Nos. 12-3819, 12-3833 and 12-3867 United States Court of Appeals for the Seventh Circuit UNITED STATES OF AMERICA, Plaintiff-Appellee, v. TIMOTHY S. DURHAM, JAMES S. COCHRAN, AND RICK D. SNOW, Defendants-Appellants. On Appeal from United States District Court for the Southern District of Indiana Case No. 11-CR-00042 CONSOLIDATED BRIEF AND SHORT APPENDIX OF DEFENDANTS-APPELLANTS TIMOTHY S. DURHAM, JAMES S. COCHRAN, AND RICK D. SNOW James H. Mutchnik, P.C. Leonid Feller KIRKLAND & ELLIS LLP 300 North LaSalle Street Chicago, Illinois 60654 Telephone: (312) 862-2000 Counsel for Defendant- Appellant Timothy S. Durham Michelle L. Jacobs BISKUPIC & JACOBS, S.C. 1045 West Glen Oaks Lane Suite 106 Mequon, Wisconsin 53092 Telephone: (262) 241-0033 Counsel for Defendant- Appellant James. F. Cochran Jeffrey A. Baldwin VOYLES ZAHN & PAUL 141 East Washington Street Suite 300 Indianapolis, Indiana 46204 Telephone: (317) 632-4463 Counsel for Defendant- Appellant Rick D. Snow September 9, 2013 ORAL ARGUMENT REQUESTED Case: 12-3819 Document: 34-1 Filed: 09/09/2013 Pages: 109
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Federal Appeal - Tim Durham, James Cochran, Rick Snow Federal Appeal - Part 1
Appeal to 7th Circuit Court of Appeals by Tim Durham, James Cochran and Rick Snow - Filed September 9, 2013 Notes: Fair Finance, Obsidian Enterprises
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Nos. 12-3819, 12-3833 and 12-3867
United States Court of Appeals for the Seventh Circuit
UNITED STATES OF AMERICA, Plaintiff-Appellee, v.
TIMOTHY S. DURHAM, JAMES S. COCHRAN, AND RICK D. SNOW, Defendants-Appellants.
On Appeal from United States District Court for the Southern District of Indiana
Case No. 11-CR-00042
CONSOLIDATED BRIEF AND SHORT APPENDIX OF DEFENDANTS-APPELLANTS TIMOTHY S. DURHAM,
JAMES S. COCHRAN, AND RICK D. SNOW
James H. Mutchnik, P.C. Leonid Feller KIRKLAND & ELLIS LLP 300 North LaSalle Street Chicago, Illinois 60654 Telephone: (312) 862-2000 Counsel for Defendant-Appellant Timothy S. Durham
Michelle L. Jacobs BISKUPIC & JACOBS, S.C. 1045 West Glen Oaks Lane Suite 106 Mequon, Wisconsin 53092 Telephone: (262) 241-0033 Counsel for Defendant-Appellant James. F. Cochran
Jeffrey A. Baldwin VOYLES ZAHN & PAUL 141 East Washington Street Suite 300 Indianapolis, Indiana 46204 Telephone: (317) 632-4463 Counsel for Defendant-Appellant Rick D. Snow
To enable the judges to determine whether recusal is necessary or appropriate, an attorney for a non-governmental party oramicus curiae, or a private attorney representing a government party, must furnish a disclosure statement providing thefollowing information in compliance with Circuit Rule 26.1 and Fed. R. App. P. 26.1.
The Court prefers that the disclosure statement be filed immediately following docketing; but, the disclosure statement mustbe filed within 21 days of docketing or upon the filing of a motion, response, petition, or answer in this court, whichever occursfirst. Attorneys are required to file an amended statement to reflect any material changes in the required information. The textof the statement must also be included in front of the table of contents of the party's main brief. Counsel is required tocomplete the entire statement and to use N/A for any information that is not applicable if this form is used.
[ ] PLEASE CHECK HERE IF ANY INFORMATION ON THIS FORM IS NEW OR REVISED AND INDICATE WHICH INFORMATION IS NEW OR REVISED.
(1) The full name of every party that the attorney represents in the case (if the party is a corporation, you must provide thecorporate disclosure information required by Fed. R. App. P 26.1 by completing item #3):
(2) The names of all law firms whose partners or associates have appeared for the party in the case (including proceedingsin the district court or before an administrative agency) or are expected to appear for the party in this court:
(3) If the party or amicus is a corporation:
i) Identify all its parent corporations, if any; and
ii) list any publicly held company that owns 10% or more of the party’s or amicus’ stock:
Attorney's Signature: Date:
Attorney's Printed Name:
Please indicate if you are Counsel of Record for the above listed parties pursuant to Circuit Rule 3(d). Yes No
To enable the judges to determine whether recusal is necessary or appropriate, an attorney for a non-governmental party or
amicus curiae, or a private attorney representing a government party, must furnish a disclosure statement providing the following information in compliance with Circuit Rule 26.1 and Fed. R. App. P. 26.1.
The Court prefers that the disclosure statement be filed immediately following docketing; but, the disclosure statement must
be filed within 21 days of docketing or upon the filing of a motion, response, petition, or answer in this court, whichever occurs first. Attorneys are required to file an amended statement to reflect any material changes in the required information. The text of the statement must also be included in front of the table of contents of the party's main brief. Counsel is required to complete the entire statement and to use N/A for any information that is not applicable if this form is used.
[ ] PLEASE CHECK HERE IF ANY INFORMATION ON THIS FORM IS NEW OR REVISED
AND INDICATE WHICH INFORMATION IS NEW OR REVISED. (1) The full name of every party that the attorney represents in the case (if the party is a corporation, you must provide the
corporate disclosure information required by Fed. R. App. P 26.1 by completing item #3): James F. Cochran (2) The names of all law firms whose partners or associates have appeared for the party in the case (including proceedings
in the district court or before an administrative agency) or are expected to appear for the party in this court: On appeal: Biskupic & Jacobs, S.C., by Michelle L. Jacobs, 1045 W. Glen Oaks Lane, Suite 106, Mequon, WI 53092 In district court: Joseph Martin Cleary, Collignon and Dietrick, 310 N. Alabama, Suite 250, Indianapolis, IN 46204; William H. Dazey, Jr., Indiana Federal Community Defenders, 111 Monument Circle, Suite 752, Indianapolis, IN 46204; and Tyler D. Helmond and Jennifer Lukemeyer, Voyles Zahn Paul Hogan & Merriman, 141 East Washington Street, Suite 300, Indianapolis, IN 46204 (3) If the party or amicus is a corporation:
i) Identify all its parent corporations, if any; and
N/A
ii) list any publicly held company that owns 10% or more of the party’s or amicus’ stock:
N/A
Attorney's Signature: /s Michelle L. Jacobs Date: March 27, 2013
Attorney's Printed Name: Michelle L. Jacobs
Please indicate if you are Counsel of Record for the above listed parties pursuant to Circuit Rule 3(d). Yes x No
Address: Biskupic & Jacobs, S.C., 1045 West Glen Oaks Lane, Suite 106, Mequon, WI 53092
To enable the judges to determine whether recusal is necessary or appropriate, an attorney for a non-governmental party oramicus curiae, or a private attorney representing a government party, must furnish a disclosure statement providing thefollowing information in compliance with Circuit Rule 26.1 and Fed. R. App. P. 26.1.
The Court prefers that the disclosure statement be filed immediately following docketing; but, the disclosure statement mustbe filed within 21 days of docketing or upon the filing of a motion, response, petition, or answer in this court, whichever occursfirst. Attorneys are required to file an amended statement to reflect any material changes in the required information. The textof the statement must also be included in front of the table of contents of the party's main brief. Counsel is required tocomplete the entire statement and to use N/A for any information that is not applicable if this form is used.
[ ] PLEASE CHECK HERE IF ANY INFORMATION ON THIS FORM IS NEW OR REVISED AND INDICATE WHICH INFORMATION IS NEW OR REVISED.
(1) The full name of every party that the attorney represents in the case (if the party is a corporation, you must provide thecorporate disclosure information required by Fed. R. App. P 26.1 by completing item #3):
(2) The names of all law firms whose partners or associates have appeared for the party in the case (including proceedingsin the district court or before an administrative agency) or are expected to appear for the party in this court:
(3) If the party or amicus is a corporation:
i) Identify all its parent corporations, if any; and
ii) list any publicly held company that owns 10% or more of the party’s or amicus’ stock:
Attorney's Signature: Date:
Attorney's Printed Name:
Please indicate if you are Counsel of Record for the above listed parties pursuant to Circuit Rule 3(d). Yes No
Address:
Phone Number: Fax Number:
E-Mail Address:
rev. 01/08 AK
12-3867
USA v. Rick D. Snow
Rick D. Snow
Baldwin & Maxwell, Indianapolis, IN; Voyles, Zahn & Paul, Indianapolis, IN; Frost Brown Todd, Indianapolis, IN
TABLE OF AUTHORITIES ..................................................................... vii
JURISDICTIONAL STATEMENT ............................................................ 1 I. Timothy S. Durham ................................................................. 1 II. James F. Cochran ..................................................................... 1 III. Rick D. Snow ............................................................................ 2
ISSUES PRESENTED FOR REVIEW ...................................................... 3
STATEMENT OF THE CASE ................................................................... 4
STATEMENT OF FACTS .......................................................................... 7 I. Fair Finance Company ............................................................ 7 II. The government’s investigation ............................................ 11 III. Trial ........................................................................................ 13 IV. Sentencing .............................................................................. 16
SUMMARY OF THE ARGUMENT ......................................................... 18
ARGUMENT ............................................................................................. 22 I. The district court abused its discretion when it denied
the Defendants’ motion to suppress wiretap evidence for lack of necessity. ............................................................... 22 A. Standard of review ........................................................ 23 B. The wiretap application did not establish that
ordinary investigative techniques failed or were unlikely to succeed in this specific investigation. ....... 24
C. The district court erred by failing to suppress the wiretap evidence, and the Defendants’ convictions must be vacated because the wiretap evidence was central to the government’s case. ......................... 34
D. Evidence obtained from the search of Fair, Fair Holdings, and Obsidian also must be suppressed because wiretap evidence was essential to the government’s search warrant application. .................. 37
II. The district court should have ordered a mistrial when the prosecutor took unfair advantage of a plainly
inadvertent misstatement by defense counsel during closing arguments. ................................................................. 39 A. Factual background ...................................................... 39 B. Standard of review ........................................................ 41 C. The prosecutor’s comments were improper. ................ 42 D. The comments prejudiced all three Defendants. ......... 44
III. The government failed to introduce any evidence that the wires challenged in Counts Two and Five were “in furtherance” of any scheme to defraud. ................................ 48 A. Standard of review ........................................................ 49 B. There was no evidence that the wires charged in
Counts Two and Five were “in furtherance” of any scheme to defraud. ........................................................ 50
IV. The district court erred by rejecting the proposed securities fraud jury instruction. ........................................... 54 A. Standard of review. ....................................................... 57 B. The proposed instruction was an accurate
statement of law. ........................................................... 58 C. The proposed instruction was supported by the
evidence. ........................................................................ 60 D. Defendants’ theory was not already part of the
charge. ........................................................................... 63 E. The failure to include Defendants’ instruction
denied them a fair trial. ................................................ 64 V. The district court failed to follow proper sentencing
procedures. ............................................................................. 66 A. Standard of review ........................................................ 68 B. The district court’s loss calculation was clearly
erroneous. ...................................................................... 69 1. The district court erred when calculating
intended loss without considering Defendants’ subjective intent. ............................. 71
2. The district court erred even under the “placed at risk” standard because it failed to account for money returned to investors. ........... 75
3. The district court erred when calculating actual loss by failing to account for the effect of extrinsic factors. ..................................... 76
C. The district court erred by failing to consider the need to avoid unwarranted sentencing disparities. ..................................................................... 81
D. None of the district court’s procedural errors was harmless. ....................................................................... 86
E. The district court abused its discretion when it ordered restitution of over $208 million. ..................... 87
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) .................................................................................. 58
the crucial distinction between transferring ownership of a securi-
ty and merely continuing to hold a security or delaying an interest
payment?
5. Did the district court err at sentencing when it: (i) calculated an
intended loss amount without determining Defendants’ subjective
intent and an actual loss amount without accounting for losses in-
curred independent of Defendants’ conduct; (ii) affirmatively re-
fused to consider sentences of similarly-situated defendants from
other districts when considering the need to avoid unwarranted
sentencing disparities; and (iii) ordered restitution based on a loss
amount not tied to the Defendants’ specific conduct?
STATEMENT OF THE CASE
On March 15, 2011, a grand jury in the Southern District of Indi-
ana returned a twelve-count indictment charging Durham, Cochran,
and Snow with securities fraud, wire fraud, and conspiracy. R. 1.1 A
superseding indictment was returned on February 14, 2012. R. 217.
1 In this brief, “R.” followed by a number refers to an entry on the district court’s docket,
“Tr.” followed by a number refers to a page of the trial transcript, “Sent. Tr.” followed by a number refers to a page of the sentencing hearing transcript, “Tr. Ex.” followed by a number refers to an exhibit admitted at trial, “App.” followed by a number refers to De-fendants’ Short Appendix, and “S.A.” followed by a number refers to Defendants’ Sepa-rate Appendix.
ings, Inc., then to the ultimate recipient of the loan. S.A. 31. These
loans were “directed at markets not serviced by Fair,” which created
“additional opportunities for growth” for Fair. Id.
Fair Holdings made loans both to unrelated third-party entities
and to business that were connected to Durham and Cochran. For ex-
ample, some of the companies that ultimately received loans were busi-
nesses owned by Obsidian Enterprises, a company partially owned by
Durham.2 Tr. 82:9-25, 92:8-10, 95:13-17, 145:15-17. Obsidian’s operat-
ing companies were involved in a diversified variety of businesses,
among them manufacturing enclosed cargo trailers, leasing luxury bus-
es, and reclaiming butyl rubber from old inner tubes. Tr. 89:9-24. Fair
also made loans to DC Investments, LLC, another company owned by
Durham and Cochran. Tr. 88:15-22; S.A. 31. In turn, DC Investments
2 Obsidian became a private company in 2005. Tr. 1445:16-19, 1449:1-21. As part of the
going-private transaction, an investment bank did a valuation of Obsidian and its oper-ating companies. Id. The investment bank determined that Obsidian and its operating companies had positive equity value—that is the value of the company in excess of its debt, including its debt to Fair—of $5.7 million if the company was sold during the nor-mal course of business, as distinguished from a forced liquidation. Tr. 1453:17-1454:1; Tr. Ex. 283 at 12-13.
423. Although all three Defendants made objections to their PSRs,4 and
all three Defendants submitted sentencing memoranda, R. 429, 430,
432, the district court failed to address several of the Defendants’ objec-
tions. See, e.g., R. 413 at 3, 12; R. 429 at 12-13; Sent. Tr. 10:1-17:3; R.
432 at 1-3.
At sentencing, the government offered no evidence of the Defend-
ants’ subjective intent to cause any investors’ loss, R. 434 at 3, and the
district court made no factual findings regarding the Defendants’ sub-
jective intent, if any. Sent. Tr. 105:20-107:7; 140:13-19, 168:24-169:11.
When determining the actual loss, the court never addressed Defend-
ants’ contentions that investors’ ability to recover their investment in
Fair was substantially impacted by extrinsic factors such as the general
decline in the broader economy, including the nationwide decline in
property values, the government’s raid on Fair’s offices, and the effect of
negative publicity from the government’s forfeiture lawsuit, which was
dismissed one day after it was filed. See R. 429 at 13.
4 Durham filed his objections with the district court. R. 413. Cochran and Snow submit-
ted objections to the probation officer to be incorporated in the final PSR pursuant to S.D. Ind. L.C. R. 13.1. See R. 421, Addendum at 2; R. 424 at 29-35.
crime,” Kahn, 415 U.S. at 153 n.12. A wiretap application that fails to
meet the necessity requirement cannot support a valid wiretap authori-
zation, and any communications intercepted pursuant to that defective
authorization must be suppressed. 18 U.S.C. § 2515; Giordano, 416
U.S. at 527.
B. The wiretap application did not establish that ordinary in-vestigative techniques failed or were unlikely to succeed in this specific investigation.
To satisfy Title III, the government must demonstrate “why, in the
particular case at hand, [ordinary investigative techniques] will be in-
sufficient.” United States v. Blackmon, 273 F.3d 1204, 1210 (9th Cir.
2001) (emphasis added); see also United States v. Lilla, 699 F.2d 99, 104
(2d Cir. 1983) (suppressing wiretap evidence because “the affidavit does
not enlighten us as to why this narcotics case presented problems dif-
ferent from any other small-time narcotics case”); United States v. Rob-
ization); United States v. Zambrana, 841 F.2d 1320, 1331-32 (7th Cir.
1988) (closely run family organization). However, here the district court
expressly found that the opposite was true: the organization was not in-
Durham to talk to him, correct? A: If I invested $200,000 I probably could have, but I didn’t have $200,000.” R. 270 at 76:24-77:2. Special Agent Halliden’s post hoc rational-ization—“I didn’t have $200,000”—is unpersuasive. As his own affidavit explained, the Defendants would contact any investor who expressed an interest in investing over $200,000, R. 150, Ex. C. ¶ 26, the undercover agent would not actually have needed to invest the $200,000.
would not be effective because the government had yet to identify which
individuals were integral to the alleged scheme. R. 150, Ex. C ¶¶ 45,
46. ODS already had much of this information,6 or could have been
used to gather such information with little risk of compromising the
federal investigation.
What is more, the government made no effort to contact any third
party—Fair’s accountants and lenders, or former Fair employees, for
example—all of whom undoubtedly had useful information about the
company’s operations, personnel, records, and recordkeeping practices
and procedures. The government failed to pursue these most basic in-
vestigative techniques, and instead rushed immediately to what is sup-
posed to be a technique of last—not first—resort. Cf. S. Rep. No. 90-
1097, reprinted in 1968 U.S.C.C.A.N. 2112, 2160 (Title III enacted to fa-
cilitate evidence gathering in circumstances where there are no “books
and records available for law enforcement inspection”).
The Defendants do not suggest that the government was required
to undertake all of these investigative techniques to meet Title III’s ne-
cessity requirement if the affidavit sufficiently alleged that ordinary 6 Indeed, Durham’s trial counsel submitted an online request to ODS for publicly availa-
ble materials relevant to Fair and received voluminous materials in response. R. 239.
United States v. Williams, 493 F.3d 763, 766 (7th Cir. 2007) (internal
quotations omitted).
Here the erroneous admission of the wiretap evidence was far
from harmless. On the contrary, the wiretap evidence was the center-
piece of the government’s case. Indeed, in its opening statement, the
government acknowledged the central role of the wiretaps to its case:
So while in this case the Government is going to present witness testimony and quite a few documents, this case is a little bit different, because you, as members of the jury, are going to be able to hear the Defendants’ voices discussing committing a crime in real time when they didn’t know that anyone else was listening.
Tr. at 7:7-12. The government’s closing argument also concentrated on
the wiretap evidence:
And then October, November of 2009, go back and listen to those wiretap calls. See if you hear Rick Snow and Tim Durham working together on a plan on how to hide those bad debts. . . . Go back and listen to those calls.
Tr. at 1643:4-10 (emphasis added).
The wiretaps were, in effect, the government’s star witness.
There can be little doubt that, in the mind of the average juror, the
prosecution’s case would have been significantly less persuasive absent
the improperly admitted wiretap evidence. The Defendants’ convictions
must therefore be vacated and the case remanded for a new trial.
D. Evidence obtained from the search of Fair, Fair Holdings, and Obsidian also must be suppressed because wiretap evi-dence was essential to the government’s search warrant ap-plication.
Title III’s exclusionary provision reaches beyond intercepted
communications, encompassing all “evidence derived therefrom.” 18
U.S.C. § 2515. In particular, Title III requires suppression of evidence
tainted by illegally obtained wiretap evidence: if evidence derived from
an improper wiretap is necessary to a subsequent probable cause affi-
davit, that subsequent authorization must also be suppressed.
Spagnuolo, 549 F.2d at 712; accord United States v. McHale, 495 F.2d
bly taints the warrants used to search the offices of Fair, Fair Holdings,
and Obsidian.7
In its wiretap application, the government expressly conceded that
it lacked probable cause to search any particular location. R. 150, Ex. C
¶ 46 (“The FBI does not know and does not have any current source of
7 The government submitted two search warrant applications: one in the Southern Dis-
trict of Indiana to search the offices of Fair Holdings and Obsidian and one in the Northern District of Ohio to search the offices of Fair Finance. The Defendants properly preserved their challenge to the Fair Holdings and Obsidian search warrant. S.A. 1. This Court therefore reviews the district court’s findings de novo. See United States v. Vitek Supply Corp., 144 F.3d 476, 480 (7th Cir. 1998). The Defendants’ challenge to the Fair Finance search warrant is reviewed for plain error. See S.A. 1 n.1; United States v. Jackson, 189 F.3d 502, 508 (7th Cir. 1999).
II. The district court should have ordered a mistrial when the prose-cutor took unfair advantage of a plainly inadvertent misstatement by defense counsel during closing arguments.
Prosecutors have a special obligation to remain well within the
bounds of propriety and fairness at all times. United States v. Meeker,
558 F.2d 387, 389 (7th Cir. 1977); see also Berger v. United States, 295
U.S. 78, 88 (1935) (“It is as much [the prosecutor’s] duty to refrain from
improper methods calculated to produce a wrongful conviction as it is to
use every legitimate means to bring about a just one.”). Here, the pros-
ecutor on rebuttal stepped outside those boundaries by taking ad-
vantage of an inadvertent misstatement by Cochran’s counsel during
closing argument. By doing so, the prosecutor usurped the jury’s func-
tion, distorted the burden of proof, and ultimately violated the Defend-
ants’ due process right to a fair trial. Accordingly, all three Defendants
are entitled to a new trial on all counts of conviction.
A. Factual background
During his closing argument, Cochran’s trial counsel (William
Dazey) made the following statement:
…[A]nd there may have been some reference today [by Durham’s counsel during closing] of Mr. Durham having a right hand and a left hand that performed various functions along the way. And I hope for Mr. Durham’s sake, and I hope for Mr. Cochran’s sake, that his counsel’s presentation is persuasive. And I hope that
your finding might be that there is a reasonable doubt as to whether Mr. Durham participated in a scheme to defraud. That is none of my business. The answer is, no, I think there was a scheme to defraud. The question is, was there anybody else that was let in on that scheme? Was there anybody that knew what the conspiracy was that was charged in this indictment? Was there anybody else that knew what the plan was?
S.A. 23:21-24:8 (emphasis added).
On rebuttal, the prosecutor asserted to the jury that Cochran’s
counsel had conceded the scheme to defraud:
Let’s talk about Mr. Cochran. Now, you heard Mr. Cochran’s at-torney tell you that there was a scheme to defraud but that Mr. Cochran didn’t have a role in it. Well, Mr. Cochran’s role was ab-solutely critical to making this thing happen.
S.A. 26:1-5 (emphasis added). Trial ended for the day after the govern-
ment’s rebuttal argument was concluded. Tr. 1644:12-14.
The next morning, Durham and Snow moved for a mistrial, argu-
ing that Dazey’s misstatement was improper as a statement of counsel’s
personal opinion of the evidence. App. 236:8-38:12. When asked about
Dazey’s comment, the prosecutor acknowledged that the “thrust” of
Dazey’s argument sounded in the alternative: “I think this isn’t the
first criminal trial there are multiple Defendants and one Defendant
has made the argument maybe there was a crime but I was not involved
in it . . .” App. 237:24-38:4. The district court, after replaying the audio
recording of Dazey’s closing argument, reached the same conclusion.
App. 238-240. Dazey confirmed that his intention was to argue in the
alternative. App. 240:5-14. The court denied the motion targeted at
Dazey’s comments. App. 239:23-40:4.
B. Standard of review
Because the Defendants’ aimed their objection at Dazey’s argu-
ment, rather than specifically at prosecutorial misconduct, a plain error
standard of review generally would apply.9 United States v. Bell, 624
F.3d 803, 811 (7th Cir. 2010) (quoting United States v. Bowman, 353
F.3d 546, 550 (7th Cir. 2003)). This Court employs a two-step test in
analyzing claims of prosecutorial misconduct. First, the Court deter-
mines whether the prosecutor’s statement, in isolation, was improper.
Second, if it was improper, the Court considers whether the impropriety
prejudiced the Defendants. United States v. Clark, 535 F.3d 571, 580
9 Durham’s counsel arguably preserved his objection to the prosecutor’s statement for this
appeal when, in making the motion for a mistrial, he noted that “[t]he Government picked up on it in their final close.” App. 236:16. In addition, the court said in ruling on the motion, “I also don’t know that -- it is prosecutorial misconduct that might result in a violation of the right to fair trial.” App. 240:16-18. Because the district court erred under even under a plain error standard of review, its failure to order a mistrial would be error under the abuse of discretion standard, which applies when the issue was properly preserved. U.S. v. Sandoval, 347 F.3d 627, 631 (7th Cir. 2003).
Five. S.A. 19:8-22:11, 141-142. Each exhibit originally consisted of
multiple pages, with the first page documenting a wire transfer be-
tween Fair and Fair Holdings, and the remainder presumably intended
to establish some connection to a scheme to defraud. But, the govern-
ment ultimately introduced only the first page of each exhibit—setting
forth nothing more than the fact of each wire—into evidence. S.A.
20:12-24, 21:8-17, 141-142. As a result, the only evidence in the record
with respect to Counts Two and Five was that on two particular occa-
sions, money was sent between two companies, Fair and Fair Holdings.
Id. During the remainder of trial, the government elicited no further
testimony about either wire and offered no evidence that these wire
transfers made “the fraud possible or facilitate[d] it” in anyway. Kwiat,
817 F.2d at 443.11 Accordingly, there is no basis for a juror to infer from
the simple movement of money between two companies that the trans-
fers were “incident to an essential part of [a fraudulent] scheme.” Maze,
414 U.S. at 411.
11 In contrast, with respect to Count Three, for example, the government introduced simi-
lar documentary evidence with respect to the fact of a wire transfer, S.A. 21:25-22:11, but then also offered testimony tracing the proceeds of the wire to alleged personal ex-penditures by the Defendants, Tr. 910:15-911:16. No similar evidence—or any evidence whatsoever for that matter—was offered with respect to Counts Two and Five.
The Defendants’ theory of defense to securities fraud was that “a
scheme to delay is not a scheme to defraud” and that many of the al-
leged misrepresentations on which the government built its case related
to, at most, delaying interest payments to investors, or encouraging in-
vestors to delay redemptions of investment certificates—not the pur-
chase or sale of a security by any investor. Tr. 1577:9-24, 1578:16-17;
S.A. 145. For the jurors to understand the legal import of this theory of
defense, it was critical that they understand the difference between, on
one hand, misrepresentations made in connection with a purchase or
sale of a security, and, on the other, misrepresentations made to delay
interest payments to investors or to cause investors to hold previously
purchased investment certificates. To highlight this vital distinction,
Defendants proposed the following jury instruction for the securities
fraud charge:
First, there must be a purchase or sale of a security. This means that the transfer of ownership of an asset is required for a purchase and sale. Simply continuing to holding [sic] a security does not qualify. Furthermore, delaying an interest payment or redemption of an Investment Certificate is not a purchase or sale of a security. Second, to satisfy the ‘in connection with’ requirement, the government must prove beyond a reasonable doubt that there was some nexus or relationship between the alleged
untrue statements of material fact and the purchase or sale of interests in Fair Finance. The misrepresentations must have some direct pertinence to a securities transaction. Evi-dence that defendants made untrue statements or omissions of material fact following the purchase of an Investment Cer-tificate is inadequate. Likewise, evidence that investors pur-chased or sold interests in spite of defendants’ alleged un-true statements of material fact is insufficient. Instead, the government must prove beyond a reasonable doubt that in-vestors actually purchased or sold some or all of their In-vestment Certificates in Fair in connection with the defend-ants’ alleged untrue statements of material fact.
S.A. 145.
The district court rejected the proposed jury instruction and in-
stead gave a set of instructions simply mirroring the statutory lan-
guage. The instructions as given told jurors only that the misrepresen-
tation must have been made “in connection with the purchase or sale of
a security”—without any mention of the legal distinction vital to a
proper understanding of that language in light of the testimony and ev-
idence at this trial. S.A. 182. This was error. It allowed the jurors to
consider mistakenly evidence of misrepresentations made to delay
payments—acts that do not rise to securities fraud—when deciding
whether to convict Defendants of securities fraud.12 Absent the pro-
12 The Defendants are entitled to appellate review of this error notwithstanding the fact
that the prison term to which each Defendant was sentenced based on their securities fraud convictions runs concurrent to other portions of their sentences. See App. 3; App.
posed instruction, it is impossible to know whether Defendants were
convicted based on evidence clearly insufficient to support a securities
fraud conviction. Given the importance of the proposed instruction to
Defendants’ theory of defense, their conviction for securities fraud must
be vacated. See Hach, 162 F.3d at 945.
A. Standard of review.
This Court reviews de novo a properly preserved objection to a dis-
trict court’s decision not to instruct the jury on a defendant’s theory of
defense. Irorere, 228 F.3d at 825. Here, Durham explicitly objected to
the district judge’s rejection of the proposed jury instruction. App.
246:1-10; see also United States v. Requarth, 847 F.2d 1249, 1253-54
(7th Cir. 1988). Thus, the district court’s refusal to give the instruction
is reviewed de novo.13
74; App. 144. At a minimum, Defendants were each assessed a monetary special as-sessment for each count, App. 6, 77, 147, 269, 283, 297; R. 426 ¶ 147; R. 421 ¶ 148; R. 424 ¶ 132, which renders the “concurrent sentences doctrine” inapplicable. Steffes v. Pollard, 663 F.3d 276, 280-81 (7th Cir. 2011) (citing Ray v. U.S., 481 U.S. 736, 737 (1987)).
13 Counsel for Cochran and Snow did not object to the court’s rejection of the proposed jury instruction. Thus, the appropriate standard for them may be plain error. See Irorere, 228 F.3d at 825.
omitted).15 Such error requires a remand for resentencing because “the
lack of explanation” means this Court “cannot meaningfully review the
[district c]ourt’s decision.” Leiskunas, 656 F.3d at 737-38; Jewel, 947
F.2d at 232.
As to the district court’s loss calculations, the district court found
that each Defendant intended a $250 million loss or, in the alternative,
that the Defendants caused an actual loss of $202 million, resulting in a
28-level increase in the offense level. See App. 250:20-252:7, 272:13-19,
288:24-289:18. As set forth below, both calculations were infected with
error.16
1. The district court erred when calculating intended loss without considering Defendants’ subjective intent.
Intended loss is the “the pecuniary harm that was intended to re-
sult from the offense.” U.S.S.G. § 2B1.1, cmt. n. 3(A)(ii). In the Seventh 15 The district court also seemingly rejected, without meaningful consideration, Cochran’s
mitigation argument about life expectancy and the importance of considering a sentence that would not be an effective life sentence. S.A. 220:10-24. The court commented: “I don’t know about the life expectancy table, but I have crafted a sentence I think based on the counts for which you were charged . . . .” App. 279:13-15. The court continued: “[I]t may be in effect a life sentence. It is not certainly an effective life sentence.” App. 280:20-22. This too is failure to give meaningful consideration to a mitigation argu-ment, which warrants reversal. This error is particularly egregious given that “death in prison is not to be ordered lightly” and the chance that a defendant will not live out his sentence should “give pause to a sentencing court.” United States v. Wurzinger, 467 F.3d 649, 652 (7th Cir. 2006).
16 Defendants objected to both the intended and actual loss figures. R. 413 at 1-12; Sent. Tr. 10:6-14; R. 432 at 1-3; R. 421, Addendum at 2; R. 424 at 29-35.
Circuit, intended loss should be established through the subjective in-
tent of the defendant. United States v. Middlebrook, 553 F.3d 572, 578
(7th Cir. 2009). Here, the government presented no evidence whatsoev-
er of subjective intent, see R. 434 at 3, and the district court made no
factual findings on this point.17
Instead, the district court found that the Defendants intended in-
vestors to lose $250 million because that was “the amount that [De-
fendants] placed at risk.” App. 251:1-252:7, 272:13-19, 288:24-289:11
(citing United States v. Lauer, 148 F.3d 766, 768 (7th Cir. 1998)). Cas-
es, like Lauer, applying a “placed at risk” standard are contrary to the
weight of authority in this Circuit requiring proof of subjective intent to
establish intended loss. See Middlebrook, 553 F.3d at 578; United
States v. Berheide, 421 F.3d 538, 541 (7th Cir. 2005) (reversing the in-
tended loss finding, which must be based on a determination of “how
much loss, if any, [the defendant] intended [the victim] to suffer”); Unit-
ed States v. Fearman, 297 F.3d 660, 662 (7th Cir. 2002) (reversing the
17 Indeed, there is contrary evidence in the record, including evidence that Durham per-
sonally assumed loans Fair made to debtors who could no longer pay, Tr. 446:2-13, 1343:16-1346:25, and ultimately paid over $28 million into Fair, Tr. 1368:19-23. Almost $7 million of the $28 million in payments from Durham to Fair occurred after January 2008. Tr. 1388:8-11. Durham also pledged personal assets as collateral on other loans. Tr. 1036:18-20.
loss is “a loss the defendant purposely sought to inflict.”) (emphasis in
original); cf. United States v. Confredo, 528 F.3d 143, 152 (2d Cir. 2008)
(“[A] district court may presume that the defendant intended the vic-
tims to lose the entire face value of the [fraudulent] instrument, but the
defendant may rebut the presumption by producing evidence to demon-
strate that he actually intended to cause a lesser loss.”) (internal quota-
tions omitted).18
The Tenth Circuit recently set forth an exhaustive analysis of why
the Guidelines compel this conclusion: the meaning of “intent” is plain,
it fits within background legal norms, which the Sentencing Commis-
sion clearly understood, and a definition of intent is “implausible on its
face” if it “includes things [a defendant] never contemplated—except
perhaps in an Opposite Day game.” Manatau, 647 F.3d at 1050-53.
Because there was no offer of proof by the government and no
finding by the district court as to the amount Defendants subjectively
intended investors to lose, the district court erred in calculating De-
18 In Confredo, the court noted that although the 1991 Sentencing Guidelines referred to
the “probable or intended loss,” subsequent versions of the Guidelines eliminate the word “probable,” and courts have subsequently rejected equating “intended” loss with “the worst case scenario [of] potential loss.” 528 F.3d at 150-51 (emphasis in original) (internal citations omitted).
Neither, however, is the proper measure of intended loss even under the
district court’s erroneous “placed at risk” standard.
First, although Fair did sell substantially all its investment certif-
icates under the July 2008 authorization, Tr. 676:18-22, it is undisputed
that some of those investors were paid back, although the precise
amount was not adduced at trial or at sentencing.19 The money repaid
to investors before the fraud was detected must be deducted from the
intended loss figure under the “placed at risk” standard. United States 19 The $250 million July 2008 offering was nearly fully subscribed. Tr. 676. But in Fair’s
bankruptcy, investors claimed a total of $208 million in unpaid principal from all Fair offerings. R. 434 at 2-3. Therefore, at a minimum, $42 million of the July 2008 offering was necessarily repaid, although this amount is almost certainly greater since the $208 million total includes claims from all of Fair’s offerings, including pre-2008 offerings.
802 (reversing for failure to find the misrepresentations caused the
loss). As with intended loss, it is the government’s burden to prove the
actual loss by a preponderance of the evidence. Schroeder, 536 F.3d at
753.
Here, the district court’s actual loss calculation of $202 million
equaled the outstanding principal investors claimed they were owed at
the time of sentencing, after a credit for the $6 million of assets Fair’s
bankruptcy trustee recovered on their behalf. App. 251:11-252:7; R. 434
at 2-3. But the district court’s loss calculation failed to account, as it
must, for “extrinsic factors” that contributed to any decline in the value
of Fair’s assets.20 United States v. Olis, 429 F.3d 540, 548-49 (5th Cir.
2005); see also United States v. Rutkoske, 506 F.3d 170, 180 (2d Cir.
2007) (remanding for resentencing as a result of “[t]he District Court's
basic failure at least to approximate the amount of the loss caused by
the fraud without even considering other factors relevant to a decline”
in the at-issue security’s value); United States v. Nacchio, 573 F.3d
20 As unsecured creditors of Fair, the value of the investment certificates was based on the
value of Fair—measured either in terms of the value of Fair’s assets or Fair’s going con-cern value—less Fair’s liabilities to senior or secured creditors. Fair’s assets consisted mostly of its consumer receivables and outstanding loans, including the collateral or se-curity interests in assets underlying those loans. S.A. 103-122.
In doing so, the judge must “address any substantial arguments the de-
fendant made.” Id. at 443 (internal citation omitted). Section
3553(a)(6) requires a sentencing court to take into account “the need to
avoid unwarranted sentencing disparities among defendants with simi-
lar records who were found guilty of similar conduct.” United States v.
Bradley, 675 F.3d 1021, 1027 (7th Cir. 2012). The district court’s re-
21 The Defendants’ Guideline range was also increased based on the number of victims.
App. 252:15-21, 273:7-11, 289:19-21. This enhancement hinges on the actual loss find-ing. See United States v. Kimoto, 588 F.3d 464, 496 (7th Cir. 2009) (“[T]he estimation of the number of victims is limited to those who incurred part of the actual loss.”); United States v. Arnaout, 431 F.3d 994, 999 (7th Cir. 2005) (reversing for lack of evidence con-necting the number of victims to the loss amount). Because the district court’s errone-ous actual loss finding was based on the assumption that Defendants’ conduct caused all investors to lose their entire investment, the record remains devoid of any proof or find-ing as to the number of victims who suffered a loss if the loss were properly calculated. Thus, the district court’s actual loss calculation error renders the enhancement for the number of victims erroneous too.
fusal to properly consider sentencing disparities here, under the mis-
taken belief that it could not, was error.
At sentencing, Defendants identified and presented cases involv-
ing convictions, following trial, for fraud involving losses far in excess of
those the government claimed here, with sentences imposed far less
than the 50-year, and in some cases the 10- and 25-year, terms handed
down in this case:
• Ronald Ferguson was sentenced to 2 years’ imprison-ment for a $544 million fraud. S.A. 201; see also Unit-ed States v. Ferguson, 584 F. Supp. 2d 447, 456 (D. Conn. 2007).
• E. Kirk Shelton was sentenced to 10 years’ imprison-ment for a $3.2 billion fraud. S.A. 201; see also S.A. 228-229.
• Bernard Ebbers was sentenced to 25 years’ imprison-ment for a $1 billion fraud. S.A. 201; see also United States v. Ebbers, 458 F.3d 110, 128-129 (2d Cir. 2006).
Defendants pointed to other such examples. S.A. 199-203, 215-216,
217:19-218:5; R. 432 at 1.22
22 The district court seemed to suggest that Cochran did not preserve this argument be-
cause his “lawyers really haven’t made that argument.” Sent. Tr. at 158. But Cochran stated unequivocally in his sentencing memorandum that he had joined and adopted the disparity argument and analysis presented fully in Durham’s sentencing memorandum. R. 432 at 1. Moreover, the PSR included the disparity issue as a basis for potential de-parture. R. 421 at ¶ 156(f). Thus, Cochran properly raised the § 3553(a)(6) issue. See generally United States v. Jones, 438 Fed. App’x. 515 (7th Cir. 2011) (discussing preser-vation of arguments under § 3553).
2009)). In Reyes-Medina, however, that statement was mere dicta, as
this Court found that the judge did expressly consider section
3553(a)(6). Id. at 840. Further, that dicta was based on a line of cases
in the Seventh Circuit holding that judges adequately consider dispari-
ties among co-defendants by relying on properly calculated Guidelines
ranges. See Bartlett, 567 F.3d at 908. Here, in contrast, the Defend-
ants’ disparity argument concerned nationwide disparities with respect
to a category of offenses that regularly result in sentences substantially
below the Guidelines range. See R. 429 at 42-46; R. 432 at 1; R. 430 at
3-4. 23 Regardless, the district court here erred as a matter of law in its
23 It is unclear how the district court treated the sentences the government argued should
be considered with respect to unwarranted sentencing disparities. The district court may have also ignored the examples the government offered or, in even more egregious departure from sentencing procedures, the court may have considered the government’s examples and ignored only the Defendants’ examples. Further, the counter-examples the government offered to the district court are inapposite. In one—United States v. Bernard Madoff, 09-cr-213 (S.D.N.Y)—the 150 year sentence flowed from a $13 billion fraudulent scheme, an amount significantly above the loss the court found in this case. R. 435 at 15. In others, the specific conduct and criminal history of the defendant, ra-ther than the loss amount at issue, warranted a longer sentence. For example, Scott Rothstein was sentenced to 50 years for a $429 million fraud, but he fled to Morocco with $16 million in an attempt to escape prosecution. Id.; Defendant’s Sent. Memo at 12, United States v. Rothstein, No. 09-60331-CR-COHN, 2010 WL 3499085 (S.D. Fla. June 4, 2010). Robert Stinson was sentenced to 33 years for a $14 million fraud, but he was a repeat offender. R. 435 at 15; S.A. 230-231 (noting that the PSR utilized a crimi-nal history category of III). Edward Okun was sentenced to 100 years for a $126 million fraud, but there was evidence that he had been warned nine times by counsel that his behavior was illegal. R. 435 at 15; S.A. 225-227. And Richard Harkless was sentenced to 100 years for a $39 million fraud, but he fled to Mexico and diverted funds outside the United States in an attempt to escape prosecution. R. 435 at 15; S.A. 221-224. Thus, none of the government’s examples established a lack of unwarranted disparity between Defendants’ sentences and those from comparable cases.
Here, the restitution amount was based on the same facts under-
lying the actual loss calculation: the amount of outstanding principle
payments Fair investors claimed in Fair’s bankruptcy, without account-
ing for extrinsic factors that contributed to the loss.24 Tr. 1415; R. 434
at 2. Thus, the restitution award suffers from the same defects as the
actual loss calculation. See R. 413 at 33; R. 432 at 1; R. 421, Addendum
at 2; R. 424 at 26. Because the district court erred in calculating the ac-
tual loss under the Sentencing Guidelines, the district court abused its
discretion in entering a restitution order in the same amount, and the
restitution order should be vacated. See Allen, 529 F.3d at 396.
CONCLUSION
For the foregoing reasons, the Defendants respectfully request
that the Court: (1) vacate their convictions on all counts, (2) direct the
district court to enter a judgment of acquittal for Durham on Counts
Two and Five, (3) remand the remaining the counts for a new trial. In
the alternative, the Court should vacate the Defendants sentences and
remand for new sentencing proceedings.
24 Although the restitution award is set at $208 million, Defendants receive credit for any
recovery made by the bankruptcy trustee, which at the time of the sentencing was ap-proximately $6 million, making the restitution award and actual loss calculation ($202 million) equal. See App. 4-5.
Pursuant to Federal Rule of Appellate Procedure 34(a) and Sev-
enth Circuit Rule 34(f), oral argument is requested, as Appellants be-
lieve it would assist the Court in resolution of this appeal.
September 9, 2013 Respectfully submitted, s/ James H. Mutchnik, P.C.
James H. Mutchnik, P.C. Leonid Feller Kirkland & Ellis LLP 300 North LaSalle Street Chicago, Illinois 60654 Telephone: (312) 862-2000 [email protected][email protected] Counsel for Defendant-Appellant Timothy S. Durham
s/ Michelle L. Jacobs Michelle L. Jacobs, SBN 1021706
Biskupic & Jacobs, S.C. 1045 West Glen Oaks Lane Suite 106 Mequon, Wisconsin 53092 Telephone: (262) 241-0033 [email protected] Counsel for Defendant-Appellant James F. Cochran
Jeffrey A. Baldwin Voyles Zahn & Paul 141 East Washington Street Suite 300 Indianapolis, Indiana 46204 Telephone: (317) 632-4463 [email protected] Counsel for Defendant-Appellant Rick D. Snow
I hereby certify that I electronically filed the foregoing with the
Clerk of Court for the United States Court of Appeals for the Seventh
Circuit on September 9, 2013 via the CM/ECF system, thereby serving
the following counsel of record:
Winfield D. Ong Nicholas E. Surmacz Office of the United States Attorney 10 West Market Street Suite 2100 Indianapolis, Indiana 46204 [email protected][email protected] John-Alex Romano U.S. Department of Justice Criminal Division, Appellate Section 950 Pennsylvania Avenue, N.W. Room 1264 Washington, D.C. 20530 [email protected]
Dated: September 9, 2013
s/ James H. Mutchnik, P.C.
James H. Mutchnik, P.C. Counsel for Defendant-Appellant Timothy S. Durham