Martin Armstrong: The white-collar defendant time forgot

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8p ET Wednesday, March 7, 2007

Dear Friend of GATA and Gold:

Back in 1999, not long after GATA was founded, the first personage of the financial establishment to engage us in cordial correspondence was Martin A. Armstrong of Princeton Economics International in New Jersey. Armstrong disputed our contention that the gold market was manipulated, a contention we now consider proven by the several admissions of central bankers and other major players in the gold market since that time. But we did credit Armstrong for an insight with which we increasingly have agreed over time -- that the central banks should sell all their gold and thereby remove the overhead supply and forfeit their power of market manipulation and unleash a lasting bull market for gold. We just wanted the central bank selling and leasing to be done openly and with proper accounting so the world would understand the manipulation.

Soon after our correspondence Armstrong ran into trouble with the U.S. government. We're not in a position to judge his culpability but his long imprisonment on a count of contempt of court -- now more than seven years -- is beginning to seem tyrannical, like too many other things recently in the United States. A few weeks ago The New York Times published a story updating Armstrong's situation. Thanks to our friend Mark Webber for bringing it to our attention. It is appended.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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In Fraud Case, 7 Years in Jail for Contempt

By Gretchen Morgenson
The New York Times
Friday, February 16, 2007

On Jan. 14, 2000, Martin A. Armstrong, a globe-trotting investment manager, was told to produce $15 million in gold and antiquities, as well as documents, in response to a civil suit by the government accusing him of securities fraud involving hundreds of millions of dollars.

When he said that he did not have the items and could not produce them, a federal judge ordered him jailed for contempt of court.

Seven years later, Mr. Armstrong sits in the Metropolitan Correctional Center in Lower Manhattan.

Imprisoned two years before Enron and WorldCom brought corporate crime to center stage, Mr. Armstrong, 57, is the white-collar defendant time forgot. Over the years, the losses of his former clients have been repaid by a bank involved in his trades.

Still, he remains jailed on one of the longest-running charges of contempt. In many cases, a federal law limits to 18 months how long someone can be held under civil contempt while the court tries to coerce compliance with an order. Even in cases of criminal contempt, whose goal is punishment rather than coercion, an individual is entitled to the full protections of due process after six months.

"A legal proceeding is supposed to be the quest for truth," Mr. Armstrong said in a phone interview last week from the 12-story building, which is used mostly as a temporary holding site for prisoners. "But this contempt was used to stop me from going to trial, and it's been nothing but bad faith from the government ever since."

How Mr. Armstrong has been held for so many years without a trial is a tangled and bizarre tale. Mr. Armstrong, his lawyers say, has been stuck in a surreal situation in which criminal prosecutors have never had to prove their 24-count indictment at trial while the civil case tied him up. Nevertheless, they have gotten their desired result -- a lengthy prison term for Mr. Armstrong.

Last August, he pleaded guilty to one count of conspiracy in the criminal case. He struck that deal with federal prosecutors after he was moved from the 75-square-foot cell he shared with another prisoner into solitary confinement and had not slept for days, his lawyer said. Over the years, prosecutors have said that they were ready to proceed to trial and that civil contempt had nothing to do with their case. Mr. Armstrong countered that his detainment impeded his efforts to mount a proper defense, blocking his access to essential documents and computers as well as the assets to pay counsel.

Because there has been no jury trial in the case, it is impossible to say which side is right: the government, whose indictment in September 1999 contended that Mr. Armstrong misappropriated hundreds of millions in client funds; or Mr. Armstrong, who said that officials at the bank executing his trades generated temporary losses that could have been recovered in the market. (Two of those officials later pleaded guilty to fraud in a related case involving the bank.)

But this much is certain: Mr. Armstrong's years in jail for civil contempt will soon exceed the sentence of 6.5 to 8 years that he would have received if he had been convicted of all 24 criminal counts of securities fraud, commodities fraud, and wire fraud.

"The case sends a very bad signal," said Bernard V. Kleinman, a criminal lawyer in White Plains who represented Mr. Armstrong until 2004 and argued twice for his release before the U.S. Court of Appeals for the 2nd Circuit, in Lower Manhattan. "I think it bodes very ill for anybody held in civil contempt. District court judges can look at this case and feel that the likelihood of the circuit reversing them is small and that time is, in and of itself, no factor in determining whether civil contempt has lost its coercive effect and has become punitive."

John F. Keenan, the federal district court judge overseeing the criminal case, has not yet sentenced Mr. Armstrong. It is unclear whether the judge will give Mr. Armstrong credit for the time he has served. Under federal sentencing guidelines, his lawyers expect a sentence of about five years.

A spokeswoman for the U.S. attorney in Manhattan said the office did not comment on open cases.

Judge Richard Owen, the senior district judge who ordered Mr. Armstrong held in contempt, still sits on the bench in the Southern District of New York, where he has been for 34 years. When he ordered Mr. Armstrong taken away by federal marshals, he declared, "Mr. Armstrong has the keys to the jail cell in his pocket by production and telling people where to go to get it and dig it up and turn it over."

Over the years, Judge Owen would revisit the contempt order every 18 months, guided by the federal statute. He repeatedly said that Mr. Armstrong was motivated by greed and was awaiting his release from jail to retrieve the $15 million that the government said was missing. According to lawyers who worked on the case in the early days, the financier's headstrong manner irritated Judge Owen almost immediately.

But Judge Owen was moved off the case in November by a panel in the 2nd Circuit Court hearing Mr. Armstrong's third appeal on the contempt charge.

The three judges unanimously rejected the appeal to free Mr. Armstrong but found that on the seventh anniversary of his confinement, "his case deserves a fresh look by a different pair of eyes."

It was the second time in less than a year that the Second Circuit had ordered Judge Owen replaced on a high-profile case. In March a panel overturned the 2004 conviction of Frank P. Quattrone, the former investment banker at Credit Suisse, because Judge Owen failed to instruct the jury properly; the panel assigned the case to a new judge in the "interest of justice." Later the government decided not to retry Mr. Quattrone.

Judge P. Kevin Castel has taken over the Armstrong civil case. A hearing is scheduled on the contempt matter for March 15. A request to interview Mr. Armstrong in person was denied by corrections officials, and Judge Owen did not return a call seeking comment.

At the peak of his career in the mid-90s, Mr. Armstrong oversaw $3 billion in client assets. He was widely quoted in the financial news media, including The New York Times, on interest rate and currency movements. He began working at a coin and stamp dealership when he was 13 and opened a collectors' store when he was 21. He founded Princeton Economics International, based in Princeton, N.J., in 1981.

Mr. Armstrong, an intelligent and imperious man who claimed to have made his first million by age 15, seems to have begun having trouble in 1999 when trading losses turned up in accounts that were held for the firm at Republic Bank. The problems appeared as the HSBC Group conducted a financial review before acquiring Republic.

The government said that Mr. Armstrong had improperly commingled accounts and overstated the value of the account's securities in client statements.

Mr. Armstrong said that he did not authorize the transactions that produced losses and that he was not involved with commingling of the accounts. He was indicted in September and released on $5 million bond.

In January 2000 the receiver appointed by the court in the civil case said that Mr. Armstrong had purchased gold coins and other assets with his firm's money. His lawyers argued that the assets might have been purchased before the suspected wrongdoing.

When Judge Owen ordered the assets returned, Mr. Armstrong delivered four of the five computers sought, eight of the 11 requested boxes of documents, and gold coins worth $1.1 million. He said that was all he had. The receiver said assets worth about $15 million were missing. Mr. Armstrong's odyssey in the judicial system began.

His assets frozen, Mr. Armstrong has been unable to pay lawyers. He now relies upon David Cooper and Steven Z. Legon, two lawyers from the Criminal Justice Act panel, set up to help indigent defendants, and Thomas V. Sjoblom, a lawyer at Proskauer Rose, who has received nominal compensation.

"On what grounds can you tie up the system of criminal procedure and civil procedure and hold everything in abeyance during contempt?" Mr. Sjoblom asked. "What about your speedy trial rights? What about the government's need to move forward in the civil case? You're using the contempt process to wring a settlement or a plea out of the person. That, to me, is abuse of the process."

Over the years, more than half a dozen government lawyers have cycled through the case. In 2003, Mr. Armstrong changed his legal approach in challenging the contempt charge, saying that he did not have to produce the assets and citing his Fifth Amendment right.

The receiver, meanwhile, has recovered the vast majority of money said to have been lost by investors in the case. In January 2002, Republic New York Securities, a brokerage firm that housed Princeton Economics' accounts, pleaded guilty to conspiracy and securities fraud charges. Republic Bank paid $606 million to victims, all Japanese companies. It was "full restitution," the assistant United States attorney said at the time.

Alan M. Cohen, then a lawyer at O'Melveny & Myers and now executive vice president and global head of compliance at Goldman Sachs, is the court-appointed receiver.

His former colleague, Tancred V. Schiavoni, a lawyer at O'Melveny, said that all the victims had been satisfied. "We tried to do the right thing, and we've gotten nothing but grief," he said. "What this guy wants is to be given credit for time served on the contempt and leave with the money."

O'Melveny & Myers has received at least $3.9 million to cover its fees and disbursement over the years, according to court filings.

The discovery process was protracted partly because of the complexity -- hundreds of boxes of materials had to be examined and data transcribed into digital format -- and because Mr. Armstrong was in jail and relying on lawyers working pro bono.

In January 2006, criminal prosecutors said they were eager to put Mr. Armstrong on trial in October. Then in early August, federal prosecutors appeared at the correctional center to strike a plea deal. The visit, Mr. Sjoblom said, came a week after Mr. Armstrong had been ordered into solitary confinement -- known as "the hole" -- for damaging a vent in a common area.

Mr. Armstrong pleaded guilty to one count of conspiracy to commit securities fraud for failing to keep his investors informed about losses and for agreeing to make investor funds available to Republic to cover Princeton Economics' unrelated trading losses.

"I think the government just wore Marty out," Mr. Sjoblom said.

On Dec. 7, Stephen J. Obie, regional counsel for the Commodity Futures Trading Commission, visited Mr. Armstrong with a settlement offer in which he would sign over some $30 million as a penalty. Mr. Armstrong declined.

The Securities and Exchange Commission and the CFTC declined to comment on the case.

The government has said that $21 million is still owed. Even if that must be paid by Mr. Armstrong's firm and not Republic Bank, an estimated $40 million is left in what was once Princeton Economics: $30 million in the United States and $10 million in a British entity. Mr. Armstrong and his lawyers learned of the $10 million three weeks ago.

Mr. Armstrong, who is divorced, has two children and an elderly mother who await his release. His daughter, Victoria Armstrong, 30, visits most Wednesdays, spending about one hour with him in a common room with other visitors and prisoners.

"You never stop thinking about where he is and what he goes through," Ms. Armstrong said in an interview last week.

Her brother, Martin, 31, said he was bewildered at what he sees as the breakdown of due process in his father's case. "That you can keep someone in contempt for such a long time with so many unanswered questions -- that part of it has been a real eye-opener," he said.

Sonia Sotomayor, a judge on the 2nd Circuit panel that heard Mr. Armstrong's appeal last year, seemed to echo this point. "The district court's finding that Armstrong is motivated solely by greed is not enough to justify disregard for due process," she wrote. "Courts must exercise caution in their use of the contempt power and must recognize when it has reached the limits of its utility."

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