DSW Stock Tipper Gets 1 Year After 'Heated' Court Debate
By Chris Villani
Law360, Boston (March 21, 2023, 8:28 PM EDT) -- An admitted Designer Shoe Warehouse insider trader was sentenced to a year and a day in prison Tuesday following an emotional four-hour hearing during which a prosecutor blasted the defendant's "despicable crime" and the defense called the government's request for a nearly four-year term "vindictive."
U.S. District Judge Douglas P. Woodlock at different times acknowledged that the proceeding in the packed courtroom had been "heated" and "open warfare," and took a break before imposing a sentence, in part, to allow temperatures to drop. When he returned to the bench, he said David Schottenstein's prosecution is a "jail case."
"It's harsh, but it seems to me a necessary and important part of the sentence in this case," Judge Woodlock said.
In addition to the prison time, the judge said Schottenstein would be on supervised release for five years, during which he is to perform 30 hours of community service per week.
Toward the end of the hearing — which stretched late enough into the evening that the overhead lights in the courtroom twice shut off — the judge said he would allow both sides to submit supplemental arguments about where Schottenstein should serve his time, citing the mentalhealth struggles that led to Schottenstein ending his cooperation with the government.
Assistant U.S. Attorney Stephen Frank asked for 46 months in prison for Schottenstein. He argued that the Florida resident did not need the $600,000 he made for himself by trading the stock of DSW, now called Designer Brands Inc., and several other companies that his family either controlled or had a substantial investment in, including Albertsons, American Eagle Outfitters, and Green Growth Brands
Schottenstein, Frank said, has "privilege that is inconceivable to most people in this country" after being born into an extremely wealthy family.
"There are defendants who are motivated by desperation. There are defendants motivated to commit those crimes out of extreme financial hardship. There are defendants who are motivated by addiction," Frank said. "In this case, none of those things exist. What he chose to do was abuse that privileged status, to line his pockets and line his friends' pockets."
Prosecutors said Schottenstein and his co-conspirators, Kris Bortnovsky and Ryan Shapiro, netted at least $4.5 million from the scheme. Schottenstein and Shapiro — who founded the inmate money transfer service JPay — are millionaires many times over, the government said.
"I think that makes this a particularly despicable crime," Frank said, likening it to the "Varsity Blues'' college admissions cases. "Those defendants had a leg up on everyone in the college admissions process, and they nonetheless abused their status and their privilege to get an even bigger advantage."
One of Schottenstein's lawyers, Eric Rosen of Freedman Normand Friedland LLP, was formerly a lead prosecutor in the "Varsity Blues" cases. He argued that the government is trying to get back at Schottenstein because his decision to stop cooperating led to prosecutors dropping the case against Shapiro and Bortnovsky in December.
Rosen said Schottenstein sat down with investigators for hours and numerous calls, and went so far as to wear a wire and develop a trove of evidence that "cooked" Bortnovsky.
But Schottenstein's mental-health challenges caused by sexual and physical abuse during his childhood caused him to break down when he wore a wire with Shapiro, a friend and fellow congregant at a Florida synagogue, according to the defense. It led to his running through the streets of Miami into traffic and trying to take his own life with a mix of alcohol and pills, Rosen said. After that incident, Schottenstein eventually stopped cooperating.
"We didn't expect the government to be happy about it," Rosen said. "We did not expect the level of, we think, vindictiveness, that we see here today."
The defense attorney said Schottenstein's childhood was not as rosy as the government has made it out to be and that prosecutors are "blinded" by the end of his cooperation to the point where they have "manufactured the defendant they want."
The sexual abuse Schottenstein suffered has led to a lifetime of mental illness, Rosen said.
"What parent would wish David's childhood abuse on their child?" Rosen said, gesturing towards Frank. "What prosecutor in this building would do that? What government official, knowing of David's abuse, could argue David did not suffer under the enduring legacy of a challenging upbringing."
"The prosecutor's pooh-poohing of that is, frankly, sickening," Rosen added.
In an unsuccessful attempt to argue for probation and no prison time, Rosen said Schottenstein stopped trading on insider information well before being approached by the government and immediately accepted responsibility and gave the money he earned through the scheme to charity. He was motivated not by greed, Rosen said, but by a lifelong desire to be liked by his peers, in this case his alleged co-conspirators.
While Rosen said most insider trading cases in Massachusetts bring sentences substantially lighter than the 46 months sought by the government, Frank said the prison time was warranted because Schottenstein had tried to obfuscate and deflect blame for his crimes.
The prosecutor said Schottenstein argued for no prison in part because of the hardship it would cause his children, but at the same time had his children take part in a "staged" video he submitted to Judge Woodlock that included a professionally shot camera-stabilized video of them walking on a beach boardwalk, making cookies, and reading a bedtime story.
"It is manipulative, and it is frankly grotesque," Frank said.
At one point during the hearing, Rosen took exception when Frank objected in the middle of his argument, turning to him directly to say, "I let you talk, Steve."
The back-and-forth played out in filings in the days leading up to the sentencing as Schottenstein's lawyers accused the government of "sandbagging" them by revealing the existence of a secret wiretap last week for the first time. Judge Woodlock bristled at the defense argument that the entire sentencing memorandum should be stricken, but, after Frank acknowledged the government did not comply with disclosure requirements, did not consider the intercepted call as part of the sentencing.
Schottenstein told Judge Woodlock he was a "very humbled man" and "deeply ashamed" of his crimes. As he spoke, several supporters — who Rosen said included a 95-year-old Holocaust survivor, a man released from prison whom Schottenstein helped get an apartment, and others who had traveled from as far as Israel — wiped tears from their eyes.
Schottenstein wept as he turned to his wife, who he said was the one who got him to stop his criminal activity.
"You peeled me off the floor and saved my life, over and over again," he said. "I owe you everything. Thank you my love."
The government is represented by Seth B. Kosto and Stephen E. Frank of the U.S. Attorney's Office for the District of Massachusetts.
David Schottenstein is represented by Devin Freedman, Eric S. Rosen and Richard Cipolla of Freedman Normand Friedland LLP and Howard Srebnick of Black Srebnick.
The case is USA v. Schottenstein, case number 1:22-cr-10005, in the U.S. District Court for the District of Massachusetts.
--Editing by Peter Rozovsky.
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