Opinion ID: 793369
Heading Depth: 6
Heading Rank: 7

Heading: Unfair Prejudice with Computer Generated Evidence

Text: 253 In a reply brief, Defendants raise the argument that computer generated evidence may be unreliable. (Elie Abboud Reply Br. 7.) An argument first presented to the Court in a reply brief is waived. United States v. Moore, 376 F.3d 570, 576 (6th Cir.2004) (citing Priddy v. Edelman, 883 F.2d 438, 446 (6th Cir.1989)). 254 G. THE EVIDENCE WAS SUFFICIENT TO SUPPORT DEFENDANTS' CONVICTIONS FOR BANK FRAUD AND MONEY LAUNDERING 1. Standard of Review 255 When reviewing the sufficiency of evidence in support of a jury verdict, this Court views the evidence in the light most favorable to the prosecution and gives the prosecution the benefit of all reasonable inferences from the testimony. United States v. Sawyers, 409 F.3d 732, 735 (6th Cir.2005). Viewing the evidence in this manner, a jury verdict is supported by sufficient evidence if  any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt. United States v. Evans, 883 F.2d 496, 501 (6th Cir.1989) (quoting Jackson v. Virginia, 443 U.S. 307, 319, 99 S.Ct. 2781, 61 L.Ed.2d 560 (1979)) (internal quotations omitted). In sum, a defendant claiming `insufficiency of the evidence bears a very heavy burden.' United States v. Vannerson, 786 F.2d 221, 225 (6th Cir.1986) (quoting United States v. Soto, 716 F.2d 989, 991 (2d Cir.1983)). 2. Analysis 256 a. Bank Fraud 257 i. Legal Framework 258 Section 1344 of Title 18 of the United States Code states, [w]hoever knowingly executes, or attempts to execute, a scheme or artifice . . . to defraud a financial institution shall be guilty of bank fraud. In order to prove bank fraud, the government must prove three elements: (1) that the defendant knowingly executed or attempted to execute a scheme to defraud a financial institution; (2) that the defendant did so with the intent to defraud; and (3) that the financial institution was insured by the FDIC. United States v. Hoglund, 178 F.3d 410, 412-13 (6th Cir.1999). 259 This Court has held that check kiting is a form of bank fraud. United States v. Stone, 954 F.2d 1187, 1190 (6th Cir.1992). In Stone, the Court outlined the mechanics of check kiting: 260 Check kiting consists of drawing checks on an account in one bank and depositing them in an account in a second bank when neither account has sufficient funds to cover the amounts drawn. Just before the checks are returned for payment to the first bank, the kiter covers them by depositing checks drawn on the account in the second bank. Due to the delay created by the collection of funds by one bank from the other, known as the float time, an artificial balance is created. 261 Id. at 1188 n. 1. Check kiting acts as a substitute for a short-term loan. Id. at 1188. For example, if the defendant needed $100,000 today but would not have sufficient money for three days, he would write a check for $100,000 on Day 1 from an account with Bank A with insufficient funds. If Bank A has a one day float time, then it would find insufficient funds on Day 2. Before Bank A returned the check, the defendant would write a check for $100,000 on Day 2 from an account with Bank B with insufficient funds. If Bank B has a one day float time, then it would find insufficient funds on Day 3. Before Bank B returned the check, the defendant would write a check for $100,000 on Day 3 from the account at Bank A with insufficient funds. Before Bank A returned the check on Day 4, the defendant would hopefully have received sufficient money and deposited this in the account at Bank A. This process can become extremely complicated with multiple accounts and a large transaction volume between these accounts. 262 ii. Bank Officials' Purported Approval of Defendants' Actions 263 Defendants' primary contention is that the bank officials approved of Defendants' check kiting practices. We disagree. 264
265 With respect to PVF accounts, Defendants had specific accounts with PVF for use in their check cashing business. The mechanics of such an account was that Defendants would deposit customer checks that they had cashed into an account on Day 1. PVF would then give instant credit to Defendants, so that they could withdraw the full amount of the checks deposited on Day 1, even though PVF had not received credit from those checks. On Day 2, PVF would find out which checks deposited were actually good and which were returned by the computer. As a result, a possibility existed that Defendants' account would be negative, if they had withdrawn on Day 1 an amount that was greater than the actual amount credited on Day 2. 266 PVF allowed these accounts to become negative, because it had $500,000 in collateral from Defendants. If the account was negative, Defendants on Day 2 had to deposit funds sufficient to place the balance at zero. 267 PVF also charged a fee for the instant credit given to Defendants on Day 1. This was in connection with expenses in handling the accounts and for the time value of money. 268 We agree with Defendants that this system was created for the benefit of Defendants, so that they could have money on Day 1 without having actual deposits until Day 2. Of course, the banks also benefitted from this arrangement through the fees charged. 269 The fact that the banks created this system did not give Defendants free license to abuse the system by check kiting. The purpose of the system was to give Defendants instant credit for checks they had cashed, not for checks from Defendants' other accounts with insufficient funds. Defendants were mixing checks from their own insufficient accounts with checks cashed from customers and depositing these into their accounts. In other words, Defendants were disguising the fact that they were drawing instant credit with checks from their own accounts. 270 Defendants seem to be arguing that because they could run a negative balance on PVF Account 1, and because they could run a negative balance on PVF Account 2, they were authorized to cycle checks between Account 1 and Account 2 to artificially inflate the balances of the two accounts. This is simply incorrect; no one had given them permission to do so. We find our previous decision in Stone to be directly on point. There, the banks allowed the defendant to run a negative balance for a service charge. The defendant argued that this system was essentially bank approval of check kiting between accounts where the bank imposed such a charge. This Court disagreed: 271 [The defendant's] elaborate check-kiting scheme was never authorized, negotiated, secured, or known to the bank. . . . While simple overdrafts by themselves may not rise to the level of misapplication of bank funds, the evidence presented in this case showed a complicated scheme wherein a series of worthless checks were systematically written, none of which had any monetary substance.. . . [The bank's] assessment of a service charge did not in any sense confer a right upon [the defendant] to engage in the otherwise illegal activity of check kiting. 272 Stone, 954 F.2d at 1192-93 (quoting United States v. McKinney, 822 F.2d 946, 948-49 (10th Cir.1987)) (emphasis supplied). Likewise, while bank officials in this case did authorize simple negative balances on Defendants' accounts, no one authorized check kiting. 273 The testimony of the bank officials proved that they did not give such authorization. Schimmelman testified that he was notified by Curschman in June of 1999 about suspiciously heavy activity in Defendants' accounts. Schimmelman and Curschman held a meeting with Defendants in early July to discuss the issue. There, Schimmelman asked Defendant Elie Abboud if he could explain the large volume of transactions, to which Defendant Elie Abboud said he could not. Schimmelman testified that he told [Defendant Elie Abboud] that I thought it looked like it might be kiting, and if it was, it was not legal, and it had to be stopped. 10 (J.A. at 753.) 274 This statement unequivocally shows that Schimmelman did not approve of the check kiting. He did not know that Defendants were depositing checks from their own accounts along with the cashed customer checks until Curschman informed him of this fact in June 1999. In other words, he did not previously know about the check kiting; therefore, he could not have approved of it. Moreover, as soon as he found out about the check kiting, Schimmelman warned Defendants that such a practice was illegal and had to be stopped. 275 The fact is that no bank official approved of the check kiting scheme. Defendant Elie Abboud points to testimony from Schimmelman and Swaney. As explained, supra, Schimmelman approved of the negative balances in Defendants' accounts, not check kiting. Swaney elaborated on this procedure by stating that Defendants could run a negative balance as great as the collateral on the accounts. This meant that bank officials approved negative balances with a maximum of $500,000, the value of Defendants' collateral; this did not mean approval for the actual negative balances of $1.6 to $4.5 million Defendants were running during the three-month period in 1999. 276 Next, Defendant Michel Abboud cites to testimony from John Male as evidence of bank approval of check kiting. The pages to which Defendant cites do not support this contention; in fact, the testimony shows that John Male did not know Defendants were getting the benefit of carryover, i.e., the benefit of the extra day of float created by the system, until the investigation by Curschman and Schimmelman. (J.A. at 743.) If John Male did not even know about the nature of the accounts, Defendant cannot claim that John Male approved such accounts for check kiting purposes. John Male also testified that because of the investigation, he did not trust Defendants. Either Defendant did not correctly cite to John Male's testimony, 11 or Defendant is being disingenuous with the Court. 277 Defendant Michel Abboud further cites to the facts that Defendants had unlimited overdraft protection, and that PVF had the right to offset the negative balances with the collateral. As explained, supra, Defendants did not have unlimited overdraft protection; their protection was the value of the collateral, $500,000. Furthermore, the right to offset could hardly be considered a comfort to PVF, considering that the actual negative balances soared considerably above the collateral it held. 278
279 Defendants had zero balance accounts in connection with a controlled disbursement system with NCB. The zero balance accounts entailed a system that had two types of accounts: a main account, and separate disbursement accounts. Defendants could write checks drawn from the disbursement accounts. In turn, the disbursement accounts would draw from the main account. If the main account was negative, then NCB would ask Defendants to cover the negative amount. 280 This system of controlled disbursement did allow Defendants to run a negative balance, but so long as they covered that balance with good funds. As the government correctly notes, [t]his controlled disbursement account was established with the understanding that `good funds' would be deposited to cover checks clearing from the zero-balance account. But, [Defendants] did not deposit good funds. Instead, they deposited checks that were not collectible. (Pl.'s Br. 73.) 281 No NCB official gave Defendants permission to kite checks; in fact, the officials did not even know about the activity until the kite collapsed. 282
283 Defendants also had zero balance accounts with Star Bank. The policy was similar to that of the NCB controlled disbursement system; Defendants could have a negative balance on the main account, so long as they corrected the negative balance at the bank's request. 284 No official at Star Bank approved of Defendants check kiting practices. In fact, the bank had previously closed Defendants' accounts in 1996 because of suspected check kiting. 285
286 Finally, even if bank officials did approve of the check kiting scheme, which they did not, this approval would not relieve Defendants of criminal liability, because the victim is the bank as an entity. See, e.g., United States v. Rackley, 986 F.2d 1357, 1361 (10th Cir.1993) (Defendant confuses the notion of defrauding a federally insured bank with the idea of defrauding its owner or directors. It is the financial institution itself—not its directors or agents—that is the victim of the fraud the statute proscribes.). 287 iii. Service Fee 288 Defendants erroneously claim that because the banks profited from their check kiting scheme, the banks could not be the victim of bank fraud. Even though PVF was receiving fees for the check kiting transactions, these fees were incomplete. By nature, the check kite hid the actual negative balance on Defendants' accounts, so that the fee was calculated with a smaller negative balance than actually existed. In addition, the purpose of the check kite was to act as a loan substitute; the overnight interest rate attached to Defendants' account was 5.05%, whereas a normal open line of credit would have an interest rate of 9%. As a result, PVF was defrauded in two respects: on the base of the interest calculation and the interest rate itself. 289 In addition, this Court held in Stone that the imposition of a service fee did not amount to an authorization of check kiting. 954 F.2d at 1192. There, the Court reasoned, if we were to adopt [the defendant's] rationale, it would henceforth be perfectly legal for a person to kite checks at any financial institution that levied such a charge. This does not reflect the state of the law, and [the defendant] offers no compelling grounds why it should. Id. Even if PVF charged a service fee for its instant credit, this fact is not a defense for illegal conduct. 290 iv. Good Faith Defense 291 As the district court noted, good faith conduct is a complete defense to bank fraud, as it negates the element of intent. The evidence presented below, however, was sufficient to negate Defendants' defense of good faith. 292 The evidence shows that Defendants were kiting checks between PVF accounts when Schimmelman and Curschman met with Defendants in July 1999 to express their suspicions. Schimmelman testified that he told [Defendant Elie Abboud] that I thought it looked like it might be kiting, and if it was, it was not legal, and it had to be stopped. (J.A. at 753.) The evidence shows that Defendants did not stop the check kiting after this meeting, but instead started using accounts from other banks to perpetrate their scheme. The district court correctly held that this evidence was sufficient to negate the good faith defense. 293 Defendant Elie Abboud also exhibited bad faith in his discussions with NCB officials. Defendant Elie Abboud told NCB officials that he discovered the check kiting activity, he was the one who stopped it and went to Parkview and had explained there was a problem and he was trying to get them to work with him. (J.A. at 484.) This directly conflicts with the testimony of PVF officials who discovered the check kiting scheme and conducted meetings with Defendants to fix the problem. Defendant Elie Abboud tried to portray himself as the discoverer of the problem, when in fact the evidence shows he and Defendant Michel Abboud created the check kite system. If Defendants' actions were truly in good faith, then Defendants would have had no need to try and disguise the events that occurred at the unfolding of the scheme. 294 v. Loss to the Bank 295 Defendants also claim that after the banks discovered the kite, Defendants were fully cooperative with the banks, paid timely payments, and repaid the kited funds. While this may be true, this does not relieve Defendants of criminal liability. 296 For a bank fraud case, the amount of loss is determined at the time of detection, not at the time of sentencing. United States v. Sparks, 88 F.3d 408, 409 (6th Cir.1996) (citing United States v. Scott, 74 F.3d 107, 111-12 (6th Cir.1996)). Moreover, `[t]he fact that a check-kiter enters into a repayment scheme after the loss has been discovered does not change the fact of the loss; such fact merely indicates some acceptance of responsibility.' Scott, 74 F.3d at 112 (quoting United States v. Mau, 45 F.3d 212, 216 (7th Cir. 1995)). As a result, the fact that Defendants repaid the kited amount after detection does not reduce their culpability. 297 b. Money Laundering 298 i. Legal Framework 299 Section 1957 of Title 18 of the United States Code states [w]hoever . . . knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000 and is derived from specified unlawful activity, shall be punished as provided by law. 300 Defendants provide a framework that is incorrect; they state that to prove money laundering, the government must prove (1) that Michel Abboud not only conducted the transactions involved, which is conceded, (2) that he knew the funds involved were the proceeds of unlawful activity, and (3) that he knew the transactions were designed to conceal or disguise the nature, location, source, ownership and control of the proceeds involved. (Michel Abboud Def.'s Br. 54-55.) 301 First, Defendants concede that Defendants engaged in the questioned transactions. 302 Second, the government is not required to prove Defendants knew the funds were from unlawful activity. The statute explicitly states, In a prosecution for an offense under this section, the Government is not required to prove the defendant knew that the offense from which the criminally derived property was derived was specified unlawful activity. 18 U.S.C. § 1957(c). Knowledge of illegality on the part of Defendants is not a requirement. 303 Third, the statute does not require that the government prove any concealment or disguise of the transaction. United States v. Hill, 167 F.3d 1055, 1069-70 (6th Cir. 1999) (§ 1957 does not require that the defendant know that the transaction was designed to conceal or disguise the nature, location, source, ownership, or control or the subject proceeds or designed to avoid a transaction reporting requirement under state or federal law.). 304 ii. Application to This Case 305 Defendants first contention is that if Defendants are not guilty of bank fraud, they are not guilty of money laundering. Because § 1957 requires a monetary transaction in criminally derived property, we agree that if the transactions did not include fruits of bank fraud, no money laundering occurred. The evidence, however, was sufficient to support Defendants' convictions for bank fraud. 306 Defendants' second contention is that the government did not provide sufficient evidence to show that Defendants concealed or disguised the questioned transactions. As explained above, § 1957 does not require the government to make such a showing. 307 H. THE DISTRICT COURT ERRED IN ITS SENTENCING DECISION IN LIGHT OF BOOKER 1. Standard of Review 308 Defendants made timely objections to their sentences. Because Defendants preserved this issue for appeal, the Court reviews for harmless error. United States v. Hazelwood, 398 F.3d 792, 801 (6th Cir.2005). Under the harmless error test, a remand for an error at sentencing is required unless we are certain that any such error was harmless—i.e. any such error `did not affect the district court's selection of the sentence imposed.' Id. (quoting Williams v. United States, 503 U.S. 193, 203, 112 S.Ct. 1112, 117 L.Ed.2d 341 (1992)). 2. Analysis 309 Defendants correctly argue that the district court committed error when it sentenced Defendants according to the then mandatory Federal Sentencing Guidelines. See United States v. Booker, 543 U.S. 220, 125 S.Ct. 738, 764, 160 L.Ed.2d 621 (2005) (eliminating the mandatory nature of the guidelines due to constitutional violation). This error was not harmless, as it did in fact affect the sentences imposed on Defendants. See United States v. Oliver, 397 F.3d 369, 381 (6th Cir.2005). We remand the cases to the district court for resentencing.