Thursday, September 10, 2015

Offshore Account Conviction Affirmed (9/10/15; 9/12/15)

In United States v. Hough, ___ F.3d ___, 2015 U.S. App. LEXIS 15973 (11th Cir. 2015), here, involving offshore accounts and related skullduggery, the Court starts its opinion as follows:
It may be, as the Downton Dowager bemoaned, that "[l]ie is so unmusical a word," n1 but it strikes the right note for some of the statements that Dr. Patricia Lynn Hough made in her tax returns.
   n1 Downton Abbey: Season 3, Episode 6 (Carnival Films Oct. 21, 2012).
Hough lost the case, but did obtain a limited remand for recalculation of the sentencing because of incomplete facts to support the tax loss calculation.

I will supplement this blog more detail and discussion on this opinion because it is very interesting.  But, I just don't have time to do that right now.

In the meantime, the following is a bullet point of key issues decided:
  • The evidence was sufficient to permit the jury to conclude that there was a defraud / Klein conspiracy.
  • The evidence was sufficient to permit the jury to conclude that the defendants filed false returns because, in part, she failed to report the foreign accounts on Schedule B.
  • The district court did not abuse its discretion in the cross examination of expert witnesses and, in any event, if error, it was harmless.
  • The district court did not err in admitting co-conspirator (her husband) statements because there was sufficient evidence of conspiracy.
  • The district court did not make sufficient findings to support its tax loss determination -- specifically, it did not properly determine that the foreign entity was a partnership rather than an association taxable as a corporation.
There is some good stuff in each of those bullet  points.  More later.

The blog entry for the conviction is:  Another UBS Related Offshore Account Conviction (5/9/14; 5/12/14), here.

Addendum 9/12/15 5:00pm

The appellate briefs are linked here for viewing or download:
  • Hough's opening brief, here.
  • U.S. Answering brief, here.
  • Hough's reply brief, here.
I supplement to add a discussion of just a couple of issues.


the taxpayer urged on appeal that the evidence was not sufficient to convict of the defraud / Klein conspiracy.  The taxpayer's argument was that the other evidence was insufficient and therefore that the jury was not entitled to infer guilt beyond a reasonable doubt from disbelieving the taxpayer's testimony.  Here is the Court's resolution of that issue:
To convict Hough of conspiracy to defraud the IRS, the government had to prove that: (1) Hough and Fredrick agreed to impede the functions of the IRS; (2) Hough knowingly and voluntarily participated in that agreement; and (3) Hough or Fredrick committed an act in furtherance of the agreement within the six-year statute of limitations (that is, after May 15, 2007). See Adkinson, 158 F.3d at 1153-54 (elements of a Klein conspiracy); United States v. Waldman, 941 F.2d 1544, 1548 (11th Cir. 1991) (statute of limitations for a Klein conspiracy). The government did not need to provide direct evidence of an agreement between Hough and Fredrick; it could instead rely on circumstantial evidence such as "the parties' concerted actions, overt acts, relationship, and the entirety of their conduct." United States v. Kottwitz, 614 F.3d 1241, 1265 (11th Cir.), vacated in part on other grounds on denial of reh'g en banc, 627 F.3d 1383 (11th Cir. 2010). The circumstantial evidence, however, must have supported a "reasonable inference[]" that Hough and Fredrick had "a common design with unity of purpose to impede the IRS." Id. (emphasis and quotation marks omitted). 
A reasonable jury could have found Hough guilty of conspiracy to defraud the IRS. The evidence showed that she and Fredrick owned two successful medical schools in the Caribbean and made millions of dollars from operating and then selling them. The evidence also showed that, instead of reporting and paying taxes on any of that money, the couple followed "a common design" to hide it in multiple offshore accounts. Kottwitz, 614 F.3d at 1265. 
Consider, for example, how Hough and Fredrick hid the proceeds from the sale of the schools. In anticipation of selling to the Huntington Institute, they opened two accounts in the names of foreign entities (MTA and Apex) to serve as "[r]eceiving account[s]" for the money that the sale was going to generate. After that sale fell through, the couple split their joint account at UBS and told their banker that they planned to "send equal amounts to deposit into each [individual] account" when they eventually sold the schools. The couple later followed that same basic plan, tweaking it here and there to make it even more difficult for the IRS to find the money. They created a foreign entity (New Vanguard), opened two accounts in the name of that entity at two different banks (LLB and Fortis), and deposited into each account half of the $36 million that the sale generated. There was plenty of circumstantial evidence showing that Hough and Fredrick agreed to hide millions of dollars from the IRS. See, e.g., Adkinson, 158 F.3d at 1158 (observing that "[t]he elaborate creation of foreign . . . corporations [that] have no function whatsoever beyond the receipt and transference of money . . . bespeak[s] a scheme" that has as its objective the "evasion of taxes"); United States v. Moran, 759 F.2d 777, 785 (9th Cir. 1985) (affirming a defendant's Klein conspiracy conviction where he had designed a complex "scheme of foreign and domestic corporations and bank accounts" to "make it as confusing as possible" for the IRS "to unravel [his] case if the IRS ever had to unravel it") (quotation marks omitted). 
While sufficient, the circumstantial evidence of Hough's knowing participation in a scheme to defraud the IRS is not the only evidence supporting her conviction on the conspiracy charge. Hough chose to take the stand and testify in her own defense, claiming that what the government called a conspiracy to hide the couple's money from the IRS was really "an asset-protection strategy" for the Saba Foundation's funds. Having seen and heard her testimony, the jury was free to discredit her explanation, to infer that the opposite of what she said was true, and to consider that inference as substantive evidence of her guilt. See United States v. Brown, 53 F.3d 312, 314 (11th Cir. 1995) ("[A] statement by a defendant, if disbelieved by the jury, may be considered as substantive evidence of the defendant's guilt. . . . [W]hen a defendant chooses to testify, he runs the risk that if disbelieved the jury might conclude the opposite of his testimony is true.") (quotation marks omitted); see also United States v. McCarrick, 294 F.3d 1286, 1293 (11th Cir. 2002) ("[Our decision in] Brown . . . stand[s] for [the] proposition . . . that, in combination with other evidence, the jury's disbelief of a defendant's testimony may be used to help establish his guilt.") (emphasis omitted).
The interesting issue relates to inferring guilt from disbelieving a defendant's testimony.  Actually, that is not just disbelieving but believing the opposite elements of the crime from that discredited testimony.  In her briefs, the taxpayer argued that the Government erroneously asserted that "the jury's presumed disbelief of Hough's trial testimony is alone sufficient to support her convictions."  The Court avoided addressing that issue by finding that there that disbelief was not alone in supporting the convictions.

This, of course, demonstrates one of the dangers of a taxpayer testifying in a case.  It is not inconceivable that a jury may have otherwise found the circumstantial evidence somewhat persuasive but not enough alone to permit it to find guilt beyond a reasonable doubt.  (Stated another way, it would have been sufficient for the jury to do so, but the jury would not have done so.)  But, the defendant's testimony may convince the jury of guilt even though the bare language of that testimony was a claim of innocence.  So, that the other circumstantial evidence and inference of guilt from testimony would support the conviction.

As to putting the defendant on the stand, the defendant's lawyer will usually test the sufficiency of the Government's case in chief on the various elements of the crimes charged via a motion for judgment of acquittal under Rule 29, Federal Rules of Criminal Procedure, here ("the court on the defendant's motion must enter a judgment of acquittal of any offense for which the evidence is insufficient to sustain a conviction").  Of course, the trial court may deny it and could be wrong in the denial.  Then the defendant's lawyer must face the issue of whether to put the defendant on the stand.  The defendant might in his or her testimony supply any deficiencies in the case in chief either affirmatively or by negative inference from disbelief.

It is not an easy decision as to whether the defendant should testify in a white collar crime case.  If the prosecutor's case is strong, the testimony is likely to offer nothing except more reasons for the jury to convict.  If the prosecutor's case is "sufficient" but perhaps not so strong, the testimony may firm up the prosecutor's case by (i) a jury conclusion that the defendant is not credible and (ii) a jury conclusion that the truth is the opposite of the defendant's testimony.


The Court found sufficient evidence to support the tax perjury convictions based on the taxpayer's answering "No" to the Schedule B question about foreign accounts.
A reasonable jury could have found Hough guilty on Counts 6, 8, and 9 based on a finding that she perjured herself by responding as she did to questions 7a and 7b. The multiple Form A's (the account-opening forms at Swiss banks) that the government entered into evidence established that Hough was the beneficial owner, or one of the beneficial owners, of multiple Swiss bank accounts during the years in question, including one that she opened in her own name. Although Hough testified that she owned nothing and signed whatever papers were put in front of her, the jury was free to disbelieve that testimony, to infer the opposite, and to consider that inference as substantive evidence of her guilt. See Brown, 53 F.3d at 314. The Form A's and Hough's testimony were sufficient to support her convictions on Counts 6, 8, and 9. 
Hough argues that her convictions on these counts cannot stand because question 7a contained the language "see page B-2 for exceptions," and the government did not prove that her foreign bank accounts failed to fit within those exceptions. If they did fit within an exception, her answer of "No" would have been true. The two page B-2 exceptions are for: (1) accounts containing less than $10,000; and (2) accounts with a U.S. military banking facility operated by a U.S. financial institution. The evidence in the record establishes beyond a reasonable doubt that the accounts contained more than $10,000 and that they were with financial institutions that were not U.S. military banking facilities operated by U.S. financial institutions. The government met its burden of proving that Hough's "No" answer was false. 
Because a reasonable jury could have found Hough guilty on Counts 6, 8, and 9 based on a finding that she failed to disclose her financial interest in foreign bank accounts, her convictions on those counts stand. We need not address the understated-income basis, which is the alternative basis for the jury's guilty verdicts on those counts. See Rivera, 77 F.3d at 1351.
By affirming on the basis of the improper answer to the foreign bank account question on Schedule B, the Court of Appeals ducked another issue -- whether the evidence was sufficient to convict on the basis of underreported income.  The taxpayer had argued that the income was not her income because held in the name of the entity and therefore not taxed until repatriation.  The Government argued that the accounts were nominee accounts and therefore taxed to her directly regardless of the regime that might have otherwise deferred taxation until repatriation.  Here is the argument (footnotes omitted):
Hough’s second argument (Br.41-42), suggesting that income made offshore is not taxable (and therefore not “reportable”) until it is brought back to the United States, fares no better. To begin with, this suggestion is wrong: as a general matter, all income made anywhere in the world by a United States citizen is subject to federal income tax. 26 C.F.R. § 1.1-1(b); Cook v. Tait, 265 U.S. 47, 56, 44 S. Ct. 444, 445 (1924). Profits made by a foreign corporation are sometimes not taxable until they are distributed to the corporation’s owners, just as profits from a domestic corporation are not generally taxable to the corporation’s owners until distributed.118 But the tax treatment of a legitimate foreign corporation has little to do with Hough’s argument, which concerns not the medical schools’ profits but the income generated from the offshore accounts. These were indisputably nominee accounts; the only factual question was who owned them.119 And to the extent Hough offers not a legal-impossibility argument but simply another argument about her knowledge or mental state, that argument fails along with her other factual disagreements with the jury’s verdicts: the jury watched her testify for a day and a half, and the jury was the proper judge of her intent and credibility. 
In any event, Hough did bring some of the schools’ funds back onshore, in each of the relevant tax years. And Hough also failed to report her financial interest in the offshore accounts. Thus, even if one or both of these arguments had merit, they would not affect the validity of Hough’s convictions.

The taxpayer claimed that the Government's questions of character witnesses improperly assumed the taxpayer's guilt.  The most troublesome question was "If you were to be told the things that I told you the government is alleging in this case, . . . would that change your opinion of Dr. Hough's character for truthfulness and honesty, yes or no?"  The witness said no, he wouldn't believe it.

The Court reasoned that that likely was an improper question based on Circuit law, but in context it was not, because defense counsel's prior questioning had gotten close enough to permit the cross examination.
Hough argues that the district court committed reversible error in allowing the government to cross-examine Gruber and Walker with questions that assumed her guilt. Her argument rests on three premises: (1) that the questions posed to both character witnesses asked them to assume her guilt; (2) that allowing the questions to be asked and answered was error under our precedent; and (3) that the error was not harmless. Let's take those assertions in that order. 
As to assertion one, we agree with Hough that the government cross-examined both Gruber and Walker with questions that asked them to "assume" her guilt, as that term is used in our decision in United States v. Guzman, 167 F.3d 1350 (11th Cir. 1999), and our predecessor court's decision in United States v. Candelaria-Gonzalez, 547 F.2d 291 (5th Cir. 1977). The government asked Gruber: "And if that [were] proven, that Dr. Fredrick and Dr. Hough did conspire to defraud the Internal Revenue Service by not reporting the sale of the medical schools on their tax returns, . . . would that change your opinion?" As the government concedes, that question explicitly asked Gruber to assume for purposes of the question that Hough was guilty of conspiracy and to answer based on that assumption. The question to Walker, though phrased differently, was close enough to that. The government asked him: "And so it's possible, if you heard all of the evidence, that you might change your opinion about whether Dr. Hough is honest or not[?]" That question implicitly asked Walker to assume for purposes of the question that the evidence would establish Hough's guilt on one or more of the charged crimes and to answer based on that assumption. 
As to assertion two, although the government asked guilt-assuming questions in testing the character testimony of both Gruber and Walker, the district court did not abuse its discretion in allowing those questions to be asked and answered. To be sure, we held in Guzman that the district court had abused its discretion by allowing the government to ask an opinion character witness a question that assumed the defendant was guilty of one of the charged crimes. 167 F.3d at 1351-52. But Guzman's holding "can reach only as far as [its] facts and circumstances." Anders v. Hometown Mortg. Servs., Inc., 346 F.3d 1024, 1031 (11th Cir. 2003) (quotation marks omitted); see Watts v. BellSouth Telcomms., Inc., 316 F.3d 1203, 1207 (11th Cir. 2003) ("Whatever their opinions say, judicial decisions cannot make law beyond the facts of the cases in which those decisions are announced."); Edwards v. Prime, Inc., 602 F.3d 1276, 1298 (11th Cir. 2010) ("We have pointed out many times that regardless of what a court says in its opinion, the decision can hold nothing beyond the facts of that case."). Guzman's facts and circumstances differ from those of this case in at least one important respect: As far as we can tell from the opinion in Guzman, defense counsel in that case stuck to a traditional form of direct examination; he elicited testimony about how the witness knew the defendant, how long the witness had known the defendant, and what the witness' opinion of the defendant's character for the pertinent trait was. n5 Guzman, 167 F.3d at 1351-52; see Fed. R. Evid. 405(a). In contrast, when questioning Gruber and Walker, Hough's counsel went beyond traditional direct examination of a character witness. He asked each witness — not once, but twice—whether his opinion of Hough's character for honesty and truthfulness would change in view of the allegations against her. By asking those questions on direct, Hough's counsel, unlike defense counsel in Guzman, "opened the door" to the government's guilt-assuming questions on cross-examination. The district court did not abuse its discretion in permitting the government to walk through the door that defense counsel had opened wide and to follow up on that line of questioning. See United States v. Russo, 110 F.3d 948, 952-53 (2d Cir. 1997) (concluding that defense counsel "opened the door" to the government's guilt-assuming questions by asking the character witness on direct if he was aware that the defendant had been charged with certain crimes and if those charges were consistent with the defendant's character).
    n5 The same holds true of defense counsel's questioning in United States v. Candelaria-Gonzalez, 547 F.2d 291, 293 (5th Cir. 1977), the only binding decision in our Circuit other than Guzman to address the issue of whether the government may properly pose a question to a character witness (there, a reputation character witness) that assumes the defendant's guilt of the charged crimes. 
As to assertion three, even if we assume that the district court improperly allowed the questions, we would find that the error was harmless. See Guzman, 167 F.3d at 1352-54 (holding that such errors can be harmless). n6 Before the jury found Hough guilty on all counts, it heard eleven days' worth of evidence that overwhelmingly established her guilt. See id. at 1353 (observing that "[o]verwhelming evidence of guilt is one factor that may be considered in finding harmless error"); see also supra Part II. Given all of that evidence, it is inconceivable that the jury would have returned a different verdict based on two answers to two allegedly improper questions. As the district court put it in denying Hough's motion for a new trial: "No one who sat through [Hough's] trial would have any doubt at all that the responses to the disputed questions to the character witnesses had no impact on the jury's determination of the facts of the case."
   n7 While we're assuming things, we'll also assume, as we did in Guzman, that the Chapman standard governs our harmless-error analysis — in other words, that reversal is required unless the government can show that the court's error was harmless beyond a reasonable doubt. Guzman, 167 F.3d at 1353-54 (citing Chapman v. California, 386 U.S. 18, 24, 87 S. Ct. 824, 828, 17 L. Ed. 2d 705 (1967)). We can make that assumption here because it does not affect the result.

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