Conviction in Foreign Account Plus Case

There is a recent opinion in United States v. Simon (ND IN No. 3:10-cr-00056) \about which I previously blogger here. The new opinion is here. The new opinion, dated 1/1/11, is short and cryptic -- assuming some familiarity with earlier rulings in the case to understanding the judge's exasperation. The new opinion rejects the defendant's post trial motion for judgment of acquittal and alternative motion for new trial. The Court's opening paragraph under Background, gives the reader an indication of how the court will rule:

A 23-count indictment was handed down in April 2010, charging Mr. Simon with filing false federal income tax returns (Counts 1-4), failing to file foreign bank account reports (FBARs)(Counts 5-8), mail fraud (Counts 9-19), and fraud involving federal financial aid (Counts 20-23). More than seventeen pretrial motions required four hearings, numerous oral rulings [Doc. Nos. 25, 33, 71 and 109], and three detailed written opinions and orders [Doc. Nos. 62, 74 and 100]. Trial began on November 2, 2010. Evidentiary objections were the rule, rather than the exception, during trial, and the court frequently had to restate earlier evidentiary rulings. Mr. Simon seemed to change his theory of defense mid-trial, requiring additional briefing.

The Government dismissed Count 5, and, after trial the jury convicted on all remaining counts except Counts 13, 14 and 16 (mail fraud counts). Not a good day for Mr. Simon.

The issue I previously blogged was the Court's rejection of the claim that the IRS's extension of time for signatories on foreign accounts to file delinquent FBARs by 6/30/11 operated to preclude prosecution for the original delinquencies which, if they occurred with the required willfulness, were criminal acts at the time. In this new opinion, the Court begins its Discussion as follows:

Mr. Simon's renewed motion for judgment of acquittal is premised on arguments previously raised, considered, and rejected.

And, the Court concluded its Discussion with the following:

The court carefully considered Mr. Simon's arguments, has given detailed reasons for rejecting them, and believes that it properly ruled on each of the issues raised. Mr. Simon hasn't presented any authority or identified any error or circumstance that would warrant reconsideration at this stage of the proceedings or a new trial.

Not a good opening or closing discussion for the defendant.

There is not a whole lot in between that I think particularly worthy of note for readers of this blog. The opinion is short so it might be worth scanning by those whose interest is piqued.  I mention the case only because the underlying scheme did involve foreign accounts and foreign entity intrigues and there were FBAR count convictions. The Government has another notch under its belt in this area. But, it is clear from this and the prior opinion that this was not a garden variety foreign account case. The facts underlying the federal financial aid fraud counts makes this case quite an outlier to the cases I have encountered involving foreign accounts. I just wonder whether, if facts had not involved federal financial aid fraud, the dispute between Mr. Simon and the IRS / DOJ Tax (which also had some other predicate intrigues) could not have been resolved short of criminal prosecution.

Another Set Back for the Remaining Daugerdas Defendants - Economic Substance is Sufficiently Malleable to Establish a Line a Citizen Could Know

Judge Pauley, USDC SDNY, served up a loss for the Daugerdas defendants just before Christmas. The opinion in United States v. Daugerdas, 759 F. Supp. 2d 461 (SD NY 2010) is here. The defendants made the now standard argument in complex tax shelters, particularly those based on extrapolations of Helmer, that, given Helmer, the law was not sufficiently clear to establish a legal duty that the defendants could know. I have previously blogged on facets of this issue before. See here.

As occurs frequently, Judge Pauley conflates two distinct -- albeit related -- concepts. The threshold issue is whether the duty was knowable -- a legal inquiry that is separate from what the defendants might have known or intended. James and its progeny establish that the duty must be sufficiently clear that a citizen (not necessarily the actual defendant in the dock) could know the duty. Only if that question is answered in the affirmative is the Cheek issue reached -- did the defendant know the knowable legal duty? That is an issue for the jury to determine after trial so long as the prosecutors have enough evidence to survive a motion for acquittal.

Without citing James or its progeny, Judge Pauley does address the James threshold issue. Bottom line, he holds that the economic interest concept as a bar to claimed benefits and as interpreted by the courts (it is a judicial doctrine, after all) was sufficiently certain to give the hypothetical citizen a line that could be crossed (aka was knowable), leaving the issue for trial of whether these particular defendants knew the line they allegedly crossed. Could have known is not sufficient for a criminal conviction. The Government will have to prove that the did know. But that is another chapter.

False Statements (18 USC 1001) and Knowledge of Criminality

18 USC Section 1001(a) criminalizes false statements to executive, legislative and judicial and is one of the chief weapons in the Government's arsenal for fighting tax crimes. 18 USC § 1001 requires, inter alia, that the false statement be made "knowingly and willfully." Willfully is a word of many nuances. Certainly, in the Title 26 tax crimes context, willfully means at a minimum knowing that the conduct is illegal. So, the question is which nuance applies to § 1001? Does the speaker commit the crime by making a knowingly false statement to a federal agent or must the speaker also know that making a knowingly false statement to a federal agent is a crime? The CTM says cryptically on this issue: “As used in Section 1001, the term "willful" simply means that the defendant did the forbidden act (e.g., made a false, fictitious, or fraudulent statement) deliberately and with knowledge.” CTM 24.08 (2008). With knowledge of what – the falsity or the falsity and its criminality? I think the CTM fairly read intends the former rather than the latter.

In a recent case (United States v. Moore, 612 F.3d 698 (D.C. Cir. 2010)), Judge Kavanaugh in a concurring opinion focused on this issue although siding with the majority because the defendant had not properly raised the issue at trial. The facts are that, incident to a drug investigation, the USPS intercepted a drug package addressed to "Karen White" and then, after substituting white powder for the drug, had a USPS employee deliver it to the address. At the address, the USPS employee delivered the package to the defendant, a male, upon his representation that he was Karen White's boyfriend and upon his signing the receipt with a false name. The defendant was thereafter first charged with drug crimes and the jury hung. He was tried a second time for the same charges but with a false statement charge added for his conduct in accepting the package. On the second trial, the jury hung again on the drug charges but convicted on the false statement charge. On appeal, Moore urged that the falsity was not "materially false" (another element in Section 1001). The panel unanimously handily rejected that argument. Speaking to the substantive issue of whether "knowingly and willfully" requires knowledge of criminality, Judge Kavanagh echoed the concerns of Judge Kozinski of the Ninth Circuit in dealing with the somewhat amorphous crime of the defraud conspiracy (the Klein conspiracy in tax context) and that is not surprising because, as Judge Kavanaugh cites, Judge Kozinski has addressed this concern in the context of 18 USC § 1001. I quote (pp. 703-704) (parallel citations omitted):

Proper application of statutory mens rea requirements and background mens rea principles can mitigate the risk of abuse and unfair lack of notice in prosecutions under § 1001 and other regulatory statutes. In § 1001 cases, that means proof that the defendant knew that making the false statement would be a crime. To be sure, "ignorance of law is no defense" is a hoary maxim. But it does not automatically apply to today's phalanx of federal regulatory crimes. See WAYNE R. LAFAVE, CRIMINAL LAW § 5.6, at 298-311 (5th ed.2010). For some regulatory offenses -- particularly statutes like § 1001 that proscribe only "willful" conduct -- the Supreme Court has recognized an ignorance-of-law or mistake-of-law defense, or has required affirmative proof of the defendant's knowledge that his or her conduct was unlawful. See Bryan v. United States, 524 U.S. 184 (1998); Ratzlaf v. United States, 510 U.S. 135, 141-49 (1994); Cheek v. United States, 498 U.S. 192, 199-201 (1991); Lambert v. California, 355 U.S. 225, 229-30 (1957); cf. Liparota v. United States, 471 U.S. 419 (1985); Dan M. Kahan, Ignorance of Law Is an Excuse -- But Only for the Virtuous, 96 MICH. L. REV. 127, 150 (1997) (noting that"courts permit mistake of law as a defense [] selectively across malum prohibitum crimes"). For criminal statutes prohibiting "willful" violators, those cases together require proof that the defendant was aware that the conduct was unlawful.

In Bryan, the Supreme Court summarized the rule quite clearly: "[I]n order to establish a willful violation of a statute, the Government must prove that the defendant acted with knowledge that his conduct was unlawful." 524 U.S. at 191-92 (internal quotation marks omitted). Since Bryan, the Court has reiterated this formulation on several occasions. See also Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 n.9 (2007) ("we have consistently held that a defendant cannot harbor such criminal intent unless he acted with knowledge that his conduct was unlawful") (internal quotation marks omitted); Dixon v. United States, 548 U.S. 1, 5 (2006) (the term"willfully" "requires a defendant to have acted with knowledge that his conduct was unlawful") (internal quotation marks omitted).*
n* To say that the Government must prove the defendant knew the conduct was a crime is not necessarily to say that the Government must prove the defendant knew the specific code provision proscribing the conduct, except with respect to certain highly technical statutes. See Bryan, 524 U.S. at 194; cf. Ratzlaf, 510 U.S. at 141 (anti-structuring statute); Cheek, 498 U.S. at 200 (tax statute).

It is true that our Court many years ago seemed to assume (in addressing a mens rea issue under a different statute) that proving the defendant's knowledge of the law may not be required in § 1001 cases. See United States v. Hsia, 176 F.3d 517, 522 n.3 (D.C. Cir. 1999). In so doing, Hsia referenced a 1994 Third Circuit opinion that pre-dated the Supreme Court's clarifying decisions in Bryan and later cases. That assumption may not endure in light of those subsequent Supreme Court precedents. In a future case, we therefore may need to consider the appropriate mens rea requirements and defenses for § 1001 prosecutions under those Supreme Court decisions.

Here, however, there is no legal obstacle to our affirming Moore's § 1001 conviction: Moore did not contend that the term "willfully" in § 1001 requires proof of the defendant's knowledge of the law, and he did not challenge the jury instructions on that basis. But in a case where the issue is raised, the Supreme Court's precedents arguably require district courts in § 1001 cases to give a willfulness instruction that requires proof that the defendant knew his conduct was a crime. To be sure, in many false statements cases the Government will be able to easily prove that the defendant knew his conduct was unlawful. But in some cases, it will not be able to do so -- and those of course are precisely the cases where it would seem inappropriate and contrary to § 1001's statutory text to impose criminal punishment.

Notice that Judge Kavanaugh repeats in the footnote the notion that Bryan requires proof that the defendant knew of the specific Code provision he or she intended to violate. Setting that aside (there is no requirement that the defendant know the specific Code section, taking the Supreme Court literally on tax issue is a mistake), it is clear that Cheek requires only that the defendant knew the conduct was illegal and intended to do the act he or she knew to be illegal. That is the point to which Judge Kavanaugh focuses his fire -- does the Cheek willfulness requirement of knowledge of criminality also apply to 18 USC Section 1001?

Thanks to the White Collar Crime Prof Blog here for the lead to Judge Kavanaugh's discussion.