Wednesday, April 29, 2009

Straddle Sore

United States v. Josephberg, No. 07-3958-cr (2d Cir. April 9, 2009) (Kearse, Sack, Katzmann, CJJ)

Background - Multiple Acts of Tax Fraud and Evasion

A “straddle” is a type of tax shelter transaction involving the simultaneous ownership of a contract to buy a commodity for delivery in a future month and a contract to sell the same amount of the same commodity in a different future month. Either the purchase or sale contracts can be sold at a loss. Josephberg’s company sold interests in limited partnerships that invested in such straddle transactions. The partnership owned both contracts to buy and contracts to sell, and each year it would sell the type of contract that had decreased in value, to realize the losses. Individual partners would claim their shares of the losses as deductions on their tax returns for that year, and the partnership would defer the sale of the offsetting profitable contracts until the following year. The amounts of the transactions would escalate each year so that the next year’s sales losses would offset the gains that had been straddled from the year before.

An ordinary straddle transaction is not risk free because there is no assurance that the gain on the second leg will be equal in amount fo the loss on the first. But Josephberg and his associates sought to structure their transactions in ways that would ensure that any profit was always the same as the loss. In 1981, Josephberg’s partnerships’ accumulated deferred gains were $140 million; absent an offsetting loss, they would have owed taxes on those gains in 1982. However, due to a change in the 1981 tax law, the gains could not be offset by further straddle tax shelters. Instead, Josephberg agreed with a bond dealer to artificially generate tax losses in T-bill transactions by using repurchase agreements. These arrangements were used to “simulate” a straddle.

Overall, the straddles were rigged to avoid any true risk; the transactions were engaged in not to produce profits but to generate losses that investors could deduct from their income at tax time. Indeed, the Josephberg’s tax returns for the relevant nine-year period showed only $41,000 in tax liability on more than $3.6 million in income.

In 1986, IRS billed Josephberg for $372,000 in taxes based on its rejection of losses from some of the straddle transactions. He appealed administratively, and lost. By 1993, the IRS wanted that sum plus an additional $548,000 for a different tax year. Ultimately, the tax court entered judgment against him, and also sought additional taxes for other years. In response to the IRS’ effort to collect the debt, Josephberg repeatedly maintained that all his assets had already been seized by the IRS.

In truth, however, he was hiding his income by, for example, running it through shell entities and securities accounts in the names of his wife and children.

For a period of 20 years, from 1979-1998, Josephberg claimed or carried over a substantial net operating loss stemming from the straddle transactions. Even after a 1993 notice from the IRS that those tax shelters were disallowed because they were rigged, risk-free transactions that “generated artificial tax losses” and not “bona fide economic transactions,” he continued to do so.

In 1997 and 1998, Josephberg he failed to pay any employment taxes for his family’s live-in housekeeper, and he neither filed tax returns nor paid any taxes from 1999 to 2003.

Josephberg also engaged in health care fraud, by submitting false tax forms to Oxford to provide coverage for his wife and charge a group insurance rate to his company.

Josephberg was convicted of seventeen counts of tax evasion and both tax and health care fraud. By this time, his tax debt, including interest and penalties was $17,000,000.

The Appeal

Josephberg’s primary challenges on appeal were to the sufficiency of the evidence. All were unsuccessful, and only two are summarized here.

He first argued that there was insufficient evidence of “substantial tax due” with respect to the tax evasion counts because he “mounted a strong challenge” to the IRS tax assessment certificates that showed the tax debt. But this was merely a challenge to the weight of the evidence, not its sufficiency. Nor did the government’s case rest on the certificates alone. The government also introduced notices of deficiency sent to Josephberg informing him of the amounts due and tax court judgements rejecting his challenges to some of the assessments.

Josephberg also claimed that there was insufficient evidence that he engaged in any affirmative act of evasion, claiming that the government’s witnesses retracted their direct testimony on cross-examination. Not only did the court disagree with this characterization of the testimony, it again noted that the claim itself was poorly disguised challenged to the weight of the evidence.

Next, he claimed that the charge that he willfully failed to file tax returns or pay taxes between 1999 and 2003 violated the Fifth Amendment. He argued that, since in those years he was the subject of an ongoing investigation into the propriety of his continued claims of a net operating loss, the very filing of returns for those years would incriminate him. But it is “well settled that the Fifth Amendment does not provide a blanket defense for a failure to file tax returns,” even where there is an ongoing investigation into the taxpayer’s affairs.

At sentencing, Josephberg disputed the court’s use of the 2006 guideline manual, under which the tax loss included interest and penalties because he was convicted of willful evasion of payment. Until a 2001 amendment, the tax guideline always excluded interest and penalties, and Josephberg argued that since his tax evasion offenses were completed by 1998 it violated the Ex Post Facto Clause to use the 2006 manual. The district court held that he had committed a “continuing offense which straddled the dates of the guidelines,” and the circuit found no abuse of discretion. It noted that Josephberg’s failure to file from 1999 to 2003, by his own account, was an effort to avoid assisting in his prosecution for having claimed net operating losses through 1998.


Tuesday, April 28, 2009

Object Permanence

United States v. Marte Robles, No. 07-1013-cr (2d Cir. April 9, 2009)(Straub, Hall, CJJ, Eaton, DJ)(per curiam)

In this case, the court was called upon to construe Application Note 4 to U.S.S.G. § 1B1.2. Section 1B1.2(d) provides that a “conviction on a count charging a conspiracy to commit more than one offense shall be treated as if the defendant had been convicted on a separate count of conspiracy for each offense that the defendant conspired to commit.” The application note advises that “[p]articular care must be taken” when applying this subsection because there are cases where “the verdict or plea does not establish” which offenses were “the object of the conspiracy. In such cases, [subsection(d)] should only be applied with respect to an object offense alleged in the conspiracy count” if the court, were it sitting as the trier of fact, “would convict the defendant of conspiring to commit that object offense.”

After a jury trial, defendant Marte was acquitted of several substantive Hobbs Act robbery charges. He was convicted only of a single Hobbs Act conspiracy count that alleged, generally, that he and others robbed drug dealers in the Bronx and Manhattan, but did not identify any specific robberies as the object of the conspiracy. At sentencing, however, the district court concluded that the government had proven beyond a reasonable doubt that he conspired to commit two particular robberies, considered them to be the offenses that were the object of the conspiracy, and took them into account when calculating Marte’s guideline range.

On appeal, Marte argued that this was a misapplication of § 1B1.2(d) and Note 4, because those provisions prohibit sentencing enhancements based on the objects of a conspiracy are not specifically identified in the conspiracy count of the indictment.

On its face, Marte’s position would seem reasonable, since it appears to be consistent with the plain language of the application note. But the circuit disagreed. It held that the emphasis of Note 4 was “not on the specificity of the conspiracy charge but on the standard of proof that must be satisfied to permit a court to find that a defendant conspired to commit particular object offenses and then to treat such findings as a sentencing factor in determining the defendant’s offense level.”

The court also rejected Marte’s Sixth Amendment challenges to the sentence. There is no Sixth Amendment violation in a conspiracy sentence that is based on objects not alleged in the conspiracy count of an indictment. Nor was it true that the district court based the sentence on “the same conduct” that Marte was acquitted of. The substantive commission of a robbery is not “the same conduct” as conspiring to commit that robbery.

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Sunday, April 26, 2009

A Small Triumph

United States v. Hertular, No. 07-1453-cr (2d Cir. April 6, 2009) (Straub, Raggi, CJJ, Session, DJ)

Robert Hertular was convicted after a jury trial of running a large-scale cocaine importation ring, obstruction of justice, and misdemeanor assault of a federal officer under 18 U.S.C. § 111. He was sentenced to 400 months’ imprisonment on the drug counts, 120 months concurrent on the obstruction, and 12 months concurrent on the assault. On appeal, the circuit agreed that the evidence was insufficient on the assault count. It reversed that conviction and remanded the case for resentencing.


Hertular was originally arrested by local authorities in Belize, and charged with cocaine trafficking. Once released on bail, he initiated contact with a DEA agent, Vincent Williams, who was stationed in Belize, and expressed an interest in cooperating with American authorities. After two meetings in 2001, Williams told Hertular that the DEA would not use him as an informant.

In 2003, Williams was involved in a different drug investigation. Hertular appeared on the scene and met with the DEA’s informant. Hertular told the informant that the DEA was nearby and offered to “get rid of” the agents. After Hertular left, Williams followed him, and pulled him over, warning him to “be mindful of his associations.” In response, Hertular told Williams that he was “willing to kill a DEA agent” or US Embassy employee. Williams reported the threat to the Embassy, which implemented extra security measures. Hertular was not charged with this threat.

At the end of 2003, the DEA opened a formal investigation into Hertular’s drug activity. On December 25, 2003, Hertular called a second DEA agent, Raymond Kelly, on his cell phone and requested a meeting. Both Kelly and Williams attended the meeting, which took place in Kelly’s car. Hertular told them that he knew he was a target and was likely to be indicted soon. When the agents denied this, he played them a recording of a telephone conversation between Kelly and an informant regarding one of Hertular’s co-conspirators. He told the agents that DEA telephones had been tapped, that he had a source of information within the Embassy, and that he knew the identities of several DEA informants.

Later, Hertular became confrontational. He told the agents that it would be in their “best interest to back down from the investigation because he would have to protect himself.” When Kelly asked whether DEA agents in Belize were in jeopardy, Hertular said that they had better “protect” themselves and “watch [their] backs, because [his] organization would hire hit men from Colombia or Mexico to take [the agents] out.”

About two weeks later, Hertular was indicted in the Southern District of New York. In July of 2004 was extradited to the United States.

The Insufficient Evidence of Assault

The circuit held that the evidence was insufficient on the assault charge because 18 U.S.C. § 111 “requires some proof of the assailant’s present ability to inflict injury giving rise to an objectively reasonable apprehension of immediate harm."

The statute makes it a crime to “forcibly” assault, resist, oppose, impede, intimidate or interfere with a federal officer engaged in the performance of official duties. The word “forcibly” limits the scope of the statute to “fewer acts than would fit the definition of the unmodified verbs alone.” Although the actual use of force is not necessary to satisfy the force element of § 111, the threat must “objectively inspire fear of pain, bodily harm, or death that is likely to be inflicted immediately.”

Here, the evidence was sufficient as to the first prong - inspiring fear - but not for the immediacy prong. An “implied threat to use force some time in the indefinite future” is insufficient to support a § 111 conviction. Here, that is all the government proved.

Hertular’s threats to the agents “did not indicate by word or deed that he was then armed or even that he was contemplating any present action against” them. Rather, he threatened them with “death at some unspecified future time.” Indeed, the threat would only come to fruition if the DEA continued its investigation of Hertular and Hertular’s organization hired hit men from other countries and brought them to Belize to carry out the threat. Since these conditions “suggest[ed] the passage of some time, a jury could not reasonably find that, when Hertular threatened the agents, he had the apparent present ability to take their lives.”

Obstruction of Justice

This same conduct was sufficient, however, to satisfy the obstruction of justice statute, 18 U.S.C. § 1512(b)(3), which makes it an offense to use threats or intimidation to hinder the communication of information relating to a federal crime to a law enforcement officer. “On this record, a reasonable factfinder could easily have concluded that when Hertular told the agents it was in their ‘best interest to back down’ from the investigation and warned them that ‘hit men from Colombia or Mexico’ would be hired to take [them] out,’ ... his specific intent was to hinder or prevent not simply the filing of an indictment but any communication to or among federal law enforcement officials that could lead to his indictment.”

The Remedy

Generally, when the circuit overturns even one count of a multi-count conviction it remands the case for de novo sentencing proceedings. Here, although the reversal of a single misdemeanor count made little change to the “factual mosaic” of the case, the change to the “constellation of offenses” relevant to sentencing was sufficient to warrant resentencing. It is up to the district court to decide whether a conviction on three, rather than four, counts, affects its assessment of the statutory sentencing factors.

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Monday, April 20, 2009

Kopp Out

United States v. Kopp, No. 07-797-cr (2d Cir. April 6, 2009) (Kearse, Katzmann, CJJ, Chin, DJ) (per curiam)

James Charles Kopp was sentenced to life plus ten after a jury convicted him of killing an abortion provider, in violation of 18 U.S.C. § 248, and discharging a firearm in connection with a crime of violence. He raised a host of issues on appeal, all of which were quickly dispatched by the court.

First, he complained that some of his pretrial statements were improperly admitted because they occurred when he was represented by conflicted counsel. But since his motion to suppress the statements was untimely, he was not entitled to relief. Moreover, he testified at trial and admitted the killing, which was in substance the content of the statements he sought to have suppressed.

He also complained that the admission of redacted versions of the statements violated the rule of completeness because the omitted portions went to his “mens rea” and would have shown that he did not intend to kill the doctor. But intent to kill is not an element of the offense - the statute only requires an intent to injure.

Finally, he complained that the district court erred in precluding him from asserting, and the jury from considering, a justification defense. According to the circuit, it is not clear that a federal court can recognize a necessity defense that is not provided by statute. But even if it can, here the district court correctly concluded that the evidence in support of such a defense was legally insufficient.


Wednesday, April 01, 2009

Summary Summary

Here’s the latest crop:

In United States v. Ramirez, No. 08-2771 (2d Cir. April 1, 2009), the district court committed a procedural sentencing error in the defendant’s favor by refusing to calculate the applicable Guideline range based on the actual drug quantity and instead deferring to the jury’s finding that less than 500 grams of cocaine was attributable to the defendant. But the circuit found that the error was harmless since there was no doubt that the district court would have imposed the same sentence absent the error.

In United States v. Soto, No. 08-0654-cr (2c Cir. March 25, 2009), two defendants challenged their lengthy sentences on various procedural grounds. The circuit affirmed, but “pause[d] ... to note the striking size of the discrepancies between the sentences estimated at the time of the ... pleas and those that were imposed.” The court agreed that it was “understandable if they came as a considerable shock to the defendants when they were imposed” and had “some concern that they may therefore have an adverse impact on the willingness of criminal defendants to engage in similar plea negotiations in the future.”

In United States v. Carter, No. 07-5756-cr (2d Cir. March 25, 2009), the circuit vacated a 5-year consecutive 924(c) sentence under United States v. Williams, 2009 WL 563644 (2d Cir. March 5, 2009), even though the issue was not raised in the district court.