Why were insider trading charges dropped vs. Miami men accused of $3.5 million fraud? [Miami Herald]

A federal insider trading prosecution involving men from Miami-Dade beach cities halted last week after the government’s prime witness claimed testifying against one of his alleged cohorts “would significantly exacerbate (his0 mental health issues.”

That quote is from a November filing in Boston federal court by Surfside’s David Schottenstein, 39. Back in January, Schottenstein pleaded guilty to conspiracy to commit securities fraud, at least a $3.5 million stock fraud involving DSW, the Albertsons supermarket chain, Rite Aid and a corporate fighting over cannabis.

READ MORE: A $3.5 million insider trading case with Rite Aid, designer shoes and weed

The plan of federal prosecutors when Schottenstein pleaded guilty included delaying his sentencing until July 2023, after he testified against Surfside’s Kris Bortnovsky (aka Kris Bort) and Bay Harbor Islands’ Ryan Shapiro. Each pleaded not guilty to his own conspiracy charge as well as a charge of aiding and abetting securities fraud.

But in the November filing, Schottenstein asked to have his sentencing moved up to March and said he wouldn’t be speaking in court against Shapiro.

Schottenstein “has recently withdrawn from his cooperation agreement due to advice received from (his) psychologists and his therapist who have told [Schottenstein] and his counsel that cooperation against Mr. Shapiro, a friend and community member, would significantly exacerbate [Schottenstein’s] existing mental health issues,” the filing stated.

“This is not a decision [Schottenstein] undertook lightly, specifically, as described in previous motions to this Court as well as at (his) Feb. 1 plea hearing, [Schottenstein] has had serious life-long mental health issues, including acute anxiety stemming from childhood trauma,” the filing continued. “These serious mental health issues have been present since the start of cooperation, and have prevented [Schottenstein] from cooperating against Mr. Shapiro. Accordingly, [Schottenstein] has informed the government that he can no longer be a cooperating witness.”

When Schottenstein pulled out as a witness against Shapiro, federal prosecutors filed to dismiss charges against both Shapiro and Bortnovsky.

U.S. Attorney Rachel Rollins’ request for a dismissal of the indictments without prejudice said: “The government’s investigation is continuing and — if circumstances warrant — the government may request that a grand jury return any criminal charges, including against Bortnovsky and Shapiro, that the evidence supports.”

Judge William Young granted the dismissal of charges Dec. 7.

As for Schottenstein’s sentence, that’s scheduled to be handed down by Judge Douglas P. Woodlock on March 20. The U..S. Attorney’s Office in Massachusetts had no comment Wednesday on how Schottenstein’s refusal to testify would alter the sentencing recommendation in his plea deal, which was the low end of 46 to 57 months prison time; $634,893 forfeiture in cash; and restitution to be determined by the court.

Court documents put David Schottenstein’s earliest illegal action on his information mining at Aug. 15, 2017, when he bought DSW shares and call option contracts. That’s five months after he bought his 5-bedroom, 4 1/2-bathroom SoliMar Condominium residence for about $1.5 million.

So, the condo unit is unlikely to be considered fruit of white collar loot in any economic settling up by Schottenstein.

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Did what was said in the family stay in the family?

Forbes estimated the Schottenstein family’s net worth at $2.7 billion in 2015, a telegraph-to-television-on-telephones jump from Ephraim Schottenstein selling goods out of a buggy before opening his first store in 1917.

A century later, in 2017, Jay Schottenstein would be executive chairman of shoe sellers DSW (now known as Designer Brands) as well as a board member of supermarket chain giant Albertsons. Also, on the DSW/Designer Brands boards then and now was Joseph Schottenstein, Jay Schottenstein’s Miami Beach-based son. For a time in 2018, Joseph Schottenstein also worked on the board of Green Growth Brands (GGB), which sold cannabis products.

Although the Securities and Exchange Commission complaint against David Schottenstein, Bortnovsky and Shapiro refers to Jay Schottenstein as David’s uncle, a representative of Jay and Joseph Schottenstein told the Miami Herald that David is Joey’s second cousin.

The SEC says David Schottenstein worked his second cousin for inside tips on DSW’s financial situation in 2017; a 2018 proposed acquisition of the Rite Aid chain by Albertsons that eventually didn’t happen; and GGB’s hostile, but ultimately futile takeover attempt of Canadian cannabis company Aphria.

Charging documents say David Schottenstein, without Joseph Schottenstein’s knowledge, passed the insider information on to Bortnovsky and Shapiro, and everybody profited. Schottenstein’s plea agreement says his scheme was worth at least $3.5 million to $9.5 million.

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