February 20, 2018

Tenth Circuit: Defendant Sentenced to Significant Jail Time After Evasion of Personal Taxes

Tenth Circuit Court of Appeals issued its decision in United States v. Stegman on Friday, October 20, 2017.

Defendant Stegman owned and operated Midwest Medical Aesthetics Center (Midwest), which provided a wide range of medical aesthetic services. Clients were permitted to pay with a credit card, cash, or check made out to Stegman personally, who encouraged cash or checks. Stegman would personally collect the cash and checks at the end of each business day.

Stegman then established several limited liability companies (LLCs), which were effectively used to launder Midwest client payments. Stegman would use the LLCs to purchase money orders that she then used to purchase items for personal use. Stegman reported zero cash income on her federal income tax returns in 2007, 2008, and 2009.

Stegman employed two separate tax preparers for her corporate and personal tax returns. Stegman provided Jones, the corporate tax preparer, with Midwest bank account information, but did not provide Jones with bank records for the other accounts into which she deposited Midwest income. Similarly, Stegman did not provide Lake, the personal tax preparer, with accurate records of the Midwest client payments that she used to purchase personal property.

When Stegman was audited for the 2007 and 2008 tax returns, Stegman said Midwest never accepted cash payments, stated that the source of her money came from relatives or savings, and gave conflicting information for the purpose of one of her LLCs. The case was then referred to the IRS’s criminal investigation division. The investigation that followed revealed that Stegman used her LLCs to create false business expenses, that Stegman altered Midwest’s ledgers and directed other employees to destroy business records, and that Stegman encouraged a former Midwest client, Clark, to tell the IRS that she, Clark, didn’t remember anything about her dealings with Midwest. Stegman raises five issues on appeal.

1. The Amendment of the Indictment During Trial

Stegman argued that the district court erred by granting the government’s motion to amend the indictment during trial. The indictment in this case alleged that Stegman was the owner and operator of “Midwest Medical Aesthetics Center” and not “Midwest Medical Aesthetics Center, Inc.” The Tenth Circuit distinguished between a district court’s amending an indictment as to form, which is permissible, and as to substance, which is impermissible. An amendment as to form is a change that does not mislead the defendant in any sense, does not subject the defendant to any added burdens, and does not otherwise prejudice the defendant.

Stegman argued that the amendment, which substituted the name of one business entity for another, was substantive. The Tenth Circuit disagreed. Contrary to Stegman’s assertion, and consistent with what the district court concluded, the amendment was merely a matter of form, and dropping the “Inc.” accurately reflected the change that Stegman made to the structure of her business. Because the amendment was one of form only, the district court did not err in granting the government’s motion to amend the indictment.

Stegman further argued that the jury was never told there was an amendment or that she was entitled to rely on the indictment and, as a result, the jury may have been left with the impression that she misled them. The Tenth Circuit disagreed for several reasons. First, Stegman’s counsel conceded that Stegman never asked for such an instruction. Second, she failed to properly alert the district court to her constitutional challenge. Third, the argument lacked merit given the conclusion that the amendment was one of form only. Finally, the evidence of Stegman’s guilt was overwhelming and thus the district court’s decision did not deprive her of the right to a fair trial.

2. The Purported Braswell Violation

Stegman next contended that the government violated the Supreme Court’s decision in Braswell v. United States, 487 U.S. 99 (1988), by using corporate records against her as an individual. The company ledgers were obtained by compulsory summons issued to her. The Court in Braswell noted that it had long recognized that, for purposes of the Fifth Amendment, corporations and other collective entities are treated differently from individuals.

Prior to trial, Stegman moved to exclude from evidence handwritten ledgers of Midwest that were produced to the IRS pursuant to a Corporate Summons. Stegman argued, in pertinent part, that under Braswell, the Government could not introduce into evidence the fact that Stegman produced the documents in response to a subpoena, and thus could not attribute the documents to Stegman as an individual. Contrary to Stegman’s assertions, however, the Tenth Circuit found no violation of Braswell.

3. The Alleged Destruction of Exculpatory Evidence

Stegman also argued that the district court erred in denying her motion to dismiss the indictment due to destruction of exculpatory evidence.

After Stegman’s audit was referred to the IRS’s criminal investigation division in 2009, the IRS’s civil division forwarded to the criminal division a referral package of documents that included the file from an earlier audit that the IRS had conducted for the 2000 and 2001 tax season. The file was ultimately destroyed at the National Archives and Record Administration facility without the IRS’s knowledge.

Stegman moved to dismiss the indictment due to destruction of exculpatory evidence, namely the old civil audit file relating to her tax returns for 2000 and 2001. Stegman argued that these returns contained positions that were similar, if not identical, to the positions the government claimed were criminal in this case, and that the IRS found the 2000 and 2001 tax returns were accurate and did not assess any additional tax.

Where, as here, a defendant made the necessary request, but the evidence was no longer available at that time, the failure to preserve the evidence violates due process if the evidence was exculpatory and its exculpatory value was apparent before its loss. If, however, the evidence was not apparently exculpatory but merely potentially useful, the failure to preserve the evidence does not violate due process unless the criminal defendant can show bad faith on the part of the police.

The Tenth Circuit concluded that the district court did not clearly err in finding that the exculpatory value of the civil audit file was not apparent, as Stegman failed to challenge the district court’s finding that many of the documents could be obtained from other sources. Further, Stegman failed to establish that she relied in good faith on the IRS’s determination that her tax positions in 2000 and 2001 were valid. Lastly, Stegman failed to produce any evidence that the IRS itself played a role in the file’s destruction or any authority supporting a per se bad faith rule.

4. The Admission of Testimonial Statements from Don Lake

In her fourth issue on appeal, Stegman argued that the district court erred by allowing the government to introduce testimonial statements from her now-deceased personal tax preparer, Don Lake, in violation of the Confrontation Clause.

In her appeal, Stegman focused on the district court’s admission of Exhibit 85, a fax cover sheet and faxed records that Lake sent to an IRS Revenue Agent during the course of the IRS’s investigation. Mrs. Lake identified Don Lake’s handwriting on the fax cover sheet and on some of the accompanying records. Stegman objected to Exhibit 85, arguing that the language on the fax cover sheet violated her confrontation rights.

The Tenth Circuit remarked that Stegman made no attempt to challenge the district court’s finding that the papers contained in Exhibit 85 were actually her own financial documents rather than Lake’s work papers. She also failed to make a showing that the documents were testimonial in nature, which is a requirement for a challenge under the Confrontation Clause. As for the fax cover sheet that contained Lake’s handwriting, the Tenth Circuit agreed with the district court that it was also not testimonial in nature.

5. Stegman’s Advisory Sentencing Range

Finally, Stegman argued that the district court erred by miscalculating her advisory sentencing range under the Sentencing Guidelines. More specifically, Stegman asserted that the district court improperly calculated the intended tax loss and improperly applied the sophisticated means and obstruction of justice enhancements in calculating her advisory Guidelines sentencing range.

The Sentencing Guidelines apply to tax-related crimes, such as those of which Stegman was convicted. It directs a district court to apply a base offense level from the Tax Table corresponding to the tax loss. If the offense involved both individual and corporate tax returns, the tax loss is the aggregate tax loss from the offenses added together. The district court in this case found that the corporate tax loss and the individual tax loss were inextricably intertwined, and Tenth Circuit agreed.

One section of the Sentencing Guidelines states that if a tax-related offense involved sophisticated means, the base offense increases. “Sophisticated means” includes especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense, and includes conduct such as hiding assets or transactions through the use of fictitious entities, corporate shells, or offshore financial accounts. The district court in this case concluded that the “sophisticated means” enhancement applied to Stegman, and the Tenth Circuit found no error.

The Sentencing Guidelines further direct a district court to increase a defendant’s offense level 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 the obstructive conduct related to (A) the defendant’s offense of conviction and any relevant conduct, or (B) a closely related offense. The district court in this case found that Stegman obstructed the IRS’s investigation in three ways: directing employees to shred receipts that documented cash that she received from her business, altering Midwest ledger entries to change the characterization of the way certain expenses were entered so that they appeared to be legitimate business expenses, and directing a witness, Clark, to testify that she did not remember her business relationship with Midwest.

Stegman argued that any attempt she made to tamper with Clark’s testimony was unsuccessful because Clark told investigators that she couldn’t recall what happened when she was a client of Midwest. Notably, the district court found that even if Stegman’s attempt to influence Clark’s testimony was unsuccessful, it nevertheless was an attempt to obstruct justice. The Tenth Circuit, therefore, concluded that the district court did not err in applying the obstruction of justice enhancement.

The Tenth Circuit Court of Appeals AFFIRMED the judgment of the district court.

Tenth Circuit: Witness Improperly Usurped Role of Jury by Opining on Lawfulness of Conduct

The Tenth Circuit Court of Appeals issued its opinion in United States v. Richter on Friday, July 31, 2015.

Brandon Richter and Tor Olson were former CEOs of Executive Recycling, Inc., a waste removal and recycling business in Colorado, Utah, and Nebraska. Executive also offered electronics recycling, promising customers that Executive would domestically recycle or destroy electronics that could not be resold and would do so in an environmentally friendly manner. However, between 2005 and 2008, Executive sold many items to Hong Kong and China for export, including cathode ray tubes (CRTs) that were eventually reused in new monitors or refurbished. One shipment, the GATU shipment, was featured on 60 Minutes because the CRTs were broken and could not be reused. The 60 Minutes episode attracted the attention of the EPA, ICE, and Colorado Attorney General’s Office. An EPA investigator asked Richter to supply records of Executive’s shipments over a three-year period, but Richter produced only four records, including an altered copy of the GATU invoice. A later federal search warrant uncovered many more shipping records and revealed that Richter had destroyed the original GATU invoice.

The government charged Executive, Richter, and Olson in the U.S. District Court for the District of Colorado with 13 counts of mail and wire fraud, one count of exporting hazardous waste in violation of the Resource Conservation and Recovery Act (RCRA), and one count of smuggling hazardous waste. The government contended defendants violated laws concerning hazardous waste when they exported the CRTs overseas, and their actions were contrary to the representations they made to their customers. The government also charged Richter and Olson with obstruction of justice. Before trial, defendants moved to dismiss the wire and mail fraud counts, arguing their customers were not deprived of money because they obtained the benefit they paid for—removal of electronic waste—and they were not deprived of property because the e-waste had no value to the consumers. The district court denied the motions. Defendants also disagreed with the jury instructions regarding “hazardous waste.” At trial, Richter and Olson argued that even if broken CRTs are regulated hazardous waste, they did not know the CRTs were broken. Following the trial, the jury returned verdicts against Richter and Olson on six counts of wire fraud, one count of mail fraud, and one count of smuggling. Richter was also convicted of obstructing justice based on his destruction of the original GATU invoice. Richter was sentenced to 30 months’ imprisonment followed by three years’ supervised release and was ordered to pay $70,144 in restitution. Olson was sentenced to 14 months’ imprisonment with three years’ supervised released and was ordered to pay $17,536 in restitution. They timely appealed.

The Tenth Circuit first evaluated Defendants’ contention that the jury instruction incorrectly defined waste under Colorado law, and that even if the instruction was correct they lacked fair notice that the definition might be criminally enforced against them. Reviewing the strictures of the RCRA, the Tenth Circuit noted that the RCRA makes it a crime to export hazardous waste without filing the proper notice of intent to export with the EPA or without consent of the receiving country. Colorado also has its own regulations, the Colorado Hazardous Waste Management Act, which generally mirrors the RCRA. However, the Colorado Act does not contain rules regarding broken CRTs and instead regulates the disposal of CRTs under its universal waste regulations. Richter and Olson argued that the jury instruction improperly defined hazardous waste by including a requirement that waste must be reused for its original intended purpose to be excluded. The Tenth Circuit ultimately disagreed, finding that since the Colorado statute was ambiguous it must look to legislative intent, which was to comply with the RCRA. The Tenth Circuit rejected Richter’s and Olson’s challenge to the jury instruction.

Defendants next argued that the government did not prove that they committed mail and wire fraud because their customers were not deprived of money or property. Defendants contended that since their customers’ property was relinquished to them for disposal, it was no longer the customers’ concern how the disposal occurred. The Tenth Circuit again disagreed, finding that the customers expected their waste to be disposed of within the United States using environmentally sound practices. Defendants would not have retained their customers if not for their deceptions. The wire and mail fraud convictions were affirmed.

The Tenth Circuit next addressed Defendants’ contention that the testimony of Mr. Smith was improperly admitted as lay witness testimony and exceeded the bounds of permissible testimony by infringing on the province of the jury. The Tenth Circuit examined Mr. Smith’s testimony, which included testimony that CRTs that had been removed from their housings were waste because they could not be used again for their original intended purpose without processing, and found that it was expert testimony. The Tenth Circuit further found that the scope of Mr. Smith’s testimony improperly instructed the jury on how it should rule. Because the Tenth Circuit found that the district court erred in allowing Mr. Smith’s testimony, it evaluated whether the error was harmless and found it was not. The government relied heavily on Mr. Smith’s testimony to prove whether the CRT use was improper, since he testified that CRTs could not be considered recycled if they had been “processed,” and Mr. Smith failed to define processing or explain its significance. The Tenth Circuit reversed the convictions.

Finally, the Tenth Circuit examined Richter’s conviction for obstruction of justice based on his destruction of the GATU invoice. The Tenth Circuit found that Mr. Smith’s testimony did not have a substantial impact on the obstruction of justice charge because there was plenty of evidence beyond Mr. Smith’s testimony.

The Tenth Circuit reversed Defendants’ convictions for smuggling and fraud and remanded for further proceedings. The Tenth Circuit affirmed Richter’s conviction for obstruction of justice.

Tenth Circuit: Obstruction of Justice Conviction Affirmed

The Tenth Circuit Court of Appeals issued its opinion in United States v. Ahrensfield on Wednesday, November 14, 2012.

The defendant, Brad Ahrensfield, was a former Albuquerque police officer who was convicted of obstructing justice in violation of 18 U.S.C. § 1512(c)(2). Ahrensfield’s teenage son worked for Car Shop, a business owned by Shawn Bryan. Car Shop and Bryan were the targets of an investigation by the FBI and Albuquerque police, following information from a confidential informant that Car Shop employees purchased stolen merchandise and sold drugs and that Bryan was the leader. An officer who was friends with Ahrensfield told him about the investigation because he was concerned about the son’s safety. Ahrensfield then told Bryan his shop was the target of an investigation and he was the suspected ringleader. Bryan then contacted the Albuquerque sheriff and police department commander to ask why he was under investigation and told them the defendant had told him about it. The investigation was dropped at that point.

The defendant was charged with obstruction of justice and making false statements to the FBI. During his first trial, he was acquitted of making false statements but the jury did not reach a verdict on obstruction of justice. Before the second trial, Ahrensfield argued the Double Jeopardy Clause precluded the government from introducing any evidence regarding the false statements because he had been acquitted of that charge by the jury in the first trial. The district court denied his motion. The Tenth Circuit upheld the admission of testimony regarding his false statements because the evidence was admitted as proof of his guilty knowledge, not because it was a required element of the offense of obstruction of justice. “Where the government is not required to prove the offered evidence relating to the prior acquittal beyond a reasonable doubt, ‘the collateral-estoppel component of the Double Jeopardy Clause is inapposite.’”

The defendant filed a motion to dismiss during his second trial based on alleged Brady violations. During that trial, the government impeached Bryan through transcripts of an interview he gave the FBI after the first trial. Defense counsel said he had not been given the transcript or a copy of the recording and did not know Bryan had been interviewed after the first trial. The court gave him time to review the transcript and he extensively cross-examined Bryan. The next day, the government produced a transcript of a call between Bryan and the FBI. The district court denied his renewed motion to dismiss and instead allowed him to recall the FBI agent for further cross-examination as part of the government’s case. He did so and effectively cross-examined the FBI agent using the transcript. After the jury convicted the defendant, the defense discovered it had not received a laboratory report of analysis of the drugs purchased by the confidential informant from a Car Shop mechanic.

The Tenth Circuit found that while the transcripts were suppressed by the government and were favorable to the defendant, they were not material. The lab report was neither favorable nor material, so the court found no Brady violation.

The court affirmed the conviction as there was a nexus between the defendant’s conduct and interference with the official proceeding.