U.S. v. Ervasti

• Decision Date: 19 October 1999
• Docket Number: 99-1636,No. 99-1631,99-1631
• Parties: (8th Cir. 2000) UNITED STATES OF AMERICA, APPELLEE, v. GREGORY CHARLES ERVASTI, APPELLANT. UNITED STATES OF AMERICA, APPELLEE, v. DENIENE "DEE" ERVASTI, APPELLANT. Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1029

201 F.3d 1029 (8th Cir. 2000)

UNITED STATES OF AMERICA, APPELLEE, v. GREGORY CHARLES ERVASTI, APPELLANT.

UNITED STATES OF AMERICA, APPELLEE, v. DENIENE "DEE" ERVASTI, APPELLANT.

No. 99-1631, 99-1636

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: October 19, 1999

Filed: January 13, 2000

Rehearing Denied March 2, 2000

Appeals from the United States District Court for the District of Minnesota. [Copyrighted Material Omitted]

[Copyrighted Material Omitted]

Before: Bowman, Lay, and Beam, Circuit Judges.

Bowman, Circuit Judge.

Gregory and Deniene "Dee" Ervasti appeal their convictions and sentences arising out of the misappropriation of over $5.7 million of impounded tax monies from over 100 clients of their payroll processing corporation. For the reasons stated below we affirm in part and reverse and remand in part.

I.

We begin with a summary of the facts underlying the Ervastis' convictions. From 1991 to 1995, Gregory and Deniene "Dee" Ervasti, husband and wife, owned and operated Corporate Financial Services, Inc. ("CFS"). CFS offered a variety of payroll processing services to employers, including a tax filing service. Through this service, CFS received the tax monies its clients (the employers) were required by law to withhold from their employees' pay.¹ Having received these tax monies, it was then the Ervastis' responsibility to timely prepare and file their clients' Employer's Quarterly Federal Tax Returns, also known as Forms 941, with the Internal Revenue Service ("IRS") and to make timely deposits with the IRS in the amount each Form 941 indicated was due.

Initially, the Ervastis maintained a single bank account and commingled the impounded tax monies with their general operations monies. At some point, the Ervastis opened a "tax account" into which the impounded tax funds were deposited. Their practice of utilizing impounded tax monies to cover operating expenses, however, did not end with the opening of the tax account. Unbeknownst to CFS's clients, the Ervastis from time to time would take funds from the tax account and use them for operating expenses, such as meeting CFS's own payroll. At trial, the Ervastis characterized this practice as "borrowing from the float," that is, using the impounded tax monies during the period between its collection and its deposit with the IRS.²

Before long the "float" began to sink. CFS lacked adequate capital to meet its expenses and had chronic cash flow problems. Consequently, in many cases, the Ervastis' "borrowing" from the impounded tax monies began to stretch beyond the date the taxes were due to the IRS, the Ervastis already having spent the impounded tax monies by the time they were due to the IRS. Although the Ervastis continued to submit the Forms 941 on time, those filings often were not accompanied by a corresponding tax deposit. On many occasions, the Ervastis misrepresented that the money due had been timely deposited when it had not. Indeed, Mrs. Ervasti signed and submitted many Forms 941 falsely indicating that the amount due had been timely paid. Likewise, when the Forms 941 were filed, the Ervastis notified their clients that the taxes had been timely paid, when they often had not.

This course of conduct had several consequences. The late deposits triggered the IRS's internal federal tax deposit alerts and the IRS began to investigate why CFS's clients had not deposited the tax funds their Forms 941 claimed they had. In addition, IRS computers began to churn out "large stacks" of late payment notices to CFS and its clients indicating the payment discrepancies. Not surprisingly, clients who received copies of these notices--or who were investigated by the IRS--became concerned. After all, according to the testimony of numerous former CFS clients, they had turned over tax monies to the Ervastis with the understanding that the IRS would be paid properly and timely; that was the very purpose of hiring the Ervastis to process their tax deposits. Moreover, as employers, CFS's clients ultimately were liable for the taxes due.

In response to client and IRS inquiries, the Ervastis lied and made up "lame excuses," Brief of Appellant Deniene Ervasti at 12,³ often blaming the IRS notices on trumped-up computer problems or nonexistent IRS mistakes. Moreover, the Ervastis denied using impounded tax monies to fund CFS's operating expenses. Asked why they would lie to their clients, Mrs. Ervasti testified, "I wanted to pacify them and . . . retain their business." Tr. at 998. Indeed, up to the end, the Ervastis continued to seek and accept clients' impounded tax monies and use them for purposes other than paying the taxes.

Besides the legal implications, the Ervastis' conduct had disastrous financial consequences for CFS. The late deposits to the IRS triggered a cascade of penalties and interest. The situation spiraled downward as the Ervastis used incoming impounded tax monies to pay the interest and penalties on the late deposits. As a result, CFS made still more late payments to the IRS, thus triggering even more penalties and interest liability. Though CFS's clients became unwitting "investors" in CFS, Mr. Ervasti was never able to secure any legitimate outside financing to fund CFS's operations. By September 1995, CFS's finances were collapsing. The Ervastis had fallen nearly two quarters behind in the tax payments for many clients and sought bankruptcy protection for CFS.

While the Ervastis did pay the taxes, penalties, and interest owed with respect to some of their clients (especially those who complained earliest and most vociferously), most clients did not fare so well. By the end, more than 100 clients still owed money to the IRS. Many former CFS clients ended up, in essence, paying their taxes twice: first to the Ervastis and again to the IRS (with penalties and interest).⁴ A September 1995 accounting, compiled under Mr. Ervasti's direction to assess CFS's debt for the bankruptcy proceedings, revealed that the difference between the amount of impounded tax monies CFS received from its clients and the amount the Ervastis actually deposited with the IRS was $5,747,478.88.

The IRS investigated the Ervastis' conduct and a grand jury ultimately issued a ten-count superseding indictment. Both Mr. and Mrs. Ervasti were charged in Counts 1 through 5. Count 1 charged conspiracy to commit mail fraud in violation of 18 U.S.C. § 371 (1994) for defrauding CFS's clients of money, property, and the intangible right of honest services. Counts 2 through 4 were substantive counts of mail fraud under 18 U.S.C. § 1341 (1994) in furtherance of the conspiracy. Count 5 charged a conspiracy to impede or impair the due administration of the IRS in the ascertainment, computation, assessment, and collection of taxes in violation of 18 U.S.C. § 371. In addition, Mrs. Ervasti alone was charged, under Counts 6 through 10, with five counts of aiding a false tax return in violation of 26 U.S.C. § 7206(2) (1994).

After hearing the evidence at trial--including testimony from many of CFS's former clients and employees, as well as from the defendants themselves--a jury convicted the Ervastis on all counts. The District Court sentenced Mr. Ervasti to sixty-three months imprisonment for Counts 1 through 5. Mrs. Ervasti was sentenced to forty-eight months imprisonment for Counts 1 through 5 and thirty-six months for Counts 6 through 10, to be served concurrently.⁵ In addition, the Ervastis were ordered to pay $5,747,478.88 in restitution and to comply with certain terms of supervised release. The Ervastis appeal their convictions and sentences.

II.

We turn first to the Ervastis' challenge to their convictions under Counts 1 through 4, for conspiracy to commit mail fraud and for three substantive counts of mail fraud. The defendants dispute two jury instructions and challenge the sufficiency of the evidence supporting their convictions. We review each of these matters in turn.

A.

The defendants contend that the District Court erred in refusing to instruct the jury in the precise language that appeared in United States v. Jain, 93 F.3d 436, 442 (8th Cir. 1996), cert. denied, 520 U.S. 1273 (1997): "The essence of a scheme to defraud is an intent to harm the victim." Although the defendants requested this instruction, the District Court declined to give it, observing that this language does not appear as an element in the mail fraud statute and reasoning that, in Jain, we were "making a distillation . . . not setting out one of the elements." Tr. at 1070.

Instead, the District Court instructed the jury, inter alia, that "[t]o act with intent to defraud means to act knowingly and with the intent to deceive someone for the purpose of causing some financial loss or loss of property or property rights, loss of an intangible right to honest services to another, or bringing about some financial gain to one's self or another to the detriment of a third party." Tr. at 1218. This instruction is nearly identical to the corresponding part of the mail fraud instruction in the Manual of Model Criminal Jury Instructions for the District Courts of the Eighth Circuit (1997).

It is axiomatic that federal district courts have wide discretion in crafting appropriate jury instructions. See, e.g., United States v. Clapp, 46 F.3d 795, 803 (8th Cir. 1995). In particular, "the district court is afforded considerable discretion in choosing the form and language of jury instructions." United States v. Jerde, 841 F.2d 818, 820 (8th Cir. 1988). "A defendant is not entitled to a particularly worded instruction where the instructions given adequately and correctly cover the substance of the requested instruction." United States v. Kouba, 822 F.2d 768, 771 (8th Cir. 1987), quoted in Jerde, 841 F.2d at 823. We are satisfied that, at least in these circumstances, instructing the jury that it must find that the defendants intended to cause "loss" or "detriment" in order to...