Sunday, January 30, 2011

When is Producing False Documents Under Compulsion Obstruction?

In United States v. Thorson, 633 F.3d 312 (4th Cir. 2011), the Court (at least the majority) rejected the defendant's attempt to avoid the sentencing enhancements imposed by the sentencing court. I thought one of defendant's argument was worth commentary here.

The defendant, a lawyer, assisted in a bogus tax shelter.  Key elements of the bogus shelter involved (i) the backdating of documents to make cemetery lots contributed to charity appear as if they had been purchased and held for longer than a year and (ii) the inflation of the values of the donated cemetery lots. Defendant routed his share of the ill-gotten gains through a corporation and created various documents, some backdated, related thereto. In 1998, in response to the IRS "formal request" (presumably an IDR), the defendant produced documents, one of which he prepared after receiving the IDR. Thereafter, a grand jury investigation started and, in response to a grand jury subpoena, the defendant produced that false document and another false document that had been prepared before either the IRS or the grand jury investigation started. Stated otherwise, none of the documents produced in response to the grand jury subpoena were falsified after the date of the grand jury subpoena.

The defendant was tried and found guilty for one count of conspiracy and three counts of aiding and assisting (Section 7206(2)). The court of appeals majority decision explained the sentencing as follows:
In sentencing Thorson, the district court accepted the presentence report's calculation of the offense level, level 21, based on the amount of loss caused by the criminal activity. The court then applied four enhancements: (1) a two-level enhancement under U.S.S.G. § 2T1.4(b)(1)(A), finding that Thorson had derived a "substantial portion of his income" from the scheme; (2) a two-level enhancement under U.S.S.G. § 2T1.4(b)(2), finding that Thorson had engaged in sophisticated concealment; (3) a four-level enhancement under U.S.S.G. § 3B1.1, finding that Thorson was "an organizer or leader"; and (4) a two-level enhancement under U.S.S.G. § 3C1.1, finding that Thorson "willfully obstructed . . . justice." The resulting offense level of 31 yielded a recommended sentencing range of 108 to 135 months' imprisonment. After considering all of the factors under 18 U.S.C. § 3553(a), the district court sentenced Thorson at the low end of the recommended range, to 108 months' imprisonment.
I focus on the obstruction of justice enhancement. That Guideline and an Application Note for that enhancement is:
§3C1.1. Obstructing or Impeding the Administration of Justice

If (A) the defendant willfully obstructed or impeded, or attempted to obstruct or impede, the administration of justice with respect to the investigation, prosecution, or sentencing of the instant offense of conviction, and (B) the obstructive conduct related to (i) the defendant's offense of conviction and any relevant conduct; or (ii) a closely related offense, increase the offense level by 2 levels.

Application Notes:

1.In General.—This adjustment applies if the defendant's obstructive conduct (A) occurred with respect to the investigation, prosecution, or sentencing of the defendant's instant offense of conviction, and (B) related to (i) the defendant's offense of conviction and any relevant conduct; or (ii) an otherwise closely related case, such as that of a co-defendant.

Obstructive conduct that occurred prior to the start of the investigation of the instant offense of conviction may be covered by this guideline if the conduct was purposefully calculated, and likely, to thwart the investigation or prosecution of the offense of conviction.
In support of the sentencing court's imposition of this enhancement,
The government argues that if Thorson's sentence had not been enhanced for obstruction of justice, then he would have received a free pass with respect to providing false documents to the grand jury. The government referred to two fabricated purchase agreements, one created for production to the IRS during its civil investigation and subsequently produced to the grand jury and another one produced to the grand jury. The government also referred to the spreadsheet and letters created by Thorson to show that proceeds of the fraudulent scheme were transferred to AGH, Inc., and then back to Thorson, purportedly as loans.
Again, I repeat, that none of these false documents were produced after the grand jury investigation started. The defendant produced pursuant to the subpoena documents already produced and part of the business files.

The key question was the nexus to an investigation (which is required) and particularly to the grand jury investigation which was the gravamen of the sentencing court's application of the enhancement and the Government's argument on appeal. The court conceded:
Thus, if a document had been falsified as part of the offense of conviction but before any investigation, the defendant's production of the falsified document in response to a subpoena would not support this enhancement, unless it were shown that the falsification was "purposefully calculated, and likely, to thwart the investigation or prosecution of the offense of conviction." U.S.S.G. § 3C1.1 cmt. 1.
The Court then focused on the willfulness element, saying:
The willfulness element is essential. Not only is it explicitly included in the language of the Guidelines, but to impose the enhancement without that element would lead to making any production of falsified documents an automatic basis for the enhancement, creating an unacceptable dilemma for a defendant. To avoid the automatic enhancement, he would have either to withhold the fabricated documents from the grand jury, which would amount to obstruction of justice by refusing to comply with the grand jury subpoena, or to produce the documents with added corrections, which would implicate his Fifth Amendment right against self incrimination. We do not read the enhancement so broadly. Rather, we conclude that the willfulness element requires that either in producing or attempting to produce fabricated documents in the course of an investigation, a defendant must consciously act with the purpose of obstructing justice.
I do not understand what the majority is saying here. If the records were in the files when he received the grand jury subpoena, his only legal choices were to produce them or assert a Fifth Amendment privilege (i.e., act of production). The Court had already acknowledged that obstruction would not apply if he simply produced the documents. But there is a logical inconsistency even here. If false documents are prepared in the context of false tax claims, the purpose of preparing the false documents is to affect any subsequent investigation by concealing the crime. Hence, under this view, concealment by false documents would necessarily invoke the obstruction enhancement and the sophisticated concealment enhancement. But the Court said that was not what it was doing.  Note how the panel crafts the critical last sentence in the quote above -- the willfulness element is met only if, in producing the documents pursuant to the grand jury subpoena, the defendant must not only have intended to comply with the grand jury subpoena but he must have further intended that, in so doing, he would obstruct the grand jury investigation. I guess the message there is when the Government summonses or subpoenas documents that a witness knows are false documents, rather than confessing to the Government (he does have a Fifth Amendment privilege), the witness should make a contemporaneous memorandum or communication to his lawyer that he is producing only because he is required to do so under compulsion of the summons or subpoena and has no intent that the grand jury be misled by the false documents. I suppose he should also play out his Fifth Amendment privilege under the act of production doctrine.

Then the court concludes this discussion:
In this case, Thorson did more than simply respond to a grand jury subpoena by producing previously falsified documents. Rather, during the civil IRS investigation of his offense, he created documents to thwart the investigation. He fabricated a December 23, 1995 agreement in response to the IRS audit, with the purpose of providing documentation to support the tax deduction. Similarly, he fabricated another purchase agreement dated December 22, 1996, and produced it, together with the fabricated December 23, 1995 agreement, to the grand jury. As the IRS audit and grand jury investigation both constituted investigations of his offense, we find no error in the district court's application of the enhancement under U.S.S.G. § 3C1.1. See United States v. Fiore, 381 F.3d 89, 94 (2d Cir. 2004) (holding that perjury during a related civil investigation constituted obstruction of justice under § 3C1.1).
Finally, of course, it was clear that the defendant did prepare one of the false documents during the IRS investigation and submitted it with the obvious intent to affect the investigation. That was not a criminal investigation, but still appears within the scope of the obstruction enhancement but for some reason, as noted by the dissenting judge, the sentencing judge really did not rely upon that production as the obstruction.

Finally, the dissenting judge was concerned by the appearance of the sentencing court extra animus to the sentencing process.  The dissenting judge said:
After imposing the enhancements sought by the government, the district court made the following statement when discussing Thorson's sentence:
I consider this to be a tragedy for Mr. Thorson and his family, but it is also a tragedy for the legal profession. Mr. Thorson is a disgrace to the legal profession. There are those who takes [sic] their law degree [sic] and use it in the best traditions of this profession of which I'm a member for promotion of good and the advancement of client's interest and the legitimate practice of law, and there are those who take that special training and use it not for good but for evil.
In this case, Mr. Thorson is not just a concigliori [sic] in the context of the godfather, but he was a significant leader of this enterprise. Indeed, as described by one of the coconspirators, a closer. His offense is truly offensive to the court. . . .
J.A. 1121. Clearly the court took Thorson's conduct as a personal affront, but that justification is insufficient to support the government's piling on in this case. Beyond that fact, it is evident that Thorson's occupation weighed heavily on the court's mind when arriving at a sentence approximately triple the original, unenhanced guidelines sentencing range. Given the lack of evidence to support the enhancements at issue and the court's apparent focus on Thorson's role as an attorney, it seems that if the court was intent on adjusting Thorson's sentence based on facts in the record, it could have applied a two-level enhancement for use of his special skill as an attorney under U.S.S.G. § 3B1.3, which the government requested. The court took a different course, one which the majority today endorses, and punishes Thorson on no evidentiary basis.
Extrapolating from the fact pattern, consider the following: The taxpayer overstates his business expenses and plants false receipts from his vendors in his files in the places were valid receipts, if they existed, would have appeared. Obviously, the only intended target for the false receipts is the IRS or perhaps a grand or even a trial court if he thought that far ahead. Is that an obstruction of the IRS investigation or of justice at that point? Probably not. Then, if the taxpayer receives an IDR, an IRS summons or a grand jury summons for his business records related to his claim of business expenses, what does he do? I think most courts would say that his mere production of the documents to the Government would not alone be an obstruction of justice without the intent, contemporaneous with the production under legal compulsion, to obstruct the proceeding. But, the does have the legal compulsion to produce the documents, false or not, and the only difference is strictly the mental one of whether he is just complying with the legal compulsion or is doing so with the intent to obstruct. That seems a bit gossamer to me to have such enormous consequences as obstruction (the crime) or obstruction (the enhancement).

Note also in this regard, that the false receipts would be a critical element in any type of usual charge that would be brought -- evasion, tax perjury, aiding or assisting, tax obstruction (which the Government urges can occur before an investigation), and Klein conspiracy to impair or impede the IRS.  There could be a lot of doubling up of the charges (which is really rendered moot by the grouping rules), but then the enhancements can kick in to effectively double up (or at least enhance) based on the same conduct already considered in setting the base offense level.

1 comment:

  1. Falsification of documents in any form is very unlawful. It is a crime punishable by law. This information that gave clarification regarding the matter as implied in tax cases is very useful. Thank you for sharing a very helpful article.


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