Court Opinion

ID: 4032263
Source: CourtListenerOpinion
Date Created: 2016-09-08 19:00:55.582402+00
Date Added: 2024-06-11T14:35:40.731711
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                            No. 15-4097

UNITED STATES OF AMERICA,

                Plaintiff - Appellee,

           v.

JONATHAN D. DAVEY,

                Defendant - Appellant.

Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte.     Robert J. Conrad,
Jr., District Judge. (3:12-cr-00068-RJC-DSC-1)

Argued:   May 12, 2016                  Decided:   September 8, 2016

Before TRAXLER and WYNN, Circuit Judges, and Norman K. MOON,
Senior United States District Judge for the Western District of
Virginia, sitting by designation.

Affirmed by unpublished opinion. Judge Wynn wrote the opinion,
in which Judge Traxler and Senior Judge Moon joined.

ARGUED: Gary Alvin Bryant, WILLCOX & SAVAGE, PC, Norfolk,
Virginia, for Appellant. Anthony Joseph Enright, OFFICE OF THE
UNITED STATES ATTORNEY, Charlotte, North Carolina, for Appellee.
ON BRIEF: Dianne K. Jones McVay, JONES MCVAY LAW FIRM, PLLC,
Dallas, Texas, for Appellant.     Jill Westmoreland Rose, United
States   Attorney,  OFFICE   OF  THE   UNITED  STATES   ATTORNEY,
Charlotte, North Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.

                                2
WYNN, Circuit Judge:

     Jonathan Davey (“Defendant”) appeals his jury convictions

for conspiracy to commit wire fraud, conspiracy to commit money

laundering,    and     tax    evasion,   as     well   as   a   related     award    of

restitution.      Defendant contends that the district court erred

in   excluding    certain       evidence,      that    there      was    insufficient

evidence supporting his conviction for tax evasion, and that

restitution      was    improperly       calculated.            We      reject    these

arguments, and affirm.

                                         I.

                                         A.

     Evidence     produced      at   trial     revealed     the      following.     In

2007, Defendant created a hedge fund named “Divine Circulation

Services” (“DCS”).           Over the following two years, he solicited

millions of dollars in funds from numerous entities and private

individuals, and through DCS, he invested that money in four

different    business        ventures,   each    of    which    either     failed    or

turned out to be fraudulent.

     By February 2009, one of the only DCS investments that was

purportedly    still     profitable      was    with    a   supposed      hedge    fund

called “Black Diamond,” which was later revealed to be a Ponzi

scheme.     That month, Black Diamond’s founder, Keith Simmons, met

with Defendant and other hedge fund managers with investments in

Black Diamond and told them that a “cash out” was imminent. J.A.

                                         3
146-48.     In other words, said Simmons, Black Diamond soon would

be shut down, and all investor money would be returned.                         That

payout    never     happened.       Indeed,       soon     after   the    meeting

announcing the supposed cash out, Black Diamond stopped honoring

withdrawal requests from its investors.

     By the end of April 2009, Black Diamond was effectively

illiquid, the other DCS business ventures had collapsed, and

Defendant    had     stopped     investing       additional    money      in    any

ventures,    including    Black    Diamond.         Nevertheless,        Defendant

continued to solicit funds from new investors on the pretense

that their money actually would be invested.                  Along with other

hedge fund managers who had invested in Black Diamond, Defendant

set up a “cash” or “liquid” account in which to deposit these

new investor funds. J.A. 149.             Instead of investing the money,

Defendant    used    it   to    fulfill       withdrawal   requests      from   old

investors, to pay himself a management fee, and to pay his own

personal expenses.        In other words, Defendant set up his own

Ponzi scheme.

     In addition to misrepresenting that DCS investors’ money

actually would be invested, Defendant made a number of other

false statements in order to obtain, or retain, investor funds.

For instance, Defendant told one large investor about a supposed

liquidity provider that did not exist, and he falsely suggested

                                          4
to another investor that his organization had developed and was

using a successful currency trading software.

        After    the    February          2009       meeting    during       which    Simmons

announced the Black Diamond “cash out,” Defendant also helped

facilitate a broader Ponzi scheme involving numerous other hedge

fund managers who, like Defendant, used new investor money to

fund withdrawal requests and pay personal expenses.                               In return

for a monthly management fee, Defendant—through an entity called

“Safe    Harbor”—served         as    a    hedge       fund    administrator,         handling

fund transfers to and from hedge fund cash accounts.                                 In doing

so,   Defendant        contributed         to    an    effort     to    falsely      reassure

investors that their investments were sound by maintaining a

website     accessible     to        investors        that     showed    false,      positive

monthly returns.         DCS investors were among those with access to

this website, and the investors made additional investments in

reliance on the false information it conveyed.                               Defendant also

permitted the hedge fund managers to report that they had been

vetted by an “independent” accounting firm, i.e., Safe Harbor,

when that was not the case. J.A. 175-76.

      One   of    the    most    significant            personal       expenses      Defendant

funded with DCS investor money was the construction of a $2

million,    10,000-square-foot              personal      home.         To   channel    money

from DCS towards the construction of his home, Defendant created

two additional entities: “Sovereign Grace” and “Shiloh Estates.”

                                                 5
Essentially,      Defendant        transferred           funds,    in    the      form   of

purported “loans,” from DCS to Sovereign Grace, and then from

Sovereign Grace to Shiloh Estates, the legal owner of the home

and direct funder of its construction. J.A. 291-98, 513.

      Those “loans” had no recognized interest rates, no payment

schedules, no associated liens, and no loan documentation.                               In

late 2008, Defendant informed Barry McFerren, his brother-in-law

and   business     associate,       that     he    intended       to    default     on   the

loans,    and    Defendant       did    so   in    2009.         Defendant     identified

$810,000    as    a     “loan”     on    his      2008     tax    return,      an   amount

corresponding to purported loan payments to Shiloh Estates in

that year. J.A. 516-17.

      Over time, without any truly profitable investments, the

money in DCS dried up.             Near the end of August 2009, when DCS

had   accumulated       over      $4    million      in     outstanding        withdrawal

requests from investors, Defendant stopped accepting additional

investments.      Through the fall of 2009, however, he continued to

use DCS money to pay personal expenses, and he continued to

accept fees from other hedge fund managers for publishing false

returns    on    Safe     Harbor’s       website.           Outstanding        withdrawal

requests from DCS investors grew to over $6 million by the end

of November 2009.

                                             6
                                                 B.

       In   February          2012,   the       government     indicted      Defendant       and

three of the other hedge fund managers involved in the above

scheme on charges of conspiracy to commit securities fraud, 18

U.S.C. § 371, conspiracy to commit wire fraud, 18 U.S.C. § 1349,

and conspiracy to commit money laundering, 18 U.S.C. § 1956(h).

Additionally, Defendant was indicted for tax evasion, 26 U.S.C.

§ 7201.       The       other    co-defendants          pled    guilty,      but    Defendant

elected to go to trial.

       Over       the    course       of    a    four-day      trial,       the    government

presented testimony from over a dozen witnesses, including one

of the hedge fund managers who participated in the broader Ponzi

scheme,       Defendant’s             two        principal      employees,          an      IRS

investigator,           and    numerous      individuals       who   invested       money     in

DCS.        The    defense       presented        testimony     from    five       witnesses,

including Defendant and Simmons.

       The jury returned a verdict of guilty on all four counts.

The    district          court        sentenced        Defendant       to     252     months’

imprisonment.             The    court      also      found    Defendant      and    his     co-

conspirators        jointly       and      severally     liable      for     roughly       $21.8

million     in     restitution.             Defendant     appealed,        challenging       the

restitution         amount      and     all      of    his    convictions         except    his

conviction for securities fraud.

                                                  7
                                           II.

       Defendant      first    argues      that     the    trial      court      committed

reversible error with regard to multiple evidentiary rulings.

In particular, Defendant contends that the district court should

not    have     excluded:         (1)    testimony        from      certain      investors

Defendant      turned      away     in    the    fall     of     2009,    (2)     evidence

regarding certain non-fraudulent investments made by DCS, and

(3) evidence that Defendant eventually paid taxes on the amount

he designated as a “loan” on his 2008 tax return.

       We review a district court’s evidentiary rulings for abuse

of discretion. United States v. Reevey, 364 F.3d 151, 156 (4th

Cir. 2004).         Moreover, such rulings are subject to a harmless-

error standard, meaning that we will affirm notwithstanding an

error if it is “‘highly probable that the error did not affect

the judgment.’”         United States v. Ibisevic, 675 F.3d 342, 349–50

(4th Cir. 2012) (quoting United States v. Madden, 38 F.3d 747,

753 (4th Cir. 1994)).

                                            A.

       Defendant contends that the district court erred when it

excluded      the   testimony       of    certain    witnesses        who     would     have

testified that Defendant refused to accept their money as an

investment     in    DCS    after       August   2009.         He   argues      that    such

testimony was relevant to his state of mind, in that it would

have    suggested       that      Defendant      took     investor       money    not     to

                                            8
facilitate a Ponzi scheme, but rather because, through much of

2009, he believed Black Diamond was legitimate and that a cash

out was imminent.

      Assuming without deciding that the district court abused

its discretion in excluding this evidence, any such error was

harmless.     The “‘single most important factor’” in a harmless-

error inquiry is the closeness of the case.                         United States v.

Ince, 21 F.3d 576, 584 (4th Cir. 1994) (quoting United States v.

Urbanik, 801 F.2d 692, 699 (4th Cir. 1986)).

      Here, as outlined above, the government introduced at trial

overwhelming       evidence   that   Defendant          and   his    co-conspirators

solicited     funds      by   intentionally        misleading         investors,   in

multiple ways.        Even though Black Diamond had stopped fulfilling

withdrawal        requests    and    Defendant          had    stopped       investing

additional money in Black Diamond by the end of April 2009,

Defendant continued to solicit investor money for several more

months, falsely representing that he would invest it.                         That is

not   to   mention       other,   more   particularized         false       assertions

Defendant made to investors—for example, about a non-existent

liquidity provider.

      Moreover, it was undisputed at trial that Defendant did

eventually     stop      accepting   new       investments.          The    accounting

records     for    DCS    were    introduced       at     trial,      and   Defendant

testified in detail regarding the investors he refused after

                                           9
August 2009.         Indeed, defense counsel incorporated Defendant’s

turning    away      of    investors    into     his   closing   argument.       The

government also accepted that fact as true—before explaining why

it was not dispositive—during its closing.

     In short, even if the trial court erred in excluding the

testimony of turned-away investors, it is “‘highly probable that

the error did not affect the judgment.’” Ibisevic, 675 F.3d at

350 (quoting Madden, 38 F.3d at 753).

                                           B.

     Defendant further argues that the district court abused its

discretion      in   excluding     as   cumulative      or   irrelevant   certain

evidence related to investments made by DCS other than Black

Diamond.        In particular, Defendant contends that the district

court should have admitted evidence that funds DCS invested in

“Amkel”—a separate venture that also turned out to be a fraud,

though    not    one      perpetrated   by      Defendant—had    been   frozen   in

connection       with     a   government        investigation,   and    ultimately

recovered.        According to Defendant, this evidence would have

shown that DCS was a legitimate investment vehicle with real

value.     Further, Defendant argues that the district court should

have permitted the principal of another failed DCS investment—a

movie production company called “Audience Alliance”—to play a

movie trailer and testify that he intended to repay the loan DCS

                                           10
issued to the company.                This evidence, too, was offered to show

that DCS was not wholly fraudulent.

      The    district           court         did    not       abuse    its     discretion      in

concluding that the potential probative value of the Amkel and

Audience Alliance evidence was “substantially outweighed by a

danger of . . . confusing the issues, misleading the jury, undue

delay,      wasting       time,          or     needlessly         presenting          cumulative

evidence.”      Fed. R. Evid. 403.

      First,    we       fail    to      see    how      evidence      that     DCS    eventually

recovered frozen funds from a different fraudulent venture is

probative      of     Defendant’s              lack      of     intent     to     defraud      his

investors.          And, as the district court reasonably concluded,

such evidence could very well confuse a jury.

      Second,       it    may       be    that       evidence      showing       DCS    invested

partially in Audience Alliance—which, though unsuccessful, was

not   fraudulent—is             relevant        regarding         Defendant’s         intent     to

defraud.        However,         numerous           witnesses,         including      Defendant,

testified      as    to       the     existence          and    nature     of    the    Audience

Alliance investment.                The district court was therefore within

its   discretion         to     exclude        further         evidence    of    the    Audience

Alliance       investment’s              legitimacy—including                 testimony        from

                                                    11
Audience       Alliance’s      principal         that     he   intended    to    repay    his

debts one day—as cumulative. *

                                              C.

       Defendant’s final argument contesting an evidentiary ruling

relates       to    his    conviction      for     tax    evasion.        At    trial,    the

government sought to show that Defendant evaded taxes by falsely

characterizing            $810,000    in     payments      from    Sovereign      Grace    to

Shiloh Estates—the entity that funded the construction of his

home—as a “loan” on his 2008 tax return.                         Defendant contends the

district court erred by excluding his 2009 tax return, which

reported the defaulted “loan” as taxable income in 2009.                                   He

argues that this evidence tends to disprove his intent to evade

taxes in 2008.

       The     government’s         theory    of    the    case,    however,      was    that

Defendant mischaracterized the payment as a loan in 2008, and

that this mischaracterization was itself a willful attempt to

evade       income    taxes.         Consequently,         the    relevant      intent    was

Defendant’s intent to repay—or not repay—the loan amount at the

time he received it. See United States v. Pomponio, 563 F.2d

659,       662–63    (4th    Cir.    1977)     (explaining        that    the   “principal

       *
       To the extent that the district court excluded testimony
from the Audience Alliance principal regarding his intent to
repay his debt in the future on the grounds of relevance, we
likewise consider that ruling to have been a proper exercise of
the court’s discretion.

                                              12
question”      relevant   to     a    tax        evasion      prosecution      based   on

mischaracterized loan payments is whether those payments “were

not [actually] loans, that is, that no intent to repay them

existed, and that the defendants knew they were not loans”).

That one year later Defendant defaulted on the loan, recognized

it as income, and paid taxes on it tends to reinforce, rather

than undermine, the government’s argument that Defendant did not

intend to repay the “loan” when he received it.

       In short, the district court did not abuse its discretion

in excluding the 2009 tax return for lack of relevance.

                                           III.

       In addition to challenging evidentiary rulings, Defendant

challenges his tax evasion conviction on grounds that it was not

supported by sufficient evidence, and that the district court

therefore erred in denying his motion for judgment of acquittal

for that count under Rule 29 of the Federal Rules of Criminal

Procedure. [See Appellant’s Br. at 35–39]

       This Court will uphold a guilty verdict “if, viewing the

evidence in the light most favorable to the Government, it is

supported by ‘substantial evidence.’”                   United States v. Alerre,

430 F.3d 681, 693 (4th Cir. 2005) (quoting United States v.

Burgos,     94    F.3d    849,       862    (4th       Cir.     1996)    (en     banc)).

“[S]ubstantial evidence is evidence that a reasonable finder of

fact   could     accept   as     adequate        and   sufficient       to   support    a

                                            13
conclusion of a defendant’s guilt beyond a reasonable doubt.”

Burgos, 94 F.3d at 862.                In other words, the relevant question

is whether “any rational trier of fact could have found the

essential      elements       of     the    crime      beyond       a    reasonable      doubt.”

Jackson v. Virginia, 443 U.S. 307, 319 (1979).

       The relevant criminal provision, 26 U.S.C. § 7201, makes it

a   felony     to       “willfully    attempt[]         in    any       manner    to   evade    or

defeat any tax imposed by [the Internal Revenue Code].”                                        To

establish Section 7201 tax evasion, the government must show “1)

that    the    defendant          acted     willfully;         2)       that     the   defendant

committed      an       affirmative        act    that       constituted          an   attempted

evasion       of    tax     payments;       and        3)    that       a     substantial      tax

deficiency existed.”              United States v. Wilson, 118 F.3d 228, 236

(4th Cir. 1997); see also Sansone v. United States, 380 U.S.

343, 351 (1965).            “The jury may infer a ‘willful attempt’ from

‘any    conduct          having      the    likely          effect       of    misleading      or

concealing.’”            Wilson, 118 F.3d at 236 (quoting United States v.

Goodyear, 649 F.2d 226, 228 (4th Cir. 1981)).

       Here,       as    discussed     above,         the    government        theorized    that

Defendant falsely characterized the $810,000 he transferred from

Sovereign Grace to Shiloh Estates as a loan on his 2008 tax

return in order to avoid paying taxes on that amount in that

year.     It is settled law that what defines a true loan is “the

taxpayer’s own intention to repay” the loan amount.                                    Pomponio,

                                                 14
563 F.2d at 662; see also Comm’r of Internal Revenue v. Tufts,

461 U.S. 300, 307 (1983) (“When a taxpayer receives a loan, he

incurs an obligation to repay that loan at some future date.

Because of this obligation, the loan proceeds do not qualify as

income to the taxpayer.”); United States v. Beavers, 756 F.3d

1044, 1057 (7th Cir. 2014) (explaining that “loan proceeds are

not   income         because    the        taxpayer       has     incurred        a    genuine

obligation      to    repay     the   loan”        and    that    “the     recipient         must

actually intend to repay” for a transaction to qualify as a

loan).

      Defendant        does    not     dispute        that       he    characterized          the

$810,000 transfer as a loan on his 2008 tax return or that there

was a resulting tax deficiency in that year.                             Consequently, the

relevant legal question is whether Defendant’s characterization

of the transfer as a loan on his tax return was accurate, i.e.,

“whether the evidence was sufficient for the jury to have found

beyond    a    reasonable       doubt       that    the    [transfer        was]       not   [a]

loan[],       that    is,     that    no     intent       to     repay     [it]       existed.”

Pomponio, 563 F.2d at 662–63.

      In answering that question, both direct evidence of intent

and   circumstantial           evidence       regarding          the      nature       of    the

transaction are relevant.                  See id. at 663 (finding sufficient

evidence that various advances were not loans where there was no

fixed repayment date, no notes evidencing the debt, no security

                                              15
backing it, and no interest charged or paid on the amount); see

also Merck & Co. v. United States, 652 F.3d 475, 481 (3d Cir.

2011) (“[D]etermining whether a transaction qualifies as a loan

requires analysis both of the objective characteristics of the

transaction and of the parties’ intentions.”).

       The     government      introduced       direct       and      circumstantial

evidence that Defendant did not intend to repay the $810,000

transfer when he received it, and therefore that the transaction

was    taxable    income,      rather    than    a   loan.          Barry   McFerren,

Defendant’s brother-in-law and employee, testified that in the

fall of 2008 Defendant said that he intended from the beginning

to    default    on   the    purported       loan,   i.e.,    not     to    repay   it.

Defendant did in fact default on the purported loan in December

2009.        Lynn Wymer, Defendant’s accountant, testified that, to

her     knowledge,     there    was     no    interest       rate    governing      the

purported loan, no loan document, no repayment schedule, no loan

payments made, and no lien securing it.                  Tyiesha Nixon, an IRS

investigator,         similarly       testified      that,      after       examining

Defendant’s tax returns, accounting records, and other related

financial       documents,     she    found     no   loan     documents,      nothing

indicating an interest rate on the purported loan, no schedule

of payments, and no lien securing it.

       In    short,   there    was    sufficient     evidence        that   Defendant

falsely characterized the $810,000 transfer as a loan on his

                                         16
2008 tax return.            Because jurors “may infer a ‘willful attempt’

from    ‘any   conduct       having   the      likely    effect       of    misleading       or

concealing,’” Wilson, 118 F.3d at 236 (quoting Goodyear, 649

F.2d at 228), there also was sufficient evidence that Defendant

attempted to evade the payment of taxes in 2008.                             We therefore

affirm the district court’s denial of Defendant’s motion for

acquittal on the tax evasion count.

                                            IV.

        Finally,       Defendant      challenges          the     district            court’s

restitution order, primarily on the ground that his convictions

for conspiracy to commit wire fraud and money laundering are

invalid.       Because we affirm those convictions, that argument

fails.         Defendant       also   suggests         that     the        district    court

neglected to consider amounts already available to victims from

other sources, such as the funds recovered from the fraudulent

Amkel     investment.           The   record,       however,          contradicts          that

argument.        In    particular,       the     district      court       clarified       that

“[t]o the extent that there are funds available to offset the

total    amount       of    restitution,       those    will    be     applied        in    the

restitution process.” J.A. 997–98.                      Furthermore, the judgment

expressly limits “victims’ recovery . . . to the amount of their

loss,”    so   that        Defendant’s   “liability       for     restitution          [will]

cease[] if and when the victim(s) receive full restitution.”

J.A. 1075.

                                            17
     We    therefore       reject    Defendant’s     challenge     to   the

restitution order.

                                     V.

     For   the   reasons    stated   above,   we   affirm   the   challenged

convictions and the restitution order.

                                                                    AFFIRMED

                                     18