June 29, 2010
Defendant involved in fraud scheme claims that investigators were overzealous in their search
Mark Phillips was convicted of securities fraud, mail fraud, wire fraud, and access device fraud. In early 2003, the United States Postal Inspection Service began a fraud investigation of Phillips. The investigation revealed that over a period of approximately three years, Phillips had fraudulently applied for several credit cards, using his father's identity and declaring a false income. Phillips then used those fraudulent credit cards to make expensive purchases. Among other items, Phillips bought several pieces of stereo, exercise, and computer equipment, collectible coins, a pool table, a telescope, and a samurai sword. Ultimately, Phillips accumulated hundreds of thousands of dollars of credit card bills and either did not attempt to pay those bills or attempted to pay with bad checks.
Investigators at the U.S. Postal Inspection Service also uncovered other frauds perpetrated by Phillips. For example, Phillips possessed two driver's licenses, each with his own photograph, address, and date of birth, but each with a different name: Mark Le Roy Aaron and Mark Edwards Phillips. Additionally, investigators learned that Phillips had opened an account for frequent gamblers at an Atlantic City casino using his father's social security number and had made over $28,000 in cash withdrawals on that account. A criminal search history revealed that Phillips had previously been arrested on state charges of theft by deception and issuing bad checks.
During the course of the investigation, postal inspection agents also became aware that Phillips presented himself as the CEO and founder of a business called Phydea, which provided online financial stock reports. Some of Phillips's fraudulent purchases helped to fund Phydea. For example, he used a fraudulent credit card to pay Interland Web Hosting for the hosting and maintenance of his business' Web site, Phydea.com, and he used a fraudulent card to purchase advertisements for Phydea, which appeared in Investor's Business Daily. Also, Phillips frequently used Phydea's corporate name in connection with his credit card fraud. For instance, Phillips bought entertainment equipment with a fraudulent VISA card using the internet address Phydea.com. He also made a purchase on eBay using the e-mail address firstname.lastname@example.org. Phillips fraudulently applied for an American Express card using the e-mail address CEO@PHYDEA.com, and when applying for the same American Express card, Phillips misstated his income as $1 million and misstated Phydea's annual revenue as $10 million. Unbeknownst to the postal inspectors at the time, however, Phillips was using Phydea in connection with more than just credit card fraud. He was also using it and a related investment vehicle, Phydea Equity Fund, as part of an elaborate securities fraud scheme.
In July 2003, the U.S. Postal Inspection Service sought a search warrant for Phillips' Maryland residence. The magistrate judge approved the search warrant, finding probable cause for violations of various fraud statutes. The search warrant and incorporated affidavit authorized the seizure of a wide range of items and documents. Specifically, Part I of Attachment A described items and services purchased using fraudulent credit cards. It contained a number of specific examples, including payments to web hosting services. It also contained broader provisions for seizing records that might be evidence of financial crimes or fraud. The affidavit also set forth additional details relating to Phillips' case and the evidence of his fraud.
Prior to executing the search warrant, Inspector Judy Starliper, the head of the investigation, thoroughly briefed all agents on the facts of Phillips's case. Her operations plan summarized the investigation and informed the agents that Phillips operates a web page called PHYDEA.com and uses the same e-mail address to make his purchases. Each agent was provided a copy of Attachment A listing the items to be seized. During this briefing, another agent, Inspector David Reardon, informed the team that he had received a complaint from an aggrieved investor in Phydea Equity Fund, an entity related to Phydea, and therefore requested that the agents alert him if they saw anything relating to Phydea or Phydea Equity Fund during the search.
Immediately following the briefing, the U.S. Postal Inspection Service team executed the search warrant. During the search, Inspector Reardon himself identified several documents relating to Phydea and Phydea Equity Fund. He noted that these documents contained personal identifying information which he believed that Inspector Starliper was looking for and potentially related to many of the fraudulent credit card purchases made using Phydea's name. To err on the side of caution, Inspector Reardon brought the documents to the attention of his superiors, and Inspector Starliper telephoned the United States Attorney's office to seek guidance on whether the Phydea and Phydea Equity Fund documents were seizable. After reading the warrant and accompanying affidavit, the Assistant United States Attorney concluded that the warrant authorized their seizure.
In executing the warrant, the agents seized a number of documents and records that not only helped confirm the investigators' suspicions of credit card fraud but also revealed to the investigators for the first time the full extent of Phillips' securities law violations involving Phydea and Phydea Equity Fund. Among these seized documents and records were documents and records relating to Phydea, including invoices for the Phydea advertisements appearing in Investor's Business Daily, documents and records relating to Phydea Equity Fund, including the files of individual investors, and some of Phillips' own financial records, including his bank statements.
The government charged Phillips with 35 counts of securities fraud, mail fraud, wire fraud, and access device fraud. A federal grand jury indicted Phillips on all counts. Prior to trial, Phillips filed a motion to suppress the evidence seized pursuant to the search warrant. He argued that the contested seizures fell outside the scope of the warrant, because the warrant did not explicitly mention those items. That motion was denied. Phillips was eventually convicted on all the charges. He then appealed, claiming that the court erred by denying his motion to suppress.
The appellate court denied Phillips' appeal and upheld his conviction. Phillips primarily argued that the inspectors were overzealous when they served the warrant, and seized items that did not fall within the scope of the warrant. The government argued that they were purposefully very diligent and cautious in their search so as not to seize any item that did not fall within the purview of the warrant. They pointed to the language of the warrant, and argued that each and every item seized fell squarely within the stated requirements. The appellate court agreed with the government, and found that due to the extensive intermingling of Phillips' personal and business accounts, the investigators only seized items that fell within the requirements imposed by the warrant. Therefore, they upheld his conviction
The case discussed in Quinlan Law Enforcement ENews Alert (June 29, 2010) is U.S. v. Phillips, 2009 WL 4061558 (4th Cir. 2009).