DSW Insider Trader Won't Testify Against JPay
Founder
By Elliot Weld
Law360 (November 29, 2022, 7:53 PM EST) -- A Florida man who pled guilty to using insider information to trade shares in Designer Shoe Warehouse said Tuesday he will no longer cooperate with prosecutors to testify against two co-defendants whom he allegedly tipped off, including the founder of inmate money-transfer service JPay.
David Schottenstein said in a court filing that his decision to revoke his cooperation came on the advice of a psychologist and his therapist who said testifying against JPay founder Ryan Shapiro would exacerbate his mental health issues.
Schottenstein, who described Shapiro as "a friend and community member," said in the filing that he suffers from acute anxiety and other mental health issues "stemming from childhood trauma."
"These serious mental health issues have been present since the start of cooperation and have prevented defendant from cooperating against Mr. Shapiro," the memorandum said. "Accordingly, defendant has informed the government that he can no longer be a cooperating witness."
The memorandum asked the Massachusetts federal court to move up Schottenstein's sentencing hearing from July to March, saying the earlier date was scheduled under the assumption that he would be assisting in the prosecution of Shapiro and co-defendant Kris Bortnovsky. Schottenstein said the government has taken no position on the motion.
Schottenstein pled guilty to one count of securities fraud conspiracy before U.S. District Judge Douglas P. Woodlock at a hearing in February. Prosecutors alleged Schottenstein called an unnamed friend on the DSW board of directors and was given information about the company's performance before it released its 2017 second-quarter earnings report.
With that information, Schottenstein allegedly bought thousands of DSW shares and hundreds of call option contracts. Prosecutors alleged he was also given information about a December 2018 tender offer to acquire Aphria Inc. and a February 2018 announcement of a merger between grocery store chain Albertsons Cos. and Rite Aid Corp.
Schottenstein, Shapiro and Bortnovsky were sued by the U.S. Securities and Exchanges Commission in January. The civil suit alleges Schottenstein made over $600,000 in illicit gains from his trades and Shapiro and Bortnovsky made $121,000 and $4 million, respectively.
Shapiro and Bortnovsky were charged with securities fraud conspiracy in December 2021 and are currently scheduled to begin trial May 2. Shapiro filed a motion to dismiss the charges in October, arguing the indictment only alleges that he traded while in possession of the insider information, not that he used that information to make those trades.
Bortnovsky, likewise, filed his own motion to dismiss Nov. 22, arguing the indictment's allegations do not fit either the "classical" or "misappropriation" theories of insider trading. Both motions to dismiss were pending as of Tuesday.
The Massachusetts U.S. attorney's office and counsel for Schottenstein declined to comment Tuesday.
Bortnovsky's lead attorney declined to comment Tuesday.
Shapiro's attorney did not immediately respond to requests for comment Tuesday.
The government is represented by Seth B. Kosto and Stephen E. Frank of the U.S. Attorney's Office for the District of Massachusetts.
Schottenstein is represented by Devin Freedman, Eric S. Rosen and Richard Cipolla of Freedman Normand Friedland LLP.
Bortnovsky is represented by James R. Froccaro, Jonathan T. Savella and Steven C. Boozang.
Shapiro is represented by Martin G. Weinberg of Martin G. Weinberg PC.
The case is U.S. v. Schottenstein, case number 1:22-cr-10005, in the U.S. District Court for the District of Massachusetts.
Correction: An earlier version of this article misstated the relationship between Shapiro and Bortnovsky and the alleged amounts they profited. The errors have been corrected. The article has also been updated with additional counsel information.
--Additional reporting by Chris Villani and Brian Dowling. Editing by Janice Carter Brown.
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