After Guilty Verdict, District Court Denies Motions for Dismissal and New Trial in Tax Crimes Case (11/13 /15; 11/15/15)

I previously reported on the denial of the Tweel type claim that the IRS civil agent been conducting a criminal investigation.  See Court Holds that Civil Agent Did Not Continue Investigation Too Long and Even If Deceptive Did Not Prejudice Defendant (5/2/15), here, discussing United States v. Hee, 2015 U.S. Dist. LEXIS 54971 (D. HI Apr. 27, 2015).  Hee sought in that pre-trial motion to have the indictment dismissed or, alternatively, to suppress certain evidence.  Usually, this type of claim, if valid, would suppress statements that defendant made to the civil agent who conducted a criminal investigation in the guise of a civil investigation.  As reported in the prior blog, the Court denied the motion (as well as other motions).

The case went to trial.  The jury convicted Hee of one count of tax obstruction, § 7212(a), here, and 6 counts of tax perjury, § 7206(1), here.  Hee then filed post-trial motions on several issues.  The Court rejected the post-trial motions.  United States v. Hee, 2015 U.S. Dist. LXIS 145406 (D. HI 2015), here. The Court also rejected a pre-conviction motion that had been deferred.  I only discuss the ones I found most interesting.

1.  Renewed Tweel Claim.

Hee renewed his Tweel Claim.  The Court discusses the renewed claim, including a focus on the relevant facts and law, and denies the motion for the same reasons noted in the earlier blog.  I will not discuss this denial of the renewed claim, but it is interesting reading even though substantially redundant to the prior discussion.

2. Grand Jury Abuse.

Hee argued that the charges "the charges should be dismissed because the Government allegedly provided the grand jury with erroneous instructions regarding three issues."  Because of the focus of my comments, it is not important to get into merits of the alleged error in the instructions offered the grand jury.  I will start with this recitation of this motion's history (docket citations omitted for easier readability):

Hee's trial commenced on June 23, 2015. On July 6, 2015, as the trial was nearing conclusion, Hee submitted his motion concerning grand jury issues. The court discussed with the attorneys the scheduling of briefing and a hearing on the motion. Attorneys for the Government and for Hee noted that the motion could be heard following trial, and Hee's attorney expressly stated that the trial did not need to be interrupted for a decision on the motion. Briefing and a hearing were therefore scheduled for dates following the completion of the trial. With the motion awaiting further briefing, the petit jury returned a verdict of guilty beyond a reasonable doubt on all counts.

I emphasize in bold the key fact.

The question I focus on is the standard for review of this type of claim as stated by the Court:

In Mechanik [United States v. Mechanik, 475 U.S. 66 (1986)], the Court held that any error in a grand jury proceeding was rendered harmless by the petit jury's verdict of guilty. 475 U.S. at 67. The Court noted, "[T]he petit jury's verdict of guilty beyond a reasonable doubt demonstrates a fortiori that there was probable cause to charge the defendants with the offenses for which they were convicted." Id. 

The Ninth Circuit applied the Mechanik standard to the very situation at issue here. In Navarro [United States v. Navarro, 608 F.3d 529 (9th Cir. 2010)], the Ninth Circuit said that when "the error is brought to the district court's attention before the verdict, but the court did not rule on the motion to dismiss until after the jury returned a verdict . . . the conviction establishes that the error was harmless." 608 F.3d at 539; accord United States v. Hunter, 445 F. App'x 998, 1003 (9th Cir. 2011) ("Even if error in the grand jury proceedings (other than the structural errors [of race and gender discrimination]) was brought to the attention of the district court prior to trial, where the motion was denied and a guilty verdict was returned, the error is rendered harmless by the verdict." (brackets in the original)); United States v. Harmon, No. 08-CR-00938-LHK, 2014 U.S. Dist. LEXIS 74381, 2014 WL 2465504, at *2 (N.D. Cal. May 30, 2014) ("A grand jury is convened in order to determine whether probable cause exists to force a criminal defendant to suffer the hardship of a criminal trial. Because a trial jury is tasked with determining actual guilt, once a trial jury has found guilt beyond a reasonable doubt, it is presumed that any error during the grand jury proceedings was harmless beyond a reasonable doubt.").

The post-conviction standard of review is stricter than the pre-conviction standard, referred to as the Bank of Nova Scotia standard.  Bank of Nova Scotia v. United States, 487 U.S. 250 (1988).  The Court describes the Bank of Nova Scotia standard as providing:

that dismissal of the indictment "is appropriate only if it is established that the violation substantially influenced the grand jury's decision to indict or if there is grave doubt that the decision to indict was free from the substantial influence of such violations." Navarro, 608 F.3d at 539.

So why did the attorneys -- particularly Hee's attorney -- agree that resolution of the pre-conviction motion await the jury verdict?  If the jury reached a not guilty verdict, the motion would be moot; if it reached a guilty verdict, the postponement moved Hee from an arguably lesser standard to a more stringent standard.  It is not clear exactly why either the prosecution or Hee's attorney agreed to defer action on the motion.  The Court does delve into the issue and says that it just does not know why they did that.  For example:

The court cannot discern whether either party had the Mechanik issue expressly in mind in the midst of trial. For all this court knows, the Government and Hee may have been unfamiliar with the effect of a conviction on Hee's motion and may not have been addressing a waiver of Mechanik. Certainly the court, unaware of Mechanik or Navarro during Hee's trial, was not, in setting a post-trial hearing on Hee's motion, intending to suspend the applicability of Mechanik and Navarro. Under these circumstances, this court applies Mechanik and Navarro here.

Hee made other arguments in support of the motion.  Applying the Mechanik standard, the Court rejected the motion.  The Court said, however, that even applying the Bank of Nova Scotia standard, the Court would have rejected the motion:

Recognizing the lack of absolute clarity on the issue of whether the Government offered to suspend Mechanik and Navarro, this court turns to whether, if the court applied the Bank of Nova Scotia standard, Hee's motion would succeed. This court concludes that the errors Hee alleges would not be grounds to dismiss the charges under Bank of Nova Scotia. 

3.  Hee's Evidentiary Claim.

Hee claimed that the Court erred in denying his attorney the right to elicit testimony from defense witnesses that would have, he alleged, inferred that he had the type of good faith belief that would negate the element of intent to violate a known legal duty.  The Court explains:

The gist of Hee's complaint is that the court prevented witnesses from testifying about their understandings of why Hee did certain things. The court ruled that such [54]  testimony was impermissible if the understanding was based on something Hee had said to the witness. See, e.g., Testimony of Adrianne Hee, ECF No. 198-16, PageID # 3665 (sustaining hearsay objection when witness was asked, "What was your understanding as to why you were put on salary?"). The court did not completely disallow testimony about the witnesses' understandings. Instead, the court indicated the witnesses could testify about their understandings upon laying a foundation that the understandings were based on something other than out-of-court statements by Hee. 

For example, Adrianne Hee, one of Hee's daughters, was asked, "What was your understanding as to why you were put on salary?" When the Government raised a hearsay objection, the court explained that, "to the extent that her understanding is based on what somebody else told her, I'm not going to let her answer. If you want to lay a foundation that she had some independent way to know this, you can go ahead and do that."  

* * * * 

When the court refused to allow Hee's daughter to answer a question about her understanding of why she was on Waimana's payroll, it was concerned that any answer would have been tantamount to a statement that "my father told me the reason I was on salary was . . . ." The Government would have been able to cross-examine only Hee's daughter with respect to the accuracy of her recollection, without examining Hee as to the validity of the purported reason, or as to whether Hee truly believed what he purportedly told his daughter. This is quintessential hearsay. Had there been a proper foundation for Hee's daughter's understanding of why she was on salary, she would have been allowed to testify that, for example, she was on salary because she worked twenty hours per week for the company, or had performed certain duties on the company's behalf. The absence of a proper foundation was telling.

As a consequence, Hee alleged, he was improperly forced to waive his Fifth Amendment privilege. The prosecutor objected on the basis of hearsay.  The Court denied that line of inquiry because it felt that it was an indirect way for the defendant to testify without having to take the stand, thus permitting the defendant's out of court statements -- classic hearsay.  The defense made some good arguments that the desired testimony was not hearsay because it would not have been elicited to prove the truth of the defendant's good faith, just to state the witness's understanding of why they were paid compensation.

For background on this issue, I will quote from Saltzman's treatise on Tax Procedure, ¶ 12.05[2][b] Willfulness and Good Faith, online edition viewed 11/13/15, some footnotes omitted (which I substantially drafted):

Defendants who want to argue the good-faith defense will want an instruction to the jury making that clear to the jury. Generally, courts will give the specific good-faith instruction only if the evidence somehow affirmatively puts good faith in play — making it a real issue for the jury. How does the defendant do that? The most direct way is for the defendant to testify as to his or her good faith. But, in order to do that, the defendant must waive his Fifth Amendment right not to testify and be subject to cross-examination; frequently, the defense team will conclude that the potential benefits of the defendant testifying (including the good-faith opportunity) do not justify the downside risks of the defendant testifying. So, the defendant will not testify. Notwithstanding some noises that the defendant is required to testify to put good faith in play, the courts soundly reject that notion. n518 Other circumstantial evidence, including perhaps lay opinion evidence as to the defendant's mental state, n519 may be sufficient to put that issue in play and, if it does, the trial judge should give the instruction. n520
   n518 United States v. Kokenis, 662 F3d 919, 929 (7th Cir. 2011) , citing United States v. Lindo, 18 F3d 353, 356 (6th Cir. 1994) ; and United States v. Phillips, 217 F2d 435, 442 (7th Cir. 1954) .
   n519 For example, lay opinion testimony as to the defendant's mental state, including presumably good faith, might be admissible under FRE Rule 701. See United States v. Goodman, 633 F3d 963, 968 (10th Cir. 2011); and United States v. Abramson-Schmeiler, 2011 US App. LEXIS 23789 (10th Cir. 2011). For a good case where such lay opinion evidence was used by the government, see United States v. Rea, 958 F2d 1206 (2d Cir. 1992) .
   n520 See United States v. Wisenbaker, 14 F3d 1022, 1027 (5th Cir. 1994) . See also CTM 40.05[1][a] (2012 ed.), dealing with the reliance on professional subset of the good-faith defense: “A reliance-on-advice-of-accountant instruction may be warranted even without per se testimony that the defendant relied on the accountant's advice, so long as the circumstances support an inference that he did so rely.”

In this case, Hee was at the first step of trying to lay the foundation for an good faith defense through the testimony of family members receiving compensation.  Hee just wanted to get the evidence in without having to testify, so that under he could get a good faith defense instruction and argue the matter to the jury.

Here is the guts of the Court's rejection of the claim:

In sustaining the hearsay objections, this court was cognizant that Hee's family members were not being asked to testify that Hee said that it looked as if it were about to rain, or that Hee was sad. Instead, the family members were being asked to recount what Hee claimed he believed. 

Each statement that Hee says the court should have allowed contained Hee's opinion or belief. Although state of mind evidence may be admitted, see Fed. R. Evid. 803(3), Hee's statements of belief were akin to statements such as "I am not doing anything illegal," which even Hee conceded at the hearing on his motion would be distinguishable from what Rule 803 would allow. Hee was in essence stating a legal opinion that "I have a good reason for paying my nonworking children salaries." Such self-serving justifications, if admissible under Rule 803(3), would induce individuals committing crimes to repeatedly tell those around them, "I am acting within the law." 

Interestingly, while referring to the state of mind exception, Hee does not actually analyze how statements that are tantamount to declarations of innocence fall under Rule 803(3). Hee does not, for example, even attempt to fit the excluded statements under evidence of motive, intent, or plan. A court might admit a declarant's statement that "I have to keep this a secret so no one stops me from doing what I plan to do," or "I intend to cut my wife out of my will," or "I plan to leave this town." By contrast, the statements in issue in this case appear to have reflected what Hee claims were longstanding beliefs. If Hee's statements of belief that he was acting within the law are not admissible under Rule 803(3), Hee's evidentiary argument fails because Hee does not identify any other hearsay exception that his statements fall under. 

Although the purported statements were indeed hearsay and properly excluded, the court notes that, even if they were improperly excluded, that assumed error did not affect the trial outcome. Not only did the court [60]  invite Hee to lay a proper foundation for the testimony, the evidence of Hee's guilt introduced at trial was overwhelming. Hee was not prejudiced by the court's evidentiary rulings such that the interest of justice requires a new trial. To the extent Hee's Motion for New Trial is based on the court's evidentiary rulings, the motion is denied.

I am not sure the Court made the right call on that. I think that the evidence should have been admitted.  The prosecution could have easily dealt with any implicit testimony from the defendant. However, even if that was an erroneous ruling in trial, I am not sure that it would entitle Hee to a new trial.  Erroneous evidentiary rulings are made all the time without affecting the fundamental fairness of the trial.  The key issue here is whether Hee's Fifth Amendment right to not testify was fundamentally impaired by the ruling.

For readers further consideration, I provide links to the briefing on the issue.

• Hee's Memorandum in Support of the Motion, here.
• Hee's Transcript Submission (with summary table), here.
• The U.S. Answering Memo, here.
• Hee's Reply, here.

Addendum 11/15/15:

In connection with establishing good faith without the defendant having to waive his Fifth Amendment privilege by testifying, readers might consider the recent case of United States v. Wilson, 2015 U.S. App. LEXIS 19362 (6th Cir. 2015) (unpublished), here,  The good faith defense there related to reliance on the accountant.  The defendant's own credible testimony could have established the defense.  But the defendants did  not want to testify.

Before trial, the Wilsons indicated their intention to call only one witness, the accountant, who purportedly would testify that the amounts paid to Maxine Pochmara were properly reported as a return on her investment in the store, rather than as wages. The district court was skeptical, since Robert Pochmara received nothing at all for his labor, and Maxine Pochmara was said to have received a return on her investment, although it had been reported in the form of W-2 wages. The government objected to permitting the defendants to raise the defense solely on the accountant's testimony that the income was a return on Maxine Pochmara's investment and, perhaps, that he had so advised defendants. The government further expressed concern that, since it believed the accountant was an unindicted co-conspirator in the fraudulent scheme, if he were called to testify he might invoke his Fifth Amendment right not to incriminate himself.

The elements of the good faith reliance on accountant are: (1) full disclosure of relevant facts to the accountant and (2) actual good faith reliance on the accountant's advice.  Based on the briefing and proffer, the trial court was not sure that accountant's testimony would satisfy the first element but was particularly concerned that the accountant's testimony alone could establish the second.  The trial court reasoned:

. . . It is unclear whether [the accountant's] testimony alone could satisfy the Wilsons' burden of demonstrating he possessed all of the pertinent information when he provided the advice. What is clear, however, is that his testimony, without more, will not be enough to show that the Wilsons actually, and in good faith, relied upon him. . . . There must be evidence they provided him all the pertinent facts for making disclosures to the government, and evidence to demonstrate they relied upon his advice in good faith. Unless the Wilsons can provide this evidence, either through their testimony or that of another, there is no foundation for [the accountant's] testimony.

The Court of Appeals then said:

In ruling on the Government's motion in limine, the district court held that the Wilsons' accountant could not testify because his testimony alone could not establish the second element of the good faith defense, which is that "the Wilsons actually, and in good faith, relied upon [the accountant]." However, the accountant's testimony could have established both elements of the defense. First, to find that the Wilsons disclosed all pertinent facts to the accountant, the jury could have compared the information provided to the accountant with the Government's evidence. Second, the jury could have also found that the Wilsons acted in good faith reliance on the accountant's advice based on the fact that the Wilsons provided information to the accountant and acted in accordance with his advice. 

After concluding that it was improper to exclude the accountant's testimony, the Court said (fn. 1):

   n1 The question whether the accountant's testimony would have provided a foundation for an instruction on the good faith defense is a separate issue not raised by the facts in this appeal. See United States v. Lindo, 18 F.3d 353, 356 (6th Cir. 1994).

Of course that would depend upon the actual testimony, but if it came out in a way that the Court of Appeals said was possible to support both element of the reliance on professional "defense," the testimony would support the instruction.

The point is that the other testimony and evidence can at least lay the proper foundation for the defense without the defendant having to testify.  Returning to Hee, it seems to me that the witnesses should have been able to testify as to their understandings.