DHB' s subsidiaries, damaged the inventory on his
own without any direction from Brooks. That is ridiculous.
David, not Jeffrey, Brooks was the one who was employed . by DHB.
David, not Jeffrey, Brooks stood to benefit from the fraudulent
claim. It is reasonable to infer that Brooks directed his
brother to damage the inventory so that Brooks could submit a
higher insurance claim. That inference is particularly
reasonable when considering all the evidence adduced during the
criminal prosecution regarding Brooks's relationship with his
brother and the things that Jeffrey was willing to do for his
brother, like hiding assets overseas. Brooks states that
Emanuel Gold testified that there was damage caused to the
physical structure of the warehouse as a result of Hurricane
Irene. Brooks Letter at 33-34. Mr. Gold's testimony did not
refute Giaquinto's testimony regarding the damaged inventory.
In fact, Mr. Gold conceded that he did not know whether the
damaged inventory was caused by water from the hurricane or a
hose. Tr. 15352-53.
with respect to Hurricane Wilma, Brooks does not contest
that he directed Giaquinto to damage nearly $4 million worth of
inventory to make it appear that said inventory was damaged by
Hurricane Wilma. Instead, Brooks argues that he did not submit
a claim with respect to the Point Blank inventory. Brooks
Letter at 34. That is not entirely accurate. Brooks did submit
lists to the insurance company containing the fraudulently
damaged inventory. Tr. 4530. It wasn't until the insurance
company began a forensic investigation and General Ellis
intervened that Brooks withdrew the fraudulent claim. Tr. 4530-
32. The government believes that a short summary of the
uncontroverted testimony regarding Brooks's attempted insurance
fraud after Hurricane Wilma is warranted. After Hurricane
Wilma, Brooks directed Giaquinto to damage the inventory at NDL.
16491
56
Tr. 4525-26 (Brooks told Giaquinto to "make [the] inventory as
bad as possible."). At Brooks's behest, Giaquinto damaged the
NDL inventory. Tr. 4526. Brooks did not stop there. Days
later, two 40- foot tractor trailers containing undamaged Point
Blank inventory arrived at the NDL facility. Tr. 4527. Brooks
ordered Giaquinto to damage that inventory and present it to the
insurance company as if it had been damaged during Hurricane
Wilma. Tr. 4528-29. Giaquinto complied. Shortly thereafter,
they provided a list containing the fraudulently damaged Point
Blank and NDL inventory to the insurance company. Tr. 4530.
The value of the damaged NDL inventory reported on that list was
$500,000, while the Point Blank inventory was $3.5 to $4
million. Tr. 4530. The insurance company informed DHB that it
was going to conduct a forensic investigation. Tr. 4530.
General Ellis then intervened and DHB withdrew the claim
relating to the Point Blank inventory and reduced the value of
the damaged NDL inventory to $14,000. Tr. 4531-32. For the .
foregoing reasons, Brooks's objections should be rejected.
Those frauds constitute evidence of Brooks's additional bad
acts that the Court may consider at sentencing as "relevant
conduct" because both frauds were part of the "same type of
criminal activity over time" that Brooks repeated. United
States v . Silkowski, 32 F.3d 682, 687 (2d Cir. 1994) (citing
reference and internal quotation marks omitted). In other
words, the falsification and inflation of the cost of company
inventory that Brooks attempted to claim was damaged in
hurricanes, like Brooks's offense conduct, involved
falsification of DHB's books and records that constitutes "an
identifiable behavior pattern of specified criminal activity."
Id. (citing reference and internal quotation marks omitted) .
209. Brooks argues that there is no evidence to support
the factual conclusion that he has ever been delinquent in
paying his attorneys. Brooks Letter at 34. One of Brooks's
trial attorneys has already taken his fees dispute to the Court,
who ruled in the attorney's favor, and to the Second Circuit,
where the Court was af firmed. See Levi t tv. Brooks, 669 F. 3 d
100 (2d Cir. 2012). The objection should be denied as
frivolous.
212. As discussed above, the PSR's total offense level of
57 and criminal history category of I are accurate, resulting in
a Guidelines recommended range of life in prison.
16492
57
216 and 218-219. As discussed in ~ ~ 7-12 above, the Second
Circuit has expressly distinguished criminal restitution from
fines in the context of the Apprendi rule. "Apprendi is not
implicated where district courts order criminal restitution or
forfeiture based on court-determined loss or gain amounts
[C]riminal restitution and forfeiture are indeterminate
schemes without statutory maximums." Pfaff, 619 F. 3d at 175.
See also Anderson v. United States, 2013 U.S. Dist. LEXIS 35749
(S.D.N.Y. February 21, 2013) ("Apprendi does not apply to
determinations of restitution, where no statutory maximum
exists. The Second Circuit Court of Appeals extended
Apprendi to criminal fines even prior to the Supreme Court's
holding in Southern Union, but expressly distinguished orders of
restitution from fines and other punishments.") . Brooks's
obj ection to restitution on the ground that the issue was not
submitted to the jury should therefore be overruled.
221. Brooks argues that "[b] ecause fines are a criminal
penalty, and the issue was not submitted to the jury, the
maximum fine that can be imposed on Brooks upon his conviction
on Counts 1-3 and 6-11 is $250,000 per count." Brooks Letter at
35. The government agrees.
224-225. Brooks objects to any forfeiture order because he
will also be required to pay restitution. In support of this
argument, he relies upon dicta which has since been
distinguished, and he ignores recent Second Circuit case law.
Brooks--and indeed any defendant--may be properly held
liable for both restitution and forfeiture. United States v.
Torres, 703 F.3d 194 (2d Cir . 2012). The authority for
forfeiture and restitution corne from two separate statutory
provisions, and represent two separate, yet mandatory,
obligations. Compare 18 U.S.C. 981 and 982, 21 U.S.C. 853
with 18 U.S.C. 3664(A); see also Torres, 703 F.3d at 196, 203-
04. Forfeiture is typically intended to disgorge ill-gotten
gains from the defendant, while restitution is intended to
recompense victims for their losses. United States v.
Pescatore, 637 F.3d 128, 137 - 38 (2d Cir. 2011). See also The
Uni ted States' Memorandum of Law in Support of Its Motion for
Entry of a Preliminary Order of Forfeiture, Docket No. 1422, at
pp. 18-19). Therefore, to the extent that Brooks complains of
being required to pay both forfeiture and restitution, his
complaint is without merit: forfeiture is expressly authorized
16493
58
by statute and is not " impermissibly duplicative of [a]
concurrent restitution order." Torres, 703 F.3d at 205.
228. Brooks states that he intends to move for a downward
departure on the ground of diminished capacity, pursuant to
U. S. S . G. 5K2 .13 . Brooks claims that his medical conditions
"contributed substantially to the commission of his alleged
offenses." Brooks Letter at 36. The Court should deny such a
motion because Brooks cannot prove that he had "a significantly
impaired ability to (A) understand the wrongfulness of the
behavior comprising the offense or to exercise the power of
reasoni or (B) control behavior that the defendant knows is
wrongful." U.S . S.G. 5K2 . 13 cmt. n.li see United States v.
McBroom, 124 F.3d 533, 548 (3d Cir. 1997) (recognizing that
"reduced mental capacity" includes cognitive impairments as well
as volitional impairments) .
In this case, the Court had ample opportunity to observe
Brooks's behavior and demeanor in the courtroom on a daily basis
over the seven-and-a-half month trial, as well as during
additional appearances concerning questions of competency and
civil matters. United States v. Brooks, 06-CR-0550 (JSjAKT),
2012 WL 2000792, at *7 (E.D.N.Y. Jun. 4, 2012). During this
period Brooks did not exhibit any unusual behavior that led the
Court to question his competence or mental facilities. Id. The
Court found that Brooks was readily able to assist in his own
defense at trial and that he "underst[ood] the nature and the
consequences of the proceedings." Id. at *6. Even when Brooks
was experiencing benzodiazepine withdrawal, medical personnel at
the Nassau County Correctional Center and the Queens Private
Detention Facility "repeatedly observed his cognitive
functioning to be unimpaired and no decline in his mental
status," and that Brooks was "attentive, demonstrated intact
abstraction and calculation, and had good insight and judgment."
Id. The Court summarized its impression of Brooks by observing
that he was "an intelligent, controlling, and highly successful
businessman." Id . at *9.
On Brooks's motion for a new trial pursuant to Rule 33 on
grounds that he was incompetent, the Court was also presented
with conflicting m ~ d i c a l evaluations that were prepared by both
parties in regards to Brooks's mental health. The Court came to
the conclusion that "the value of Brooks's experts' opinions in
this case [was] minimal." Brooks, 2012 WL 2000792, at *10. The
16494
59
Court questioned the absence of contemporaneity in defense
experts' diagnoses, the reliance placed on partisan information
provided by Brooks and his family, as well as the fact that Dr.
Liebowitz, Brooks's long-time doctor, only diagnosed him with
panic disorder and anxiety disorder. Id. These identical facts
and circumstances would be present with respect to any motion
for downward departure that Brooks may elect to file on
diminished capacity grounds. As it did in connection with
Brooks's Rule 33 motion, the Court is free to rely on its own
observations of the defendant, counsel's arguments and the
proven criminal conduct to make its findings, even if those
findings are inconsistent with expert opinion, to deny Brooks's
downward departure motion. United States v. Valdez, 426 F. 3d
178, 186 (2d Cir. 2005); United States v. Piervinanzi, 23 F.3d
670, 684 (2d Cir. 1994) (noting that the defendant had provided
some evidence to substantiate his claim, but the judge, "as the
finder of fact, was in the best position to evaluate this
information") .
Contrary to the defendant's assertion, he has not entered
into a binding settlement agreement with the victims. The
purported settlement agreement between the defendant and victims
(who likely include a significant portion, but not all of the
defendant's victims for restitution purposes pursuant to the
MVRA) will not become an enforceable settlement agreement unless
and until, among other things, the government, an essential
party to the proposed settlement, agrees to the terms of the
proposed settlement, and the Court approves the proposed
settlement. As previously reported to the Court, the government
could not meaningfully assess the terms of the proposed
settlement until it obtained and evaluated the victim and loss
data it required to ascertain the amount of restitution owed by
the defendant. As set forth above, Gilardi recently wrote the
Probation Department a letter documenting the claims
administration procedures and analysis that it employed to
determine investor restitution in this case. Based upon the
16495
60
data provided by Gilardi, the government continues to
to reach a resolution of restitution in this case.
attempt
By:
Encls.
Respectfully submitted,
LORETTA E. LYNCH
United States Attorney
/s/
Christopher Ott
Richard T. Lunger
Christopher C. Caffarone
Assistant U.S. Attorneys
cc: Defense counsel (Via ECF and Email)
Probation Officer Linda Fowle (Via Email)
Case 2:06-cr-00550-JS-AKT Document 1661-2 Filed 05/20/13 Page 1 of 4 PageID #: 16496
r , . 1 1 ~ r d i
~
3301 Kerner Blvd.
San Rafael, CA 94901
VIA OVERNIGHT DELIVERY
May 8, 2013
Ms. Linda Fowle
Supervising Probation Officer
U.S. Probation Department - EDNY
202 Federal Plaza
Central Islip, N.Y. 11722
RE: United States v. David Brooks Restitution Process
Dear Ms. Fowle:
Gilardi & Co. ("Gilardi") was retained by the office of the United States Attorney for the Eastern
District of New York to help victims in this matter present their claims for restitution, and to
calculate the individual and aggregate amounts of those claims based on a methodology provided
by the Government. This letter will explain how Gilardi gathered the information from victims
needed to perform those calculations, how the calculations were performed, and what the results
of those calculations are.
Background on Gilardi
Since our founding in 1984, Gilardi has managed more than 4,500 legal administrations and
distributed more than $25 billion in assets. We are the nation's largest private full-service claims
administrator and are solely dedicated to matters related to legal settlements and administrations.
On an annual basis, we provide administration services for over 600 Qualified Settlement Funds
and manage assets in excess of $1.5 billion. Gilardi has served as the claims administrator for
some of the largest and most complex private settlements, with notices provided to more than 26
million class members and settlements of more than $7 billion. Throughout our history, we have
also partnered with countless government entities, including the DOJ, SEC, FINRA, CFTC, the
Attorneys General of every state and numerous local and county offices, to perform legal
administration services. For more than a quarter-century, we have been a national contract holder
with the FTC, during which time we have partnered closely with the FTC to develop, refine, and
continuously hone the standards for cost-effective redress administration. Gilardi was also
recently awarded a ten-year contract by the Department of Justice to perform administrative
services in matters related to redress and asset forfeiture.
United States v. David Brooks Restitution Calculation
Page 2 of3
May 8, 2013
Methodology for Collecting Restitution Claim Information
Among the private litigation settlements Gilardi has administered is a securities class action that
was filed and litigated in the United States District Court for the Eastern District of New York, in
which DHB Industries, Inc. ("DHB") was a defendant (Case No. 2:05cv-04296-JS-ETB). In
connection with that case, Gilardi received claims from class members that included a list of
those class members' transactions in the publically traded securities of DHB between November
18, 2003 and November 30, 2006 (the "Class Period"). The database of those private class
members and their submitted claims provided a good starting point for compiling victims' claims
for restitution in this matter and for calculating the losses associated with those claims. After
consulting with the Government, Gilardi developed a plan to send an instructional cover letter
and Proof of Claim form to every class member that had been identified in the private civil
litigation. Additionally, a cover letter and Proof of Claim was sent to a list of securities brokers
and other financial institutions maintained by Gilardi, seeking their assistance in identifying
additional possible victims among their customers. The cover letter and Proof of Claim form
were ultimately mailed to 136,445 persons and entities who were either previously identified as
class members or were newly identified as possible victims in a recent solicitation of name and
address information from various financial institutions. The cover letter and Proof of Claim are
attached as Exhibit A to this letter.
The Government's economic consultant in this matter established a relevant period during which
the defendants' illegal actions artificially inflated the market price of DHB common stock,
thereby potentially harming investors who purchased shares during an inflated period. That
period, May 1, 2003 through August 18, 2006, substantially corresponds to the Class Period.
Because the periods are not identical, however, potential victims were urged to file a claim in the
restitution proceeding even if they had previously filed a class action claim. The restitution
Proof of Claim asked investors to list the shares which they held immediately prior to the period
of artificial inflation, those which they purchased and sold during that period and those which
they held at the end of the period. As more fully explained below, where an investor submitted
a claim for restitution, those listed transactions were used by Gilardi to calculate the dollar
amount of the harm caused to each victim and to all of the victims in aggregate. Additionally, if
a class member submitted a claim in the private matter but did not submit a claim for restitution,
that investor's previously submitted list of transactions was used to calculate a restitution amount
for the investor. A total of 9,637 new restitution Proofs of Claim were submitted to Gilardi and
an additional 11,893 claims were processed using data collected during the class action
administration.
Methodology for Processing and Calculating Restitution Claims
The Government's economic consultant supplied Gilardi with a table of artificial inflation
amounts for the common shares of DHB for each trading day during the relevant period. The
inflation table is attached to this letter as Exhibit B. That table and the transactions for each
United States v. David Brooks Restitution Calculation
Page 3 of3
May 8, 2013
investor were entered into Gilardi's proprietary software, which then calculated a restitution
amount for each share as follows:
If an investor's shares were sold during the relevant period, the per share loss is the difference
between total inflation per share on the date of purchase minus total inflation per share on the
date of the sale. If shares are still held as of August 18, 2006, the per share loss equals total
inflation on the date of purchase. For the purposes of calculating loss under the plan of
allocation, the "last-in, first-out" pairing methodology was applied, meaning that sales were
matched first against any shares purchased or acquired during the relevant period, and then
against any shares held at the beginning of the relevant period in reverse chronological order.
For each paired transaction that resulted in a calculated loss, the dollar amount of that loss was
added to the investor's total calculated restitution amount. For each paired transaction that
resulted in a calculated gain, the dollar amount of that gain was subtracted from the investor's
total calculated restitution amount. Sales that were matched against shares held at the beginning
of the relevant period were not used in the calculation of the net loss.
As a result of these calculations, Gilardi determined that 6,360 claims were candidates for
restitution, meaning that the investor suffered a financial loss directly attributable to purchasing
the common shares of DHB while those shares were artificially inflated. Gilardi concluded that
a number of claims were submitted in the restitution claims process which had no financial loss
attributable to artificial inflation, were substantively deficient in some way, or were duplicative
of another submitted claim. Notification letters have been sent to all of those investors informing
them of the determination and providing them with a 20-day period in which to supplement or
cure their claim with additional information. After processing all information and amendments
received as of the date of this letter, Gilardi has concluded that 15,170 claims remain ineligible
for restitution at this time. A list of the 6,360 claims with a calculated restitution amount,
together with the calculated amount for each is attached to this letter as Exhibit C.
Calculated Restitution Claim Amounts
The total aggregated restitution amount Gilardi calculated is $45,199,790.90. The average
amount of the valid individual victim claims is $7,106.89, while the median is $1,000.00.
Sincerely,
Michael Joaquin
Director of Securities
Gilardi & Co. LLC
cc: Richard A. Greenberg, Newman & Greenberg
VENABLE:LP
575 SEVENTH STREET NW WASHINGTON, DC 20004
T 202.344.4000 F 202.344.8300 wwwVenable.com
George Kostolampros
T 202.344-8071
F 202.344.8300
Gkostoiampros@venabie.com
May 7, 2013
VIA FEDERAL EXPRESS
Ms. Linda 1. Fowle
Supervising United States Probation Officer
202 Federal Plaza
Central Islip, New York 11722
Re: United States v. Brooks, Cr. No, 06-550
Dear Ms. Fowle:
We represent Point Blank Solutions, Inc., f/k/a DHB Industries, Inc. ("Point Blank"), a
victim in the above-referenced matter, Enclosed please find a declaration by T. Scott Avila, the
Chief Restructuring Officer for Point Blank, in further support of the Affidavit of Loss of Point
Blank Solutions, Inc., which was previously submitted in this matter.
cc: Nancy R. Grunberg, Esquire
Richard Lunger, Esquire
vChristopher Caffarone, Esquire
Christopher Ott, Esquire
Richard A. Greenberg, Esquire
Respectfully Submitted, .,. .
. _5(!/ /"r
~ ) /' y / ~ ~ ~ V -
George Kostolampros
16500
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
-----------------------------------------------------)(
UNITED STATES OF AMERICA
-v-
DA YID H. BROOKS, ET AL. ,
Defendants.
-----------------------------------------------------)(
Cr. No. 06-550 (S-I) (JS)
DECLARA TION OF T. SCOTT AVILA
IN FUR'rHER SUPPORT OF POINT BLANK'S RESTITUTION CLAlM
T. SCOTT AVILA, declares as follows, pursuant to 28 U.S.c. 1746:
I. r am the Chief Restructuring Officer ("CRO") of the companies formerly known
as Point Blank Solutions, Inc., Point Blank Body Armor, Inc. and Protective Apparel
Corporation of America (collectively referred to herein as "Point Blank" or the "Company").
I have been the CRO since March 27, 2010. I am also currently a Principal at Deloitte
Financial Advisory Services LLP. My duties to Point Blank have included general
supervision of, and responsibility fot, Point Blank's business and financial affairs and
activities and reviewing, formulating and assisting with Point Blank's business plans and
strategies in bankruptcy. In my capacity, r have general knowledge of the books and records
of the Company.
2. 1 submit this declaration in further support of the Affidavit of Loss of Point Blank
Solutions, Inc. dated June 28, 2011, which was submitted to the probation officer in this
matter. I make this declaration based upon my own personal knowledge, my review of the
Company's books and records, and other information prepared by the Company' s employees .
. _ .. _ .... -_ .._-------------_. ___ --_00 ______ -
16501
3. Set forth as Exhibit A to this Declaration is a true and correct copy of a
spreadsheet further detailing celiain of Point Blank's restitution claims. Specifically, as
detailed in the attached spreadsheet, from 2005 through 20 I 0, Point Blank expended the
following in costs as a result of the defendants' criminal conduct-
$15.8 million in advancing legal defense fees for Brooks, Schlegel and Hatfield;
$1.5 million in advancing legal defense fees to directors of the company;
$16.9 million in remediation costs;
$1. 9 mill ion in back taxes; and
$11.4 million in SEC and class action defense costs.
4. In addition to the above, the Company lost approximately $6.4 million in
Company funds Brooks used to pay for his own personal items and another $21 .5 million
through Brooks' siphoning of Company funds from DHB to TAP.
5. From 2006 through 2010, the Company's debt obligations increased significantly
as a result of expending these enormous amounts of cash as a direct result of Brooks'
conduct-

$38.9 million in 2006;

$40 million in 2007;

$70.3 million in 2008;

$61.4 million in 2009; and

$75.3 million in 2010.
6. In early 2010, because of its considerable debt, the Company received a letter
from Bank of America providing notice of default of the Company's revolving credit line
because the Company's EBITDA fell below $1.3 million for the three months ended
16502
December 3 I, 2009 and failed to have a net worth of at least $5 million as of December 31,
2009. 5,'ee February 23, 2010 Point Blank Solutions SEC Form 8-K attached as Exhibit B.
7. Attached as Exhibit C is an April 14,2010 8-K issued by the Company attaching
a press rel ease di sclosing that the Company filed a voluntary petition in bankruptcy. The
press release specifically sets forth that ' " [t]he decision to file for Chapter 11 protection was
driven primarily by continued expenses associated with legacy issues from former
management, and the lack of financing available to the Company given the state of the credit
markets . .. . Without a financing facility and with mounting legacy expenses, however, we
had to take this step to reorganize."
8. At the time of the Company' s bankruptcy in April 2010, the Company owed
approximately $28.2 million in trade debt. The Company's total debt, however, at that time
was $68.4 million and the Company was expending over $600,000 in legal fees each month
in actions and/or governmental investigations concerning the defendants' criminal conduct.
9. Based on my review of the Company' s books and records, from 2006 through
2010, the Company spent approximately $45.8 million in restatement , remediation, and legal
costs, and an additional $1.9 million in back taxes. Taken together with the amounts he
directly stole from the Company (over $6 million in unauthorized compensation and the
siphoning of $21 .5 million in cash from DHB to TAP), the total cash drain from the
Company amounted to over $75 million. If the Company had not suffered this $75 million
cash loss, it would not have filed for bankruptcy because it would not have had this large
debt and cash drain.
16503
10. In addition to the enormous cash drain on the Company, the legacy issues were a
major distraction to the Company's efforts to emerge from the mounting debt and controls
issues caused by defendants' conduct.
11. As of June 28, 2011 , the date of Point Blank' s Affidavit of Loss submitted in this
matter, Point Blank had suffered losses of $22.5 million representing costs expended in
bankruptcy that would not have been spent if the Company had not been in bankruptcy.
I declare under penalty of perjury that the foregoing is true and correct to the best of my
knowledge information and belief. Executed on this Eth day of April, 2013.
C
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Year of Expense
USA ltr Category Company Category Item Description 2005 2006 2007 2008 2009 2010 Total
Back Taxes Back Taxes - Employee Payroll Tax Payment for Former officer's payroll taxes 1,054,322 40,000 1,094,322
Back Taxes Back Taxes - Employee Payroll Reduction of refund for carryback to 2005 852,417 852,417
Back Taxes Total 1,054,322 892,417 1,946,739
BHS Defense legal- Brooks 2006 MILLBANK, TWEED, LEVIN BROOK'S ATTORNEY'S 715,825 4,353,407 (452,390) 4,616,843
BHS Defense legal- Hatfield 2006 SERCARZ &RIOPELLE -HATFIELD'S ATTORNEYS 213,396 213,396 404,848 265,791 397,318 1,894,872 3,389,621
BHS Defense legal- Brooks 2006 MINTZ LEVIN COHEN & FERRIS BROOK'S ATTORNEY'S 1,S4D,402 300,607 296,330 211,732 244,445 2,593,516
BHS Defense legal- Brooks BAKER BOTTS 1,814,428 1,814,428
BHS Defense legal- Schlegel 2006 KOBRE & KIM 44,701 562, 219 480,987 123,577 133,543 282,517 1,627,543
BHS Defense legal- Brooks MORRIS, NICKELS, ARSHT & TUNNELL 10,000 11,159 378,084 3,536 402,780
BHS Defense legal- Brooks PEPPER HAMILTON LLP 308,175 308,175
BHS Defense legal- Brooks AKERMAN SENTERFITT 52,519 226,141 278,660
BHS Defense legal- Brooks Schlam, Stone & Dolan 149,443 149,443
BHS Defense legal- Brooks Goodwin Procter 106, 773.40 19,880 126, 654
BHS Defense legal- Brooks Ferber Frost Chan & Essne 116,460 116,460
BHS Defense legal - Brooks Robert & Holland 104,479 104,479
BHS Defense legal- Brooks Kasowitz, Benson 95,000 95,000
BHS Defense legal- Brooks Gibson & Dunn 91,000 91,000
BHS Defense legal- Hatfield 2006 BOUCHARD, MARGULES & FRIEDLANDER - HATFIELD 28,430 28,430 4,108 60,968
BHS Defense legal- Hatfield RITCHIE, DILLARD & DAVIES 4,797 29,977 34,774
BHS Defense legal- Brooks SILVERMAN PERLSTEIN & ACA 26,500 26,500
BHS Defense legal- Brooks Sullivan, Ward, Asher & P 25, 961 25,961
BHS Defense legal- Brooks Ferber Frost Chan & Essne 15,000 15,000
BHS Defense legal - Brooks PAUL HASTINGS
BHS Defense legal- Brooks STERN
BHS Defense Total 1,939,168 8,522,282 831,815 1,289,923 852,903 2,441,713 15,877,805
legal D&05 legal- O&Os RICHARDS, KIBBE & ORBE 169,116 207,620 121,456 91,523 96,247 685,961
legal 0&05 legal- O&Os COVINGTON & BURLING 3,751 12,987 149,237 220,003 66,440 452,418
legal 0&05 legal- O&Os HELLER EHRMAN 257,865 257,865
legalo&Os legal- 0&05 DLA PIPER 20,192 106,443 1,504 128,138
legalD&Os legal- O&Os CARTER LEDYARD & MILBURN LLP
legal O&Os Total 193,058 327,049 530,061 311,526 162,687 1,524,382
Remediation Interim executive management AliX PARTNERS 4,118,525 (253,408.54) 3,865, 117
Remediation Forensic Accounting Huron 1,757,985.52 1,689, 642 106,875 3,554,502
Remediation Interim executive management Robert Half 554,371 1,174,854 308,313.74 2,037,539
Remediation Tax Restatement oeloitte & Touche tax advisor and revised income tax returns 1,114,024 370,006 14,009 1,498,039
Remediation Financial Restatement MarcumRachlin, a division of MARCUM llP 826,744 171,736 998,479
Remediation legal 2007 McDERMOTT, WILL & EMERY 948,938 948,938
Remediation Financial Restatement FTI Consulting Inc 316,053 612,793 12,761 941,607
Remediation Interim executive management Scott Burke 95,680.60 469,037 244,709.30 809,427
Remediation Financial Restatement RACHLIN 605,279 19,213 624,492
Remediation Financial Restatement Steven Douglas consolidation 31, 055 317,413 79,495.00 182,020 609, 983
Jefferson Wells consultants completing restatements of 2003 thru
Remediation Financial Restatement 2005 10Q's and 10K's 354,515.74 123,076 477,591
Remediation Interim executive management MARCIA WIERSMA 166,978.88 101,591 268,570
Remediation Tax Restatement Oeloitte work on Payroll taxes 14,009 162,098 176,107
Remediation Forensic Accounting MARGOLIN, WINER & EVENS LLP 124,112 124,112
Remediation Interim executive management TATUM, TSF' D FROM P88A 9,000.00 11,541 (5,000) 15,541
Remediation Total 316052.5 9,892,435.88 4,846,096 1,351,587 210,038 333,834 16,950, 042
5EC & CA legal- SEC, Class Action Venable 371,862 2, 020,264 3,886,887 761,890 7,040,903
5EC & CA legal- Class Action Bryan Cave, SEC investigation 1,927,511 1,927,511
5EC & CA legal- Class Action BRYAN CAVE 354,238 1,426,771 1,781,009
SEC & CA legal- Class Action CLIFFORD & CHANCE 441,378 196,856 53,158 11,829 703,221
SEC & CA Total 1,167,477 2,020,264 5,510,514 1,980,669 773,719 11,452,643
- --_.-
16505
8-K I form8k0760 I 022320 10.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Rep0l1 (Date of earliest event reported) : February 23, 20 10
Delaware
(State or other jurisdiction
of incorporation)
POINT BLANK SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
001-13112
(Commission
File Number)
2102 SW 2nd Street, Pompano Beach, Florida
(Address of principal executive offices)
11-3129361
(IRS Employer
Identification No.)
33069
(Zip Code)
Registrant's telephone number, including area code: (954) 630-0900
N/A
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the
registrant under any of the following provisions (see General Instruction A.2. below) :
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c
16506
Item 2.04. Triggering Events that Accelerate or Increase a Direct Financial Obligation or an Obligation under
an Off-Balance Sheet Arrangement.
On February 23, 20 I 0, Point Blank Solutions, Inc. (the "Company"), and its subsidiaries Protective Apparel
Corporation of America and Point Blank Body Armor, Inc. (collectively, the "Borrowers"), received a letter (the "Letter")
from Bank of America, N.A. ("Bank of America") providing notice that events of default occurred and are continuing under
that certain Amended and Restated Loan and Security Agreement, dated as of April 3, 2007 (the "Loan Agreement"), by and
among the Borrowers, as borrowers, the Company, as guarantor, and Bank of America (as successor by merger to LaSalle
Business Credit, LLC), as administrative agent and collateral agent for itself and all other lenders party to the Loan
Agreement. The Letter provides that, as a result of the ongoing events of default, (i) all of the Borrowers' liabilities under the
Loan Agreement have been accelerated and are immediately due and payable and (ii) Bank of America' s commitments under
the revolving credit line provided for under the Loan Agreement have been terminated.
The Loan Agreement, the terms of which were previously disclosed in reports filed with the Securities and
Exchange Commission, provided the Borrowers with financing through a revolving credit line and a term loan. As of
February 23, 2010, $0 was outstanding under the revolving credit line and $10,000,000 in principal was outstanding under
the term loan.
The events alleged by Bank of America to constitute an event of default under the Loan Agreement include the
failure of the Borrowers to comply with their financial covenants under the Loan Agreement to have a minimum EBITDA of
at least ($1,300,000) for the three months ended December 31, 2009 and to have a net worth of at least $5,000,000 as of
December 31, 2009. Pursuant to the terms of the Loan Agreement, in case of an event of default, Bank of America is also
entitled in its sole and absolute discretion to (i) institute a default rate of interest of 2% per annum in excess of the interest
rate otherwise payable with respect to any or all liabilities outstanding under the Loan Agreement, (ii) commence any legal or
other action to coll ect any or all of the liabilities outstanding under the Loan Agreement from the Company or the Borrowers,
(iii) foreclose or otherwise realize on any or all of the collateral and appropriate, set-off or apply to the payment of any or all
of the liabilities, any or all of the collateral , and (iv) take any other enforcement action or otherwise exercise any and all
rights and remedies provided for under the Loan Agreement or applicable law. Bank of America indicated in the Letter that
it reserves its right to exercise at any time its default-related rights and remedies under the Loan Agreement and applicable
law.
The Company is considering all alternatives available to it in response to the matters set forth in the Letter.
16507
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this repOIi to be
signed on its behalf by the undersigned hereunto duly authorized.
Dated: March 1,2010 By: /s/ Michelle Doery
Name: Michelle Doery
Title: Chief Financial Officer
16508
8-K I form8k0760 I 04 1220 I O.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 12,2010
Delaware
(State or other jurisdiction
of incorporation)
(Exact name of registrant as specified in its charter)
001- 13 I 12
(Commission
File Number)
2 I 02 S W 2nd Street, Pompano Beach, Florida
(Address of principal executive offices)
11-3129361
(IRS Employer
Identification No.)
33069
(Zip Code)
Registrant's telephone number, including area code: (954) 630-0900
N/A
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the
registrant under any of the following provisions (see General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a- I 2 under the Exchange Act (17 CFR 240. I 4a- I 2)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240. 14d-2(b
o Pre-commencement communications pursuant to Rule 13e-4( c) under the Exchange Act (17 CFR 240. 13e-4(c
16509
Item 1.01. Entry into a Material Definitive Agreement.
The information contained in Item 2.03 regarding the DIP Financing Agreement (as defi ned below) and the Lender
Relationships (as defined below), and the information contained in Item 5.02 regarding the Henderson Agreement (as defined
below) is incorporated by reference into this Item 1.0 I .
Item 1.02. Termination of a Material Definitive Agreement.
The information contained in Item 2.03 regarding the Lender Relationships and the information contained in Item
5.02 regarding the Management Services Agreement (as defined below) is incorporated by reference into this Item 1.02.
Item 1.03. Bankruptcy or Receivership.
Chapter 11 Petitions
On April 14, 20 I 0, Point Blank Solutions, Inc. (the "Company"), a Delaware corporation, and its subsidiaries
Protective Apparel Corporation of America, a New York corporation, Point Blank Body Armor, Inc., a Delaware corporation,
and PBSS, LLC, a Delaware limited liability company (the " Subsidiaries", and together with the Company, the "Debtors"),
filed voluntary petitions (the "Chapter II Petitions") for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The
Chapter 11 Petitions are being jointly administered under the caption "In re Point Blank Solutions, Inc., et. at." Case No. 10-
11255 (the "Case"). The Debtors will continue to operate their businesses as "debtors-in-possession" under the jurisdiction
of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the
Bankruptcy Court.
On April 14,20 I 0, the Company issued a press release relating to the foregoing, a copy of which is attached hereto
as Exhibit 99.1 and is incorporated herein by reference.
Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement
of a Registrant.
DIP Financing Agreement
On April 12, 20 I 0, in connection with the Chapter 11 Petitions, the Debtors obtained a commitment from Steel
Partners II, L.P. (the "Lender"), subject to approval by the Bankruptcy Court and the satisfaction of certain other conditions,
to provide the Debtors with post-petition financing pursuant to a Debtor-in-Possession Financing Agreement (the "DIP
Financing Agreement"). The DIP Financing Agreement provides for a revolving loan facility of up to an aggregate amount
of $20,000,000 (the "DIP Revolving Loan"). The DIP Revolving Loan will be used for, among other things, working capital
and the repayment of all amounts outstanding under the Loan Agreement (as defined below) . The maximum amount of
availability under the DIP Revolving Loan at any particular time is based on a percentage of the Debtors' eligible accounts
receivable and eligible inventOlY, plus the amount of the Third Party Guaranty (as defined below), minus certain reserves
established by the Lender in its sole discretion. The principal outstanding under the DIP Revolving Loan will bear interest at
a rate of7.50% per annum plus the greater of 0) 3.25% per annum or (ii) the prime rate. The interest due and payable under
the DIP Revolving Loan as of any required payment date, however, wi ll not be less than the interest that would have accrued
and been payable if the principal balance under the DIP Revolving Loan was $ 10,000,000. After the occurrence and during
the continuance of an event of default under the DIP Financing Agreement, the interest rate will increase to 9.50% per annum
plus the prime rate.
16510
The Debtors' obligations under the DIP Financing Agreement are secured by a first perfected security interest and
lien on all of the Debtors' assets and constitute a super-priority administrative claim under Section 364(c)(I) of the
Bankruptcy Code. The Debtors' obligations under the DIP Financing Agreement are partially supported by a $10,000,000
third pa11y guaranty (the "Third Party Guaranty"). The guarantor providing the Third Party Guaranty is the same guarantor
that provided a $10,000,000 third party guaranty in support of the Term Loan (as defined below) and is the beneficiary of the
Subordinated Note (as defined below) .
All obligations under the DIP Financing Agreement will be due and payable on the earliest of (i) September 30,
20 I 0, (ii) the occurrence of an event of default under the DIP Financing Agreement and the acceleration of the Debtors'
obligations under the DIP Financing Agreement by the Lender, (iii) the closing of a sale of all or substantially all of the assets
of the Debtors pursuant to Section 363 of the Bankruptcy Code, or (iv) the effective date of a confirmed plan of
reorganization in the Case.
The DIP Financing Agreement also contains certain customary representations, covenants, indemnifications, and
events of default. Other events of default include, but are not limited to (i) a change in control of any Debtor's board of
directors, (ii) any person or "group" (within the meaning of the Securities Exchange Act of 1934, as amended) becoming the
beneficial owner, directly or indirectly, of25% or more of any Debtor's capital stock, (iii) the termination or attempted
termination of the Third Party Guaranty, and (iv) certain customary events of default.
In connection with the DIP Financing Agreement, the Debtors will pay the Lender (i) a commitment fee of 0.75%
per annum of the average daily difference between the maximum amount available under the DIP Revolving Loan and the
outstanding loans during the calendar month just ended and (ii) a telmination fee of $400,000 upon the termination of the
DIP Financing Agreement. In connection with the DIP Financing Agreement, the Debtors will also pay Steel Partners, LLC,
an affiliate of the Lender ("Steel Partners") , a non-refundable fee of $400,000. Additionally, the Debtors are required to
reimburse the Lender for all costs and expenses, including reasonable attorneys' fees, incurred by the Lender in connection
with the DIP Financing Agreement.
Relationships with the Lender and its Affiliates
As of April 14, 2010, based on information provided by the Lender, the Lender owned 2,360,146 shares, or
approximately 4.6%, of the Company's outstanding common stock. As of April 14,2010, based on information provided by
the Lender, the Lender and its affiliates also own approximately 38.2% of IPS Industries, Inc. ("IPS"), a supplier of ballistic
materials from whom the Company has historically made and continues to make purchases of materials . For the year ended
December 31, 2009, the Company made purchases from IPS with an aggregate value of approximately $24,700,000.
16511
SP Corporate Services LLC, an affiliate of Steel Partners ("SP Corporate Services"), was a party to the Management
Services Agreement (as defined below), which is described in Item 5.02.
James R. Henderson, the Company's Chief Executive Officer and Chairman of the Board, is a Managing Director
and operating partner of Steel Partners, and Terry R. Gibson, another member of the Company's Board of Directors, is a
Managing Director of SP Corporate Services. Steel Partners is the manager of the Lender.
The relationships between the Debtors and the Lender and its affiliates discussed above are referred to herein as the
"Lender Relationships".
Item 2.04. Triggering Events that Accelerate or Increase a Direct Financial Obligation or an Obligation under
an Off-Balance Sheet Arrangement.
Effect a/Chapter 11 Petitions
The filing of the Chapter 11 Petitions constituted an event of default under that certain Amended and Restated Loan
and Security Agreement, dated as of April 3, 2007 (the "Loan Agreement"), by and among the Company, its subsidiaries
Protective Apparel Corporation of America and Point Blank Body Armor, Inc. (collectively, the "Borrowers"), and Bank of
America, N.A. ("Bank of America"). As a result of such an event of default, all obligations under the Loan Agreement have
become due and payable. As of April 14, 2010, $0 was outstanding under the revolving credit line, $525,654 was
outstanding under certain letters of credit, and $10,000,000 in principal was outstanding under the term loan (the "Term
Loan") provided for under the Loan Agreement.
As previously reported in the Company's Form 8-K filed on March 1,2010, on February 23, 2010, Bank of America
provided notice that events of default occurred and were continuing under the Loan Agreement, and a result, (i) all of the
Borrowers' liabilities under the Bank of America Loan Agreement were accelerated and became immediately due and
payable and (ii) Bank of America's commitments under the revolving credit line provided for under the Loan Agreement
were terminated.
Additionally, the filing of the Chapter II Petitions may constitute an event of default under that certain
Subordinated Note, dated October 29, 2009 (the "Subordinated Note"), made by the Borrowers for the benefit of the third
party guarantor of the Term Loan, and may trigger the acceleration of the Borrowers' obligations under the Subordinated
Note. The Subordinated Note evidences indebtedness of the lesser of (i) $10,000,000 or (ii) such amount as may be
advanced by the third party guarantor to Bank of America on behalf of the Borrowers and the Company to satisfy their
obligations under the Term Loan, which amount was $0 as of April 14,2010.
16512
The Debtors believe that any efforts to enforce such payment obligations against the Debtors under the Loan
Agreement and the Subordinated Note are stayed as a result of the filing of the Chapter II Petitions in the Bankruptcy Court.
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers;
Compensatory Arrangements of Certain Officers.
Henderson Transitions to Employment on "At Will" Basis
On April 12, 2010, the Company and James R. Henderson, the Company's Chief Executive Officer, enter.ed into an
oral agreement pursuant to which Mr. Henderson became an employee of the Company (the "Henderson
Agreement"). Pursuant to the Henderson Agreement, Mr. Henderson is now employed as the Company' s Chief Executive
Officer on an " at will" basis and receives an annual salary of $77 ,000 per month. Pursuant to the Henderson Agreement, Mr.
Henderson will no longer receive additional compensation for his service on the Company's Board of Directors or as
Chairman of the Board, and will no longer receive a monthly stipend for living expenses.
Termination of Management Services Agreement
Mr. Henderson had previously been serving as the Company's Chief Executive Officer pursuant to a management
services agreement, dated as of September 1, 2009 (the " Management Services Agreement"), by and between the Company
and SP Corporate Services. Pursuant to the Management Services Agreement, the Company paid SP Corporate Services
$37,500 per month as consideration for Mr. Henderson's services and provided Mr. Henderson with a stipend of$8,000 per
month for living expenses.
On April 12,2010, in connection with Mr. Henderson's transition to employment on an "at will" basis, the
Company terminated the Management Services Agreement.
Item 8.01. Other Events.
The Debtors retained CRG Partners Group, LLC, a financial advisory firm specializing in operational improvement
and financial restructuring services ("CRG Partners"), to serve as their financial advisor in connection with the restructuring
process.
Each of the Debtors has appointed Scott A vila, a Managing Partner with CRG Partners, as its Chief Restructuring
Officer.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
Exhibit No. Description
99.1 Press release, dated April 14,20 I O.
16513
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this repOIt to be
signed on its behalf by the undersigned hereunto duly authorized.
Dated: April 14,2010 By: lsi Michelle Doery
Name: Michelle Doery
Title: Chief Financial Officer
16514
Exhibit No.
99.1
EXHIBIT INDEX
Description
Press release, dated April 14,20 10.
-1-
REBUTTAL REPORT OF JORDAN G. MILEV, PH.D.
I. Summary of Assignment
1. At the request of the U.S. Attorneys Office for the Eastern District of
New York, I previously submitted to the Supervising U.S. Probation Officer a letter
attaching a report dated June 22, 2012 (Milev Report) in relation to the matter of U.S.A.
v. Sandra Hatfield and David H. Brooks. The letter and report present my analysis of the
losses caused to investors in the common stock of DHB Industries, Inc. (DHB) as a
result of the actions that are the basis of defendants David H. Brookss and Sandra
Hatfields convictions in September 2010 of several counts in the Superseding Indictment
(Offenses of Conviction).
2. The U.S. Attorneys Office has informed me that Mr. Brooks has recently
submitted a report by John F. Gould dated February 22, 2013 (Gould Report) which
comments on the Milev Report. I have been asked by the U.S. Attorneys Office to
respond to the Gould Report.
3. The U.S. Attorneys Office has also informed me that additional proof of
claim data are available for this matter and has asked me to update my estimate of
aggregate investor losses taking into account the available proof of claim data.
II. Summary of Opinion
4. I have refined my estimate of aggregate investor losses as a result of the
Offenses of Conviction using recent proof of claim data submitted to the claims
administrator for this matter. My base case estimate of aggregate investor losses using
these data is $109.2 million to $111.9 million. I note that the midpoint of that range is
$110.6 million, while the previous base case estimate calculated in the Milev Report
using institutional holdings data from SEC filings was $110.8 million and was calculated
without the benefit of any proof of claim data for this particular case. Additionally,
inclusion of investor losses associated with the market-adjusted stock price decline on
one additional date with news about defendants illegal insider sales can lead to further
$41.8 million in losses not captured by my base case estimate. In addition, inclusion of
investor losses associated with the market-adjusted stock price decline on one additional
date with news about Tactical Armor Products, Inc. (TAP) can lead to further $1.4
million in losses not captured by my base case calculation.
5. My response to the Gould Report can be summarized as follows:
a. Criticisms in the Gould Report of the dates used in my event study are
flawed and unfounded. Specifically:
i. Event dates that were a result of the Offenses of Conviction and
caused investor losses should be included in any investor losses
estimate because this is the proper methodology according to the
16515
-2-
2006 United States Sentencing Guidelines Manual (Sentencing
Guidelines);
ii. Criticism regarding the length of the event window for two of the
event dates is without merit as the event window is determined
using an unbiased, ex-ante specified objective criterion applied
consistently throughout the Milev Report;
iii. It is improper to include DHBs price increase associated with
the July 10, 2006 event date as an offset to any estimate of losses
as that is contrary to the Sentencing Guidelines.
b. Criticisms in the Gould Report of NERAs Multi-Sector Multi-Trader
(MSMT) model are flawed and unfounded. Specifically:
i. Without the availability of complete trading data for all investors,
use of a trading model is necessary to calculate the aggregate
investor losses as a result of the Offenses of Conviction;
ii. NERAs trading model is consistent with the scientific method
and is appropriate to use to estimate aggregate losses to all DHB
investors in this case;
iii. The fact that the trading model calculation does not match
claimed losses for some claimants is expected and does not
invalidate the overall loss number;
iv. Aggregate investor losses estimates using NERAs trading model
are consistent with the available proof of claim data;
v. The court cases cited in the Gould Report do not address
NERAs trading model or support the opinions in the Gould
Report.
III. Refined Estimate of Base Case Aggregate Investor Losses
Using Additional Proof of Claim Data
6. The U.S. Attorneys Office has informed me that additional proof of claim
data have been filed in this matter and asked me to update my estimate of aggregate
investor losses taking into account the available proof of claim data.
7. My base case estimate of the range of aggregate investor losses using the
available proof of claim data is $109.2 million to $111.9 million.
1
I note that the
midpoint of that range is $110.6 million. My previous base case estimate using

1
This estimated range is a refinement of my previous estimated range for the base case estimate of investor
losses using the proof of claim data of $107.2 million to $112.7 million (see fn. 66 in the Milev Report).
16516
-3-
institutional holdings data from SEC filings was $110.8 million and was calculated prior
to having the proof of claim data for this particular case.
2
Additionally, inclusion of
investor losses associated with the market-adjusted stock price decline on one additional
date with news about defendants illegal insider sales can lead to further $41.8 million in
losses not captured by my base case calculation of investor losses.
3
In addition, inclusion
of investor losses associated with the market-adjusted stock price decline on one
additional date with news about TAP can lead to further $1.4 million in losses not
captured by my base case calculation.
4

IV. Criticisms in the Gould Report of My Event Date Selection
Are Flawed and Unfounded
A. Requiring That Loss Be Directly Caused by Curative Disclosures Is
Erroneous and Contrary to the Sentencing Guidelines
8. The Gould Report rests most of its criticisms of my event date selection on
a mistaken belief that I must rely on curative disclosures as a basis for my calculation of
investor losses. The Gould Report states, In my opinion, the calculation of losses to
investors should include only stock price decreases that are associated with a disclosure
of fraud and not include decreases that simply follow the disclosure of an event that may
later be deemed to be the possible effects of a fraud. Events where the investors could
not have discerned any link between the information revealed to the market on that day
and any alleged fraud cannot provide a basis for calculating losses caused by fraud.
5

9. As discussed below, this opinion in the Gould Report is contrary to the
instructions provided in the Sentencing Guidelines for the calculation of investor losses.
The Gould Report provides no support for excluding from the calculation of investor
losses dates that are a result of the Offenses of Conviction.
6

10. As described in the Milev Report, my analysis of loss is informed by the
Sentencing Guidelines that defines loss as the greater of actual loss or intended loss and

2
Note that in the Milev Report I did not have proof of claim data gathered specifically for this matter and
based my estimate of investor losses on a calculation using institutional holdings from SEC filings. I also
performed a calculation using proof of claim data from the In re DHB Industries, Inc. Class Action
Litigation as a robustness check. In this report, I am able to use the additional proof of claim data that have
been submitted to the claims administrator in the current matter.
3
This estimate is a refinement of my previous estimate of $42.1 million (see 46 and fn. 69 in the Milev
Report).
4
This estimate is a refinement of my previous estimate of $1.3 million (see 47 in the Milev Report).
5
Gould Report, 19.
6
Even if the Gould Report were correct in requiring that a loss must be directly caused by a curative
disclosure, which I believe to be incorrect and against the Sentencing Guidelines, several of the dates on
which the fraud was not explicitly disclosed by DHB may still have been a partial disclosure. For example,
DHB announced on May 4, 2006 that Lawrence Litowitz was resigning from his position as DHBs
Director of Finance, less than a month after DHB announced CFO Dawn Schlegels resignation. Upon this
news, market participants may have interpreted this as a signal of further problems with DHBs financials.
16517
-4-
further states that actual loss is the reasonably foreseeable pecuniary harm that
resulted from the offense and that intended loss is the pecuniary harm that was
intended to result from the offense, including intended pecuniary harm that would have
been impossible or unlikely to occur.
7
A calculation of losses consistent with the
Sentencing Guidelines requires that losses that are a result of the fraud should be included
in a loss calculation regardless of whether the market knew about the reason for the price
decline at the time. To use an illustration, when an arsonist starts a fire, the arson causes
loss at the time the fire is discovered; the loss is independent of whether the criminal
nature of the fire is disclosed then or remains unknown until a formal investigation into
the fire is complete.
11. As I state in the Milev Report, my analysis of loss resulting from the
Offenses of Conviction is based on events that represent a disclosure of new information
related to the Offenses of Conviction.
8
While such disclosure needs to be a result of the
fraud and lead to a pecuniary harm to the investors holding DHB stock, such a disclosure
does not need to be curative of the fraud itself. In the language of the Sentencing
Guidelines, The estimate of the loss shall be based on available information, taking into
account, as appropriate and practicable under the circumstances, factors such as the
following: (iv) The reduction that resulted from the offense in the value of equity
securities or other corporate assets
9
(emphasis added).
12. One example of a date that the Gould Report improperly excludes from the
calculation of investor losses is April 18, 2006. On that date DHB announced after
market hours that it had been notified by one of its lenders, Lasalle Business Credit, LLC
(Lasalle), that events of default had occurred under the terms of DHBs loan
agreement.
10
This date was a result of the Offenses of Conviction because the events of
default noted by Lasalle were all due to the Offenses of Conviction, as I stated in the
Milev Report and with which the Gould Report appears to agree.
11
Therefore, the
Sentencing Guidelines would require that this date be included in any calculation of
investor losses.

7
Sentencing Guidelines, 2B1.1 Application Note 3A, available at the following URL:
http://www.ussc.gov/Guidelines/2006_guidelines/Manual/gl2006.pdf. See also the 2005 United States
Sentencing Guidelines Manual containing identical language, available at the following URL:
http://www.ussc.gov/Guidelines/2005_guidelines/Manual/GL2005.pdf.
8
See my letter to Supervising U.S. Probation Officer dated June 22, 2012. Further, as I state in the Milev
Report, 12, My base case estimate of losses is based only on DHBs price movements that are statistically
significant and associated with disclosure of defendants criminal conduct or effects thereof.
9
Sentencing Guidelines, 2B1.1 Application Note 3C.
10
The events of default were a result of DHBs withdrawal of reliance on its 2005 interim financial
statements, DHBs delay in filing its annual report for 2005, and DHBs failure to satisfy certain continued
listing standards of the Amex. See DHB SEC Form 8-K filed on April 18, 2006.
11
Gould Report, 34.
16518
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B. My Calculation of Investor Losses Is Conservative Because the Event
Study Methodology May Not Capture All Fraud-Related Price Declines
13. The Gould Report states that I disagree with Dr. Milevs characterization
of his decision to exclude dates that were not significant under his model from his
investor loss analysis as conservative.
12
The Gould Report misses the point. As I state
in the Milev Report, The traditional event study methodology may not capture losses to
investors related to price declines that are due to the Offenses of Conviction but are not
followed individually by a statistically significant price decline, or losses to investors in
cases when the Offenses of Conviction harm the company and its shareholders but the
harm is not disclosed or is disclosed only partially and gradually over time (so that these
partial disclosures are not followed individually by a statistically significant price
decline).
13

14. My base case estimate of aggregate actual losses uses only the seven
events with news related to the Offenses of Conviction that were followed by a
statistically significant stock price decline. However, as I note in the Milev Report, there
are other days and sequences of days with news related to the Offenses of Conviction
where the declines are not statistically significant using my market model, yet they are
statistically significant using the market model presented by the defendants expert at
trial.
15. As an example, the Milev Report stated that [i]nvestor losses tied to
DHBs common stock price decline between the insider selling ending in December 2004
and the March 16, 2005 conference call can be substantial. Equity analysts commenting
during and after DHBs March 16, 2005 investor call attributed a portion of the decline in
DHBs stock price from approximately $19 per share to approximately $12 per share over
the January March 2005 timeframe to loss in investor confidence due to the large
insider sales and lack of explanation or assurance from management.
16. On January 11, 2005, one of the many days during that overall decline,
Newsday carried a story about the insider sales.
14
That date is not included in my base
case investor losses estimate, however, because my event study shows that there is
approximately 12 percent probability that a price movement of such magnitude could
have been observed at random, even absent the Newsday article. On the other hand, the
event study of the defendants expert at trial showed that this probability is less than 5
percent.
15
In light of such economic evidence that can be used to argue both for and
against inclusion of this date in an estimate of aggregate investor losses, I chose to be

12
Gould Report, 6.
13
Milev Report, fn. 5.
14
Execs get $200M in stock sale, Newsday, January 11, 2005.
15
When performing an event study of the Newsday article, my market model is more conservative for
purposes of assessing statistical significance than the one that the defendants expert presented at trial and
using my model will result in a conservative estimate of loss. For a more detailed discussion, see 20-23 in
the Milev Report.
16519
-6-
conservative and to exclude that date from my base case estimate of investor losses even
though defendants own expert at trial provided a basis for its inclusion.
17. I provide this complete information and leave it to the finder of fact to
decide whether the price decline on January 11, 2005 should be counted toward investor
losses. Including the market-adjusted decline on the date of the Newsday article as part of
investor losses due to the Offenses of Conviction would add $41.8 million to any estimate
of actual investor losses.
16
I also note that the total market-adjusted price decline from
December 30, 2004 to March 16, 2005 was $7.54 per share, and the $41.8 million
estimate above assumes that only $1.08 per share of this price decline is due to the
Offenses of Conviction.
V. Response to Specific Arguments in the Gould Report
Regarding Each Date Used in My Investor Losses Calculation
A. March 16, 2005
18. After the market close on March 16, 2005, DHB management held a
conference call to discuss earnings results for the fourth quarter of 2004.
17
This was the
first conference call following Mr. Brookss and Ms. Hatfields insider sales. The
conference call transcript and subsequent analyst commentary revealed that the focus of
the analysts concern was the loss of confidence in management due to managements
refusal to provide future guidance or explain the reasons for their recent insider sales.
The jury convicted Mr. Brooks and Ms. Hatfield of insider trading with respect to these
same insider sales.
19. The Gould Reports conclusions regarding this date are erroneous. In
summary:
a. The Gould Report disputes that the cause of the investor losses
following the conference call was reputational harm resulting from
the Offenses of Conviction.
18
This is incorrect. See V.A.i below,
and Milev Report V.A.1-2.

16
My previous estimate of this loss using quarterly institutional holdings data from SEC filings was $42.1
million. See 46 and fn. 69 in the Milev Report.
17
DHB Industries Posts Record Fourth Quarter Results - Fourth Quarter EPS Increases 200% to Record
$0.18 - - Fourth Quarter Revenues Climb 24% to Record $90.2 Million - - Full-Year 2004 Revenues
Increase 48% to a Record $340 Million - - DHB Announced Approximately $544 Million in New Orders
in 2004, PR Newswire (U.S.), March 16, 2005, 4:05 PM.
18
For example, the Gould Report states that DHB management and Mr. Brooks were controversial well
before 2005 Therefore it is inappropriate for Dr. Milev to suggest that large reputational damage
occurred on March 16, 2005. Gould Report, 28. The Gould Report also states that [o]nly the lack of
guidance and financial issues can be considered to be new news on this day. Gould Report, 27.
16520
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b. The Gould Report mischaracterizes my position on investor losses
caused by reputational factors related to the Offenses of Conviction.
19

See V.A.ii below.
c. The Milev Report states that the first investor question on the
conference call was about the high inventory levels and asked if there
was a potential write-down of that inventory. The Gould Report
states that this question was addressed satisfactorily,
20
but the
Gould Report fails to acknowledge that the answer provided by Ms.
Hatfield was false and misleading because it was based on inventory
levels that were inaccurate due to the Offenses of Conviction. See
V.A.iii below.
d. The Gould Report argues that the price decline following the
conference call is due to lack of guidance and financial issues,
21

including a shortage of raw materials, rather than to any reputational
impact as a result of the Offenses of Conviction. This is incorrect. I
demonstrate in V.A.i below that fraud-related lack of guidance
caused severe reputational damage to DHB, and I show in V.A.iv
below that financial issues were not a major concern to analysts.
e. The Gould Report is incorrect to exclude this date from the
calculation of investor losses simply because DHB did not explicitly
reveal the fraud at that time.
22
The stock price decline associated with
this date was the result of the Offenses of Conviction and is properly
included in an estimate of investor losses. See IV.A above.
i. Investors suffered losses due to the reputational harm to DHB
resulting from the Offenses of Conviction
20. The Gould Report disputes that the stock price declined due to reputational
harm on this date, and that the reputational harm was related to the fraud.
23
Instead, the
Gould Report seems to attribute the stock price decline following the March 16, 2005
conference call to non-fraud related factors. The Gould Report states, Only the lack of
guidance and financial issues can be considered to be new news on this day. Neither of
these pieces of news was related to fraud...
24
I do not agree. Given that the defendants
were found guilty of securities fraud with respect to the companys financials and had
recently committed insider trading fraud, DHB managements refusal to provide financial

19
The Gould Report incorrectly asserts that Dr. Milev notes that any price declines attributable to loss in
investor confidence due to the insider sales would have occurred before March 2005. Gould Report, 24.
20
Gould Report, 26.
21
Gould Report, 24.
22
Gould Report, 5, 20.
23
Gould Report, 24.
24
Gould Report, 24.
16521
-8-
guidance caused reputational damage related to the Offenses of Conviction. I note that
DHB competitors Armor Holdings and Ceradyne were continuing to provide guidance.
25

21. Importantly, the Gould Report ignores the fact that analysts themselves
identified the reason for the sell-off after the investor call. In fact, in the words of the
analyst from Feltl and Company, The selling pressure continued this morning due, we
believe, to the absence of guidance along with the earlier insider sales at much
higher prices (emphasis added). Similarly, a Roth Capital Partners report stated,
[F]rustrated retail and institutional shareholders alike fixated on the guidance issue (or
lack thereof) and investors also responded angrily to managements unsatisfactory
comments over insider selling in December.
26

22. In addition, while investors were generally aware of the insider sales prior
to the conference call, they were not aware that management would not provide any
explanation regarding these sales and that management would, inexplicably and to the
dismay of virtually all analysts, simultaneously refuse to provide guidance going forward
and refuse to agree that DHB is a good stock to invest in. One participant on the
conference call stated to Brooks, You sold basically half, a third of your holding. Thats
why the market is getting fidgety. Theyre, like, If the CEO thinks the companys going
to go a lot higher in the next couple of years, and he really has confidence in his own
stock, he wouldnt unload a third of his holdings.[] Another participant stated, I think
the more it seems like youre not forthcoming, really I think it hurts stock
performance, it hurts investors confidence (emphasis added).
23. Frustration over the lack of explanation for the massive insider selling was
further evidenced by other questions from the conference call such as the following:
Noting that the stock is - subsequent to December has gone from a basically [$23]
spike, down to [$12]; why would somebody want to buy this at the face if youre
continuing to sell? Youre not willing to say that you wont sell any more? And youre
unwilling to give any forward revenue guidance? (emphasis added)

25
Armor Holdings provided FY2005 guidance in its 4Q 2004 earnings announcement on February 10,
2005. On April 21, 2005, Armor Holdings revised its FY2005 guidance provided on February 10, 2005
and initiated preliminary FY2006 guidance. See Armor Holdings, Inc. Reports Record Revenues and 4th
Quarter Results - 4th Quarter Earnings Per Share Increase to $0.74 Per Diluted Share vs. Prior Year Loss of
$(0.17) Per Diluted Share - - FY05 Guidance of $2.75 to $3.00 Per Diluted Share After $0.06 to $0.07
Anticipated Integration and Other Charges, PR Newswire (U.S.), February 10, 2005, 4:09 PM, and Armor
Holdings, Inc. Reports Record Revenues and 1st Quarter Results - 1st Quarter Earnings Per Share Increase
107.1% to $0.87 Per Diluted Share vs. Prior Year $0.42 Per Diluted Share - - Revises FY05 Guidance to
$3.30 to $3.60 Per Diluted Share After $0.06 to $0.07 Anticipated Integration and Other Charges- - Initiates
Preliminary, FY06 Guidance of at least $3.00 Per Diluted Share Before Acquisitions, PR Newswire (U.S.),
April 21, 2005, 4:05 PM. Ceradyne raised its 2005 earnings guidance on March 4, 2005 and later reiterated
its guidance on April 28, 2005. See Q4 2004 Ceradyne Earnings Conference Call - Final, FD (FAIR
DISCLOSURE) WIRE, March 4, 2005, and Q1 2005 Ceradyne Earnings Conference Call Final, FD
(FAIR DISCLOSURE) WIRE, April 28, 2005.
26
Truth & Consequence: Record Q404 Results, But Investor Call Fails to Inspire, Roth Capital Partners,
March 17, 2005.
16522
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24. Similarly, John Winslow, an analyst with DuPont Funds, had the
following exchange with David Brooks during the same conference call:
<Q John Winslow>: In general, as far as the price of the stock now, would
you consider it a great buy?
<A David Brooks>: Well, thats thats a question I dont believe I should
answer. I dont believe I should answer that question.
<Q John Winslow>: But you always want to say this, because you know,
with you know, to show some sort of support for the shareholders, why not
I mean, seeing that the levels went from 20 [dollars] and change to right now
12 [dollars] and change, why not invest not the companys money, but your
own insider money
25. Investors lost confidence in management as a result of the conference call.
The following exchange reflects the sentiment of the call with regard to management
credibility concerning what had been happening and was continuing to happen at DHB:
<Q>: What do you guys feel that youre going to do to basically put
confidence in investors going after all of the selling weve seen from you as
far as other shareholders and insiders coming into 05?
<A David Brooks>: Well Jason, I dont know who youre with, or who you
work with, but I believe that the results will speak for themselves. That the
intrinsic value of the company will also speak for itself and we believe that
in the end the companys results and the progress of the company will speak
for itself.
<Q>: Okay. Thank you. I dont believe a word .
<A David Brooks>: All right. (emphasis added)
26. In summary, as the quotes above illustrate, the defendants unsatisfactory
responses regarding their insider trading, which has now been deemed illegal, and refusal
to provide financial guidance, which has now been deemed to be based on inflated gross
profit margins, caused losses to investors related to reputational effects, losses that are
related to the Offenses of Conviction.
ii. The Gould Report mischaracterizes my position on investor losses
caused by reputational factors related to the Offenses of Conviction
27. The Gould Report asserts that Dr. Milev notes that any price declines
attributable to loss in investor confidence due to the insider sales would have occurred
before March 2005.
27
On the contrary, the page specifically cited in the Milev report
contains no such statement or inference. Furthermore, language in the Milev Report on
the page previous to the one cited plainly contradicts the above assertion. Specifically, I

27
Gould Report, 27.
16523
-10-
state, The conference call caused analysts and investors to doubt managements
credibility, motives and ability to run the company.
28

28. To make it clear, my position is that following the conference call there
are investor losses due to reputational damage as managements credibility was damaged
in the eyes of investors and analysts. However, reputational damage likely occurred even
earlier. The Milev Report contained a discussion of the investor losses that are likely due
to a loss in investor confidence prior to the March 2005 conference call, which is in
addition to investor losses due to loss in investor confidence following the conference
call.
29

29. The Gould Report cites a Roth Capital Partners analyst report that states
that the conference call did little to restore investor confidence
30
and claims that this
quote implies that confidence [in DHB management] was already low
31
prior to the
investor call and therefore no large reputational damage occurred in connection with the
call. This claim is contradicted by the remaining part of that same sentence in the Truth
& Consequence section of that analyst report. The complete sentence, including the part
that the Gould Report omits, reads: This call probably did very little to restore investor
confidence and to the contrary most likely did more damage than good
32
(emphasis
added).
iii. Managements answer about inventory levels was based on inaccurate
financial information that was a result of the Offenses of Conviction
30. In the Milev Report, I pointed out that the increases in inventory in the
fourth quarter of 2004 prompted an analyst question given the lower levels of raw
materials reported. The inventory issue, the Gould report claims, appears to have been
addressed satisfactorily during the conference call.
33
However, the Gould Report
ignores the fact that Ms. Hatfields answer to the question about raw material shortages
and inventory levels was false and misleading because it relied on the very same
inventory levels that were inaccurate due to the Offenses of Conviction.
34

28
Milev Report, 17.
29
See Milev Report, 20-23. See also Milev Report, 46, Incorporating DHBs market-adjusted price
decline following one day with specific reports [prior to the March 2005 conference call] about the insider
sales, January 11, 2005, would add $42.1 million to any estimate of investor losses. Note that my refined
estimate of this number using additional proof of claim data in this matter is $41.8 million, as described in
Section III.
30
March 17, 2005.
31
Gould Report, 28.
32
March 17, 2005.
33
Gould Report, 26.
34
DHB SEC Form 8-K filed on August 18, 2006.
16524
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iv. The Gould Report mischaracterizes the overall tone of analysts
commentary about DHBs 4Q2004 earnings
31. In an attempt to attribute the price decline on March 17, 2005 to the fourth
quarter revenues and the limited supply of raw materials, the Gould report states that
[a]rticles that appeared on March 17, 2005 indicate that DHBs fourth quarter revenues
were below some analysts expectations
35
and that [o]ne of the reasons mentioned [for
the shortfall] is a limited supply of raw material.
36

32. The Gould Report ignores commentary from analysts themselves that
attributes the price decline to the absence of guidance and to the insider sales. For
example, as cited in the Milev Report 15, a Feltl and Company analyst observed, The
stock has been under heavy selling pressure since large insider sales were reported late in
the year. The selling pressure continued this morning due, we believe, to the absence of
guidance along with the earlier insider sales at much higher prices.
37

33. In addition, the Gould Report mischaracterizes the overall tone of analysts
commentary about DHBs 4Q2004 earnings. In general, analysts remarked on the
investor call that DHB had had a great quarter and congratulated management on a
good year given the record $90.2 million of quarterly net sales reported and the near
tripling of income available to common stockholders to $8.2 million. As one analyst
observed in a subsequent report, Aided by a lower tax rate, reported EPS beat our
estimate by a penny,
38
another analyst reported that EPS [would have] missed by a
penny when using a normal tax rate. Results well ahead of prior year,
39
and a third
stated that Q404 EPS results were in-line with our estimate and ahead of consensus
views by a penny.
40
None of the analysts covering DHB revised their recommendation
of Buy or Strong Buy and all continued to have a price target for the stock above its
current price.
34. Further, the Gould Report specifically identifies the shortage of raw
materials as an issue discussed during the investor call.
41
Statements by DHB

35
Gould Report, 21.
36
Gould Report, 21.
37
Year-End Results in Line, Feltl and Company, March 17, 2005. Similarly, as cited in the Milev Report
15, a Roth Capital Partners analyst summed up the call as a venting session where frustrated retail and
institutional shareholders alike fixated on the guidance issue (or lack thereof) and investors also responded
angrily to managements unsatisfactory comments over insider selling in December. From our experience
as sell side analysts, this was the most bizarre conference call in which we have ever participated. This
call probably did very little to restore investor confidence and to the contrary most likely did more damage
than good. Truth & Consequence: Record Q404 Results, But Investor Call Fails to Inspire, Roth Capital
Partners, March 17, 2005.
38
Year-End Results in Line, Feltl and Company, March 17, 2005.
39
4Q04 Results Below Estimates; Reducing Price Target, Miller Johnson Steichen Kinnard, March 17,
2005.
40
March 17, 2005.
41
Gould Report, 23.
16525
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management during the conference call reveal that the issue was expected to ease over
the coming quarters, and that DHB had been able to sustain [its] growth in spite of
material shortages. Indeed, analysts commented that they expected increased supply of
raw materials in the second half of the year to alleviate the current shortage.
42

B. April 18, 2006
35. After the market close on April 18, 2006, DHB announced that it had been
notified by one of its lenders, Lasalle, that events of default had occurred under the terms
of DHBs loan agreement. The Gould Report states, The only information in the April
18, 2006 8-K filing that was new to the market was the default notice from Lasalle
Business Credit Dr. Milev selects April 18, 2006 without taking into account that all of
the fraud related news had already been disclosed in a series of announcements in
March through April 7, 2006.
43

36. I do not disagree with the Gould Report that the new information released
that day was that DHB had received a default notice. However, the reasons that DHB
received the notice of default were all a result of the Offenses of Conviction the reasons
stated by DHB were DHBs withdrawal of reliance on its 2005 interim financial
statements, DHBs delay in filing its annual report for 2005, and DHBs failure to satisfy
certain continued listing standards
44
of the Amex.
37. As I discussed in IV.A above, the Gould Report is incorrect to exclude
this date from the calculation of investor losses simply because DHB did not explicitly
reveal the fraud on this date. This event and the associated stock price decline resulted
from the Offenses of Conviction. My inclusion of the stock price decline associated with
this date is consistent with the Sentencing Guidelines requirement for inclusion of losses
that are due to the Offenses of Conviction in the loss calculation.
C. May 4, 2006
38. After the market close on May 4, 2006, DHB announced that its recently
hired Director of Finance, Mr. Litowitz, had resigned
45
within a month of his hiring after
the resignation of the prior CFO, Ms. Schlegel. The Gould Report states, Dr. Milevs

42
See, for example, Year-End Results in Line, Feltl and Company, March 17, 2005: DHB production
has been constrained by raw material shortages; however, production of these materials is expected to
increase and alleviate the shortages by the second half of 2005. Our quarterly revenue profile reflects
increased ballistic material availability and rising sales as the year progresses. See also, Truth &
Consequence: Record Q404 Results, But Investor Call Fails to Inspire, Roth Capital Partners, March 17,
2005: We also point out the fabric constraints in the industry are contributing to the company purchasing
and stockpiling raw material when it becomes available and approximately $31.7 million or 36.7% of the
inventory balances are uncut fabrics.
43
Gould Report, 33-34.
44
DHB SEC Form 8-K filed on April 18, 2006.
45
DHB SEC Form 8-K filed on May 4, 2006.
16526
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inclusion of May 4, 2006 as an event date is flawed because there was nothing in the 8-K
filing that would suggest that Mr. Litowitzs resignation was due to fraud at DHB.
46

39. As I stated in the Milev Report, the transcript testimony of Mr. Litowitz
before the SEC shows that the resignation was due to the Offenses of Conviction.
Specifically, responding to the question, And why did you resign from DHB? Mr.
Litowitz stated, There were several reasons, one I believe I wasnt getting - I wasnt
being allowed to do my job. The rhetoric with which David Brooks conducted himself
was just inappropriate, and I wouldnt tolerate it anymore. I felt personally threatened by
him. I believe there may have been illegal banking acts [at DHB] which I just
wouldnt tolerate being involved with, and it was just an untenable situation. He
wouldnt allow us to really help him
47
(emphasis added).
D. May 11, 2006
41. A week after Mr. Litowitzs resignation, and one month after Ms.
Schlegels resignation, DHB announced that Jerome Krantz was resigning from its Board
of Directors, including his role as the Chairman of the Boards Audit Committee.
48

Similar to Mr. Litowitzs resignation, Mr. Krantzs resignation was likely due to the
Offenses of Conviction as I stated in the Milev Report. Mr. Krantz testified before the
SEC that he resigned because he did not trust the management of [DHB] any longer
and he refused to participate in any actions at that point with [DHB].
49

42. The Gould Report states, Dr. Milevs inclusion of May 11, 2006 as an
event date is flawed because the 8-K filed on this day only mentions that Mr. Krantz
resigned for personal reasons. The quote that Dr. Milev cites that Mr. Krantz did not
trust the management of [DHB] any longer was taken from a transcript dated two years
later, on March 20, 2008. This information was not available to the public at the time of
this price drop
50
(footnotes omitted).

46
Gould Report, 35.
47
Lawrence R. Litowitz testimony to the SEC in the matter of DHB Industries, Inc., May 15, 2006.
48
DHB SEC Form 8-K filed on May 11, 2006. DHB simultaneously announced that Senator William
Campbell had been elected to the Board of Directors.
49
Jerome Krantz testimony to the SEC in the matter of DHB Industries, Inc., March 20, 2008, p. 78.
50
Gould Report, 38.
16527
-14-
44. The Gould Report states that it is important to note that on the same day
there was a Newsday article that described an increase in competition from Armor
Holdings and Ceradyne.
51
However, the Gould Report does not mention that this is not
new news. The Newsday article that the Gould Report references describes a recent
Army [statement that] it wants ideas from companies by May 31 to improve on and
replace DHBs Interceptor Body Armor.
52
This same information was published in a
Defense Daily article titled Army Looks For Information On Next Generation Body
Armor System on May 8, 2006, three days before May 11, 2006.
53
Further, there is a
notice posted on May 1, 2006 on the U.S. Governments Federal Business Opportunities
website that contains substantially the same information.
54

E. May 23, 2006
45. After the market close on May 23, 2006, DHB announced that it had been
notified by Amex, the national stock exchange that held the principal listing for DHBs
common stock, that DHB was not in compliance with Amexs continued listing
standards. As I describe in the Milev Report, this was due to the fraud, and the Gould
Report does agree that this event caused investor losses.
55

46. The Gould Report states, Dr. Milev has chosen to use the cumulative
negative stock price decrease for both May 24, 2006 and May 25, 2006 in his calculation
of aggregate investor losses. Dr. Milev includes the stock price decrease on May 25, 2006
because the stock price decrease was statistically significant and no additional news
regarding DHB was released during that time. I find this rationale for including a third
day to be unreasonable.
56

47. The way the Gould Report characterizes my opinion is incorrect.
Specifically, I do not include the price movement on May 25, 2006 only because it is a

51
Gould Report, 37.
52
DHB Industries gears up for competition as Army calls for body-armor redesign - A new vested
interest, Newsday, May 11, 2006.
53
Army Looks For Information On Next Generation Body Armor System, Defense Daily, May 8, 2006.
The article states, for example, By May 31 the Army wants potential sources for a Next Generation Body
Armor System to improve on and replace the current Interceptor Body Armor (IBA).
54
The notice is available at the following URL:
https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&id=3494a7322677318aa0ac9f256cafee
5b.
55
See Milev Report, 27 and Gould Report, 40.
56
Gould Report, 41.
16528
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decline.
57
In other words, I do not require that the second day of price movements after
the disclosure be a decline in order to include it. I follow an ex-ante defined, unbiased
methodology for event window selection that was originally published by NERA almost
ten years ago and not developed for purposes of this particular litigation.
58

48. The Gould Report advocates a seemingly ad-hoc approach. The Gould
Report examines the intra-day price movement on the second day and, in this particular
situation, makes the subjective choice to ignore the evidence that price continued to
adjust through market close on the second day after the disclosure. References in the
Gould Report to intraday price movements are not accompanied by any objective and
scientific intra-day analysis of statistical significance. The Gould Report provides no
basis to ignore the evidence that the decline on the second day after the announcement
was statistically significant.
49. In contrast, I use an objective, unbiased, ex-ante specified methodology to
evaluate the price response subsequent to each disclosure. The methodology considers
the price movements through the last consecutive day that has a statistically significant
abnormal daily price return.
59
If significant abnormal daily returns continue past the first
day, and no new information has been released, then the statistical evidence suggests that
the market is continuing to process the information from the original disclosure. Note
that using my methodology, if there are significant abnormal daily returns for only the
first day, I would not consider the following days as part of investor losses, and if there
are no significant abnormal daily returns following the disclosure, I would not include
that date in my base case estimate of investor losses.
50. It is appropriate to look at the stock price movements beyond just the first
day following an announcement because it may take more than one trading day for the
market to fully react to new information. The efficient market hypothesis does not
necessitate that the market react immediately or within one trading day.
60
In fact, when
NERA examined 120 stocks involved in class action lawsuits in 2001, we found that the
average number of days that a stock took to react to the disclosure at the end of the
alleged class period was greater than one day.
61
The studys authors stated, The average

57
Note that the methodology I use to measure the complete price response to the news may also result in my
measuring a smaller overall reaction or, even, a complete reversal of the first-day movement (if it happens
that a decline on the first day is followed by a statistically significant increase the day after).
58
Tabak, David, Robert Patton, Erica Rose, and Dmitry Krivin, Determination of the Appropriate Event
Window Length in Individual Stock Event Studies, NERA Economic Consulting Working Paper,
November 4, 2003.
59
In this report, when I refer to a reaction being statistically significant, I am referring to statistical
significance at the 5% level. This is consistent with the Milev Report (see Milev Report, 11). It is my
understanding that the Gould Report also agrees with using this threshold for statistical significance.
60
See Fama, Eugene, The Behavior of Stock-Market Prices, The Journal of Business, Vol. 38, No. 1.
(January 1965), p. 39.
61
November 4, 2003.
16529
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estimated event window being over a day long is therefore not a wholly unexpected
result, as long as one recognizes that the no-arbitrage formulation of the efficient market
hypothesis requires that the market begin to impound information immediately, not that it
complete the process even within the course of a trading day.
62

51. In sum, contrary to the implication in the Gould Report that I employed
this methodology in order to calculate artificially high negative stock price reactions,
63

this method does not bias the size of the price reaction to be either higher or lower than
the size of the reaction using a single day event window. Rather, the Gould Reports
failure to follow a defined ex-ante methodology allows for subjectivity and bias.
F. May 25, 2006
52. After the market close on May 25, 2006, DHB announced that it had
received a Wells Notice from the SEC that indicates that the Staff has preliminarily
determined to recommend that the SEC bring a civil injunctive action against the
Company alleging violations of the antifraud, reporting and books and records provisions
of the Securities Exchange Act of 1934, as amended.
64
DHB stated that the SEC action
related to allegations of false journal entries in 2005 relating to inventory, which had the
effect of inflating DHBs gross profit margin and net income.
65
As I describe in the
Milev Report, this event was a result of the fraud, and the Gould Report agrees that this
event is reasonable to include in a calculation of investor losses caused by the fraud.
66

53. Following DHBs announcement that it had received the Wells Notice,
DHBs stock was halted so that the vast majority of investors were unable to sell their
shares and the market price was unable to reflect the markets revised expectations. As I
state in the Milev Report, just 800 shares of DHB stock appear to have changed hands
following the announcement, and all other shareholders were unable to trade the common
stock of DHB throughout the halt that lasted from May 26, 2006 until July 6, 2006.
67

54. The market did not fully react to the Wells Notice news on May 26, 2006
because only 800 shares changed hands in the morning before the halt. The volume of
800 shares is anomalous in several respects, as I explain below.
55. First, to put the 800 shares in context, for the two other dates that the
Gould Report includes in its estimate of investor losses, May 24, 2006 and August 18,
2006, the trading volume on the day following the disclosure was 701,800 and 543,334,
respectively. The 800 shares traded on May 26, 2006 represent less than 0.15% of the

62
November 4, 2003.
63
Gould Report, 5.
64
65
66
See Milev Report, 28-29 and Gould Report, 44.
67
Milev Report, fn. 57 and exhibit 4 fn. 7.
16530
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volume on these days with full-day trading. The claim in the Gould Report that the price
at which 800 shares appear to have changed hands on the morning of May 26, 2006 fully
reflects the markets response to the Wells Notice is without merit or support.
56. Further, according to NYSEs Trade and Quote (TAQ) database, the 800
shares of DHB reportedly changed hands in eight trade blocks of 100 shares each, at a
price of $1.57, all trades occurring within 20 seconds of each other, between 9:44:06 and
9:44:25 in the morning. It is notable that there were no trades in DHB between the
market open at 9:30 a.m. and 9:44 a.m. (or after 9:45 a.m., for that matter). As a
comparison, on May 24, 2006, another date that the Gould Report includes in the estimate
of investor losses, the NYSE TAQ database reports a trading volume of 94,400 shares
between the market open, 9:30 a.m. and 9:44 a.m.
68

57. Last, I note that the NYSE TAQ data show that all eight trade blocks are
listed as being reported by the National Association of Securities Dealers (ADF). ADF
stands for Alternative Display Facility. No shares traded on DHBs principal listed
exchange, Amex, on May 26, 2006. As a comparison, TAQ data report 329,000 shares of
DHB traded on the Amex on another date that the Gould Report includes in its estimate
of investor losses, May 24, 2006.
58. According to FINRA, The Alternative Display Facility (ADF) is an SRO
[Self-Regulatory Organization] display only facility that is operated by FINRA. The ADF
provides members with a facility for the display of quotations, the reporting of trades, and
the comparison of trades As an SRO display only facility, ADF does not provide
automated order routing functionality, execution facilities, or linkages between ADF
trading centers.
69
Note that unlike exchanges such as Amex and NASDAQ, the ADF
does not provide automated order routing and execution. The NYSE Amex defines the
Alternative Display Facility as [a]n entity independent of a registered securities
exchange that collects and disseminates securities quotes and prints. These organizations
exist to capture some of the value of this information (which has historically been
captured by exchanges) for the ADFs information suppliers, usually ECNs.
70

59. Due to all of the above considerations, the 800 shares traded on May 26,
2006 represent anomalous volume, and consequently the price at which the 800 DHB
shares are reported to have changed hands in the morning of May 26, 2006 cannot be said
to have incorporated the news of the Wells Notice. For that reason, in order to measure
the complete price response to the news, I extended my event window to look to the next
available closing price, which was the closing price immediately following the halt. It is
appropriate to include the price response through the stock halt as investor losses because,
as the Gould Report acknowledges, the stock halt itself was a result of the Offenses of

68
Note that I cannot compare the trading volume to the other date that the Gould Report includes in the
estimate of investor losses, August 18, 2006, because TAQ data are not available for this date since DHB
was no longer listed on an exchange.
69
http://www.finra.org/Industry/Compliance/MarketTransparency/ADF/
70
See definition at: http://www.amex.com/servlet/AmexFnDictionary?pageid=display&titleid=253.
16531
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Conviction
71
and the market price was not able to reflect the market reaction until after
trading resumed following the halt. To the extent that other unrelated factors impacted
the stock during the halt, those should be included as investor losses because the halt
itself was a result of the fraud.
60. In other words, take an investor who held the shares on May 25, 2006, just
prior to the Wells Notice announcement. Following the announcement, the investor was
unable to sell because of the halt (in fact, only 800 shares were reported to have changed
hands), and the investor was locked into holding DHB shares through the halt. The
trading halt caused by the Offenses of Conviction took away from investors the ability to
sell their shares. The trading halt, a result of the Offenses of Conviction, made it
impossible for investors to avoid the price declines that occurred while the trading halt
was in effect. In fact, a Newsday article during the halt states that several investors were
frustrated by the still unexplained trading halt[and] they want to see what action they
can take to force an explanation from the company, the government or the American
Stock Exchange.
72

61. In addition, the Gould Report states that an important negative
development in this period, again having nothing to do with fraud, was the announcement
that Armor Holdings (a competitor of DHB Industries) had licensed the technology for
new, more advanced body armor, as well as news of plans to withdraw troops from Iraq.
None of these events that occurred during Dr. Milevs six-week event window were taken
into account by him.
73
This is false. When I calculate investor losses, I use a market
model that controls for market and industry effects. The market-adjusted price drop in
response to the May 25, 2006 event is net of the impact of market events and industry
events such as the ones identified in the Gould Report. In fact, the Gould Report
acknowledges that I used market and industry factors in my event study and that it is my
opinion that [Dr. Milevs] regression analysis was reasonable for evaluating the statistical
significance of DHBs stock price movements.
74

G. August 18, 2006
62. The Gould Report agrees with my conclusion that the stock price decline
associated with August 18, 2006 represents loss to investors due to the Offenses of
Conviction.
75

71
Gould Report, 44.
72
DHBs restless shareholders [:] Some are forming committee to find out why the stock hasnt been
trading amid several investigations, Newsday, June 24, 2006.
73
Gould Report, 46.
74
Gould Report, 15.
75
Gould Report, 48.
16532
-19-
H. The Gould Reports Inclusion of the Price Increase on July 10, 2006 as
an Offset to Investor Losses Is Improper and Contrary to the
Sentencing Guidelines
63. The Gould Report states, Dr. Milev fails to consider the benefit to
investors resulting from the increase in DHBs stock price when Mr. Brooks was placed
on administrative leave on July 10, 2006 pending the outcome of federal, state and
internal investigations.
76
I disagree that the price increase following this event should be
included as a credit to any calculation of loss because this date is not relevant to the
calculation of loss under the Sentencing Guidelines.
64. As discussed in IV.A, the Sentencing Guidelines define loss as the
greater of actual loss or intended loss.
77
Actual loss is the reasonably foreseeable
pecuniary harm that resulted from the offense and that intended loss is the pecuniary
harm that was intended to result from the offense, including intended pecuniary harm
that would have been impossible or unlikely to occur.
78

65. The July 10, 2006 event was a remedial measure taken by DHBs Board
designed to address the harm caused by the Offenses of Conviction.
79
For this reason, it
is improper to include the price increase on July 10, 2006 as an offset in a calculation of
investor losses in this case.
VI. Criticisms in the Gould Report of My Trading Model Are
Flawed and Unfounded
A. Without Complete Data on All Investors, Use of a Trading Model Is the
Current State of the Art for Calculating Aggregate Investor Losses
66. A trading model is commonly used to model investor behavior. It is
necessary to use a trading model to estimate the shares which suffered a loss because
there is no complete set of data on DHB trading by all entities who are eligible for a loss.
The Milev Report estimates aggregate investor losses due to the Offenses of Conviction,
not only the investor losses that may be claimed through a proof of claim process in this
case.
67. In order to calculate all investor losses due to the fraud one needs to
observe all trading. However, in practice, trading records are typically unavailable for a
large number of, if not most, investors. Economists have developed models that estimate

76
Gould Report, 5.
77
Sentencing Guidelines, 2B1.1 Application Note 3A.
78
Sentencing Guidelines, 2B1.1 Application Note 3A.
79
DHB Industries, Inc. Places CEO on Administrative Leave; General (Ret.) Larry Ellis, DHBs President
will assume the role of acting CEO and Senator William Campbell will serve as Chairman of the Board of
Directors; Companys securities listed on the OTC Pink Sheets, effective July 6, 2006, PR Newswire
(U.S.), July 10, 2006, 9:00 AM.
16533
-20-
trading by investors that is not observed (i.e., trades that are not provided in proof of
claim forms, or that cannot be inferred from SEC filings of insider transactions or
quarterly institutional holdings). Indeed, economists at Dr. Goulds firm, Cornerstone
Research, Inc., have themselves advocated the use of trading models.
80
These models
generally use actual trades or holdings records if available and a model for the remaining
trading.
68. The Gould Report states that the investor losses for just the entities who
submitted proof of claim data in the civil securities litigation against DHB provides a
lower estimate of investor losses than my aggregate estimate of investor losses.
81
This
does not invalidate my calculation of aggregate losses, as the Gould Report erroneously
seems to imply. It is well-established that typically the majority of eligible entities do not
submit proof of claim forms as a result of receiving a proof of claim notice. For
institutional investors, for example, who are arguably among the most informed types of
investors that also frequently have a fiduciary duty to pursue recovery in securities class
actions, published studies show that in general less than thirty percent of institutional
investors with provable losses file a claim.
82
Therefore, any estimate of investor losses
using only proof of claim data from the civil securities litigation involving DHB is an
underestimate of total investor losses.
69. In what may be an acknowledgement that proof of claim data do not
represent all losses, the Gould Report uses a trading model to estimate the amount of
loss.
83

B. NERAs Multi-Sector Multi-Trader Model Is Consistent with the
Scientific Method and Is Appropriate to Use to Estimate Aggregate
Investor Losses in This Case
70. The Gould Report claims that because the parameters used in NERAs
MSMT model are based on an average over a sample of securities, and not derived from

80
As stated by an economic expert in the In re Countrywide Financial Corporation Securities Litigation,
Several researchers have advanced and advocated the use of a multi-trader model to be more
representative of actual trading behavior, including researchers associated with defendant-oriented firms
such as NERA and Cornerstone Research. See W. H. Beaver and J. K. Malernee, Estimating Damages in
Securities Fraud Cases, Cornerstone Research I note that J.K. Malernee is a cofounder of Cornerstone
Research, Inc. See
http://www.countrywidesecuritiesclassaction.com/PDFs/DeclarationOfFrankCTorchiowithExhibitsandAppx
.pdf
81
Gould Report, 7.
82
See, for example, Cox , James D., and Randall S. Thomas, Letting Billions Slip Through Your Fingers:
Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in
Securities Class Action Settlements, 58 Stanford Law Review 411-454 (2005).
83
Gould Report, 64. The Gould Report calculation inappropriately uses only a subset of the fraud-related
dates.
16534
-21-
DHB itself, they cannot be used to make estimates of the behavior of investors who
invested in DHB.
84

71. There are numerous peer-reviewed studies that calculate statistics on a
sample and then use the average over that sample to make a prediction on a different
sample.
85
In fact, this is a primary use of any scientific work: scientists routinely use
sampling techniques to estimate model parameters on data they can observe, and then
apply these same parameters to perform estimates on a different sample where data are
not available or harder to observe. It is common in finance to take parameters estimated
in a study on a set of companies and to then form opinions, conclusions, or estimates of
the effect of the issue studied on a different company or set of companies.
72. Furthermore, when scientists do obtain data on a new sample, it is
common to examine whether the newly available data confirm the conclusions from the
prior sample, which I describe in VI.D below.
C. The Fact That the Trading Model Calculation Does Not Match Exactly
Claimed Losses for Some Claimants Is Expected and Understandable;
This Does Not Invalidate the Aggregate Investor Losses Estimate
73. The Gould Report states that my model overstated losses for one entity,
Harbinger Capital Partners, and was unreliable for other entities that it examined.
86
In
comparing losses using the proof of claim data to the losses using the model, the Gould
Report assumes that all shares reported by an entity are held in its own name. If this is
not the case, and an entity trades DHB for its own account as well as in accounts managed
for other persons and entities, this may explain part of the discrepancy, as that entity may
file only for its own account.
74. Furthermore, I do not agree with the statement in the Gould Report that
inability to predict a single entitys loss invalidates the overall loss number calculated by
the model. The trading model was developed to explain trading behavior in the
aggregate. Scientists routinely use models to predict the overall behavior of a population
and the benchmark of such models is not whether they predict the behavior of a particular
individual. As an illustration, statistical models are routinely used to predict the overall
voting result in elections; evidence that these statistical models may not accurately predict
the actual vote cast by any single individual does not cause scientists to discard election
result polls altogether.

84
Gould Report, 59.
85
To take an example from one recent edition of the Journal of Finance, Spiegel and Tookess paper uses
the estimated parameters to predict rivals returns near merger announcements. (Spiegel, Matthew and
Heather Tookes, Dynamic Competition, Valuation, and Merger Activity, Journal of Finance, Vol. 86,
No. 1, February 2013).
86
Gould Report, 61.
16535
-22-
D. NERAs Trading Model Produces Aggregate Investor Losses Estimates
Consistent with the Available Proof of Claim Data
75. The Gould Report states that proof of claim submissions account for $36.4
million in losses to investors. The Gould Report then claims that my estimated range
using the proof of claim data does not provide support for using NERAs MSMT model
[s]ince Dr. Milevs estimate of investor losses using the proof of claim data ranges from
$107.2 million to $112.7 million.
87
I disagree.
76. First, to avoid any possible ambiguity, the range of $107.2 million to
$112.7 million in investor losses is the range of investment losses to all victims of the
fraud if one were to use as an input in NERAs MSMT model the actual proof of claim
data themselves, rather than institutional holdings data that are publicly available.
88
As I
noted in III above, recently filed additional proof of claim data have enabled me to refine
my estimate of aggregate investor losses to a range of $109.2 million to $111.9 million.
In the remainder of this section only (77-78), I will address the criticisms in the Gould
Report using the numbers in the Milev Report that were originally challenged in the
Gould Report. I note that my conclusions also hold if I were to use the refined estimate
instead.
77. The Gould Report seems to imply that there is an inherent contradiction
between that range and the calculated investor losses of $36.4 million for the proof of
claim entities. However, these two calculations are entirely consistent with published
peer-reviewed literature, as I show below.
78. According to the literature on claim rates, e.g., the Stanford Law Review
article by Cox and Thomas, in a typical proof of claim process, 28.09% of all eligible
entities file a claim.
89
Therefore, given that the investor losses for the civil action proof
of claim entities that the Gould Report itself calculates are $36.4 million, this would
imply that the $36.4 million number represents 28.09% of all investors that could have
potentially filed a claim, assuming that DHB is like the average case examined in the Cox
and Thomas paper. A back of the envelope calculationwithout the use of a trading
modelsuggests that, assuming a 28.09% filing rate for this case, consistent with the
typical case, total investor losses are approximately $36.4 million/28.09% = $129.6
million. My estimate of the aggregate investor losses of $110.8 million (based on a
trading model and institutional data from 13F filings), and my estimated range for the

87
Gould Report, 60.
88
See Milev Report, fn. 66, referring to the range of $107.2 million to $112.7 million as an alternative to
the calculation of a base case estimate of aggregate actual losses of $110.8 million. Both estimates use
NERAs MSMT model, the $110.8 million estimate uses publicly available institutional holdings data on
DHB, while the range of $107.2 million to $112.7 million uses the DHB proof of claim data from the civil
action instead.
89
See, for example, Cox, James D., and Randall S. Thomas, Letting Billions Slip Through Your Fingers:
Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in
Securities Class Action Settlements, 58 Stanford Law Review 411-454 (2005), p. 424.
16536
-23-
aggregate investor losses of $107.2 million to $112.7 million (based on a trading model
and proof of claim data from the civil securities litigation) are consistent with, if not
lower than those projected from, peer-reviewed literature on claim rates and the proof of
claim data for DHB.
90

E. The Cases Cited in the Gould Report Do Not Actually Address NERAs
Trading Model
79. The Gould Report states that in Broadcom Corporation Securities
Litigation, proposed expert testimony that performed an analysis applying NERAs
multi-trader model for determining aggregate damages, was excluded
91
Notably, the
citation in the Gould report referring to NERAs multi-trader model comes from the
report of Scott Hakala, Ph.D., who is not, and has never been, employed by NERA. It
appears that Dr. Hakala at the time used a model that he chose to label as NERAs multi-
trader model. To my knowledge, it is not substantiated that Dr. Hakalas multi-trader
model is a correctly implemented version of NERAs MSMT model.
92

80. The Gould Report ignores the question before the court at the time the
decision was handed down in Broadcom. The Broadcom court stated that the question at
issue was whether, under the particular circumstances of this case, a prove-up of
aggregate damages is appropriate, or an alternative method is better. Plaintiffs suggest
use of a trading model to prove aggregate damages, while Defendants suggest final prove-
up through the claims administration process is more appropriate.
93
Importantly, the
Broadcom court noted that Plaintiffs argue the public is entitled to know the full amount
of the harm; but, the lawsuits purpose is to compensate claims lawfully made, not to
declare a degree of harm (emphasis added).
94
While in Broadcom that was a true
statement, in this particular matter it is not. The Sentencing Guidelines are clear that for
purposes of calculating loss under 2B1.1, the Court needs to determine a reasonable
estimate of pecuniary harm resulting from the Offenses of Conviction.
81. Furthermore, the Broadcom court explicitly noted that it does not need to
finally decide whether the trading model technique passes the Daubert test.
95
Indeed, on
that general issue, the Broadcom opinion noted precedent that aggregate damages

90
The conclusion also holds if I were to use the refined estimate of the range of aggregate investor losses of
$109.2 million to $111.9 million based on recently filed additional proof of claim data.
91
Gould Report, 57.
92
I note that the Gould Report, fn. 51, cites as the source an Expert Report of Scott D. Hakala, In re
Broadcom Corporation Securities Litigation, August 2, 2004, page 64. The docket for that case, however,
does not show any expert reports by Dr. Hakala filed in August 2004.
93
In re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (C.D.Cal.), p. 1.
94
95
16537
testimony is admissible 96but also cautioned the unique facts ofthis particular case 97
made none ofthe cited cases controlling or dispositive. 98
82. Separately, the Gould Report states that several Courts have excluded
testimony that employed a single-trader model, which is a special case of the multi-
trader model used by Dr. Milev and cites to two cases that explicitly refer to the single-
trader model. 99 The Gould Report identifies no specific criticisms in these decisions of
the single-trader model that would also apply to NERAs MSMT model. Nevertheless,
the Gould Report appears to imply that the cases affect NERAs MSMT model because
a single-trader model
[]
is a special case ofthe multi-trader model used by Dr.
Milev. It is not logical to say that an exclusion ofthe single-trader model would
implicate NERAs MSMT model. According to the same erroneous logic, the Gould
Report would appear to support the argument that, because inebriated people will fail a
sobriety test, and they are a special case of all people, one should then conclude that all
people will fail a sobriety test.
VII. Miscellaneous
83. My conclusions are subject to revision based on additional information or
data I may receive.
Dated: May 20, 2013 -
7)
cE%t/c/ I
Jordan G. Milev, Ph.D.
96
re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (C.D.Calj, p. 1, citing In re
OxfordHealth Plans, Inc. Securities Litigation, 244 F.Supp.2d 247, 249-52 (S.D.N.Y.2003).
97
A variant ofthat qualification appears six times in the decisions three pages of text.
98
99
Gould Report, 57 and fn. 50.
100
Gould Report, fn. 50.
-24-
16538
testimony is admissible,,96 but also cautioned "the unique facts of this particular case,,97
made none of the cited cases "controlling or dispositive.,,98
82. Separately, the Gould Report states that "several Courts have excluded
testimony that employed a 'single-trader' model, which is a special case of the multi-
trader model used by Dr. Milev" and cites to two cases that explicitly refer to the single-
trader model.
99
The Gould Report identifies no specific criticisms in these decisions of
the single-trader model that would also apply to NERA's MSMT model. Nevertheless,
the Gould Report appears to imply that the cases affect NERA's MSMT model because
"a 'single-trader' model [] is a special case of the multi-trader model used by Dr.
Milev."IOO It is not logical to say that an exclusion of the single-trader model would
implicate NERA's MSMT model. According to the same erroneous logic, the Gould
Report would appear to support the argument that, because inebriated people will fail a
sobriety test, and they are a special case of all people, one should then conclude that all
people will fail a sobriety test.
VII. Miscellaneous
83. My conclusions are subject to revision based on additional information or
data I may receive.
Dated: May 20, 2013
Jordan G. Milev, Ph.D.
96 In re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (CD.Cal.), p. 1, citing In re
Oxford Health Plans. Inc. Securities Litigation, 244 F.Supp.2d 247,249-52 (S.D.N.Y.2003).
97 A variant of that qualification appears six times in the decision's three pages of text.
98 In re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (CD.Cal.), p. 2.
99 Gould Report, ~ 5 7 and fn. 50.
100 Gould Report, fn. 50.
-24-
Exhibit 1
Additional Materials Relied Upon
Number Item
(1) (2)
Expert Reports
1 Expert Report of John F. Gould dated February 22, 2013, and cited materials.
Legal Documents
2 2005 United States Sentencing Guidelines Manual, available at the following URL:
http://www.ussc.gov/Guidelines/2005_guidelines/Manual/GL2005.pdf
3 In re Broadcom Corporation Securities Litigation docket.
4 In re Broadcom Corporation Securities Litigation, 2005 WL 1403756 (C.D.Cal.).
5 http://www.countrywidesecuritiesclassaction.com/PDFs/DeclarationOfFrankCTorchiowithExhibitsandAppx.pdf
News, Data, and Miscellaneous
6 Proof of claim data submitted by DHB investors to the claims administrator in this case.
7 https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&id=3494a7322677318aa0ac9f256cafee5b
8 Additional news stories from Factiva and Bloomberg News.
Academic Literature and Industry Publications
9 Fama, Eugene, The Behavior of Stock-Market Prices, The Journal of Business, Vol. 38, No. 1. (January 1965).
10 http://www.amex.com/servlet/AmexFnDictionary?pageid=display&titleid=253
11 http://www.finra.org/Industry/Compliance/MarketTransparency/ADF/
12 Spiegel, Matthew and Heather Tookes, Dynamic Competition, Valuation, and Merger Activity, Journal of Finance, Vol.
86, No. 1, February 2013.
13 Tabak, David, Robert Patton, Erica Rose, and Dmitry Krivin, Determination of the Appropriate Event Window Length in
Individual Stock Event Studies, NERA Economic Consulting Working Paper, November 4, 2003.
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