Opinion ID: 2802975
Heading Depth: 3
Heading Rank: 1

Heading: Mail and Wire Fraud (Counts 4-20)

Text: To prove mail or wire fraud, the government must show (1) a scheme to defraud victims (2) by obtaining their money or property (3) furthered by the use of interstate mail or wires. Fountain v. United States, 357 F.3d 250, 255 (2d Cir. 2004), see also 18 U.S.C. §§ 1341 and 1343. The government must further establish that the defendant had fraudulent intent or “a conscious knowing intent to defraud,” and that some harm or injury to the property rights of the victim was contemplated. United States v. Guadagna, 183 F.3d 122, 129 (2d Cir. 1999) (quotation marks omitted). Both defendants argue that the government did not establish their intent to defraud and Smith also claims that he was not involved in certain of the charged transactions. McGinn first challenges his mail and wire fraud convictions on Counts 4-6 and 1113, all of which concern the sales of Firstline certificates, contending that he was not responsible for losses related to Firstline’s bankruptcy because he did not know or believe it would occur. However, the government’s proof showed otherwise. It established that he was immediately informed of the bankruptcy, and that he received regular emails regarding post-bankruptcy sales to investors. Although he testified that he paid very little attention to these emails, this testimony was belied by examples of his responses to these messages. Considering the email evidence and the fact that MS&C had a potent motivation to conceal the bankruptcy because disclosure of the bankruptcy would have made it exceedingly difficult, if not impossible, for MS&C to procure investors, the jury was entitled to reject McGinn’s self-serving testimony and accept the government’s proof that he knowingly concealed material information from prospective investors. After all, as we have held, a defendant’s belief “that ultimately everything would work out so that no one would lose any money” does not excuse fraudulent 8 No. 13-3164-cr conduct. See, e.g. United States v. Rossomando, 144 F.3d 197, 199-201 (2d Cir. 1998). Similarly, as to Counts 7, 14-18 and 20, a reasonable jury could have rejected McGinn’s contentions that the transfers out of the trust escrow accounts were not improper because the escrow accounts had been “broken” and so defendants enjoyed unrestricted access to the funds, and that they were essentially anticipating “profits” that they would realize over time. The jury was also free to accept the government’s proof that, contrary to the defendants’ testimony and to representations in the PPMs, the defendants, without the necessary disclosures, took funds that were required to remain in escrow, diverted them for personal use, shored up other trusts, and funneled money from unrelated entities to make monthly interest payments and that all of this conduct involved material misrepresentations or omissions. This evidence was sufficient for the jury to reasonably infer that defendants intended to defraud investors, or, in other words, that their conduct was willful.1 The evidence introduced at trial regarding the Four Funds was also sufficient to support both defendants’ mail fraud convictions (Counts 8 and 9) and McGinn’s wire fraud conviction (Count 19). McGinn argues that the monies he and Smith diverted were fees legitimately owed to them, which, instead of taking, they applied to other investments in order to forestall losses. The government, however, proved that these diversions were not authorized by the PPMs and were not disclosed to investors, and thus directly called into question their legitimacy. Even more tellingly, the government’s proof established that the defendants 1 Smith was only convicted of Counts 14 and 17. There was sufficient evidence demonstrating Smith’s involvement for the jury to have inferred that Smith was a knowing participant in the fraud and that he knew of a $35,000 wire transfer to his personal account to find him guilty on those counts. 9 No. 13-3164-cr caused the creation of false accounting records intended to disguise the sources of the diverted money and that McGinn applied certain of the transferred funds to his personal use. Smith’s involvement in falsifying the relevant accounting records contradicts his argument that the government did not prove his specific intent with regards to Counts 8 and 9. As for Count 10, which relates to the mailing sent to investors after Firstline’s bankruptcy, the government’s proof established that the letter falsely identified the source of post-bankruptcy payments and falsely claimed that Firstline’s management had concealed the condition of the company. The defendants contend that the letter, which postdated the bankruptcy by many months, was insufficient to demonstrate intent to defraud. However, as the government correctly pointed out, in a mail fraud scheme, a mailing need not deprive someone of money or property so long as it is in furtherance of the scheme and the letter in question satisfied that requirement. See United States v. Lane, 474 U.S. 438, 451-52 (1986) (“[m]ailings occurring after receipt of the goods obtained by fraud are within the statute if they were designed to lull the victims into a false sense of security [or] postpone their ultimate complaint to the authorities”) (quotation marks omitted). B. Conspiracy to Commit Mail and Wire Fraud (Count 1) To prove conspiracy, the government must demonstrate the existence of the conspiracy and the defendant’s knowing participation. See United States v. Story, 891 F.2d 988, 992 (2d Cir. 1989). Here, the government adduced sufficient evidence that defendants knowingly and willingly entered into a conspiracy to defraud investors. Particularly probative in this regard was the evidence concerning the defendants’ joint efforts to divert funds, conceal losses through the creation of false accounting records, and the submission of false documents to FINRA. Viewing this evidence 10 No. 13-3164-cr in its totality, and in the light most favorable to the government, a rational jury could have found beyond a reasonable doubt that defendants were knowing participants in a conspiracy to commit mail and wire fraud. C. Securities Fraud (Counts 21-26) McGinn and Smith also challenge the sufficiency of the evidence on their securities fraud convictions, arguing principally that there was insufficient evidence demonstrating their intent to defraud. In order to establish a criminal violation of the securities laws, the government must show that defendants acted “willfully.” 15 U.S.C. § 78ff(a). We have defined willfulness in this context as “a realization on the defendant’s part that he was doing a wrongful act under the securities laws, in a situation where the knowingly wrongful act involved a significant risk of effecting the violation that has occurred.” United States v. Cassese, 428 F.3d 92, 98 (2d Cir. 2005) (internal quotation marks and citation omitted). As previously mentioned, the securities fraud charges concerned money that defendants took for themselves and for one of their business associates from two of the trusts which MS&C organized. The government’s evidence showed that McGinn and Smith induced investors to part with their money on the understanding that their money would be used by the trust in which they were investing for the limited purposes specified in that trust’s PPM. Instead, defendants transferred significant amounts of investors’ money to their personal accounts and used them for purposes unrelated to the reasons they were invested. These facts supplied a reasonable basis upon which the jury could conclude that the defendants acted willfully. D. Filing False Tax Returns (Counts 27-32) Defendants were each convicted on three counts of filing false tax returns for the years 2006, 2007 and 2008. See 26 U.S.C. § 7206(1). 11 No. 13-3164-cr Essentially, the government contended that a series of advances to the defendants were not loans but income. The defendants argued that the advances were, in fact, loans, but that, in any event, the government’s evidence was insufficient to prove that they acted willfully and knowingly. Section 7206(1) requires the government to prove: (1) that the defendant made or caused to be made an income tax return for the relevant year, which he verified was true; (2) that the tax return was false as to something material; (3) that the defendant willfully signed the return knowing it was false; and (4) that the return stated that it was made under penalty of perjury. United States v. LaSpina, 299 F.3d 165, 179 (2d Cir. 2002). While a taxpayer is not ordinarily required to report a loan as income, he must do so if he does not intend to repay the loan. See United States v. Rosenthal, 470 F.2d 837, 841 (2d Cir. 1972). At trial, the government adduced evidence, apparently accepted by the jury, that Smith did not believe the amounts in question were loans. The government established that Smith initially characterized the loans at issue as “fees” when asked about them by FINRA investigators. McGinn did not disclose the payments as “loans” on a residential mortgage application and neither defendant listed the purported loans as liabilities on their financial statements. Moreover, while McGinn and Smith provided contemporaneous documentation of other loans with promissory notes, neither of them memorialized the terms of the unreported loans at issue. The comptroller for MS&C also testified that the advances were not loans, but fees, and that Smith had directed him to change the entries of certain payments from “fees” to “loans” for “tax reasons.” Gov’t App’x 215-20. Based on this evidence, we have little difficulty concluding that a jury could have reasonably accepted the government’s evidence that defendants knew the payments were income, not loans, and willfully omitted them from their returns. 12 No. 13-3164-cr