Source: https://dc.fd.org/motions/appeals/other%20crimes/pless.htm
Timestamp: 2019-04-22 10:39:46+00:00

Document:
The parties below were defendant David A. xxxxxxxx and the United States of America. The parties to this appeal are defendant-appellant, David A. xxxxxxxx, and plaintiff-appellee, the United States of America. There are no intervenors or amici.
This is an appeal from the judgment of the district court (the Honorable Louis F. Oberdorfer), dated December 6, 1994, adjudging appellant guilty after a jury trial on the charges of bank fraud, in violation of 18 U.S.C. § 1344. In this appeal, appellant seeks review of the district court's instructions to the jury delivered on April 22, 1994, amending the grand jury's indictment and instructing the jury that acquittal was optional if it found that appellant held a good-faith belief that the bank consented to his banking practices, the court's ruling on April 6 and 18, 1994, admitting evidence of other crimes, and the court's ruling on April 18, 1994 denying appellant's motion for judgment of acquittal where the evidence that First American Bank of Maryland's was insured by the Federal Insurance Deposit Corporation was insufficient.
The District Court had jurisdiction under 18 U.S.C. § 3231. A timely notice of appeal having been filed, this Court has jurisdiction under 28 U.S.C. § 1291.
I. Whether the grand jury's indictment charging three counts of executing a scheme to defraud a financial institution by depositing worthless checks into the National Bank of Washington was constructively amended by the trial court's instruction to the jury to consider whether appellant executed a scheme to defraud the National Bank of Washington, or the First American Bank of Maryland, or both banks.
II. Whether (assuming that the indictment charged an offense against the First American Bank of Maryland) a witness' testimony that the First American Bank of Maryland was insured by the Federal Deposit Insurance Corporation at the time of the offense was sufficient where the witness was not, and had never been, in any way associated with the First American Bank of Maryland but, rather, had been an employed by a different bank.
III. Whether the trial court's instruction -- that if the jury found that appellant held a reasonable, good-faith belief that the victim bank consented to his banking activities then it should consider whether the government had proved the intent element of the offense -- erroneously communicated that acquittal was optional rather than mandatory upon a finding of good faith.
IV. Whether the trial court erroneously admitted, pursuant to FED R. EVID. 404(b) for the purpose of proving appellant's intent to execute a scheme to defraud a financial institution by conducting a check-kite, evidence that appellant failed to file tax returns and to pay taxes.
On October 1, 1993, a grand jury returned an indictment charging Mr. xxxxxxxx with three counts of bank fraud in violation of 18 U.S.C. § 1344 and 18 U.S.C. § 2. The indictment also included a forfeiture allegation pursuant to 18 U.S.C. § 982(a)(2). The bank fraud charges were heard by a jury commencing on April 6, 1994, before the Honorable Louis F. Oberdorfer. On April 25, 1994, the jury returned verdicts of guilty on the bank fraud charges. Commencing May 18, 1994, the judge heard evidence of the forfeiture allegation and, on June 6, 1994, ordered forfeiture of $1,226,000. On November 21, 1994, Mr. xxxxxxxx was sentenced to 30 months imprisonment on each count to be served concurrently and to be followed by 5 years supervised release. (A: __). In addition, Mr. xxxxxxxx was ordered to make restitution in the amount of $1,226,000. Mr. xxxxxxxx filed a timely notice of appeal (A: __).
In Counts One through Three, the grand jury charged Mr. xxxxxxxx with executing a scheme to defraud a financial institution by depositing checks drawn on insufficient funds into an account at the National Bank of Washington ("NBW") on December 19, 1989, on January 29, 1990, and on February 27, 1990. (A: ___). Mr. xxxxxxxx' defense was that NBW was aware of the kite, and that he reasonably believed NBW consented to his check-writing activities.
In 1988, David xxxxxxxx created Allied Atlantic Corporation ("Allied Atlantic") when he bought and merged two companies that manufactured and serviced signs. (4/7/94am: 33-34; 4/7/94pm: 35). (1) The business' profits rapidly increased under Mr. xxxxxxxx' ownership. (4/11/94: 73, 121-125, 132-133, 142-144, 147). Allied Atlantic maintained checking accounts at NBW and at FAB-MD. Mr. xxxxxxxx also maintained a checking account at FAB-MD for a related company, Phoenix Partners, Incorporated. (4/7/94pm: 70). Mr. xxxxxxxx was the only authorized signatory on the accounts. (4/7/94am: 42).
The three counts of the indictment related to checks drawn on Allied Atlantic's accounts at FAB-MD and deposited into its account at NBW on three separate days: On December 19, 1989, Mr. xxxxxxxx deposited checks amounting to $373,214.15 into the NBW account; on January 29, 1990, he deposited checks amounting to $483,313.22; on February 27, 1990, he deposited checks amounting to $567,231.47. (4/7/94pm: 6-7, 12-15, 17-23, 25-26, 57-58). (3) All of the checks were drawn on insufficient funds and were signed by Mr. xxxxxxxx (4/12/94pm: 29).
Each day, Mr. xxxxxxxx deposited at each bank payments from customers and also a check transferring money from one bank to the other. (4/7/94am: 35, 38, 46; 4/7/94pm: 50, 65; 4/8/94am: 31). (4) In the ten month period of the check-kite, $48,331,376 was transferred from NBW to FAB-MD, and $46,841,295 was transferred from FAB-MD to NBW. (4/12/94pm: 25).
Allied Atlantic's relationship with NBW began on a high note. Beginning in the Summer of 1988, NBW was aggressively trying to make loans through its Small Business Banking Department. (4/11/94: 67-68). One of the loan officers, Bernard Serio, developed a relationship with Mr. xxxxxxxx. (4/8/94am: 47). In December 1988, NBW loaned $90,000 to Allied Atlantic. (5) Mr. xxxxxxxx began to overdraw the account almost immediately. Nevertheless, in February 1989, NBW increased Allied Atlantic's line of credit by $25,000. (4/8/94am: 52).
In April, 1989, Allied Atlantic's account was overdrawn by $135,000 (4/8/94am: 52-53). Bernard Serio summoned Mr. xxxxxxxx to a meeting at which he accused Mr. xxxxxxxx of running a check kite. According to Mr. Serio, Mr. xxxxxxxx denied that he was kiting checks, and promised to pay the overdraft with loans from family members. (4/8/94am: 54-55). However, Mr. Serio never informed his supervisor that he suspected a check-kite. (4/12/94am: 62, 74).
Many of the checks that caused the overdraft were payable to Mr. xxxxxxxx and to his wife. (4/8/94am: 55; 4/8/94pm: 18). Mr. xxxxxxxx explained to Bernard Serio that he was repaying himself and his wife for loans that they had made to the business and for unpaid wages because he needed the money for a down payment on a house they were purchasing. (4/8/94am: 55-56). Mr. Serio testified that when he threatened to "call the existing loans," Mr. xxxxxxxx responded that such action would force him into bankruptcy. (4/8/94am: 56).
Rather than make a criminal referral or other action such as closing Allied Atlantic's account, NBW converted the overdraft into a $135,000 loan and, for the first time, began placing holds on Mr. xxxxxxxx' deposits. (4/8/94am: 58; 4/14/94am: 50). The loan was to be repaid within 31 days. (4/8/94pm: 16). Mr. xxxxxxxx repaid part of the loan within the 31 days, but requested an extension of time within which to repay the remainder of the loan. (4/8/94pm: 20-22, 26). Again, rather than take any action against Mr. xxxxxxxx, NBW agreed to extend the loan deadline. (4/11/94pm: 10-12). Mr. xxxxxxxx eventually repaid the loan in installments, the last of which was paid on March 1, 1990. (4/11/94: 7, 52). Mr. Serio was aware that Mr. xxxxxxxx repaid the loan in part by transferring money from Allied Atlantic's accounts at FAB-MD, but claimed at trial that he had believed that the checks from the FAB-MD account were "real money." (4/12/94am: 27, 34).
After the $135,000 overdraft, Allied Atlantic's bank accounts continued to be overdrawn. (4/12/94am: 27). Between May, 1989 and October, 1989, Allied Atlantic's account at NBW was overdrawn "a large number of times." (4/11/94: 103). Three or four times a week Allied Atlantic received notices from the bank regarding overdrawn checks. (4/7/94pm: 44). The bank always paid the checks. (Id.).
Mr. xxxxxxxx' overdrafts directly profited NBW. NBW received $53,000 in service charges from Mr. xxxxxxxx during the ten months of the kite, mostly in overdraft charges. (4/12/94pm: 37-38). According to one of NBW's branch managers, Mr. Serio later admitted that he had approved the overdrafts even above his own lending limit. (4/13/94: 30). Despite the history of overdrafts, NBW stopped placing "holds" on Mr. xxxxxxxx' deposits in October, 1989. (4/14/94am: 50). On March 1, 7, 9, and 19, 1990, Mr. xxxxxxxx requested "hold" waivers. (4/12/94pm: 84-85).
The "cross-deposits" ended on March 20, 1990, when FAB-MD realized that it was at risk of losing over one million dollars in the kite. (4/12/94pm: 65, 73). FAB-MD continued to accept deposits into Mr. xxxxxxxx' accounts, while refusing to honor checks drawn on the accounts. (4/12/94pm: 74, 76). (7) Approximately $900,000 "piled up" in the FAB-MD accounts. (4/13/94: 49). Meanwhile, the overdrafts at NBW were mounting. Within the week, the overdraft was $2.8 million. (4/11/94: 112). FAB-MD covered its own expenses and then transferred the remaining money to NBW to cover NBW's losses. (4/12/94pm: 74; 4/13/94: 55, 74-77). In the end, NBW lost and was unable to recover $1,226,063.45. (4/12/94am: 68). Bernard Serio was forced to resign. (4/11/94: 60).
After his FAB-MD accounts were frozen, Mr. xxxxxxxx met with FAB-MD's management. According to xxxxxxxx' account manager, Larry Bolton, Mr. xxxxxxxx said at the meeting that "he was allowed to overdraw his account at National Bank of Washington up to $400,000 and since he was paying a service charge of anywhere from six, seven, $8,000 a month he thought that was an acceptable practice." (8) (4/13/94: 65). Mr. xxxxxxxx also said that he spent between two and four and one half hours a day making the deposits at the banks. (4/13/94: 50; 4/18/94: 140).
Over the course of the next several months Mr. xxxxxxxx and his attorney met with NBW's attorneys to determine whether they could settle the matter short of litigation. (4/12/94pm: 44-45). Mr. xxxxxxxx' counsel hired Louis Ruebelman, a Certified Public Accountant, to prepare an analysis of the transactions that led up to the bank overdraft at NBW and to evaluate Allied Atlantic "to determine if it was a going concern." (4/12/94pm: 15). The government called Mr. Ruebelman as a witness at trial. He testified that during the period of the check kite Mr. xxxxxxxx paid himself approximately $160,000, and that "a typical CEO in a company of this nature" could expect to earn approximately $10,000 per month. (4/12/94pm: 22, 53-54). He testified that it was unusual that the transfers between NBW and FAB-MD had not been recorded in Allied Atlantic's accounting books. (4/12/94pm: 29-30).
A former executive vice-president of NBW, Ronald Brown, testified that during 1989 and 1990 "the accounts of the National Bank of Washington [were] insured by the Federal Deposit Insurance Corporation." (4/14/94am: 33). That same witness also testified about FAB-MD's FDIC insured status: "Q. Were the accounts, if you know, of the First American Bank of Maryland insured by the Federal Deposit Insurance Corporation? A. Surely." (Id.).
Appellant moved for judgment of acquittal at the close of the government's case. (4/18/94: 72-73).
Mr. xxxxxxxx testified in his own defense. He agreed that he engaged in the "cross-deposits" that constituted the check-kite. (4/19/94: 6). He contended, however, that he never hid anything from NBW, that NBW was well-aware of the kite, and that he did not intend to deceive the bank. (4/18/94: 133-134; 4/19/94: 6).
One month after Mr. xxxxxxxx purchased his first sign company in June, 1988, he considered buying another sign company. (4/18/94: 79, 81-82). Bernard Serio told him that NBW had a lot of money available for small business loans and that NBW was an "extremely aggressive" lender. (4/18/94: 82). Based on Mr. Serio's promises, Mr. xxxxxxxx scheduled the closing on the purchase of his second sign company for October, 1988. (4/18/94: 84). When the time came, however, NBW did not provide loan assistance for the purchase. (Id.). Mr. Serio continued to promise that loans for equipment and other needs of the business would be forthcoming. (4/18/94: 90).
To make ends meet between January and April, 1989, Mr. xxxxxxxx funded Allied Atlantic with money that he received from the sale of his personal residence. (4/18/94: 92). Nevertheless, beginning in January, Allied Atlantic's account at NBW often was overdrawn. (4/18/94: 92, 97). NBW paid the checks, often without even calling Mr. xxxxxxxx. (4/18/94: 93). Mr. xxxxxxxx began "cross-depositing" checks between NBW and FAB-MD to cover the overdrafts. (4/18/94: 96). He would check his balances and make deposits in both banks daily "in order to maintain a balance" in each account. (4/18/94: 139-140). He recorded the deposits in the company's check register, but did not explain the practice to his assistant. (4/19/94: 7).
In April 1989, in order to purchase his new house, Mr. xxxxxxxx repaid himself the money that he had loaned the business. (4/18/94: 93). Soon thereafter, the NBW account was overdrawn by $135,000. (4/18/94: 94). Mr. Serio called a meeting at which he confronted Mr. xxxxxxxx with the fact that the overdraft was caused, in large part, by checks written to Mr. xxxxxxxx and to his wife. (Id.). Mr. xxxxxxxx explained. (4/18/94: 93). At that meeting, NBW "converted" the overdraft to a loan. NBW also told Mr. xxxxxxxx that, in the future, it would place three-day holds on all of Allied Atlantic's deposits. (4/18/94: 94-95).
I told him that if he would take the hold off the account and let us go back to how we were doing business in the spring the pressure would be off and I would be able to do what I was doing and he wouldn't have to worry about it.
Mr. Serio said that "he would have to check" whether that practice would be acceptable. (4/18/94: 96). Three or four days later NBW stopped putting holds on Allied Atlantic's deposits. (Id.).
Mr. xxxxxxxx continued to work with NBW to obtain a business loan. On three occasions, NBW sent analysts to review Allied Atlantic's accounts. (Id.). Mr. xxxxxxxx believed that NBW would come through with a loan, and that "in the meantime" he could make cross-deposits "with the full knowledge and consent of the National Bank of Washington." (4/19/94: 83).
Beginning in July 1989, Mr. xxxxxxxx was using the cross-deposits between the two banks to "fund the growth in the business." (4/18/94: 97). Mr. xxxxxxxx and Mr. Serio were in frequent contact. (4/18/94: 100). By November, 1989, Mr. Serio was calling Mr. xxxxxxxx two or three times a week about whether Allied Atlantic would be able to pay off the $135,000 "loan." (4/18/94: 103).
In the Summer of 1989, Mr. xxxxxxxx also had a conversation with Larry Bolton at FAB-MD in which Mr. Bolton noted that Allied Atlantic was on the Overdraft Report, said that Mr. xxxxxxxx was a kite suspect, and told Mr. xxxxxxxx to "be careful." (4/18/94: 101). When Mr. Bolton called again about a $25,000 or $30,000 overdraft, Mr. xxxxxxxx told him that "if there was an issue" he should call NBW. (4/18/94: 102). Mr. Bolton did so and reported back, "You're okay." (Id.).
In March 1990, FAB-MD asked Mr. xxxxxxxx to come to the bank for a meeting. (4/18/94: 114-115). At the meeting, Mr. xxxxxxxx was informed that "there had been an irregularity" in his accounts and that the bank stood to lose an estimated $600,000. (4/18/94: 115). Mr. xxxxxxxx told them that NBW would pay the checks. (Id.). The FAB-MD officers said that if their bank lost any money they would contact the FBI. (Id.). Mr. xxxxxxxx contacted an attorney. (4/18/94: 117). When he received telephone calls from NBW later that week, he referred NBW to his attorney. (Id.).
The defense also called an expert in banking, Paul Carruba. Mr. Carrubba concluded, after analyzing the relevant documents and hearing the trial testimony, that "there was sufficient information available to [Bernard] Serio for him to know that activity that was going on in [Allied Atlantic's] account after April of 1989." (4/19/94: 93). Mr. Carrubba's conclusion was based on the following facts: 1) Serio's knowledge of the history of the account; 2) NBW paid the overdrawn checks; 3) Mr. Serio discovered the check-kite in April, 1989, and knew that the $135,000 overdraft was caused by checks written to Mr. xxxxxxxx and his wife; 4) NBW placed holds on deposits in July and August but not in subsequent months; 5) Serio knew that Mr. xxxxxxxx was covering overdrafts with checks drawn on the business' account at FAB-MD; 6) Mr. xxxxxxxx was withdrawing as much as he was depositing each day; and 7) Serio knew that Mr. xxxxxxxx repeatedly deposited and withdrew "a quarter of a million dollars" in a single day even though Allied Atlantic's gross sales were only "a little over a million dollars" annually. (4/19/94: 93-96, 101-102, 110). Mr. Carruba testified about a report prepared by the Comptroller of the Currency criticizing NBW for its lending practices -- specifically for "sacrificing prudent lending standards" in pursuit of profits, and for "not monitoring the potential bad loan situations." (4/19/94: 165; 4/21/94: 22).
Over objection, the trial court admitted other crimes evidence for the purpose of proving Mr. xxxxxxxx' intent to defraud a financial institution. Specifically, the Court admitted IRS Certificates of Lack of Record indicating that Mr. xxxxxxxx failed to file tax returns or to pay personal taxes, business taxes and employee's withholding taxes for the years 1988 through 1993. In addition, the court admitted a transcript of a June, 1990 deposition in which Mr. xxxxxxxx testified that Allied Atlantic had not filed a tax return for 1989 and had not yet paid any taxes for the year 1989. (4/18/94: 45-46). He estimated that the company had withheld $350,000 to $400,000 from its employees but had not yet paid those taxes to the government. (4/18/94: 46-47).
In his testimony, Mr. xxxxxxxx admitted that he failed to file personal income tax returns and to pay taxes from 1988-1992. (4/18/94: 120). He offered no excuses for his failure to file returns, but explained that he did not owe taxes for those years. (Id.). He admitted that he failed to file corporate tax returns for Allied Atlantic, and testified that the company would not have had any taxable income since it was operating at a loss. (4/18/94: 121). Mr. xxxxxxxx admitted that he failed to file Form 940s and Form 941s concerning withholding from employees' paychecks, although he contended that his previous estimate of the amount due ($350,000 to $400,000) was grossly overstated and that the true liability was $55,000. (4/18/94: 121, 123). He testified that Allied Atlantic did file Form W-2s for its employees. (4/18/94: 122). (9) The prosecutor cross-examined Mr. xxxxxxxx extensively on the subject of taxes.
At the end of the trial, the prosecutor responded to defense Brady demands by providing copies of two certified checks paid by Mr. xxxxxxxx for taxes owed by Allied Atlantic's previous owner and perhaps by Allied Atlantic. (4/21/94: 2, 6, 38; 4/22/94: 50, 53, 66, 74, 76, 79-81). The payments were made in November, 1989 and January, 1990, and were in the amount of approximately $32,000. (4/21/94: 3, 94). The defense introduced the checks into evidence with a stipulation that "they represent payments to the Internal Revenue Service for tax obligations." (4/22/94: 89). The government then introduced into evidence a certificate alleging that Mr. xxxxxxxx never paid any taxes (4/22/94: 90). In the final instructions, the court provided a limiting instruction on the use to which other crimes evidence can be put. (4/22/94: 187).
The prosecutor argued that the jury should be instructed to determine whether Mr. xxxxxxxx executed a scheme to defraud either NBW, or FAB-MD, or both, because "the essence of a check kite scheme and of the check kite scheme charged in the indictment is that the defendant intended to defraud two banks." (4/21/94: 52). The defense argued that the jury should be instructed to determine only whether Mr. xxxxxxxx executed a scheme to defraud NBW because all three counts of the indictment alleged that Mr. xxxxxxxx violated the bank fraud by depositing worthless checks into NBW, and because the grand jury could not properly have charged Mr. xxxxxxxx with executing a scheme to defraud FAB-MD because venue for that offense did not lie in the District of Columbia. (4/7/94pm: 61; 4/21/94: 108-110, 156-157; 4/22/94: 2-4, 20).
The trial court agreed with the parties that "[t]he critical issue is whether this is a one-bank case or a two-bank case," and ultimately ruled in favor of the government's view that the jury should be asked to determine whether Mr. xxxxxxxx intended to defraud NBW or FAB-MD or both banks. (4/21/94: 168; 4/22/94: 2). The court commented that "[I] am inclined to agree with the government that this was a scheme that involved two banks, and it's awfully hard to wall off all the evidence that there was of what was going on in First American." (4/21/94: 168). "[I]f he defrauded either bank, then the scheme is actionable." (4/22/94: 21). In response to the court's ruling, defense counsel argued that such an instruction would cause a variance and proposed another alternative: to instruct the jury to determine whether Mr. xxxxxxxx executed a scheme to defraud "a" bank or "any" bank. (4/22/94: 2-3). The court rejected defense counsel's alternative.
Counts one through three of the indictment charge that, beginning on or about July 1989, and continuing to on or about March 1990, and on various dates within the District of Columbia, the defendant knowingly executed or attempted to execute a scheme to defraud two federally insured financial institutions, the National Bank of Washington and the First American Bank of Maryland.
Three: the financial institutions were then insured pursuant to the Federal Deposit Insurance Act.
The indictment charges that the scheme was to defraud by operation of a check kite. If you find that the government has proven beyond a reasonable doubt that the defendant intended to defraud either bank or both of them, and if you find that the government has proven beyond a reasonable doubt the other elements of the offense of bank fraud, then you should find the defendant guilty.
On the other hand, if you find that the government has failed to prove that the defendant intended to defraud either or both banks, then you should find the defendant guilty.
In determining whether the government has proved the intent element of the offense, that is, the intent to defraud, you should consider all the facts and circumstances in the case, including the banks' practices and employees, their knowledge of Mr. xxxxxxxx' check-writing activities, and Mr. xxxxxxxx' understanding to their knowledge, as well as any other facts and circumstances that you find relevant.
During deliberations, the jury requested to be reinstructed on "the definitions of `specific intent' and `defraud.'" (4/25/94: 8; A: __). Thereafter, the jury returned verdicts of guilty on all three counts and, on a special verdict form, answered "yes" to the question, "Are you unanimous that the government has proved beyond a reasonable doubt that the defendant intended to defraud both the First American Bank of Maryland and the National Bank of Washington?" (A: __).
The defendant states that he acted in good faith and that he did not intend to defraud any of the financial institutions in question or anyone else. Good faith is a complete defense to the charges in the indictment since good faith on the part of the defendant is inconsistent with intent to defraud or wilfulness, which is an essential part of the charges.
See also 4/21/94: 130-136, 142. The trial court ruled that the defendant's theory of consent "isn't an absolute defense. Even if he believed it, it isn't an absolute defense, but it is one of the things to consider in determining whether he had formed an intent." (4/21/94: 162). The defense objected that the court's proposed language "dilute[d]" the defense theory because if jury found "that the defendant reasonably believed that NBW had consented to his banking activities, then he must be found not guilty, because that reasonable belief is diametrically inconsistent with the concept of intent to defraud." (4/21/94: 164).
The indictment charges that the scheme was to defraud by operation of a check kite. If you find that the government has proved beyond a reasonable doubt that the defendant intended to defraud either bank or both of them, and if you find that the government has proved beyond a reasonable doubt the other elements of the offense of bank fraud, then you should find the defendant guilty. On the other hand, if you find that the government has failed to prove that the defendant intended to defraud either or both banks, then you should find the defendant not guilty.
In determining whether the government has proved the intent element of the offense, that is, the intent to defraud, you should consider all the facts and circumstances in the case, including the banks' practices and policies and the acts and words of one or more bank employees, their knowledge of Mr. xxxxxxxx' check-writing activities, and Mr. xxxxxxxx' understanding of their knowledge, as well as any other facts and circumstances that you find relevant.
It is the defendant's theory that, the foregoing considered, the government has failed to prove beyond a reasonable doubt that the defendant had the specific intent to defraud either bank. If you find that the defendant in good faith and reasonably believed that the banks had consented to his banking activities, then you should consider whether in that case the government has proved beyond a reasonable doubt the intent element of this charge. To act in good faith means to act upon honest opinion or belief, even if that opinion is wrong or the belief is mistaken or wrong. The burden of proving whether the defendant had the specific intent to defraud the bank does not rest on the defendant beyond the defendant does not have any obligation to prove anything.
I. The trial court's jury instructions constructively amended the indictment by broadening the bases of conviction to include a charge not made by the grand jury -- execution of a scheme to defraud the First American Bank of Maryland. The grand jury's indictment charged Mr. xxxxxxxx with executing a scheme to defraud a financial institution by depositing worthless checks into the National Bank of Washington. Although the indictment explained that the execution of the scheme to defraud NBW was part-and-parcel of a check-kiting scheme involving both NBW and FAB-MD (paragraphs 1 through 12), the charging paragraph (paragraph 13) alleged three counts of violations of 18 U.S.C. § 1344, each involving a fraud against NBW only. By instructing the jury to determine whether Mr. xxxxxxxx executed a scheme to defraud NBW, or FAB-MD, or both, the trial court expanded the indictment to allow the jury to convict Mr. xxxxxxxx for an additional crime not charged in the indictment. Under the Fifth Amendment's Grand Jury Clause, a defendant cannot be tried on charges that are not made in the grand jury's indictment. Stirone v. United States, 361 U.S. 212, 217 (1960). Because the Grand Jury Clause "is a substantial right which cannot be taken away with or without court amendment," Stirone, 361 U.S. at 218-219, deprivation of the right is per se reversible error.
II. If the indictment charged Mr. xxxxxxxx with executing a scheme to defraud FAB-MD, then the government failed to prove an essential element and jurisdictional requirement of that offense: that FAB-MD was FDIC insured at the time of the offense. The one witness who testified that FAB-MD was FDIC insured had formerly been employed by NBW, but had never been employed by FAB-MD. There was insufficient evidence to support a finding that the witness had personal knowledge of the matter and, therefore, insufficient evidence that FAB-MD was insured by the FDIC at the time of the offense. The convictions must be reversed and the indictment dismissed.
III. The trial court's instruction to the jury that if it found that appellant held a good-faith belief that the banks consented to his banking activities it should then consider whether the government proved the intent element of the charges, erroneously communicated to the jury that acquittal would be optional upon such a finding. A successful "good-faith" defense defeats the intent element of bank fraud. United States v. Ratchford, 942 F.2d 702, 706-707 (10th Cir. 1991), cert. denied, 502 U.S. 1100 (1992). An instruction that makes acquittal optional rather than mandatory after a finding of good faith is erroneous. United States v. Cavin, 39 F.3d 1299, 1310 (5th Cir. 1994).
IV. The trial court erred by admitting evidence under FED. R. EVID. 404(b) that Mr. xxxxxxxx failed to file tax returns and failed to pay personal and corporate taxes. The tax misconduct evidence was not relevant to whether Mr. xxxxxxxx intended to execute a scheme to defraud the bank by way of a check-kiting scheme. Failing to comply with tax obligations and executing a complex check kite are entirely different offenses, one a simple matter of omission, and one a matter of exacting, repeated commission. They are related only to the extent that one can conclude that they both demonstrate a criminal "disregard for the law."
I. WHERE THE GRAND JURY CHARGED APPELLANT WITH EXECUTING A SCHEME TO DEFRAUD A FINANCIAL INSTITUTION BY DEPOSITING WORTHLESS CHECKS INTO THE NATIONAL BANK OF WASHINGTON THE TRIAL COURT CONSTRUCTIVELY AMENDED THE INDICTMENT BY INSTRUCTING THE JURY TO CONSIDER WHETHER APPELLANT EXECUTED A SCHEME TO DEFRAUD THE NATIONAL BANK OF WASHINGTON, OR THE FIRST AMERICAN BANK OF MARYLAND, OR BOTH.
B. The Trial Court's Instructions Constructively Amended The Grand Jury's Indictment.
i. Under The Grand Jury Clause Of The Fifth Amendment, A Grand Jury's Indictment May Not Be Broadened.
Under the Fifth Amendment's Grand Jury Clause, "a court cannot permit a defendant to be tried on charges that are not made in the indictment against him." United States v. Lawton, 995 F.2d 290, 292 (D.C. Cir. 1993) (quoting Stirone, 361 U.S. at 217). The Grand Jury Clause is designed to "limit [one's] jeopardy to offenses charged by a group of his fellow citizens acting independently of either prosecuting attorney or judge." Stirone, 361 U.S. at 216. The right conferred by the Grand Jury Clause "is a substantial right which cannot be taken away with or without court amendment." Id. at 218-219.
An indictment is constructively amended when the proof at trial or the judge's instructions broaden the possible bases for conviction beyond that charged by the grand jury in the indictment. (12) Miller, 471 U.S. at 145; Gaither, 413 F.2d at 1071. See, e.g., Stirone, supra (constructive amendment where indictment charged Hobbs Act violation by interference with importation of sand, but instruction permitted conviction based on finding of interference with export of steel); Floresca, 38 F.3d at 711 (constructive amendment where indictment charged witness tampering with intent to affect witness' testimony at trial, but instruction permitted conviction based on finding that defendant approached witness "with the intent to affect either his cooperation in the investigation or his testimony at trial"); Lawton, supra (constructive amendment where indictment charged embezzling from union Local, but jury instruction permitted conviction based on finding that defendant embezzled either from Local or from two other union organizations); United States v. Roshko, 969 F.2d 1, 6 (2d Cir. 1992) (constructive amendment where indictment charged conspiracy to fraudulently seek changes in immigration status of one defendant, but jury instruction permitted conviction based on alternative finding that defendants fraudulently sought changes in immigration status of second defendant); Weissman, 899 F.2d at 1115 (constructive amendment where indictment charged RICO conspiracy involving enterprise known as DeCavalcante Family, but jury instruction permitted conviction based on alternative finding of conspiracy involving other enterprise); United States v. Zingaro, 858 F.2d 94, 99 (2d Cir. 1988) (constructive amendment where indictment charged RICO conspiracy involving extortionate loans made in connection with customers' gambling debts at Yonkers social clubs, but evidence and instruction permitted conviction based on loan involving renovation of Bronx diner); United States v. Adams, 778 F.2d 1117, 1119 (5th Cir. 1985) (constructive amendment where indictment charged misrepresentation of name in connection with purchase of handguns, but evidence and instructions permitted conviction based on misrepresentation of name and residence); Yeo, 739 F.2d at 387 (constructive amendment where indictment charged extortion from named person, but evidence permitted conviction based on extortion from named person or others); United States v. Cusmano, 659 F.2d 714, 719 (6th Cir. 1981) (constructive amendment where indictment charged extortion by means of threatened economic loss but evidence also permitted conviction based on threatened physical violence); Howard v. Daggett, 526 F.2d 1388, 1389 (9th Cir. 1975) (constructive amendment where indictment charged that defendant induced two specific women to engage in prostitution, but instruction permitted conviction based on inducement of additional women).
ii. The Indictment Charged Mr. xxxxxxxx With Executing A Scheme To Defraud The National Bank Of Washington.
does not criminalize schemes or scheming per se; it criminalizes the execution (or attempted execution) of schemes. Phrased another way, the statutory terminology focuses on the fraudulent acts actually committed, or attempted, along with the effects of those acts, rather than upon the distinctively different question of how a defrauder visualizes his plot.
United States v. Lilly, 983 F.2d 300, 303 (1st Cir. 1992) (footnote omitted). See United States v. Molinaro, 11 F.3d 853 (9th Cir. 1993) (bank fraud statute imposes punishment for each execution of the scheme), cert. denied, 115 S. Ct. 668 (1994); United States v. Lemons, 941 F.2d 309, 318 (5th Cir. 1991) (same); United States v. Schwartz, 899 F.2d 243 (3d Cir.) (in check-kiting scheme "each deposit was a separate violation of 18 U.S.C. § 1344(a)(1), because in making each deposit [the defendant] was executing his scheme to defraud [the bank]"), cert. denied, 498 U.S. 901 (1990); United States v. Poliak, 823 F.2d 371, 372 (9th Cir. 1987) (deposits of ten checks in check-kiting scheme constituted ten separate executions of scheme to defraud banks), cert. denied, 485 U.S. 1029 (1988). See also United States v. Hord, 6 F.3d 276, 281 (5th Cir. 1993) (deposits of bogus checks into account, not attempted withdrawals, constituted executions of scheme to defraud bank), cert. denied, 114 S. Ct. 1551 (1994).
The first 12 paragraphs of the 13-paragraph indictment explain general banking practices and describe the alleged scheme. The charging paragraph (paragraph 13) describes the conduct constituting the alleged execution of the scheme -- deposits on three separate days of worthless checks into an account at NBW. Paragraph 13 does not charge any deposits into FAB-MD, or any other acts that could be construed as an execution of a scheme to defraud FAB-MD.
Indeed, the grand jury could not have charged Mr. xxxxxxxx with executing a scheme to defraud FAB-MD because venue for that offense would not lie in the District of Columbia. See 4/21/94: 149-151. The Sixth Amendment to the Constitution provides that an accused in a criminal prosecution has the right to be tried in the "district wherein the crime shall have been committed." Venue must be proper with respect to each count of a multi-count indictment. United States v. Beech-Nut Nutrition Corporation, 871 F.2d 1181, 1188 (2d Cir. 1989). When a crime consists of a single non-continuing act, such as depositing worthless checks, "it is `committed' in the district where the act is performed." Beach-Nut, 871 F.2d at 1188 (citing United States v. Anderson, 328 U.S. 699, 703 (1946)). The fact that the grand jury could not have charged Mr. xxxxxxxx with execution of a scheme to defraud FAB-MD supports the conclusion that it did not do so.
iii. The Jury Instructions Constructively Amended The Indictment By Adding The Charge Of Executing A Scheme To Defraud The First American Bank Of Maryland.
The trial court's instructions gave the jury an alternative basis on which to convict Mr. xxxxxxxx. The jury was allowed to return a verdict of guilty upon finding that Mr. xxxxxxxx executed a scheme to defraud either NBW or FAB-MD, or both. The constructive amendment of the indictment requires reversal.
The trial judge's instructions expanded the indictment here in much the same way as did the instructions in United States v. Lawton, supra. There, the defendant, in his capacity as president of AFSCME Local 2426, collected dues from the union's members. Id. at 291. The membership dues were to be divided between three union organizations: the Local, the District Council, and the International. Id. The defendant stopped paying to the District Council and the International their portion of the dues but, the government alleged, began paying himself unauthorized amounts from the Local's checking account. Id. The defendant contended that he had been authorized to use the local's funds for his personal expenses. Id. at 291-293. The grand jury returned an indictment charging the defendant with embezzlement from a labor union (the Local) of which he was an officer. Id. at 292. The trial judge, however, instructed the jury that it could convict the defendant if it found that he embezzled the Local's funds, the District Council's funds, or the International's funds. Id. at 293.
The judge's instruction in Lawton constructively amended the indictment because it "allowed the petit jury to convict [the defendant] of additional charges." Id. at 294. Because the grand jury had not indicted the defendant for embezzlement from all three labor bodies, "[t]he trial court's instructions . . . violated the Grand Jury Clause just as surely as if the court had written additional charges onto the grand jury's `true bill.'" Id. The Court in Lawton was restricted to reviewing for plain error because the defendant had not registered any objection at trial. Id. The Court reversed, finding that the error was obvious, id. (citing Stirone, supra, and Ex parte Bain, 121 U.S. 1 (1987)), and finding that the error affected substantial rights since the jury might have convicted the defendant for embezzling from a labor union of which he was not an officer (an essential element of the offense), and because the jury in a special verdict form indicated that it found that the defendant's use of the Local's funds had been authorized. Id. at 295.
The instructions here contained precisely the infirmity as the instructions in Lawton: they "allowed the petit jury to convict [Mr. xxxxxxxx] of additional charges," id., by allowing it to convict if Mr. xxxxxxxx executed a scheme to defraud the bank charged in Counts One, Two and Three (NBW), or an additional bank (FAB-MD), or both. Lawton, the Fifth Amendment, and decades of federal jurisprudence, compel the result here -- reversal for a new trial. Mucciante, 21 F.3d at 1234 ("If a fraud indictment . . . restricted the government to proving that a particular person was defrauded, it may well be that a jury charge that permitted a conviction for defrauding a different victim would constructively amend that indictment.").
Additionally, the special verdict form on which Mr. xxxxxxxx' jury indicated that it found that he was guilty of executing a scheme to defraud NBW and FAB-MD demonstrates that the constructive amendment had precisely the effect that the Grand Jury Clause seeks to prevent: Mr. xxxxxxxx was convicted "on grounds not alleged in the indictment." Weissman, 899 F.2d at 1114. By instructing the jury to determine whether Mr. xxxxxxxx executed a scheme to defraud FAB-MD, the judge added a charge beyond that which the grand jury charged, and Mr. xxxxxxxx actually was convicted on the additional charge of executing a scheme to defraud FAB-MD. (A: __).
Now, what about the fact that [the defense attorney] wants to insist, well, there's only one bank involved in this case. This is a one-bank case. One bank, one bank, one bank, and Bernie Serio, Bernie Serio, Bernie Serio. Okay, is that a fair characterization of what he said in his closing argument? Well, I want to predict that the judge is going to tell you that this is a two-bank case to defraud. He's going to tell you that the law is that a check kite, as presented on these facts, is a scheme to defraud one, two or both banks, because do you think first of all why ever he did it, Mr. xxxxxxxx ran his check kite scheme not to victimize either one of the banks; he wanted the money.
[The evidence] [t]ells you that he ran a check kite with a specific intent to defraud either or both of the banks, because it's a two-bank case, not a one-bank case.
The prosecutor's argument helped to ensure that the jury would consider whether Mr. xxxxxxxx envisioned a scheme involving both banks instead of considering whether he executed a scheme to defraud NBW. United States v. Mollica, 849 F.2d 723 (2d Cir. 1988) (where trial court's instructions amended indictment charging conspiracy to evade income taxes, prosecutor exacerbated error by arguing "this is not just a conspiracy to evade income taxes or to file false returns . . . It is a conspiracy to defraud the United States").
II. TESTIMONY FROM AN EMPLOYEE OF A DIFFERENT BANK THAT THE FIRST AMERICAN BANK OF MARYLAND WAS INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION WAS LEGALLY INSUFFICIENT TO ESTABLISH THE BANK'S INSURED STATUS BEYOND A REASONABLE DOUBT.
The Court reviews the record to determine whether, "viewing the evidence in the light most favorable to the government, `any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.'" United States v. Teffera, 985 F.2d 1082, 1085 (D.C. Cir. 1993) (quoting Jackson v. Virginia, 443 U.S. 307, 319 (1979). However, the Court "must insure that the evidence adduced at trial is sufficient to support a verdict as a matter of law. A jury is entitled to draw a vast range of reasonable inferences from the evidence, but may not base a verdict on mere speculation." United States v. Long, 905 F.2d 1572, 1576 (D.C. Cir. 1990).
B. The Proof Of FAB-MD's FDIC Insurance Was Legally Insufficient.
Assuming, arguendo, that the grand jury's indictment charged Mr. xxxxxxxx with executing a scheme to defraud FAB-MD, then the government failed to prove an element of the offense. An essential element of the offense of bank fraud -- on which federal jurisdiction depends -- is that, at the time of the offense, the bank was insured by the Federal Deposit Insurance Corporation ("FDIC"). United States v. Nnanyererugo, 39 F.3d 1205, 1208 (D.C. Cir. 1994), cert. denied, 115 S. Ct. 1969 (1995); United States v. Gallop, 838 F.2d 105, 111 (8th Cir.1988); United States v. Platenburg, 657 F.2d 797, 799 (5th Cir. 1981). Although the indictment alleged that both NBW and FAB-MD "were financial institutions with deposits insured by the Federal Deposit Insurance Corporation," (A: __), the government failed to introduce sufficient proof of FAB-MD's insured status at trial. For this reason, Mr. xxxxxxxx' convictions must be reversed and the indictment dismissed.
The most blatant shortcoming of the government's evidence of FAB-MD's status with respect to FDIC insurance is that the witness who testified was not and had never been in any way associated with FAB-MD. Mr. Ronald Brown answered "surely" to the question, "Were the accounts, if you know, of the First American Bank of Maryland insured by the Federal Deposit Insurance Corporation?" (4/14/94am: 33). Mr. Brown, however, was not shown to be a competent witness on the subject. "A witness may not testify to a matter unless evidence is introduced sufficient to support a finding that the witness has personal knowledge of the matter." FED. R. EVID. 602. Mr. Brown certainly did not testify that his job at NBW gave him personal knowledge of FAB-MD's FDIC insured status. Indeed, his testimony was very likely based an assumption about FAB-MD's insured status, rather than on his personal knowledge. Therefore, on its face, Mr. Brown's testimony fell short of constituting reliable proof that the bank had been insured by the FDIC.
While there are a plethora of cases affirming convictions where bank officers testified about the banks' insured status, (14) appellant can find no cases in which a witness who is not even an employee of the bank established FDIC insured status. Cf. United States v. James, 987 F.2d 648, 650 (9th Cir. 1993) (reversing conviction where the bank employees who testified did not testify about FDIC insured status and where FDIC certificate was not introduced). Furthermore, a bank that was FDIC insured status in one moment in time is not necessarily insured at another moment in time; like all insurance, FDIC insurance requires the regular payment of premiums. United States v. Darrell, 828 F.2d 644, 648 (10th Cir. 1987); Wood, 780 F.2d at 557. See United States v. Shively, 715 F.2d 260, 265 (7th Cir. 1983) ("[A] national bank like any other bank can lose its insured status). Mr. Brown surely was not qualified to testify that FAB-MD had in 1989 and 1990 paid its premiums to the FDIC in a timely manner.
Courts have for years been warning prosecutors of the possible consequences of neglecting their burden of proving FDIC insured status. (15) Just last year, both this Court and the United States Court of Appeals for the Fifth Circuit reiterated those warnings. In Nnanyererugo, 39 F.3d at 1208, this Court "reluctantly" affirmed the defendant's convictions where the government proved only that the bank was FDIC insured at the time of trial, but not that the bank was insured at the time of the offense. Id. The Court was "bemused to discover that the Justice Department `still has not effectively instructed prosecutors to ask the simple question that would avoid the need for judicial consideration of what should be a non-problem . . . ,'" id. (quoting Sliker, 751 at 484), and noted its reluctance to "sanction carelessness." Id. United States v. Schultz, 17 F.3d 723, 727-728 nn.11, 12 (5th Cir. 1994) (reversing defendant's convictions under 18 U.S.C. §§ 1344 and 1014 because government's proof of FDIC insurance was insufficient).
Because Mr. Brown's testimony that FAB-MD was insured by the FDIC was legally insufficient to prove that element of the offense, and because the federal court, therefore, is deprived of jurisdiction, Mr. xxxxxxxx' convictions must be reversed and the indictment dismissed.
III. THE TRIAL COURT ERRED BY INSTRUCTING THE JURY THAT IF IT FOUND THAT APPELLANT REASONABLY AND IN GOOD-FAITH BELIEVED THAT THE BANKS CONSENTED TO THE CHECK-KITE THEN ACQUITTAL WAS OPTIONAL RATHER THAN MANDATORY.
An appellate court reviews the district court's instructions de novo, considering the instructions as a whole. United States v. Edelin, 996 F.2d 1238 (D.C. Cir. 1993), cert. denied, 114 S. Ct. 895 (1994); United States v. Whoie, 925 F.2d 1481, 1485 (D.C. Cir. 1991). See United States v. Myers, 972 F.2d 1566, 1572 (11th Cir. 1992).
B. The Trial Court Should Have Instructed The Jury That Acquittal Was Mandatory If It Found That The Defendant Held A Good-Faith Belief That The Banks Consented.
Mr. xxxxxxxx' defense was that he held a good-faith belief that the banks knew what he was doing and that they consented. His defense was supported by evidence that NBW placed "holds" on his deposits after they discovered that he was kiting checks in April, 1989, but then removed the holds a few months later; that NBW subsequently knew that Mr. xxxxxxxx' account continued to be overdrawn on a regular basis but continued to pay the overdrafts; that NBW knew that Mr. xxxxxxxx repaid the overdrafts by transferring money from FAB-MD; that NBW knew that Mr. xxxxxxxx regularly deposited and withdrew $250,000 in a single day even though his business earned only slightly over 1,000,000 annually; that FAB-MD informed Mr. xxxxxxxx that he was a "kite suspect" and should "be careful;" and that FAB-MD consulted with NBW about the overdrafts and reported back that he was "okay."
made acquittal optional rather than mandatory, and fatally misled the jury. (4/22/94: 195). The jury should have been instructed that if it found that Mr. xxxxxxxx held a good-faith belief that the banks consented to his banking practices it must acquit.
A successful "good faith" defense defeats the intent element of bank fraud. Ratchford, 942 F.2d at 706-707 (good faith is defense to check-kite bank fraud); United States v. Unruh, 855 F.2d 1363, 1369-1370 (9th Cir. 1987) (failure to instruct on good-faith belief that bank's board of directors consented to check kite reversible error because such defense would negate criminal intent to charge of aiding and abetting "insider" bank fraud), cert. denied, 488 U.S. 974 (1988); United States v. Casperson, 773 F.2d 216, 233 (8th Cir. 1985) (good faith constitutes complete defense to specific intent crimes in which fraudulent intent is essential element).
This Court's decision in United States v. Gambler, 662 F.2d 834, 837 (D.C. Cir. 1981) is not to the contrary. The defendant in Gambler was an interior decorator who accepted from two customers payment for furniture, but did not then order the furniture. The defendant testified that he had not failed to order the furniture, but had merely delayed doing so. He claimed that he had not intended to defraud either customer. Id. at 835-836. The trial court declined to deliver a "good-faith" instruction to the jury, but instead "took care to emphasize the Government's burden of proving the element of specific intent beyond a reasonable doubt." Id. at 837. Without reciting the instructions actually given and with little discussion, this Court held that the instructions given "sufficiently covered the particular point raised by appellant's 'good faith' instruction." Id. Gambler embodies the proposition that a "good-faith belief" that "it will all work out in the end" is no defense to a fraud charge. See Molinaro, 11 F.3d at 863 ("a good faith belief that the victim will be repaid and will sustain no loss is no defense at all"). In the instant case, appellant did not contend that he believed that NBW's loss was merely temporary or that it would be repaid, but that the bank knew exactly what Mr. xxxxxxxx was doing and agreed to let him do it.
charged the jury that it "may" acquit the defendants if it found that they acted in good faith. A good-faith defense is "the affirmative converse of the government's burden of proving . . . intent to commit a crime. Acquittal is not optional upon a finding of good faith, as the court erroneously charged; it is mandatory because a finding of good faith precludes a finding of fraudulent intent.
Id. (emphasis supplied). See United States v. Birbal, 62 F.3d 456, 460 (2d Cir. 1995) ("By instructing the jury that it "may," rather than "must," acquit if the government failed to meet [its] burden, the court gave the jury the clearly unlawful option of convicting on a lower standard of proof."); United States v. Augustine, 189 F.2d 587, 591 (3d Cir. 1951) (same). If Mr. xxxxxxxx' jury had found that he held a good-faith belief that the banks knew what he was doing and agreed to let him do it, that finding would have precluded a finding of fraudulent intent. Since the instruction allowed the jury to find that Mr. xxxxxxxx held a good-faith belief, yet still have convicted him, reversal is required.
IV. THE EVIDENCE THAT APPELLANT FAILED TO FILE PERSONAL AND CORPORATE TAX RETURNS AND FAILED TO PAY THOSE TAXES WAS NOT RELEVANT TO WHETHER HE INTENDED TO DEFRAUD A FINANCIAL INSTITUTION BY ENGAGING IN A CHECK-KITE, AND WAS UNFAIRLY PREJUDICIAL.
This Court reviews the admissibility of evidence under FED. R. EVID. 404(b) for an abuse of discretion using a two-step analysis. Jankins v. TDC Management Corporation, 21 F.3d 436 (D.C. Cir. 1994). "The first step requires that the evidence be probative of some material issue other than character. The second step requires that the evidence not be inadmissible under Rule 403." United States v. Clarke, 24 F.3d 257, 264 (D.C. Cir. 1994) (citations omitted).
B. The Trial Court's Ruling On The FED. R. EVID. 404(b) Evidence.
[t]he fact that he was in the government's opinion stealing from him [sic] employers [sic] and from the Internal Revenue Service at the very time he was doing this . . . sheds a great deal of light on what his intent was.
[The prosecutor is] saying that Mr. xxxxxxxx was greedy. He's saying that because he was greedy and he wanted to get money, that any other instance, any other technique, any other modis operandi for getting money becomes relevant. It just doesn't, though, Your Honor. I mean, greed, you know, intending to prove greed is essentially the same thing as somebody tossing dirt on a defendant.
(4/6/94: 7-8; 4/12/94pm: 4; 4/14/94am: 23-24; 4/18/94: 27, 29-34). The trial court granted the government's motion, finding: "I think the evidence of these financial peccadillos is of a piece with the evidence of what is the core allegation, and the obvious prejudice to the defendant is of a piece with the modis operandi that's described." (4/6/94: 8). The court found that the tax evidence bore "on contempt . . . ; [t]hat is that he was scrabbling for cash." (4/21/94: 103).
The court admitted IRS Certificates of Lack of Record indicating that Mr. xxxxxxxx: 1) failed to file personal tax returns or to pay personal taxes from 1988 through 1992; 2) that Mr. xxxxxxxx failed to file personal and corporate Form W-2s for the years 1988 through 1993; 3) that Mr. xxxxxxxx failed to file Form 1099s for the years 1988 through 1993; 4) that Mr. xxxxxxxx' company failed to file corporate tax returns (Form 1120) or to pay corporate taxes for the years 1987 through 1993; and 5) that Mr. xxxxxxxx' company failed to file Employer's Quarterly Federal Tax Returns (Forms 941 and 940) or to pay withholding taxes for the years 1987 through 1993. (4/18/94: 41-43, 4/20/94: 100).
Q. Mr. xxxxxxxx, you never paid any taxes from 1988 forward through 1992; that's correct, isn't it?
Q. You didn't pay any personal taxes?
Q. You didn't pay any business taxes?
Q. You didn't even bother to file any reasons; is that correct?
Q. Does this indicate on your part an utter disregard for the laws of the United States?
[Defense Attorney]: Objection, Your Honor.
[Court]: That's argumentative. You can argue that.
[Prosecutor]: I just wanted to know what was in his mind.
[Court]: I know, but don't do it that way.
Q. I don't know. Are you finished?
Q. Is there anything else you'd like to say about that?
Q. How about "I'm sorry"?
A. I am very sorry.
The cross-examination about his failure to file taxes went on for four more pages. (4/19/94: 35-38). The prosecutor concluded his examination of Mr. xxxxxxxx by asking, "Did the employees [of your company] suffer as a result of your stealing their social security contributions." (4/19/94: 84).
B. Evidence That Mr. xxxxxxxx Failed To File Tax Returns And To Pay Taxes Was Not Relevant To Whether He Intended To Defraud A Financial Institution When He Executed The Check-Kite Scheme And Should Not Have Been Admitted.
The use of the tax crimes evidence to prove that Mr. xxxxxxxx intended to defraud a financial institution since, in the prosecutor's words, it showed that "he was basically stealing money . . . from every source he could get his hands on" is no more than a naked propensity argument: "He is a thief." (4/6/94: 5). Admission of the tax crimes evidence was error and was not harmless.
Rule 404(b) prohibits the admission and use of evidence of other crimes "to prove the character of a person in order to show action in conformity therewith." FED. R. EVID. 404(b). As the Supreme Court has written, "[t]he threshold inquiry a court must make before admitting similar acts evidence under Rule 404(b) is whether the evidence is probative of a material issue other than character." Huddleston v. United States, 485 U.S. 681, 686 (1988). In other words, the rule "`countenances admission of "bad acts" evidence that is relevant to any issue in the case except to show the likelihood that, having once fallen into sin, a second slip is likely.'" United States v. Perholtz, 842 F.2d 343, 358 (D.C. Cir. 1988) (citations omitted). The record demonstrates that the prosecutor here introduced the other crimes evidence for just that forbidden purpose.
The tax crimes evidence was not relevant to the question whether Mr. xxxxxxxx intended to execute a scheme to defraud NBW (or FAB-MD). A threshold requirement for relevance of extrinsic acts to show intent is that the two sets of offenses must be sufficiently similar so that the extrinsic act illuminates the intent of the actor in the charged conduct. United States v. Nicely, 922 F.2d 850 (D.C. Cir. 1991); United States v. Foskey, 636 F.2d 517, 524 (D.C. Cir. 1980) ("When a prior criminal act is relied upon to prove intent or knowledge, similarity between the two events must be shown to establish the threshold requirement of relevance.").
Failing to file tax returns and to pay taxes is entirely dissimilar to running a check-kite bank fraud. A check-kite bank fraud is a complex crime of commission that requires regular deposits and careful bookkeeping. Generally, "the intent required for fraud is the intent to deceive." Jankins, 21 F.3d at 441 (emphasis in original). On the other hand, failure to file tax returns and to pay taxes are crimes of omission that require little (if any) planning and require no intent to deceive the IRS. Certainly, in this instance, Mr. xxxxxxxx did not deceive the IRS by filing false tax returns; he simply failed to do what he was legally obligated to do.
Thus, the fact that xxxxxxxx failed to file tax returns and pay money that he owed to the IRS has no connection to whether he intentionally defrauded NBW except to the extent that it proved that he is a "greedy" person who, in the prosecutor's words, has "an utter disregard for the laws of the United States." (4/19/94: 33). Proof that the defendant is greedy is impermissible since it "can be only a shade less general than a claim that [the defendant is] a bad man." Jankins, 21 F.3d at 441. And certainly, proof that a person does not respect the laws of his country is nothing more than proof of criminal propensity.
The improper admission of the other crimes evidence is not excused by the fact that the prosecutor probably could properly have cross-examined Mr. xxxxxxxx about the tax crimes to attack his credibility as a truthful witness once Mr. xxxxxxxx took the witness stand. FED. R. EVID. 608(b). (17) Here, the evidence of Mr. xxxxxxxx' tax crimes was admitted as proof of his intent to commit bank fraud, rather than as proof of his lack of credibility as a witness. The prosecutor never suggested to the court or to the jury that the evidence was relevant to Mr. xxxxxxxx' credibility, but only that it was relevant to whether he intended to commit bank fraud (4/7/94am: 14-15; 4/19/94: 32-34). The trial court instructed the jurors that they could use the evidence "only to help you decide whether the government has proved beyond a reasonable doubt that the defendant had the intent to defraud. You may not consider the evidence, that is, the tax evidence, for any other purpose." (4/22/94: 187).
Moreover, under Rule 608(b), specific instances of conduct may be inquired into on cross-examination, but "may not be proved by extrinsic evidence," as was done here. See United States v. Brooke, 4 F.3d 1480, 1484 (9th Cir. 1993) (extrinsic evidence that defendant had feigned cancer could not properly be admitted to impeach defendant's credibility under Rule 608(b)); United States v. Blake, 941 F.2d 334, 338 (5th Cir. 1991) (under Rule 608(b) only cross-examination may be employed to expose dishonest acts; it is error to attack witness' general character for truthfulness by using extrinsic evidence of conduct that has not resulted in conviction for a crime).
Finally, the erroneous admission of the tax crimes evidence was not harmless, Kotteakos v. United States, 328 U.S. 750 (1946), especially in light of the prosecutor's use of the evidence to smear Mr. xxxxxxxx by asking him whether his failure to pay taxes "indicate[s] on your part an utter disregard for the law of the United States," and by chastising him for not apologizing to the jury for failing to pay his taxes: "Is there anything else you'd like to say about that? . . . How about `I'm sorry?'" (4/19/94: 33- 34).
C. Even If The Prior Crime Evidence Was Relevant To Prove Intent To Defraud A Financial Institution, The Danger Of Unfair Prejudice Substantially Outweighed Its Probative Value.
Even if this Court finds that the tax-related misconduct was admissible under Rule 404(b), it should have been excluded under FED. R. EVID. 403 because the minimal relevance of the prior crimes evidence was "substantially outweighed by the danger of unfair prejudice" and by the danger of "confusion of the issues, or misleading the jury."
Because of the dissimilarities discussed above, the probative value of the evidence was minimal. In addition, the government had available other evidence bearing on whether Mr. xxxxxxxx intended to defraud the bank. See (4/7/94am: 46; 4/7/94pm: 31-33).
Given the state of the evidence, there also was a danger of "confusion of the issues, or misleading the jury." The government alleged that Mr. xxxxxxxx did not pay any corporate taxes, and introduced IRS Certificates of Lack of Record of corporate taxes from 1987-1993 in support of that allegation. Later, however, the government disclosed to the defense contradictory evidence: checks paid to the government by Allied Atlantic in 1989 and 1990, apparently for taxes owed by Allied Atlantic and its predecessor company. (4/18/94: 41-43; 4/21/94: 2-6). The defense introduced those checks into evidence and the government stipulated that "they represent payments to the Internal Revenue Service for tax obligations." (4/22/94: 89). The jury heard no explanation for the contradictory evidence.
Finally, the danger of unfair prejudice substantially outweighed any probative value of the evidence. The duty to report earnings and to pay taxes is one with which each of the jurors is intimately familiar. So, while failing to pay taxes is not the most heinous of felonies, it is one that is likely to raise the ire of jurors who, presumably, pay their fair share. In this circumstance, the jurors likely would consider Mr. xxxxxxxx' failure to pay taxes as propensity evidence, reasoning that a person who does not pay taxes is a "cheat" who would be more likely to commit fraud.
Because the grand jury's indictment was constructively amended, this Court must reverse Mr. xxxxxxxx' convictions and remand the case for a new trial. If the Court concludes that the indictment charged execution of a scheme against FAB-MD as well as NBW, then the convictions must be reversed and the indictment dismissed because the evidence of FAB-MD's FDIC insured status -- an essential element of the offense and the element that confers federal jurisdiction -- was insufficient. Even if the Court concludes that the indictment was not constructively amended, and that the FDIC evidence was sufficient, the case must be reversed and remanded for a new trial because the trial court's instructions made acquittal optional rather than mandatory upon the jury's finding of good-faith, and because the trial court permitted the government to introduce extrinsic evidence of highly prejudicial, but irrelevant, other crimes.
I HEREBY CERTIFY that the foregoing brief for appellant, David A. xxxxxxxx, does not exceed the number of words permitted by D.C. Circuit Rule 28(d).
I HEREBY CERTIFY that two copies of the foregoing Brief and Addendum for Appellant have been delivered by hand to the United States Attorney's Office, John R. Fisher, Esq., Appellate Division, 555 Fourth Street, N.W., Washington, D.C. 20001, this 27th day of November, 1995.
1. "A." citations refer to the Appendix to this brief. Numbers preceded by a month and day (e.g., "4/7/94: 33") reflect pages of the transcript of the trial.
2. NBW and FAB-MD generally did not place "holds" on deposits made by commercial customers unless there was suspicious activity in the account. (4/7/94pm: 70; 4/8/94am: 9-11, 44). Instead, the banks placed short-term "float holds" on commercial deposits based on the banks' evaluation of the time required for clearance through the other institution. (4/7/94pm: 70; 4/8/94am: 9-11). Thus, deposits into commercial accounts were credited and were available for withdrawal almost immediately.
3. Mr. xxxxxxxx also made "cross-deposits" into FAB-MD on those days: On December 19, 1989, he deposited checks amounting to $364,197.23, on January 29, 1990, he deposited checks amounting to $464,369.90, and on February 27, 1990, he deposited checks amounting to $447,335.56. (4/7/94pm: 57-58).
4. Mr. xxxxxxxx's assistant also made deposits. She testified that Mr. xxxxxxxx once told her not to write the term "transfer check" on the deposit slips. (4/7/94am: 46).
5. This was a two part loan: a $39,000 "time loan" and a $51,000 revolving line of credit. (4/8/94am: 48, 51; 4/11/94: 65).
6. Mr. xxxxxxxx' accounts also were "frequently" on the Overdraft Report at FAB-MD. (4/13/94: 95). The FAB-MD manager responsible for Mr. xxxxxxxx' accounts at that bank, Larry Bolton, conducted the same procedures as Mr. Serio at NBW. (4/7/94pm: 78; 4/8/94am: 18; 4/13/94: 42).
7. According to Mr. xxxxxxxx' assistant, Mr. xxxxxxxx said that FAB-MD closed Allied Atlantic's bank accounts because he had made a deposit using a photocopy of a deposit slip rather than an original deposit slip (4/7/94pm: 31-33).
8. Mr. xxxxxxxx' account manager at FAB-MD and a FAB-MD branch manager both testified that they had been unaware that Mr. xxxxxxxx had been kiting checks. (4/7/94pm: 77; 4/13/94: 68-69). One of NBW's branch managers testified that she was unaware. (4/12/94pm: 79; 4/13/94: 6).
9. The defense also called as a witness Mr. xxxxxxxx' former assistant, Judy Weicht, to attempt to rebut the government's 404(b) evidence. She testified that a bookkeeping company performed payroll services for Allied Atlantic. (4/20/94: 96, 106). The reports received from the bookkeeping company were in the name of Allied Atlantic's predecessor business, Better Business Signs. (4/20/94: 96). Ms. Weicht testified that she filed Forms 940 and 941 on behalf of Allied Atlantic in 1989, 1990, and 1991. (4/20/94: 93, 105). She testified that each year that the business was in operation, she distributed the W-2 forms to the employees and filed copies with the federal government. (4/20/94: 94, 96).
10. The prosecutor argued that "[I] could not have charged as counts the deposits that took place in Maryland, because there is a lack of venue. The first pleading in this case would have been dismiss for lack of venue, and I would have said, well, yeah, that's right." (4/21/94: 151). "[H]alf of those acts takes [sic] place in Maryland, half of those acts take place in the District of Columbia. Since we're sitting in the District of Columbia we can only criminalize for venue purposes those acts that took place in the District of Columbia." (4/21/94: 149-150).
11. Every circuit has ruled constructive amendments reversible per se. United States v. Dunn, 758 F.2d 30, 36 (1st Cir. 1985); United States v. Mucciante, 21 F.3d 1228, 1235 (2d Cir. 1994); United States v. Somers, 496 F.2d 723, 744 (3d Cir. 1974); United States v. Floresca, 38 F.3d 706, 711 (4th Cir. 1994); United States v. Young, 730 F.2d 221, 223 (5th Cir. 1984); United States v. Ford, 872 F.2d 1231, 1235 (6th Cir. 1989); United States v. Leichtnam, 948 F.2d 370, 377 (7th Cir. 1991); United States v. Yeo, 739 F.2d 385, 387 (8th Cir. 1984); United States v. Van Stoll, 726 F.2d 584, 586 (9th Cir. 1984); United States v. Apodaca, 843 F.2d 421, 428 (10th Cir. 1988); United States v. Weissman, 899 F.2d 1111, 1114 (11th Cir. 1990).
12. No constitutional right is implicated when an indictment is narrowed, however. In Miller, supra, for example, the indictment charged the defendant with defrauding his insurer by consenting in advance to a burglary of his business, and by later inflating the value of his loss. Id. at 131-132. At trial, the government proved only that the defendant inflated the value of the loss. Id. at 132. The indictment was not improperly amended, however, since by simply removing one of the bases of a conviction no charge or additional basis for conviction was added to the grand jury's indictment. Id. at 144.
13. It is worth noting, however, that the government's attorney firmly believed that had the jury been asked to consider only whether Mr. xxxxxxxx executed a scheme to defraud NBW the jury would have acquitted (4/21/94: 162): "If [the case] goes to the jury on a one-bank theory, this jury is going to acquit. I don't have any doubt about that in my own mind . . . ."
14. See e.g., United States v. Hadamek, 28 F.3d 827 (8th Cir. 1994) (president of victim bank); United States v. Schermerhorn, 906 F.2d 66 (2d Cir. 1990) (vice president of victim bank); United States v. McClelland, 868 F.2d 704 (5th Cir. 1989) (vice president of victim bank); United States v. Roberts, 844 F.2d 537 (8th Cir. 1988) (vice president of victim bank); United States v. Wood, 780 F.2d 555 (6th Cir. 1986) (assistant vice president of victim bank).
15. See e.g., Schermerhorn, 906 F.2d at 70 ("reiterat[ing]" Judge Friendly's "reproach" to prosecutors in United States v. Sliker, 751 F.2d 477, 484 (2d Cir. 1984), cert. denied, 470 U.S. 1058 (1985)); United States v. Maner, 611 F.2d 107, 111-112 (5th Cir. 1980) (observing that the failure of federal prosecutors to sufficiently prove FDIC status was "a nationwide plague infecting United States Attorneys throughout the land").
16. The prosecutor initially argued that the tax crimes were relevant to prove "plan" and "knowledge." He proffered that the evidence was relevant to prove "plan," because Mr. xxxxxxxx "had a plan to steal money, and he did it in a bunch of different ways, one of which has been indicted." (4/6/94: 6). The prosecutor later abandoned those two theories. (4/21/94: 103-106).
17. See e.g., United States v. Bustamante, 45 F.3d 933, 946 (5th Cir. 1995) (cross-examination of defendant about failure to report or pay taxes on certain income is proper under FRE 608(b) because it is relevant to the defendant's character for honesty). But see, United States v. Dennis, 625 F.2d 782, 798 (8th Cir. 1980) ("trial court did not err in precluding evidence of the arrest for tax problems, because civil tax problems cannot be regarded as indicating a lack of truthfulness" under Rule 608(b)).

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