Pretrial Order Excluding Government Evidence in Criminal Tax Case for Offshore Accounts (4/22/18)

In United States v. Doyle, 2018 U.S. Dist. LEXIS 66980 (S.D. N.Y. 2018), here, the defendant had been charged in a superseding indictment for tax obstruction (§ 7212(a)), tax perjury (§ 7206(1)), and conspiracy (18 USC § 371).  The superseding indictment is here; the docket entries as of yesterday are here.  "These charges allege that Defendant and others unlawfully hid Defendant's foreign bank accounts from the IRS from approximately 2003 to 2017."

The Court describes the primary allegations as:

In 2003, Defendant's father died and left her an inheritance of over $4 million. Id. ¶¶ 23-25, 29, 34. The Defendant, who was also executor of her father's estate, made court filings falsely stating under penalty of perjury that the total value of her father's estate was under $1 million when, in fact, it was more than four times that amount. Id. In 2006, the Defendant sought the help of Beda Singenberger, a Swiss citizen who ran a financial advisory firm, to open a Swiss bank account into which the inheritance was deposited. Id. ¶ 34. To conceal the existence of the account, the Defendant and Singenberger established a trust in Lichtenstein named Gestino Stiftung ("Gestino" or "Gestino Foundation") to hold the Swiss bank account in its name. Id. As of December 31, 2008, the account held currency and financial instruments valued at approximately $3,548,380. Id. ¶ 41. In 2010, Gestino re-domiciled from Lichtenstein to Panama. Id. ¶¶ 45, 47. As of December 31, 2016, Gestino maintained assets in various Swiss bank accounts in the amount of at least approximately $3,028,562. Id. ¶ 53. 

The Defendant is alleged to have used this arrangement to unlawfully and fraudulently avoid paying over $1.5 million dollars in United States taxes resulting from the inheritance. For each of the tax years from 2004 through 2009, the Defendant failed to report any income from foreign accounts in her tax filings, and also stated in those filings that she did not have an interest in or signatory or other authority over a financial account in a foreign country (the "Foreign Accounts Question"). Id. ¶ 63.

The motions resolved by the court related to

(i) Tax Return Issue.  The Defendant claimed the Fifth Amendment on her federal income tax returns after she became a target of investigations of her interest in foreign accounts; the issue is whether the tax returns can be admitted in evidence by the Government in support of the tax obstruction and conspiracy charges; and
(ii) Subpoena Litigation Issues.  Represented by Counsel, the Defendant continued to resist the subpoenas, raising, through her then counsel, variations of the Fifth Amendment argument and lack of possession or control of the subpoenaed documents.  The Government asserted the resistance was evidence of unlawful conduct and thus admissible in support of the charge of tax obstruction.  

The Tax Return Issue:

The Court describes the facts succinctly as follows:

from 2004 to 2009, Defendant answered "no" to the Foreign Accounts Question. However, after Defendant received a grand jury subpoena, she did not check either a "yes" or "no" in response to the Foreign Accounts Question on her 2010 through 2015 returns. Rather, she wrote "See Attached Statement" and attached a "Disclosure Statement" stating: "In the context of an on-going federal criminal grand jury investigation being undertaken in the Southern District of New York, under the auspices of the United States Attorney's Office for that District, Lacy D. Doyle hereby asserts her rights and privileges under the Fifth Amendment not to incriminate herself by responding to [the Foreign Accounts Question]." 

The defendant moved "to preclude the Government's use of her answer to the Foreign Accounts Question on her 2010-2015 tax returns in its direct case."

The Government wanted to show that "the defendant never disclosed her foreign accounts to the IRS during that time period." The Government proposed to redact any reference to her assertion of privilege on the return and simply show the foreign account question on Schedule B was blank.

The Court's resolution of the issue:

That the tax returns would be redacted is of no moment: the prosecution would be asking the jury to infer guilt by use of this blank space, which, besides being incomplete and misleading, is the documentary equivalent of the Defendant's silence. See Salinas v. Texas, 570 U.S. 178, 195 (2013) ("[T]o allow comment on silence directly or indirectly can compel an individual to act as 'a witness against himself'—very much what the Fifth Amendment forbids." (emphasis added)).n1
   n1 The Government cites United States v. Ezeh, 92 F. App'x 834, 837 (2d Cir. 2004) for the proposition that prejudicial material is commonly redacted from otherwise relevant exhibits. Gov't Br. at 17. This is certainly true in the context of potential violations of Bruton v. United States, 391 U.S. 123, 126 (1968), as was the case in Ezeh. Here, where the Defendant's own statement (or silence) is at issue, it goes without saying that the stakes are different. But even if this were analogous to the Bruton context, "redactions are permissible so long as the redaction does not distort the statements' meaning, exclude substantially exculpatory information, or change the tenor of the utterance as a whole." Ezeh, 92 F. App'x at 837 (citation omitted). Here, the proposed redaction would drastically alter the meaning of the exhibit.

Likewise, the parties' arguments that the jury might be misled with or without this evidence are not pertinent. These contentions relate to relevance. The Government cites no case law suggesting that such an argument trumps a Defendant's concededly valid invocation of her Fifth Amendment privilege; rather, it is much to the contrary. See, e.g., United States v. Carriles, 832 F. Supp. 2d 699, 702-708 (W.D. Tex. 2010) (holding that Defendant's invocation of privilege was inadmissible on Fifth Amendment grounds, then concluding, in dicta, that it was irrelevant, even as substantive evidence of obstruction charge). As such, reference to Defendant's answer to the Foreign Accounts Question on her 2010-2015 tax returns is precluded.

The Subpoena Litigation Issues

The Court described this issue as "more analytically rigorous" to resolve, but still granted the Defendant's motion.

Additional relevant facts (highly summarized) are:

The Defendant was involved in two grand jury subpoena enforcement proceedings related to her interest (if any) in offshore accounts.  The two grand jury subpoenas were issued in 2010 and 2016, respectively.  The Defendant resisted both and was held in contempt both times.  The Court broke these subpoena enforcement proceedings into three stages of court proceedings.  The Government sought to admit evidence of the resistance to the subpoena enforcement proceedings and Defendant's Counsel's statements in the second and third stages in order to establish that the actions were obstructive, thus supporting the tax obstruction charge.  As explained by the Court:

To demonstrate this "unlawful[]" conduct, the Government apparently seeks to present the legal arguments that counsel made during those periods, in order to argue to the jury that Defendant's continued withholding of documents constituted unlawful and obstructive behavior because defense counsel's legal arguments were "frivolous and in bad faith." Gov't Br at 22; see Gov't Br. at 19-23 (arguing that counsel's legal arguments at various stages of the litigation constituted unlawful conduct). In addition, the Government intends to admit defense counsel's allegedly "false and misleading statements" to the Court at the November 3, 2016 conference. Gov't Br. at 23-24. As to both categories of evidence, the Government reasons that precluding this evidence on the basis that Defendant was acting in good faith upon advice of counsel would improperly usurp the jury's role as factfinder. Id. at 19-20.

First, the Court held that the resistance to the subpoenas, even after enforcement orders, was in the context of Defendant's good faith assertion of the Fifth Amendment privilege and thus was not unlawful.  Hence, the Government's proposed use of that resistance implicated the Fifth Amendment and was excludable in this criminal case.

Second, the Court held that Counsel's factual representations regarding documents would be a distraction and thus should be inadmissible under FRE 403, here (allowing the trial court to "exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence."  Here is only a portion of the Court's reasoning:

This [Government] argument suffers from a lack of imagination. Of course, a crime committed in furtherance of a conspiracy is not a prior bad act, and thus Rule 404(b) would not prohibit its admission. As such, the Court requested submissions regarding Rule 403 and the appropriate balancing thereunder. See, e.g., United States v. Crowder, 141 F.3d 1202, 1213 (D.C. Cir. 1998) (contrasting the two different inquiries); United States v. Stein, 521 F. Supp. 2d 266, 270 (S.D.N.Y. 2007) (suggesting evidence admissible under 404(b) may nonetheless be precluded under Rule 403 balancing). To be sure, a particularly effective piece of evidence for the Government, while certainly "prejudicial" to Defendant, does not, for that reason alone, inflict "unfair" prejudice on Defendant under Rule 403. See Old Chief 519 U.S. at 180 ("The term 'unfair prejudice,' as to a criminal defendant, speaks to the capacity of some concededly relevant evidence to lure the factfinder into declaring guilt on a ground different from proof specific to the offense charged." (emphasis added)) (citation omitted); see also United States v. Castellano, 610 F. Supp. 1151, 1163 (S.D.N.Y. 1985) (suggesting that lawyer's testimony against client, though prejudicial, was not "unfair[ly]" prejudicial simply because it established an element in RICO prosecution). However, the effectiveness of counsel's representations at proving the Government's case is not the only possible "unfair prejudice" to Defendant here. Moreover, "unfair prejudice" is not the only potential "danger" to be weighed against the probative value of a given piece of evidence under Rule 403. Thus, the analysis is more nuanced than the Government posits. 

Though the Government has not specified precisely how it would present counsel's prior statements to the jury, regardless of how that is accomplished, Defendant's former attorney will be, in essence, called by the prosecution as a witness against her. As a general matter, "[p]ermitting counsel to be called as witnesses, even in a hearing out of the presence of the jury, is a step a court should ordinarily be reluctant to take." United States v. Melo, 702 F. Supp. 939, 943-44 (D. Mass. 1988). Even where the attorney no longer represents the client, the practice is strongly disfavored. United States v. Cochran, 546 F.2d 27, 29 n.5 (5th Cir. 1977) ("The mere appearance of an attorney testifying against a former client, even as to matters of public record, is distasteful and should only be used in rare instances."). This is because there is no small possibility that the jury will infer from counsel's appearance as a government witness against his former client (or, to a lesser but certain extent, the reading of a transcript of counsel's prior statements) that his former client engaged in wrongdoing. And, even though Defendant will be represented by another attorney at her trial, jurors may be inclined to disbelieve that attorney on the improper basis that Defendant previously hired an allegedly dishonest lawyer. They may further speculate regarding the reasons for Defendant's obtaining a new attorney. The Court is not persuaded that a limiting instruction on these subjects, though theoretically possible to draft, will do enough to mitigate these undue harms. 

Moreover, admitting this evidence on its own, without explanation as to its context, is misleading and will lead to undue speculation. Even if jurors are given the limited context that Defendant was duly issued a subpoena for documents, advanced these arguments in response, and then subsequently complied, the statements on their own are not remotely conclusive of Defendant's guilt, and appear to invite more questions than they provide answers. See, e.g., United States v. Beauchamp, 986 F.2d 1, 4 (1st Cir. 1993) (suggesting that time and effort to present testimony outweighed probative value of testimony in light of testimony's not being entirely conclusive of issue). The admission of this evidence on its own will inevitably cause jurors to speculate as to why counsel stated these allegedly false facts, and whether Defendant, in fact, authorized him to do so, and questions regarding defense counsel's credibility will overwhelm their deliberative process. Edward J. Imwinkelried, A New Antidote for an Opponent's Pretrial Discovery Misconduct: Treating the Misconduct at Trial As an Admission by Conduct of the Weakness of the Opponent's Case, 1993 B.Y.U. L. Rev. 793, 819 (1993) ("Even when it is uncontroverted that the act occurred, there may be a serious question about the motivation for the act; at the time of the act, the attorney may not have made a contemporaneous avowal of her intent. In these cases, if the judge admits evidence of the attorney's discovery misconduct, the evidence will almost inevitably inject the issue of the attorney's credibility into the case."). In other words, jurors may too hastily give Defendant's lawyer's testimony undue weight and conclude that Defendant herself acted with the requisite corrupt intent after the Government presents evidence suggesting that her attorney made factually inaccurate representations to a court in response to the subpoena. 

This brings the Court to the additional problems of needlessly consuming time and confusion of the issues. In this case, Defendant's calling her former attorney to provide the entire context for the alleged misstatements is easily anticipated. Def's Ltr. Br. at 3-4 (arguing that that defense will need to call Mr. Leibman to present to jury his state of mind when making statements, as Defendant will need to show that Leibman made no false statements and that his statements were not made with intent to further a conspiracy); Valencia, 826 F.2d at 175 (Meskill, J., dissenting) (suggesting that where attorney creates inconsistency at issue, a defense attorney is to be "expected to take the stand on behalf of his client to explain why the government's evidence contradicted his own"). That will lead to extended testimony which will seemingly include, among other things, defense counsel's professional background in litigating these issues, explication of defense counsel's strategy as the case progressed, the procedural postures of the parallel legal proceedings at the time the statements were made (i.e., the subpoena litigation and the criminal proceedings), and the extent to which Defendant communicated with her lawyer regarding the subject matter of the representations (as well as how and when she authorized her lawyer to make those representations on her behalf). As alluded to above, one of the the many problems the Court perceives with this testimony is that the jury may conflate Defendant's lawyer's intent with Defendant's own intent. Moreover, to the extent that Defendant calls her attorney to testify, it is highly likely that the jury will learn of Defendant's invocations of the privilege, which will substantially complicate matters. The law governing the required records exception is not simple, and certainly significant instruction will be required, hardly guaranteeing a proper understanding of the governing law, and likely muddying the waters as to the issues to be proved. See, e.g., Fisher, 425 U.S. at 410 (discussing case-specific nuances of act of production privilege); see also Carriles, 832 F. Supp. 2d at 709 ("Because the invocations have such weak probative value but such a high risk of confusing the jury on the legal issues surrounding the privilege, or even more seriously risk leading the jury to convict based on acts Defendant has not been proven to have committed and is not charged with committing, the evidence must be excluded."). 

At bottom, the admission of counsel's factual representations, even in the limited form proposed, will unavoidably result in a mini-trial about the adequacy of defense counsel's representation, the truth or falsity of his statements, and the merits of the legal arguments he put forward. The Court is persuaded that the finders of fact will be led so far afield from the essence of the charges to be tried that their truth-seeking mission will be lost on them; indeed,  

"[t]he candid, open, rigorous clash of ideas—not persons—is the essence of the search for truth and understanding. To allow a diversion of attention to charges and counter-charges against advocates themselves is to lose incisive focus on material issues of fact and law—the focus that characterizes the adversary system at its best and causes it to make its distinctive contribution to clearer understanding of issues, wiser decision making, and greater likelihood of achieving the goal of equal justice under law."

United States v. LaRouche Campaign, 682 F. Supp. 610, 615 (D. Mass. 1987). 

For these reasons, counsel's alleged factual misrepresentations, even when extracted from the accompanying legal arguments, are inadmissible. [*64] 

Prior Federal Tax Crimes Blogs on the Doyle case machinations are:

• Contempt Sanctions Continued in GJ Subpoena for Required Records (Federal Tax Crimes Blog 1/25/17), here.
• Another Offshore Account Indictment (Federal Tax Crimes Blog 7/30/16), here. (discussing the original indictment).

JAT Notes:

1.  There is a substantial delay between the time of the first grand jury subpoena 2010 and the original indictment in 2016.  The subpoena litigation occurred in that period, but does not alone explain the delay in the indictment.  Presumably, the Defendant was in tax and FBAR compliance from the date forward.  Certainly, as noted above, she was in tax compliance through the assertion of the Fifth Amendment to the Schedule B foreign account question.  There is no indication of FBAR noncompliance, either for years before or after 2010.  I infer that, since there is no FBAR charge for years after 2010, the Defendant was in FBAR compliance (at least, perhaps, through an assertion of the Fifth Amendment).

2. Although it is clear that the income, if any, was or was not reported on the 2010 through 2015 returns.  As described, the Fifth Amendment seems to have been asserted only as to the Schedule B foreign bank account question. If all the Government wanted to show was her failure to report, it perhaps could have done that by showing that any income was not properly reported.  However, the account seemed to have been a discretionary trust as to which the Defendant may not have had any income.

3.  In the tilting over the 2016 grand jury subpoena, "the Government moved for the imposition of additional contempt sanctions, in light of Defendant's failure to produce documents responsive to the 2010 Subpoena "that she had the legal authority to obtain from any other person or entity, including foreign banks and foundations." Hafetz Aff., Ex. 29 at 22. The Government noted that it had received documents from Lichtenstein in December 2015 suggesting that the Defendant held foreign bank accounts through the Gestino Foundation, none of which was the subject of the Defendant's prior production."

4.  On the prior attorney being a witness with respect to representations made, see Update on the Zukerman Indictment - Potential Waivable Conflicts of Interest of Advocate as Witness (Federal Tax Crimes Blog 5/28/16; 6/21/16) (5/28/16; 6/21/16), here.