507 F.3d 82 (2nd Cir. 2007), 06-1495, United States v. Shellef

Docket Nº:06-1495-cr(L), 06-1710-cr(CON).
Citation:507 F.3d 82
Party Name:UNITED STATES of America, Appellee, v. Dov SHELLEF and William Rubenstein, Defendants-Appellants.
Case Date:November 08, 2007
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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507 F.3d 82 (2nd Cir. 2007)

UNITED STATES of America, Appellee,

v.

Dov SHELLEF and William Rubenstein, Defendants-Appellants.

Nos. 06-1495-cr(L), 06-1710-cr(CON).

United States Court of Appeals, Second Circuit.

November 8, 2007

Argued: Dec. 18, 2006.

Appeal from judgments of conviction following a trial in the United States District Court for the Eastern District of New York (Joanna Seybert, Judge) for wire fraud, money laundering, tax evasion, filing false tax returns, and conspiracy to defraud the IRS as to defendant Dov Shellef, and conspiracy to defraud the IRS and wire fraud as to defendant William Rubenstein. We conclude that the indictment improperly joined certain tax counts with the other charges against the defendants, that it improperly joined Shellef and Rubenstein as defendants, and that the misjoinders were not harmless.

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Andrew L. FREY, Mayer Brown LLP (Andrew H. Shapiro, Daniel B. Kirschner, Mayer Brown LLP, Stuart E. Abrams, Frankel & Abrams, of counsel), New York, NY, for Defendant-Appellant Dov Shellef.

ALAN L. ZEGAS, Law Offices of Alan L. Zegas, Chatham, NJ (William Nossen, Law Offices of Alan L. Zegas, Chatham, NJ, and, Robert W. Gluck, Mandelbaum, Salsburg, Gold, Lazris & Discenza, P.C., New Brunswick, NJ, of counsel), for Defendant-Appellant William Rubenstein.

S. ROBERT LYONS, Tax Division, Department of Justice, Washington, D.C., (Eileen J. O'Connor, Assistant Attorney General, Alan Hechtkopf, Karen M. Quesnel, Tax Division, Department of Justice, Washington, D.C., and Roslynn Mauskopf, United States Attorney for the Eastern District of New York, New York, NY, of counsel), for Appellee.

Before: POOLER, SACK, and WESLEY, Circuit Judges.

SACK, Circuit Judge:

The defendant Dov Shellef owned or operated several companies engaged in the distribution of industrial chemicals. The defendant William Rubenstein owned or operated Dunbar Sales, Inc., and Stevens Industries, Inc., which also distributed industrial chemicals and provided warehousing, packaging, labeling, and billing services to other distributors. The chemical at issue in this case -CFC-113 -is exempt from excise taxes if its sale comports with applicable federal statutory and regulatory requirements. Notwithstanding the defendants' representations to the manufacturers from whom they bought the chemical that the defendants would sell it in a manner that would render the sales excise-tax-free, some of Shellef's and Rubenstein's sales of CFC-113 did not comply with at least one of these requirements. The government charged Shellef and Rubenstein jointly with conspiracy to defraud the IRS and wire fraud. The indictment also charged Shellef (but not Rubenstein) with 1) personal income tax evasion in 1996; 2) filing on behalf of one of his businesses a corporate tax return that was false insofar as it failed to report legitimate income in 1996; and 3) filing a corporate tax return on behalf of another of his businesses that was false insofar as it failed to report income in 1999. Shellef alone was also charged with money laundering associated with the alleged wire fraud. A jury convicted Shellef and Rubenstein on all charges against them.1

On appeal, Rubenstein argues, as a threshold matter, that the 1996 tax charges against Shellef were improperly joined with the conspiracy to defraud and wire fraud charges against him. Shellef similarly argues that the 1996 tax charges should not have been joined with the other charges against him.2

Under Rule 8 of the Federal Rules of Criminal Procedure, joinder of criminal charges is permissible when, inter alia, the charges are "based on the same act or transaction." Fed. R. Crim. P. 8(a). Joinder of tax charges with non-tax charges under Rule 8 is therefore permissible if "the tax offenses arose directly from the other offenses charged," such as when the funds derived from the acts underlying the

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non-tax charges "either are or produce the unreported income" that is the basis for the tax charges. United States v. Turoff, 853 F.2d 1037, 1043 (2d Cir. 1988) (internal quotation marks and citations omitted). Even "if the character of the funds . . . do[es] not convince us of the benefit of joining the[] two schemes in one indictment, other overlapping facts or issues may." Id. at 1043-44.

We conclude that the indictment improperly joined the 1996 tax evasion and false return counts against Shellef with the other charges against both defendants because the 1996 counts are not "based on the same act or transaction" as the other charges within the meaning of Rule 8. We further conclude, for reasons set forth below, that the joinder of Shellef and Rubenstein as defendants in the indictment was also improper. Because the government has not established that the misjoinders of charges and defendants were harmless, we vacate the judgments of conviction and remand for further proceedings.

Shellef and Rubenstein raise several other issues on appeal that we need not decide in light of our disposition of the question of joinder: 1) the legal sufficiency of the wire fraud and conspiracy indictments; 2) the evidentiary sufficiency of the conviction for wire fraud; 3) the propriety of several evidentiary rulings made by the district court; and 4) the propriety of the jury instructions. We nonetheless discuss all but the district court's evidentiary rulings to guide the district court on retrial.

BACKGROUND

Because the jury returned a guilty verdict, the evidence presented to it is construed "in the light most favorable to the government." United States v. Naiman, 211 F.3d 40, 46 (2d Cir. 2000) (citation omitted). Except where noted below, the parties do not dispute the relevant material facts.

The Defendants

The defendant Dov Shellef owned or operated four companies: Poly Systems, Inc. ("Poly Systems"); PolyTuff, Ltd. ("PolyTuff"); PolyTuff USA, Inc. ("PolyTuff USA"); and Poly Systems USA, Inc. ("Poly Systems USA"). Poly Systems was an entity located in and doing business from the United States, which sold and distributed defense-related materials, including aircraft manufacturing and maintenance products, primarily to the government of Israel. PolyTuff, an Israeli company, functioned as Poly Systems's representative in Israel. Although nominal ownership of PolyTuff was transferred to one Avi Dolev in 1990, Shellef ran the company beginning no later than 1995, when, according to Shellef, Dolev "disappeared." Test. of Dov Shellef, Trial Tr. 2270-71, July 14, 2005. PolyTuff USA was located in and doing business from the United States; it had been founded by Dolev in 1992 after the Israeli government refused to continue doing business with Shellef and Poly Systems. Poly Systems USA manufactured and sold industrial solvents.

Rubenstein is the executive vice president and a forty-five percent owner of two New Jersey-based companies, Dunbar Sales, Inc. ("Dunbar"), and Stevens Industries, Inc. ("Stevens"). The companies buy a variety of industrial chemicals and re-sell them to the United States and foreign governments. These entities also provide warehousing, packaging, labeling, shipping, and bill collection services. Rubenstein provides day-to-day management for the companies.

In 1995, Rubenstein and Shellef began working together in an attempt to profit from an impending ban on domestic production of CFC-113. Their plan was to

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purchase a large volume of CFC-113 that had been produced and stockpiled in anticipation of the ban on production and to sell it to entities that would have difficulty obtaining it elsewhere thereafter.

In 1998, Stevens became a co-owner, with Shellef, of Poly Systems USA. That year, Shellef or his company Poly Systems transferred cash to Poly Systems USA as capital. Around that time, Shellef also invested in three unrelated real estate ventures that Rubenstein had undertaken.

Regulatory Regime Governing CFC-113

CFC-113 is a highly regulated, ozone-depleting industrial solvent commonly used to remove grease from metal. Global regulation of CFC-113 began in earnest following the ratification of the Montreal Protocol on Substances that Deplete the Ozone Layer (the "Montreal Protocol") in 1987. Montreal Protocol, Sept. 16, 1987, S. Treaty Doc. No. 100-10, 1522 U.N.T.S. 29. Pursuant to the Montreal Protocol, Congress sharply limited American production of CFC-113 as part of the Clean Air Act, 42 U.S.C. §§ 7401 et seq. The Act implemented a phased ban, 4 to be completed by 2000, of the "production and consumption" of the substance in the United States. See 42 U.S.C. § 7671c. Previously stockpiled CFC-113 could, however, still lawfully be used in the United States. As an incentive for discontinuance of such use, Congress imposed an excise tax on any CFC-113 "sold or used by the manufacturer . . . thereof." See 26 U.S.C. § 4681(a)(1) (imposing a tax on sales of ozone-depleting chemicals); 26 U.S.C. § 4682(a)(2) (including CFC-113 within the definition of ozone-depleting chemicals).

Congress carved out three exceptions to the applicability of the excise tax, two of which are relevant here. See 26 U.S.C. § 4682(d).

First, CFC-113 that has been "diverted or recovered in the United States as part of a recycling process (and not as part of the original manufacturing or production process)" is not subject to the tax. 26 U.S.C. § 4682(d)(1). Such diverted or recovered CFC-113 is known as "reclaimed CFC-113." Newly manufactured CFC-113, by contrast, is referred to as "virgin CFC-113."

Second, the statute exempts "sale[s] by the manufacturer or producer of...

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