Second Circuit Reverses and Vacates Convictions for Wire Fraud and Tax Evasion (5/1/12)

In  United States v. Litwok, 678 F.3d 208 (2d Cir. 2012), here, the Second Circuit  upset convictions for wire fraud and tax evasion, applying seeming settled principles.

I address first the tax evasion convictions, although the Court addressed first the wire fraud conviction.  The defendant's tax evasion convictions for 3 years arose from her failure to file income tax returns for those years where she omitted substantial income unrelated to the wire fraud.  Normally, a failure to file income tax returns establishes only the crime of failure to file, Section 7203, a misdemeanor.  In order to prove tax evasion in the context of failure to file, the Government has to prove some affirmative element other than just failure to file.  The Second Circuit held, cryptically, that, for two of the years, the evidence was insufficient to support conviction for two of the three years but was sufficient for the third year, reasoning as follows (case citations and quotations omitted):

(i) 1995 Tax Count 

We have previously described as examples of affirmative acts conduct such as making false statements to the IRS for the purpose of evading taxes, establishing accounts in the names of other entities to conceal income, and handling of one's affairs to avoid making the records usual in transactions of the kind, More broadly, we have held that an affirmative act includes any conduct, the likely effect of which would be to mislead or to conceal.

With these principles in mind, we review the evidence relating to the tax evasion count for 1995 (Count Two). The most significant testimony relating to that count was that of Peter Testaverde [an accountant]. As set forth above, Testaverde testified that Litwok barred him from verifying the accuracy of the trading account statements that she claimed were inaccurate and thereby prevented him from preparing 1995 K-1 tax forms for Kohn Investment I LP's partners — including its general partner, Kohn Investment Management, which Litwok owned. Without K-1 tax forms, the company's partners could not determine their income and file their returns. Based on Testaverde's testimony, a rational juror could find that Litwok actively prevented the filing of her returns that year. On a sufficiency challenge, her conduct constitutes an affirmative act sufficient to sustain her conviction on Count Two.

(ii) 1996 and 1997 Tax Counts 

In contrast to the evidence relating to the calendar year 1995, there was no evidence at trial  of any affirmative act beyond a mere failure to file tax returns for calendar years 1996 and 1997. For the first time at oral argument on appeal, the Government sought to defend the convictions for tax evasion for 1996 and 1997 (Counts Three and Four) in two ways. First, it claimed that Litwok had an affirmative, fiduciary duty to prepare K-1 tax forms for Kohn's partners, and that her failure to do so constituted the requisite affirmative acts. Second, it argued that Litwok's refusal to allow Testaverde to verify financial documents for 1995 constituted an affirmative act of tax evasion in 1996 and 1997 because it prevented the calculation of accurate income for those later years. Because it did not raise either of these arguments in its brief or before the District Court, these arguments were forfeited, and we decline to consider them. Accordingly, we reverse the judgment of conviction as to Counts Three and Four.

The wire fraud conviction related to the defendant's false claims for insurance reimbursement for damage to two properties.  This was relatively petty theft (and would seem to me to be the stuff of state criminal charges).  The Second Circuit held that evidence was sufficient to sustain the conviction, but vacated and remanded it anyway because the wire fraud charge had been improperly joined with the tax charges.  Under Rule 8(a), FRCrP, criminal charges may be joined if "of the same or similar character, or are based on the same act or transaction, or are connected with or constitute parts of a common scheme or plan."  Here, there was no relation between the tax charges and the wire fraud charges, other than perhaps both involved fraud which permitted the prosecutor to blend the arguments.  The Court found that the defendant was prejudiced by the improper joinder, reasoning.

The Government argues that the evidence of Litwok's failure to file tax returns for her investment companies and her improper personal use of business funds had virtually no impact on the jury's consideration of the mail fraud count. We disagree. The evidence of the 1995 tax evasion charged in Count Two included testimony about Litwok defrauding her investors of millions of dollars for personal compensation. At trial and in its closing argument, the Government was able to point to that and other evidence to describe Litwok as "a cheat, a liar, and a thief" and to otherwise contend that Litwok had a propensity to engage in fraudulent activity. Because none of the evidence of the 1995 tax evasion was related to the 1997 mail fraud offense, it would not have been admitted in a trial involving only that offense; yet it inevitably colored the jury's view of Litwok's role in the mail fraud scheme. The prejudice, in our view, went both ways: although the evidence of Litwok's involvement in the fraud related to the Aborigine Way claim would have been inadmissible in a trial involving only the 1995 tax evasion count since it did not support that charge in any way, it surely affected the jury's consideration of that count.

Accordingly, the Second Circuit vacated and remanded for further proceedings on the wire fraud charge.

In summary, the tax evasion convictions for the two years were reversed altogether.  The evasion conviction for the third year was vacated and remanded, along with the conviction for wire fraud.  The case can be retried, apparently with separate trials for the wire fraud and the remaining tax evasion charge.  Note that the Government rarely would charge and try a single year evasion case, but the facts in the case seem fairly egregious so it might proceed to trial in the case.