Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-93-01058/USCOURTS-ca10-93-01058-0/pdf.json

Parties Involved:
Steven Sneed
Appellant
United States of America
Appellee

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

UNITED STATES OF AMERICA, 

Plaintiff-Appellee, 

v. 

STEVEN SNEED, 

Defendant-Appellant. 

JTII·ED 

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Tenth Circmt 

SEP t 3 \994 

No. 93-1058 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 91-CR-122-01) 

Marcella T. Clark (Philip E. 

Lowery and Lowery, P.C., 

appellant. 

Lowery with her on the briefs) , 

Denver, Colorado, for defendantKenneth R. Fimberg (Henry L. Solano, United States Attorney, 

Gerald J. Rafferty, Assistant United States Attorney, with him on 

the brief), Assistant United States Attorney, Denver, Colorado, 

for plaintiff-appellee. 

Before BALDOCK, ~ and BRORBY, Circuit Judges. 

BARRETT, Senior Circuit Judge. 

Appellate Case: 93-1058 Document: 01019285216 Date Filed: 09/13/1994 Page: 1 
Steven Sneed (Sneed) appeals from the district court's 

judgment and sentence imposed following a jury trial. Sneed was 

found guilty of one count of aiding and abetting securities fraud 

(18 U.S.C. § 2 and 15 U.S.C. §§ 78j (b) and 78(ff)), two counts of 

aiding and abetting mail fraud (18 U.S.C. §§ 2 and 1341), and one 

count of aiding and abetting wire fraud (18 U.S.C. §§ 2 and 1343). 

He was sentenced to 33 months imprisonment, 3 years supervised release, and fined $15,000 with a special assessment of $200.00. 

FACTS 

In late 1988 and early 1989, the Federal Bureau of Investigation (FBI) , in conjunction with the Securities and Exchange Commission (SEC), commenced a "sting" operation to investigate fraud 

in the Rocky Mountain area penny stock market industry. The FBI 

established a Colorado corporation known as Monarch Investment 

Services (Monarch) and opened an office in Denver, Colorado. FBI 

Special Agent John Coffey (Coffey) posed as the company's 

president, "John O'Kelly" (O'Kelly), and let it be known in 

Denver's penny stock community that he was interested in finding 

an individual to assist him in doing a "box job" by obtaining a 

"boxed" public company and manipulating the price of its worthless 

stock.1 

1 A "box job," is a device whereby a small group of individuals 

controls virtually all of the stock of a corporation and artificially manipulates purchases and sales of the stock in order to 

manipulate the price of, or market for, the stock. Control of the 

corporation and its stock is concealed by the use of "nominee" or 

"straw" officers, directors and shareholders, who hold their stock 

in their own (or fictitious) names, but are controlled by the 

individuals manipulating the stock. Originally, the term referred 

to the controlling persons actually having the stock certificates 

"in a box." 

-2-

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From mid-January to early March, 1989, Anthony Cavanaugh 

(Cavanaugh), an FBI informant and convicted felon, introduced 

O'Kelly to various people in the securities industry. Cavanaugh 

introduced O'Kelly by telephone to Sneed, a licensed securities 

professional and promoter. Sneed flew to Denver from Virginia for 

a January 16, 1989, meeting. During this meeting, which was taped 

by the FBI, Cavanaugh, O'Kelly, and Sneed discussed the plans to 

purchase a shell company,2 including all of the corporate stock, 

create false nominee owners of the stock, and trade the stock back 

and forth between the nominees and O'Kelly in order to manipulate 

the market. (Appellee's Addendum, Exh. 1-2A). The inflated stock 

was then to be used as collateral to partially secure a large 

offshore bank loan.3 Sneed agreed to locate a shell company. He 

was to receive at least $2,500 when a letter of intent for the 

purchase of the shell was signed and ten percent of the net loan 

proceeds (approximately $147,000) when the bank loan was obtained.4 

2 A 11 shell 11 company is an inactive or defunct corporation with 

little or no assets which carries on no business activity. 

3 In the typical instance, the control group of a 11 boxed11 public company manipulates the price of the stock to some target 

price and then 11 retails 11 the stock, through cooperating brokers, 

to real public investors. Once the conspirators have their proceeds from selling the worthless stock to the public, the stock's 

alleged 11 value 11 crashes to zero. 

In the Monarch sting operation, because the FBI wanted to 

avoid exposing public investors to the fraudulent scheme, it used 

the offshore bank loan as the financial incentive. 

4 Sneed received $7,115.66 over the course of the scheme. 

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From January to April, 1989, Sneed introduced O'Kelly to a 

number of people who had "boxed" companies or other corporate vehicles for sale. For various reasons, these companies were not 

suitable. In April, 1989, by telephone, Sneed introduced O'Kelly 

to Brent Gundersen (Gundersen) from Salt Lake City, Utah, whom 

Sneed learned about through Herman Graulich (Graulich),S a 

marketmaker with Morgan Gladstone & Co., Inc., Boca Raton, 

Florida.6 Gundersen agreed to provide O'Kelly with a shell 

company for $40,000, with a $20,000 down payment and a final 

$20,000 payment when the company's stock was listed in Standard & 

Poors and ready to trade. Gundersen also offered to supply 

O'Kelly with a few more shareholders if needed. 

On April 26, 1989, O'Kelly and Sneed flew to Salt Lake City 

to meet with Gundersen. Gundersen told O'Kelly and Sneed that he 

could deliver one hundred percent of the stock of a defunct company, Androids, which he could get in the Pink Sheets.? Gundersen 

also related that he could provide documents to provide credibility to the company, such as certified financial statements, a 

listing in Standard & Poors, and an attorney's opinion, or 

tradeability letter. 

5 Gundersen and Graulich were jointly tried and convicted with 

Sneed for their participation in the Monarch scheme. Their related appeals are addressed separately. 

6 A marketmaker is a broker-dealer that holds itself out to the 

investing public as willing to buy and sell the particular penny 

stock. This is also known as "making a market" in the stock. 

7 The Pink Sheets are a daily publication of the National Quotation Bureau (NQB), a private company. Printed on pink paper, 

the pink sheets list penny stocks, their marketmakers, and their 

price. 

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Gundersen worked with Eldon Weber {Weber)8 and others to nrevive 11 the company and prepare the necessary corporate history and 

documentation in the names of nominee shareholders, officers, and 

directors. Androids' back taxes and reinstatement fees were paid 

by Gundersen and he bought 11 Shareholders's 11 signatures. Gundersen 

created and backdated various false documents such as stock certificates and minutes of directors's and shareholders's meetings. 

Through the false documentation, Gundersen was able to obtain an 

attorney's opinion letter which indicated that the stock could be 

freely and publicly traded because the shareholders had owned the 

restricted insider stock for the required holding period. 

Androids' name was changed to Monarch Acquisitions, Inc. 

During May and June, 1989, Sneed and Gundersen recruited Sam 

Pandolfo9 {Pandolfo) in Denver and Graulich in Florida to assist 

in the scheme. For a fee, Pandolfo was to get the company listed 

in the Pink Sheets and Graulich was to arrange the marketmakers 

and orchestrate the prearranged trades in the company's stock. 

During this time period, Sneed prepared Monarch's business plan. 

During the summer, Sneed and Graulich recruited marketmakers 

and cooperating brokers to trade Monarch's stock. The marketmakers were to go into the Pink Sheets and make a market in the 

stock, and the retail brokers were to open nominee accounts to 

execute trades where both the buyers and sellers were controlled 

by the Monarch participants. Pandolfo's firm, General Bond & 

8 Weber pled guilty to this securities fraud scheme, cooperated 

with the government, and testified at trial about Gundersen's creation of bogus shell companies. 

9 Pandolfo, another joint defendant, was acquitted at trial. 

-5-

Appellate Case: 93-1058 Document: 01019285216 Date Filed: 09/13/1994 Page: 5 
Share Co., was to be the first marketmaker to go in the "pinks." 

Sneed arranged for Harold Fisher (Fisher) of Roth Securities, 

Sarasota, Florida, to act as a marketmaker, and recruited Peter 

Schwartz (Schwartz} of J. W. Gant & Associates, Inc., Greenwood, 

Colorado, to open retail "buying" accounts.10 Graulich opened a 

nominee account for "Michael Moss" at Morgan Gladstone & Co., 

Inc.11 and also arranged for Kashner Davidson Securities Corp., 

Sarasota, Florida, to act as a third marketmaker. 

By the latter part of July, Sneed had prepared a detailed 

written schedule for the first week of controlled, prearranged 

trades in Monarch's stock. Sneed planned to take Monarch from 

three cents to twenty-five cents a share in only one week. In 

August, Graulich reviewed the schedule and recommended that 

several changes be made. Graulich also suggested the use of 

cashier's checks in the nominees' names to make the money tracing 

more difficult. 

In September, 1989, final preparations were made. On September 14, Pandolfo submitted the false 15c 2-11 form12 to the NQB 

and his firm, General Bond & Share, entered the Pink Sheets as 

Monarch's lead marketmaker. Prior to the October 10, 1989, 

10 Fisher and Schwartz pled guilty to securities fraud for their 

part in the Monarch scheme. 

11 Michael Moss was an assumed name used by one or more FBI 

special agents during the course of this investigation. 

12 A "15c 2-11" is a form that 

each broker-dealer who wishes to 

a particular stock. It contains 

company and its stock, as well 

for the stock. 

must be filed with the NQB by 

be identified as a marketmaker in 

general information about the 

as the basis for the price quoted 

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trading date, some modifications were made to the trading schedule. 

On October 10, 1989, Sneed joined O'Kelly at Monarch's office 

in Denver and directed the day's activity. Graulich and Pandolfo 

had General Bond & Share make the first trade. On October 11, 

Sneed placed prearranged trades with Schwartz at J. W. Gant & 

Associates, Inc. That same day, Scott Fitzpatrick (Fitzpatrick)13 

opened a nominee account for "John Pergram" at Tri-Bradley Investments, Inc., Englewood, Colorado, and agreed with O'Kelly to trade 

the stock. The trading continued to October 12, when Fitzpatrick 

purchased 20,000 shares in the "John Pergram" account, for twelve 

cents a share. 

In five trades over the three trading days, the scheme sueceeded in moving the price of Monarch's stock, of which there were 

7,500,000 shares issued and outstanding, from five cents to twelve 

cents a share for a total "value" of $900,000. On October 13, 

1989, the SEC, by prior arrangement with the FBI, suspended 

trading to prevent any possible public trading. In telephone 

conversations after the suspension, Gundersen and Graulich encouraged O'Kelly not to worry, and said that they should just lay 

low and could resume trading in a few days. Gundersen told 

O'Kelly, "We're all covered [and) I can provide any 

documents [t]hat they have questions about." (Appellee's 

Addendum, Vol. 2, Tab 1-67A at 4). 

13 Fitzpatrick pled guilty to a felony false books and records 

charge for his involvement in the Monarch scheme. 

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ISSUES 

Sneed frames the issues on appeal as: (1) Did the trial court 

err in denying Sneed's Motion to Dismiss the Indictment based on 

the outrageous conduct of the government; {2) Did the trial court 

err in allowing the peremptory challenge of a juror, Ms. Low; {3) 

Did the trial court err in denying Sneed's Motion for Discovery; 

(4) Did the trial court err in allowing certain prejudicial 

opinion testimony of FBI Special Agent Coffey; and (5) Was the 

sentence imposed by the court improper as a matter of law? 

I. 

Sneed contends that the trial court erred in denying his 

Motion to Dismiss the Indictment based on outrageous governmental 

conduct because the governmental agents created, engineered, and 

directed the undercover sting operation from start to finish. 

Sneed maintains that the governmental conduct in this instance is 

so grossly shocking and outrageous that it violates the Due 

Process Clause of the Fifth Amendment of the United States 

Constitution and should bar his conviction. 

The issue of whether a law enforcement agent's conduct is 

outrageous is reviewed de novo. United States v. Diggs, 8 F.3d 

1520, 1523 {lOth Cir. 1993). 

When the government's conduct during a sting operation is 

sufficiently outrageous, the courts will not allow the government 

to prosecute the crimes which are the result of that conduct. 

United States v. Mosley, 965 F.2d 906, 908 (lOth Cir. 1992). Under those circumstances, a defendant may assert the outrageous 

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governmental conduct defense, which is based on the Due Process 

Clause of the Fifth Amendment to the United States Constitution. 

Id. at 908-09. The outrageous governmental conduct defense is 

distinct from the entrapment defense because the entrapment 

defense considers the predisposition of the defendant to commit 

the crime. Id. at 909; see Jacobson v. United States, U.S. 

112 S. Ct. 1535, 1540 (1992). In contrast, the outrageous 

governmental conduct defense looks only at the government's conduct. Mosley, 965 F.2d at 909. 

The outrageous governmental conduct defense was first 

described in United States v. Russell, 411 U.S. 423, 431-32 

(1973). In a later plurality decision, Hampton v. United States, 

425 U.S. 484 (1976), the concurring opinion left open the 

possibility that an outrageous governmental conduct defense based 

on the Due Process Clause might be successfully invoked despite 

the unavailability of the entrapment defense due to 

predisposition. Id. at 494-95. 

The outrageous governmental conduct defense "is an extraordinary defense reserved for only the most egregious circumstances. 

It is not to be invoked each time the government acts deceptively 

or participates in a crime that it is investigating. Nor is it 

intended merely as a device to circumvent the predisposition test 

in the entrapment defense." Mosley, 965 F.2d at 910. 

In Mosley, we observed that "two factors . form the underpinnings for most cases where the outrageous conduct defense 

has been upheld: government creation of the crime and substantial 

coercion." Id. at 911. 

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A. Government Creation of the Crime 

Government creation of the crime occurs when there has been 

excessive governmental 

solely to prosecute it 

involved in the crime 

involvement in generating a new crime 

or in inducing a defendant to become 

for the first time, rather than merely 

interposing itself in an ongoing criminal enterprise. Excessive 

governmental involvement occurs when the government engineers and 

directs the criminal enterprise from start to finish and the 

defendant contributes nothing more than his presence and 

enthusiasm. United States v. Harris, 997 F.2d 812, 816 (lOth Cir. 

1993). See, e.g., United States v. Lard, 734 F.2d 1290, 1296-97 

(8th Cir. 1984) (stating, in dicta, that an alternative ground for 

reversing the conviction was that the governmental conduct 

approached being sufficiently outrageous to sustain a due process 

defense because the government agent's over-involvement in 

conceiving and contriving the crimes was aimed at creating new 

crimes for the sake of bringing criminal charges against the 

defendant); United States v. Twigg, 588 F.2d 373, 381 (3d Cir. 

1978) (determining that fundamental fairness prevented a defendant 

from being convicted because of outrageous governmental conduct 

where the government agent supplied the necessary ingredient, 

purchased almost all of the other supplies, established the lab, 

and was the only person with the knowledge necessary to manufacture methamphetamine); Greene v. United States, 454 F.2d 783, 786-

87 (9th Cir. 1971) (determining that the government was barred 

from prosecuting the defendants because the government permitted 

itself to become enmeshed in criminal activity from beginning to 

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end when the government helped to reestablish and sustain bootlegging operations in which the government was the only customer) . 

It is not excessive governmental involvement for the 

government "to infiltrate an ongoing criminal enterprise" or "to 

induce a defendant to repeat or continue a crime or even to induce 

him to expand or extend previous criminal activity." Mosley, 965 

F.2d at 911. Moreover, the government can suggest the illegal 

activity, can provide supplies and expertise for the activity, and 

can act as both supplier and buyer in sales of illegal goods in 

order to induce the defendant to repeat, continue, expand, or 

extend the criminal activity. Id. at 911-12. 

Here, the FBI was aware of the fraud and abuses which were 

occurring in the Rocky Mountain penny stock market. The 

investigation was designed to uncover ongoing criminal behavior, 

not to manufacture a new crime. To this end, the FBI established 

Monarch Investment Services as a front organization with O'Kelly 

engaging in appropriate conduct to maintain this front and his 

undercover role. Through O'Kelly, the FBI implemented the 

scenario of a crooked businessman looking for a "boxed" public 

company in order to manipulate its stock through arranged nominee 

trades. 

Though the FBI initiated the contact and admittedly outlined 

the basic plan to Sneed, he readily adapted and refined the suggested plan, adding the crucial details in order to make it work 

smoothly. Sneed had a direct, active, and primary role in organizing and planning the Monarch fraud. He acted as a finder in 

searching for a shell corporation, he recruited marketmakers and 

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other key players, he devised Monarch's business plan and trading 

schedule, and he orchestrated the trades. The government simply 

provided Sneed an opportunity to commit the securities fraud, 

which he fully embraced. 

B. Coercion 

We next consider whether the government's means of influencing the defendant into participating in the scheme were substantially coercive to the point of being outrageous. The coercion, 

"must be particularly egregious before it will sustain an outrageous conduct defense." Mosley, 965 F.2d at 912. 

Sneed contends that he was coerced by O'Kelly into becoming 

involved because he was told that he would receive $147,000 when 

the loan was received and at least $2,500 when he obtained a 

signed letter of intent for the acquisition of the shell corporation. Sneed argues that O'Kelly also coerced him when, in June, 

1989, O'Kelly became enraged with him and told him that if he 

wanted $147,000, he had better plan on doing some work to get it 

done. 

The district court found that the defendants's hoped-for gain 

"was a negotiated amount," and the defendants "had at least as 

much input into the figure as the Government." United States v. 

Sneed, 814 F. Supp. 964, 979 (D. Colo. 1993). We agree with the 

district court that the amount of the compensation was negotiated. 

The government did not unilaterally set a figure excessively high 

with the purpose of coercing Sneed into assisting in the scheme. 

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Moreover, O'Kelly's comment to Sneed was completely consistent with his undercover role as a crooked businessman dealing 

with a conspirator who was not doing what he had promised to do in 

return for his fee. Sting operations, though necessarily deceptive, are an effective law enforcement tool to uncover securities 

fraud. As in the investigation of illicit narcotics trafficking, 

gathering after-the-fact evidence of illegal manipulation of penny 

stocks would be an all but impossible task. In fact, without an 

undercover agent or cooperating insider, stock manipulation would 

be even more difficult to detect than narcotics trafficking because of the large numbers of legal transactions occurring simultaneously. We hold that neither the compensation amount nor 

O'Kelly's conduct was substantially coercive. 

Accordingly, we hold that the governmental conduct was not 

sufficiently outrageous, if at all, to reach the level of fundamental unfairness violative of the Due Process Clause of the Fifth 

Amendment to the United States Constitution. 

II. 

Sneed contends that the trial court erred in allowing the 

peremptory challenge of a juror, Ms. Low, who is Chinese-American. 

Sneed argues that the defense made a timely objection to this peremptory challenge and the defense made the required prima facie 

showing of discrimination. 

During jury selection, Ms. Low was called to the jury box for 

voir dire. (Appellant's App., Vol. 22 at 124). At a sidebar conference, Ms. Low stated that her husband had a felony charge 

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before they were married but that she would rather not divulge it. 

Id. at 125. The prosecution subsequently exercised a peremptory 

challenge to excuse her. Id. at 128. 

After Ms. Low left the courtroom and another potential juror 

had been questioned, co-defendant Gundersen's counsel objected to 

the government's peremptory challenge of Ms. Low under Batson v. 

Kentucky, 476 U.S. 79 (1986) (Equal protection clause forbids the 

prosecutor from challenging potential jurors solely on account of 

their race). The basis for his objection was that Ms. Low 

appeared to be the only Asian-American on the panel. 

App., Vol. 22 at 131-32). 

(Appellant's 

After some discussion outside the presence of the jury, the 

district court asked the prosecutor to explain his reasons for the 

challenge. The prosecutor stated that Ms. Low had a close relative who had a pending felony charge, and that Ms. Low was uncomfortable about discussing it. Id. at 134-35. When the district 

court corrected the prosecutor and said that her husband's felony 

charge was in the past, the prosecutor stated that the main reasons for the peremptory challenge were: that Ms. Low's husband was 

the person charged, the charge itself, and the fact that she asked 

to approach the bench and had a problem with discussing it 

openly. Id. at 135. Gundersen's attorney asked that Ms. Low be 

brought back for additional questioning. Id. at 136. The 

district court agreed to have the clerk attempt to get her back, 

but Ms. Low could not be reached quickly enough to prevent a delay 

in the jury selection process and the trial. 

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After the lunch recess, the district court held a conference 

to address the issue of Ms. Low's peremptory challenge. Id., Vol. 

21 at 4. The prosecutor again explained that he had misunderstood 

Ms. Low's response to the felony charge question and thought at 

first that she said she had a pending felony charge against her. 

However, the prosecutor said there were independent, specific, and 

articulable reasons that were racially neutral. Id. at 5. The 

prosecutor continued to support the peremptory challenge because 

of her husband's prior felony matter. Also, his intuition told 

him that she would be more sympathetic towards the defense because 

she worked in the counseling field and lived in Boulder, Colorado, 

commonly known as a liberal community. Id. at 6. 

The district court ruled that the defendants's challenge was 

untimely because Ms. Low had already been excused from the courtroom and because the defense could have made the objection 

earlier. Id. at 9. The district court also ruled that the 

defendants had not made a prima facie showing, in that the defendants had not met their burden of proving that the United 

States had intentionally challenged Ms. Low on the basis of race 

or national origin. Id. at 11-12. Furthermore, the district 

court found that the prosecutor's explanation was adequate and in 

good faith and that the government's exercise of the peremptory 

challenge was reasonable under the circumstances. 

For purposes of our analysis, we may assume, 

ing, that the defense counsel's objection to 

challenge was timely. 

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without decidthe peremptory 

Appellate Case: 93-1058 Document: 01019285216 Date Filed: 09/13/1994 Page: 15 
Then, under Batson, 476 U.S. at 96-98, once a defendant has 

established a prima facie case by showing that the prosecutor has 

exercised peremptory challenges on the basis of race, the burden 

then then shifts to the prosecution to provide a race neutral 

explanation for its strikes. This accomplished, the trial court 

must determine whether the defendant has carried his burden of 

proving purposeful discrimination. Id. at 98. 

The defendant need not establish a prima facie case, the 

threshold under Batson, in every instance, if the other two prongs 

have nevertheless been met. "Once a prosecutor has offered a 

race-neutral explanation for the peremptory challenges and the 

trial court has ruled on the ultimate question of intentional discrimination, the preliminary issue of whether the defendant had 

made a prima facie showing becomes moot." Hernandez v. New York, 

111 S. Ct. 1859, 1866 (1991). 

Moreover, in examining the prosecutor's explanation, 

"[u]nless a discriminatory intent is inherent in the prosecutor's 

explanation, the reason offered will be deemed race neutral." Id. 

Once a race neutral reason is offered, "the trial court's 

decision on the ultimate question of discriminatory intent 

represents a finding of fact of the sort accorded great deference 

on appeal .... " Id. at 1868-69. In making its determination, 

the district court can consider whether the prosecutor's 

explanation is a mere pretext for race-based peremptory 

challenges. Id. at 1868. The trial court's findings on the issue 

of discriminatory intent largely turn on an evaluation of the 

prosecutor's credibility. Id. at 1869. 

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We review de novo whether the prosecutor's explanation is 

facially race neutral. We then review the district court's ruling 

that the prosecutor did not intend to discriminate under the 

clearly erroneous standard. United States v. Johnson, 4 F.3d 904, 

913 (lOth Cir. 1993), cert. denied, 114 S. Ct. 1082 (1994). 

Here, the issue of whether the defendants established a prima 

facie case of discrimination is moot because the prosecutor gave 

his explanation of the peremptory challenge of Ms. Low and the 

district court ruled on the ultimate question of intentional 

discrimination. 

The prosecutor stated that he, mistakenly, thought that Ms. 

Low had a pending felony charge. When corrected, he stated that 

he had other independent, specific, and articulable reasons. Irrespective of who the felony charge involved, the prosecutor was 

also concerned about Ms. Low's discomfort in discussing the charge 

as evidenced by her request for a sidebar conference, her profession in the counseling field, and the fact that she lived in Boulder. Because a discriminatory intent is not inherent in the 

prosecutor's explanation, we deem it race neutral as a matter of 

law. 

The district court found that the prosecutor's explanation 

was adequate and in good faith and that the government's exercise 

of the peremptory challenge was reasonable under the 

circumstances. The district court determined that the prosecutor 

was credible. Based on the record before us, we hold that the 

district court's determination is not clearly erroneous. 

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Accordingly, we hold that there was no Batson error in allowing 

the prosecution's peremptory challenge of Ms. Low. 

III. 

Sneed contends that the trial court erred in denying his 

Motion for Discovery. Sneed claims that he was induced and 

encouraged by Cavanaugh to participate in this sting operation as 

a government agent and therefore he had no intent to defraud. In 

support of his defense, Sneed claims that the government has 

exculpatory taped conversations from the summer and fall, 1988, 

between Sneed, Cavanaugh, informant Gene Humphrey, "Michael Moss," 

and/or other government agents. Though the government denies the 

existence of any such exculpatory tapes, Sneed claims that because 

all of his conversations with O'Kelly were taped, the other tapes 

must exist also. 

During an in camera hearing to discuss Sneed's discovery 

request, the government disclosed that one taped conversation 

existed in which Cavanaugh introduced "Michael Moss" to Barry 

Fortner, an individual in the Denver penny stock market who was 

being investigated in a separate undercover operation. The 

government stated that this taped conversation would arguably fall 

within Sneed's discovery request which provided, in pertinent 

part: 

2. All documents and tangible objects defined in Fed. 

R. Crim. P. 16(a) (1) (C), which have not already been 

provided to Defendants including but not limited to any 

and all reports compiled by law enforcement authorities 

in the investigation and preparation of this case, including rough notes and typed reports, concerning the 

following: 

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* * * 

b. Anthony Cavanaugh 

and conversations concerning 

other hotel groups. 

and Barry Fortner meetings 

corporate purchases for 

* * * 

(Appellant's App., Doc. 17 at 2). 

The district court ruled that disclosure of this tape would 

jeopardize the separate ongoing investigation and that the tape 

was not relevant to Sneed or the Monarch transactions. 

(Appellant's App., Vol. 53 at 21-22). In making its ruling, the 

district court relied on the representations of the Assistant 

United States Attorney which were supported by the affidavits of 

Agents Coffey and Witkowsky. The district court did not review 

the tape, did not require the agents to give sworn testimony on 

this issue, and did not require the government to turn the tape 

over or include a transcript of it in the record. The district 

court sealed the evidence and the transcript of the in camera 

proceeding. 

We review de novo Sneed's claim that the government failed to 

disclose evidence favorable to the accused in accordance with 

Brady v. Maryland, 373 U.S. 83 (1963). United States v. DeLuna, 

10 F.3d 1529, 1534 (lOth Cir. 1993). 

To establish a Brady violation, the defense must prove that: 

(1) the government suppressed the evidence; (2) the evidence would 

have been favorable to the defendant; and (3) the suppressed evidence was material. DeLuna, 10 F.3d at 1534. 

With regard to the alleged tapes of conversations from the 

summer and fall of 1988, Sneed has failed to establish the first 

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Brady requirement. The attorneys for the United States, as 

officers of the court, have denied that any relevant tapes exist. 

A statement by Agent Coffey that it is a general policy of the FBI 

to tape conversations depending on the circumstances is 

insufficient to prove that other conversations were recorded. 

With regard to the taped conversation which the government 

disclosed at the in camera hearing, Sneed has shown that the 

evidence was suppressed. However, Sneed has failed to establish 

that the evidence would have been favorable to him or that the 

evidence was material, the second and third Brady requirements. 

The only evidence in the record, the affidavits of the government 

agents, shows that Barry Fortner was not involved with Sneed in 

the Monarch scheme. Thus, the taped conversation with this individual was neither exculpatory nor was it material to the Monarch scheme. 

Accordingly, we hold that the facts of this case do not 

constitute a Brady violation. 

IV. 

Sneed asserts that the district court erred in allowing 

certain opinion testimony of Agent Coffey. Sneed claims that the 

statements he made to Agent Coffey (O'Kelly), were clear and 

straightforward statements which showed that Sneed was acting as a 

government agent and therefore could not have had a specific intent to defraud. Sneed contends that because the jury heard Agent 

Coffey's interpretation of Sneed's statements, rather than looking 

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at the clear statements themselves, the jury was not allowed to 

form its own conclusions regarding specific intent. Sneed argues 

that the admission of this testimony violated Fed. R. Evid. 701. 

"[T]he admission of lay opinion testimony is within the sound 

discretion of the trial court and will not be overturned on appeal 

absent a clear abuse of discretion." United States v. Hoffner, 

777 F.2d 1423, 1425 (lOth Cir. 1985). 

Fed. R. Evid. 701, Opinion Testimony by Lay Witnesses, provides: 

If the witness is not testifying as an expert, the 

witness' testimony in the form of opinions or inferences 

is limited to those opinions or inferences which are (a) 

rationally based on the perception of the witness and 

(b) helpful to a clear understanding of the witness' 

testimony or the determination of a fact in issue. 

A witness may base his testimony upon his perceptions of 

conversations and, thus, may clarify conversations that are abbreviated, composed of unfinished sentences and punctuated with 

ambiguous references to events that were clear only to the conversation participants. United States v. Awan, 966 F.2d 1415, 

1430 (11th Cir. 1992). The accuracy of those perceptions is a 

question for the jury. Id. 

Sneed cites United States v. Dicker, 853 F.2d 1103, 1110 (3rd 

Cir. 1988) in which the court held that when the undercover agent 

"simply ascribed his own, illicit meaning to straightforward, 

potentially legitimate statements," such testimony "was surely 

prejudicial, and was not helpful to a clear understanding of the 

testimony. " 

We have a different situation here. Sneed directs us to 

specific portions of the record in which counsel for each of the 

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defendants were cross-examining Coffey. we have excerpted 

portions of this cross-examination to illustrate the context in 

which Coffey's opinion and interpretation of the events occurred. 

For example: 

Q (by Ms. Clark for Defendant Sneed): Well, but Mr. 

Sneed also discussed general compliance requirements, 

didn't he? 

Coffey: He talked about things that we would have to 

do in the way of filings for the company. 

Q: Right. And, those were things that you had to do 

in order to keep the whole deal legal, correct? 

Coffey: Filing the paperwork with the Securities & 

Exchange Commission or a marketmaker, whoever it is, was 

kind of like closing the barn door after the horses were 

out in this case. We were talking about market manipulation, moving the price, controlling the stock. 

That was simply paperwork that had to be done. 

(Appellant's App., Vol. 32 at 58). 

Q (by Mr. Lane for Defendant Gundersen): You said he 

already offered to sell you a box, 100 percent control 

of the corporation; is that correct? 

Coffey: Correct. 

Q: And, you took that to mean he knew what he was 

doing was illegal, there's something wrong with that, it 

that correct? 

Coffey: I understood a 100 percent box company from 

every broker and every person I ever met in the industry 

to be clearly illegal. 

Id., Vol. 33 at 669. 

Q (by Mr. Lane for Defendant Gundersen): 

Brent said indicated that this is a bogus 

note? 

Something 

promissory 

Coffey: Well, he said, sir, with it later, you know, 

you're really flexible to do--

The Court: Where are you reading from? 

Mr. Lane: The middle of page 14, Your Honor. 

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Coffey: The middle of page 14. Gundersen entry beg1nn1ng, so, we have our new board of directors, give a 

promissory note. We give them the investment stock and 

then we could deal with it later. You know, you can--

you're really flexible to do. 

Q: And, that means this is a bogus promissory note? 

Coffey: That's what I understood he was suggesting to 

me that the promissory notes would be put in after the 

new board was--I would have flexibility as to what to do 

with those notes. 

* * * 

Q: Did Brent Gundersen suggest that you were dishonest 

person or that--let me just make sure I understand this. 

This sentence right here, where he says give a promissory note and then you're flexible, that doesn't mean 

you're flexible because you have a lot of cash in your 

pocket that you didn't have before then, it would all be 

put in the promissory note. You didn't take it to mean 

that, did you? 

Coffey: I took the whole conversation to mean he 

needed assets to get the company listed in Standard and 

Poors and that was the easiest way to do it, create 

those and I'd be flexible to do whatever I wanted with 

them, down the road. 

Id. at 690-91. 

Q (by Mr. Lane for Defendant Gundersen): Well, on 

this tape on April 26th, doesn't Brent Gundersen also 

talk to you about putting cash into the corporation? 

Coffey: He talks about putting assets into the corporation. 

Q: Doesn't Brent Gundersen specifically say--and I 

refer to page 38--"Yeah, if we put a note, that's what 

I've been doing. Usually you put a promissory note with 

a little cash in there," is that correct? 

* * * 

Q: So he's--is this bogus cash or is this real cash 

he's talking about, in your estimation? 

Coffey: We talked about assets and other connections 

there, too. I understood that, no, they didn't have to 

be legitimate .... 

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Id., Vol. 34 at 14. 

Q (by Mr. Lane for Defendant Gundersen): You tell me 

if you can't answer this with a yes or no, and then 

we'll proceed from there. But let me just ask you very 

simply, aren't you telling Brent Gundersen that you've 

got investors coming from different states, and so because of that fact, you're concerned about where Standard & Poors covers, yes or no? Isn't that what you're 

telling Brent Gundersen, in essence? 

Coffey: When you say 11 in essence, 11 sir, it's not a yes 

or no question. I say those words. The reason I have 

difficulty with it is I don't think I conveyed that 

these were legitimate, true investors in the common 

sense. 

Q: I see. So what you're in essence saying, then, is 

that Brent should have known that these investors you're 

talking about were bogus, phony investors, and they 

weren't real people; is that it? 

Mr. Rafferty (for the government): Your Honor, 

what Mr. Gundersen should have known is speculation on 

the part of the agent. I object. 

Id., Vol. 35 at 862-63. 

Q (by Ms. Bradley for Defendant Graulich): And [Sneed] 

says, 11 All we have to do is each market-maker 11 --he's 

going--that he's going to be supplied with the 215 forms 

and then the other market-makers just all submit their 

215 forms, right? 

Coffey: Correct, something to that effect. 

Q: There's nothing illegal about that, is there? 

Coffey: He's talking 

understood that in some 

breaking a regulatory 

given me. 

about circumventing a rule. I 

fashion, he was violating or 

rule, is the impression he had 

Q: Do you think--do you think it's illegal for--well, 

do you think it's improper--

Rafferty (for the government): Your Honor, I 

object. Pardon me, Ms. Bradley. I object to what this 

agent thinks. 

Id., Vol. 38 at 1106. 

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From this record, Coffey was asked by defense counsel to 

clarify conversations which were on tape. The taped conversations 

were not clear and unambiguous statements. In light of the complex transactions involved here, Coffey's opinions were helpful to 

the jury in order for the jurors to get a clear understanding of 

Coffey's remarks. Further, the record does not show that Sneed 

was acting as a government agent as part of the sting operation. 

Accordingly, we hold that the district court did not abuse its 

discretion in allowing such testimony. 

Moreover, it is clear that Coffey's opinion testimony was 

solicited by defense counsel. 

occasions, the prosecution 

using this unorthodox method 

We also note that, at least on two 

objected to this questioning. After 

of cross-examination, the defense 

cannot now successfully claim that the district court should have 

policed this witness's answers more thoroughly. 

v. 

Sneed was sentenced to 33 months imprisonment, 3 years supervised release, and was fined $15,000 with a special assessment 

of $200.00 for the convictions of aiding and abetting securities, 

mail, and wire fraud. 

A. 

Sneed argues that the sentence 

matter of law because the district court 

imposed was improper as a 

failed to follow the 

statutory and precedential procedures established for application 

of the 1988 United States Sentencing Guidelines (Guidelines). 

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The district court applied U.S.S.G. § 2F1.1 (Nov. 1988). 

From a base offense level of 6, the district court added 2 levels 

for the offense characteristic of more than minimal planning 

pursuant to U.S.S.G. § 2F1.1(b) (2) and 4 levels for his leadership 

role in the offense pursuant to U.S.S.G. § 3B1.1(a) (Nov. 1988). 

The district court applied the "zero" loss adjustment pursuant to 

U.S.S.G. § 2F1.1(b) (1) because, under this sting operation, there 

could be neither actual loss to real victims nor true intended 

loss. Under the authority of U.S.S.G. § 2F1.1 comment (n. 9) 

(Nov. 1988) ("Dollar loss often does not fully capture the 

harmfulness and seriousness of the conduct. In such instances, an 

upward departure may be warranted.), the district court ruled that 

because Sneed had negotiated for and anticipated receiving 

$147,000, this amount would be used to justify a 6 level upward 

departure. Based on the final adjusted offense level of 18, the 

district court imposed the maximum sentence of 33 months. 

Sneed maintains that the 6 level upward departure pursuant to 

U.S.S.G. § 2F1.1f, Comment (n.9) (Nov. 1988) was improper because 

the court failed to identify specific aggravating circumstances 

which were not taken into consideration by the Guidelines, failed 

to adequately state the reasons for the departure, failed to 

properly apply the Guidelines, and failed to follow the mandates 

of certainty and fairness set forth by Congress. Sneed argues 

that the district court's departure based on either anticipated 

gain to Sneed or nonexistent loss to an offshore bank is contrary 

to law and must be reversed because the Guidelines do not speak to 

hypothetical criminal offenses. 

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The government argues that the district court should have 

enhanced Sneed's sentence based on intended loss, rather than 

determining that "the correct loss in an undercover 'sting' 

operation ... is zero." Sneed, 814 F. Supp. at 970-71. 

In United States v. Galbraith, 20 F.3d 1054, 1058-60 (lOth 

Cir. 1994), petition for cert. filed (U.S. July 14, 1994) (No. 94-

5179), we specifically endorsed the approach used by the district 

court in Sneed. Accordingly, we agree that the intended loss here 

is zero and will examine only the upward departure under U.S.S.G. 

§ 2Fl.lf, comment (n.9) (Nov. 1988). 

We review the district court's upward departure in three 

steps. United States v. Tisdale, 7 F.3d 957, 961 (lOth Cir. 

1993), cert. denied 114 S. Ct. 1201 {1994). First, we determine 

whether the circumstances cited by the district court warrant a 

departure from the Guidelines as a matter of law. Second, we 

review the court's factual determinations underlying the asserted 

justification for departure to determine if they are supported by 

the record. Third, we determine whether the degree of departure 

is reasonable. Id.; see 18 U.S.C. § 3742(e). 

In Sneed, the district court ruled: 

In applying the fraud guideline, I have concluded 

that the proper loss figure for a "sting" operation, 

structured as this one was, is zero. I have done so 

largely on the premise that there was never any possibility of a real loss to a real victim and that use of 

a fictional loss figure invented largely by Government 

agents would effectively permit them to set the loss 

figure. I nonetheless recognize that a figure of zero 

is almost as fictional, in terms of defendants' culpability, because it attributes the same level of loss to 

this intricate, carefully-executed scheme as I would 

attribute to a bank teller who embezzled $500 from his 

or her cash drawer on a single occasion. While other 

guideline adjustments {more than minimal planning, for 

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example) may account for part of the difference in the 

two situations, I still think some degree of departure 

is required to account for the seriousness of these 

defendants' conduct. 

Sneed, 814 F. Supp. at 979. 

We agree. Therefore, under step one, sting operations which 

expose fraud are not adequately addressed in the Guidelines 

because the result is an intended loss of zero. A zero loss does 

not adequately address the seriousness of Sneed's conduct as a 

matter of law. 

Under the second step, we review the court's factual determinations underlying the asserted justification for departure to 

determine if they are supported by the record. Here, the district 

court's justification for an upward departure is the seriousness 

of Sneed's conduct. In the record, there is evidence that Sneed 

was involved in the entire scheme from the beginning, that he 

located a shell company, arranged for a company to "pink" the 

stock, prepared Monarch's business plan, recruited marketmakers 

and brokers, prepared a schedule of trading, and directed the 

actual trading. Though Sneed received a separate enhancement for 

his role in the offense, in light of the Guidelines failure to 

adequately address "loss 11 under this sting operation, there is 

sufficient evidence in the record to support the district court's 

justification for upward departure. 

Under the third step, we determine whether the degree of 

departure is reasonable. The district court reasoned: 

Assuming that the facts here warrant a departure 

from the guidelines, the remaining issue concerns the 

degree of departure. Because the rationale for departure is rooted in the inadequacy of the calculated loss 

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figure to reflect the seriousness of defendants' conduct, I believe the degree of departure must be explained in terms related to the concept of loss. I have 

already concluded that the loss figures preferred by the 

parties were either wholly unintended or wholly unrealistic. The amount of the bank loan, for example, was 

determined by the Government, not defendants; as a 

practical matter, defendants (especially Mr. Gundersen 

and Mr. Graulich) were undoubtedly indifferent concerning the amount or terms. Their main concern was the 

money they were to receive in the scheme. This was a 

negotiated amount. Defendants had at least as much 

input into the figure as the Government. Indeed, the 

Government's incentive was to negotiate hard for a lower 

amount; the defendants', for a higher amount. There is 

some justice in saying that each defendant should be 

stuck with the amount he negotiated for himself, even 

though the overall harm could never be accomplished. In 

fact, Mr. Gundersen and Mr. Graulich received the bulk 

of the fixed sum for which they bargained. Mr. Sneed 

did not and could not, given the impossibility of the 

scheme and the fact that he had hitched his wagon to it, 

but that was what he negotiated. I view Mr. Sneed's 

conduct as substantially more culpable than Mr. 

Gundersen's or Mr. Graulich's precisely because he 

bargained for a percentage arrangement that gave him a 

direct economic interest in seeing that the scheme 

succeeded. His greater anticipated share of the intended profits reflects that greater culpability. 

Id. at 979-80. 

We agree and hold that the amount of the upward departure was 

reasonable based on the rationale used by the district court. 

Sneed also argues that the district court's departure based 

on a nonexistent loss to an offshore bank is contrary to law and 

must be reversed because the Guidelines do not speak to hypothetical criminal offenses. However, taking Sneed's argument to 

its conclusion, no individual convicted in a sting operation could 

be sentenced under the Guidelines because, in essence, all sting 

operations are hypothetical criminal offenses. 

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Further, Sneed argues that the case of United States v. 

Haddock, 12 F. 3d 950 (lOth Cir. 1993) prevents the use of anticipated gain as a measure of loss. In Haddock, we stated that 

"enhancement is only for loss to victims, not for gain to 

defendants. The defendant's gain may be used only as an 

'alternative estimate' of that loss; it may not support an 

enhancement on its own if there is no actual or intended loss to 

the victims." Id. at 960. However, Haddock addressed comment (n. 

8) to U.S.S.G. § 2Fl.l and did not involve a sting operation. 

Here, the district court properly used the $147,000 anticipated 

gain merely as a gauge to measure the seriousness of Sneed's 

conduct under U.S.S.G. § 2Fl.lf, comment (n. 9). We affirm the 

district court's upward departure of Sneed's sentence. 

B. 

Sneed argues that the $15,000 fine imposed was clearly erroneous because his Presentence Report recommended that no fine be 

imposed because of his inability to pay. 

We review the imposition of the $15,000 fine for plain error 

because Sneed did not object to the fine at sentencing. United 

States v. Burson, 952 F.2d 1196, 1202 (lOth Cir. 1991), cert. 

denied, 112 S. Ct. 1702 (1992). 

U.S.S.G. §§ 5E4.2(a) and (f) (1988) mandate a fine except 

where the defendant establishes that he is unable to pay and is 

not likely to become able to pay the fine. In deciding the amount 

of a fine, the Guidelines require the court to consider any evidence presented as to the defendant's ability to pay the fine 

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(including the ability to pay over a period of time) in light of 

his earning capacity and financial resources. U.S.S.G. § 

5E4.2(d) (2) (1988). Neither express written nor oral findings on 

this issue are required. Burson, 952 F.2d at 1203. Compliance 

with § 5E4.2 merely requires the record to reflect that the district court considered the pertinent factors before it imposed the 

fine. See United States v. Washington-Williams, 945 F.2d 325, 328 

(lOth Cir. 1991) (addressing U.S.S.G § 5E1.2, the successor "Fines 

for Individual Defendants" section). 

Here, the record of the sentencing hearing establishes that 

the district court considered Sneed's ability to pay in setting 

the amount of the fines. Recognizing that Sneed was without 

substantial assets and therefore unable to pay the full fine immediately, the court concluded that Sneed had earning capacity 

sufficient to pay the fine over time during his period of supervised release. (Appellant's App., Vol. 51 at 230-31). See United 

States v. Blanchard, 9 F.3d 22, 26 (6th Cir. 1993) (court has duty 

to impose fine when no proof is submitted by the defendant on his 

likelihood to regain earning capacity). Accordingly, because the 

fine table in§ 5E4.2(c) (3) allows for a fine of $15,000 for the 

offense level of 18, the district court's imposition of the fine 

did not constitute plain error. 

AFFIRMED. 

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