Notable Decision in SDNY Criminal Tax Shelter Case (1/14/10)

I have previously blogged that John B. Ohle was an unindictead alleged co-conspirator in the Daugerdas et al. indictment.  See here.  Ohle was indicted apart from that indictment.  He was indicted along with a guy named Bradley.  That indictment generated a significant decision from Judge Leonard Sand in United States v. Ohle, 2010 U.S. Dist. LEXIS 2150 (SDNY No. S2 08 Cr. 1109 (LBS)).  The following are the points that attracted my particular attention:

1. The Court rejected a challenge to the wire fraud count (Count One). Ohle argued that "Count One of the indictment impermissibly uses the wire fraud statute to reach an alleged criminal tax conspiracy, citing United States v. Henderson, 386 F. Supp. 1048 (S.D.N.Y. 1974)." The Court essentially took the life out of Henderson. Prosecutors have their choice of how to charge tax conspiracies. Why does it matter if a conspiracy is a conspiracy and there is a single punishment scheme in 18 U.S.C. § 371? Ah, but there are other potential consequences of wire and mail fraud -- forfeiture and even ramping up to money laundering or RICO -- which are not available for tax crimes and tax conspiracy (either offense or Klein defraud conspiracy). See fn. __ on page __. For the DOJ Tax Division policy for prosecutors to make the choice, see Directive No. 128 here (noting that virtually all tax crimes can be charged as mail or wire fraud, and attempting to provide guidance and preclearance directives so the mine-run tax cases are not willy-nilly charged as mail or wire fraud). Thus, these charging decisions are not tweedle dum / tweedle dee from the defendant's perspective.

2. The Court rejected a challenge to another conspiracy (Count Five) as duplicitous. The indictment contained a "boilerplate" allegation that appeared to allege a single conspiracy. The overt acts, however, seemed to suggest multiple conspiracies. Yet, because the apparent multiple conspiracies were related and involved players not acting in a vacuum, with compensation flowing around, the Court concluded that the allegation is of a single conspiracy and not multiple conspiracies so as to implicate duplicity concerns. In the process of getting to that holding, the Court had a nice discussion of the concerns that are implicated by duplicity in counts (case names and quotation marks omitted to easier see the logical flow):

An indictment is duplicitous if it joins two or more distinct crimes in a single count. Duplicitous pleading is not presumptively invalid; rather, it is impermissible only if it prejudices the defendant. Duplicity is only properly invoked when a challenged indictment affects one of the doctrine's underlying policy concerns: (1) avoiding the uncertainty of a general guilty verdict, which may conceal a finding of guilty as to one crime and not guilty as to other, (2) avoiding the risk that jurors may not have been unanimous as to any one of the crimes charged, (3) assuring the defendant has adequate notice of charged crimes, (4) providing the basis for appropriate sentencing, and (5) providing the adequate protection against double jeopardy in subsequent prosecution.

The Court of Appeals for the Second Circuit has recognized that application of the duplicity doctrine to conspiracy indictments presents "unique issues." In this Circuit, it is well established that [t]he allegation in a single count of a conspiracy to commit several crimes is not duplicitous, for the conspiracy is the crime and that is one, however diverse its objects. A single conspiracy may be found where there is mutual dependence among the participants, a common aim or purpose or a permissible inference from the nature and scope of the operation, that each actor was aware of his part in a larger organization where others performed similar roles equally important to the success of the venture. Each member of the conspiracy is not required to have conspired directly with every other member of the conspiracy; a member need only have participated in the alleged enterprise with a consciousness of its general nature and extent. If the Indictment on its face sufficiently alleges a single conspiracy, the question of whether a single conspiracy or multiple conspiracies exists is a question of fact for the jury. Accordingly, courts in this Circuit have repeatedly denied motions to dismiss a count as duplicitous.

 3. The Court rejected a challenge to joinder on Count 5 based on the "reasonable person" test - "We take a common sense approach when considering the propriety of joinder under Rule 8(b), and ask whether "a reasonable person would easily recognize the common factual elements that permit joinder." (Internal quotations and citations omitted.) The Court undertook a fact specific inquiry to show that the test was met so that the two conspiracies could be joined.

4. The Court granted severance as to the two conspiracy allegations (Counts One and Five) because they were not sufficiently related. Because of that severance, the Court also severed Counts Six through Eight involving individual tax counts for tax crimes arising from failure to report and pay tax on income from the conspiracy alleged in Count Five.

5. The Court held that, since a financial institution was involved in -- affected by -- the scheme, the 10 year statute of limitations in 18 USC § 3293(2) applies. Further, the tax crimes charged 6 years and one month after the return filings, although in untimely by a strict application of the 6 year limitations period could still be timely if the defendant were, during that period, out of the country for one month or more. The reason is that, while a person is outside the country (even for business or personal trips), the statute of limitations is tolled. § 6531. This is a good reminder that we, as practitioners, should not just assume a 6 year statute of limitations. Actually, it is a 6 year statute of limitations that just gets tolled for some period. All of us need to remember that nuance.

6. The Court easily moved past the venue objections. Although the defendants were not residents of SDNY, such broadly alleged conduct easily met the nexus requirement.

7. The Court then held that the tax obstruction count (Count Eight) was not unconstitutionally vague because it racked the statute and incorporated the specific allegations in prior paragraphs of the indictment. Further, the Court rejected the Kassouf argument (United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998)) that tax obstruction did not reach actions taken before an IRS investigation was commenced.

8. The Court rejected any consequence of the IRS and DOJ to offer pre-indictment conferences. The reasoning is short and bitter (case citations omitted):

However, IRS guidelines do not provide for a pre-indictment conference "if the taxpayer is the subject of a grand jury investigation," as was the case here. IRM 9.5.12.3.1 (July 25, 2007). The United States Attorneys' Manual ("USAM") provides that, "If time and circumstances permit, the Tax Division generally grants a taxpayer's written request for a conference with the Division in Washington, D.C." USAM 6-4.214 (Sept. 2007). However, the Second Circuit has held that the provisions of the USAM "reflect executive branch policy judgments" and "do not confer substantive rights on any party." United States v. Piervinanzi, 23 F.3d 670, 682-83 (2d Cir. 1994); see also United States v. Kelly, 147 F.3d 172, 176 (2d Cir. 1998) (stating that "[internal department] guidelines provide no substantive rights to criminal defendants" in discussing DOJ Criminal Tax Manual). The Government claims it decided not to offer Ohle a pre-indictment conference in order to prevent Ohle from dissipating assets subject to forfeiture before he was indicted and arrested. This decision does not provide a basis for dismissal of the indictment. See United States v. Goldstein, 342 F. Supp. 661, 666 (E.D.N.Y. 1972) (failure to offer pre-indictment conference in criminal tax case not grounds for dismissal of indictment because "such a conference is clearly not a matter of right").

This is a specific application of the Caceres doctrine (United States v. Caceres, 440 U.S. 741 (1979) (holding that IRM does not confer rights on taxpayers; hence, evidence obtained arguably in violation of IRM cannot be excluded).

9. The Court rejected Ohle's claims that two grand jury subpoenas after the original indictment and IRS investigations after the indictment were improper use of process in violation of the limited discovery allowed in criminal cases. As to the grand jury subpoena, the Court noted curtly that none were issued after the superseding indictment, and that was the end of the matter. As to the IRS investigations, the Court rejected Ohle's request for an evidentiary hearing to inquire into whether they were intended to circumvent the limited criminal discovery rules. The Court reasoned:

Although Ohle cites a number of legal propositions, he alleges no acts of bad faith on the part of the Government to support the contention that the Government conducted the civil tax proceedings in order to obtain evidence for the pending criminal trial. He argues only that the timing of the two civil audits conducted in the midst of the criminal tax investigation is "suspicious" without alleging relevant dates or information obtained. Notably, Ohle does not contest the Government's statement that he had counsel during both of the audits, and that one of the audits was commenced prior to the criminal investigation. (Gov't Opp. 77 n.45.) Ohle has not raised any issues or pointed to any potential infringement of his rights that would warrant an evidentiary hearing. Ohle's motion for an evidentiary hearing is denied.

Obviously, this can be a serious concern.  It implicates some of the same concerns as parallel investigations that have been a hot topic in the tax and SEC area over the last few years.