Case o' The Week: One to Watch -- Phillips and Mail Fraud

Trick your company into paying your girlfriend tens of thousands of dollars to pay for an expensive Breguet watch, that you have shipped to yourself from out of state, and you’ve done several things: theft, probably, fraud, certainly, money laundering, maybe.

What you haven’t done, however, is commit mail fraud. United States v. Phillips, 2012 WL 6700220 (9th Cir. Dec. 26, 2012), decision available here.

Players: Decision by Sr. D.J. Rakoff, SD NY, joined by Judges Schroeder and Gould.

Facts: Phillips was the CEO of “MOD” – a high-tech start-up in Seattle. Id. at *1. He also fancied fine watches, and bought a pair from an Arizona company, “Feel Good Watches.” Id. After Feel Good shipped him the watches, Phillips paid for them by forging invoices and convincing MOD to (unknowingly) pay his girlfriend as a “consultant.” Id. at *2-*3. Phillips’ girlfriend then paid Feel Good. Id. Phillips was charged with mail fraud (and other crimes) and was convicted after a jury trial. Id. at *5.

Issue(s): “The [mail fraud] scheme charged . . . was that Phillips ‘devise[d] and intend[ed] to devise a material scheme to defraud MOD and to obtain money from MOD by means of material false and fraudulent pretenses, representations and promises and the concealment of material facts.’ Therefore, the scheme was to defraud MOD and to obtain money from MOD. The only asserted use of the mails was Feel Good Watches's mailing of the first Breguet watch to Phillips. Phillips, citing to United States v. Maze, 414 U.S. 395 (1974), argues that the mailing was not in furtherance of the fraudulent scheme to defraud MOD, and that Phillips ‘simply used the money he obtained from MOD to purchase a watch.’” Id. at *6.

Held: “Here, as in Maze, the success of Phillips's fraudulent scheme did not depend in any way on the use of the mails. The fact that Phillips purchased a watch with $30,000 of fraudulently obtained MOD funds, instead of using the funds for his personal benefit in some other fashion, did not in any way affect the scheme ‘to defraud MOD and to obtain money from MOD,’ as charged in [the mail fraud] Count. The fact that payment eventually was made to a watch dealer and that watch dealer mailed a watch in return was not a part of the scheme to defraud MOD and to obtain money from MOD—it was simply the byproduct of that scheme. Put another way, as a result of Phillips's successful execution of his scheme to defraud, he had sufficient funds to pay for the watch. 

Therefore, even under the demanding plain error standard, Phillips's mail fraud conviction must be reversed.” Id. at *7 (emphasis in original).

Of Note: While Phillips is great on mail fraud, it is less laudable on prosecutorial misconduct. Phillips testified at trial. In closing argument the AUSA argued that Phillips had told “numerous lies” – both to MOD employees and when he testified. Id. at *10. The Ninth tolerates these two categories of references to lies – lies during the fraud, and lies during testimony – explaining that the prosecutor was “commenting on the evidence.” Id. 

The Court emphasizes, though, that the AUSA “did not give his own opinion on defendant’s guilt,” and that the AUSA alleged that Phillips “lied” but didn’t call the defendant a “liar.” Id. “Liar” (the Court assures us) “could have the tendency to overtake the role of the jury as the arbiter of credibility” in a way that “he lied” does not. Id. Verb vs. noun – “lied” vs. “liar”: makes a difference, apparently, when used in closing argument.

How to Use: Mail fraud is a tool frequently abused by the feds in their effort to federalize vanilla state crimes, like theft. In Phillips, Judge Rakoff gives us a brief but valuable description of the lead Supreme Court case on this abuse, United States v. Maze. Id. at *6-*7. Run mail fraud charges through the Phillips test: was the mail just used to buy stuff using the loot of a crime? If so, you’ve got a great mail fraud defense (although you may admittedly have some money laundering problems). See id. at *9 n.9 (discussing the relationship between mail fraud and money laundering theories in Phillips).

                                               

For Further Reading: Phillips got hit with an obstruction of justice enhancement in light of his testimony. Id. at *5. For a wince-inducing article on Phillips’ acceptance of responsibility – or lack thereof – see piece here.

 Thirty-one year old Phillips was sentenced to four years on eight-year guidelines: another example of just and measured sentencing by D. Wa. Judge Coughenour. See, e.g., blog on Ressam here.

Image of Breguet watch from http://www.priceit.in/price-of-watches/breguet-watch-price/

Steven Kalar, Federal Public Defender N.D. Cal. Website at www.ndcalfpd.org

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Case o' The Week: The Webster Definition - Money Laundering Proceeds in US v. Webster

Q: What is the most frustrating thing about the "rule of lenity," where a defendant catches a rare break thanks to an ambiguous term in a statute?

A: The courts' and Congress' eagerness to limit and clean up the ambiguity as quickly as humanly possible (in ways that never help the defense).

This week's decision is a case study for this phenomenon. In United States v. Webster, the Ninth Circuit further whittles down a righteous application of the rule of lenity by the Supreme Court in Santos -- and notes that Congress has done the same. United States v. Webster, 2010 WL 3784829 (9th Cir. Sept. 30, 2010), decision available here.

Players: Decision by Judge Thompson.

Facts: [On June 2, 2008, the United States Supreme Court decided United States v. Santos, 553 U.S. 507 (2008). The plurality decision in Santos required that the term, “proceeds” in money laundering jury instructions refer only to “profits,” and not to all gross receipts (at least in some cases).]

Six months later, Lamar Webster went to trial in Montana. 2010 WL 3784829, *1. Four cooperators testified against Lamar Webster on federal meth and money laundering charges. Id. at *1. The jury instructions for the money laundering counts referred to “proceeds,” but did not further define that term. Id. The jury returned guilty verdicts on all counts. Id.

Issue(s): “In instructing the jury on the money laundering counts, the district court did not define ‘proceeds’ as ‘profits,’ a failing which Webster now challenges for the first time. Because Webster did not raise a timely objection to the instructions, we review for plain error. . . . . Webster contends our decision in Moreland compels the conclusion that the district court's failure to define ‘proceeds’ as ‘profits’ in the jury instructions constitutes plain error. See Moreland, slip op. at 14319-320 (discussing and applying United States v. Santos, 553 U.S. 507, 128 S.Ct. 2020 (2008)).” Id. at *3 (some internal quotations and citations omitted).

Held: “We disagree.” Id. “We . . . read Santos as holding that where, as here, a money laundering count is based on transfers among co-conspirators of money from the sale of drugs, ‘proceeds’ includes all ‘receipts’ from such sales. . . . Because the broad ‘receipts’ definition of ‘proceeds’ was permissible, the district court did not err in its jury instructions by failing to define ‘proceeds’ narrowly to mean ‘profits.’” Id. (internal quotations and citations omitted).

Of Note: Santos was the great 2008 Supreme Court victory, which reigned in the money laundering statute by refusing to allow all receipts of a crime to be deemed “proceeds” and subject to laundering prosecution. That victory was immediately whittled down – first, because it was only a plurality of the Supreme Court that arrived at that a narrow decision.

Then, in the 2009 Van Alstyne case, the Ninth Circuit held that this plurality opinion was limited to money laundering from offenses presenting the danger of “merger” between the laundering and the substantive crime (like pyramid schemes, where there was the “merger” danger that every fraud crime creating income would automatically become money laundering if “receipts” weren’t distinguished from “profits). See blog here.

To make matters worse, on May 20, 2009 Congress amended 18 USC § 1956 (the money laundering statute) by gutting Santos with a new definition of “proceeds.” The new definition is terrifically broad: “the term ‘proceeds’ means any property derived from or obtained or retained, directly or indirectly, through some form of unlawful activity, including the gross receipts of such activity.” PL 111-21, May 20, 2009, 123 Stat 1617.

In sum, Santos had a short run.

How to Use: There are probably ex post facto problems with applying the new § 1956 definition of “proceeds” to fraud cases with conduct before May 20, 2009 (the effective date of the statute). For these pipeline cases with money laundering charges and “merger” problems, Santos should still control and modified jury instructions are in order.

For Further Reading: For a thoughtful and concise summary of the very confusing Santos tangle, the new definition of “proceeds” in the money laundering statute, and ideas how to use all of this wonderful mess to defend criminal and forfeiture charges, see Carlos F. Gonzalez and Regan Kruse, U.S. Anti-Money Laundering Laws in the Wake of U.S. v. Santos, Nov. 6, 2009, .pdf available here.



Money laundering image from http://www.tesionline.com/intl/img/focus/money-laundering.jpg

Steven Kalar, Senior Litigator N.D. Cal. FPD. Website at www.ndcalfpd.org


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Case o' The Week: Ninth Airs Supreme's Dirty Laundry (Money Laundry Analysis, that is): Van Alstyne

Who has the temerity to call out the Supreme Court for a fractured decision that does far more to muddy money laundering cases, than to clarify them? Judge Marsha "Calls 'em Like She Sees 'em" Berzon, in United States v. Van Alstyne,__ F.3d __, No. 07-50105, 2009 WL 3381144 (9th Cir. Oct. 22, 2009), decision available here.

Players: Important victory on complex issue for CD Cal AFPD James Locklin and Defender Sean Kennedy. Decision by Judge Berzon (right).

Facts: Val Alstyne ran a Ponzi scheme and was charged with mail fraud and money laundering. Id. at *1. Two of the three money laundering counts involved transfers from a corporation to a partnership, used to make lulling payments to investors. Id. The third was a similar transfer, used to completely refund an investor’s outlay after the scheme began to unravel. Id. at *2.

He was convicted of seven mail fraud counts and all three money laundering counts. Id. at *2. After his conviction, and before this appeal, the Supreme Court decided United States v. Santos, 128 S. Ct. 2020 (2008). Id. at *1. Santos addressed the question of which financial transactions constitute “proceeds” that are chargeable under the federal money laundering statute. Id. at *3.

Issue(s): Van Alstyne now argues that Santos requires us to reverse his money laundering conviction. Id. at *1. “Van Alstyne contends that his payments to investors were no different than those held insufficient to sustain Santos’ money laundering conviction because the payments were ‘necessary for the operation to continue.’” Id. at *3. [Because these payments were not ‘proceeds’ as defined in the money laundering statute], “Van Alstyne now argues that Santos requires us to reverse his money laundering conviction.” Id. at *1.

Held: “We hold that Santos undermines our earlier approach to determining whether funds arising from a specified illegal activity constitute ‘proceeds’ for the purposes of the money laundering statute, 18 USC § 1956, and requires a reversal of Van Alstyne’s money laundering conviction for two of the three money laundering counts.” Id. at *1. “We . . . view the holding that commanded five votes in Santos as being that ‘proceeds’ means ‘profits’ where viewing ‘proceeds’ as ‘receipts’ would present a ‘merger’ problem of the kind that troubled the plurality and concurrence in Santos.” Id. at *7.

Of Note: Before he was a Judge, one of Professor W. Fletcher’s memorable lectures was a forceful attack on fractured appellate decisions. Santos proves his point. In Van Alstyne, Judge Berzon struggles to glean the holding of Santos, reading the tea leaves from a plurality decision, a dissent, and a Stevens’ swing vote that irked everyone. Van Alstyne is a careful, honest – indeed, blunt – decision that is a worthwhile read in an era where divided Supreme Court opinions are the norm. See id. at *5 (bluntly describing earlier Lazarenko panel’s erroneous reading of Santos, available here).

How to Use: Q: After Van Alstyne, when will Santos preclude a money laundering prosecution? A: It depends. Van Alstyne cannot be cited for the proposition that the distribution of money from mail fraud will always – or never – support a money laundering conviction: the “analysis of the ‘merger’ problem must focus on the concrete details of the particular ‘scheme to defraud,’ rather than on whether mail fraud generally requires payments of the kind implicated in Santos.” Id. at *8. Van Alstyne illustrates this context-specific analysis: the first two of the three money-laundering counts were reversed, while the third survived. Id. at *8.

The acid test, it seems, is “merger:” if the funds at issue are treated as “proceeds,” would this transform the underlying substantive crime (like mail fraud) into a simultaneous money launder crime in every case (i.e., “merge” the substantive offense with money laundering?) Id. at *4. Through no fault of Judge Berzon, this fact-bound test is difficult to understand and will be even more difficult to apply: thus preserve Santos objections to money laundering counts, a fertile field for appellate error.

For Further Reading: This was a prolific panel: last week the same three judges decided United States v. $186,416 in U.S. Currency, No. 07-56549, 2009 WL 33503042 (decision available here.

$186,416 is also worth a read for its compelling argument that the Fourth Amendment should apply – with even more force – in the civil forfeiture context (here, regarding funds forfeited from a medical marijuana clinic by the feds). Id. at *5-*6.



Image of the Hon. Marsha Berzon from http://blog.law.uark.edu/?p=76 . Image of medical marijuana symbol from http://marijuanacannabis.wordpress.com/2009/08/


Steven Kalar, Senior Litigator N.D. Cal. FPD. Website at www.ndcalfpd.org


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Case o' The Week: Defense 45 / Gov't 8 (but Lazarenko still gets nine . . .)

Years of litigation, millions of dollars of investigation, government "depositions" under sketchy circumstances in Russia, and the feds end up losing 45 out of 53 counts against Pavel Ivanovich Lazarenko, former Prime Minister of Ukraine? United States v. Lazarenko, __ F.3d __, 2008 WL 4368219 (9th Cir. Sept. 26, 2008), decision available here.

A remarkable effort by some of the best of California's defense bar.

Unfortunately for Mr. Lazarenko (left, leaving the SF federal building) even with an additional six counts knocked by the Ninth, the remaining eight counts of conviction make his nine year sentence a step closer.

Players: SF Giants Dennis Riordan, Doron Weinberg, and Donald Horgan for Mr. Lazarenko. Opinion by Judge McKeown, joined by Judges Tashima and Gould.

Facts: Lazaranko was the former prime minister of Ukraine. Id. at *1. His “involvement” in businesses was actually extortion, alleged the US government. Id. Because the money hit US accounts, Lazaranko was charged in SF with a 53-count indictment alleging conspiracy, money laundering, wire fraud, and interstate transportation of stolen property. Id. He was convicted after trial of fourteen counts, and appealed. Id.

Issue(s): (One among many): “Lazarenko also appeals the denial of his Rule 33 motion for a new trial. He argues that the government indicted him on [one specific set of] charges, knowing that the charges could not be proven, and then, after the directed verdict of acquittal, used the evidence from [this alleged] scheme against him in its closing argument, in violation of the doctrine of retroactive misjoinder. He asserts that he was denied the opportunity to respond in his own closing argument to the government's misleading statements.” Id. at 14 (footnote omitted).

Held: “[W]e reject the government’s contention that we have limited the doctrine of retroactive misjoinder only to cases where there is more than one defendant.” Id. at *15. “[T]he doctrine of prejudicial spillover or retroactive misjoinder may apply to a case where there is only one defendant.” Id.

“Invoking the three-factor test that the Second Circuit developed in Vebeliunas, the district court concluded that Lazarenko was not prejudiced by the now-dismissed charges. Under the Vebeliunas test, the court considers:

(1) whether the evidence was so inflammatory that it would tend to cause the jury to convict on the remaining counts;

(2) the degree of overlap and similarity between the dismissed and remaining counts; and

(3) a general assessment of the strength of the government's case on the remaining counts . . .

These factors reasonably address concerns about prejudicial spillover. We adopt these factors and add to them the factors we identified in Cuozzo - whether the trial court diligently instructed the jury and whether there is evidence, such as the jury's rendering of selective verdicts, to indicate that the jury compartmentalized the evidence.” Id. at *16.

“The district court did not abuse its discretion in denying Lazarenko a new trial based on prejudicial misjoinder.” Id.

Of Note: What is “retroactive misjoinder?” “ ‘Retroactive misjoinder’ arises where joinder of multiple counts was proper initially, but later developments- such as a district court's dismissal of some counts for lack of evidence or an appellate court's reversal of less than all convictions-render the initial joinder improper. In this Circuit, ‘[t]o invoke retroactive misjoinder,’ a defendant ‘must show compelling prejudice.’ Prejudicial spillover from evidence used to obtain a conviction subsequently reversed on appeal may constitute compelling prejudice.” Id. at *14.

How to Use: Lazarenko provides new rules for retroactive misjoinder:

1. the principle can apply to single defendants, and

2. there is a new multi-factor test for prejudicial spillover. It will be the lead decision on the concept.

The opinion has many other important holdings as well, however. This decision discusses “constructive amendments” – and calls out the government’s “shift in theory.” Id. at *6. It finds too great a temporal break to uphold wire fraud allegations, when funds were wired years after the fraud. Id. at *8. And, unfortunately, it refuses to demand a particularity requirement for the specific foreign statutes violated, when those foreign crimes were the bases of money laundering, wire fraud, and transportation of stolen money counts. Id. at *6.

An important read for white-collar defense.

For Further Reading: Павло Івáнович Лазарéнко, Pavlo Ivanovych Lazarenko, has lead a colorful life that has sparked a great deal of litigation. See wikipedia entry here. In the present case, he was sentenced to nine years, with a $10 million fine. See New York Times article here.

Long before this appeal of the convictions hit the Ninth, a different panel (including Justice O’Connor) issued a pretty controversial ruling on the criminal forfeiture aspects of the case. See blog on United States, Liquidators v. Lazarenko here.


Photo of Mr. Lazarenko leaving the San Francisco federal building from http://blog.kievukraine.info/4129.jpg


Steven Kalar, Senior Litigator, N.D. Cal. FPD. Website at www.ndcalfpd.org


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