Court Opinion

ID: 9364295
Source: CourtListenerOpinion
Date Created: 2023-01-18 21:00:38.048304+00
Date Added: 2024-06-11T17:15:37.045568
License: Public Domain

RECOMMENDED FOR PUBLICATION
                                Pursuant to Sixth Circuit I.O.P. 32.1(b)
                                       File Name: 23a0010p.06

                   UNITED STATES COURT OF APPEALS
                                  FOR THE SIXTH CIRCUIT

                                                             ┐
 UNITED STATES OF AMERICA,
                                                             │
                                   Plaintiff-Appellant,      │
                                                              >        No. 21-1782
                                                             │
        v.                                                   │
                                                             │
 EMANUELE PALMA,                                             │
                                  Defendant-Appellee.        │
                                                             ┘

  Appeal from the United States District Court for the Eastern District of Michigan at Detroit.
                 No. 2:19-cr-20626-1—Nancy G. Edmunds, District Judge.

                                   Argued: October 20, 2022

                             Decided and Filed: January 18, 2023

                    Before: COLE, GIBBONS, and BUSH, Circuit Judges.

                                      _________________

                                            COUNSEL

ARGUED: Andrew W. Laing, UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Appellant. Greg D. Andres, DAVIS, POLK & WARDWELL LLP, New York, New
York, for Appellee. ON BRIEF: Andrew W. Laing, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., John K. Neal, UNITED STATES ATTORNEY’S OFFICE,
Detroit, Michigan, for Appellant. Greg D. Andres, Paul J. Nathanson, DAVIS, POLK &
WARDWELL LLP, New York, New York, Kenneth M. Mogill, MOGILL, POSNER &
COHEN, Lake Orion, Michigan, for Appellee.
                                      _________________

                                             OPINION
                                      _________________

       JOHN K. BUSH, Circuit Judge. Defendant Emanuele Palma was indicted for several
crimes, including conspiracy to commit wire fraud. The indictment alleges that Palma and others
 No. 21-1782                        United States v. Palma                              Page 2

conspired to falsify test results for a new diesel engine and market these engines as
environmentally friendly, meeting regulatory standards, and “best-in-class” compared with other
diesel engines. The district court dismissed this count since, in its view, the property loss by
consumers was too far removed from the falsified test results, which, the court reasoned, were
meant to deceive regulators. Because Palma is only charged with conspiracy, not wire fraud
itself, and because the indictment alleges adequate facts tying Palma to a fraudulent scheme, we
REVERSE.

                                               I

       In 2010, Fiat Chrysler Automobiles N.V. (FCA) began developing a new diesel engine
for several types of vehicles. Defendant Palma worked for FCA starting in 2013. Also named in
the superseding indictment are Sergio Pasini, a head calibration engineer who supervised Palma,
and Gianluca Sabbioni, a technical director who supervised Pasini.

       Palma led a team of engineers who developed and calibrated diesel engines for use in
FCA’s vehicles. Diesel-fueled engines use a combination of systems to reduce emissions and
improve fuel economy and performance. But these systems are a double-edged sword. For one,
the Exhaust Gas Recirculation system lowers emissions, but it reduces fuel economy. And
Selective Catalytic Reduction, or the injection of ammonia fluid into the exhaust to reduce
emissions, consumes diesel exhaust fluid, requiring owners to replenish the fluid more
frequently.

       The indictment alleges that Palma participated in a scheme that manipulated the diesel
engine’s function during testing to produce artificially impressive results. Using the software
programs known as “T_eng,” “Standard Dosing,” and “Online Dosing,” Palma and others
allegedly made the engine appear to offer features that FCA was targeting to customers,
including a fuel economy of greater than 30 miles per gallon and a frequency of fluid changes
similar to that of standard oil changes for gasoline-powered cars. The indictment alleges that
Palma and others achieved these standards by manipulating the engine’s operation during testing.
When the vehicles were tested for emissions, the program activated Exhaust Gas Recirculation,
sacrificing fuel economy. When the vehicles were tested for fuel economy or driven under real-
 No. 21-1782                         United States v. Palma                                Page 3

world conditions, T_eng lowered Exhaust Gas Recirculation, which improved fuel economy but
increased emissions. Similarly, for the diesel engine fluid, Palma and co-conspirators allegedly
used Dosing programs to selectively reduce emissions or ease fluid consumption during the
respective testing. Palma and co-conspirators allegedly referred to this tactic as “cycle beating,”
referring to adjusting performance during the regulatory testing cycle.

       The indictment alleges the following. Palma and his co-conspirators knew that these
testing results were critical to marketing the vehicles to consumers, including receiving the “best-
in-class” fuel economy ratings and being able to market the vehicles as using “clean” diesel.
Palma knew that false and misleading claims were being made to consumers and participated in
making these claims. Emails and documents provided by the government show Palma was
aware that the marketing of the vehicles was in jeopardy because of failure to meet performance
standards. In fact, Palma knew that the engine could not meet the standards and the “cycle
beating” strategy was the only way to pass them. On January 30, 2014, Palma received an email
indicating EPA confirmed the fuel efficiency label showing 28 miles per gallon on the highway.
Palma responded, “Best in class, great job.” Because of Palma’s use of cycle beating, he was
aware that the vehicles did not meet EPA requirements or the requirements for “best-in-class.”
Yet he was also aware that the vehicles were marketed as having “best-in-class fuel economy”
and delivering “clean-diesel technology,” claims he knew were false. In addition, a sticker
affixed to the cars’ windows stated the cars complied with regulations and provided detailed
emissions information, as influenced by the cycle beating that Palma used. Palma was informed
by email that EPA approved this label for placement on the vehicle.

       According to the indictment, the scheme’s goal was

       for PALMA, PASINI, SABBIONI, and their co-conspirators to obtain money
       and property for FCA through the production and sale of Subject Vehicles that
       they knew did not comply with EPA rules and regulations governing emissions by
       (a) making and causing others to make material misrepresentations to FCA’s
       Regulators, and (b) making and causing others to make material
       misrepresentations to purchasers and potential purchasers of the Subject Vehicles.

FCA sold more than 100,000 of these vehicles (amounting to more than $4 billion in customer
payments), which purportedly were legal to sell, compliant with federal regulations, and rated
 No. 21-1782                         United States v. Palma                                Page 4

“best-in-class” for fuel efficiency. Per the indictment, customers who purchased the vehicles
have said that the false and misleading representations were material to their purchase decisions.

       In 2019, the grand jury indicted and arrested Palma, charging him with thirteen counts.
The count appealed here is conspiracy to commit wire fraud in violation of 18 U.S.C. § 1349.
The district court held that there was an insufficient causal nexus between Palma’s conduct and
customers being induced to purchase vehicles. Referencing proximate causation, it concluded
that there were two intervening circumstances. First, Palma was not personally responsible for
marketing.   Second, Palma’s marketing goals were “intertwined” with obtaining regulatory
approval. Therefore, under Kelly v. United States, 140 S. Ct. 1565 (2020), the district court
concluded Palma’s conduct was less a deprivation of consumer property and more a deception of
regulators. The United States timely appealed.

                                                  II

       We review de novo the legal question of whether the offense’s elements are adequately
alleged in the indictment. United States v. Maney, 226 F.3d 660, 663 (6th Cir. 2000) (citing
United States v. Superior Growers Supply, Inc., 982 F.2d 173, 177 (6th Cir. 1992)).            An
indictment must be a “plain, concise, and definite written statement of the essential facts
constituting the offense charged.”    Fed. R. Crim. P. 7(c)(1).      To be legally sufficient, an
“indictment must assert facts which in law constitute an offense; and which, if proved, would
establish prima facie the defendant’s commission of the crime.” United States v. Landham, 251
F.3d 1072, 1079 (6th Cir. 2001) (quoting Superior Growers, 982 F.2d at 177). Although the
statutory language of the offense may be used, it “must be accompanied with such a statement of
the facts and circumstances as will inform the accused of the specific offense.” Id. (quoting
Hamling v. United States, 418 U.S. 87, 117–18 (1974)). Courts reviewing a motion to dismiss
“do not evaluate the evidence upon which the indictment is based.” Id. at 1080 (citing Costello
v. United States, 250 U.S. 359, 362–63 (1956)).

                                                 III

       Wire fraud is the use of interstate or foreign communications for the purpose of executing
a scheme to defraud others of property. 18 U.S.C. § 1343. Wire fraud consists of three
 No. 21-1782                          United States v. Palma                                Page 5

elements: the defendant (1) devised or willfully participated in a scheme to defraud, (2) used an
interstate wire communication in furtherance of the scheme, and (3) intended to deprive a victim
of money or property.” United States v. Rogers, 769 F.3d 372, 377 (6th Cir. 2014). The
deprivation of property must be an object of the scheme, not merely incidental to it. Kelly, 140
S. Ct. at 1573.

       Under 18 U.S.C. § 1349, a conspiracy to commit wire fraud is punishable by the same
penalties as wire fraud itself. A conspiracy to commit wire fraud requires that two or more
persons conspired, or agreed, to commit wire fraud and the defendant knowingly and voluntarily
joined the conspiracy. Rogers, 769 F.3d at 377; Sixth Circuit Pattern Criminal Jury Instruction
3.01B(2).

       The key question on appeal is whether there is a sufficient causal nexus between the
conduct of Palma and co-conspirators and a deprivation of property. See United States v.
Berroa, 856 F.3d 141, 152–53 (1st Cir. 2017); see also United States v. Frost, 125 F.3d 346, 354
(6th Cir. 1997) (citing American Eagle Credit Corp. v. Gaskins, 920 F.2d 352, 353 (6th Cir.
1990)) (explaining mail fraud requires a deprivation of property). In considering this question, it
is important to recognize two issues about the disposition of the appeal: first, that it comes at the
pleading stage, and second, that the count is for conspiracy to commit wire fraud, not for wire
fraud itself. Therefore, the government need only allege facts showing that the conspiracy as a
whole had the object of using deception to deprive consumers of property, and Palma joined the
conspiracy.

       Palma relies on the distance between his alleged conduct and the property losses
consumers suffered.       Specifically, he asserts that the indictment does not allege he
communicated with any of FCA’s customers or was personally involved in marketing strategy.
Further, as to the stickers affixed to the vehicles’ windows, he asserts there were no allegations
that the information on the stickers was a communication Palma made or caused to be made to
customers. Rather, he believes the government is overcoming the lack of connection through
conclusory allegations about his participation in making misstatements. Any involvement he
may have had in defrauding FCA’s regulators, he contends, was attenuated from the scheme to
defraud customers.
 No. 21-1782                         United States v. Palma                                Page 6

       In particular, Palma relies on Kelly, in which the Supreme Court held that realigning
traffic lanes for political reasons failed to meet the property requirement for property fraud. 410
S. Ct. at 1568–69. In that case, the government alleged two theories of property derivation: first,
the loss of property from the “commandeering” of the bridges; and second, the loss of a public
employee’s paid time. Id. at 1572. The Court held that the scheme was intended to alter a
regulatory choice about the use of the bridges, rather than to take the bridges as property. Id.
Further, the minimal loss of public employees’ paid time to execute the scheme was only
incidental; the scheme, at its core, was political in nature. Id. Therefore, the Supreme Court
reversed the convictions. Id. at 1569.

       Certain differences make Kelly an inapt case for comparison. For one, Kelly took place
in post-conviction proceedings, whereas Palma challenges an indictment, and therefore we take
the government’s allegations as true and do not test the evidence behind its claims. Landham,
251 F.3d at 1079–80. What’s more, FCA sold billions of dollars’ worth of cars, which would
amount to a serious deprivation of property if the allegations in the indictment are true. This
property loss is both much more significant than the loss in Kelly and much more connected with
the alleged scheme. See Kelly, 140 S. Ct. at 1573 (holding defendants regulated, but did not
commandeer, traffic lanes). The indictment suggests a cooperative effort by many employees,
including Palma, designing and marketing these vehicles with the clear intent that the vehicles be
sold to consumers. Indeed, it is unclear what purpose Palma and co-conspirators might have had
in bringing the vehicles to market other than to sell them. No such alleged deprivation of
property, directly connected with the purpose of the scheme, can be found in Kelly.

       Still, a loss of property does not always stem from alleged illegal conduct, as in the case
of United States v. Berroa, 856 F.3d 141 (1st Cir. 2017), which Palma relies on. There, the
government argued that convicted defendants who falsified test scores to obtain medical licenses
and then practiced medicine perpetrated property fraud on health care benefit programs and
health care consumers. Id. at 149. The First Circuit reasoned that this theory of fraud would
greatly expand federal jurisdiction by allowing fraud prosecutions where “the underlying
fraudulent scheme, and the mailing in furtherance thereof, is far removed from any money or
property.” Id. at 152; see also United States v. Frost, 125 F.3d 346, 358–60 (6th Cir. 1997)
 No. 21-1782                         United States v. Palma                                Page 7

(“[E]ven the cases which have held that convictions may rest upon the deceit of a person other
than the ultimate victim contemplated that the deception was causally related to the scheme to
obtain property from the victim.”). Therefore, the First Circuit reversed the convictions based on
insufficiency of the evidence. Berroa, 856 F.3d at 154.

         Berroa is not persuasive here—and as a First Circuit case, it certainly is not binding.
First, Berroa left intact the conspiracy convictions, while reversing the fraud convictions. Id. at
20–21. Also, unlike in Berroa, where the purpose of fraudulently obtaining medical licenses was
to practice medicine, 856 F.3d at 147, the goal of “cycle beating” and falsely inflating the
engines’ performance was, the government alleges, to induce customers who otherwise would
not have bought the vehicles to do so. It is uncontested that the government has alleged that
Palma engaged in deceptive conduct in conjunction with other employees to deceive regulators.
Further, it is also uncontested that the government-approved vehicles have been sold for
revenues running in the billions of dollars. Unlike Berroa, the case at bar is clearly about
property. And it is plausible that the scheme’s goal was not merely to deceive regulators but also
to sell the resulting products to consumers.

         Palma also zeroes in on marketing, arguing that any allegations of his participation in
marketing the vehicles to consumers are “conclusory.” Because the count in question is for
conspiracy, the government need not allege that Palma participated in all aspects of a conspiracy,
only that he knowingly and voluntarily joined a conspiracy to commit wire fraud. Rogers, 769
F.3d at 377. “[F]or purposes of the indictment the government has pleaded sufficiently” that
Palma participated in a deceptive scheme to defraud consumers, regardless of any participation
in marketing. See United States v. Douglas, 398 F.3d 407, 418 (6th Cir. 2005). Even so, the
government does allege participation in communications with consumers, which reinforce his
apparent participation in a conspiracy.

         Weighing the issues and considering the relatively lenient standard for pleading charges
in an indictment as opposed to proving them at trial, the government has met its bar of alleging a
conspiracy to commit wire fraud. Based on these alleged facts, it is eminently plausible that an
object of this scheme was to deceive consumers in order to falsely induce them to purchase
goods.
 No. 21-1782                         United States v. Palma                               Page 8

       One last point: Palma alleges there is a fundamental inconsistency in the government’s
allegations that Palma and others used cycle beating to deceive regulators and consumers but
also to fix problems with the vehicles, including a misfire issue. Assuming it is true that Palma
and the alleged co-conspirators found another use for the T_eng protocol to fix a specific vehicle
issue, that does not bear on whether they used T_eng to artificially inflate the vehicles’
performance and participated in a conspiracy to defraud consumers. A consumer driving a
vehicle with the new diesel engine, whether using the T_eng protocol or not, has suffered the
same injury—purchasing a vehicle with inferior fuel economy and emissions and that passed
regulatory muster through deception, at least according to the indictment.

                                                IV

       In sum, the indictment has made out the allegations and facts necessary for conspiracy to
commit wire fraud. We therefore REVERSE the order of the district court and REMAND for
further proceedings consistent with this opinion.