U.S. v. Mueffelman

Decision Date28 November 2006
Docket NumberNo. 05-2616.,05-2616.
Citation470 F.3d 33
PartiesUNITED STATES of America, Appellee, v. Steven D. MUEFFELMAN, Defendant, Appellant.
CourtU.S. Court of Appeals — First Circuit

Martin G. Weinberg with whom Kimberly Homan was on brief for appellant.

Peter A. Mullin, Assistant United States Attorney, with whom Michael J. Sullivan, United States Attorney, was on brief for appellee.

Before BOUDIN, Chief Judge, CAMPBELL, Senior Circuit Judge, and LIPEZ, Circuit Judge.

BOUDIN, Chief Judge.

By a superseding indictment, Steven Mueffelman was charged by a federal grand jury with 15 counts of mail fraud, 18 U.S.C. § 1341 (2000), and 3 counts of wire fraud. Id. § 1343. A co-defendant, John Lombardi, pled guilty, but Mueffelman went to trial in a proceeding lasting almost a month. Reserving details and disputed issues for the discussion below, the evidence showed the following.

In the summer of 1996, Mueffelman, Lombardi and an attorney formed a business venture, using an inactive corporation whose name they changed to Commonwealth Capital Funding Corporation ("CCFC"). CCFC offered to assist persons who were poor or had low credit ratings in acquiring homes. A primary means was to be an arrangement in which CCFC purchased property selected by the client (within a designated price range) at up to 94 percent of its value and, in a paired transaction, immediately resold the property to the client for 100 percent of the value with full financing provided by a mortgage lender found by CCFC.

CCFC charged each client who enrolled in the program a $100 fee (doubled for couples and later upped to $125) for a credit check, plus one month's gross income from the client. In exchange CCFC seemingly promised 100 percent (later expressed as "up to 100 percent") financing. Only 17 of Mueffelman's approximately 300 clients ever purchased homes; those who did purchase homes paid more for the homes than the sellers were willing to sell them for and qualified for a mortgage on the basis of their credit, without assistance from CCFC. Thus, most of CCFC's income was from the initial fees rather than the 6 percent differential.

CCFC also claimed to offer a lease-to-purchase program which (as it was represented) would use a nonprofit entity to purchase a home with favorable financing and lease it to the client while the client cleaned up his or her credit record. If the client did so, the client would then assume the mortgage. A federal program was in place that provided insured financing under favorable terms where a nonprofit organization secured the financing and received the necessary government approvals.

CCFC attracted customers through advertising coupled with the use of so-called independent sales representatives who called upon and dealt directly with clients—receiving for themselves 30 percent of the initial client payment of one month's gross income. Mueffelman, as president of CCFC, hired the sales force, approved the sales literature, made decisions on purchase offers and sought to arrange for financing. In the course of its operations in Massachusetts, lasting from September 1996 to August 1997, CCFC had or sought relationships with various mortgage brokers and at least one nonprofit organization.

Investigations by the Massachusetts banking authorities led in August 1997 to an injunction against Mueffelman, Lombardi and CCFC. In the months preceding the injunction, Mueffelman set about organizing a new but similar venture in Florida under a different corporate name, which proceeded to enroll clients and collect fees. Through August 1997, CCFC took in about $1.2 million in fees from its over 300 clients; the sales force was paid over $400,000; and Mueffelman himself received over $167,000, apart from payments from the new Florida venture.

In its indictment, the government identified a number of specific falsehoods, which it said that Mueffelman had used or approved to secure money from clients. Each of the counts of mail or wire fraud that followed in the indictment identified a particular mail or wire communication by CCFC to a particular customer on a specified date as a means by which the scheme was executed. The indictment alleged not only that CCFC was a sham but also described particular false or misleading statements.

Specifically, the indictment charged that CCFC advertised "100% financing" and "Home ownership guaranteed!!" and otherwise appeared to guarantee financing without a down payment for those with poor credit (e.g., "Bankruptcy OK"); that CCFC claimed to have established relationships with lenders and government-supported loan programs when in fact it had no such track record; and that CCFC claimed it was an "investor" when in fact it did no more than seek lenders.

At trial the government offered evidence from which the jury could have found that CCFC had no record and little prospect of finding lenders for clients with poor credit records and no money for down payments; that the advertising would naturally lead clients to think that they were getting guaranteed financing for their month's gross income;1 and that Mueffelman continued to expand the business despite warnings from others including Lombardi as to difficulties in securing financing.

The jury convicted Mueffelman of 13 counts of mail fraud. (The government dismissed the remaining counts.) On November 1, 2004, the district court sentenced Mueffelman to 27 months in prison. Mueffelman now appeals, contesting both the jury verdict and his sentence. The standard of review varies with the issue raised, and we start with the attacks upon the judgment of conviction and then turn to the sentence.

Mueffelman does not deny in his brief that false statements to customers were made nor that he was responsible for them. His core arguments are that his conviction should be overturned because he optimistically believed that his programs would succeed; that—contrary to the indictment—his business was not a sham enterprise; and that the government's reliance at trial on the false statements was a constructive amendment of the indictment. We begin with Mueffelman's good-faith argument.

The mail fraud statute, so far as pertinent to this case, requires (1) a scheme to defraud or to obtain money or property by false or fraudulent pretenses; (2) the use of the mails in executing the scheme or attempting to do so; and (3) specific intent, inferred from statutory language and common law background, which excludes false statements honestly believed to be true and promises or predictions made in good faith. United States v. Cacho-Bonilla, 404 F.3d 84, 90 (1st Cir.), cert. denied, ___ U.S. ___, 126 S.Ct. 471, 163 L.Ed.2d 358 (2005); United States v. Dockray, 943 F.2d 152, 155 (1st Cir.1991); 2 Sand et al., Modern Federal Jury Instructions ¶ 44.01 (Instruction 44-3) (2005).

This is a far cry from saying that Mueffelman was free knowingly to make false statements to secure money from clients because he believed that his enterprise would succeed. One can be optimistic, even with good reason, about the prospects of a business, but one still cannot, for example, sell stock by lying about the business' past earnings or the presence of booked orders that do not exist. A prediction made in good faith may be sheltered; a statement of fact known to be false is not.2

In Dockray, we held that a good faith instruction is not required. 943 F.2d at 155. If references to good faith are made in fraud instructions, this must be done with great care. Here, the trial court's good faith instruction, taken as a whole, could easily have led the jury to think that lies were protected if Mueffelman believed in his enterprise. The pertinent language from the instructions is reprinted in an addendum to this opinion. The instruction was thus overly favorable to Mueffelman, but the jury convicted anyway.

Mueffelman attempts on appeal to use the overbroad instruction as the yardstick by which to measure the sufficiency of the evidence against him, claiming that the instruction is "the law of the case." It may be unhelpful to use the phrase "law of the case" in the present context, as if this court were bound by a district court's ruling; but, in any event, the overbroad instruction, properly objected to by the government and likely to be misread in Mueffelman's favor, does not prevent us from determining the proper legal tests for scienter.3

Using the correct legal yardstick, Mueffelman is unquestionably liable for statements of fact that he had to know were untrue. Importantly, his advertising said or implied that Mueffelman's business had been ongoing for several years, that it was in a position to secure 100 percent financing, and that it had a network of lenders willing to provide loans. Whether Mueffelman was generally optimistic about his venture does not excuse his lies.

Mueffelman's next argument is that the government charged in the indictment that his business was from the outset a sham and failed to prove it. The indictment did so charge: paragraph 22 stated, "In short, the entire business enterprise conducted by Mueffelman and Lombardi was a sham designed solely to generate advance fees." But the indictment also described in detail the effort to procure monies from clients by specific falsehoods which the government did prove—which, with the mailings, made out a violation of the mail fraud statute.

Whether the government failed to prove that the whole enterprise was a sham from start to finish is a different matter.4 The district judge said in connection with sentencing that CCFC was not a sham, relying on long hours spent by Mueffelman at the office and endless efforts to find mortgage lenders. We need not decide if the jury could rationally take a different view of the evidence, because the sham allegation did not have to be proved to permit and sustain the conviction.

The indictment adequately charged and gave notice of a series of...

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