United States v. Smith

• Decision Date: 20 May 2014
• Docket Number: 11–5828,12–5695,11–5852,13–5440.,Nos. 10–6136,s. 10–6136
• Citation: 749 F.3d 465
• Court: U.S. Court of Appeals — Sixth Circuit
• Parties: UNITED STATES of America, Plaintiff–Appellant (10–6136), Plaintiff–Appellee (11–5828, 11–5852, 12–5695 & 13–5440), v. Christopher Cello SMITH, Defendant–Appellee (10–6136), Defendant–Appellant (11–5828, 12–5695 & 13–5440), Michael D. Smith, Defendant–Appellee (10–6136), Defendant–Appellant (11–5852, 12–5695 & 13–5440).

749 F.3d 465

UNITED STATES of America, Plaintiff–Appellant (10–6136), Plaintiff–Appellee (11–5828, 11–5852, 12–5695 & 13–5440),

v.Christopher Cello SMITH, Defendant–Appellee (10–6136), Defendant–Appellant (11–5828, 12–5695 & 13–5440),Michael D. Smith, Defendant–Appellee (10–6136), Defendant–Appellant (11–5852, 12–5695 & 13–5440).

Nos. 10–6136, 11–5852, 11–5828, 12–5695, 13–5440.

United States Court of Appeals,Sixth Circuit.

Argued: Oct. 8, 2013.

Decided and Filed: April 15, 2014.

Rehearing En Banc Denied May 20, 2014.

ARGUED: Paul McCaffrey, United States Attorney's Office, Lexington, Kentucky, for Appellant United States in 10–6136 and Appellee United States in 11–5828, 11–5852, and 12–5695. Jeffrey M. Blum, Louisville, Kentucky for Appellee C. Smith in 10–6136 and Appellant C. Smith in 11–5828. Timothy J. McKenna, Timothy J. McKenna, LLC, Cincinnati, Ohio, for Appellant M. Smith in 11–5852 and 12–5695. ON BRIEF:Charles P. Wisdom, Jr., Andrew Sparks, United States Attorney's Office, Lexington, Kentucky, for Appellant United States in 10–6136 and Appellee United States in 11–5828, 11–5852, and 12–5695. Jeffrey M. Blum, Louisville, Kentucky for Appellee C. Smith in 10–6136 and Appellant C. Smith in 11–5828. Timothy J. McKenna, Timothy J. McKenna, LLC, Cincinnati, Ohio, for Appellant M. Smith in 11–5852 and 12–5695. Jeffrey M. Blum, Louisville, Kentucky, for Appellants C. Smith and M. Smith in 13–5440. Charles P. Wisdom, Jr., United States Attorney's Office, Lexington Kentucky, for Appellee United States in 13–5440.

Before: BOGGS, CLAY, and GILMAN, Circuit Judges.

OPINION

RONALD LEE GILMAN, Circuit Judge.

Michael D. Smith and Christopher Cello Smith are brothers who operated Target Oil and Gas Corporation (Target Oil), a company that engaged in speculative resource drilling in Kentucky, Tennessee, Texas, and West Virginia. While serving as President of Target Oil and a related company named Kentucky–Indiana Oil and Gas Corporation (Kentucky–Indiana), Michael Smith ran Target Oil's day-to-day operations, controlled correspondence with potential investors, and directed drilling programs. Christopher Smith was the Vice President and lead salesman of Target Oil. The Smith brothers were arrested in 2008 and accused of conspiring with others to defraud investors of millions of dollars.

After a four-week jury trial, Michael Smith was convicted on one count of conspiracy to commit mail fraud, in violation of 18 U.S.C. § 1349, and on eleven substantive counts of mail fraud, in violation of 18 U.S.C. § 1341. He was sentenced to 120 months in prison, to be followed by three years of supervised release. The district court also ordered him to pay $5,506,917 in restitution.

Christopher Smith was convicted by the same jury on seven counts of mail fraud, in violation of 18 U.S.C. § 1341. He was sentenced to 60 months in prison, to be followed by three years of supervised release. The district court also ordered him to pay $1,652,075 in restitution.

On appeal, Michael and Christopher Smith argue that (1) the government's evidence was insufficient to support their convictions; (2) the government offered evidence that constructively amended or varied Count 1 of the indictment; (3) their sentences are procedurally and substantively unreasonable; (4) one of the forfeiture judgments is excessive; (5) the district court erred in denying their motions for a new trial; (6) the district court erred by excluding an expert witness for the defense; and (7) various items of evidence relating to the alleged fraud were erroneously admitted.

For the reasons set forth below, we AFFIRM the judgment of the district court with respect to all issues.

I. BACKGROUND

A. Factual background

Employees of Target Oil interacted with potential investors in three principal ways: (1) the potential investors were first contacted from lead sheets, (2) they were subsequently mailed information packets, and (3) they were then pressured by company “closers” to invest in oil and gas drilling programs. The fraud that the government accused the Smith brothers of perpetrating occurred in the final two stages. Information packets that were mailed to the potential investors often misrepresented Target Oil's past successes and exaggerated the likelihood of finding oil and gas. When Target Oil salesmen followed up on the telephone, they frequently represented some wells as “the greatest thing since sliced bread” and others as virtually certain to produce consistent streams of royalties. Investors relied on these various representations in deciding to place their money with Target Oil. When some dissatisfied investors later sought a return of their investment, however, Christopher Smith engaged in stalling tactics, continued to stress the potential for investment returns, or simply would not allow the investors to “pull out.”

The image of Target Oil that its salesmen communicated was inconsistent with reality. Of the millions of dollars invested in the company, only thousands of dollars were returned as royalties. Wells that Target Oil had represented as sure-fire investments often produced virtually no oil, and numerous wells that had been drilled were never completed. Many investorslost the entirety of their investments, and investor losses totaled in the millions of dollars. In fact, from 2003 to 2008, Target Oil received approximately $15,800,000 in investor funds but, according to the postal inspector, distributed only $460,000 in royalties.

Michael and Christopher Smith were at the heart of Target Oil's operations, but they did not act in isolation. Several individuals were employed to assist in the business, with varying degrees of experience and success. Shannon Williams was a young geologist who was hired directly from college and given the responsibility of designing and writing the information packets for Target Oil. Working at the direction of the Smith brothers, Williams often manipulated the images contained in the information packets in a misleading way. The manipulated images frequently exaggerated the likelihood of finding oil or downplayed the presence of dry wells. Eventually, despite limited experience, Williams became a salesman and field geologist for the company.

Geology reports and field recommendations were crucial to Target Oil's operations. The company employed Ray Garton, a licensed geologist, to prepare these documents. Information packets mailed to potential investors included a letter from Garton, which in the beginning recommended particular drilling sites based on field evaluations conducted by him personally. As time went by, however, Garton stopped conducting his own field evaluations and instead relied heavily on representations from Michael Smith, who would state that a particular well was “good” and would supply documents to be used in preparing the geological reports.

Information packets were the bridge between Target Oil's initial contact with potential investors and their being called on the telephone by the company's closers. The closers were experienced salesmen who were tasked with convincing hesitant investors to do business with Target Oil. Mark Irwin started at Target Oil as a regular salesman but eventually became a closer. He testified that all the closers followed a strict regimen. Closers and other salesmen, for example, were not to discuss investment opportunities with women. Reluctant investors were frequently asked if they were risk takers capable of managing and handling their own affairs. Target Oil salesmen often placated dissatisfied investors by offering additional shares in underperforming wells.

The closers were provided with little formal training, and many of them learned by watching and listening to more experienced closers like Christopher Smith. Learning by example, however, was not the only method of instructing new closers. At least one employee was shown the movie The Boiler Room as training material. The Boiler Room depicts a fictional New York brokerage firm that used high-pressure sales techniques to commit investment fraud. Another salesman said that Michael Smith made copies of The Boiler Room and distributed the movie to various employees.

After Target Oil solicited investors, drilling began. Under general industry practice, the initial drilling for natural gas is typically followed by a process known as completion, which occurs when the drilling area is isolated and hydraulically fractured using service companies to extract the gas. This process, which is commonly known as “fracking,” requires an additional investment of time and expense by the drilling company. Target Oil rarely engaged in fracking. Michael Smith preferred to produce gas from wells that did not require this additional expense. On at least one occasion, Michael Smith pledged to frack an underperforming well to increase its production. The fracking was never completed.

As time passed, Michael Smith faced greater difficulties in securing drilling permits and leases. Violations of environmental regulations made obtaining new permits in Target Oil's name problematic. This caused him to obtain permits in Kentucky–Indiana's name, but Target Oil employees continued to handle the investment solicitations for those wells.

B. Procedural background

A grand jury indicted Michael Smith, Christopher Smith, Garton, Irwin, and two other Target Oil employees—Josh Harris and Shaun Smith—on one count of conspiring to commit mail and wire fraud, twenty counts of mail fraud, two counts of wire fraud, and two counts of selling securities without registering with the United States Securities and Exchange Commission. The cases against Michael Smith, Christopher Smith, Harris, and Shaun Smith proceeded to trial. Garton and Irwin pleaded guilty to the conspiracy charge and testified against Michael and Christopher Smith. After seven days of trial, Harris and Shaun Smith likewise pleaded guilty to the charges against them.

The trial...