The Hammer is Hammered or Slammered - Tom Delay and the Reliance on Professional "Defense"

I read in the paper yesterday and today about Tom Delay's three year sentence for money laundering and conspiracy. Among other claims (e.g., political persecution), Mr. Delay is reported to have claimed that "Everything I did was covered by accountants and lawyers telling me what I needed to do to stay within the law." See Washington Post Article (at p. 2) here. Readers will recognize this as the reliance on professionals so-called "defense" that raises its head in many tax prosecutions. In tax prosecutions, the Government must prove that the defendant acted willfully (under Cheek, meaning that the defendant intended to violate a known legal duty).  To the extent the defendant relied on professionals, the defendant did not act willfully. In this light, therefore, reliance on professionals is not a defense but rather an element that the Government's proof beyond a reasonable doubt must negate.

One of the problems with the "defense," of course, is that in order to put the issue in play in the trial in chief, the defendant will usually have to take the stand to say that he or she relied. Most defense attorneys in white collar crime cases (of which Mr. Delay's prosecution and tax prosecution are simply subsets) are loath to have their clients take the stand and usually for very good reasons -- the testimony alone may be what nails the coffin and, even worse, if the judge thinks he was laying might be considered some type of obstruction of justice to enhance the sentencing.
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The Reliance Defense as Bearing on Willfulness: Expert Testimony

The issue in a tax crimes case having a willfulness element (all of the significant ones except the tax obstruction crimes) is whether the defendant intentionally violated a know legal duty. Defendants will often try to deflect the blame other orthers, particularly the accountants and tax return preparers. In US v. St. Pierre, 599 F.3d 19 (1st Cir. 2010), the defendant sought to introduce expert testimony that the acountant/tax return preparer's failure to meet standards of care at least raised a reasonable doubt as to the defendant's state of mind. The district court denied the attempt, citing tangential relevance of the proffered expert testimony to the issue of the defendant's state of mind, and, in any event, FRCrP 403 that the evidence might not be helpful to the jury. Rule 403 provides: "Although relevant, evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence." The Court of Appeals rejected the defendant's appeal on the issue.

The Court of Appeals went through the steps as follows:

1. Defendant was charged with tax evasion for 2000-2002 and tax obstruction under Section § 7212(a).

2. At trial, St. Pierre's underpayment of her personal taxes was undisputed; the central issue was whether St. Pierre had the requisite state of mind for the various offenses.

3. One of the accountants testified "that St. Pierre had been told to deposit company income into Staab's corporate bank account, as such deposits would enable the accountants to track Staab income that had to be reported on Staab's corporate and St. Pierre's personal income tax returns." There was apparently other "evidence that St. Pierre's accountants had explained to her -- in connection with past failures that she had claimed to be inadvertent -- the obligation to report company income on Staab's books."

4. Without telling her accountants, St. Pierre established at least 10 bank accounts unknown to the accoutants and deposited business revenue into the accounts, diverting over 3,000 business checks into those accounts. "Records indicated unreported income of $1,248,327 for the three-year period; the taxes avoided by the failure to report this income amounted to over $500,000, apart from interest."

5. This pattern existed in the years 2000-2002. By 2002 a tax audit had started, and the defendant doctored documents to affect the audit.

6. The jury acquitted the defendant of evasion for 2000 & 2001, but convicted for tax evasion in 2002 and for obstruction. The Court noted (fn. 1): "Although the unpaid taxes for 2000 and 2001 were also substantial, the government suggests that the jury may have given St. Pierre the benefit of the doubt as to her understanding of her obligations prior to 2002. By the time she signed her 2002 return, a tax audit was underway and St. Pierre had told IRS auditors that she understood her obligation to report company income."

7. The defendant claimed on appeal that the trial court's exclusion of the proffered expert testimony violated her Sixth Amendment right to present a defense and that the trial court misapplied the rules of evidence in denying the testimony.

8. The Court of Appeals rejected the defendant's claim as follows (footnote omitted):

At first blush, one might think that whether St. Pierre's accountants exercised due care was flatly irrelevant to any issue properly in the case. Mere failure of the accountants to detect her under-reporting or to give St. Pierre better directions, even if negligent, would not be a defense to a knowing effort by St. Pierre to evade taxes or willfully create false documents. n2 The jury was told what elements were required to prove tax evasion and obstruction, and the evidence amply permitted the jury to find that St. Pierre had the requisite consciousness of wrongdoing.

The trial judge was probably wise to invoke Rule 403, thereby assuming arguendo some possible relevance of the proffered evidence, however minimal or doubtful. Cases can be imagined where an accountant's neglect could bear on the likelihood that a taxpayer's under-reporting was due to honest reliance rather than deliberate dishonesty. And, although not at all a straightforward inference in this case, in some situations the professional standards governing accountants might in turn have some bearing on whether there was such neglect.

However, the scheme as charged and proved in this case was not hospitable to such reasoning. The government's evidence allowed the jury to find that St. Pierre, in diverting company income to personal ends but not reporting it as income to the company or herself, had acted against warnings; that St. Pierre had used multiple personal accounts not disclosed to accountants; that the scale of diversion was huge; that the accountants were unaware of most of what was occurring; and that St. Pierre herself engaged in creating false documents to cover her tracks.

By contrast, St. Pierre's proposed accounting standards evidence, by shifting the focus to whether the accountants were doing a good job, did have a potential to confuse and mislead a jury -- precisely because her accountants' failure to prevent the fraud would not be a defense. To the extent that St. Pierre relied on what she said her accountants or lawyer or bankers told her, she was permitted to offer such evidence. Her own beliefs about what they were responsible for doing might also be pertinent to her state of mind. Evidence of accounting standards, unknown to St. Pierre, had at best little tendency to negate the damning inferences against her, and Rule 403 was properly applied."

Obstruction of Justice At Trial

In United States v. Dehlinger, 2010 U.S. App. LEXIS (4th Cir. No. 09-4099 2010) (unpublished), the Fourth Circuit gives a cautionary lesson for practitioners as to the risks of going to trial and mounting a defense that the jury does not accept. Here's the lesson (case citations omitted):

As to the second of Dehlinger's sentencing issues, the district court did not err in increasing Dehlinger's offense level by two levels for obstruction of justice. The Sentencing Guidelines allow a two level increase if "the defendant willfully obstructed or impeded, or attempted to obstruct or impede, the administration of justice with respect to the investigation, prosecution, or sentencing of the instant offense of conviction and any relevant conduct." U.S.S.G. § 3C1.1. Obstruction of justice includes committing perjury at trial. U.S.S.G. § 3C1.1, comment (n.4(b)). A district court applying an enhancement based on obstruction of justice must necessarily find, by a preponderance of the evidence, that the defendant (1) gave false testimony, (2) concerning a material matter, (3) with the willful intent to deceive while under oath.

The district court found that Dehlinger committed perjury when he testified (extensively) under oath that he relied on others, taking advice from his accountant and financial planner, as well as Dr. Chari, regarding the legality and soundness of the AAA programs. Specifically, Dehlinger claimed that he took certain deductions "because Richard Marks and George Benoit said they were appropriate deductions." Tr. 108. As an initial matter, the district court's enhancement for perjury did not constitute double counting (even though Dehlinger's crime constituted lying to the IRS) because the crime for which he was convicted was completed by the time he went on trial. Indeed, his crime was complete after he had filed the fraudulent tax returns. Lying under oath constitutes a new and different circumstance designed to hide the already completed crime. In short, the conduct underlying Dehlinger's conviction is different from the conduct upon which the district court based its enhancement.

Second, the district court properly reasoned that, since the jury found Dehlinger guilty of all tax evasion charges, it must have rejected all of his testimony regarding good faith and lack of willfulness. During sentencing, the district court discussed at length its reasons for enhancing Dehlinger's sentence; namely, that Dehlinger (1) gave false testimony, (2) concerning a material matter, (3) with the willful intent to deceive while under oath. The district court said,

[Defendant's] testimony was to say, if it is detrimental reliance, if that is the description, the proper description, it may well be; but it was more specific about what was going on, what I did and, gosh, I really did not know that this was not on the up and up. And it seems that the jury evaluated that testimony and the jury found the defendant guilty and ignored that testimony altogether. . . .

But [defendant] was very specific about what he had done and the fact that it was not bad motive or criminal intent by him; but the specifics were such that, it seems to me, there was a rejection of those facts. . . . But the testimony was detailed and specific about what happened; and he asked the jury to rely on his position that he did not know what was up in light of a lot of evidence that indicated that he knew some of the things that were going on simply were not legal, and ultimately the jury concluded they were criminal.

Sent. Tr. 34-38. These observations by the district court support its determination that Dehlinger committed perjury for the sole purpose of deceiving the jury regarding his culpability and involvement with AAA. The district court therefore properly sentenced Dehlinger.

For more on this subject, I offer the following which is a footnote in my current Federal Tax Crimes Book:

See United States v. Ellis, 548 F.3d 539 (7th Cir. 2008) (the enhancement is not warranted in every case of false testimony; the court’s formulation seems to be that if the defendant commits perjury in her defense, the enhancement can apply even though, presumably, the defendant might be separately prosecuted and sentenced for the perjury; I suspect but have no empirical evidence that the standard unelaborated denial of guilt by a defendant on the stand will not draw the enhancement, but the elaborate, egregious lie will; note, also, that for the sentencing enhancement the Government’s burden is preponderance of the evidence); see also United States v. Holmes, 406 F.3d 337 (5th Cir. 2005) (a nontax case).