Hedge fund manager faces up to 45 years when sentenced for fraud

Date: Tuesday, October 26, 2010
Author: Andrew Tangel, NorthJersey.com

It began with what James Nicholson described as a simple “smoothing of returns” in 2000. Nicholson’s hedge fund Westgate Capital Management sustained its first monthly loss early that year, which the Saddle River resident says led him to conceal his fund’s poor performance. That lie snowballed nearly a decade later into a $140 million loss for investors.

“Your honor, I am scared,” Nicholson told U.S. District Judge Richard Sullivan in a letter filed recently in the case. “Not as much for myself as I am for the victims and the collateral damage I have caused.”

Federal prosecutors want Nicholson, 44, to spend 45 years in prison — the maximum sentence and possibly the rest of his life — for what they called in their court papers a “staggering Ponzi scheme” fueled by “colossal greed.”

Both sides in the case have recently filed briefs in federal court in Manhattan ahead of Nicholson’s sentencing Friday, arguing how long he should spend behind bars.
Under federal guidelines, Nicholson’s sentence would fall in the range of 30 to 45 years in prison. The primary factor in the sentencing formula: Westgate’s officially determined loss to investors of $140,922,822.57.

Michael Weinstein, a former federal prosecutor who practices white-collar defense for the law firm Cole Schotz Meisel Forman & Leonard in Hackensack, predicts Nicholson’s sentence would likely fall in the middle to the higher end of the guideline range.

“He should not be surprised when he spends a long time in jail,” Weinstein said.
The U.S. government dredged up Nicholson’s checkered past as a stockbroker before he founded Westgate in 1999. The government noted Nicholson was fired from two companies for stealing customers’ funds while working at investment firms. He was later kicked out of the securities industry by the National Association of Securities Dealers.

When he tried to register Westgate as an investment adviser in New York, the state’s attorney general denied his application, calling any such role for Nicholson “a fraudulent practice,” according to the government’s presentencing brief.

“Viewed in any reasonable context, Nicholson’s fraudulent undertakings — involving literally hundreds and hundreds of lies issued over the course of nearly a decade, as well as the evidence of the defendant’s apparently insatiable greed — place him far beyond the vast majority of white-collar defendants to face judgment before this or any other sentencing court,” Assistant U.S. Attorney David Leibowitz wrote. “The defendant’s history of recidivism in flouting securities regulations, the sheer number and vulnerability of his victims, and his callous indifference to the harm he has wrought upon his victims all weigh in favor of imposing the maximum sentence of imprisonment authorized by statute here.”

Nicholson was arrested in February 2009, a few months after the multibillion-dollar Ponzi scheme of Bernard Madoff became public.

Nicholson pleaded guilty to securities, investment-adviser and mail fraud charges in December.

In their presentencing brief, Nicholson’s attorneys, James Mitchell and Erik Zissu, argued for a sentence “substantially below the guideline range” of 30 to 45 years, which they call “draconian.” Nicholson’s attorneys argue that he did not intend to start a Ponzi scheme, and note that $76 million of Westgate’s losses came from actual trading.

“To be sure, Mr. Nicholson wrongly derived significant wealth from Westgate, with which he purchased real estate and certain extravagances,” Nicholson’s attorneys wrote, “but he invested most of the money he was given by investors.’’

Nicholson’s lawyers also say a sentence of 30 to 45 years would deepen the pain of his family, particularly his three sons — ages 7, 10 and 12 — who wrote letters filed along with the presentencing brief.

“There can be no question that Mr. Nicholson’s incarceration will deal its harshest blow on his three young children,” his attorneys wrote.
Nicholson’s attorneys also note his work for charities, but also of his addiction to sports gambling.

Whether Nicholson’s lawyers succeed in winning a lenient sentence will depend on federal sentencing guidelines, which are only advisory but carry significant weight, legal experts said.

“They have a lot of importance,” said Stuart Green, a law professor at Rutgers University in Newark. “The most significant factor in determining the ultimate punishment in the case of fraud would be the value” of the loss to victims.

In 2009, 37 percent of defendants in 279 fraud cases in the Southern District of New York received sentences below the guideline range, according to data from the U.S. Sentencing Commission. Forty percent of those sentences fell within the guideline range.

Sullivan, a former federal prosecutor who handled narcotics and organized crime cases before he was appointed to the court in 2007, has yet to give any indication of how he may sentence Nicholson. In one white-collar fraud case in February, Sullivan handed down a sentence the defendant’s lawyer deemed “long” and “harsh,” according to news accounts.

Sullivan raised eyebrows last year when he ordered Frank DiPascali, Madoff’s former finance chief, to jail even though DiPascali and prosecutors had agreed to let him remain free on bail.

“That’s certainly a tea leaf that [Nicholson’s] lawyers are aware of,” said Daniel Richman, a law professor at Columbia University. “Judge Sullivan has made quite clear how seriously he takes white-collar crime.”

E-mail: tangel@northjersey.com