A White Collar Crime Case with Issues Relevant to Tax Crimes (10/10/12)

The White Collar Crime Prof Blog has an interesting post on a petition for certiorari filed recently in United States v. Brooks, 681 F.3d 678 (5th Cir. 2012), here.  See Defense Witness Immunity & Global Tech - Important Issues on Cert (White Collar Crime Prof Blog 10/7/12), here.  These issues presented for certiorari arise in many white collar crimes cases, including tax crimes.

In Brooks, allegedly in order to manipulate commodity prices, Defendants, commodity traders with an energy company, provided false information on commodity trades to an trade publication widely used to indicate prices and price movements, thus potentially having a disruptive effect on the markets in those commodities.  They were prosecuted and convicted for false reporting in violation of the Commodities Exchange Act and the federal wire fraud statute.

The Fifth Circuit addressed many issues in affirming their convictions.  I will discuss in separate blogs later the two issues being presented on petition for writ of certiorari.  Those issues are (i) the holding that the Government did not have to grant immunity to witnesses who might be exculpatory to defendant and (ii) the blessing of the deliberate ignorance instruction given to the jury.

I will summarize here the remaining issues in the Fifth Circuit opinion that I think of particular relevance to tax crimes.  Keep in mind that tax crimes are just a subset of white collar crime, so many of the skirmishes in white collar crime cases generally will often appear in tax crimes cases.

1. Government Interference with Payment of Legal Fees.

The defendants alleged that the Government's actions, direct and indirect, caused their employer to withhold attorneys fees for their defense and thereby violated their Fifth and Sixth Amendment privileges.  Defendants relied upon the landmark decision in United States v. Stein, 541 F.3d 130 (2d Cir. 2008), a criminal tax prosecution of tax shelter promoters, where the Second Circuit affirmed dismissal of most of the defendants because the Government had put undue pressure on KPMG to withhold attorneys fees for those defendants.  The Court noted in this regard that the case was distinguishable from Stein because:  "The district court's factual findings bound the Second Circuit, and on such findings, the Second Circuit held KPMG's actions were state actions that violated the defendants' right to counsel of their choice."   No such findings were made in Brooks.

2. Conspiracy Instructions.

The defendants were charged with conspiracy to commit wire fraud through disseminating false information.  As I have noted elsewhere and Judge Easterbrook has lamented, conspiracy charges seem to be ubiquitous in white collar crime cases.

The trial court instructed the jury with standard conspiracy and wire fraud instructions.  The jury then sent out the following note:

In the second part of Count 1 it states, "that the Defendant knew the unlawful purpose." Doesn't this contradict the idea that "ignorance of the law is no excuse."

After consulting with counsel, the trial court responded in writing to the jury inquiry as follows:

There is no contradiction. The government is not required to prove that a defendant knew the purpose of the agreement was in fact unlawful, that is, in violation of a statute, but the government must prove the defendant knew the purpose of the agreement, and the government must prove that the purpose was in fact unlawful.

The Fifth Circuit stated the general conspiracy requirements as follows:

A conviction for conspiracy under Section 371 requires that the government prove: "(1) an agreement between two or more persons to pursue an unlawful objective; (2) the defendant's knowledge of the unlawful objective and voluntary agreement to join the conspiracy; and (3) an overt act by one or more of the members of the conspiracy in furtherance of the objective of the conspiracy." United States v. Coleman, 609 F.3d 699, 704 (5th Cir. 2010); see also United States v. Curtis, 635 F.3d 704, 719 n.53 (5th Cir. 2011). Conspiracy actually has two intent elements—intent to further the unlawful purpose and the level of intent required for proving the underlying substantive offense. See 2 Wayne R. LaFave & Austin W. Scott, Jr., Substantive Criminal Law § 12.2(c)(1) (2003); United States v. Alvarez, 610 F.2d 1250, 1255 (5th Cir. 1980) ("Conspiracy is, however, more complex because it involves two elements of intent that shade into each other: each party must have intended to enter into the agreement and the schemers must have had a common intent to commit an unlawful act."). fn16
   fn16 Although the two intents are separate, they often functionally collapse into a single intent. United States v. Chagra, 807 F.2d 398, 401 (5th Cir. 1986). Thus, oftentimes, it is only necessary for the government to prove the level of intent required for proving the underlying substantive offense. United States v. Feola, 420 U.S. 671, 686, 95 S. Ct. 1255, 43 L. Ed. 2d 541 (1975); United States v. Dadi, 235 F.3d 945, 950 (5th Cir. 2000).

I urge those with an interest in esoteric discussion of this area to read the court's analysis.  It is a bit obscure, but there is some interesting analysis.  Here, however, is my summary that does not pick up all the nuance but, I think, captures the big picture.  The Court held that, under the first intent requirement, conspiracy does not always require proof that that the defendant knew the objective was unlawful.  Basically, for the first intent requirement, the defendant must know the purpose of the conspiracy.  Whether he knows the purpose is unlawful is not required; so long as the law defines that purpose as illegal, that is sufficient under the first intent requirement.  For the first intent requirement, therefore, ignorance of the law -- the legal characterization -- of the purpose is not required.  As to the second intent requirement, when the alleged purpose is a specific intent crime (such as in tax substantive crimes cases), then Ingram requires that the Government prove that the defendant knew that the purpose was unlawful.  The Court then turned to the level of intent required for wire fraud and concluded that it is not the type of specific intent crime as is, for example, tax crimes (the court calls this the "narrow exception for specific intent crimes).  The Court said:

The jury note states that as to the conspiracy statute itself, ignorance of the law is no excuse, because "[t]he government is not required to prove that a defendant knew the purpose of the agreement was in fact unlawful, that is, in violation of a statute, but the government must prove the defendant knew the purpose of the agreement." See Ingram, 360 U.S. at 678. The note also accurately states that the government must prove that the purpose was in fact unlawful, which requires proof that the Defendants-Appellants acted with the requisite mens rea to commit wire fraud. Coleman, 609 F.3d at 704-06 (analyzing whether elements of target offense also met when determining if conspiracy to commit that offense proven); United States v. Bedford, 536 F.3d 1148, 1155 (10th Cir. 2008) (stating government must prove degree of criminal intent necessary to prove underlying crime). Although the district court's response possibly could have spelled out the relationship between conspiracy and the underlying substantive offenses more clearly, it is not an incorrect statement of the law, particularly in light of the rest of the jury charge. See United States v. Chavis, 772 F.2d 100, 108 (5th Cir. 1985) ("The jury charge must . . . be considered as a whole, in the  [**49] full context of the trial."). fn18    fn18 The Defendants-Appellants also argue that the note gave the jury the impression that the maxim "ignorance of the law is no excuse" was officially a jury instruction. Whether or not it was proper for the district court to implicitly adopt this statement, the note accurately stated that this case did not fall within the narrow exception to the traditional rule that "ignorance of the law is no excuse," as laid out by the Supreme Court. The Supreme Court stated that "the traditional rule that ignorance of the law is no excuse" does not apply only in cases involving highly technical statutes that criminalize otherwise "innocent conduct." Bryan v. United States, 524 U.S. 184, 194-96, 118 S. Ct. 1939, 141 L. Ed. 2d 197 (1998); see also Ratzlaf v. United States, 510 U.S. 135, 149, 114 S. Ct. 655, 126 L. Ed. 2d 615 (1994); Cheek v. United States, 498 U.S. 192, 199-200, 111 S. Ct. 604, 112 L. Ed. 2d 617 (1991). Although wire fraud is a specific intent crime, it would not fall into this narrow exception to the general rule. See Kay, 513 F.3d at 447-51 (describing narrow exception to traditional rule that ignorance of the law is no excuse). Further, to the extent that the Defendants-Appellants argue that this instruction gave the jury the impression that it could not acquit, even if it found that the Defendants-Appellants believed they were giving accurate answers to the publications, the instruction on specific intent to defraud made clear to the jury that it could not convict unless it found a "conscious knowing intent to defraud." See United States v. Cavin, 39 F.3d 1299, 1310 (5th Cir. 1994) (a finding of intent to defraud and good faith are mutually exclusive). Taken in context with the rest of the instructions, and the remainder of the note, we do not think that the statement regarding "ignorance of the law" was in error.

I am not sure that I understand this notion of dividing specific intent crimes into those within the narrow exception (such as tax crimes per Cheek) and other specific intent crimes outside the narrow exception.  Maybe a reader will leave a comment that will enlighten me.

3. Fundamental and Arguable Ambiguity.

The defendants argued that the questions on the trade publications survey made the questions arguably or fundamentally ambiguous, thus rendering their response not false.  This issue is often presented in the context of perjury charges under 18 USC 1621 or false statement charges under 18 USC 1001.  At least arguably, it could be present in a tax perjury (Section 7206(1)) charge.  There are two levels of potential ambiguity -- (i) fundamental ambiguity being one that is so facially ambiguous that the judge determines the ambiguity and (ii) arguable ambiguity being one that must be submitted to the jury.

The First Circuit announced the general law as follows (footnote omitted):

A determination of whether a question or statement is arguably ambiguous is generally left to the jury. See, e.g., United States v. Posada Carriles, 541 F.3d 344, 362-63 (5th Cir. 2008) (stating that jury resolves ambiguities where they are not fundamental); United States v. Bell, 623 F.2d 1132, 1136 (5th Cir. 1980) (same). It is not clear whether an arguable ambiguity instruction is appropriate in cases charging false reporting and wire fraud. In support of their argument, the Defendants-Appellants rely upon a Tenth Circuit case, United States v. Migliaccio, 34 F.3d 1517 (10th Cir. 1994),  in which the doctrine was applied to a charge of fraud under facts somewhat similar to the current suit. In that case, the Tenth Circuit held that not allowing an arguable ambiguity instruction was reversible error where the defendants were charged with fraudulent billing of medical procedures. Id. at 1520-25. The defendants argued that the terminology was ambiguous and that their answers were truthful under their interpretation of the terms. Id.

Based on this, the defendants argued that the trial judge should have given their requested arguable ambiguity instruction.  The Fifth Circuit held, however, that there was no reasonable ambiguity in context and hence no requirement for an arguable ambiguity instruction.  In addition, the Fifth Circuit noted (fn. 26):

Here, even though the district court denied the specific instruction on ambiguity, the Defendants-Appellants were permitted to present this argument to the jury, and in fact, Phillips's lawyer discussed how the ambiguous terms negated the intent elements of the charged offenses during closing arguments at length. Further, the district court accurately instructed the jury on how both offenses require knowledge of the falsity of the statement, which prevented the jury from convicting if it found that the Defendants-Appellants actually believed that they were complying with the instructions. Thus, the district court's charge "enabled the jury to recognize and understand the defense theory, [to] test it against the evidence presented at trial, and then [to] make a definitive decision whether, based on that evidence and in light of the defense theory, the defendant was guilty or not guilty." Gray, 751 F.2d at 736-37 (quotation omitted).

4. Sentencing - Burden of Proof - Preponderance of the Evidence.

The trial court made its fraud loss quantum determinations by a preponderance of the evidence.  For financial crimes, the Sentencing Guidelines make the quantum of the loss -- fraud or tax loss -- the principal determinant in the sentencing calculation.  The defendant argued that the court was required to find the fraud loss by a higher standard -- clear and convincing evidence.  The Courts have not been entirely consistent on the issue, with some (even the Fifth Circuit) holding out the possibility that, in some extreme cases, a higher burden may apply where its effect on sentencing is extreme.  The Firth Circuit summarily reasoned:

We need not decide at this time that a heightened burden is never required. While the Defendants-Appellants' enhancements are significant, accounting for more than fifty percent of their offense levels, and increasing their recommended sentence range from 18-to-24 months to 135-to-168 or 168-to-210 months, this Court has held a similar enhancement did not require a heightened burden of proof. See United States v. Carreon, 11 F.3d 1225, 1240 (5th Cir. 1994) (holding enhancement in recommended sentence from six years to twenty years did not require proof beyond a preponderance).32 Accordingly, we find that a heightened burden or proof, even if required by due process in certain situations, is not appropriate here, and the district court did not err in refusing to apply one.

5. Sentencing - Obstruction of Justice.

The trial court applied a 2-level enhancement for obstructing justice.  This enhancement usually applies where the defendant has done something during the investigation leading to the prosecution that interfered with the investigation.  The defendants' alleged obstructive conduct occurred during an internal investigation by their employer.  The defendants argued that their alleged obstructive conduct did not qualify for this enhancement because:  "(1) their statements occurred before any government investigation started, (2) their false statements were not made directly to government agents, and (3) their false statements did not actually impede the investigation."

One of the defendants had obstructed a state investigation, so that was handily dismissed.  Turning to the others who have allegedly obstructed an internal investigation (emphasis supplied by JAT):

With regard to Phillips and Walton, the PSRs found obstruction based on their statements to El Paso's legal counsel and independent investigators during the company's investigation arising from inquiries by the CFTC, the Federal Energy Regulatory Commission, and the U.S. Attorney's Office.44 The Defendants-Appellants show no error in the district court's finding that they made their false statements during the course of the investigations. Similarly, they show no error in the district court's finding the Phillips's and Walton's statements were not made in ignorance of the investigations and were not "the result of a spur of the moment decision." See United States v. Greer, 158 F.3d 228, 235 (5th Cir. 1998) (finding obstruction limited to "egregiously wrongful behavior whose execution requires a significant amount of planning and presents an inherently high risk that justice will in fact be obstructed"). Further, although the statements were not made directly to government officials, the district court's finding that they were made with intent to be communicated to government officials, and thus to impede the investigation into their wrongdoing, was not implausible. See U.S. Sentencing Guidelines Manual §3C1.1 cmt. n.9 (providing obstruction may be "induced, procured, or willfully caused"); see also United States v. Aguilar, 515 U.S 593, 601, 115 S. Ct. 2357, 132 L. Ed. 2d 520 (1995) (holding, to secure conviction for obstruction of justice charge, government must show defendant "knew that his false statement would be provided to the grand jury").