Wednesday, November 21st, 2007

Joint Pain

United States v. Shellef, No. 06-1495-cr (2d Cir. November 8, 2007) (Pooler, Sack, Wesley, CJJ)

In this decision applying Fed.R.Cr.P 8, the court held that counts were improperly joined against two separate defendants, and that the misjoinders were not harmless. The decision also has an interesting discussion of some unusual wire fraud theories.

Defendants Shellef and Rubenstein were tried together on tax and wire fraud charges. At the same trial, Shellef alone was tried on tax evasion charges relating to some of his personal and business dealings. Both were convicted of all counts.

The tax and mail fraud charges arose from the defendants’ efforts to purchase and resell CFC-113, a highly regulated, ozone-depleting industrial solvent upon which, Congress, in an effort to phase out its use, imposed an excise tax. However, the tax does not apply to CFC-113 reclaimed as part of a recycling process, or CFC-113 that is sold or manufactured for export.

The defendants were charged with attempting to avoid this excise tax, beginning in 1997 or 1998, through a series of complex business transactions. In very brief, they falsified documents so that it would appear that CFC-113 that they had purchased and resold was either reclaimed or was being shipped for export. Similar misstatements duped their suppliers into not charging them the excise tax.

Shellef alone was also charged with tax evasion – he understated his income and assets – relating to his personal and business returns for the 1996 tax year. At trial, Shellef moved to sever the 1996 tax counts from the others, and Rubenstein joined in the motion, all without success.

The circuit reversed. Tax counts can be joined with other crimes from which the tax offenses arose, as when a defendant is prosecuted for fraud and for not paying taxes on the proceeds. Here, however, Shellef’s 1996 tax counts were unrelated to the other charges. The government’s only claimed connection was that all related in some way to the sale of CFC-113 (a claim unsupported by the record for the 1996 conduct) and that all arose from the same businesses. But the circuit held that this was insufficient to support joinder in the prosecution of Shellef under Rule 8(a).

The court further held that the government failed to show that this misjoinder was harmless. The 1996 conduct would have been inadmissible at a trial on the other counts under Rule 404(b), because the earlier acts would have led the jury to “reason that if Shellef was willing to lie to the IRS in 1996 he would be willing subsequently to lie to others” or to interpret the 1996 conduct as an “indication of Shellef’s general mendacity.” The court also held that, for similar reasons, the 1996 evidence probably prejudiced the jury’s assessment of the other counts. The absence of any limiting instructions on these issues compounded this prejudice.

After a much less detailed analysis, the court also held that Shellef’s 1996 tax counts were misjoined against Rubenstein. The court simply noted that this was true for “many of the same reasons” that they were misjoined against Shellef, but did not give any specifics. Interestingly, and with no real analysis at all, the court held that Shellef’s 1996 misdeeds posed an “arguably greater” potential for prejudice against Rubenstein, even though that conduct had nothing at all to do with him.

This opinion is also notable for its discussion of the theories of wire fraud advanced in the indictment, the “no-sale” theory and the “tax liability” theory. The no-sale theory posited that Shellef’s misrepresentations to his supplier constituted fraud because the supplier would not have made the sale if it knew of his true plans to improperly sell the chemical domestically. However, the court held that this is not enough. A scheme that does no more than cause a victim to enter into a transaction it would otherwise avoid is not fraud. Fraud is present only if the scheme depends “for [its] completion on a misrepresentation of an essential element of the bargain.” Here, because the indictment alleged only that Shellef’s misrepresentation induced his supplier to enter into the transaction, but did not charge that the misrepresentation had “relevance to the object of the contract,” the indictment was legally insufficient on a “no sale” theory.

The indictment was sufficient, however, on the alternative “tax liability” theory. This theory was that Shellef induced his supplier to continue to sell the chemical without paying the excise tax or including it in the sales price. This was sufficient because it deprived the supplier of money it should have been entitled to – the tax – and it is irrelevant that that money was to be passed on to the IRS. It was sufficient that the supplier “had a right to” the money and that Shellef’s scheme was intended to deprive the supplier of it.

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