U.S. v. Elliott

• Decision Date: 31 August 1995
• Docket Number: 94-2020,Nos. 90-3696,s. 90-3696
• Citation: 62 F.3d 1304
• Parties: , Fed. Sec. L. Rep. P 98,909, 42 Fed. R. Evid. Serv. 1359 UNITED STATES of America, Plaintiff-Appellee, v. Charles Phillip ELLIOTT, William Melhorn, Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1304

62 F.3d 1304

64 USLW 2180, Fed. Sec. L. Rep. P 98,909,

42 Fed. R. Evid. Serv. 1359

UNITED STATES of America, Plaintiff-Appellee, v. Charles Phillip ELLIOTT, William Melhorn, Defendants-Appellants.

Nos. 90-3696, 94-2020.

United States Court of Appeals, Eleventh Circuit.

Aug. 31, 1995.

Charles M. Harris, Asst. Federal Public Defender, Fort Myers, FL, for Elliott.

Helen H. Sundgren, Naples, FL, for Melhorn.

Anne R. Schultz, Asst. U.S. Atty., Miami, FL, for appellee.

Appeal from the United States District Court for the Middle District of Florida.

Before ANDERSON and BIRCH, Circuit Judges, and JOHNSON, Senior Circuit Judge.

BIRCH, Circuit Judge:

In this appeal, we decide the first-impression issue for our circuit of the requirements for qualification as an investment adviser under the Investment Advisers Act of 1940, 15 U.S.C. Secs. 80b-2(a)(11) and 80b-6. Because we conclude that managers of a number of investment companies were investment advisers who violated the anti-fraud provisions of the Investment Advisers Act, we AFFIRM their convictions. The district court, however, erred in formulating the restitution ordered. We VACATE the previous restitution orders and REMAND for the district court to order restitution consistent with this opinion.

I. BACKGROUND

From 1980 to 1987, defendants-appellants Charles Phillip Elliott and William H. Melhorn managed a collection of investment companies that included Elliott Real Estate, Inc., Elliott Securities, Elliott Mortgage Company, Inc., and Elliott Group, Inc. (collectively, "Elliott Enterprises"). During the relevant period, Elliott was president and owner of Elliott Enterprises; Melhorn began as a special assistant to Elliott and was promoted to chief executive officer of Elliott Enterprises. While Elliott Securities operated as a securities broker, the rest of Elliott Enterprises marketed a range of investment vehicles created and managed by Elliott Enterprises.

Elliott Enterprises lost millions of dollars each year between 1980 and 1987. Nevertheless, Elliott and Melhorn retained their current investors and attracted new ones by making false claims regarding the safety and performance of Elliott Enterprises investments. For example, Elliott and Melhorn represented to current and prospective investors that Elliott Enterprises had a good track record and was financially sound. The two men also falsely represented Elliott Enterprises as being a regulated bank. They assured investors that particular investments were insured or secured when, in fact, the investments often were backed with insufficient, worthless or nonexistent collateral. In several instances, Elliott and Melhorn falsely told investors that income from investments was tax-free. The two also stated that Elliott Enterprises had " 'always received a clean bill of health by periodic audits by the Florida Department of Professional Regulation,' " when no such audits were performed. R11-230-660.

Significantly, Elliott Enterprises "lulled" its investors by sending regular, competitive interest payments at rates just above the market rate. Elliott Enterprises was able to maintain these payments, despite huge, mounting losses, by the use of a Ponzi, or pyramid, scheme: interest payments were funded not only by returns from underlying investments, but also by the principal from newer investor funds. On some occasions, Elliott and Melhorn and their employees solicited new investments in Elliott Enterprises in order to cover interest payments that were coming due.

Both Elliott and Melhorn profited enormously from this arrangement. Elliott's extravagant lifestyle included multimillion dollar residences, resort homes, and luxury automobiles. Although Elliott's sole employment during this period was as president of Elliott Enterprises, he did not receive a salary. Instead, he compensated himself by commingling investor funds with personal funds. ¹ Melhorn's compensation came from commissions on sales of Elliott Enterprises investment products; in some years, income from those commissions exceeded one million dollars.

In 1987, following an investigation by the Securities Exchange Commission ("SEC"), a receiver took control of Elliott Enterprises. An audit taken at that time revealed liabilities exceeding assets by more than twenty million dollars. As a result, Elliott and Melhorn were no longer able to attract new investments; the Ponzi scheme collapsed, and interest payments ceased. Following the failure of Elliott Enterprises, investors and creditors have recovered from the receiver ten-and-a-half cents on the dollar.

Elliott and Melhorn were indicted on twenty-two counts of fraud under the Investment Advisers Act, 15 U.S.C. Secs. 80b-3(d) and 80b-6 and 18 U.S.C. Sec. 2, six counts of securities fraud under the Securities Act, 15 U.S.C. Sec. 77q(a) and 18 U.S.C. Sec. 2, ten counts of mail fraud, 18 U.S.C. Secs. 2 and 1341, and one count of conspiracy, 18 U.S.C. Sec. 371. The thirty-nine charges in the indictment stemmed from misrepresentations allegedly made by Elliott and Melhorn to nineteen ² individuals. In March, 1990, a jury returned a verdict of guilty on all but two charges of mail fraud. In July, 1990, the district court sentenced Elliott and Melhorn to prison terms ³ and ordered each defendant "to make full restitution as determined by U.S. Probation." R5-209-1; R5-210-1.

On first appeal, this court determined that the original restitution orders were impermissibly vague. Consequently, we remanded the case for further proceedings on the restitution issue and retained jurisdiction over the remainder of the appeal. The district court referred the case to a magistrate judge solely to calculate the amount of loss to the victims. After two status conferences, the magistrate judge recommended that the district court accept the government's estimate of victim loss, which was based on claims made to the receiver by approximately 940 Elliott Enterprises investors. The district court adopted the magistrate judge's report and recommendation without vacating the original restitution orders, setting an actual restitution amount, or making any other findings of fact. Elliott and Melhorn now appeal from this order. At the government's request, we consolidated this new appeal with the remainder of their original appeals pending before this court.

II. DISCUSSION

A. Exclusion of Relevant Evidence

Elliott and Melhorn contend that the district court erred by excluding proffered testimony from satisfied Elliott Enterprises customers. ⁴ These customers, none of whom was named in the indictment, were to have testified to their belief that Elliott and Melhorn had committed no wrongdoing; they also would have testified that the two defendants had kept their promise to secure these particular investments with collateral. We review evidentiary rulings by the district court for abuse of discretion. United States v. Adair, 951 F.2d 316, 320 (11th Cir.1992).

Although the admission and exclusion of evidence falls within the broad realm of judicial discretion, such discretion "does not extend to the exclusion of crucial relevant evidence necessary to establish a valid defense." United States v. Williams, 954 F.2d 668, 671 (11th Cir.1992). Relevant evidence is evidence that has "any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Fed.R.Evid. 401. To the extent that Elliott and Melhorn proffered the witnesses to show that these investors did not believe that they had been defrauded, that they had received a portion of their money back upon request, that Elliott had told these investors to testify truthfully before the SEC, or that Elliott had backed these investors with the appropriate collateral as he had promised, the district court properly excluded this testimony as irrelevant. See Fed.R.Evid. 402. The fact that Elliott and Melhorn avoided wrongdoing in their dealings with five customers not named in the indictment is inconsequential in determining whether both made fraudulent representations to the nineteen victims listed in the indictment.

Elliott and Melhorn's main contention, however, is that the testimony of satisfied customers is relevant to the issue of their intent to defraud. In support of this proposition, they rely on the Ninth Circuit's decision in United States v. Thomas, 32 F.3d 418 (9th Cir.1994). In Thomas, the defendant was charged with mail fraud for implementing an "averaging scheme." Id. at 419. Under the scheme, the defendant quoted false prices to fruit growers to even out fluctuations in the market. The growers affected by this scheme collectively came out ahead by approximately $175,980, but the trial court in Thomas excluded testimony from growers, who had benefitted under the scheme but were not named in the indictment. The Ninth Circuit reversed the district court and held that the testimony of all growers impacted by the scheme was relevant to the defendant's intent in devising the scheme. The court further noted that there was "no basis for concluding that the scheme defendant had devised was intended to impact unnamed individuals any differently than those the government chose to name." Id. at 420.

While Elliott and Melhorn proffered the same type of testimony as that excluded in Thomas, we note that the scheme and intent at issue in Thomas differ significantly from the scheme and intent at issue in this case. In Thomas, the defendant made two, distinct misrepresentations: when fruit prices rose above an "average" price, the defendant falsely quoted a lower price to growers; when fruit prices dropped below average, the defendant falsely quoted a higher price. Overall, the growers impacted by the averaging scheme actually came out ahead by approximately $175,980; thus, testimony from "satisfied" growers could have helped the defendant establish that he...