The opinion of the court was delivered by: Royce C. Lamberth, Chief Judge,
On May 10, 2011, a grand jury returned a ten-count Indictment against defendants Shelly S. Singhal, Loretta Fredy Bush, and Dennis L. Pelino. The Indictment alleges that defendants engaged in a conspiracy and scheme to defraud the United States Securities and Exchange Commission ("SEC"), investors, and others through a series of undisclosed and disguised related party transactions and insider trading that generated proceeds exceeding $50 million. Indictment ¶ 1. The Indictment reads like a typical U.S. securities fraud case, yet it does not expressly charge any violations of U.S. securities laws, including failure to report related party transactions or insider trading. Count One charges each defendant with conspiracy to commit mail fraud and submit false statements, in violation of 18 U.S.C. § 371. Counts Two through Five charge each defendant with mail fraud, in violation of 18 U.S.C. §§ 2 and 1341. Counts Six through Nine charge each defendant with false statements, in violation of 18 U.S.C. §§ 2 and 1001. Count Ten charges defendant Pelino with false statements, in violation of 18 U.S.C. § 1001.
Before the Court are defendants' Motions [39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49] to dismiss the Indictment, defendants' Motion  to strike surplusage from the Indictment, and defendants' Motions [51, 52, 53, 54] to compel.
A.Background on Xinhua Finance and the Defendants
According to the Indictment, the alleged conspiracy and scheme to defraud related to transactions involving Xinhua Finance Limited and its wholly-owned affiliate, Xinhua Financial Network Limited (referred to collectively in the Indictment as "Xinhua Finance"). Xinhua Finance provided information products focused on China's financial markets, including market indices, ratings, financial news and analysis, and investor relations. Indictment ¶ 2. Xinhua Finance was organized under the laws of the Cayman Islands and headquartered in Shanghai, China. Id.
In October 2004, Xinhua Finance's shares began to trade publicly on the Tokyo Stock Exchange's Mothers Board (market of the high-growth and emerging stocks). Id. ¶ 3. Xinhua Finance was the first Chinese Initial Public Offering in Japan, the first non-Japanese entity to list on the Mothers Board, and the first time a foreign stock traded in Japan through an international settlement agreement, which allowed investors globally to invest in Xinhua Finance. Id.
According to the Indictment, defendant Bush co-founded Xinhua Finance and was its Chief Executive Officer and Vice Chairman of Xinhua Finance's Board of Directors. Id. ¶ 5. Defendant Pelino, Xinhua Finance's other co-founder, served as an independent member of Xinhua Finance's Board of Directors, Chairman of its Compensation Committee, and a member of its Audit Committee and Investment Committee. Id. ¶ 6. Defendant Singhal served as an independent member of Xinhua Finance's Board of Directors, Chairman of its Audit Committee, and a member of its Compensation Committee and Investment Committee. Id. ¶ 4. Singhal also provided investment advisory services to Xinhua Finance through his company SBI USA, LLC. Id. ¶ 7.
B.Xinhua Finance's Entry and Involvement in U.S. Capital Markets
According to the Indictment, starting in or around 2003 Xinhua Finance began to raise funds from U.S. investors. Indictment ¶ 3. Rather than register these offerings with the SEC, Xinhua Finance filed notices with the SEC to qualify for registration exemptions under U.S. securities laws. Id. After obtaining its public listing in Japan in October 2004, Xinhua Finance sought increased access to U.S. capital markets. In April 2005, Xinhua Finance began furnishing the SEC with information to establish an exemption from registration for the offer and sale of securities in the United States. Id. To sell ADRs on the U.S. over-the-counter market, Xinhua Finance was required, pursuant to the exemption from the reporting requirements of the Securities Exchange Act upon which it relied, to furnish to the SEC the information: (a) Xinhua Finance made or was required to make public pursuant to the laws of Japan or the Cayman Islands; (b) Xinhua Finance filed or was required to file with and which was made public by the Tokyo Stock Exchange; or (c) Xinhua Finance distributed or was required to distribute to the holders of its securities. Id. ¶ 24; see also 17 C.F.R. § 240.12g3-2(b)(1) (2005). In July 2005, Xinhua Finance established in the United States a sponsored Level 1 American Depository Receipt ("ADR") facility. Id. Xinhua Finance's ADRs traded on the U.S. over-the-counter market using the stock trading symbol "XHFNY." Id.
C.The Alleged Scheme to Defraud
The Indictment identifies various nominees and nominee entities that the defendants used to engage in a number of transactions involving Xinhua Finance. Indictment ¶¶ 8--22. The defendants used the nominees and nominee entities for the following alleged purposes: (1) to obtain cash, warrants, stock, and other things of value from Xinhua Finance; (2) to sell shares of Xinhua Finance stock owned directly and beneficially by Singhal, Bush, and Pelino; and (3) to transfer assets off of Xinhua Finance's balance sheet to minimize potentially negative impacts to that balance sheet. Id. ¶¶ 25--57. The defendants' alleged motivation for using the nominees and nominee entities to engage in the transactions involving Xinhua Finance, rather than engaging in them using their own names or the names of their own companies, was to misrepresent and avoid disclosing the defendants' involvement in the transactions and the sale of their Xinhua Finance shares in statements furnished to the SEC, investors, and others. Id. ¶ 61. According to the Indictment, the defendants and others used the nominees and nominee entities for those purposes and with that alleged motivation to engage in the following transactions involving Xinhua Finance: (1) the Entree Capital transaction; (2) the Bedrock Securities and Bedford transactions; and (3) the Wiremill and Hyperion transactions.
1.The Entree Capital Transaction
All three defendants were allegedly involved in the Entree Capital transaction. Singhal and Pelino, allegedly through false representations and deceptive practices, obtained a warrant to purchase 6,944 Xinhua Finance shares. Id. ¶¶ 25--27. The Indictment alleges that rather than purchase the shares in their own names or in the name of one of their companies, they used a nominee and a fictitious entity, Brightline Capital LLC, to buy the warrant. Id. ¶ 29. Singhal used nominees, including Robert S. Brown, to exercise the warrant and deposit the 6,944 Xinhua Finance shares into a brokerage account in the name of another nominee entity, Entree Capital LLC ("Entree Capital"). Id. Following a request by Singhal and Pelino, Bush, as Xinhua Finance's CEO, authorized an acceleration of the lock-up period for the Xinhua Finance shares held by Entree Capital, which allowed Singhal-through Entree Capital-to begin selling the Xinhua Finance shares approximately four weeks before investors who held similarly restricted shares. Id. ¶¶ 31, 62(i)--(n).
Singhal and his company, SBI USA, paid Xinhua Finance $1,388,888 of the $5 million exercise price for the 6,944 shares held by Entree Capital. Id. ¶ 32. The Indictment alleges that, with Pelino's assistance, Sinhal attempted to have the exercise price for the shares lowered from $0.36 per share to $0.10 per share. Id. ¶ 62(h). If successful, the exercise price for the warrants would have totaled $1,388,888. Although that effort to lower the exercise price of the shares was unsuccessful, the Indictment alleges that Singhal used a nominee, Brown, to direct Xinhua Finance to credit to Entree Capital $3,611,111, which Xinhua Finance purportedly owed originally to Wire Mill Partners II, LLC, a nominee entity controlled by Singhal. Id. ¶¶ 33, 62(p)--(q).
At Singhal's direction, Entree Capital sold the 6,944 Xinhua Finance shares for total proceeds of approximately $21,700,000. Id. ¶ 34. One of Singhal's associates allegedly kept Bush and Pelino apprised of the Xinhua Finance share sales by Entree Capital. Id. ¶¶ 62(r), 62(t). Entree Capital, at Singhal's direction, allegedly distributed the proceeds from the share sales for the principal benefit of Singhal, Bush, and Pelino. Id. ¶ 35.
As a result of the Entree Capital transaction, the defendants allegedly caused Xinhua Finance to furnish statements to the SEC that misrepresented and failed to disclose: (a) a related party transaction between Xinhua Finance, its CEO (Bush), and members of its Board of Directors (Singhal and Pelino) concerning the acquisition of the warrant, acceleration of the lock-up period, and exercise of the Xinhua Finance shares held by Entree Capital; (b) Singhal, Bush, and Pelino had an ownership interest in the Xinhua Finance shares held by Entree Capital; and (c) Singhal, Bush, and Pelino sold Xinhua Finance shares for proceeds of approximately $21,700,000 through Entree Capital for their personal benefit. Id. ¶ 36.
2.The Bedrock Securities and Bedford Transactions
The Indictment alleges that Singhal assisted Bush and Pelino to engage in undisclosed trading of their Xinhua Finance shares through nominee entities, Bedrock Securities LLC ("Bedrock Securities") and Bedford Proprietary Trading, LLC ("Bedford"), which were allegedly controlled by Singhal. Id. ¶¶ 15--16, 37--48. Between January 6, 2006 and May 2008, according to the Indictment, Singhal assisted Bush in selling 36,736 Xinhua Finance shares beneficially owned by Bush. Id. ¶¶ 39--44, 46--47. The share sales generated over $23,000,000 in proceeds. Id. ¶ 47. During the same time period, Singhal assisted Pelino in selling 3,914 Xinhua Finance shares owned by Pelino, which generated approximately $2,500,000 in proceeds. Id. ¶ 45.
With regard to these share sales, Bush allegedly entered into backdated, written agreements with Bedford and a nominee. Id. ¶ 42. The agreements were allegedly created to give the false appearance that Bush had not sold any of her Xinhua Finance shares and that she had merely pledged them to Bedford for purposes of securing a loan. Id. Bedford's operations allegedly consisted of receiving shares belonging to Bush, selling those shares at the direction of Singhal and Bush, and distributing the proceeds for Bush's primary benefit. Id. ¶¶ 42--43. As part of this transaction, Singhal allegedly provided false and misleading testimony to the National Association of Securities Dealers ("NASD") during its investigation of Bedrock Securities concerning, among other things, the sale of Bush's Xinhua Finance shares. Id. ¶¶ 41, 62(gg).
Singhal allegedly controlled and used the nominee and nominee entities to disguise his involvement in the sale of Bush's Xinhua Finance shares. Id. ¶ 42. Pelino allegedly did not enter into written agreements with Bedford concerning the sale of his 3,919 Xinhua Finance shares, but rather allegedly transferred the shares to Bedford, which sold the shares at Singhal's direction. Id. ¶ 45. Pelino allegedly used Bedford to conceal and disguise the sale of his Xinhua Finance shares. Id.
3.The Wiremill Transactions
The Indictment charges that Xinhua Finance entered into agreements with two nominee entities controlled by Singhal, Wire Mill Partners II and Wiremill, in which Xinhua Finance agreed to pay commissions to Wire Mill Partners II and Wiremill in return for them introducing certain transactions to Xinhua Finance. Id. ¶ 49. The transactions introduced by Wire Mill Partners II and Wiremill to Xinhua Finance included the receipt by Xinhua Finance of securities assets in publicly traded companies in consideration for Xinhua Finance providing business development services in China for the various publicly traded companies listed in the United States. Id. According to the Indictment, in the short term, the securities assets received by Xinhua Finance from the various publicly traded companies listed in the United States positively affected Xinhua Finance's balance sheet. Id.
Singhal, according to the Indictment, controlled and used Wire Mill Partners II and Wiremill as nominees to disguise Singhal's interest and involvement in the activities of Wire Mill Partners II and Wiremill. Id. ¶ 50. As discussed earlier, Xinhua Finance credited $3,611,111 to Wire Mill Partners II in return for transactions purportedly introduced by Wire Mill Partners II to Xinhua Finance. Singhal, in turn, allegedly directed Wire Mill Partners II to apply the $3,611,111 to the exercise price for the warrant held by Entree Capital for the benefit of the defendants. Id. ¶ 51. Singhal and Bush allegedly received $5,500,000 and $1,800,000, respectively, from Xinhua Finance via Wire Mill Partners II and Wiremill. Id. ¶ 55. As a result of the Wiremill transactions, the defendants allegedly caused Xinhua Finance to furnish statements to the SEC that misrepresented and failed to disclose the transaction between Xinhua Finance, its CEO (Bush), and members of its Board of Directors (Singhal and Pelino) concerning the payment of monies from Xinhua Finance to Wire Mill Partners II and Wire Mill. Id. ¶ 57.
The Indictment further alleges that in February 2006, Singhal directed a "round trip" of over $1 million originating from Xinhua Finance and paid back to Xinhua Finance via Singhal's nominee entities to purchase Xinhua Finance shares for Singhal's benefit. According to the Indictment, Xinhua Finance paid $1,368,463.42 to Wiremill, an entity allegedly controlled by Singhal, which in turn wired $1,290,671.39 to another entity controlled by Singhal, SBI Advisors LLC. Id. ¶¶ 13, 21, 52. To facilitate the transfer, the Indictment alleges that SBI Advisors provided a bogus invoice to Wiremill. Id. ¶ 62(ll). SBI Advisors, in turn, wired $1,029,600 to Singhal's company, SBI USA. Id. ¶ 62(mm). SBI USA, in turn, wired $1,029,600 to Xinhua Finance to purchase 3,900 Xinhua Finance shares. Id. ¶ 62(nn).
The Indictment also alleges that in May 2006, Singhal and Bush used Wire Mill Partners II, Wiremill, an Israeli company, and an Austrian Bank account as conduits to make a $1,000,000 payment from Xinhua Finance to Bush. Id. ¶ 53. According to the Indictment, in May 2006, Xinhua Finance paid $1,050,000 to Wire Mill Partners II in return for transactions purportedly introduced by Wiremill. Id. Wire Mill Partners II, in turn, wired $1,050,000 to Wiremill at Singhal's direction. Id. Wiremill, in turn, wired $1,000,000 at Singhal's direction to an account in Austria. The Austrian account then wired $1,000,000 to an account in China for Bush's benefit. Id. To paper the transaction, the Indictment alleges that, at Singhal's direction, identical consulting agreements were executed between Wiremill and an Israeli company, and between the Israeli company and Bush, which Bush allegedly signed in New York, New York. Id. ¶¶ 62(rr)--(ss).
The Indictment additionally alleges that in December 2006, Singhal and Bush used Wiremill as a conduit to make payments of $683,117 and $800,000 to Singhal and Bush, respectively. Id. ¶ 54. Those payments originated from a payment of $1,883,197.50 from Xinhua Finance to Wiremill, which Bush allegedly authorized. Id. ¶¶ 54, 62(vv). Wiremill, in turn, wired $683,117 at Singhal's direction to an account under Singhal's control. Id. ¶¶ 54, 62(yy). Wiremill separately wired $800,000 at Singhal's direction to a different nominee entity, Tamarack partners LLC, which was also under Singhal's ...