On Monday, January 16, Sam Zhadanov reported to the Allenwood Federal Prison Camp in Montgomery, Pennsylvania, to begin serving a five-year sentence for money laundering, conspiracy to sell drug paraphernalia, and conspiracy to aid and abet the distribution of crack cocaine. Given the charges, he could have received a sentence of 14 years to life. But because he pleaded guilty and let the government take his assets, the prosecution certified that he had been cooperative and was therefore eligible for a "downward departure" from the mandatory minimum sentence. In a sense, then, he is lucky.
But Sam Zhadanov, a 68-year-old engineer who emigrated from Russia in 1973, does not feel lucky. An inventor who holds patents in Russia and the United States, he feels the government has robbed him of his last productive years, not to mention the fruits of his hard work during the two decades since he came to America with his wife and son.
Starting out as a machinist with a few hundred dollars to his name, Zhadanov built a successful plastic-molding business, Vortex Products, which the government would later falsely depict as a shady, fly-by-night operation devoted to serving crack dealers. At first Vortex manufactured Zhadanov's inventions, such as a shower massage and a portable dishwasher. Later it also made items to order for various businesses, including toy, computer, and medical-supply companies. Eschewing vacations, fancy cars, and luxury homes, Zhadanov never had much use for the money he made, except to reinvest it in the business.
Longtime friends report that Zhadanov was always quick to help fellow immigrants, even while he and his family were still struggling. Eight of them told the court that sentenced him: "Sam helped more than 30 Russian immigrants to start their lives in the United States. He shared his apartment, food, and everything he had with many of us when we came here. It was not because he had extra (he barely had enough for his family) but because we needed it. Sam helped us to find work, move to a new home, buy the first car. Most importantly, he was always there for us and gave us tremendous energy and moral support….We know Sam as a person of rare kindness, exceptional honesty, and uncompromising integrity."
Vitaly Rogalsky, a professor at Mt. Sinai Medical Center, told the court he had sought Zhadanov's help in developing a device to increase the efficiency of bottles used to grow cell cultures. Zhadanov created the prototype for free, without a written agreement. "Mr. Zhadanov struck me as…a true enthusiast absolutely devoted to progress in medicine," Rogalsky wrote, noting that Zhadanov had later invented a new kind of safety syringe designed to prevent the spread of disease. "It is absolutely clear that Sam is an important contributor to our society and deserves to be treated as such."
Even after he officially retired and stopped taking a salary from Vortex, Zhadanov continued to work long hours at the factory. "What will I do for five years?" he asks, reflecting on his prison sentence. "I need my work. Taking away my equipment is like taking away my hands."
Zhadanov, who has never had trouble with the law before, is bewildered by the concepts of drug paraphernalia, money laundering, and conspiracy, which can turn business transactions into felonies. "What crime have I committed, that I should go to jail for five years?" he asks. "I made a mistake. Why do you give for a mistake five years in prison?"
Zhadanov's mistake was to manufacture little plastic containers, about an inch long and the width of a pencil, similar to the ones fancy stores use for perfume samples. These containers are also used by drug dealers to hold small nuggets of crack cocaine (half a gram or so). They are perfectly legal when intended for a legitimate purpose. But when they are intended for packaging crack, they are considered drug paraphernalia. As far as Sam Zhadanov was concerned, he made perfume sample bottles. According to the government, he made crack vials.
The entire case against Zhadanov rests on this distinction. The government does not allege that he or any of the other defendants in the case ever saw any crack, let alone sold it. "There's not a single drug dealer anywhere," says Eli Zhadanov, Sam's son. "This case does not have one ounce of drugs or one name of a drug dealer—or a drug user, for that matter. Not one."
Sam Zhadanov's story shows how the drug laws have expanded to cover behavior increasingly remote from drug dealing. Because crack is illegal, so are the containers that carry it. The money used to buy the containers is tainted, and so is the business that accepts it. In this way a decent, productive, conscientious man can lose his freedom and everything he owns, even though his arrest and imprisonment cannot possibly have an impact on the drug trade.
In effect, the federal law against drug paraphernalia punishes the crime of thinking the wrong thought while doing something—in this case, making plastic containers—that is otherwise permitted. Legally, the issue is straightforward: What did Sam Zhadanov know, and when did he know it? But we should not lose sight of the moral issue: Whatever was going on in his mind—and no one but Zhadanov can ever know that for sure—is it right to put a man in prison for making little plastic containers? The question should give pause to supporters of drug prohibition.
The prosecutors conceded that Zhadanov initially did not know that the containers had anything to do with drugs. But they argued that he must have soon realized he was manufacturing an illegal product, given the suspicious behavior of his customers. It does seem that Zhadanov was oddly naive and incurious about the ultimate use of the containers, and he says he regrets that he was not more inquisitive.
Yet Zhadanov's behavior is not surprising given his personality. A slight, thin man with short, gray hair and metal-framed glasses, Zhadanov gets excited about a better way to make a plastic toothpick. He has a heavy Russian accent, and his command of English is spotty, but when he talks about his work, the words flow and he gestures enthusiastically. When the conversation turns to financial or legal matters, he consults his wife, Anna, an engineer who served as Vortex's bookkeeper, for details.
"When he touches a new object," Eli Zhadanov says of his father, "he starts turning and twisting it to see how it is made and how it works. He observes the world around him in terms of building blocks and working mechanisms….Whether [customers] introduce the product as a 'safety syringe' or a 'perfume sample,' he treats them all in terms of cavities, runners, and pins." After finding the most efficient way to manufacture a product, designing the necessary molds, and setting up the manufacturing process, Zhadanov would move on to the next challenge. He was not very interested in production once it became routine, let alone in what happened to the product after it left the factory.
"For me, this was a legal job," Zhadanov says of the work order that led to his imprisonment. "I never imagined that I had to be responsible for it. I am a custom molder. I never knew that plastic could be illegal."
This was Zhadanov's attitude in the summer of 1990, when he got a call from an engineer he had known in Russia. The acquaintance said his son-in-law, Henry Belkin, and Belkin's partner, Leonard Edelson, had an item they wanted to manufacture. Zhadanov agreed to meet with them at his Metuchen, New Jersey, factory. They brought samples of cylindrical, clear plastic containers with colored tops, which they said were used for perfume. Each of them owned an electronics and general-merchandise store in Philadelphia, and they had found that the containers were very popular. They had decided to become wholesalers and were looking for a manufacturer who could make the containers cheaply enough. Zhadanov agreed to study the problem and eventually told them Vortex could do the job. Belkin and Edelson hired him, and by January 1991 Vortex was producing the containers on a regular basis.
Under instructions from Belkin and Edelson, Vortex packed the containers in clear plastic bags bearing the image of a partially unpeeled banana and the phrases "For perfume sample use only" and "Made in Taiwan." (Belkin and Edelson said they were copying a product made in Taiwan, and they later told Zhadanov they did not want competitors to know the location of his factory.) The instructions read: "FILL UP THE BOTTOM PART WITH SCENTED OIL OR PERFUME. USE THE SCREW-ON TOP AS A TESTER." Belkin and Edelson wanted to pay for the containers in cash, but Zhadanov insisted on checks. The two businessmen formed a trading company called Tri-State General and paid Vortex out of its account. But they were chronically behind on payments, and Zhadanov says he felt compelled to accept cash in addition to the checks. He had the impression that Belkin and Edelson were trying to use up unreported income from their stores.
Although a chart accompanying a recent Wall Street Journal article on "Russian organized crime" alludes to their operation, the fact that Belkin and Edelson would agree to pay for the containers even partly by check suggests that they were not exactly professional criminals. Similarly, an incident that occurred soon after Vortex started making the containers indicates a lack of savvy in dealing with the police. On February 6, 1991, Edelson was driving a rented van loaded with the containers on the New Jersey Turnpike when he was pulled over by state police for changing lanes without signaling. Edelson and his passenger, an employee named Zachria Gispan, seemed nervous, and their stories about the cargo were inconsistent. So the troopers asked Edelson for permission to search the van, which he granted—an odd decision for an experienced criminal. "Through my training and experience I immediately identified the items as 'crack' vials," one of the troopers later reported. He and his partner arrested Edelson and Gispan for possession of drug paraphernalia with intent to deliver. They pleaded guilty and were sentenced to probation. Edelson and Belkin concealed the incident from Zhadanov, afraid that he would stop producing the containers.
It may have been obvious to the state trooper that Edelson's cargo was illegal, but it appears that not all of New Jersey's police officers were up to speed on the state's drug-paraphernalia law. On May 9, 1991, the Metuchen Police Department received a phone call from someone who reported that crack vials were being manufactured at Vortex. The police declined to investigate. Today Sam Zhadanov wants to know why he is being punished for a crime the local police didn't even consider worth looking into.
The event that ultimately led to the downfall of what investigators dubbed the Belkin Crack Vial Organization occurred that same month in Pennsylvania. State law-enforcement agents raided two general-merchandise stores in Philadelphia that, like many other stores in Philadelphia and New York, openly sold the plastic containers. The owner of the stores, Roni Moshe, was Belkin and Edelson's biggest customer. Facing the threat of a stiff prison sentence, Moshe agreed to help build a case against Belkin, Edelson, and their associates by continuing to purchase their containers and secretly recording conversations with them.
The government claimed that, following the raids on Moshe's stores, Zhadanov must have known that he was engaging in illegal activity, since "Belkin and Edelson told Zhadanov what had happened." But this doesn't make sense: Moshe could not have informed Belkin and Edelson that he had been arrested on drug-paraphernalia charges without blowing his assignment as an informant. Judging by a recorded conversation that Moshe had with Belkin and Edelson on July 18, 1991, his cover story was that he had gotten into trouble with the Internal Revenue Service.
During the conversation, the three men discuss accounting procedures and mention the seizure of money and financial records. Belkin says: "You didn't learn yet how to do it…. You've been in business for two years….You have to speak the truth: 'I'm sorry. I didn't know. You got all my money now. Take the taxes, take everything.'" Assistant U.S. Attorney Paul Gray, the lead prosecutor in the case, concedes that Moshe did not tell Belkin and Edelson the whole truth about the raids. "He said stuff like, 'Yeah, I had a tax problem,'" Gray says.
The Zhadanovs say Belkin and Edelson told them they had disbanded Tri-State General because of its close association with Roni Moshe. Since this meant Belkin and Edelson would no longer pay by check, Sam Zhadanov decided to drop the job. But Alex Srebrianski, a former Russian dissident whom Zhadanov employed as a plant manager, proposed leasing the necessary equipment from Vortex and taking on the job himself. He said he had become comfortable with Belkin and Edelson while overseeing production of the plastic containers, and he had no problem taking cash from them. Zhadanov agreed to this new arrangement, and on July 10, 1991, he and Srebrianski signed a lease agreement for the equipment.
Srebrianski paid $8,000 a month for the equipment with checks drawn on the account of his U.S. Alexander Trading Company. Since he did not have enough regular work to hire full-time employees, the Zhadanovs say, he continued using Vortex employees, and since he had trouble getting credit, he obtained his supplies through Vortex as well. He reimbursed Vortex for these expenses in cash.
In September 1991 Pennsylvania drug agents found a scrap of paper outside a storage locker used by Belkin and Edelson. On the paper was the logo of D-M-E, the company that had produced the molds that Vortex used to make the plastic containers. Through D-M-E, the agents identified Vortex and, together with the U.S. Drug Enforcement Administration, started to watch the factory. "The government for two years was watching our factory, and they say in their reports that everything was open," says Anna Zhadanov. "If you want to hide something, you don't leave the door open….They knew that we didn't know. They never came to us….When we asked an agent why they did this, he said, 'We wanted to find drugs.' For two years they waited for drug dealers, and they do not have any."
The Zhadanovs say they became suspicious when Belkin and Edelson started using transfer locations instead of picking the containers up at Vortex. In late 1991, the Zhadanovs asked Belkin and Edelson what was going on. This was the first time, the Zhadanovs say, that they learned the containers could be used for drugs. But they say Belkin and Edelson assured them that it was legal to make and sell the product.
Indeed, a conversation recorded on October 23, 1991, suggests that, despite Edelson's arrest, he and Belkin were confused about the meaning of state and federal paraphernalia laws. Roni Moshe's sister, Sigy, asks Belkin, "Is there a law against it?"
He replies: "You know, with the law is. You coming from an interstate, you know, from one state to the next….That's where they were coming, from Pennsylvania to New York back in Jersey."
Sigy Moshe presses him: "But I'm talking about, is there any law against it? To sell it?"
Her brother, Roni, interjects, "No paraphernalia."
Belkin says, "I don't know. Is there a law?"
Roni Moshe again interjects, "That's a container to contain."
Belkin concludes, "To sell it maybe there is no law, but to take it on the road…"
In any event, Sam Zhadanov assumed that he could not be held responsible for the ultimate use of a product made in his factory. Production continued until May 1992, when Zhadanov observed a man in a car taking photographs of the factory. When he told Belkin about the incident, Belkin said the man might be a police officer, or he might have been sent by a competing manufacturer. Alarmed, Zhadanov ordered a halt to production and consulted an attorney about the legality of the operation. After researching the relevant New Jersey statutes and case law, the attorney, Martin A. Spritzer of Edison, New Jersey, wrote Zhadanov a letter on May 21, 1992:
"You have asked for an interpretation as to whether you could be responsible for the manufacturing and distribution of certain items which are being manufactured on your premises by another person to whom you have leased certain machines and molds in the event such product is used in connection with unlawful drug distribution….It is my opinion that the…containers that you showed me, together with the description of how they emanate from your building, should not make you liable….First of all, you are not distributing, processing, or manufacturing the container. The person to whom you leased the molds and machinery is doing that. Secondly, you have no knowledge of how these containers are being used." (By this he meant that Zhadanov did not know for sure that drug dealers were buying the containers.)
Meanwhile, Srebrianski tried unsuccessfully to set up his own factory and continue the operation there. In June 1992, he approached Zhadanov about resuming production at Vortex. Reassured by the attorney's letter, Zhadanov agreed. At this point, Belkin and Edelson changed the way the money was handled. Previously, one of their distributors would collect receipts from the stores and give the money to Belkin and Edelson, who would give Srebrianski his share; then Srebrianski would pay Vortex. Now Belkin and Edelson decided that the distributor should give the money directly to Srebrianski, who would divide it among himself, Vortex, and Belkin and Edelson. Because of this change, the Zhadanovs say, they discovered that Belkin and Edelson were selling the containers for about $850 a case after paying Vortex just $200. So Sam Zhadanov insisted on a $50 price increase, to be split evenly between Srebrianski and Vortex.
Production continued for nearly a year. On the morning of May 19, 1993, state and federal agents banged on the door of Sam and Anna Zhadanov's two-bedroom apartment in Brooklyn. When the Zhadanovs opened the door, the agents tackled Sam (the government says he was "placed on the floor"). "They knocked me down on the floor in my underwear," recalls Zhadanov, who stands five feet, four inches tall and weighs about 135 pounds. "Eight people, big like that. And I am a small old man. They scared me so much, I was close to a heart attack. With guns, they come at 6 o'clock in the morning."
Although they did not have a search warrant, the agents looked through the apartment, ostensibly doing a "security sweep," and discovered a safe in the bedroom. Anna Zhadanov says one of the agents ordered her to open it (the government says he simply "asked" her to do so). The safe contained several shoe boxes, which the agent asked her to open. She refused and closed the safe. The agents later obtained a search warrant and seized about $800,000 in cash from the safe.
Eli Zhadanov notes that his parents come from a culture where there is nothing inherently suspicious about keeping large amounts of cash. The Zhadanovs say about $200,000 of the money belonged to relatives. The balance came from the cash payments that Vortex received from Srebrianski and from Belkin and Edelson over the course of two-and-a-half years. But the Zhadanovs say less than half of that, about $280,000, represents profit. Sam Zhadanov covered expenses for the Belkin and Edelson job with money from other customers that he deposited in Vortex's bank account.
Zhadanov says he did not deposit the cash in the bank because he was afraid it would raise questions about the source, and Belkin and Edelson did not want to be named. Instead, he planned to spend the money on new equipment that he would need to make plastic Scrabble pieces for Milton Bradley. (The Zhadanovs have the prototype for the game pieces and price quotations for the equipment.) Since he intended to reinvest the money in his business, he did not consider it unreported income. The IRS, of course, has a different view, though the agency chose not to bring criminal charges.
In addition to the money from the safe, the government seized the Zhadanovs' personal bank accounts, Vortex's bank account, the factory, the equipment, and the land on which it was located—$1.5 million to $2 million in assets. The government argued that all of this property either represented the proceeds of illegal activity or helped facilitate illegal activity. If drug dealers sold crack and used the proceeds to buy vials from retailers, who paid Belkin and Edelson, who paid Srebrianski, who then paid Vortex, this money then contaminated any bank accounts into which it was deposited. Furthermore, all of the assets associated with Vortex can be said to have facilitated the production of the vials (thereby facilitating the distribution of crack) or to have helped launder the proceeds of illegal activity.
Thus, in the government's view, everything the Zhadanovs had achieved was tainted by the order from Belkin and Edelson. Indeed, in testimony before a federal grand jury in Philadelphia, a DEA agent suggested that Vortex had been established to serve the needs of crack dealers. On November 12, 1992, DEA Special Agent Ellis Hershowitz testified: "This company [Vortex]—our indications of it, it hasn't been in operation all that long. As of the time of the interview, they were just ordering equipment in the early part of '91 through D-M-E Corporation. And it's our understanding that they were just getting started out then. Our impression is that they went into business for the purpose of manufacturing these vials because they knew they could make a lot of money doing it."
A juror asked, "They didn't make anything else, just the vials?"
Hershowitz answered, "Back then they didn't make anything else."
In fact, Vortex had been in business since 1981 and had been making items to order since 1987; its customers included Drexel University, Milton Bradley, Shenley Distillers, and Computer Insights. During the period that Vortex was producing plastic containers for Belkin and Edelson, its main customer was the medical-supply company Becton-Dickinson, for which it made a safety syringe that Zhadanov had invented.
After Zhadanov's arrest, federal agents began contacting his customers, informing them of the charges against him. Becton-Dickinson terminated its relationship with Vortex. A deal with Hammacher Schlemmer, which had planned to carry Zhadanov's shower attachment, fell through. Zhadanov received an anxious letter from a Russian businessman who had ordered 10,000 shower attachments from Vortex. "I am alarmed by the extent of your legal problems," he wrote. "The cause of my concern is a most unpleasant phone call that I received last night at my residence from [a] U.S. government agent….For now I will keep my obligations, but if they continue to harass me, I will have no alternative but to cancel the order." In this manner, the government undermined what was left of Zhadanov's business.
The charges against Zhadanov were certainly alarming. The government estimated that Vortex produced more than 200 million vials, each of which might ultimately contain at least half a gram of crack. Hence Zhadanov was charged with participating in a conspiracy to distribute 10,000 kilograms of crack. He was also charged with 69 money-laundering counts, based mostly on the checks that he received from Belkin and Edelson and from Srebrianski, which he deposited in Vortex's bank account. Although this might seem like a pretty inept way to launder money, since it left a clear paper trail, the government argued that a financial transaction can be considered money laundering even when it could not realistically be expected to hide the proceeds of illegal activity.
Zhadanov was initially determined to go to trial, since he felt he had done nothing wrong. But under pressure from the prosecutors, who he feared might bring charges against his wife, and at the urging of his attorney, Peter Ginsberg, who said it was the best way to avoid a long prison term, Zhadanov signed a plea agreement in December 1993. He pleaded guilty to the conspiracy charges and to most of the money-laundering counts. He agreed to give up all of his assets, except for half of the proceeds from the sale of the Vortex factory, which the government agreed to let his wife keep. (As it turned out, this money was claimed by the IRS, which argues that Anna Zhadanov is liable for back taxes, interest, and penalties related to the Vortex money that the Zhadanovs had kept in the safe.) The prosecution agreed to certify that Zhadanov had been cooperative and was therefore eligible for a reduction in his sentence. Ginsberg says it was also understood that Anna Zhadanov would not face criminal charges.
After Zhadanov pleaded guilty but before he was sentenced, the government ordered Chemical Bank to freeze any funds in the account of Gold & Wachtel, Peter Ginsberg's firm, coming from a Swiss bank account held jointly by Sam, Anna, and Eli Zhadanov. The account contained money that belonged to several of Eli Zhadanov's business associates who had given it to him for safekeeping because of the political unrest in Russia. He planned to borrow the money to pay his father's legal fees. But the government claimed the account had been contaminated by money from vial sales. The order freezing the money was entered on March 23, 1994, and lifted two days later. Ginsberg says he persuaded the prosecutors that the freeze threatened Zhadanov's ability to retain legal counsel, and they agreed to split the money with him. "The government may have been able to forfeit the entire amount," he says, "but they chose not to." Thus Ginsberg had to depend on the prosecutors' discretion for his income while he was still representing Zhadanov.
Meanwhile, the prosecutors continued to play up Zhadanov's role in the case, arguing for a substantial prison sentence. They insisted that he must have known he was making crack vials, and they portrayed him as eager for the work, although the record shows he resisted taking cash and repeatedly threatened to stop production. They said Zhadanov had not honestly sought legal advice to clarify his situation but had framed his inquiry in a way that underplayed his knowledge of how the containers were used. They dismissed his lease arrangement with Srebrianski, confirmed by Srebrianski's grand-jury testimony, as a charade designed to distance Zhadanov from production of the vials. They asserted that Zhadanov was always in charge of setting prices and dividing the money. They cited the $50 price increase as evidence of both his greed and his knowledge of the risk involved in making the containers. They called Zhadanov's profits "staggering," estimating that his cost per case was $28, while he sold each case for as much as $250. Gray says he doesn't recall where the cost estimate came from but that it was probably based on Vortex's records. The Zhadanovs say the actual cost was about $170 per case.
The probation officer who prepared the presentence investigation report accepted the prosecution's version of events. Nevertheless, he wrote that "the defendant is considered to have a minor role in the offense of conviction….While the defendant may have held a managerial position within the vial making and distribution activity, his guidelines are predicated upon the distribution of cocaine base—an offense with which he is associated in only the most peripheral way. As such, he is eligible for a significant role reduction, the greatest of which may not even appropriately address this role." (Emphasis added.) In other words, the probation officer suggested that the lowest possible sentence under the guidelines was too high, since it was inappropriate to treat Zhadanov like a crack dealer.
Noting Zhadanov's impressive accomplishments, his impeccable record, and the punishment he had already suffered as a result of the arrest, the loss of his property, and the damage to his reputation, Ginsberg asked for a sentence of probation. In his statement just before sentencing, Zhadanov tried to explain where he had gone wrong: "If somebody come to me and say, make this….I make it. I don't care what this product used for. And this was my mistake. Because I have to care. I never knew what this means, conspiracy. Now I know."
Then he appealed to U.S. District Judge Thomas N. O'Neill to let him remain free: "When I come to this country 20 years ago, I have in my pocket $300. And I started work. Take a look at my hands. I cannot make it straight, my hand. I work for 16 hours in the machine shop to make everything, and I don't know how to spend the money. All the money I spent for the business…I don't care about the money at all. I care about my life. Because my life, this is my work. OK? You put me in the prison, I will go to the prison, but I will die."
Citing "the enormity of the offense, the harm that was done, the profit [that] was materialized, and, most of all, the necessity for deterrence of others who might be tempted by greed to engage in this endeavor," Judge O'Neill imposed a sentence of five years for each count, to be served concurrently.
"Unfortunately," Ginsberg says, "the government decided to make an example in this case."
By contrast, the informant Roni Moshe, who was in a much better position than Zhadanov to know who bought the containers and for what purpose, was sentenced to a year in a halfway house and a year of home detention. Srebrianski was sentenced to 18 months in prison, while Edelson, who was on probation for the earlier paraphernalia conviction, got four years. As of this writing, Belkin has yet to be sentenced. Zhadanov has hired a new attorney to appeal his sentence, arguing that the judge misapplied the federal sentencing guidelines and that the prosecution did not allege sufficient factual basis for the money-laundering counts.
Before he reported to prison, Zhadanov put most of his time and effort into the business his son has established to market his inventions. He sold what little equipment the government allowed him to keep to the new business, which rents an industrial space in Linden, New Jersey.
During an interview at the new factory in late December, Anna Zhadanov proudly shows off her husband's patents. Sam eagerly explains some of his recent projects, including an improved blood lance for diabetics and a new kind of flavored plastic toothpick. But when he considers the looming prison term, Zhadanov turns somber. "Right now, I feel very badly, because I don't know where I stand, or what kind of person I am anymore," he says. "I don't know who I am today."
To Gray, Sam Zhadanov is a confessed felon. "He's been treated fairly for what he did," the prosecutor says. "He admitted that he made hundreds of millions of crack vials. That's the extent of the issue, as far as we're concerned."