Court Opinion

ID: 2645535
Source: CourtListenerOpinion
Date Created: 2013-12-12 01:00:46.688671+00
Date Added: 2024-06-11T12:50:53.892017
License: Public Domain

PUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                             No. 12-4469

UNITED STATES OF AMERICA,

                Plaintiff - Appellee,

           v.

KEITH FRANKLIN SIMMONS,

                Defendant - Appellant.

Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte.     Robert J. Conrad,
Jr., Chief District Judge. (3:10-cr-00023-RJC-DCK-1)

Argued:   October 29, 2013              Decided:   December 11, 2013

Before NIEMEYER and MOTZ, Circuit Judges, and John A. GIBNEY,
Jr., United States District Judge for the Eastern District of
Virginia, sitting by designation.

Affirmed in part, reversed in part, vacated in part, and
remanded by published opinion. Judge Motz wrote the opinion, in
which Judge Gibney joined.    Judge Niemeyer wrote a dissenting
opinion.

ARGUED: Joshua B. Carpenter, FEDERAL DEFENDERS OF WESTERN NORTH
CAROLINA, INC., Asheville, North Carolina, for Appellant.
William Michael Miller, OFFICE OF THE UNITED STATES ATTORNEY,
Charlotte, North Carolina, for Appellee.    ON BRIEF: Henderson
Hill, Executive Director, Ann L. Hester, FEDERAL DEFENDERS OF
WESTERN NORTH CAROLINA, INC., Charlotte, North Carolina, for
Appellant.    Anne M. Tompkins, United States Attorney, Amy
Elizabeth Ray, Assistant United States Attorney, OFFICE OF THE
UNITED STATES ATTORNEY, Asheville, North Carolina, for Appellee.

                               2
DIANA GRIBBON MOTZ, Circuit Judge:

        Keith   Simmons     appeals       his       convictions       on   one    count   of

securities fraud, one count of wire fraud, and two counts of

money    laundering,        as   well     as       his    sentence    of   fifty    years’

imprisonment.       We affirm his fraud convictions but reverse his

money-laundering convictions because the transactions prosecuted

as   money      laundering       constituted             essential    expenses     of     his

underlying fraudulent scheme.                  Accordingly, we affirm in part,

reverse in part, vacate his sentence, and remand for further

proceedings consistent with this opinion.

                                           I.

                                           A.

     From April 2007 to December 2009, Simmons operated a $35

million    Ponzi    scheme       called    Black         Diamond     Capital     Solutions.

With help from a network of self-styled hedge fund managers,

Simmons recruited more than 400 investors by promising to invest

their    money     in   a    lucrative         and       exclusive    foreign     currency

exchange, or “Forex” fund.              Simmons told investors that only ten

or twenty percent of their investment would be at risk at any

given time.       He sent them monthly earnings statements reporting

sizeable profits.           And he promised them that, after an initial

ninety-day period, they could withdraw their money at will.

                                               3
     Numerous investors tested Simmons’s promise and withdrew a

portion of their money after ninety days had passed.            Upon the

receipt   of   these   returns,    which   seemed    to   evidence   Black

Diamond’s legitimacy and profitability, many investors sent even

more money to Simmons.      Some recruited their friends to invest

with Simmons as well.

     In fact, no Forex fund existed and Simmons never invested a

cent of his victims’ funds.          Simmons fabricated the earnings

reports, and he paid the purported returns to early investors

from deposits made by later ones. 1          Rather than investing his

victims’ funds as promised, Simmons treated their investments as

his personal piggy bank.          He purchased $4.6 million in real

estate, invested $1.2 million in an extreme fighting venture,

funneled $2.2 million to his other businesses, and bought lavish

gifts and trips for his employees and girlfriends.

     Greed provoked the Ponzi scheme, and greed doomed it.              As

more investors sought to withdraw their funds, Simmons told a

series of escalating lies to “string out” investors and delay

withdrawals.       First,   he     claimed    that    withdrawals     were

interfering with the fund, and that he would henceforth limit

withdrawals in order to reduce the fund’s volatility.           Later, he

     1
       Simmons paid out a total of $19 million, but only $9
million made its way to actual investors.   Corrupt hedge fund
managers, who served as middle-men between Simmons and some of
his investors, siphoned off the rest.

                                    4
asserted    that     he     was      negotiating           with    a     German     named         Klaus

Bruner, who allegedly planned to cash out investors and take

over the account.           And Simmons told some investors that the FBI

itself was impeding some withdrawals.

        Simmons    was     lying.           In       2009,    when       investors’           earning

statements      reflected        a    total      of    more       than      $292    million,        the

Black    Diamond     bank    account         had      in    fact    dwindled        to    $523.60.

Still, Simmons told investors that their money was safe.

        By July 2009, Simmons permitted no further withdrawals by

investors.        After that date, Simmons managed to attract only one

new   investor.           Moreover,         existing         investors        began      demanding

their money back.           And as victim-investors became more alarmed,

Simmons’s       dissembling          became      more        desperate.             Finally,         in

December    2009,     the     FBI      raided         his    offices.          During         a    long

conversation with an FBI agent, Simmons confessed to the fraud.

        Ultimately, Simmons’s Ponzi scheme cost his victims more

than $35 million.            Many lost their life savings.                               Some lost

their families.            Many became depressed, even suicidal, after

learning that their money was gone.

                                                 B.

      The Government indicted Simmons on one count of securities

fraud,    one     count     of       wire    fraud,         and    two       counts      of       money

laundering.        The fraud counts arose from Simmons’s role in the

Ponzi     scheme     itself,         which,          according         to     the    superseding

                                                 5
indictment, took place from April 2007 to December 2009.                                     The

indictment      did    not    predicate       Simmons’s         two    fraud     charges      on

discrete instances of fraud; rather, it charged Simmons with a

two-and-one-half year “scheme to defraud,” specifically claiming

that       Simmons    executed    “what       is    commonly          known     as    a    ponzi

scheme.”       Simmons’s money-laundering counts, by contrast, arose

from   two     discrete      payments    to       investors      made     in    2008.         The

Government       alleged       that     these       payments       also        involved      the

“diver[sion of] investor money back to other investors in ponzi-

fashion .      . .     to induce further investments by investors and

their friends and family members.”

       Simmons proceeded to trial in December 2010.                             Nine of his

victims       testified      against     him,       as   did      certain        hedge      fund

managers,      an    IRS     agent,   and     the    FBI       agent    to     whom       Simmons

confessed.       Simmons did not testify.                His counsel argued that he

was    a    neophyte     financier      who     never     intended        to    defraud      his

investors.       The jury, however, convicted him on all counts.

       After Simmons’s conviction, a probation officer drafted a

presentence         report    calculating         Simmons’s       recommended         term    of

imprisonment.          The     probation      officer          recommended       an       offense

level of 43 -- the maximum level permitted under the Guidelines

-- and a criminal history category of I.                        This offense level and

criminal       history       category    produced          a    Guidelines-recommended

sentence of 960 months’ imprisonment.
                                              6
       The    district     court     varied       downward    from   the   probation

officer’s recommendation and sentenced Simmons to 600 months’

imprisonment.         Specifically, the court sentenced Simmons to 240

months on the securities-fraud count, a consecutive term of 240

months on the wire-fraud count, and 240-month terms on each of

the two money-laundering counts -- 120 months of which was to be

served      consecutively    to    the     fraud    counts,    and   360   months   of

which was to be served concurrently.                    The court acknowledged

that   this    was    an   “enormous”      sentence,    but    explained     that   it

could not “remember another case that involved such devastating,

life wrecking” greed.              The court concluded that a fifty-year

sentence      was    sufficient,     but    not    greater    than   necessary,     to

accomplish justice.

                                           II.

       On     appeal,      Simmons       primarily     challenges      his    money-

laundering convictions. 2          He claims that the trial court erred by

       2
       Simmons also challenges all of his convictions on the
general ground that the district court violated due process by
admitting three pieces of assertedly irrelevant victim-impact
testimony. Even if the court erred in admitting this evidence,
any error was harmless.     Overwhelming evidence supported the
jury verdict. Nine testifying victims traced the fraud directly
to Simmons. He confessed his role in the Ponzi scheme to an FBI
agent, who also testified.    And the fraud left a paper trail
that pointed straight to Simmons.     Thus, given the wealth of
evidence against Simmons, even if the admission of brief victim-
impact testimony was error, the guilty verdict “was surely
(Continued)
                                            7
declining to grant his motion for judgment of acquittal on those

counts.      We     review     the    denial      of    a    motion       for   judgment       of

acquittal de novo.           United States v. Mehta, 594 F.3d 277, 279

(4th Cir. 2010).

                                             A.

      The federal promotional money-laundering statute makes it a

crime   to   engage     in     a    “financial         transaction”        involving         “the

proceeds     of    specified       unlawful       activity”         with   the    intent       to

“promote     the     carrying        on”    of     that      activity.            18    U.S.C.

§ 1956(a)(1)(A)(i)        (2006).            The       statute       defines      “specified

unlawful activity” to encompass more than 250 predicate crimes,

including         securities        fraud     and       wire        fraud.             Id.     at

§ 1956(c)(7)(A).

      Both of Simmons’s money-laundering convictions arose from

payments that he made to investors during the course of his

Ponzi scheme.        The first conviction was based on a wire transfer

of $150,000 to James Bazluki on March 14, 2008.                                  Bazluki had

invested     $250,000    in        Black    Diamond         prior    to    receiving         this

return; after receiving it, Bazluki invested another $70,000.

The   second      money-laundering          conviction         was    based      on     a    wire

transfer of $16,000 to Till Lux on October 22, 2008.                                   Lux had

unattributable to the error.”                  Sullivan v. Louisiana, 508 U.S.
275, 279 (1993).

                                             8
invested     $40,000      in      Black    Diamond.            He   testified     that       after

recovering the $16,000, he subsequently convinced many of his

friends    to      invest    in     Black    Diamond.            Lux    also    continued         to

withdraw money from Black Diamond, and ultimately turned a small

profit on his investment.                  Simmons contends that these payments

did not involve “proceeds” of unlawful activity as required to

constitute money laundering.

      His argument relies on United States v. Santos, a 4-1-4

decision      in     which        the     Supreme        Court      reversed      the       money-

laundering convictions of a defendant convicted of both running

an illegal gambling business and money laundering.                               553 U.S. 507

(2008).      Santos’s gambling counts arose from his operation of an

illegal lottery through a network of local bars and restaurants.

The money-laundering counts were based on payments by Santos to

the “runners” and “collectors” who helped operate the lottery,

and   to     the     lottery       winners     themselves.               The     lower       court

concluded       that    these           payments     involved          the     “proceeds”        of

operating       an   illegal       lottery,        and    could     therefore      constitute

grounds for money-laundering convictions.

      Five      members      of    the     Supreme       Court      disagreed.          A    four-

Justice    plurality        concluded        that        the   term     “proceeds”          in   the

money-laundering statute was ambiguous -- it could mean either

“receipts” or “profits” -- and invoked the rule of lenity to

resolve the ambiguity in favor of the defendant.                                  Id. at 514

                                               9
(plurality    opinion).        The    plurality           thus    concluded   that   the

money-laundering        statute      only        covers     transactions      involving

“profits” of criminal activity.              Id. at 524.

     In    rejecting     the   statute’s           broader       interpretation,     the

plurality found that construing “proceeds” to mean “receipts”

would create a “merger problem.”                    Id. at 515.         The plurality

explained that those who run illegal gambling businesses must

necessarily pay their accomplices and the lottery’s winners.                          If

a defendant could commit money laundering merely by “paying the

expenses     of   his     illegal      activity,”           all     illegal   gambling

businesses would involve money laundering, and the Government

could   punish    a   defendant      twice       for   an   offense    that    Congress

intended to punish only once.           Id. at 517.

     This merger problem, the plurality noted, is not limited to

illegal gambling.         Writing for the plurality, Justice Scalia

explained:

     Few crimes are entirely free of cost, and costs are
     not always paid in advance.    Anyone who pays for the
     costs of a crime with its proceeds -- for example, the
     felon who uses the stolen money to pay for the rented
     getaway car -- would violate the money-laundering
     statute. And any wealth-acquiring crime with multiple
     participants would become money laundering when the
     initial recipient of the wealth gives his confederates
     their shares.      Generally speaking, any specified
     unlawful activity, an episode of which includes
     transactions which are not elements of the offense and
     in which a participant passes receipts on to someone
     else, would merge with money laundering.

                                            10
Id.     at    516.         The   plurality       concluded       that     interpreting

“proceeds” to mean “profits” would resolve the merger problem by

ensuring that defendants cannot be convicted of money laundering

merely for paying the essential “crime-related expenses” of the

predicate crime.          Id. at 515.

        Justice Scalia devoted much of the plurality opinion to

challenging the dissent’s prediction that applying the “profits”

interpretation would undermine the viability of “the very cases

that    money      laundering     statutes       principally      target,       that   is,

cases    involving        large-scale     criminal     operations       that    continue

over a substantial period of time.”                   Santos, 553 U.S. at 538-39

(Alito, J., dissenting).             The dissent warned that, following the

plurality’s        approach,     the     money-laundering        statute       could   not

reach long-term criminal enterprises in which the distinction

between payments of “essential expenses” and payments dispensing

criminal      profits      may   often     be    unclear.        But    the     plurality

dismissed the dissent’s concerns as baseless.                      According to the

plurality,         determining    the     lifespan     of    a   long-term       criminal

enterprise, for purposes of evaluating whether the enterprise

produced      profits,       would      raise    no    difficulties          because   an

enterprise lasts “as long as the Government chooses to charge.”

Id. at       520    n.7   (plurality     opinion).          Because    the     Government

selects the lifespan of the predicate crime, it must prove that

payments      charged      as    money     laundering        during     that     lifespan

                                            11
involved       profits,           rather    than     essential        expenses,    of      the

predicate crime.            Id.

       Justice Stevens provided the crucial fifth vote to reverse

Santos’s money-laundering convictions, but did not endorse the

plurality’s          view       that   “proceeds”          always       means    “profits.”

Rather, Justice Stevens concluded that courts should resolve the

scope     of    the        term    “proceeds”        on    a   case-by-case       basis     by

reference to congressional intent.                         Id. at 525 (Stevens, J.,

concurring).           Justice Stevens grounded his conclusion on the

merger problem identified by the plurality.                            He concluded that

using funds earned through an illegal lottery business to pay

the    “essential          expenses”       of   that      business     cannot    constitute

money laundering.               Id. at 528.      And he agreed with the plurality

that    there        was   “no     explanation       for    why      Congress   would     have

wanted a transaction that is a normal part of a crime it had

duly    considered          and    appropriately          punished     elsewhere    in     the

Criminal       Code,       to     radically     increase       the    sentence    for     that

crime.”        Id.     Justice Stevens concluded that Congress could not

have intended such a perverse result.                      Id.

                                                B.

       Congress amended the money-laundering statute in May 2009;

that amendment effectively overruled Santos, defining proceeds

to include “gross receipts.”                    Fraud Enforcement and Recovery Act

of 2009, Pub. L. No. 111–21, § 2(f)(1), 123 Stat. 1617, 1618

                                                12
(2009) (codified at 18 U.S.C. § 1956(c)(9)).                      However, because

the amendment was not enacted at the time of the conduct giving

rise    to   Simmons’s    money-laundering          convictions,      this   expanded

definition of “proceeds” does not apply in this case.                           We are

therefore called on to wade into the murky Santos waters, as we

have in three previous published opinions.

       In United States v. Halstead, we considered the reach of

Santos in the context of a defendant convicted of healthcare

fraud    and    money   laundering.         634 F.3d 270   (4th    Cir.    2011).

Halstead’s fraud convictions arose from his scheme to capitalize

on his patients’ healthcare benefits by making phony medical

diagnoses.       His money-laundering conviction, by contrast, arose

from his transfer of the illicit gains into his personal bank

account.       He claimed that Santos prohibited his money-laundering

conviction because transferring his ill-gotten gains into his

own coffers constituted an “essential expense[] of operating”

his healthcare fraud.               Santos, 553 U.S. at 528 (Stevens, J.,

concurring).

       To    resolve    Halstead’s       argument    we   first      examined    what,

exactly, Santos         held   --    a   task   complicated     by    the    fractured

disposition.       Relying on Marks v. United States, 430 U.S. 188

(1977), we interpreted Santos narrowly to bind lower courts only

in cases where illegal gambling constituted the predicate for

the defendant’s money-laundering conviction.                    Halstead, 634 F.3d
13
at 279.        But, because the merger problem provided the “driving

force”     behind       both     the        plurality’s         and   Justice       Stevens’s

opinions, we recognized that Santos compelled us to construe the

money-laundering statute so as to avoid punishing a defendant

twice for the same offense.                  Id. at 278-79.           We concluded that a

defendant cannot be convicted of money laundering merely “for

paying     the     essential          expenses      of        operating     the    underlying

crime.”        Id. at 278 (quotation marks omitted).                              But if “the

financial transactions of the predicate offense are different

from the transactions prosecuted as money laundering” no merger

problem arises.          Id. at 279-80.

       Applying        this    rule    to    Halstead,         we   held    that    no   merger

problem tainted his money-laundering conviction.                             His healthcare

fraud    was     “complete”       as    soon     as      he    received     the    ill-gotten

healthcare       reimbursements.              Transferring          these    reimbursements

into     his     own    account        thereafter         constituted        an    altogether

“separate” offense that the Government properly prosecuted as

money laundering.             Id. at 280.

       After Halstead, we twice returned to Santos and its elusive

merger problem.               In United States v. Cloud, we considered a

defendant convicted of mortgage fraud -- for fraudulently luring

home-buyers into making bad real-estate investments -- and money

laundering -- for paying kickbacks to the accomplices who helped

him locate his victims.                  680 F.3d 396 (4th Cir. 2012).                      We

                                               14
reversed Cloud’s money-laundering convictions, concluding that

the kickbacks constituted “essential expenses” of the mortgage-

fraud scheme because “Cloud’s mortgage fraud depended on the

help of others, and their help, in turn, depended upon payments

from Cloud.”       Id. at 406.         Because Cloud’s scheme “could not

have succeeded” without the kickbacks, we held that convicting

him separately for these transactions would present the very

same merger problem identified in Santos.            Id. at 407.

       A few months ago, in United States v. Abdulwahab, we again

relied    on   Santos     to    reverse    a   defendant’s   money-laundering

convictions.      715 F.3d 521 (4th Cir. 2013).                 Abdulwahab had

committed an elaborate investment fraud, and the jury convicted

him of money laundering based on payments he made to his co-

conspirators to carry out that fraud.               Id. at 506-07.         As in

Cloud,    we   found    that   these   payments   “were   for   services    that

played a critical role in the underlying fraud scheme” because

they persuaded confederates to participate in the crime.                Id. at

531.     Abdulwahab resembled the paradigmatic felon, recognized by

the Santos plurality, who uses “stolen money to pay for the

rented getaway car.”           Id.   We therefore concluded that the same

merger problem presented in Santos barred his money-laundering

convictions.     Id.

                                          15
                                            III.

      Simmons argues that Santos, Halstead, Cloud, and Abdulwahab

require that we reverse his money-laundering convictions.                                     He

claims that his payments to investors did not involve “proceeds”

of    criminal       activity       but     rather           “essential      expenses”        of

maintaining his Ponzi scheme.                   And he maintains that convicting

him   separately        of   money     laundering            for    payments       that     were

essential to accomplishing his fraud would raise the same fatal

merger      problem     identified         in        Santos.        The    Government,       by

contrast, argues that Simmons’s fraud did not depend on payments

to investors and that these payments were not essential to the

fraud.      The Government therefore maintains that Simmons’s money-

laundering convictions should be affirmed.

                                                A.

      After considering the record in this case, the parties’

arguments,        and   controlling        law,        we     conclude     that      Simmons’s

money-laundering         convictions            cannot        stand.         The     evidence

admitted     at    Simmons’s       trial    irrefutably            established       that    the

ongoing     success     of   his    Ponzi       scheme        depended     on    payments     to

earlier     investors,       including          those        payments      charged    in     the

money-laundering counts.

      The    evidence        against      Simmons           confirmed      the    commonsense

notion that people generally do not send money into unproven

investment        schemes    without       some       evidence      that    they     will    see

                                                16
their money again.              Early payments from Simmons provided his

victims with just such evidence.                  Thus, the $9 million dollars

that    Simmons        paid     to    early      investors      was     essential   to

perpetuating the fraud scheme that ultimately earned him more

than $35 million.             Indeed, James Bazluki -- the victim whose

payment   formed       the    basis    of   Simmons’s     first       money-laundering

count -- testified that the fact that he “was able to request

money out of the account” convinced him “that this was a good

place to have [his] money” and prompted him to make further

investments.      And Till Lux -- whose payment formed the basis of

Simmons’s      other    money-laundering         count   --     testified    that   the

fact that he was able to withdraw from his account made him “100

percent confident” in his investment, convinced him that his

gains   were    “not     just    on    paper,”    and    made    him    encourage   his

friends to invest.            In sum, the very victims who received the

payments that formed the basis for Simmons’s money-laundering

charges unequivocally testified to the critical importance of

those payments in fostering the (misplaced) confidence necessary

to perpetuate the fraud.

       That Simmons’s fraud continued for five months after the

payments to existing investors stopped does not alter this fact.

When payments ceased in July 2009, Simmons managed to attract

only one new investor.                And, as soon as the payments ceased,

existing investors started demanding the answers that led to the

                                            17
scheme’s prompt unraveling.                  That Simmons managed, through lies

and dissembling, to extend a fraud that had endured for more

than two years for an additional five months without paying any

new returns to investors does not prove that those payments were

unnecessary to the scheme.               If anything, the rapid unraveling of

the Ponzi       scheme     when    the      payments       ceased    suggests         just     the

opposite.

       Furthermore,       we    note     that      throughout       its    prosecution          of

this    case,      the    Government         itself     treated       the       payments       to

investors    as     essential      to       Simmons’s       fraud.        The    superseding

indictment      characterized          the    wire    fraud    offense          as    including

transfers    to     “wire      ponzi     payment      to    investors       and       to     their

intermediaries in other States” -- the very transactions that

the Government later prosecuted as money laundering.                                 And in its

closing    argument,        the    Government        contended       that       payments        to

investors were necessary to the fraud because they “g[a]ve the

investors       confidence”       that       their     investment         was        sound     and

“induce[d] them to put even more money back into the scheme.”

The Government explained that the payments were “one of the ways

the defendant kept the scheme going.”

       In addition to the evidence proving that this particular

Ponzi     scheme     relied       on    payments       to    early        investors,         such

payments    are     understood         to    constitute       essential         features        of

Ponzi schemes.           In fact, we have defined a Ponzi scheme as one

                                              18
“in which early investors are paid off with money received from

later investors in order to prevent discovery and to encourage

additional and larger investments.”                           United States v. Loayza,

107 F.3d 257,    259       n.1     (4th      Cir.     1997).       The    Oxford     English

Dictionary similarly defines a Ponzi scheme as a “form of fraud

in which belief in the success of a non-existent enterprise is

fostered by payment of quick returns to first investors using

money    invested        by    others.”               Ponzi    Scheme,       Oxford      English

Dictionary (2013).

      Given these definitions, it is hardly surprising that the

only other appellate court to decide a case involving a Ponzi-

scheme operator convicted of both fraud and money laundering has

reached the same conclusion as we do.                           In United States v. Van

Alstyne,     the    Ninth          Circuit      reversed        the     defendant’s       money-

laundering       convictions          on    the       ground     that       the   payments      of

purported       returns       to    early       investors       were    “inherent”       to    the

defendant’s underlying scheme to defraud.                               584 F.3d 803, 815

(9th Cir. 2009).          The court concluded that the money-laundering

convictions       suffered         from     a    merger       problem    because       the    very

nature of a Ponzi scheme “require[s] some payments to investors

for it to be at all successful.”                      Id. at 815.

      Finally,      we    note       that       when    Congress       amended     the    money-

laundering statute in 2009 to include “gross receipts” within

the     law’s      definition          of       “proceeds,”           the     Senate      Report

                                                 19
acknowledged that Ponzi scheme payments could not be prosecuted

as    money   laundering         under       the     existing        statute.      The    Report

bluntly stated that, given the Santos Court’s interpretation of

the existing statute, the “proceeds of ‘Ponzi schemes’ like the

Bernard Madoff case, which by their very nature do not include

any profit, would be out of the reach of the money laundering

statutes.”       S. Rep. No. 111-10, at 4 (2009).                             Of course, the

Senate’s interpretation of Supreme Court case law does not bind

us.    It does, however, accord with our conclusion that payments

of    purported       returns         to    early        investors      are     understood    to

constitute      “essential           expenses”        of     Ponzi    schemes     rather     than

transactions dispensing a Ponzi scheme’s profits.

                                                 B.

       The     Government            concedes         that     this     case      involves     a

“difficult line-drawing” issue, Gov’t Br. at 57, but nonetheless

contends      that    we     must         affirm.        The   Government        raises    three

principal       arguments            as     to     why     Simmons’s       money-laundering

convictions present no merger problem.

       First, the Government contends that Simmons’s returns to

investors      constitute        “the        reinvestment        of     profit     to    finance

future fraud” rather than “essential expenses” of an ongoing

fraud.        Gov’t    Br.      at    56.        Although      the     line     between    using

criminal      profits      to    finance         a    future    fraud     and     using    gross

receipts to pay the expenses of an ongoing fraud is less than

                                                 20
self-evident,       see     Santos, 553 U.S.       at     544      (Alito,      J.,

dissenting),      Santos      both    requires       us    to       draw    this    line    and

offers useful guidance as to where the line falls in this case.

       Santos’s     gambling         scheme     and       Simmons’s           Ponzi     scheme

resemble each other in virtually all material respects.                                    Both

constituted       ongoing       schemes       rather       than       discrete        criminal

transactions.       The indictments in both cases charged underlying

conduct that spanned a number of years rather than a single

illegal act.       And both schemes required occasional payments to

third parties to sustain the crime during its lifespan.

       Santos   paid    his     lottery     winners,           presumably      hoping      that

reliable paydays would induce winners, losers, and new players

alike to test their luck during the next round of play.                                      Of

course,   Santos       could     have    declined         to    pay     his    winners      and

instead   pocketed        the    cash.        Had    he    done       so,     however,      his

gambling scheme would have been short-lived; it could not have

lasted the six years charged in the indictment.                               A majority of

the Supreme Court therefore agreed that Santos’s payments to

winners did not amount to the reinvestment of profit to finance

new,    discrete       gambling         crimes.           Rather,          these      payments

constituted expenses necessary to further a crime that, by its

very nature, required periodic payments to survive.

       The same is true in this case.                  Like a bookie who pays his

winners   in    the    hopes     of     attracting        new     and      repeat     gamblers

                                           21
during   the    course    of       an   ongoing      lottery,    Simmons      paid       early

investors in the hopes of attracting new and repeat investors

during the course of an ongoing fraud.                      Although Simmons could

have absconded with the early investors’ money before paying any

returns, had he done so, his scheme certainly could not have

lasted   for     the     nearly          three-year      period       charged       in    the

indictment.      See Santos, 553 U.S. at 520 n.7 (plurality opinion)

(a criminal enterprise’s profitability must be proved for “as

long as the Government chooses to charge”).

      Given this case’s similarity to Santos, we must decline the

Government’s invitation to divide Simmons’s Ponzi scheme into a

successive series of past, present, and future frauds.                              Rather,

Santos requires that we hold that Simmons’s Ponzi scheme, like

the   lottery    scheme       in    Santos,        represented    a    single,      ongoing

enterprise      that    the    defendant        could    sustain       only    by    making

limited payouts.

      The Government next argues that payments to innocent third

parties -- rather than to coconspirators -- cannot constitute

essential expenses of a criminal scheme.                        The Government notes

that in both Cloud and Abdulwahab, the payments we deemed to be

essential      were    made    to       the   defendant’s       criminal      accomplices

rather than to innocent outsiders like Simmons’s Ponzi victims.

According to the Government, while paying one’s accomplices is a

typical expense of criminal activity akin to paying for a rented

                                              22
getaway      car,   paying       investors            in   order    to    maintain        a     Ponzi

scheme is a different matter entirely.

       This argument ignores the very facts of Santos itself.                                     In

Santos,      payments      to    runners,            collectors,     and     lottery       winners

formed        the       basis        of        the     defendant’s          money-laundering

convictions. 553 U.S.      at    509.        Although        the    runners       and

collectors        were     accomplices           to     Santos’s      crime,       the    lottery

winners were not. 3             Manifestly, the Supreme Court therefore did

not    believe      that       the     merger         problem      arises    only        when    the

defendant pays his co-conspirators or accomplices.                                 See Santos,
553 U.S. at 515-16 (plurality opinion) (“Since few lotteries, if

any,       will   not    pay    their      winners,         the     statute       criminalizing

illegal       lotteries         would      ‘merge’         with     the     money-laundering

statute.”).         For       our    part,       we    have     repeatedly        explained       in

interpreting Santos that the essential nature of the payment --

rather than the identity of the payment’s recipient -- dictates

whether a given transaction raises a merger problem.                                See Cloud,
680 F.3d at 407; Halstead, 634 F.3d at 279.

       3
       That these winners participated in an illegal lottery, and
were therefore not strictly “innocent,” did not make them
accomplices to Santos’s crime.     The illegal gambling statute
criminalizes      “conduct[ing],     financ[ing],     manag[ing],
supervis[ing], direct[ing], or own[ing]” a gambling operation
that violates state law. 18 U.S.C. § 1955 (2006). The statute
thus criminalizes the management of -- rather than the mere
participation in -- an illegal gambling venture.       Just like
Simmons’s victims, the lottery winners were therefore not
participants or co-conspirators in Santos’s crime.

                                                 23
     Finally,       perhaps    recognizing        the    similarity          between   the

payments    in     this   case     and   those    in    Santos,        the    Government

stretches    to    distinguish       them    by   pointing        to   the    assertedly

unscheduled, discretionary nature of the Ponzi payments.                               The

Government maintains that although regular payments to lottery

winners -- as in Santos -- can constitute essential expenses of

a criminal scheme, “payments in discretionary amounts made on no

schedule in particular” -- assertedly as in this case -- cannot.

Gov’t Br. at 57.

     It is not at all clear that the payments in Santos were

more “scheduled” or less “discretionary” than those here. 4                            But

even assuming that Santos made payments according to a strict

schedule, and that Simmons made them at whim, the Government

raises a distinction without a difference.                   If a criminal scheme

requires certain payments to succeed, it makes no difference

whether    these    payments       arrive    regularly       or    sporadically.         A

payment    need    not    be   predictable        to    be   essential.          Because

Simmons’s    Ponzi        scheme     depended      on    periodic        payments       to

     4
       The payments here were governed by a contract permitting
investors to withdraw funds on the first business day of each
month. To be sure, Simmons failed to honor this contract. But
his ultimate failure to honor his contractual obligations does
not   necessarily  render   the  payments   that  he   did  make
unscheduled.   For its part, the Santos Court never specified
whether Santos paid his winners on a particular schedule.     In
any event, in neither case can the payments be characterized as
“discretionary” given that both schemes depended on the payments
to survive.

                                            24
investors, these payments constituted essential expenses of his

criminal    enterprise      regardless         of   whether    they   accrued     on    a

specified timetable.

                                          IV.

      Simmons’s fraudulent scheme, like any typical Ponzi scheme,

depended    on    attracting        new    investments         through      occasional

payouts to existing investors.                  Without these payouts, there

would have been no new investments and, consequently, no Ponzi

scheme.     The Government conceded -- indeed, trumpeted -- this

fact throughout the trial proceedings -- both in its charging

documents and its arguments to the jury.                       And Congress itself

recognized as much when it amended the money-laundering statute

in 2009 to ensure that Ponzi disbursements like the ones at

issue here could henceforth be punishable as money laundering.

Simmons’s     payments      to    investors,        like   Santos’s      payments      to

lottery winners, constitute essential expenses of his underlying

fraud.        Punishing      Simmons       separately         for   these     payments

therefore raises the same merger problem identified in Santos.

For   these      reasons,        while    we    affirm     Simmons’s        two   fraud

convictions,       we     must      reverse         his    two      money-laundering

                                           25
convictions,   vacate   his   sentence,   and   remand   for   further

proceedings consistent with this opinion. 5

                                AFFIRMED IN PART, REVERSED IN PART,
                                      VACATED IN PART, AND REMANDED

     5
       We need not address Simmons’s contention that his fifty-
year sentence was procedurally and substantively unreasonable.
And, given that Simmons’s procedural challenge to his sentence
rests on an asserted misapplication of a money-laundering
sentence enhancement, this challenge should be moot on remand in
light of our reversal of the money-laundering convictions on
which it is based.

                                 26
NIEMEYER, Circuit Judge, dissenting:

     During the course of this Ponzi scheme, Simmons obtained

money through wire fraud and securities fraud from investing

customers and used a portion of the money so obtained -- the

proceeds of the fraud -- to return $150,000 to James Bazluki and

$16,000 to Till Lux in an effort to conceal the fraud he had

committed on them.        By so investing the proceeds of the fraud,

Simmons was able to engage in additional fraud from which he

obtained additional proceeds, because the payments to Bazluki

and Lux deflected potential suspicion that otherwise might arise

with respect to his initial fraudulent transactions.

     Under these facts, when Simmons returned money to Bazluki

and Lux, he engaged in “transactions” that constituted money

laundering,    in    violation      of        18    U.S.C.     § 1956(a)(1)(A)(i)

(prohibiting financial transactions involving the “proceeds of

specific unlawful activity” (i.e., in this case, wire fraud and

securities    fraud)).      And    the    fraud       committed    by   Simmons   in

obtaining    investors’    money    was       a    distinct,   antecedent     crime,

completed     when   Simmons       received         the   money.         In   these

circumstances, I submit, the two crimes (money laundering and

wire or securities fraud) did not merge so that Simmons was

subjected to punishment twice for the same conduct.                     See United

States v. Santos, 553 U.S. 507, 517 (2008) (observing that a

“merger problem” would allow prosecutors, in their discretion,

                                         27
to seek the higher penalty for the two merged crimes or both

penalties); United States v. Halstead, 634 F.3d 270, 278-79 (4th

Cir. 2011) (same).

      Disagreeing with the majority’s analysis, I would conclude

that the payments to Bazluki and Lux were not the “essential

expenses” of Simmons’ wire fraud.            See Santos, 553 U.S. at 528.

The wire fraud did indeed have expenses in marketing and selling

the scheme and paying employees to work the office.                            But once

the   fraudulent      statements     were    made      to   customers          and    the

customers sent money to Simmons based on the statements, the

fraud was complete, and Simmons would then be punishable for

violating    the    wire    fraud   statute,      18   U.S.C.       §    1343.        The

subsequent payments back to the investors, who had earlier been

defrauded, were not expenses of the fraudulent act -- they were

not necessary as a matter of fact or law.                     Rather, they were

acts of money-laundering that indeed would have the effect of

covering up the fraud and thus promoting future frauds.

      Our decision in United States v. Cloud, 680 F.3d 396 (4th

Cir. 2012), makes clear the distinction between an expense of

the fraud and a payment to conceal the fraud and promote future

frauds.     In     Cloud,   the   proceeds   of     the     fraud       were   paid    to

employed    recruiters,     as    coconspirators       of   the     defendant,        who

helped perpetuate the fraud.           Id. at 408.           We noted that the

payments to these recruited coconspirators were the “essential

                                       28
expenses of Cloud’s underlying fraud, thus presenting a merger

problem.”          Id. at 407.           We thus found it essential that the

payments be made to conspiring employees, distinguishing those

payments from payments made to investors for cover-up and future

frauds.         As we stated:

       In utilizing monies from previous properties to
       finance future purchases, Cloud was not paying the
       “essential expenses” of the underlying crime.

Cloud, 680 F.3d at 408; see also United States v. Abdulwahab,

715 F.3d 521,    531    (4th      Cir.    2013)       (likewise       holding   that

payments        made     to   the    defendant’s         agents    for     “services     that

played      a    critical     role    in    the    underlying      fraud       scheme”   were

essential expenses of the fraud and recognizing the distinction

made   in       Cloud     that   payments         to    nonparticipating         persons   to

promote future frauds were not “essential expenses”).

       In       this     case,      Bazluki   and        Lux    were     not     recruiters,

confederates, or coconspirators in the fraudulent scheme.                                  To

the contrary, they were innocent victims of Simmons’ wire or

securities fraud, and the payments made to them were to cover up

Simmons’ past fraud and promote future fraud.                            Simmons’ ability

to obtain investments based on fraudulent statements subjected

him to punishment under 18 U.S.C. § 1343, as well as 15 U.S.C.

§ 78j(b), and his payments of the fraudulently obtained monies

to    victims       of    the    fraud      were       separate    “transactions”        that

subjected him to punishment for money laundering under 18 U.S.C.

                                              29
§ 1956(a)(1)(A)(i).           In this circumstance, there is no risk of

penalizing Simmons twice for the same conduct.

     The majority could only make its analysis work if Simmons

were convicted of some single crime prohibiting a Ponzi scheme

because    under    a     Ponzi      scheme,      the     proceeds         from       earlier

fraudulent    transactions           are        used    to        engage     in        future

transactions.       But       Simmons      was    not     charged      with       a     crime

prohibiting   a    Ponzi       scheme;     he    was    charged      with     committing

distinct   crimes       of    wire   fraud,      securities        fraud,     and       money

laundering,   and       his   payment      of    monies      to    investors      who     had

already been defrauded was not an expense of the fraud; it was a

transaction of money laundering.

     Accordingly, I would not find that a merger problem exists

in this case and would affirm on all counts.

                                           30