2008-10-20 sentencing 1 transcript

8/7/2019 2008-10-20 Sentencing 1 Transcript

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1 UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

2 ------------------------------x3 UNITED STATES OF AMERICA,4 v . 07 Cr. 541 (RPP)5 DANIEL B. KARRON,6 Defendant .7 ------------------------------x8 New York, N.Y.October -20, 20089 2:30 p.m.

10 Before:11 HON. ROBERT P. PATTERSON, JR. ,12

Dis t r i c t Judge1314 APPEARANCES15 MICHAEL J . GARCIA

United Sta te s Attorney fo r the16 Southern Dis t r i c t of New YorkSTEVE KWOK17 CHRISTIAN EVERDELL

Ass i s t an t United Sta te s Attorneys18 RUBINSTEIN & COROZZO19 Attorneys fo r DefendantBY: RONALD RUBINSTEIN202122 ALSO PRESENT: KIRK YAMATANI23 RACHEL ONDRIK2425

SOUTHERN DISTRICT REPORTERS, P.C.(212) 805-0300


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1 (Case ca l led)2 MR. KWOK: Good af ternoon, your Honor, Steve Kwok fo r3 th e government . With me a t counsel t ab le i s Chris Everdel l .4

5THE COURT: Good af ternoon, Mr. Kwok and Mr. Everdel l .MR. RUBINSTEIN: Good af te rnoon , your Honor, Ron

6 Rubins te in fo r the defendant . I have to apologize. I thought7 it was 2:30, th e s en te nc e. It must have been a sen io r moment.89101112131415

'THE COURT: I have a presen tence r epo r t . The l a t e s tone i s dated October 7, 2008. Has th e defendan t seen th epresen tence repor t s , in clu din g th e l a t e s t one, October 7, 2008?

MR. RUBINSTEIN: Yes, your Honor.THE COURT: He has read them?MR. RUBINSTEIN: Yes, your Honor.THE COURT: Are t he re any changes to be made?MR. RUBINSTEIN: No. Except fo r the objec t ions we

16 have - -17 THE COURT: Except fo r the objec t ions t ha t you have in18 your l e t t e r of October 13 and a lso in a l e t t e r received Friday ,19 October 17, 2008, those two l e t t e r s to th e Court?2021

MR. RUBINSTEIN: Th at 's c or re c t, your Honor.THE COURT: The government s en t us a l e t t e r dated

22 October 17 a l so . I have n ot re ce iv ed any response by the23 government to your l e t t e r of October 17.24 MR. KWOK: The government d id no t submit a response to25 th e l a te s t le t t e r .



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SentenceTHE COURT: You're wil l ing to proceed on tha t basis?MR. KWOK: The government i s ready to proceed.THE COURT: Then I guess the bes t way - - I don ' t know

4 how the pa r t i e s th ink the bes t way to proceed, but it would5 appear to me t ha t the bes t way to proceed i s by consider ing6 Mr. Rubins te in ' s l e t t e r of October 17, which disputes the7 computat ion of loss contained in the presentence repor t and in8 the government 's l e t t e r .9 I might say tha t I ' ve had some c on ce rn s a bo ut the l o s s

10 computation. It's not c l ea r to me tha t a f a i l u r e to get11 approval of expenditures from the grant of f i c e r amounts to th e12 same as an in ten t ional misappl icat ion of funds. And to the13 extent tha t we have here in th i s case , as I understand i t , the14 f i na l budget as approved in December 2001, and subsequent to15 th e appl ica t ions to amend th e budget were not approved. So th e16 requis i t e documents t ha t th e Court has to examine of the budget17 conta ined in - - i s it Exhib i t 12?18 MR. KWOK: Your Honor, I th ink the l a s t approved19 budget i s the budget a t tached to Government Exhib i t 22. It's20 th e th i rd page - -21 THE COURT: It's Exhibi t 12. Jus t a second. Exhibi t22 12 i s the or ig ina l budget t ha t Dr. Karron signed. Then the re23 i s Exhibi t 20. 21 was j u s t an adminis t ra t ive contac t change.24 Exhib i t 22 contains th e f ina l budge t app roved - - amended budget25 approved by the agency.



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8AKMKARS SentenceSo I have d i f f i c u l t i e s . For i n s t a n c e , looking a t

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2 E x h i b i t 20 and 22 and t h e f r i n g e b e n e f i t s be ing al lowed a t 343 p e r c e n t o f s a l a r y , as I s e e it i n t h e documents. I have4 d i f f i c u l t y a l s o with t h e t a b u l a t i o n c o n t a i n e d i n Government5 E x h i b i t 114 and 115 because t h e y a r e j u s t rough c a l c u l a t i o n s ,6 a s I s e e it. I d o n ' t know who compiled them, b u t I g a t h e r it7 was Ms. R il e y , b u t we never went i n t o t h e d e t a i l about, for8 i n s t a n c e , t h e s t a t e m e n t i n t h e t a b u l a t i o n t h a t Dr. Karron 's9 s a l a r y b u d g e t e d . a t 175, v a r i o u s cash. He s p e n t 200,486,

10 a c c o r d i n g t o t h a t t a b u la t i o n . Tho se amounts, as I saw them,11 e r r were s a l a r y . They in vo lv ed lo an s made which someone, I12 d o n ' t know whom, I presume Ms. Ri ley , determined t h e e q u i v a l e n t13 o f s a l a r y .14 A s I a l l u d ed t o e a r l i e r , t h e f r i n g e b e n e f i t s f i g u r e i n15 t h i s t a b u l a t i o n - - I ' m looking a t 114 says t h a t Dr. Karron16 d i d n ' t spend $40,337 i n f r i n g e b e n e f i t s , and y e t i n t h e same17 t a b u l a t i o n it says t h a t t h e f r i n g e b e n e f i t s were n o t allowed18 and s p e n t $4,081. That whole s c e n a r i o .of f r i n g e b e n e f i t s i s19 somewhat i l l u s i v e t o me.20 The test imony, as I r e c o l l e c t it, was CASI, t h e21 c o r p o r a t i o n , d i d no t have a formal b e n e f i t p l a n and they were22 endeavoring t o compile one d u r i n g t h e t ime of t h e g r a n t . And23 i n s t e a d what Dr. Karron d i d was t o pay b e n e f i t s j u s t as he was24 accustomed t o paying them, f o r wha teve r medic al expenses t h e25 v a r i o u s employees had f o r t h e i r wives. I have some d i f f i c u l t y



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1 in , 1, f inding t ha t the re was cr imina l i n t en t with respec t to2 t he se expendi tu r es , which a re a l l on Government 114, and with3 the manner in which t ho se over expend it ur es were computed. I t4 seems to me t h i s i s j u s t a rough ca lcu la t ion and not something5 t h a t a Court could re ly on in a c rim in al c as e. I'll hear from6 you. That ' s my assessment of t h a t proof .7 MR. EVERDELL: Your Honor, I th ink; in fac t , I know8 114 and 115 a re based on Ms. Ri l ey ' s underly ing ana lys i s .9

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THE COURT: The spreadshee t s .MR. EVERDELL: Yes, the spreadshee t s .THE COURT: But it doesn ' t meet it because in her

12 spreadsheet she doesn ' t have any payment l i ke $248,000 worth of13 sa la ry in year one.14 MR. KWOK: Your Honor, she does. That number i s the15 ne t t r an s fe r s .1617

THE COURT: I ' ve looked a t sa la ry , I th ink .MR. KWOK: Including the tax withholding, I bel ieve i s

18 th e tes t imony t ha t she t e s t i f i ed to . When you take in to19 account a l l the money t h a t Dr. Karron took out from CASI, minus20 the amount t ha t he paid back - -21 THE COURT: That i s n ' t sa la ry . We a re ta lk in g about22 sa la ry . I don ' t see sa la ry . There i s noth ing l i ke sa la ry in23 those d o c ~ ~ e n t s t h a t equals 248 - - $200,488.24 MR. KWOK: Salary i s j u s t a heading. What she meant25 by t h i s i s money t h a t defendant took, pure money, no t in terms



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1 o f expendi tu re ; cash t h a t he took from CASI, whether in the2 form of quote unquote loan o r whether in te rms - -3 THE COURT: Show me. She has no t abu la t ion put t ing4 114 in to c on te xt w ith her 110, Exhib i t 110.5 MR. KWOK: I f your Honor could look a t Government6 Exh ib i t 110.789

10 it here .1112

THE COURT: I d id look a t Exh ib i t 110.MR. ~ K W O K : Page 38.THE COURT: I have it here . I don ' t know t h a t I have

MR. KWOK: Page 38 o f 44.THE COURT: I guess we wi l l have to ge t 110, because I

13 don ' t th ink I have it here , bu t I 'm fu l ly fami l i a r with it. I14 th ink it's in Mr. Rub ins t e i n ' s submiss ion, as a m atte r of f ac t .15 MR. KWOK: That page shows money going to th e16 defendan t and money coming from the defendan t . So t ak ing17 THE COURT: What page a re you r e f e r r i ng to? Maybe18 it's in Mr. Rubinstein19202122232425

MR. KWOK: 38 of 44.THE COURT: He has payro l l . Looking a t 13 of 44?MR. KWOK: Page 38 of 44.THE COURT: Tha t ' s loan and loan repay. Tha t ' s not

s a l a ry .MR. KWOK: I f you look a t th e memo l i n e , it i s sa l a ry .

Look a t , fo r example, th e t h i rd check, per check r eg i s t e r ,



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1 sa lary advance.Sentence

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23

THE COURT: That one she t r ea ted as a loan.MR. KWOK: These are expressed in a spreadsheet as

4 loans, but they are a l l money going to the defendant.56

THE COURT: I understand. I t ' s j u s t not sa la ry .MR. KWOK: You can give it whatever l abe l you l ike,

7 bu t the bottom l ine i s , the defendant took from the company8 t h i s much money which added to 188.

9 THE COURT: I don ' t doubt t ha t ' s what your10 c ~ l c u l a t i o n s are .11 MR. KWOK: I f I can j u s t cor rec t a misimpression,12 Government Exhibit 114 i s not a rough calcula t ion. I t ' s not a13 guess. It's based ent i re ly on Government Exhibit 110 which, In14 tu rn , i s based ent i re ly on the bank records tha t she reviewed.15 THE COURT: They are cer ta in ly not in th os e r ec or ds , a16 showing of $200,488 in sa la ry .1718

MR. KWOK: I f I can explain how she got tha t number.THE COURT: I t ' s denominated sa lary. It's a t ab le

19 saying sa la ry . I don ' t care how she got the number.20 MR. KWOK: But tha t doesn ' t rea l ly a f fec t the loss21 amount. You can l abe l it and give it whatever l abel you want.22 But a t the end of the day - - l e t me back up one s tep . The23 grant says Dr. Karron can take from the g rant for h is own use,24 whether we ca l l it sa lary or compensation for e f fo r t s tha t he25 put into the grant , $175,000. That ' s the amount - - the port ion



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1 of the p ie t ha t he can get from the grant , $175,000.2 THE COURT: He can get a sa lary of 175,000 i s what it3 says in the budget, plus 34 percent for fr inge benef i t s .4 MR. KWOK: I f he took from the grant money in addi t ion

to $175,000, put t ing aside f r inge benef i t for a second, any6 amount above tha t i s a disallowed amount, whether you ca l l it7 excess sa la ry or ca l l it a loan tha t never gets paid back. It8 doesn ' t rea l ly matter . At the end of the day, the budget says9 $175,000 and no more. I f you take more than tha t , the f i r s t

10 dol la r above $175,000 i s disal lowed. Whether you ca l l tha t11 excess sa la ry or loan, it doesn ' t rea l ly matter .12 THE COURT: I 'm not dealing with i f s . I 'm d ea lin g13 with what the record shows. This doesn ' t show what the records14 show as fa r as sa lary goes.15 MR. KWOK: I t shows tha t , j u s t for s impl ic i ty , she16 doesn ' t want to create tha t many di f fe ren t categor ies . Salary ,17 loan.18 THE COURT: She has got a sa la ry category. She shows19 it. Go on a couple of pages. Payroll , next page, $35,293.58.20 MR. EVERDELL: Your Honor, also , to bear in mind with21 th i s , these ent r ie s on the spreadsheet are based on how22 Dr. Karron himself character ized things in the documents. So23 we have checks here for pay periods tha t are quote unquote24 payro l l checks for sa lary . However, he cal led other things25 loans or other th ings l ike tha t .

SOUTHERN.DISTRICT REPORTERS, P.C.(212) 805-0300


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1 Now, Lynn Riley, in doing th i s analys is , put those2 together in the same category because as Mr. Kwok was saying,3 it was money paid from CASI to Dr. Karron. I f he i s allowed a4 payrol l , a sa lary of $175,000, it doe sn 't n e ce s sa r il y matter5 how the defendant himself character izes those paYments to6" himself . Whether he ca l l s them payrol l checks or whether he7 ca l l s them loans, it's s t i l l a paYment to him personal ly from8 CASI funds. So her objec t , I th ink in doing it th is way, was9 to sweep together th os e th in gs which were di rec t paYments from

10 the company to Dr. Karron.11 THE COURT: I don ' t dispute tha t . But the tabulat ion12 i s not something tha t I can go along with. I t i s not salary.13 MR. KWOK: We have no problem with tha t . I f you want14 to ca l l it sa lary / loans or j u s t simply money to Karron, excess15 money to Karron, it doesn ' t rea l ly a f fec t the loss amount16 because a t the end"of the day the loss amount i s simply17 ar i thmet ic , what he took from CASI minus what he i s supposed to18 ge t under the grant , which i s $175,000. We have no problem, i f19 it makes th ings c lea re r , ins tead of c al l in g th at sa lary , we20 could ca l l tha t , simply, excess money to Dr. Karron.21 THE COURT: You see what he did was - - I th ink it i s22 borne out by the defendant ' s papers to some degree - - i s he"23 took a very low sa lary to pay back the loans. Is th a t a fa i r24 statement?25 MR. EVERDELL: Your Honor, t ha t fac t tha t you jus t



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1 s a i d , t h e f a c t t h a t he d i d n ' t take h i s f u l l s a l a r y , i s taken2 i n t o account3 THE COURT: I d i d n ' t say t h a t . I want t o know whether4 y o u ' r e d i s p u t i n g what I j u s t s a i d .5 MR. EVERDELL: \Nhat I agree with i s t h a t , yes, the6 defendant d i d not t a k e h i s f u l l s a l a r y i n t h e sense t h a t when7 you look a t s a l a r y i n checks , they a r e l e s s than t h e $175,0008 o f quote unquote s a l a r y .9

10THE COURT: You saw t h e r e was l e s s withholding, r i g h t ?MR. EVERDELL: But he p a i d himself i n o t h e r ways in

11 t h i n g s he do did n o t c h a r a c t e r i z i n g as s a l a r y .12 THE COURT: Was t h e r e l e s s withholding o r not? You13 b e t t e r c o n f e r .14 MR. EVERDELL: Your Honor, a p p a r e n t l y wha t happened15 was, he w a s n ' t c h a r a c t e r i z i n g anything - - t h e r e was no16 withholding u n t i l an accountant came i n towards t h e end of y e a r17 one and s a i d , you have t o c a l l t h e s e t h i n g s p a y r o l l , you have18 t o take your s a l a r y and then you have t o c a l c u l a t e withholding.19 And t h a t account went back r e t r o a c t i v e l y and looked a t these20 payments and did t h e withholding r e t r o a c t i v e l y with a l l t h e s e21 payments t o him which had not been c h a r a c t e r i z e d .22 THE COURT: There a r e documents appended t o t h e23 d e f e n d a n t ' s papers which i n d i c a t e t h a t t h e withholding was24 taken t i m e l y . T h a t ' s not borne out by what you say, showing25 Mr. R u b i n s t e i n ' s l e t t e r of Friday. Where d i d I p u t i t ? He has



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1 g o t documents s howing money b e i n g w i t hh e l d t o c a l c u l a t e s a l a r y .23

MP_. KWOK: Which page a r e you looking a t , your Honor.THE COURT: I ' m t r y i n g t o f i n d t h e l e t t e r now.

4 Attached t o i t , i f you look, it's about t e n pages i n . It shows5 t h e s a l a r y , August 2, 2002, s a l a r y . It shows o u t s t a n d i n g6 s a l a r y of $61,918; f e d e r a l w i t h h o l d i n g t a x , minus 17,104;7 s o c i a l s e c u ri t y deduct ion, 2,091; Medicare and employee 462.81.8 New York withhold ing , New York C i t y r e s i d e n t also:. It I S a l l i n9 t h e r e . He a l s o has one f o r t h e pay p e r i o d 7/01/2002. ' Maybe10 t h a t ' s t h e same.111213 t o p .14

MR. KWOK: Are you looking a t t h i s page?THE COURT: Yes, I b e l i e v e s o . It has a check a t t h e

MR. EVERDELL: Your Honor, I t h i n k t h i s may a c t u a l l y15 r e f l e c t what we a re t a lk in g about . I f you look a t check No.16 10401. I s t h a t t h e page y o u ' r e looking a t ?1718

THE COURT: Yes.MR. EVERDELL: That looks l i k e it was p a i d out on

19 August 2, 2002, which i s towards t h e end of y e a r one of the20 g r a n t . I f you ,look a t t h e s p r e a d s h e e t t h a t Ms. R i l e y c re a t e d ,21 it shows t h a t t h e f i r s t a c t u a l p a i d check t h a t he go t was i n22 May of 2002; again, s o r t of towards t h e end of y e a r one of t h e23 g r a n t . This i s , as we a r e g e t t i n g towards t h e end o f y e a r one,24 where Dr. Karron i s b e i n g t o l d t h a t needs t o p u l l o u t25 w i t h h o l d i n g . I d o n ' t t h i n k t h i s c o n t r a d i c t s what we were



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1 saying b e f o r e .Sentence

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2 THE COURT: It does c o n t r a d i c t what was s a i d . What3 you s a i d i s n o t c o n s i s t e n t w i t h what y o u ' r e saying now. T h a t ' s4 t h e t r o u b l e w i t h t h e s e a n a l y s e s . They a r e f i n e as f a r as they5 go, b u t t h e y do n o t t e l l t h e s t o r y .6 Anyway, t h e r e a r e , s i m i l a r l y , p r e s c r ip t i o n s , f i r s t7 i tem i n Mr. R u b i n s t e i n ' s l e t t e r . I d o n ' t t h i n k t h a t t h e item8 i s p r e s c r i p t i o n s . I t h i n k t h e i tem i s o t h e r and it included9 o th e r m a tt e r s such as bank p r o c e s s i n g , c o n s u l t a n t s , lawyers,

10 and bookkeeping .11 MR. EVERDELL: Your Honor, if I can j u s t s t e p back f o r12 one secon d and j u s t t a l k about t h e g e n e r a l p o s i t i o n of t h e13 government on l o s s , which i s t h a t u n l e s s it's s p e c i f i c a l l y14 budgeted f o r - - t h a t it has been preapproved i n a budget or h a s15 had subsequent approval a u t h o r i t y from NIST, o r whatever16 e x p e n d i t u r e it may be, t h a t it's overbudget o r an i tem i n a17 c a t e g o r y t h a t i s n o t a budgeted c a t e g o r y , t h a t c o n s ti tu t e s a18 l o s s t o t h e government . The reason why i s - -19 THE COURT: It has t o be - - it seems t o me it has t o20 be a l o s s a s t o which t h e r e was c r i m i n a l i n t e n t .2122

MR. EVERDELL: Your Honor, I t h i n k - -THE COURT: I n o r d e r f o r t h e r e t o b e a n i n t e n t i o n a l

23 m i s a p p l i c a t i o n o f funds. You have t o have c r i m i n a l i n t e n t24 h e r e . The f a c t t h a t t h e government l o s t money on t h e g r a n t o r25 t h e money w a s n ' t expended p r o p e r l y does n o t n e c e s s a r i l y mean



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1 tha t there was cr iminal in ten t involved in a l l those2 expendi tures .3 MR. E \ ~ R D E L L : Your Honor, according to the4 g uid elin es, th e guidel ines commentary, when you ' re looking a t5 government benef i t s , you are supposed to look a t what the6 in te nd ed u se for the money was. For loss amount you look at7 whatever was d iv erted to in unintended use. I t ' s the8 government's p osit io n th at with th i s money tha t was given out,9 it came with a lo t of very speci f ic spending ru les and those

10 ru les were c lea r and s e t for th . So t ha t i s the intended use of11 the money.12 We handled t h i s money such t ha t you would spend i t in13 accordance with these ru les and tha t included the budgetary14 ru les , the pr ior approval ru les , a l l of the o ther spending15 ru les tha t came at tached to the grant . So tha t when money is16 diver ted elsewhere, when it i s not par t of an approved category17 or overbudgeted category, tha t ' s not an intended use of the18 money. That i s not an intended use of th e money because,19 otherwise, why not j u s t give away the grant money with no ru les20 and say, okay, here i s a block of money fo r you to use as you21 see f i t . We won't ask you how you ' re spending i t . Come back22 in a year or so and t e l l us the progress you've made on your23 grant . I 'm sure t he re are grants tha t probably do operate tha t24 way, but tha t ' s not th i s one. This one wanted to keep a very25 close leash on how t h i s money was spent , they wanted to approve



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1 everything tha t was spent and see a l l of the expendi tures2 beforehand so tha t they were on board.34

THE COURT; All the expenditures tha t were budgeted.MR. EVERDELL: They wanted to see a b ~ d g e t f i rs t , . yes,

5 and anything tha t was not in tha t budget or over tha t budget,6 with the exception of the 10 percent ru le tha t we are a l l7 fami l iar with, had to be app roved. The reason why they do t ha t8 i s because, as defense counsel sa id many times in h is own9 submissions, th i s i s a type of grant where the government is

10 actua l ly very involved. So they want to keep a t i gh t leash on11 how th i s money i s spent .12 Given th a t th a t i s the posture of th i s grant , how the13 money i s supposed to be spent , tha t i s the in tended use of the14 money, to be spent according to budge ted i tems or items tha t15 have been preapproved by NIST. So it's the government 's16 posi t ion t ha t when you go outside of those categor ies or go17 over budget on one of the approved categories , tha t s t i l l18 cons t i tu te s a loss to the government because they have not been19 able to ex erc ise the cont ro l tha t they meant to exercise with20 i n s t i t u t ing these grant ru les and these spending rules .21 THE COURT: Look. Let ' s go r i gh t to an item tha t22 bothers me, fr inge benef i t s . They were approved a t 34 percent23 of sa la ry . No one sa id what cons t i tu te s a val id , as fa r as I24 could f ind in the papers in th e court, what was a va l id fr inge25 benef i t and what wasn ' t . How can I have any confidence tha t



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1 not approved f r inge benef i t s of $4,000 i s something t ha t i s a2 wi l l fu l di s rega rd of th e Lules?3 MR. EVERDELL: Your Honor, the re a re a couple of4 th ings with f r inge benef i t s which is " I bel ieve , how t h i s was5 ca lcu la ted . We heard tes t imony t h a t the re was no plan in6 place .7 THE COURT: I heard t h a t , but the re was no plan in8 place from th e beginning. You only found t h a t out a t a cer t a in9 po in t . No one went and checked th e group out o r anything in

10 advance. It says f r inge bene f i t s . The tes t imony i s , he had a11 ca fe t e r i a plan or whatever it was.12 MR. KWOK: Your Honor, i f I may, I th ink the13 tes t imony - -14 THE COURT: And anyth ing and everything could be15 expended in th e way of f r inge benef i t s to himse l f and members16 o f the family and fo r th e employees. The government may come17 back with, oh, it wasn ' t in th e plan, so , t he re fo re , it18 shou ldn ' t be al lowed, but the re i s no warning to the person19 the re . I can ' t see th e c rim in al i n t en t the re .20 MR. KWOK: The defendant was c er ta in ly to ld21 repea tedly - -22 THE COURT: The government may have l o s t th e money,23 bu t I can ' t see any cr imina l i n t en t .24 MR. KWOK: The i n t en t i s when he asked a quest ion and25 was to ld no and went ahead and d id it anyway. I t was in the



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1 document s - -

Sentence16

2 THE COURT: He didn 'L ask any ques t ion about medical3 benef i t s , as fa r as I know; from th e record .4 MR. KWOK: I f I could j u s t address your Honor 's5 quest ion about amount. The amount re f lec ted on th i s cha r t i s6 simply th e amount over budget because he took more sa la ry7 because f r inge benef i t s i s a percentage of sa la ry . So it's8 ca lcu la ted as a f ixed percentage of s a l a ry . So because he took9 more from CASI than th e amount t h a t he was al lowed, namely,

10 $175,000, th e amount we j u s t al lowed him i s an amount of $4,00011 or so. I t i s simply an amount over budget because he took more12 in do l l a r s13 THE COURT: He underspent budge t th ro ugh those f r inge14 benef i t s by $4,000 it says r i gh t above it. Look a t t ha t . This15 i s a mess.16 MR. EVERDELL: Your Honor, I th ink we can make th i s17 much s impler . Let me see i f I can. do t h i s . Even i f you look18 a t j u s t th e c ate go rie s t h a t were nonbudgeted ca tegor i e s , we a re19 not t a lk ing about fr in ge b e ne fi ts anymore, we a re not ta lk ing20 about even equipment overexpendi tu res , we a re no t t a lk ing21 anything t ha t w a s a c ~ u a l l y a budgeted category t h a t had been a t22 l e a s t somewhere a pp ro ve d by NIST before .23 I f we are t a lk ing about everything e l se , t h a t i s ,24 r en t , u t i l i t i e s , cleaning, meals , cap i t a l improvements, or25 these o the r expenses which were ac tua l ly not l i s t ed in the



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1 category othe r under the budget , we are a l ready t a lk ing about2 fo r years one and two of th e gran t, we a re a l ready t a lk ing3 about a loss amount, under my ca lcu la t ion , i s over $172,000. I4 th ink5 THE COURT: What f igures d id you use in the f i r s t year6 of th e budget to ge t 172,000?7 MR. EVERDELL: I j u s t added up in years one and years8 two, so th i s would be 114 and 15.9

10THE COURT: Which i tems a re you adding up?MR. EVERDELL: I 'm adding up ren t , which i s $60,000 in

11 year one; I 'm adding up u t i l i t i e s , which i s 16,341 in year one.12 I 'm adding up cap i t a l improvements.1314151617

THE COURT: Rent . You're adding up a f t e r r en t what?MR. EVERDELL: Rent was f i r s t , 60,000.THE COURT: Ut i l i t i e s .MR. EVERDELL: Ut i l i t i e s was second.THE COURT: There was some tes t imony on u t i l i t i e s . He

18 got an approval .19 MR. EVERDELL: Your Honor, I don ' t th in k th ere was20 ever tes t imony t h a t he got a pr io r approval fo r u t i l i t i e s . In21 f ac t , he was to ld repea tedly t ha t u t i l i t i e s were not al lowed.22 THE COURT: The dif ference between the u t i l i t i e s fo r23 the apar tment before and a f t e r the upgrade fo r a i r condi t ioning24 and fo r the machinery - -25 MR. EVERDELL: I th ink the only tes t imony we had on



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1 the record i s tha t he t r i ed to get an approval fo r the2 u t i l i t i e s , but he never received one.3 THE COURT: Mr . Rubins te in ' s quotes a u t i l i t i e s f i ~ ~ r e4 using Mr. Benedic t ' s test imony a t 1057 .. I can ' t f ind i t . Here5 it is , 1057.6 MR. EVERDELL: I 'm looking a t the page he ci ted. Here7 it jus t says -- h is quest ion i s , th i s i s Mr. Rubins te in ' s8 quest ion, and he i s ques t ioning --9 THE COURT: And t he d is cu ss ions were tha t i f he could

10 ind ica te the fac t t ha t there was an increase , tha t they could11 be c lass i f i ed as d i rec t expenses, not ind i rec t expenses.12 MR. EVERDELL: I t says the discuss ions were, r ight ,13 tha t i f he cou ld demonst ra te the fac t tha t there was an14 increase, tha t they could be c lass i f ied as d i rec t expenses, not15 ind i rec t expenses. But there was never any approval of th i s .16 So a t th is point none of the test imony here i s t a lk ing about17 any ap pro val of any addi t ional u t i l i t i e s , expenses, or anything18 l ike tha t .19 THE COURT: Sounds l ike approval, but not wri t ten20 approval .21 MR. EVERDELL: He i s t a lk ing to Bob Benedict . Bob22 Benedict, I think, i s a w itn es s h ere who i s the finance23 manager. We are not ta lk ing to the people a t NIST, who24 actua l ly made the approval , such as Hope Snowden. I f I r eca l l25 correc t ly , Hope Snowden's test imony about u t i l i t i e s was simply



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1 t h a t t he re were l o t s of conversa t ions t h a t she had with the2 defendan t himsel f and with othe rs about whether o r not grant3 funds could be used fo r u t i l i t i e s , and she s a id no.45678 them - -9

COURT: Where i s th i s ?MR. EVERDELL: The c i t e s to th e record?THE COURT: Yes.MR. EVERDELL: Your Honor, I 'm a f r a i d I don ' t have

THE COURT: This does say the witness summarizes h is10 tes t imony a t th e end o f th e page . The incrementa l amount of11 add i t i ona l expense caused by th e gran t could be c l a s s i f i ed as12 d i r e c t expense and not i nd i r ec t expense. Direc t expenses a re13 a l lowed, r ega rd l e ss o f what they a re . I nd i r ec t expenses are14 no t a l lowed.15 MR. EVERDELL: I t h ink t h a t t h a t quote j u s t says r i gh t16 the re t h a t they a re t a lk ing about a pos s ib i l i t y , but a17 pos s i b i l i t y t h a t was never ac tua l ly approved. And a18 pos s i b i l i t y ' t ha t was neve r ac tua l l y budgeted. S o - -19 THE COURT: It su gg es ts n ot approved in wri t ing . I20 have seen t h a t . I agree wi.th t h a t . But it sounds as if it was21 approved o ra l l y .22 MR. EVERDELL: I don ' t know i f I read t h a t as t h a t .23 Maybe it's Mr. Bened ic t ' s unders tanding of what he could24 p os sib ly g et approved under th e ru les .25 THE COURT: I th ink t h a t ' s a little b i t - - th e po in t



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20I 8AKMKARS Sentencei s t ha t the cr iminal in ten t of the defendant i s importa nt h er e.And i f he was proceeding on t ha t bas i s , tha t seems to me - - Ihave reason to - - it seems to me th a t th at amount i s an amountt ha t should be considered in the loss ca lcu la t ion .

MR. EVERDELL: Your Honor, I th ink I have to6 respec t fu l ly disagree with tha t . My col league, Mr. Kwok, has7 pointed me to the pa r t in the record . This i s Hope Snowden's8 testimony on page 256 of the record where she i s t a lk ing about9 her conve rs at ion s w i th I be l ieve it's Dr. Karron and

10 Mr. Gurfein about exp en se s. And th e q ue stio n was:11 What quest ions did he ask you, i f any, during those12 conversat ions?13 And the answer lS: Was he allowed to pay fo r ren t and14 u t i l i t i e s with the ATP federal -funded gran t .15 "Q. And r en t fo r what, ren t u t i l i t i e s fo r what?16 "A. For th e condo in which a t t h i s point , I guess , CASI, the17 company, was being housed.18 "Q. And whose condo was tha t?19 "A. Dr. Karron 's condo.20 "Q . What was your response to th e quest ion? Can ren t and21 u t i l i t i e s be paid fo r with ATP funds?22 "A. No. They are unallowable costs . "23 THE COURT: I understood t ha t tes t imony. That comes24 well preceding Benedic t ' s testimony, it comes well preceding25 the work fo r the apartment fo r the a i r condit ioning, and tha t ' s



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1 what caused the u t i l i t i e s to go up and t h a t ' s a f t e r the time2 tha t Snowden i s t a lk ing about , as fa r as I can see .34

5

MF, EVERDELL: Let ' s j u s t do th i s then, your Honor.THE COURT: I ' ve got to be - -MR. EVERDELL: Let ' s do t h i s . Let ' s s e t as ide for th e

6 moment the i s sue of whether tha t $4,595 should or should not be7 inc luded in the loss amount.89 4,000.

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THE COURT: According to Mr. Rubinste in , it's not

MR. EVERDELL: I was looking a t page 2 of h is l e t t e r .THE COURT: 16,341, as I unders tand it. The u t i l i t i e s

12 pr io r were 4595, pr io r to the pro jec t .13 MR. EVERDELL: I b e l i ~ v e tha t ' s 16,341 i s what the14 government i s claiming i s th e u t i l i t i e s amount fo r year one.15 THE COURT: Maybe you ' re r i gh t . That ' s th e16 government 's claim, not 16,000. He claims17 MR. EVERDELL: He claims t ha t the loss i s only 4,595,18 which i s the amount of the inc rease , he says .19 THE COURT: That ' s the pr io r amount of u t i l i t i e s , not20 th e in cr ea se . The dif ference should be not a l o ss .21 MR. EVERDELL: I apologize , your Honor. He's c la im ing22 the dif ference between the two Sh01lld be no t in cluded in the23 lo s s .24 But se t t ing t ha t as ide fo r the moment, again, i f you25 add up th e c ate go rie s again tha t were nonbudgeted expenses,



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1 even l eav ing t h a t i s sue as ide , I guess let's j u s t say t h a t t h a t2 i s almost $12,000, no t qui te , of di f fe rence .3 I f you go to th e n ex t c ate go ry , which i s cap i t a l4 improvement, in year on2 i s 11,248. Again, t h i s has no - -5 t he re i s nowhere in the budget where t h i s s t u f f i s t a lked6 about . There i s no p r i o r approval from NIST fo r t h i s so r t of7 th ing . Mr. Benedict i s using th e money, same which he does fo r8 c lean ing and mea l s , t o do whatever he f ee l s l i ke he wants to do9 with it, and he ' s spending it on outs ide budget ca tegor ies .

10 THE COURT: Le t ' s dea l with cap i t a l improvements.11 They claim t h a t t h i s should be more p ro f i t ed by th e s i t e12 prepa ra t ion .13 MR. EVERDELL: But even s i t e prepa ra t ion i s n ' t a14 budgeted ca tegory .1516

THE COURT: I don ' t know t h a t it i s .MR. EVERDELL: It's not , according to th e exh ib i t s .

17 Bas i ca l l y , what th e defense counsel has t r i ed to do in t h i s18 submission i s take every poss ib l e expendi tu re t h a t he can th ink19 and t r y to claim t h a t if it had some t angen t i a l o r arguable20 b en ef i t to th e r es ea rc h, then it c an ' t be qua l i f i ed as a l o s s .21 That s imply can ' t be workab le, y ou r Honor, because almost every22 s ing le expendi tu re has some bene f i t to the re sea rch . You j u s t23 c an ' t work t h a t s t anda rd . It's unworkable.24 So what we decided and what our lo ss c alc u la ti on and25 theory i s about i s whether o r no t it's in budget because t h a t



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1 i s c lea r ly what the intended use of the money was. We give you2 th i s money so that you can spend it according to the ru les , and3 they were very c lea r about tha t . There was lo t s of testimony4 about how the ru les were supposed to b e followed, how they5 explained the ru les to them, how they had to adhere to the i r6 budget, and for good reason, and how they needed approvals fo r7 th ings tha t were outs ide of the budget.8 So while I understand th at c er ta in things tha t the9 defendant i s claiming may arguably have benef i ted the research

10 in some way, tha t ' s simply not the standard we can work with,11 because then there would be no loss a t a l l , it would seem l ike .12 Even meals. People h ave to ea t in order to conduct research,13 bu t you can ' t spend fe de ra l g ra nt money to do i t . Yes, you14 need to clean things in order to have your house cleaned, but15 you can ' t spend federa l grant money to do i t . I t has to be16 budgeted i f you ' re going to do it tha t way.17 Things l ike s i t e improvement, capi ta l improvement,18 whatever it i s , things tha t may sound even arguably bet t e r than19 meals and cleaning in terms of how it might af fec t the20 research, it doesn ' t count because it's not budgeted. There i s21 a good reason for tha t . The government needed to understand22 and app rove a l l the expendi tures re la ted to th e re se arc h,23 whether it was because it was in a budget or because someone24 came to them l a t e r and asked for approval for something tha t25 was outs ide of the budget .

. SOUTHERN DISTRICT REPORTERS, P.C.(212) 805-0300


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THE COURT: Let ' s not qu i t e pu t it t ha t way because

24

2 the re i s t h i s 10 percent ru le t ha t they have got in the re .3 MR. EVERDELL: Yes, your Honor. I f you look a t 1144 and 115, down a t th e bottom r ight -hand corner you see the p ie5 char t a t th e bottom r ight -hand corner which has I don ' t know6 if you can see it.789 inc l ined

THE COURT: I can see th e p ie char t .MR. EVERDELL: The s l ic e i s th e 10 percent . I f you ' r e

it's our argument t ha t th e '10 percen t ru le , the10 money still has to go from somewhere. Even i f you are going to11 exclude th e 10 percent from th e ca lcu la t ion , it's still going12 to r i s e fa r above the leve l t h a t I th ink your Honor i s

.13 consider ing .14 Not only t ha t , 10 percent can ' t be used fo r new15 ca tegor ies . I 'm t a lk ing simply now about ca tegor i e s t h a t are16 not in th e budge t . The 10 ,percent ru le only appl ies to17 ca tegor i e s t h a t are a l ready in th e budget , and you may18 rea l loca te funds within those preapproved ca tegor ies .19 So with re sp ec t to the money I 'm t a lk ing to . you about20 now, the ones t h a t a re not budgeted ca tegor i e s a t a l l , th e 1021 percent ru l e does not even apply to t ha t . So even i f you add22 it up, a l l these out-of-budget , nonbudgeted ca tegor i e s , you23 would still get to a loss amount, under my ca lcu la t ion , over24 $172,000 in lo ss .25 I f your Honor subt rac ted th e 12,000 or so from the



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1 u t i l i t i e s , we are still over the 120,000 threshold and2 guidelines which makes it - - I bel ieve , it's a l evel - - I want3 to check - - it bumps it down two l evels from th e c al cu la tio n4 t ha t ' s in the PSR. But it's still a t o t a l offense l evel of 185 as opposed to 20, using t ha t calcula t ion .67

THE COURT: The PSR or ig ina l ly was more than 200,000.MR. EVERDELL: Your Honor, we still think tha t the

8 c al cu la ti on i n 114 and 115 i s ent i re ly correc t . Weactual ly9 think tha t i s the loss tha t the government suffered . In fac t ,

10 we are giv ing the defendant qui te a b i t of the benef i t of the11 doubt because we are saying tha t everything within the budgeted12 category was a proper expense. I t makes tha t assumption. And13 everything - - a l l we are saying i s everything outs ide of tha t ,14 e i ther i f it's a nonbudgeted category or something overspended15 on a budgeted category, represents a loss to the government.16 However, i f your Honor i s not inc l ined to accept tha t ,17 because of concerns you have about the calcula t ions here , a t18 the very l eas t , i f you look simply a t the nonbudgeted19 categories , things tha t were not approved by NIST a t a l l , which20 a re those things t ha t I mentioned before - - ren t , u t i l i t i e s ,21 capi ta l improvement, cleaning, meals, and other - - then we have22 a loss amount tha t i s a t a minimum j u s t two l evels less than23 what 's in the PSR.24 THE COURT: You would agree tha t it should not be25 ent i t l ed to subscr ip t ions as other expenses.



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8AKMKARS SentenceMR. EVERDELL: I apologize, your Honor. I

26

2 miscalcu la ted . It's not two l evels l e s s . It's actua l ly four3 leve ls l e s s . I f you s t a r t with base offense of 6 and the4 loss amount i s more than 120,000, tha t acds 10 and you get 16.5 MR. RUBINSTEIN: Your Honor, I th ink tha t the i n i t i a l6 dis t inc t ion i s a q ue stio n of what i s al lowable and what i s7 al lowable . And I think - -89

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THE COURT: What i s what?MR. RUBINSTEIN: Allowable; in other wordsTHE COURT: I know what allowable i s .MR. RUBINSTEIN: As opposed to what the budget says

12 t ha t was allowed. I say to your Honor tha t th i s money was not13 . given to buy equ ipment, j u s t to buy equipment, to get14 subcontrac tors , to have employees: This money was given for15 research . That was the p urp ose of the money.16 I th ink t ha t the government i s using the budget in a17 way tha t it never was intended for the purposes of what a loss18 should be. Let ' s assume tha t Dr. Karro n's s pe nt the whole19 $800,000 on machinery. He wasn ' t budgeted fo r i t , but he spent20 $800,000 for machinery for the projec t . He d idn ' t take a21 sa la ry , he didn ' t spend money on anything e l se and, 10 and22 behold, the projec t ran the th ree years and he developed the23 sc ience t ha t the money was given for . Under tha t theory he24 could be prosecuted fo r $690,000 in misspent money.25 The bottom l ine i s , your Honor, the fac t tha t they



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1 come up with a category and then they say, we have a category2 here , cap i t a l improvements, th e tes t imony i s c lea r ,3 uncontrover ted , t ha t these weren ' t cap i t a l improvements. They4 were s i t e preparat ion and they devalued the apar tment - - we had5 an exper t - - a one bedroom apartment in Kips Bay s e l l i ng for6 j u s t over $500,000. Everyone who knows anything about the r e a l7 e s t a t e market in New York City . That f igure was devalued8 because it devalued, but they have a category. It's ca l led9 cap i t a l improvements and we don ' t have a category in the

10 budget . Therefore , no t only whatever you spent , no mat te r what11 e l s e you want to ca l l i t , we ca l l ed it cap i t a l improvements.12 Did anybody ca l l it cap i t a l improvements but th e government?13 Now they say, it's cap i t a l improvement, not in the budget ,14 the re fo re disal lowed. I submit to your Honor, t h i s i s s i t e15 preparat ion . Any reasonable , log ica l person would conclude16 THE COURT: The t rouble- i s , in h is appl ica t ion fo r th e17 gran t he sa id - - he gave the impress ion t ha t they were up and18 running.192021 ce te ra .2223

MR. RUBINSTEIN: They had equipment the re .THE COURT: As I understood it, ac t ive Web s i t e , e t

MR. RUBINSTEIN: They had a Web s i t e .THE COURT: And they had computer equipment.

24 MR. RUBINSTEIN: But they d idn ' t have t h i s kind of25 computer equ ipmen t, Judge. We are going back - -



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SentenceTHE COURT: You don ' t need s i t e improvement.MR. RUBINSTEIN: They needed it here . The cont rac tor

3 t e s t i f i ed what he did . He bu i l t th ings , he put up rackings fo r4 them to convert the l iv ing room in to a computer l ab .5 THE COURT: The mater ia l was - - everything was in6 there . What he did was, as I unders tood i t , was to improve th e7 usab i l i t y of the space .89

10 budget .11

MR. RUBINSTEIN: Not fo r an apartment.THE COURT: Not something t ha t was cal led fo r in the

MR. RUBINSTEIN: It's not ca l l ed fo r in the budget, I12 agree with you. I t may come under the ca tegor ies of others .13 I t may come in here . But the ques t ion i s - -14 THE COURT: Others i s fo r aud i t s . Other was the only15 th ing - - the budget under othe r was aud i t s , i s my reco l l ec t ion .16 MR. RUBINSTEIN: There was a budgeted category cal led17 aud i t s , your Honor.18 THE COURT: The only th ing t ha t was budgeted under19 others was aud i t s , $10,000.20 _ MR. RUBINSTEIN: I f you look a t 115, you ' l l see tha t21 In 115, nex t year, they disallow ed the $10,000.22 The bottom l i ne i s tha t the i tems t ha t t he p ro se cu to rs23 ta lked about, capi ta l improvements, I submit , were not cap i t a l24 improvements. The meals , they have no breakdown of where the25 mea ls were, who the meals were for . I f you r e ca l l Riley ' s



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1 testimony, she went to lunch with Dr. Karron to ta lk about th i s2 inves t iga t ion with o ther people from CASI, and she d is al lowed3 t ha t lunch. Any business i s going to charge a lunch l ik e th at .4 Dr. Karron spent on h is Master Card - - he had three c redi t5 cards. The only card tha t he charged meals on tha t were6 deducted were on the American Express CASI card. His own card7 and the Master Card i s in evidence. He never deducted.8 To suggest tha t there i s not a category of meals,9 there i s t rave l . There i s t r ave l does t r ave l include meals

10 when you trave l? Tha t 's why when we broke down, your Honor,11 th e s ub s cr ip tion , we to ld you what those were. They had12 nothing to do - - you sor t of have the category, you were13 th inking of some magazines l ike Sports I l lus t ra ted . This is14 fo r res earc h fo r access to research fo r the projec ts . So you15 subscr ibe to a serv ice to get your sc i en t i f i c data ..16 THE COURT: The b ig item tha t Mr. Everdel l was saying,17 jus t , look, take the ones tha t a ren ' t within the budget, the18 nonbudgeted i tems, and add them up and giving you c redi t for19 the u t i l i t i e sam?un t , so you have an $11,000 c redi t , as I20 understand i t . You still have 11,000 under u t i l i t i e s or maybe21 12, 12,000.22 MR. RUBINSTEIN: I t would be alm ost 5,000 under23 utilities--24 THE COURT: You save tha t , so to the extent , instead25 it would be 5,000. What about the other entry, the ren t entry?



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8AKMKARS SentenceMR. RUBINSTEIN: Clear ly , he was no t en t i t l ed to the

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2 r en t , your Honor, so tha t ' s $60,000.34

567

THE COURT: Then you add the o ther two then - -MR. RUBINSTEIN: What do you add two with , Judge?THE COURT: $43,000 spent .MR. RUBINSTEIN: For subscript ions?THE COURT: No. For bookkeeping, auto expense, blank

8 processing, consul tants , lawyers, dues, presc r ip t ions .9

10MR. RUBINSTEIN: That he ' s allowed. Subcontractors .MR. EVERDELL: Your Honor, I th ink t ha t the defense

11 counsel i s saying it's allowed s imp ly bec au se it i s l i s t ed12 under the category o ther , but , as your Honor pointed out , in13 th e budget , the only th ing tha t the company l i s t ed for i t s14 o ther expenses was the audi t .15 THE COURT: You got th i s 80,000 f igure tha t you can16 move around. But t ha t seems to me i s already taken care of17 when you look a t the ove rd rawn equ ipment and the overdrawn18 mater ia l s and suppl ies . That takes care of the 80,000 pre t ty19 wel l .20 MR. RUBINSTEIN: But those were budgeted items, your21 Honor, tha t went back to the in ten t theory . I f they were22 budgeted i tems and he had no cr imina l in ten t he in tended to23 misappropria te . We concede tha t . He spent over the budget .24 But did he cr iminal ly intend to misappropriate tha t amount?25 THE COURT: He d idn ' t spend much over the t o t a l amount



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1 because he took out the 836,5 plus $1300, ap paren tly , th e f i r s t2 year . It's these expendi tures in the o ther category tha t3 MR. RUBINSTEIN: I f you have 60,000 fo r the ren t , you4 have 11,000 for the - - you have 5,000 fo r the u t i l i t i e s .5 That ' s 65,000 in the f i r s t year for the u t i l i t i e s . I submit6 tha t the capi t a l improvements are not - - are a l eg i t imate7 expense. The cleaning i s quest ionable . Even though I think8 t ha t it's arguable on def endan t's s id e, I won' t contes t the9 cleaning.

10 THE COURT: It's an appropr ia te expense. He should11 have gotten approval fo r i t .12 MR. RUBINSTEIN: That i s the poin t . The point is , i f13 he d idn ' t ge t approval , we know tha t the ren t - - he was turned14 down.and he still took the ren t . We know th a t tha t i s an15 amount tha t he took tha t he wasn ' t ent i t l ed to .16 But as to o ther i tems t ha t were for the benef i t of the17 research , it doesn ' t seem tha t the guidel ines , when you look a t18 the loss fa cto rs and how to consider loss and you consider19 government benef i ts , I th ink even though they don ' t have the20 spec i f ic i l lu s t ra t ion , the government can ' t c i t e one g ran t case21 where there was a misappropriat ion.22 The problem here i s tha t , what was the government 's23 benef i t? They gave money fo r a research projec t . I t ' s24 unquest ionable t ha t ' s a l l they did was research. The only25 monies he put in h is pocket were the ren t monies.



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SentenceTHE COURT: The problem i s t ha t CASI, he did own CASI,

2 as I unders tood i t , he and h is family, I guess . Yo u can3 misapply money not j u s t fo r your bene f i t , but you can misapply4 money fo r the corpora t ion ' s benef i t .56

MR. RUBINSTEIN: Right .THE COURT: The t roub le with cap i t a l improvements,

7 yes, it probably was not to h is personal bene f i t because the8 a p a ~ t m e n t probably was worth more unimproved than it was9 contain ing those improvements, but it would be benef ic ia l to

10 CASI as a computer c en te r, r es ea rc h computer cen te r , to have11 the improvements made. That ' s the problem. That would still12 no t be the research contemplated by the gran t .13 MR. RUBINSTEIN: I still don ' t see where they get14 t he i r f igure t ha t they a re cla iming - -15 THE COURT: I don ' t see th e cap i t a l i m p r o v e m ~ n t s . I16 d id n 't r e al iz e the amount was $37,000.17 MR. RUBINSTEIN: When the apar tment was sold they had18 to r ip out a l l t ha t s t u f f fo r the new owner.19 THE COURT: That ' s what I was r e f e r r i ng to ea r l i e r .20 What kind o f a f igure do you come up with,21 Mr. Rubins t e in i22 MR. RUBINSTEIN: In the f i r s t year , 60,000 fo r rent ,23 5,000 fo r u t i l i t i e s . I 'm rounding o f f . 2,000 fo r meals and24 67,000 in th e f i r s t year . Quest ionable cap i t a l improvements or25 s i t e prepara t ion , which would probably go under equipment. And



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Sentence

MR. KWOK: Can we have the amount on tha t?MR. RUBINSTEIN: For cap i t a l improvements?MR. EVERDELL: The th ing you j u s t c i t ed .MR. RUBINSTEIN: I sa id 2,000 fo r meals, 5,000 for

33

6 u t i l i t i e s , 60,000 fo r r en t . Second year , the re i s 2,000 for7 r en t , 5,000 fo r u t i l i t i e s . Meals, th e second year , rounded o f f8 to $1500. I 'm so r ry . Meals. $3,000. That would make it9 $77,000 without cap i t a l improvements. I f you gave th e whole

10 cap i t a l imp rovemen ts , which I don ' t see how you can do tha t fo r11 th e two years , you ' re t a lk ing about 20. We don ' t concede t h i s .12 We are t a lk ing about 31,000 over t he re .13 So in a wo rs t- ca se s ce n ar io it would be 108,000, but I14 submit to your Honor t h a t I don ' t see why cap i t a l improvements15 should be considered as a nonbudgeted i tem when it c lea r ly was16 used in o rde r to f ac il i t a te - - you cou ldn ' t put those b ig17 computers in th a t apar tment wi thout s i t e prepara t ion . You18 wouldn ' t do it without having th e shades to keep th e hea t out ,19 without h av in g ex t ra wir ing to ge t th e e lec t r i c i ty needed fo r20 th e p la ce . These are th ings t ha t a re t o t a l l y unre la ted to what21 anybody would consider a cap i t a l improvement.22 THE COURT: Par t of th e problem here i s t h a t the s i t e23 was changed from NYU to apar tment . With NYU you had f ree space24 and a place fo r the computers. When t h a t f e l l down, he25 swi tched to the apar tment . But th e budget doesn ' t change in a



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1 mater ia l way, I bel ieve , between the two budgets. I think i t2 should have.3 MR. RUBINSTEIN: Judge, I j u s t fee l t ha t looking at4 Judge Rakoff 's decis ion in Adelste in - - Adelson, ra ther , and In5 other ,decis ions t ha t I 've seen, including Judge Block's6 decis ion out of th e E astern Dis t r i c t - -78

THE COURT: It's not in your memo.MR. RUBINSTEIN: I know. Because I'll give you the

9 c i t a t ions , your Honor. Judge Rakoff i s 441 F.Supp.2d 506.10 Judge Block's decis ion c i t ing Judge Rakoff 's decis ion i s a11 Westlaw c i ta t ion of 354151 and a and they t a lk about - -12 those cases were primari ly s tock cases. They t a lk about that13 the fraud guidelines - - because the numbers increase so much14 tha t they give a dis tor t ed view of what a reasonable sentence15 should be.16 In both of th ose cases - - I 'm not even up to tha t17 po in t because f i r s t we have to have a guidel ine analysis before18 we get to the quest ions of downward depar ture or 355319 cons idera t ions . I th ink what the Court i s t rying to decide now20 in i t s analys is i s , f i r s t , doing what the guidel ine calcula t ion21 i s required to do, before you determine whether or not you want22 to give a guidelines sentence or a nongu ide li nes sent ence . I23 think tha t for the purposes of a guidel ine analys is , I think24 tha t a f igure of between 70,000 and 120,000 fo r guidel ine25 purposes, analys is purpose, tha t tha t would be an appropr ia te



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1 range, 70,000 to 120,000 without - -2 MR. KWOK: Your Honor, i f I may, even taking j u s t the3 i tems Mr. Rubinstein ta lked about , the ren t , u t i l i t i e s , meals.4 Ut i l i t i e s , by the way, j u s t the di fference , not the whole5 th ing, we are up to $100,000 al ready . And then i f you look a t6 Government Exhibi t 115, year two, the category under other,7 which includes a l l manners of th ings l ike bookkeeping, auto8 expense, bank processing, consul tants , lawyers, d ues,9 subscr ip t ions , tha t alone i s $31,000. I f you add t ha t category

10 alone to a l l the s tu f f tha t Mr. Rubinstein j u s t conceded, we11 a re al ready over $120,000 , which puts us a t l eve l 16.12 MR. RUBINSTEIN: I d idn ' t concede tha t . There i s no13 breakdown of what they are ta lking about . They give you14 bookkeeping auto expenses, which I assume re la te to t ravel ,15 bank processing consul tan ts i s budgeted for 250,000 ra ther ,16 he i s budgeted for $110,000 in subcontractors, which I guess17 a re consul tants . He spends only 6,000 of tha t , and they throw18 in consul tants , dues, subscr ip t ions in to a category. Then they19 want to say, tha t ' s $31,000. I submit to your Honor, tha t20 nobody from tha t char t or from the 110 backup could say how21 they ever arr ived a t th is number. Then they want to22 a rb i t r a r i l y plug it in and say, no, look a t tha t , we have23 arr ived a t the next leve l .24 THE COURT: I 'm looking where those f igures must have25 come from. I think i f you look a t 110, 111, we can probably



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2 MR. KWOK: For example, your Honor, you can look a t3 G o v e r r ~ e n t E x h i b i t 110, page 17 o f 37. That , f o r example,4 l i s t s a l l t h e gas paYments, a l l h e r expenses . T h a t ' s where it5 came from. T h a t ' s j u s t one example.6 THE COURT: Mr. Spring i s bookkeeper . T h a t ' s what Kim7 Jackson i s f o r S p r i n t .89

MR. KWOK: T h a t ' s r i g h t .THE COURT: The s o l e purpose, as I unders tood t h e

10 tes t imony, and I may be wrong, f o r Mr. Spring t o be employed11 was t o g e t t h e books i n o r d e r f o r t h e o t h e r . They had another12 bookkeeper, as I unders tood i t , b u t I may be wrong, who could13 t a k e e n t r i e s f o r bookkeeping, b u t w a s n 't s k i l l e d enough for14 i n t e r p r e t i n g what should be i n t h e company's expenses and what15 should be p e r s o n a l expenses , and what should be r e a s o n a b l e16 expenses . I s t h a t c o r r e c t ?17 MR. EVERDELL: Your Honor, I t h i n k Mr. Spr ing , i n18 a d d i t i o n w i t h h e l p in g w i t h t h e ' a u d i t s , a l s o s t a y e d on t o do19 a d d i t i o n a l bookkeeping work f o r t h e company even a f t e r t h e20 a u d i t was over .2122

THE COURT: I thought it was a l l computerized.MR. EVERDELL: I misspoke.

23 I n a d d i t i o n t o h e l p p r e p a r i n g t h e books f o r t h e24 upcoming a u d i t , he a l s o conducted some r e g u l a r bookkeeping25 Even so, you have $10,000 budgeted


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1 fo r the aud i t and you went over tha t $10,000 by the amounts in2 other , which in clu des th e overage, includes some of the Frank3 Springs expenses, but it also includes some th ings l ike auto4 expenses.5 THE COURT: But you are allowed the $80,000, but then6 the $80,000 has been used up.7 MR. EVERDELL: By equipment or any other number of8 categor ies , yes, your Honor.9 It's the government's posi t ion tha t a t the very l ea s t

10 tha t th i s money should be co un ted as a l o ss . It's nonbudgeted11 and it's completely absent from the budgets tha t were12 submitted, and was money spent w ith ATP grant money.13 Let ' s also not lose s ight of the fac t tha t it was very14 clear from the budget ru les or from the ATP ru les tha t in direc t15 costs are not covered, and t ha t was made very c lea r to the16 defendant a t a l l the premeetings before he s t a r t ed the grant .17 Yes, ce r ta in things - - research can ' t happen without18 lo t s of th ings being bought, lo t s of th ings being improved,' a l l19 th i s s tu f f . But it doesn ' t mean tha t you can use ATP grant20 funds to spend on tha t s tuf f . You have to follow th e ru les .21 So these expenses I think, j u s t looking a t the22 spreadsheet tha t Ms. Riley prepared, you can see how they are23 i temized out here, a t l ea s t the other category.24 THE COURT: Is Peter Ross an employee or was he a25 consultant?



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38Sentence

MR. EVERDELL: Peter Ross, your Honor? I don ' t think2 I know where you're looking, your Honor. I see .3 Your Honor , I th ink tha t Dr. Karron chose to pay Peter4 Ross as a consul tant . Even so, what we are ta lking about here,5 t ha t ' s a $15 charge.6

7THE COURT: what charge?MR. EVERDELL:I thought you were ta lking about the

8 Peter Ross parking charge.9

1011 charge.12

THE COURT: Yes.MR. EVERDELL: Reimbursement to Peter Ross i s a $43

We are ta lk ing about very small numbers here. Under13 the guidel ines , as it says in the commentary, the Court need14 only make a reasonable est imate of the loss . And I th ink when15 you consider a l l these categor ies tha t we are t a lk ing about and16 the fac t t ha t it i s backed up on the paper here , tha t we are in17 the range, a t l eas t , of 120,000, given what Mr. Rubins te in has18 ju s t to ld your Honor and the very small di fference . that seems19 to exis t a t th is poin t .20 The categor ies th a t a re nonbudgeted categories should21 be counted, and tha t bumps us in to the $120,000 range without22 much t rouble a t a l l . Given tha t your Honor doesn ' t have to23 come to an exact dol la r amount of loss , the minor24 discrepancies , to the exten t they even exis t , s houl dn 't d e te r25 your Honor from coming to t ha t l a rger loss amount because I



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1 think the c lea r , lo gica l way to read the evidence i s tha t there2 a re lo t of nonbudgeted categor ies and they are backed up by th e3 spreadsheet analys is , and t ha t these should be considered as4 loss to the government because they were not approved, as the5 defendant knew he needed.67

THE COURT: Brings me back to the quest ion - -MR. RUBINSTEIN: The problem i s , 'Judge, when you go to

8 the backup tha t they throw out there , 110, and you f ind tha t9 the bank charges are under $336 - -

1011

THE COURT: What page are you on?MR. RUBINSTEIN: We have a gas exp ense on page 17 of

12 37 o f $ 1,1 89 .6 8. We then have - -1314

THE COURT: I missed the page.MR. RUBINSTEIN: Page 17 of 37. We know tha t

15 Dr. Karron was t rave l ing to Washington, D.C. and to New Jersey16 as pa r t of h is work on th is research, but l e t ' s take the whole17 f igure . Next they have l e t ' s assume she put in - - the18 parking, $67, t ha t ' s on 18 of 37. Then they have pank19 processing on 18 of 37 of $336. I f you add up lawyers they20 have on 21 of 37 $1,173.75. And I submit tha t ' s quest ionable21 because I th ink those lawyers were pa ten t lawyers re la ted to22 securing in te l lec tua l property tha t they were allowed to do.23 'Ehen it says dues and subscr ip t ions under tha t . They have24 $198.25 I 'm looking fo r the - - they have tha t bookkeeping



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1 f igure out . I don ' t th ink it i s appropr ia te , bu t they have a2 bookkeeping I don ' t know who t h a t inc luded , but l e t ' s l eave3 th e bookkeeping out of it. We a re ta lk in g about under $3,000,4 in my quick math, of expenses . And then they t e l l you t h a t th e5 ca tegory ca l l s fo r $31,000, bu t t h e i r th ing i s 31 thousand 8 o r6 625, depending on your eyes igh t . How t h a t ' s broken down,7 whether o r no t these a re app rop ria te expenses , then they say,8 let's plug In t h i s add i t iona l $31,000. I submit to your Honor9 t h a t would be inappropr ia te .10 MR. EVERDELL: Your Honor, l e t me address - - fo r11 example, the re i s a spec i f i c i s sue with th e lawyers. Pennie &12 Edmonds, pa t en t a t to rneys , it was my unders tanding th a t th is13 was incur red befo re the g ran t even s t a r t ed . And these charges14 fo r lawyers a re spec i f i c a l l y proh ib i t ed by th e g ran t ru l e s .15 Was Mr. Karron to ld t h i s? No. Because he never16 ac tua l l y t r i ed to budget it as an i tem. Had he t r i ed to budget17 it, he would have been to ld spec i f i c a l l y tha t he cou ldn ' t use18 gran t money to do t h i s .19 Again, we a re faced with t h i s argument t h a t i f it20 arguably somehow benef i t s th e r es ea rc h, it should no t be21 covered a t the lo s s . The government submits t h a t t h a t i s22 simply unworkable. What we have to work with i s what was23 budgeted and what was approved by NIST, and anything t h a t24 wasn ' t i s a lo s s to th e government.25 Not only t ha t , your Honor, we a re ta lk ing a t l e a s t - -



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1 now we seem to be t a lk ing about the di fference of maybe $10,0002 between two th resholds in the guidel ines . The defendant 's3 calcula t ion tha t he gave you a few moments ago doesn ' t even4 include the cleaning expenses, and t ha t ' s severa l thousand5 dol lars two years in a row. And t ha t I j u s t don ' t see the6 argument there . Again, the only argument could be, as he sa id7 in h is papers , was t ha t you need to clean in order to make the8 computers work. That simply doesn ' t hold water .9 This i s an ind i rec t expense, something tha t i s

10 disallowed by the grant and was never budgeted and never11 approved. That i s a loss to the government. I t was money t h a t12 was spent in contravention of .c lear ru les th at were se t out13 governing the grant fund.14 So given the fac t tha t we are l i t e r a l l y arguing now15 about a couple thousand dol lars here and there , and I16 bel ieve - - we could s i t here and t a l ly up a l l of these17 nonbudgeted expenses. I guarantee you, we would be over the18 120,000 dol la r mark without any t rouble whatsoever.19 THE COURT: What's the appl icable note tha t we apply20 here to losses?21 MR. EVERDELL: Your Honor, there are a few. One i s22 the est imat ion of loss , which j u s t says - - thac ' s 3A - - 3C,23 which says tha t the Court need only make a reasonable est imate24 of the loss , but also the specia l rules .25 THE COURT: You're looking in the commentary.



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8AKMKARS SentenceMR. EVERDELL: I 'm looking a t the commentary I yes l

42

2 your Honor.3 Commentary 3 1 which i s loss under subsect ion Bl and4 then 3C I es t imat ion of loss l sa id : The Court need only make a5 reasonable es t imate of the l o ss . And the Cou rt 's lo ss6 determinat ion i s en t i t l ed to appropr ia te deference. And then7 if you look a t F I which are the spec ia l ru les - -8 THE COURT: I j u s t want to see one second because I9 have t rouble l I guess I in determining whether or not it should10 be lo ss to the government or misappropr ia t ion .11

12MR. RUBINSTEIN: There i s another bas i sTHE COURT: In tent ional misappropriat ion by the

13 defendant . I t seems to me it should be i n t en t iona l14 misappropriat ion by the defendant .15 MR. EVERDELL: An i n t en t iona l misappropriat ion l your16 Honor I would in clu de th e fac t tha t he was to ld tha t he needed17 to submit a l l of these charges in h is budget and ge t pr io r18 approval fo r them.1920 lacking.21

THE COURT: The fraud and decei t element i s somewhat

MR. EVERDELL: Your Honor l as you l I think I pointed22 out ea r l i e r l the case law shows t ha t you can have a23 misappropr ia ti on s ca se even i f the expendi tures arguably24 b en efite d th e company. That ' s the Urlacher case.25 THE COURT: I s n ' t th i s app l ica t ion to the benef i t of

SOUTHERN DISTRICT REPORTERS I P.C.(212) 805-0300


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1 the defendant , or th i rd party?23

MR. E V ~ R D E L L : Or to the defendant .THE COURT: That ' s under one of these guide l ines .

4 Which lS i t ?5 MR. RUBINSTEIN: No, it's not , Judge. That i s for th e6 purposes of gUil t . We are t a lk ing now fo r guidel ine purposes7 determining the l o ss , which I sugges t i s a di f fe ren t analys is .8 I th ink your Honor" should be d ire cte d to 2B1.1, 3B, where i t9 says gain. This i s an a l t e rna te method fo r the Court to use.

10 THE COURT: Let me f ind you, where you are . 3B. Now11 you ' re going to the commentary.12 MR. RUBINSTEIN: I 'm in the commentary, Judge. 3B13 says gain. The Court sha l l use the gain th a t re su lte d from the14 offense as an a l t e rna t ive measure of loss only i f there i s a15 loss , but it reasonably canno t b e d eterm in ed . And I submit to16 your Honor tha t under these circumstances you cannot reasonably17 determine what the loss i s , so you should look a t the gained18 fac tor which in th i s case would r e su l t in looking a t the ren t ,19 the $62,000; the u t i l i t i e s ; cleaning, i f you want; meals, and20 you would be j u s t over $70,000. I th ink tha t is the21 appropr ia te analys is here before you consider any c redi t s or22 offse t s . But f i r s t we have to a r r ive a t what is an appropriate23 f igure . Obviously, th e guid elin e considers the fac t of what24 someone actua l ly puts in the i r pocket for personal benef i t s .25 MR. EVERDELL: Your Honor, I have not looked a t the



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1 case law on th i s recent ly and it was not c i ted in any2 submission by Mr. Rubinstein, but I th ink the loss can be3 reasonably de te rmined based on the numbers se t for th by the4 government. I don ' t th ink we need to re ly on any al te rna t ive5 method of loss because we can determine what the government6 l o s t as a r e su l t of a l l of t h i s .7 I th ink, i f I remember correc t ly , the cases where you8 ta lked about a l t e rna t ive lo ss c al cu la ti on s is where the9 vict ims - - there a re so many vic t ims and the calcula t ion

10 involved th ings l ike s tocks and how the value of s tocks go up11 and down and how t ha t ' s very h ard to est imate . Here we are12 ta lking about hard numbers. We know what grant money went to13 the defendant and we know what he spent it on. The question14 for your Honor to consider i s which of these expendi tures are15 you consider asa loss to the government and which are not .16 THE COURT: Insofar as t he m i sappl ic a ti on involved17 fraud, then I think you used loss . Insofar as the18 misappl ica t ion i s in ten t iona l - - th i s appl ica t ion seems to be a19 d i ff er en t d e fi ni ti o n of in tended. Then it seems to me to use20 the gain to the defendant or a th i rd party . But I can ' t see21 where I am in the guidel ine not ice . I don ' t see tha t it rea l ly22 appl ies under the gu id e li ne no te s. So what I jus t sa id i s n ' t23 suppor ted by the gu id e li ne not es .2425 tha t .

MR. RUBINSTEIN: What's tha t , your Honor? I missed



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THE COURT: What I j u s t s a i d isn't s u p p o r t e d by the

45

2 g u i d e l i n e n o t e s , a s I s e e it.34

MR. RUBINSTEIN: What ' s t h a t , your Honor?THE COURT: I g a t h e r t h a t you o n l y a p p l y g a i n t o an

5 i n t e n d e d m i s a p p l i c a t i o n , you a p p l y l o s s t o a f r a u d c a s e if it 's6 done by a f r a u d . Then you a p p l y l o s s . My problem from t h e7 b e g i n n i n g h e r e has been t h a t d i s t i n c t i o n . I am n o t s u r e you8 a p p l y l o s s h e r e .9 MR. EVERDELL: Your Honor, t h e commentary t h a t t h e

10 government was f o l l o w i n g was a c t u a l l y - - i n comb inat ion w i th a11 r e a s o n a b l e e s t i m a t e was t h e 3F s p e c i a l r u l e s .1213

THE COURT: Let me look a t t h e r u l e s .MR. EVERDELL: 3F2, government b e n e f i t s , which i s a l s o

14 t h e s e c t i o n t h a t was c i t e d by t h e d e f e n d a n t i n h i s l e t t e r ,15 which s a y s : I n a c a s e i n v o l v i n g government b e n e f i t s , e . g .16 g r a n t s17 THE COURT: It s a y s : S u b j e c t t o t h e e x c l u s i o n and18 s u b d i v i s i o n if t h e l o s s i s t h e g r e a t e r o f a c t u a l l o s s and19 i n t e n d e d l o s s . I n a s e n s e , t h e whole t h i n g , t h e whole20 agreement was a l o s s t o t h e government .21 MR. EVERDELL: Yes, your Honor. I n f a c t , t h e22 defendant n e v e r even d i d h i s c o s t s h a r e , a s we know, and was23 e s s e n t i a l l y n o t e n t i t l e d t o any o f t h e g r a n t money t h a t he24 s p e n t .25 THE COURT: There was h i s c o n t r i b u t i o n l a t e r , w a s n ' t



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there some money?

Sentence46

MR. EVERDELL: I th ink a f t e r th e g ran t was suspendedthe re was a con t r ibu t ion by th e defendant .

THE COURT: That went to outs tand ing b i l l s .MR. RUBINSTEIN: That money was probably extended.

That ' s the whole purpose . I t inc reases your budget .MR. EVERDELL: Your Honor, th e government to ld the

defendant t ha t in order to comply with th e cos t share he had tomake payments to the gove rnment and t h a t ' s th e payment tha t wasmade, but I be l i eve t h i s was a f t e r - -

THE COURT: That ' s more than th e co s t share - -MR. EVERDELL: I 'm so r ry . He did not make t h a t

payment.THE COURT: The $70,000.MR. EVERDELL: You a re ta lk in g about th e $70,000

loan - -THE COURT: There i s some s ta tement in these papers

t h a t he gave 70,000 a f t e r the c lo si ng p er io d .MR. EVERDELL: Tha t $ 70 ,0 00 , which I be l i eve

Mr. Rubinste in was saying was done between Ju ly 27 - - June 27o f 2003 and August o f 2003 was a f t e r the suspension.

THE COURT: What was t h a t used for?MR. EVERDELL: One moment, your Honor.Your Honor, I bel ieve my unders tanding i s the re were

outstanding invoices a t the t ime t ha t the $70,000 was used to



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1 pay the outs tanding invoices . It was not ac tua l ly used to pay2 the government any of the cos t share amount. So t ha t didn ' t3 t rans la te - -4 MR. RUBINSTEIN: You never pay th e government the cos t5 share . You put the money in so you take th e money out and6 spend it. 'I 'hat' s the concept . The money7 THE COURT: I t doesn ' t go to the government. I t goes8 to the budge ted i tems during th e p erio d of the gran t . Before9 it was suspended - -

10 MR. EVERDELL: I th ink tha t i s the po in t , your Honor.11 It wasn ' t before the grant was suspended. The grant was12 suspended on June 27, 2003.1314

THE COURT: To keep CASI going.MR. EVERDELL: But under the guidel ine ru les , i f the

15 f raud, i f th e misappropriat ion i s discovered by a government16 agency, tha t i s the po in t a t which you s t a r t you cu t off17 people from get t ing c red i t from paYments they make l a t e r . And18 as I think I out l ined in the government 's l e t t e r to the Court,19 t ha t date predates the suspension date because we had tes t imony20 from Hope Snowden who t e s t i f i e d tha t when she was get t ing21 revised budge t submis sion s a t the end of 2002 and the beginning22 of 2003, she noticed there were ser ious discrepanc ies in the23 budget numbers and t ha t ra i sed red f lag s to her t ha t there may24 be some problem with t he app rop ri at io n of these funds and t ha t25 led to them ca l l ing it of f .



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II 8AKMKARS SentenceTHE COURT: I th ink t ha t ' s covered in my opinion.MR. EVERDELL: That i s the date o f d is co ve ry and the

48

3 defendant i s , in fac t, not ent i t l ed to a cred i t fo r any funds4 he have given back a t tha t poin t because the5 misappropr ia t ion was discovered.6 MR. RUBINSTEIN: That ' s not , your Honor - - I'll take a7 look a t your opinion. That ' s not the date of the discovery8 from the standpoint tha t the defendant pu t monies back because9 he thought tha t it was discovered he did something wrong. The

10 bottom l ine i s , he d idn ' t th ink he did anything wrong. That ' s11 the whole concept of the discovery i s tha t we don ' t want12 somebody to run back and put money in a f t e r they f ind out tha t13 th eir th ef t has been discovered.14 This i s a misappropr ia t ion case and he did not feel - -15 he was a he then tha t he had done anything wrong. And it's16 h is mental process, not t he i r mental process, because the whole17 concept i s , hey, .i f you ge t caught s tea l ing , a t tha t point ,18 when you give it back, it's not the same as i f you did th is19 volunta r i ly because you rea l ized you did something wrong and20 you wanted to make amends before it was detected . S o l think21 tha t they have the wrong person tha t has to be aware of when22 there i s something wrong here .23 THE COURT: I see tha t th i s sect ion, subsect ion of the24 commentary, subsect ion I I says, in a case involving government25 benef i t s , ent i t lement program paYments, losses sha l l be



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1 considered to be something obtained from unintended rec ip ients2 o r d iv erted to unintended uses . The problem I 'm having i s t ha t3 there i s more than one s ta tu te - - the s ta tu te deals in terms of4 fraud in one case and in ten t ional misappl ica t ion in another .5 And it does seem to me tha t benef i t s obtained by unintended6 rec ip ients deals with i n t en t iona l misapplicat ion of funds7 d iv erte d to unintended uses . The second pa r t of th i s note to8 t he gui de li ne s i s more d i f f i cu l t to apply in in te nt io na l9 misappl icat ion of funds in terms of showing t ha t it was an

10 in ten t ional m isapp lication . A ll the evidence in the case kind11 of shows t ha t when con fr on ted w it h misapplying the funds, he12 would say things l ike , my mother has got the money or something13 el$e , I 'm working on i t , they are going to come along, and the14 l ad ies down there a t the program love me and everything i s15 going to be a l l r igh t . Never does he make a s ta tement , a t16 l eas t to these par t i es , the he l l with ru les , I 'm taking the17 money. They owe it to me for my research.18 I f ind it d i f f i cu l t to apply th e g uid eli ne s in th is19 case . Maybe the guidel ines make it a s i tua t ion tha t d idn ' t20 occur to the dra f te r s of th e gu id el in es . It's not the usual21 case, as I understand i t .22 Are there other cases of th is so r t th at e i th er par ty23 i s re ly ing on involving the in ten t ional misappl icat ion - - are24 th ere othe r cases involving the in ten t ional misappl icat ion of25 funds as opposed to fraud, embezzlement?



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MR. EVERDELL: I looked for some cases t ha t ta lked

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2 about loss amount in sentencing. I d idn ' t f ind anything very3 helpful in tha t regard. What I was going with was l i t e ra l ly4 what I got fr8ffi the guidel ines .5 But I still don ' t know why it's d i f f i cu l t to apply6 d iv erted to unint ended uses in th i s case , tha t prong of the7 guide l ines , specia l ru les fo r government benef i t s , because t h a t8 seems to me to be the def in i t ion of misappl ica t ion . You're9 taking funds and applying them fo r unintended uses , unintended

10 in th i s case by the people who gave out th e gran t money, NIST.11 And unintended in th e sense t ha t they gave out the money with12 l o t s of ru les at tached to it, tha t they made c l ea r to the gran t13 rec ip ients and those were the in te nd ed u se s of money, t ha t i s ,14 expendi tures t ha t followed the grant spending ru les . And15 anything t ha t d id not follow the gran t spending ru les was an16 unintended use of t ha t grant money. I th ink t ha t was made very17 c lea r to the defendant in th i s case and, from the testimony, to18 a l l grant r ec ip ie nts , th at th ings l ike th e k ick off meeting an d19 other th ings l ike tha t . I th ink t ha t i s ac tua l ly the20 appropr ia te par t of the guide l ines to be applying in th i s case,21 tha t the money t ha t was spent , contrary to g ran t spending22 ru les , was diver ted fo r an unint ended use and t ha t t ha t23 cons t i tu t es a loss .24 Now, your Honor ra i sed some d i f f i cu l t i e s you had with25 the ca lcu la t ions fo r ce r ta in th ings and whether overbudget



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1 expenses should count or should not . We have, a t le a s t , I2 th ink, provided a more s impl i s t i c and one t ha t benef i t s the3 defendant way of th inking about th i s , which i s j u s t looking a t4 the unbudgeted categor ies . Those are c lea r ly cases , money t ha t5 was spent contrary to the g ran t ru le s because the re was6 absolu te ly nothing in the budget t ha t spoke to it. These are7 monies t ha t were expended without any re fe rence to the grant8 ru les whatsoever.9 Now, defendant can argue t ha t these th ings arguably

10 benef i ted the research in some way. Perhaps they did , but11 tha t ' s not the s tandard t ha t we need to opera te with because12 tha t would sweep in every s ing le expenditure . There would be13 no loss in any of these types of cases i f t h a t ' s the way we14 have to look a t it. I f you look a t the unbudgeted ca tegor ies15 and you apply to unintended uses , being d iver ted cont ra ry to16 the gran t ru les , t ha t provides a framework fo r the loss amount17 tha t ' s appropr ia te in th is case .18 MR. RUBINSTEIN; Your Honor, I think th a t th is case i s19 outs ide the hear t land because I don ' t think anybody envisioned20 a case where somebody got a grant , spent a l l t he i r t ime and21 energy on tha t grant , bough t equ ipment in fu r therance of the22 grant . There i s no sugges ti on he re . As a mat ter of f ac t , Lide23 even t e s t i f i ed t ha t Dr. Karron met a l l the benchmarks, and your24 Honor sa id something t ha t I have to ta ke oppo si ti on to ,25 suggest ing tha t nothing came of th i s research .

SOUTHERN DISTRICT REPORTERS, P.C.(212) 805-0300 .


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THE COURT: No. Saying tha t the pro jec t wasn ' t

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2 completed, so I suppose tha t they d idn ' t ge t t he i r money's3 worth in tha t sense.4 MR. R U B I N S T E ~ N : No. Because the government gets5 t he i r money's worth s ince they d idn ' t have a f in an cia l b e ne fi t,6 no matter what, and tha t the whole concept was tha t i f7 something was developed, Dr. Karron and CASI would keep a l l the8 prof i t s fo r themselves. Society would benef i t . They were9 doing research on a cut t ing edge. We have to go back seven

10 years ago. Now it's commonplace. But they were deal ing with11 the concept o f - - I hope I pronounce th i s r i gh t - - topologica l12 imaging t ha t they use today in many medical fac t ions .13 I submit to the Court and the government a paper tha t14 was submitted f or publ ic a ti on , c i t ing work tha t was submitted15 to a medical journal , c i t ing th i s work because, in fac t , tha t16 was the whole purpose of th i s research . That ' s why the gran t17 was given, to develop th is concept, a t a time where they use18 computers ha l f the s ize of th i s room. Today they probably19 could use a laptop and get the same informat ion. I know I have20 it here . Jus t a second, your Honor.21 THE COURT: I 'm not taking i ssue with tha t ,22 Mr. Rubinstein . I am not taking i ssue with tha t . I t never23 came to f ru i t ion with the commercialization of the process , as24 fa r as I know.25. MR. RUBINSTEIN: They are t a lk ing about the amount



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1 tha t Dr. Karron received and the f igure tha t we s ta r t ed out2 with from - - as to sa la ry , it seemed to me th a t th a t figure, a s3 I c ited in my submission of October 17, on page 3 f i r s t of4 a l l , they have 129,850 in loans. This i s a t 110, Government5 Exhibi t 110, 38 through 40 of 44, th e second port ion of 110.6 They show 129,850 loans to Dr. Karron. We dispute one, and I7 have backup fo r i t , a $750 check t ha t was r ea l l y fo r Scot t Alba8 tha t was advanced from defendant out of h is own money. Then9 December 30, '02, 15,00 0 check tha t ' s fo r reimbursement.

10 Doe sn 't s ay anywhere on tha t check where it says loan, we11 reduced those numbers.

1213

THE COURT: Why do you say t ha t shouldn ' t . beMR. RUBINSTEIN: Because tha t was a pa r t i a l

14 reimbursement. There i s nothing on t ha t check - -15 THE COURT: I f he wri tes a check and it says par t i a l16 reimbursement on i t , i s n ' t tha t reimbursement fo r loans taken?17 MR. RUBINSTEIN: It's par t i a l r eimbursement because18 the medical expenses t ha t were on the c red i t cards - -19 THE COURT: What 's par t i a l reimbursement of expenses20 taken? I don ' t know what you ' re t a lk ing about .21 MR. RUBINSTEIN: Out-of-pocket expenses tha t he paid22 on the MasterCard t h a t ' s in evidence. They never give him23 c red i t fo r the monies t ha t we have the documentat ion t ha t we24 submit ted to the Court , and I have add i t iona l documentation25 showing - - not only showing t ha t these bookkeeping en t r i e s gave



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.1 back 67 - - $75,000 t h a t was given back by s a l a r y paychecks t h a t2 he never g e t s c r e d i t f o r . It seems t o me when they came up3 w i t h t h e f i g u r e t h a t they used f o r h i s s a l a r y , they included4 t h e 60,000 of r e n t . I mean, they have never s a i d - -56

THE COURT: I d o n ' t t h i n k it d i d .MR. RUBINSTEIN: I f you look a t pages 38 through 40 o f

7 E x h i b i t 110, t h e one t h a t ends i n 44 - -89

THE COURT: 1 and - -MR. RUBINSTEIN: The second h a l f of 110 has 38 of 44.

10 The beginning p a r t says1112

THE COURT: 38 of 44, y e s .MR. RUBINSTEIN: We have 38 of 44, 39 of 44, 40 of 44.

13 It s t a r t s out on t h e top of 38 saying, Dr. K a r r o n ' s l o a n s . I14 have t h e check t h a t I submit ted as p a r t of it on t h e $15,00015 l o a n . It d o e s n ' t say anything about loan. Here she p u t s DPK16 loan , b u t t h e r e i s nothing on t h e check t o i n d i c a t e loan .17 There a r e o t h e r checks t h a t do say loan. So why - -18192021

THE COURT: Which one i s t h a t ?MR. RUBINSTEIN: J u s t above t h e l i n e f o r loan repay.THE COURT: I see it. I see t h a t .MR. RUBINSTEIN: This i s 9/12/02, check 10451, it's

22 II w r i t t e n t o Dr. Karron.232425

THE COURT: Can I s e e t h e check?MR. RUBINSTEIN: Yes, your Honor.THE COURT: It's a check payable t o Dr. Karron. It

2008-10-20 sentencing 1 transcript

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