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Street Wire: SEC defendant Kostelecky to remain imprisoned

by Mike Caswell

The United States Court of Appeals for the Eighth Circuit has denied a release request brought by Joseph Kostelecky, the North Dakota man jailed for an accounting fraud that led to the demise of Toronto Stock Exchange listing Poseidon Concepts Corp. in 2013. Mr. Kostelecky, who is serving three years in prison, had sought release on health grounds. Among other things, he contended that cancer and a heart condition made him eligible for early release.

The loss for Mr. Kostelecky, 61, is contained in a judgment filed on Jan. 18, 2023. The three-sentence document simply states that the appeal court has upheld a decision that keeps Mr. Kostelecky imprisoned. The denial was one issued summarily, or without a full hearing.

As is often the case, the appeal judges did not issue any reasons. The judges undoubtedly considered the position of prosecutors, who previously said that Mr. Kostelecky's crimes called for him to remain in prison. He perpetrated an extensive fraud that included lying about his credentials, fraudulently directing subordinates to record fictitious revenue and forging documents, among other things. Prosecutors also pointed out that the Bureau of Prisons had evaluated Mr. Kostelecky and determined that he did not meet the requirements for early release.

Another factor was the three-year jail term that Mr. Kostelecky received. In handing down that term, the sentencing judge had already taken into account Mr. Kostelecky's health troubles. Prosecutors had sought 20 years, but Mr. Kostelecky complained that a sentence of that length would effectively amount to life in prison for him. The sentencing judge had also determined that Mr. Kostelecky's conditions were stable. He could get around using a rolling walker and was independent with all of his daily activities, including going to the bathroom, doing laundry, and using the phone and computer.

In seeking his release, Mr. Kostelecky had cited many health problems. He said that he suffered from chronic obstructive pulmonary disease, coronary artery disease and peripheral artery disease. He has had a total aorta replacement twice and other bypass surgery. On top of that, Mr. Kostelecky has prostate cancer, which requires chemotherapy every three weeks to slow its spread. He set out those concerns in two motions (along with letters from family) filed in district court, the most recent of which was dated Oct. 20, 2022.

While Mr. Kostelecky was seeking to reduce his sentence, he did not contest his conviction. Such an argument would have been difficult, as he pleaded guilty, entering a plea agreement on Oct. 1, 2021. His crime, as set out in that plea agreement, arose when he was the senior employee of Poseidon's U.S. operations in 2011 and 2012. He had accounting staff record tens of millions of dollars in sales based on nothing of substance.

The business of Poseidon was primarily the short-term rentals of tanks. The term of the rentals was typically a few days or weeks. Despite that, Mr. Kostelecky directed accounting staff to prepare invoices and book revenue for long-term rentals that customers had not agreed to. He did so even as accounting staff and the company's in-house lawyer asked for copies of rental agreements to support the invoices.

The scheme was uncovered when the company's board hired an outside auditor to look into its revenue. After receiving the findings, the company issued a Feb. 14, 2013, news release, in which it said that much of its revenue for the first nine months of 2012 should not have been recorded. The stock collapsed, and on May 17, 2013, the company delisted from the TSX.

In addition to the criminal charges, Mr. Kostelecky faced a parallel civil action from the U.S. Securities and Exchange Commission. He agreed to pay $75,000 (U.S.) to settle that matter. He also agreed to a permanent officer and director ban and to injunctions barring future violations.

Mr. Kostelecky is serving his sentence at Rochester FMC, a federal medical centre with 625 male inmates. He is scheduled for release on Nov. 19, 2024.

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