Court Opinion

ID: 18247
Source: CourtListenerOpinion
Date Created: 2010-04-25 07:12:28+00
Date Added: 2024-06-11T08:38:03.329856
License: Public Domain

Revised July 28, 1999

                  UNITED STATES COURT OF APPEALS
                       For the Fifth Circuit
            __________________________________________

                           Nos. 97-21031
                                97-20237
             _________________________________________

                     UNITED STATES OF AMERICA,

                                                 Plaintiff-Appellee,

                              VERSUS

             KARL L. DAHLSTROM AND KARLA D. DAHLSTROM,

                                               Defendants-Appellants.

            __________________________________________

          Appeals from the United States District Court
                for the Southern District of Texas
            __________________________________________
                           July 13, 1999

Before KING, Chief Judge, REYNALDO G. GARZA, and JOLLY, Circuit
Judges.

REYNALDO G. GARZA, Circuit Judge:

     Karl Dahlstrom (“Dahlstrom”) and his daughter, Karla

Dahlstrom (collectively “the Dahlstroms”), appeal their

convictions and sentences for securities laws violations.

     In February of 1991, Dahlstrom approached Richard Beeman

(“Beeman”), a business associate, to discuss the production and

marketing of Uni-snuff, a gel like substance designed to

extinguish oil well fires like the ones raging in Kuwait at the

time.   Prompted by their discussion, Beeman organized a group of
twenty to twenty-five potential investors in Boise, Idaho, for a

meeting with Dahlstrom.

     At the meeting, Dahlstrom demonstrated the product by

showing a videotaped recording of the product putting out a mock

oil well fire.   He explained that as a result of Saddam Hussain’s

invasion of Kuwait, the Kuwaity government had expressed an

interest in Uni-snuff and that he was looking for investors who

would invest a minimum of $10,000.   He stated at the meeting that

the product’s ingredients were approved by the Environmental

Protection Agency (“EPA”), that the product was going to be

studied by a professor at Louisiana State University, and that

contracts for the sale of Uni-snuff were currently pending in

Kuwait. He failed to disclose the risks involved with the

investment, primarily, that the product’s shelf life rendered it

commercially useless.

     Approximately ten of the investors gathered at the Boise

meeting decided to invest in the product.   On April 10, 1991,

Dahlstrom incorporated Inferno Snuffers, Inc. (“ISI”) for the

sole purpose of producing and marketing Uni-snuff.   On April 19,

1991, ISI signed a six-month lease for office space and lab

facilities for $19,000.   The office and lab facilities were in a

complex owned by Dahlstrom in Bryan, College Station.   Tension

grew as costly expansions were made to the facility, company

vehicles were bought, and large salaries were paid without the

investors’ approval.

                                 2
     Dahlstrom authorized demonstrations and encouraged the

selling of securities to meet the ever increasing need for

investment money.   Although prior attempts to market the product

in Mexico and in Kuwait had failed, investors were told that the

product was out of the prototype stage and that it had been

successfully tested on all types of fires.      Dahlstrom was aware

that the product would separate and rot if it remained in a mixed

solution for a few days.    He had also been informed that mixing

the components at the scene of an actual fire had been overly

burdensome and impractical.    A report by one of the officers also

showed that, although a freshly mixed batch of Uni-snuff would

put out regular fires on land, the product did not perform as

expected on oil well fires.    Despite this information, Dahlstrom

continued to hold demonstrations at ISI’s facility and covered-up

for the product’s deficiencies by mixing a fresh batch of Uni-

snuff on a daily basis.    Investors and contract brokers were

continuously reassured that the product was commercially viable.

     Karla Dahlstrom was in charge of sending promotional

material to potential investors.       The literature falsely stated

that the company had contracts with two fire fighting companies,

when in fact it had negotiated with two contract brokers who were

trying to secure a sales contract for ISI.      One of the documents

falsely stated that the product absorbed enormous amounts of heat

without dissipating, which was not true because it evaporated at

the same temperature as water.    The materials also stated that

                                   3
the flashpoint of the product greatly exceeded the melting point

of aluminum, which was also not true.      Claims were made that the

product was nontoxic and environmentally safe, however, samples

of the product had never been sent to the EPA and there was no

data to support this conclusion.       Videotapes of the product were

continuously used as promotional material to attract investors.

The recordings falsely stated that the product had passed Kuwait

inspections and that it was the only fire fighting chemical

approved by the Kuwait Oil Company.      Investors were told that

multi-million dollar contracts were being negotiated with

potential buyers and that a patent was pending.      Except for a few

investors who went to the laboratory and saw the product rotting

away, most of the investors and contract brokers were misled into

believing that the product was in fact commercially viable and

that all of Dahlstrom’s assertions were true.

     By July of 1991, ISI had exceeded the number of investors

permitted under securities laws for non-registered corporations.

Rather than turning investors away, investors were placed into

trusts.   Richard Lopez, who had previously applied for a license

to sell public securities, became concerned that the

“piggybacking” scheme was illegal and informed the Dahlstroms

about his concerns.   Karla Dahlstrom, who was in charge of

placing the investors in the trusts, complained that she was

signing documents that Dahlstrom did not want to sign.      Dahlstrom

argued that the thirty-five investor limit could be circumvented

                                   4
by placing the added investors into trusts and that it was a grey

area of the law that could never be proven.1

     Concerns regarding the unregistered sales of securities by

non-brokers also grew as more people invested and commissions

were paid.   Two ISI employees informed Dahlstrom that a license

was required if the person selling the securities received a fee.

Dahlstrom tried to circumvent the law by designating the

commissions as “consulting fees.”    Don Ballard (“Ballard”), who

had three million shares of ISI, was paid 10% commission fee off

of the $80,000 to $100,000 he raised for ISI through a trust.

Thirty to forty investors were placed under Ballard’s family

trust though they had no relationship to Ballard.   Dahlstrom

hoped to remedy this problem later by merging with a public

corporation.

     In September of 1991, Dahlstrom received a letter from the

State Securities Board advising him that it had information that

ISI was offering and selling securities to the general public.

The letter advised that under Texas law, securities offered for

sale to the general public had to be registered and sold by

registered dealers, unless an exemption could be found.    The

letter also advised that the antifraud provisions of the

     1
      Inferno Engineering (“IEC”) was incorporated on July 10,
1991. Dahlstrom created the company to allow for an additional
thirty-five investors because ISI had already reached its thirty-
five investor limit under securities laws. The companies,
however, were intermingled and ISI and IEC were in reality the
same company.

                                 5
Securities Act applied to the offer and sale of securities and to

all statements and representations in connection therewith.

     Shortly after receiving the letter from the State Securities

Board, Dahlstrom’s attorney suggested that they stop selling

stock until they received proper advise from a competent

securities attorney.   A meeting that same month with a law firm

undeniably revealed that the money had been raised improperly and

that a recision offer was needed.    The firm informed both

Dahlstrom and Karla Dahlstrom that they had to stop piggybacking

new investors and that the problem with the product’s shelf life

had to be fully disclosed.   Furthermore, investors should be

given the opportunity to either: (1) sell back their stock to

ISI; or (2) keep their investment after the disclosure was made.

     Despite counsel’s advice, Dahlstrom and Karla Dahlstrom

continued to sell securities through November and October of

1991.   An audit later that year revealed that the company had

raised $1.6 million by selling stock through September 30, 1997,

and another $.0458 million through December of 1991.    There was a

total of 706 investors who resided in twenty-five different

states.   The audit reflected no sales of the product for the

company and a net loss through December of 1991, of $1,036,279

and $2,114,143 through April of 1992.    It wasn’t until April of

1992 that a formal recision offer was made available to

stockholders.   The company, however, did not have enough money to

fund the recision offer.

                                 6
     The Dahlstrom were indicted on August 14, 1996, for

committing fraud in connection with the purchase and sale of

securities and in the offer and sale of securities (“Count II and

III”); for selling unregistered securities (“Count IV”); for

acting as an unregistered broker or dealer in the sale or

purchase of securities (“Count V”); for mail fraud (“Count VI

through Count XVI”); and for conspiracy to commit the same

violations (“Count I”) in violation of 15 U.S.C. §§ 77e(a) and

(c), 77q(a), 78o(a)(1), 78j(b), and 18 U.S.C. §§ 2, 371, 1341.

The jury convicted Dahlstrom on Counts II through VI, Counts IX

though XIV, and XVI. Karla Dahlstrom was convicted on Counts IV

and V.   Dahlstrom was sentenced to seventy-eight months

imprisonment on Count II and sixty months on the remaining

counts, to run concurrently.   Karla Dahlstrom was sentenced to

forty-six months imprisonment.   The Dahlstroms were ordered to

jointly pay $1,997,003 in restitution.

     This appeal followed.

                                 I.

     On May 11, 1992, a group of ISI employees and a Sheriff

arrived at the Dahlstroms’ place of business.   The ISI employees

forced themselves into Karla Dahlstrom’s office and proceeded to

remove ISI property.   The Dahlstroms argue that the bulk of the

documentary evidence used against them at trial was illegally

seized in violation of their Fourth Amendment rights.   They

                                 7
contend that the Sheriff’s presence gave the unauthorized act an

air of legality and that this inhibited their attempts to retain

control of the documents.    The Dahlstroms also assert that the

district court erred in finding that the ISI employees were not

acting as agents or instruments of the government.

     This Court has treated a district court’s determination of

whether a person is acting as a government agent as a factual

finding.    United States v. Blocker, 104 F.3d 720, 725 (5th Cir.

1997)(citing United States v. Jenkins, 46 F.3d 447, 460 (5th Cir.

1994)).    We review the denial of a motion to suppress the

district court’s factual findings under the clearly erroneous

standard and its conclusion of law de novo.    United States v.

Bloker 104 F.3d at 725 (citation omitted).    A factual finding is

clearly erroneous if after reviewing the entire evidence this

Court is left with a firm conviction that a mistake has been

committed.    Id. n.2, (citing Anderson v. City of Vessemer City,

N.C., 470 U.S. 564, 573 (1985)).

     The Fourth Amendment applies only to government action.

Evidence that is retrieved by a private individual may be

admitted at a criminal trial.    Walter v. United States, 447 U.S.
649, 656 (1980).    It may be determined, however, that an

individual acted on behalf of the state or as an agent or

instrument of the state if the record shows that: (1) the

government has offered the individual some form of compensation

                                   8
for the search; (2) if the individual did not initiate the idea

on his own that he would conduct the search; and (3) the

government knew that the individual intended a search.     United

States v. Ramirez, 810 F.2d 1338, 1342 (5th Cir.), cert. denied

sub nom. Alegria-Valencia v. United States, 481 U.S. 1072

(1987)(citing United States v. Bazan, Jr., 807 F.2d 1200, 1204

(5th Cir. 1986)).

     The Dahlstroms argue that their case is similar to the

Seventh Circuit case, Soldal v. Cook County, Illinois, 506 U.S.
56, 62 (1992), where the Supreme Court held that the unauthorized

towing of a mobile home constituted a Fourth Amendment violation.

In Soldal, the Supreme Court specifically declined to address the

Seventh Circuit’s determination that the individuals’ actions

constituted state action.   Id. at n.6.   The Supreme Court

reviewed the Fourth Amendment issue on the premise that the state

had removed the mobile home from its location without a warrant.

     After reviewing the district court’s decision and record, we

find no evidence supporting the argument that the ISI employees

acted as agents of the state.   The individuals conceived the plan

on their own and solely for their own benefit.   The officer’s

presence was merely requested to keep the peace.   In addition,

the government did not acquire possession of the documents until

much later through proper discovery proceedings.   Therefore, we

find no evidence supportive of the Dahlstroms’ argument that the

                                 9
ISI employees and the Sheriff colluded to seize the documents.

Accordingly, we hold that the Dahlstroms’ Fourth Amendment rights

were not violated.

                                II.

     The second issue on appeal is whether the involvement of the

same attorney who represented the Securities and Exchange

Commission (“SEC”) in a underlying civil action warrants a

reversal of the convictions in this case.    SEC attorney Phillip

W. Offill, Jr. (“Offill”) had previously represented the SEC in a

civil action arising from the same facts.    An agreed judgment was

entered in that case which required Dahlstrom to pay

approximately $307,122.   A criminal indictment was then presented

by United States Attorney Gaynelle Griffin Jones, by an through

Assistant United States Attorney Quincy L. Ollison.    Offill

contributed in the government’s prosecution of the Dahlstroms.

The Dahlstroms maintain that Offill’s participation constitutes

plain error due to an appearance of impropriety by his in-depth

participation.   They argue that Offill’s participation violates

their right to prosecution by an impartial prosecutor.

     We review whether Offill’s participation in the criminal

proceedings warrants reversal for plain error.    United States v.

Carter, 907 F.2d 484, 488 (5th Cir. 1990).   Reversal for plain

error is appropriate only where the alleged error was obvious,

                                10
substantial, and, if not corrected, would seriously affect the

fairness, integrity, or public reputation of the judicial

proceedings.    United States v. Morrow, No. 96-50958, 1999 WL
329712, at *3 (5th Cir. May 25, 1999).

       In Young v. United States ex rel. Vuitton et Fils. S.A., 481
U.S. 787 (1987), the Supreme Court addressed a similar issue.

The Court reversed the Second Circuit because the district court

appointed as a special prosecutor the same attorney who had

previously filed a trademark infringement claim against the

defendants.    Id. at 791.   The Court noted that a prosecutor’s

duties is to represent the United States and not the party that

is the beneficiary of the court order allegedly violated.     Id. at

804.    In Young, the court noted that “[t]he prosecutor is

appointed solely to pursue the public interest in vindication of

the court’s authority.” Id.     Given that the prosecutor may be

swayed by other interests due to a conflict in roles, the Court

held that counsel for a party that is the beneficiary of a court

order may not be appointed as prosecutor in a contempt action

alleging a violation of that order.     Id. at 808.

       In United States ex rel. S.E.C. v. Carter, 907 F.2d 484 (5th

Cir. 1990), we reversed the district court because it appointed

as special prosecutors the same attorneys who had previously

represented the SEC in the underlying civil action.    In light of

Supreme Court’s holding in Young, we turned to the Ninth

                                  11
Circuit’s holding in FTC v. American National Cellular, 868 F.2d
315 (9th Cir. 1989) for guidance.     In American National Cellular,

the Ninth Circuit implemented a two-factor test in resolving that

a Federal Trade Commission attorney, who had served in both the

civil and the criminal case, had in fact served the public

interest and not a private interest.     Id. at 318.   The two

factors considered in reaching this decision were: (1) the level

of participation by the U.S. Attorney; and (2) the extent of the

particular agency attorney’s involvement in the underlying civil

suit.   Id.   We consider, once again, the Ninth Circuit’s test in

determining whether Offill’s participation in the criminal and

underlying civil suit violated the Dahlstroms’ rights to an

impartial prosecutor.

     Although the record shows that Offill had participated

intensely in the civil suit, this Court is unconvinced that he

retained control over the prosecution.    As stated in Carter, we

consider whether the prosecuting attorney may have been tempted

to pursue nonmeritorious claims in exchange for useful

information in their underlying civil litigation.      Carter, 907
F.2d at 487.   In the case before us, it is clear that the United

States Attorney’s Office (“USAO”) was in control of this case and

that Offill’s participation does not merit its reversal.     In

Carter, the SEC attorney was the final decision maker and in full

control of the prosecution’s case.     Id. at 488.   In the present

                                 12
case, the record shows that criminal prosecution was initiated by

the USAO and that Offill was essentially assisting a

disinterested prosecutor.   The Supreme Court states in Young,

“[t]he familiarity may be put to use in assisting a disinterested

prosecutor in pursing the contempt action, but cannot justify

permitting counsel for the private party to be in control of the

prosecution.”   Young, 481 U.S. at 806.   Since Offill did not have

control of the prosecution, we hold that the Dahlstroms’ rights

were not violated by Offill’s participation in their criminal

prosecution.

                               III.

     The third issue raised on appeal deals with the sufficiency

of the evidence pertaining to the following counts: Counts II,

fraud in the connection with both the purchase and sale of

securities; Count III, fraud in the offer and sale of securities;

Count IV, the selling of unregistered securities; Count V, acting

as unregistered broker dealers; and Counts VI-XVI, mail fraud

violations in regard to Counts II and III.

     This Court will not disturb a jury’s verdict “unless the

record demonstrates that a rational jury could not have found

each of the elements of the offense beyond a reasonable doubt.”

United States v. Peterson, 101 F.3d 378, 379 (5th Cir. 1996),

cert. denied, 520 U.S. 1161 (1997).   In applying this standard,

                                13
we must view the evidence, and all inferences reasonably drawn

from it, in the light most favorable to the verdict, regardless

of whether the conviction is based on direct or circumstantial

evidence.   Id. (citing United States v. Ruggiero, 56 F.3d 647,

654 (5th Cir.), cert denied sub nom. Parker v. United States, 516
U.S. 951 (1995)).

     A review of the record evidence, pertaining to each of the

points raised by the Dahlstroms in their briefs and oral

argument, reveals that the evidence was sufficient to support the

jury’s verdict on each of the counts charged.   Therefore, we are

unwilling to disturb the jury’s verdict.

                                IV.

     Dahlstrom argues that the district court erred by allowing

Elena Szilagyi (“Szilagyi”) to testify about another of

Dahlstrom’s investment funded companies.   The evidence was

admitted as proof of Dahlstrom’s knowledge of securities law and

the absence of a good-faith mistake.   The district judge gave a

standard 404(b) instruction, telling the jury to only consider

the evidence to determine intent or motive.   Szilagyi described

how Dahlstrom raised money from investors for a company Dahlstrom

created called OWPEC by demonstrating a chemical formula she

developed to dissolve paraffin in oil fields.   She testified that

OWPEC was funded by investors shortly after the Exxon Valdez oil

                                14
spill and that OWPEC was merged with another company in order to

take the stock public.   Dahlstrom argues that the prejudicial

effect of the testimony outweighs the probative value of the

testimony.   Thus, he maintains that this case must be granted a

new trial.

     This Court reviews a district court's ruling regarding the

admissibility of evidence for abuse of discretion and will

reverse a district court's ruling only if it affects a

substantial right of a party.   United States v. Ramirez, No. 97-

11208, 1999 WL 261638 at *4 (5th Cir. May 3, 1999).

     In order to be admissible under the Federal Rule of Evidence

404(b), the evidence of the defendant’s prior bad acts must be:

(1) relevant to some issue other than the defendant’s character;

and (2) its probative value must be greater than its potential to

unfairly prejudice the jury.    United States v. Gonzalez-Lira, 936
F.2d 184, 189 (5th Cir. 1991) (citing United States v. Beechum,

582 F.2d 898, 911 (5th Cir. 1978)(en banc), cert. denied, 440
U.S. 920 (1979)).

      A review of the record reveals that the admitted testimony

demonstrates a scheme almost identical to the Uni-snuff plan.

The similarity between the plans is probative of Dahlstrom’s

knowledge or intent while he was actively seeking funding from

investors through ISI.   Due to these similarities, coupled with

the fact that the district court specifically instructed the jury

                                 15
that the testimony was admissible only as to evidence of a common

scheme or plan and not as to Dahlstrom’s character, the evidence

was in fact more probative than it was prejudicial.     Therefore,

we hold that the district court did not abuse its discretion by

allowing Szilagyi’s testimony into court.

                                 V.

     Dahlstrom asserts on appeal that the district court erred by

assessing $1,997,003 against him and by finding that he had

abused a position of trust.    Dahlstrom maintains that a twelve

point increase in the presentence report (“PSR”) was erroneous

because the appropriate amount of loss was $145,320.     This

represents the amount he personally received as wages and as

expense reimbursements.   Dahlstrom’s principal contention is that

ISI and IEC were not worthless companies, and therefore the

district judge should have offset their value against the

deposited amounts.   He argues against a two point increase in the

PSR by stating that his control over ISI and IEC should not be

determinative of the trust issue.     Dahlstrom contends that the

enhancement should not be applied because he did not owe nor

breach any fiduciary duties.

     A sentencing court’s factual findings are reviewed for clear

error.   See United States v. Navarez, 38 F.3d 162, 166 (5th Cir.

1994), cert. denied, 514 U.S. 1087 (1995).     As long as the

                                 16
finding is plausible in light of the record as a whole, it is not

clearly erroneous.    United States v. Sowels, 998 F.2d 249, 251

(5th Cir. 1993), cert. denied, 510 U.S. 1121 (1994).

Interpretations of the Sentencing Guidelines are reviewed de

novo.    See United States v. Thomas, 973 F.2d 1152 (5th Cir.

1992).

     In United States v. Oates, 122 F.3d 222, 225 (5th Cir.

1997), we stated, “[t]his Court has long adhered to the view,

supported by the relevant application note, that the amount of

loss for the purpose of determining a base offense level in

United States Sentencing Guidelines § 2F1.1(b)(1) is the dollar

amount placed at risk by a defendant’s fraudulent scheme or

artifice.”   We interpret comment number seven of § 2F.1 as

specifically stating that the defendant will be held responsible

for the amount of injury he attempted to inflict, even if that

loss is greater than the actual loss.    Id.

     As to the two point increase for Dahlstrom’s position of

trust within the company, we determine that an abuse of position

of trust is imposed if a defendant’s job places the defendant in

a superior position to commit a crime and the defendant takes

advantage of that superior position to facilitate a crime.

United States v. Brown, 7 F.3d 1155, 1161 (5th Cir. 1993).      In

this case, Dahlstrom occupied a position of trust as president

and CEO of ISI.   His unique position contributed to the

                                 17
commission and concealment of the crimes and toward the

misallocation of ISI’s investment money.   Dahlstrom breached his

fiduciary duty to the investors by failing to disclose the

blatant legal problems that afflicted ISI and by failing to

disclose the commercial ineffectiveness of the product.

     Accordingly, we hold that the district court did not abuse

its discretion by attributing a twelve point increase against

Dahlstrom for the money that was put at risk of loss and a two

point increase for the position he held within the company.

                                VI.

     The final issue on appeal is whether the district court

erred by ordering that Dahlstrom and Karla Dahlstrom each pay a

total of $1,997,003 in restitution fees.   The government argues

that the Victim and Witness Protection Act (“VWPA”), 18 U.S.C. §

3663, authorizes restitution when the subject offense involves a

scheme, conspiracy, or pattern of criminal activity.   The

Dahlstroms contend that there is no legal basis for the district

court’s orders and that even if § 3663 were applicable, there is

insufficient evidence to show that they were involved in a common

plan or scheme to defraud the investors.

     We review the legality of the district court’s order of

restitution de novo.   United States v. Hughey 147 F.3d 423, 436

(5th Cir.), cert. denied, 119 S. Ct. 569 (1998)(citing United

                                18
States v. Chaney, 964 F.2d 437, 451 (5th Cir. 1992)).    “Once we

have determined that an award of restitution is permitted by the

appropriate law, we review the propriety of a particular award

for abuse of discretion.”   Id.

     A review of the record demonstrates that all of ISI’s

investors were victims of a common scheme to be defrauded.     We

note that although in two of Dahlstrom’s counts he was acquitted,

there is an overwhelming amount of evidence that shows that all

of the investors were affected by Dahlstrom’s actions.   Since the

whole of the investors shared a common interest in ISI and the

evidence is sufficient to establish that Dahlstrom’s actions

affected all of their investments, we conclude that a common plan

to defraud existed.   Therefore, we hold that the district court

did not abuse its discretion by ordering Dahlstrom to pay

restitution.

     A review of the record shows that Karla Dahlstrom is subject

to a supervised release as part of her sentence.   In United

States v. Bok, 156 F.3d 157, 166 (2d. Cir. 1998), the court

determined that although restitution may not be directly

permitted under § 3663(a), a district court may order restitution

within the context of a supervised release.   Title 18 U.S.C. §

3583(d) explicitly provides that the court may order, as a

further condition of supervised release, “any condition set forth

as discretionary condition of probation in § 3563(b)(1) through

                                  19
(b)(10) and (b)(12) through (b)(20), and any other condition it

considers to be appropriate.”   18 U.S.C. § 3583(d).   One of the

discretionary conditions referred to in § 3563(b) is the

requirement that the defendant make restitution to a victim of

the offense.   18 U.S.C. § 3563(b)(2).   The Second Circuit

interpreted §§ 3583(d) and 3563(b) to permit a restitution award

regardless of the limitations set out in § 3663(a).    Id.    We

agree with the Second Circuit’s rationale.

     In light of the fact that Karla Dahlstrom is subject to a

supervised release, and the presence of evidence in the record

supporting the finding that she was involved in a common plan or

scheme to defraud the investors, we hold that the district court

did not abuse its discretion by ordering her to pay restitution

to the victims.

     Accordingly, for the aforementioned reasons, we AFFIRM the

district court’s decision in all respects.

                                20