Recently in the Jury Instructions category:
Buried in the impressive reversal of the fraud conviction of Mark Kaiser, an executive at U.S. Food Services (“USF”) in United States v. Kaiser, 609 F.3d 556 (2d. Cir. 2010), issued last summer, is a quotable acknowledgement that insider trading is a very different and unique kind of securities fraud, deserving of a heightened level of scienter. As the Court notes, “[u]nlike securities fraud, insider trading does not necessarily involve deception, and it is easy to imagine an insider trader who receives a tip and is unaware that his conduct was illegal and therefore wrongful. The same cannot be said of one who deliberately misleads investors about a security.”
In addition to that notable dictum, the court held that the district court committed two independent errors. First, the district court instructed the jury with respect to conscious avoidance without informing the jury that it could find that Kaiser had knowledge of the fraud if he was aware of a “high probability” of its existence unless he “actually believed” that it did not exist. Second, the district court admitted double hearsay when it allowed a USF employee, Tim Lee, to testify that USF’s CEO had told Lee that USF’s general counsel wanted to go to the SEC to expose Kaiser’s improper accounting entries. The Second Circuit found that both errors were grounds for reversal.
As one of the largest food distributors in the United States, USF was in the business of purchasing food products from manufacturers and selling them to restaurants. Between 1994 and 2001, Kaiser managed the company’s dealings with its food vendors. An important source of revenue for USF was derived from “promotional allowances,” or “PAs,” a type of rebate paid to USF by vendors upon satisfaction of certain purchasing targets. Part of Mr. Kaiser’s job included negotiating PAs with vendors. Early in 2001, Mr. Kaiser was named Chief Marketing Officer of USF, but he continued to be involved in negotiating PAs.
The indictment alleged that Mr. Kaiser fraudulently inflated USF’s PA income for the years 2001 and 2002, hid the inflated numbers from outside auditors, and made various misrepresentations to the auditors concerning the PA agreements with vendors. The scheme included recording prepayments from vendors as income and, thereby, artificially inflating the amount of revenue earned from PA payments to ensure that USF met its earnings and other budgetary targets. USF’s executives, including Mr. Kaiser, received bonuses only if USF met these targets.
At trial, the government presented a case based primarily on the testimony of three alleged coconspirators, including Tim Lee, who cooperated with the government and testified pursuant to plea agreements. Kaiser argued in his defense that he had been setup by the three USF employees and had been unaware of the fraud. Kaiser was convicted of securities fraud, making false filings with the SEC, conspiracy to commit those crimes, and conspiracy to falsify books and records. Kaiser appealed.
Conscious Avoidance Jury Instruction
On appeal, Kaiser argued that the district court’s jury instructions with respect to conscious avoidance omitted two necessary elements: “that knowledge of the existence of a particular fact is established 1) if a person is aware of a high probability of its existence, 2) unless he actually believes that it does not exist.” United States v. Schultz, 333 F.3d 393, 413 (2d Cir. 2003) (internal quotations marks omitted) (emphasis added). The court reviewed Kaiser’s conscious avoidance argument for plain error because he had failed to raise an objection to the instruction at trial.
The court held (and the government conceded) that the district court erred in instructing the jury on conscious avoidance because it “did not contain either the ‘high probability’ or the ‘actual belief’ language,” which the court had “long held is essential for an accurate conscious avoidance instruction.” 609 F.3d at 566. The government argued nonetheless that there was no prejudice from the instruction in light of the overwhelming evidence that Kaiser had actual knowledge of the fraudulent scheme. The court disagreed and found that there was a risk that the jury convicted Kaiser based on its conclusion that he was merely negligent and could have convicted him even if it found that Kaiser actually believed the PA numbers were correct. Because there was ample evidence for the jury to question the credibility of the government’s witnesses, the court concluded that there was a reasonable probability that the jury convicted Kaiser based on a conscious avoidance theory and would not have done so but for the instructional error. The court further held that the error seriously affected the fairness, integrity or public reputation of judicial proceedings and thus met all of the requisite elements for a finding of plain error.
Admission of Hearsay Statement of USF’s General Counsel
Kaiser also argued on appeal that the district court erred in admitting certain testimony. Lee testified that the CEO of USF told him that USF’s general counsel had discovered that Kaiser improperly had booked $18.5 million in prepayments as income and that the general counsel wanted to report this to the SEC. Kaiser objected at trial on the ground that it was double hearsay. The government countered that the testimony was admissible as a statement of an unindicted coconspirator under FRE 801(d)(2)(E) and that the statement was in furtherance of the conspiracy. The district court held that the statement was admissible for the limited purpose of explaining why Lee and the CEO engaged in certain subsequent acts.
On appeal, the Court held that the statement constituted hearsay and did not fall into any of the hearsay exceptions. The court observed that even if the government could have overcome the hearsay objection, the statement would have been inadmissible under FRE 403 because its prejudicial effect outweighed its probative value. Indeed, because of the highly prejudicial nature of the testimony and the risk that the jury could have given it more credence since it came from USF’s general counsel, who was not a co-conspirator, the court concluded that the error was not harmless.
The Court, however, rejected the defense challenge to the district court’s instruction on willfulness. Acknowledging that insider trading is different (as noted earlier), the Court concluded that securities fraud charges like those at issue in Kaiser required merely that the defendant “had an awareness of the general wrongfulness of his conduct” and “do not require a showing that a defendant had awareness of the general unlawfulness of his conduct.” Here, the jury was charged that they had to find that Kaiser knew the statements were “false and fraudulent” and that he made those statements “with intent to create a deception,” and the government had to prove “the contrary of the idea of mistake or good faith.” If the jury found that Kaiser possessed such an intent, as it did, “it follows necessarily that it also concluded that there was “a realization on the defendant’s part that he was doing a wrongful act.”
Lawyers: Alexandra Shapiro (Macht, Shapiro, Arato & Isseries, LLP) and Richard Morvillo, Andrew Frey, Peter White, Charles Rothfeld, Daniel Brown and Michael Passaportis (Mayer Brown LLP) for defendant; AUSAs Daniel Chung, Daniel Braun.
Fraud based on the “deprivation of honest services” is a controversial charge likely to elicit some notable rulings from the Supreme Court this term, as noted here. In particular, the cases of Jeffrey Skilling and Conrad Black may produce decisions that reign in the reach of honest services fraud in the context of private businesses, two varieties of which have been identified by the Second Circuit in United States v. Rybicki: cases involving bribes or kickbacks, and cases involving self-dealing. Bribery/kickback cases need no introduction. Self-dealing cases, on the other hand, usually involve the defendant causing his employer to do business with a corporation or enterprise in which the defendant has a secret, undisclosed interest. In Rybicki, the Second Circuit adds that "[i]n the self-dealing context, though not in the bribery context, the defendant's behavior must [.] cause, or at least be capable of causing, some detriment – perhaps some economic or pecuniary detriment – to the employer.”
This distinction is at issue in United States v. Demizo, 2009 WL 2163099 (EDNY July 20, 2009), where the defendant was convicted after trial of securities fraud and making false statements. Because EDNY Judge Gleeson concluded, however, that there was no factual predicate to treat the case as a self-dealing one, he declined to defendant’s requested jury charge on the issue of detriment. The case also includes an interesting discussion on the issue of permitting the defendant to introduce at trial a statement the government made in a brief under the "admission of a party opponent” rule.
Refusal to Charge:
Relying on the Second Circuit’s decision in United States v. Rybicki, 354 F.3d 124 (2d Cir. 2003), the court rejected the argument that the jury should have been instructed that the fraud involved self-dealing as opposed to kickbacks, and the government was therefore required to prove a possible detriment to the employers.
Assuming the validity of the legal argument, the court deemed any such instruction inappropriate because the defense “failed to identify any evidence in the record that could permit the jury to find that this was a self-dealing case.” As the Second Circuit has suggested, self-dealing involves a situation where the defendant causes the employer to do business with a corporation or other enterprise in which the defendant has a “secret interest.” That term has not been defined, but the relevant cases all involve defendants who had undisclosed ownership interests in those entities and Demizio “did not argue that the record showed he had such a cognizable interest in the firms to which he steered his employer’s business.”
The court also rejected the defense’s argument that the case involved self-dealing because the government alleged a conflict of interest because, “every fraud case, including the kickback scheme at issue in Rybicki, involve a conflict of interest in that every individual has a personal interest in pocketing a kickback while every employer has an interest in hiring people who eschew such conduct.”
Refusal to Admit a Statement from a Government Brief
The defense also argued that it should have been permitted to introduce into evidence a government pre-trial brief submitted in opposition to a request for a bill of particulars, reasoning that statements made by an attorney concerning a matter within his employment may be admissible against the represented party.
The court explained that while the Second Circuit has previously considered the admissibility of statements made in a bill of particulars and opening statements made by defense counsel at a previous trial and found that, while not inadmissible per se, policy concerns weigh against allowing such statements to be admitted as admissions by a party-opponent. Against that backdrop, Judge Gleeson reasoned that because the brief was a legal memoranda and not a formal pleading, it was merely an assertion about the charges in the indictment – which is a charge of the grand jury – and could not properly be deemed a statement by the government .
Finally, rejecting the claim that the brief was evidence that the government had changed its theory during the trial, the court found the assertion irrelevant “to any factual issue submitted to the jury” and, in any event, the probative value was substantially outweighed by the risk of confusion.
Attorneys: David Spears, Charlita Mays (Spears & Imes LLP) (defendant); AUSA’s Winston Chan, Kelly T. Currie, Winston Paes
Quoting the Supreme Court’s decision in Flores-Figueroa v. United States, 129 S.Ct. 1886 (2009), the Court explained “[i]n ordinary English, where a transitive verb has an object, listeners in most contexts assume that an adverb (such as knowingly) that modifies the transitive verb tells the listener how the subject performed the entire action, including the object as set forth in the sentence.”
Yes, I didn’t follow that either on first reading. My translation: the word “knowingly” modifies all the elements of a criminal statute. Except when it doesn’t – take note of Justice Alito’s Potter Stewart caveat in Flores-Figueroa, that there may situations where the context of the statute dictates a different result. But let’s leave prosecutors make that argument.
Lawyers: Susan Wolfe, Hoffman & Pollok, LLP (defendant); AUSAs Elie Honig and Andrew Fish
Continuing a streak of notable decisions in this circuit on the evidence necessary to establish knowledge and intent in conspiracy cases (including Murray Law LLC’s reversal in Lorenzo, and also reversals in Kapelioujnyj and Wexler), EDNY Judge Sifton has granted a motion for a judgment of acquittal to a defendant convicted after trial of participation in a drug conspiracy, and aiding and abetting drug distribution. United States v. Heras, 2009 WL 1874373 (E.D.N.Y. June 29, 2009), makes the important (and not always obvious) point that knowledge is not the same thing as intent, and reminds us of that great principle: “If the evidence viewed in the light most favorable to the prosecution gives equal or nearly equal circumstantial support to a theory of guilt and a theory of innocence, then a reasonable jury must necessarily entertain a reasonable doubt.”
Nelson Heras had driven Simon Correa, a/k/a Luichi, a known drug dealer, and an acquaintance of Correa’s to a hotel. During the ride, Correa and his companion openly discussed Correa’s plan to pick up drugs at the hotel, something Heras later admitted overhearing. Correa entered the hotel, whereupon he was arrested in a controlled delivery operation. Heras and the companion, who remained in the minivan in the parking lot, were also arrested. Upon being told that “a serious federal crime had been committed involving the importation of narcotics,” Heras stated “Whoa, whoa ... Whatever happened up there, that has to do with Simon. That has nothing to do with me,” and “This is ... Luichi’s deal.”
Granting Heras’ motion for a judgment of acquittal on both the conspiracy and aiding and abetting convictions, Judge Sifton pointed out that these two specific intent crimes required that “the purpose - not merely the effect - of the defendant’s participation in the crime was to distribute narcotics.” Noting that “the prosecution made little attempt to argue that the evidence established the element of intent, focusing instead on the issue of knowledge,” the Court held that knowledge that Correa was picking up drugs or that he Correa was a drug dealer was not the same as knowledge of any plan on Correa’s part to distribute drugs, much less the equivalent of Heras “knowingly join[ing] and participat[ing] in it or promot[ing] the venture himself.” Moreover, once evidence was introduced of Heras’ “innocent explanation” prefaced with the words “whoa, whoa,” the jury could no longer presume that Heras intended to bring about the ordinary consequences of his actions. “When faced with an innocent explanation sufficiently supported by the evidence to create a reasonable doubt about the defendant’s guilt, the Government’s burden is to present evidence sufficient to dispel that doubt.”
Whoa, now that’s a decision worth noting!
Lawyers: Justine Harris, Federal Defenders of New York, Inc. and Justin Levine, Seijas & Levine (defendant); AUSA Andrew Goldsmith
The tragic tale of Peter Polizzi has now generated another notable decision on the power of a district court to instruct a jury about mandatory minimum sentences. The Second Circuit has just issued its decision on the appeal and cross-appeal from Judge Weinstein’s huge decision, previously blogged about here. In United States v. Polouizzi, 2009 WL 1098796 (2d Cir. April 24, 2009), the Court rejected Judge Weinstein’s holding that Polizzi had a Sixth Amendment right to have the jury instructed on the five-year mandatory minimum sentence applicable to the charge of receiving child pornography. Importantly, however, the Court also held that a district court “has discretion to instruct the jury on applicable mandatory minimum sentence in some circumstances.” In addition, the Court found several Double Jeopardy violations with regard to Polizzi’s multiple convictions for receipt and possession of multiple images of child pornography. As a result, on remand, there may be a path that could rescue Mr. Polizzi from the five-year mandatory minimum sentence Judge Weinstein and several of the jurors found so abhorrent in his case.
Jury Instruction Regarding Mandatory Minimums
As readers of this blog will recall, Judge Weinstein vacated Polizzi’s twelve convictions for receipt of child pornography, concluding (in a case of judicial remorse) that he should have granted the defendant’s request to have the jury instructed about the five-year mandatory minimum sentence carried by these convictions. (A conviction of possession of child pornography carries no mandatory minimum sentence.) The Second Circuit held that Judge Weinstein had erred in holding that denying this request had violated Polizzi’s Sixth Amendment right to trial by an informed jury. In a decision that is not surprising, the Court pointed out that Judge Weinstein’s holding was foreclosed by its own precedent. Whether the Supreme Court in Booker effectively changes that precedent “is a decision we must leave to the Supreme Court.”
What is surprising is the Court’s rejection of the government’s position that a district court may never instruct a jury regarding a mandatory minimum sentence. Rather, the Court held, “the law does not support such an absolute prohibition.” It goes on:
Without attempting to define the boundaries of a district court’s discretion in this regard, we recognize the possibility, as the [Supreme] Court in Shannon did, that circumstances may exist in which instructing the jury on the consequences of its verdict will better ensure that the jury bases that verdict solely on the evidence and will better discourage nullification.
Moreover, the court also reaffirmed that “jurors have the capacity to nullify,” although it’s not something judges should encourage.
Finally, the Court left open the possibility that in a case like Polizzi’s (a non-violent offender who had been abused as a child, and who in middle-age, engaged in passive consumption of child pornography), an instruction about the mandatory minimums may have been appropriate: “[i]n this case, it is not necessary to decide whether it would have been within the district court’s discretion to inform the jury of the applicable mandatory minimum sentence.” The Court pointed out that Judge Weinstein had exercised his discretion not to give this instruction, and “[a] trial court’s failure to take discretionary steps that might have induced jurors to nullify does not furnish an adequate justification for a finding under Rule 33 that ‘the interest of justice ... requires’ a new trial.”
Needless to say, this is going to inspire some very interesting litigation on the issue of advising juries of applicable mandatory minimum sentences, especially in cases involving mandatory minimums that yield startlingly unjust results, like in Polizzi’s case, or cases that produce an effective life sentence (e.g., Ballard).
Double Jeopardy Issues
The Court’s rulings on the Double Jeopardy issues are also notable, and could lead to some tangible results for many defendants, including possibly Polizzi.
First, the Court ruled that multiple possession convictions relating to a collection of pornography possessed on one date violated the Double Jeopardy Clause. “Based on the clear language of the statute, we conclude that Congress intended to subject a person who simultaneously possesses multiple books, magazines, periodicals, films, video tapes, or other matter containing a visual depiction of child pornography to only one [child pornography possession] conviction.” Accordingly, it directed the district court on remand to vacate all but one of the possession convictions. (This conclusion has no practical effect vis a vis mandatory minimums, since possession of child pornography does not carry a mandatory minimum sentence; but it does affect the ability of those rare judges who want to stack consecutive sentences in these cases.)
Second, the Court ruled that multiple receipt convictions arising out of one instance of downloading violated the Double Jeopardy Clause: “the rule of lenity requires the conclusion that a person who receives multiple prohibited images in a single transaction can only be charged with a single [receipt] violation.” Here, the record did not establish “whether Polizzi’s receipt of multiple images on any one of these dates reflected a single simultaneous transfer or discrete and distinct transfers” and as such, the “record would appear to support Polizzi’s conviction on [only] four receipt counts – one for each date on which he received images – but not multiple receipt counts per day.”
Third, the Court highlighted without deciding the issue of whether the crime of possession of child pornography is a lesser included offense of the crime of receipt of child pornography. Both the Third and Ninth Circuits have ruled that it is “because receiving an item necessitates taking possession of it.” (Notably, in United States v. Miller, 527 F.3d 54, 73 (3rd Cir.2008), the Third Circuit held that on remand, the district court was free to decide which of the convictions – possession or receipt – to vacate.) The Second Circuit noted it found the reasoning in these cases “persuasive” but declined to decide the issue here, because it viewed Polizzi’s case factually distinguishable due to the fact that he had been convicted of possession counts that did not have a receipt counterpart. (I believe, however, that the dispositive issue may be whether Polizzi was convicted of receipt counts that have no possession counterpart.)
On remand, it would appear that Judge Weinstein must go through several steps to comply with the Court’s ruling and eliminate the Double Jeopardy problems in this case.
First, assuming he accepts the Second Circuit’s analysis that the record does not support more than four receipt convictions, he must reinstate only four of the twelve receipt convictions - one for each date upon which images were downloaded. Supreme Court precedent gives Judge Weinstein discretion which ones to reinstate.
Second, he must decide as a matter of first impression in this Circuit the issue of whether possession is a lesser included offense of receipt, since the Circuit declined to do so here.
Third, assuming he answers that question affirmatively, he must discount either a possession or a receipt conviction, where two such convictions relate to one downloaded image. Hopefully, that analysis permits him to discount all of the receipt counts.
Finally, he must discount all but one of the possession counts remaining.
If Judge Weinstein conducts his analysis in the order I have set forth here, Polizzi may have a shot of ending up with only one conviction for possession of child pornography and avoiding any mandatory minimum sentence – a resolution that would be eminently just and appropriate in this case.
At the heart of the two decisions, implicitly in Cuellar and explicitly in Santos, is disquiet with the “merger problem,” that is, where the underlying illegal activity merges with money laundering by virtue of concealment or expenditure of the money generated. As all Justices recognized in Santos, it is the rare crime that doesn’t involve some payment of expenses associated with the commission of the crime. And the same can be said about concealment. While the Court rejected the narrow definition of money laundering advocated by the defense in Cuellar – that it should be limited to those classic money laundering situations where illegal proceeds are given the appearance of legitimate wealth – the Court expressed concern in Santos that an expansive definition of money laundering gives extraordinary power to prosecutors to induce plea bargains. As Justice Scalia comments in his majority opinion (and is no surprise to defense lawyers in New York’s district courts): “Prosecutors . . . would acquire discretion to charge the lesser offense, the greater money-laundering offense, or both – which would predictably be used to induce a plea bargain to the lesser charge.”
The merger problem is explored in United States v. Catapano, 05 CR 229 (SJG), 2008 WL 4107177 (E.D.N.Y. August 12, 2008), where the defendants were charged with two frauds, one involving bribes to representatives of public utility companies and another involving false statements to procure New York City construction contracts. The defendants moved to dismiss the money laundering charges they faced under Santos, claiming that the money laundering charges alleged transactions based on mere receipts not profits. The court denied the motion, holding that even if Santos’s proceeds/profits analysis applied beyond the gambling context (an issue that is by no means certain), the indictment here was facially valid and therefore could not be challenged based on the quality or adequacy of the evidence. (This is of course totally accurate, but how cost- and time-effective it would be to root out weak cases through some kind of judicial review of the grand jury process, as happens in the state system, but that’s another blog piece . . . ).
The court nonetheless went on to address the merits of the argument, since the government had provided a summary of the evidence it planned to present at trial – essentially that the defendants used the proceeds of the corruptly or fraudulently obtained contracts to perpetrate more crimes through the payment of additional bribes. In other words, “the defendants conspired to conduct transactions with the profits derived from completed crimes in order to commit new ones.” Unlike an ongoing gambling operation, the bribery scheme involved several discrete acts of wrongdoing. Accepting the government’s proffer as true, the court found that the “merger problem” identified in Santos does not arise here.
Lawyers: Michael Rosen (Law Office of Michael Rosen), Diarmuid White (White & White), Peter J. Driscoll (Driscoll & Redlich), Jason W. Kreiss, Melvyn K. Roth, for Defendants. AUSA Charles Kleinberg
In United States v. Diaz, 04 Cr. 1353 (KMW), 2008 WL 4387209 (S.D.N.Y. September 12, 2008), in the context of a motion for a judgment of acquittal, the defendant argued that there was insufficient evidence to satisfy the concealment purpose of the statute, where the defendant established a bank account called “Fine Quality Shipping,” into which money was deposited and then transferred to the Dominican Republic. Judge Wood held, however, that concluding concealment was a purpose of these bank records was not unreasonable: here, “a reasonable jury could find a sophisticated and complex financial scheme intended to do more than simply send money from New York City to the Dominican Republic undetected by law enforcement authorities.”
In United States v. Ness, 01 Cr. 699 (AKH), 2008 WL 3842961 (S.D.N.Y. August 15, 2008), in the context of a motion for bail pending appeal, the court addressed whether evidence presented at the defendant’s money laundering trial was sufficient to establish the concealment element in light of Cuellar. Ness had run an armored carrier business that transported valuables internationally, along with millions of dollars in narcotics proceeds, commingled with jewelry and other packages of valuables. Finding no “close question” likely to result in reversal or a new trial, the court noted that the transportation was designed to conceal or disguise three aspects of the funds at issue: the “nature” of that which was being transported, its “location” among the valuables that Ness was allowed to transport and move from one airplane to another at JFK airport, and the fact that its “source” was ecstasy distributions.
In a summary order in United States v. Mercedes, 283 Fed.Appx. 862 (2d Cir. 2008), the Court indicated that Cuellar did not disturb its previous circular holding (delivered, coincidentally, in a prior ruling in the highly litigated Ness case) that if transactions were part of a “highly complex and surreptitious” process, one can infer that they “had been designed in a way that would conceal the source of the moneys.” In Mercedes the “highly complex and surreptitious” process consisted of a “highly secretive” process of transferring money, and the storage of narcotics proceeds in saran-wrap in an apartment, along with “money laundering ledgers, a money-counting machine, and a record detailing the amounts of the narcotics proceeds.” Other than the “money laundering ledgers,” whatever they are, this doesn’t sound that different from the highly surreptitious method of concealment at issue in Cuellar: a hidden compartment in a vehicle, surrounded by animal hair. But the paucity of facts here make this an unhelpful indicator of where the Second Circuit will go in interpreting Cuellar.
Lawyers: Mary Anne Wirth (Bleakley Platt & Schmidt, LLP) for appellant. AUSAs Amy Lester, Assistant, Celeste L. Koeleveld.
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