117 F.3d 82 (2nd Cir. 1997), 796, United States v. Jacobs

Docket Nº:796, Docket 96-1341.
Citation:117 F.3d 82
Party Name:UNITED STATES of America, Appellee, v. Donald E. JACOBS, Defendant-Appellant.
Case Date:July 07, 1997
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 82

117 F.3d 82 (2nd Cir. 1997)

UNITED STATES of America, Appellee,


Donald E. JACOBS, Defendant-Appellant.

No. 796, Docket 96-1341.

United States Court of Appeals, Second Circuit

July 7, 1997

Page 83

[Copyrighted Material Omitted]

Page 84

[Copyrighted Material Omitted]

Argued Jan. 10, 1997.

Page 85

Herbert L. Greenman, Lipsitz, Green, Fahringer, Roll, Salisbury & Cambria, L.L.P., Buffalo, NY, for Appellant.

Denise O'Donnell, Assistant United States Attorney, Western District of New York, Buffalo, NY, for Appellee.

Before: WALKER, McLAUGHLIN, and CUDAHY, [*] Circuit Judges.

CUDAHY, Circuit Judge:

Donald E. Jacobs appeals his convictions and sentences for conspiracy, bank fraud and mail fraud. 18 U.S.C. § 371; 18 U.S.C. § 1344; 18 U.S.C. § 1341. After a jury trial Jacobs was sentenced to 51 months on each count, to be served concurrently. He now argues that letters from his attorney were admitted into evidence in violation of his attorney-client privilege, that the banks affected were never exposed to a risk of loss as required by the statute, that the judge erred in instructing the jury on conscious avoidance and that the district court improperly calculated his sentence under the Sentencing Guidelines. We affirm.

I. Factual Background

Donald Jacobs apparently had a penchant for activities on the edge of legality. Jacobs was engaged in efforts to avoid taxes through the use of off-shore banking and by ownership of off-shore corporations. His involvement in these off-shore activities began at various seminars, where he met the other participants in the somewhat different scheme that has led him to his present straits. Jacobs was involved in a so-titled "Debt Elimination Program," in which unwitting debtors were enticed to purchase "certified drafts" drawn on non-existent financial entities in Mexico. First, the targeted debtor would obtain an exact accounting from the creditor to whom the debtor owed money. Then the debtor would give this information to one of Jacobs' "down-line" distributors along with a fee of about 15% of the total debt owed. In return, the debtor would receive an official-looking, but worthless, piece of paper purporting to be a "certified draft," drawn on a fictitious financial institution, with a face value equal to the debt owed. Along with this, the debtor received instructions to submit the draft to the creditor, together with a demand for the return of any collateral or evidence of indebtedness. Banks would accept the draft, but following sound banking practice, would decline to release the collateral until the draft cleared, which, of course, never happened. Thus, the debtor was out the 15% of face value paid for the draft, and the bank was out whatever expenses it incurred attempting to collect on the draft. The debtor would often be responsible for late fees and accrued interest as well as for the original balance.

Jacobs was convicted of one count of conspiracy to create fraudulent certified drafts with the intent to market the drafts to customers in the Debt Elimination Program (DEP). Jacobs was also convicted of 30 counts of bank fraud for his attempt to defraud federally insured financial institutions through the DEP. Each count of bank fraud reflected the submission of one certified draft to a financial institution. Jacobs was also convicted of mail fraud, each of these eighteen counts arising from the mailing of one certified draft to be handled by the United States Postal Service.

Jacobs now appeals his conviction, alleging that privileged communications between his attorney and himself were improperly and prejudicially admitted into evidence, depriving him of a fair trial. He also appeals the application of the bank fraud statute to a situation where he claims the banks had no risk of loss. He further challenges the calculation of "loss" for sentencing purposes. Finally, he claims that a jury instruction on conscious avoidance was erroneous.

Jacobs became associated with the DEP while attending an off-shore investment seminar in Acapulco, Mexico, in March of 1987. This seminar, which focused on off-shore banking, was hosted by Happy Dutton and attended by Paul Robinson. Paul Robinson,

Page 86

who also went by the names "Walter Martin," "Ed Lee," "Paul Martin" and "Leandro," was invited to the seminar after Dori Dutton (Happy's daughter) found his name on a tax protestor mailing list. Paul Robinson appears to be the "brains" behind the DEP; he introduced the scheme to Happy Dutton, who in turn hand-picked various individuals from the seminar to be "leaders." At the same time that the DEP scheme was getting off the ground, Happy Dutton continued her business running seminars on off-shore banking and off-shore corporations. In order to be a "leader" in the DEP, Jacobs was required to hold a seminar, which he scheduled for June 1987, in Cincinnati.

While in Acapulco, Jacobs obtained a Mexican driver's license and a Mexican social security card in a juristic name. The address given for these documents was the same address that appeared on the certified drafts as the drawee bank's address--a post office box in Mexico. Jacobs knew that the purchase price of the drafts (15% of their face value) was being entirely consumed by commissions for the various participants in the scheme, including 5% (or one-third of the purchase price) for the leader (e.g., Jacobs) and his sales associates (or "downline" people). In addition, there was 5% for Happy Dutton and 5% for Paul Robinson (under the name, "Paul Martin"). By April of 1987 Jacobs was well on his way to registering people to attend his Cincinnati seminar and was attempting to entice people to purchase certified drafts. Testimony also showed that the DEP was discussed at Jacobs' seminar. About this time Jacobs requested that his attorney, Jay Swob, investigate the DEP and give him his opinion of its merits. Attorney Swob wrote Jacobs two letters, one on May 28, 1987, and one on July 12, 1987. Each of these letters discussed the many potential problems associated with the DEP, explained the legal liabilities that could flow from them, and strongly advised Jacobs to have nothing to do with the DEP.

After the Cincinnati seminar, things began to pick up for Jacobs. In July 1987, Jacobs (under the name, "JMR Group") presented the DEP to a group of people in Cincinnati. One of those attending was given a document prepared by Jacobs, providing, as the following quotation indicates, that direct involvement in the DEP was initially limited to those individuals who had been trained by attending Jacobs' Cincinnati seminar:

To Prospective Debt Elimination Program Participants:


1. The JMR Group must initially limit its direct involvement to those individuals who have already been trained by attending the training meeting conducted in Cincinnati on June 9, 1987. These people paid to obtain a head start and they deserve our first priority.

By October of 1987, Jacobs was recognized as the number one producer in the DEP scheme. He received an award for his productivity. He was also involved in developing variations on the scheme, including a plan to purchase gold with the drafts. Jacobs anticipated purchasing so much gold that he was concerned about how to store it, as the following excerpt from a tape-recorded conversation illustrates:

Don Jacobs: What I'm trying to do is figure out two things, where do I stash it, and how do I get it out of the country.


Don Jacobs: I would like for you [Dori Dutton] to set up an off shore bank, and we know where to put it if I get it out of the country, my problem is $3,000 a crack. You know, move gold out ...

Dori Dutton: You're getting it virtually free though.


Don Jacobs: That's why I have a problem moving it. And I'm not going to smuggle it. I don't want to get caught. I don't want to be jailed.

By November of 1987, Jacobs had been told by one customer that he had been visited by the FBI and that a local prosecutor had warned him that the drafts were a "fraudulent ... scam ...." Jacobs also saw a television news story that focused on the certified drafts and alleged that Jacobs had sold Frank Patton a fraudulent draft. In response

Page 87

to these events, Jacobs admitted to Frank Patton that the drafts were worthless. Yet he continued to process draft requests from his downline sellers. These actions resulted in Jacobs' indictment on June 11, 1993 and his conviction after a five week jury trial.

II. Attorney-Client Privilege

The attorney-client privilege is "the oldest of the privileges for confidential communications known to the common law." Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 682, 66 L.Ed.2d 584 (1981). The purpose of the attorney-client privilege is to foster open communication between attorneys and their clients, so that fully informed legal advice may be obtained. However, because invocation of the attorney-client privilege will necessarily exclude relevant evidence from consideration, its application must be limited in some circumstances. One such circumstance involves a waiver by the client; a second involves use of the communication in furtherance of a crime or fraud. The district court found that the crime-fraud exception applied to the two letters from Attorney Swob and therefore admitted the letters as evidence. The district court then declined to reach the issue of waiver.

A. Crime-Fraud Exception

The crime-fraud exception removes the privilege from those attorney-client communications that are "relate[d] to client communications in furtherance of contemplated or ongoing criminal or fraudulent conduct." In re John Doe, Inc., 13 F.3d 633, 636 (2d Cir.1994) (quoting In re Grand Jury Subpoena Duces...

To continue reading