Source: https://law.justia.com/cases/federal/appellate-courts/F2/669/446/149155/
Timestamp: 2020-03-29 16:20:11
Document Index: 377530184

Matched Legal Cases: ['§ 371', '§ 1341', '§ 1341', '§ 25', '§ 25', '§ 702', '§ 25', '§ 1341']

United States of America, Plaintiff-appellee, v. Lewis F. Shelton, James Darrough, John Derry, Donald Burks,and Carl Bledsoe, Defendants-appellants, 669 F.2d 446 (7th Cir. 1982) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Seventh Circuit › 1982 › United States of America, Plaintiff-appellee, v. Lewis F. Shelton, James Darrough, John Derry, Donal...
United States of America, Plaintiff-appellee, v. Lewis F. Shelton, James Darrough, John Derry, Donald Burks,and Carl Bledsoe, Defendants-appellants, 669 F.2d 446 (7th Cir. 1982)
US Court of Appeals for the Seventh Circuit - 669 F.2d 446 (7th Cir. 1982) Argued Dec. 1, 1980. Jan. 21, 1982
The crime of conspiracy is an agreement to violate the law. United States v. Craig, 573 F.2d 455, 485 (7th Cir. 1977), cert. denied, 439 U.S. 820, 99 S. Ct. 82, 58 L. Ed. 2d 110 (1978). Such an agreement is rarely susceptible of proof by direct evidence but may be inferred from circumstantial evidence. Glasser v. United States, 315 U.S. 60, 80, 62 S. Ct. 457, 469, 86 L. Ed. 680 (1942). The defendants in the instant case were charged with conspiracy to commit mail fraud. 18 U.S.C. § 371 (1976). This offense requires that the fraudulent scheme be the object of the conspiracy and that it be reasonably foreseeable that the mails will be used in furtherance of the scheme. Craig, 573 F.2d at 486.5
In order to prove a violation of the mail fraud statute, 18 U.S.C. § 1341 (1976), the prosecution must establish 1) a scheme to defraud and 2) the use of the mails in furtherance of the scheme. United States v. Keane, 522 F.2d 534, 544 (7th Cir. 1975), cert. denied, 424 U.S. 976, 96 S. Ct. 1481, 47 L. Ed. 2d 746 (1976). We have no difficulty in finding overwhelming evidence to support both of these elements.
Finally, Shelton, Darrough and Derry all sold FNM stock on the misrepresentation that there would be a quick return for investors (6 months to one year). E.g. Tr. XIV at 107. Such a quick return was made impossible, however, by the "consulting fees" and excessive expenses charged against FNM by the three defendants. In particular, we note their receipt of the partial assignment of the FNM/IFMA consulting fees, described by one witness as a "sweetheart contract," Tr. XIA at 111. Derry, Shelton and Darrough received a total of one third of the first year's sales of IFMA Harvester Agreements and a small residual percentage of 19 years of future sales in exchange for six months of consulting and management assistance for the cooperative. It is not unlawful to seek and accept generous compensation from a new corporation. Under the circumstances of the instant case, however, the defendants' conduct amounted to fraud because they knew that their "fees" under the partial assignments and their excessive expenses made such a quick return unlikely. Lustiger v. United States, 386 F.2d 132, 138 (9th Cir. 1967), cert. denied, 390 U.S. 951, 88 S. Ct. 1042, 19 L. Ed. 2d 1142 (1968) (concealing material facts can constitute fraud). The availability of capital is critical to a new venture but the defendants arranged their compensation and conducted their organizational activities on such a lavish basis that there was no chance for the cooperative to achieve any return on the farmers' investment during its first year.
The defendants have attempted to show that many farmers invested because they were familiar with other farmers in the area who had invested before them. Of course, it is true that many of the farmers checked with other prior investors before they themselves invested. But, reliance by the victims upon the behavior of other previously defrauded investors could not constitute a defense to these charges. It is not necessary to show that each purchaser relied upon the misrepresentations of the defendants or their agents. United States v. Goldberg, 455 F.2d 479, 481 (9th Cir.), cert. denied, 406 U.S. 967, 92 S. Ct. 2411, 32 L. Ed. 2d 665 (1972). The facts established at trial disclose precisely the kind of scheme to defraud prohibited by 18 U.S.C. § 1341.
Defendants Darrough and Shelton also challenge the sufficiency of the evidence on the remaining element of the mail fraud statute, the use of the mails. Virtually all of the mail fraud counts involved the mailing of an FNM stock certificate or an IFMA Harvester Agreement after the money was paid by the investor. Each mailing was necessary to the overall scheme even though money had already been received from the particular investor who would receive the mailing. Failure to mail out the stock certificate or Harvester Agreement would have aroused suspicion and made future sales difficult. A mailing is in furtherance of a scheme to defraud if it is designed to lull an investor into a sense of security after he has already paid for his investment. United States v. Toney, 598 F.2d 1349, 1353 (5th Cir. 1979), cert. denied, 444 U.S. 1033, 100 S. Ct. 706, 62 L. Ed. 2d 670 (1980). See also United States v. Sampson, 371 U.S. 75, 81, 83 S. Ct. 173, 176, 9 L. Ed. 2d 136 (1962); United States v. Habel, 613 F.2d 1321, 1325 (5th Cir.), cert. denied, 447 U.S. 925, 100 S. Ct. 3018, 65 L. Ed. 2d 1117 (1980). The evidence was thus sufficient with respect to this element of the offense of mail fraud.18
constitute evidence of wilfulness. Spies v. United States, 317 U.S. 492, 499, 63 S. Ct. 364, 368, 87 L. Ed. 418 (1943). Shelton filed blank returns for the years 1972 through 1975 with differing social security numbers and paid no income tax for those years. He told the treasurer of IFMA that he used a lot of social security numbers to "dazzle them with (my) fast footwork." Tr. VA at 208. He told another IFMA employee that he always gave the IRS different social security numbers to keep them guessing. Tr. XIII at 76. Shelton hindered attempts by IFMA employees to file necessary IRS documents regarding his income. Tr. IV at 105-06; Tr. XIII at 71-73. Shelton was personally given his wage statement by the treasurer of IFMA, Tr. IV at 106, but later told an IRS agent investigating his case that he had not received the necessary forms. Tr. XVI at 92-93.19 The jury could have easily concluded that Shelton's failure to pay his income taxes in 1975 was wilful.
We also reject Darrough's contention that the Government failed to establish that his failure to pay his 1975 taxes was wilful. Darrough did not file any tax returns for 1974, 1975 or 1976. A pattern of failing to file tax returns is probative of a defendant's state of mind with regard to a particular year. Mitchell v. United States, 208 F.2d 854, 857 (8th Cir.), cert. denied, 347 U.S. 1012, 74 S. Ct. 863, 98 L. Ed. 1135 (1954), vacated on other grounds, 348 U.S. 905, 75 S. Ct. 311, 99 L. Ed. 710 (1955). Darrough also ran a portion of his income, his share of the proceeds of the sale of the cooperative scheme to Indiana investors, through a "corporation" that Darrough admitted was nothing more than a name and a bank account. Tr. XVI at 142. Darrough told an IRS agent that he had never received his income statement from the cooperative, Tr. XVI at 148,20 while IFMA's treasurer testified that he personally handed the statement to Darrough. Tr. IV at 106. We think that there was sufficient evidence for the jury to conclude that Darrough's failure to pay his income taxes for 1975 was wilful. United States v. Venditti, 533 F.2d 217 (5th Cir. 1976).21
Joinder of counts charging two or more offenses is proper under Rule 8(a) of the Federal Rules of Criminal Procedure if the offenses are based on acts constituting parts of a common scheme or plan. Contrary to the arguments of Shelton, Derry and Darrough, the indictment could properly join the conspiracy count and the 77 mail fraud counts which were the objects of the conspiracy. United States v. Nettles, 570 F.2d 547, 552 (5th Cir. 1978). Joinder of the three tax counts was also proper because those counts charged Derry, Darrough and Shelton with a failure to pay income tax on the proceeds of the scheme to defraud. United States v. Isaacs, 493 F.2d 1124, 1159 (7th Cir.), cert. denied, 417 U.S. 976, 94 S. Ct. 3183, 41 L. Ed. 2d 1146 (1974).22 It was also permissible for the indictment to include the attempted bribery of the state Attorney General's office as part of the overall scheme to defraud and of the conspiracy because the bribery attempt was made for the purpose of furthering the scheme.
Rule 8(b) of the Federal Rules of Criminal Procedure regulates the joinder of defendants. Darrough contends that it was improper to join him with the other defendants. Joinder of multiple defendants who have had significant roles in a common scheme, such as defendant Darrough, is proper under Rule 8(b). United States v. Bernstein, 533 F.2d 775, 789 (2d Cir.), cert. denied, 429 U.S. 998, 97 S. Ct. 523, 50 L. Ed. 2d 608 (1976).
Darrough, Shelton and Derry all argue that the district court should have granted their numerous motions for a severance, under Rule 14 of the Federal Rules of Criminal Procedure, of the respective charges against each of these defendants. Each of the three defendants allege that the "spillover" effect of charges against the other defendants left the jury unable to fulfill its duty to determine the guilt of each defendant based upon the evidence pertaining to that defendant. The district judge gave appropriate limiting instructions during the trial when necessary, however, and carefully instructed the jury in this regard. The jury's verdict also supports our belief that no severance was necessary. Defendant Derry was acquitted on every mail fraud count in which the mailings occurred after his leaving FNM on February 19, 1976. Defendants Burks and Bledsoe were acquitted on all counts involving the sale of FNM stock, to which they had a more tenuous connection than in other matters. Such a discriminating verdict is one indication that the jury considered each defendant individually. In summary, we feel that the trial judge acted within his discretion in denying the severance motions, United States v. Allstate Mortgage Corp., 507 F.2d 492, 495-96 (7th Cir. 1974), cert. denied, 421 U.S. 999, 95 S. Ct. 2396, 44 L. Ed. 2d 666 (1975), and the appropriateness of his decision was borne out by the discrimination shown in the jury's verdicts.
Bledsoe contends that his testimony was immune under 11 U.S.C. § 25(a) (10) which provides that
11 U.S.C. § 25(a) (10) (1976).30 Bledsoe argues, and the Government does not dispute, that this bankruptcy provision applies, because of 11 U.S.C. § 702 (1976), to FMA's voluntary reorganization under Chapter XI. The real focus of the argument concerns whether the hearings at which Bledsoe testified were covered by § 25(a) (10) and whether Bledsoe could claim immunity for his testimony as an officer of the bankrupt corporation without a specific order designating him to testify on behalf of FMA in accordance with Rule 901(6) (A) of the Rules of Bankruptcy Procedure. Compare United States v. Coyne, 587 F.2d 111 (2d Cir. 1978) with United States v. Castellana, 349 F.2d 264 (2d Cir. 1965), cert. denied, 383 U.S. 928, 86 S. Ct. 934, 15 L. Ed. 2d 847 (1966).
Burks and Bledsoe argue that the district court did not conduct an adequate voir dire of the jury concerning pre-trial publicity. The district court asked the jurors about their knowledge of the case and whether they could render a fair verdict based upon the evidence introduced at trial. Only five jurors out of approximately forty indicated any knowledge about the case and those jurors were then questioned more extensively. Given the absence of any evidence of pre-trial publicity approaching the level of the cases cited by defendants, United States v. Dellinger, 472 F.2d 340, 366-77 (7th Cir. 1972), cert. denied, 410 U.S. 970, 93 S. Ct. 1443, 35 L. Ed. 2d 706 (1973); Silverthorne v. United States, 400 F.2d 627, 635 (9th Cir. 1968) (every potential juror had some knowledge about the case), we think that the district court was not required to conduct a more extensive voir dire. We see no indication at all that the nature of the pre-trial publicity resulted in defendants Burks and Bledsoe's not receiving a fair trial.X. The Refusal of Bledsoe's Instruction on "Puffing"
Tr. XVIII at 173-79.33 We agree that there is a difference between "puffing" and representations that are sufficient to support a scheme to defraud. See Scott v. United States, 263 F.2d 398, 402, 401 n.2 (5th Cir. 1959); Comment, Mail Fraud-Fraudulent Misrepresentations must be Distinguished from "Puffing" or "Sellers Talk" in Offenses under 18 U.S.C. § 1341, 22 S.Car.L.Rev. 434 (1970). See also United States v. New South Farm & Home Co., 241 U.S. 64, 70-71, 36 S. Ct. 505, 507, 60 L. Ed. 890 (1916). "Puffing," however, relates to expressions of opinion. Miller v. Premier Corp., 608 F.2d 973, 981 (4th Cir. 1979). The proposed instruction does not sufficiently distinguish expressions of opinion from knowingly false statements of fact.34 There is no requirement to give an instruction that is inaccurate or misleading. United States v. Lisowski, 504 F.2d 1268, 1273 (7th Cir. 1974).
Certain hearsay statements of co-conspirators may be admitted against all of the members of the conspiracy under Rule 801(d) (2) (E) of the Federal Rules of Evidence. Under United States v. Santiago, 582 F.2d 1128 (7th Cir. 1978), the district court must determine by a preponderance of the non-hearsay evidence that the following four conditions of Rule 801 have been met:
We have no doubt that the statements in question were made in furtherance of the conspiracy. With respect to the other Santiago conditions, we feel that the non-hearsay evidence set out above in Part II was sufficient, by a preponderance of the evidence, to meet the Santiago requirements with regard to the existence of a conspiracy and Burks, Bledsoe and Derry's membership therein.35 We note in particular with respect to Burks and Bledsoe, whose involvement in the conspiracy presents a closer question under Santiago than that of Derry, that there was evidence that the PFA concept was so inherently susceptible to fraudulent use as to raise an inference that Burks and Bledsoe intended to promote that illegal use in Illinois through an agreement with Shelton and Darrough. See Direct Sales Co. v. United States, 319 U.S. 703, 711-12, 63 S. Ct. 1265, 1269, 87 L. Ed. 1674 (1943).
Shelton and Derry both challenge the severity of their sentences-twenty and twelve years respectively. The district court has, of course, broad discretion in sentencing. Williams v. New York, 337 U.S. 241, 69 S. Ct. 1079, 93 L. Ed. 1337 (1949). The evidence in the instant case established a massive fraud with over 700 victims, and losses approaching one million dollars. While the sentences given Shelton and Derry were certainly severe, they reflect the respective roles of these defendants in the fraud and the egregious nature of their actions. The sentences are within the statutory maximums36 and we find no abuse of discretion under the circumstances. United States v. Wilkins, 659 F.2d 769, 773 (7th Cir. 1981).
It is appropriate for a sentencing court to consider evidence of wrongdoing by defendants short of an actual conviction. Houle v. United States, 493 F.2d 915, 916 (5th Cir. 1974). A judge may, for example, consider a defendant's apparent false testimony at the trial of the charges giving rise to the sentence, conduct which occurred in front of the sentencing judge. United States v. Grayson, 438 U.S. 41, 52-55, 98 S. Ct. 2610, 2616-2618, 57 L. Ed. 2d 582 (1978). We are concerned, however, about the sentencing court's reference in the instant case to the ongoing Missouri proceedings. Where the wrongdoing short of an actual conviction is the subject of another ongoing criminal proceeding, such an assumption of guilt may infringe upon the sentencing authority of the court presiding over the ongoing proceeding. In the context of the instant case, Bledsoe was eventually found guilty of the Missouri charges, albeit after sentence was imposed in Illinois. Normally, sentence would have been imposed in Missouri based upon the severity of his conduct in Missouri as well as an assessment of the significance of his prior Illinois conviction. Because of the nature of the sentencing sequence employed in the instant case, however, the Missouri federal judge was also forced to consider whether he should reduce Bledsoe's Missouri sentence by some amount to reflect the decision of the Illinois federal judge to base Bledsoe's Illinois sentence, in part, on Bledsoe's PFA activities. While there is no explicit reference to this problem in the Missouri judge's sentencing order, that order does make Bledsoe's sentence concurrent "with any other sentence previously imposed by any other court." The Missouri fraud in dollars lost also exceeded that of Illinois by a factor of ten to one, and Bledsoe was more centrally culpable in Missouri than in Illinois. Nonetheless, Bledsoe received a shorter sentence of incarceration in Missouri than Illinois.
A "Ponzi scheme" is a type of fraud which requires an ever increasing stream of investors in order to fund obligations to the earlier investors, with a resulting pyramiding of the liabilities of the enterprise. The appellation is derived from one Charles Ponzi, a famous Boston swindler. With a capital of $150, Ponzi began to borrow money on his own promissory notes at a 50% rate of interest payable in 90 days. Ponzi collected nearly $10 million in 8 months beginning in 1919, using the funds of new investors to pay off those whose notes had come due. A more complete account of Ponzi's exploits can be found in Cunningham v. Brown, 265 U.S. 1, 44 S. Ct. 424, 68 L. Ed. 873 (1924). We do not intend to suggest that the scheme in the instant case is by any means on all fours with Ponzi's efforts. Here, for example, there was no requirement for prompt repayment of the capital of the earlier investors. But the schemes are similar to the extent that a heavy and steady influx of new capital was desirable, if not essential, to continued operation. For example, when confronted with the cooperative's lack of working funds in December of 1975, Darrough and Shelton both stated that "we'll just issue more securities like they do over in Missouri. We won't worry about running out of money." Tr. IV at 47-48. This approach is characteristic of a "Ponzi scheme."
In October of 1976, Shelton also bragged to a social acquaintance about the fraud he had pulled off in Illinois against some dumb farmers. Tr. VIIIB at 190. Shelton then pulled out a scrapbook of IFMA newspaper clippings to show his acquaintance. This evidence was properly admitted against Shelton as an admission by a defendant. Fed.R.Evid. 801(d) (2) (A).
Fed.R.Evid. 801(d) (2) (C). The statements we have referred to were not only authorized by the defendants but were derived from the sales pitch book and from statements made by the defendants at sales training meetings. Such statements by salesmen may be admitted against these defendants. United States v. Krohn, 573 F.2d 1382, 1386 (10th Cir.), cert. denied, 436 U.S. 949, 98 S. Ct. 2857, 56 L. Ed. 2d 792 (1978).
We reject Shelton's contention that his statements to IRS agents should have been suppressed for their purported failure to follow IRS regulations in connection with his interviews. United States v. Lehman, 468 F.2d 93, 104 (7th Cir.), cert. denied, 409 U.S. 967, 93 S. Ct. 273, 34 L. Ed. 2d 232 (1972)
As with Shelton's argument in this regard, we reject Darrough's challenge to his statements to IRS agents based upon purported violations of agency rules. Lehman, 468 F.2d at 104. We also reject Darrough's similar objection based upon the requirements of Miranda v. Arizona, 384 U.S. 436, 86 S. Ct. 1602, 16 L. Ed. 2d 694 (1966). See Maguire v. United States, 396 F.2d 327, 331 (9th Cir. 1968), cert. denied, 393 U.S. 1099, 89 S. Ct. 897, 21 L. Ed. 2d 792 (1969)