U.S.A v. Graf

• Decision Date: 07 July 2010
• Docket Number: No. 07-50100.,07-50100.
• Citation: 610 F.3d 1148
• Parties: UNITED STATES of America, Plaintiff-Appellee,v.James L. GRAF, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

610 F.3d 1148

UNITED STATES of America, Plaintiff-Appellee,v.James L. GRAF, Defendant-Appellant.

No. 07-50100.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 5, 2010.

Filed July 7, 2010.

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Mark C. Krause (argued), Jill T. Feeney (argued), Michael J. Raphael, Christine C. Ewell, United States Attorney's Office, Los Angeles, CA; George S. Cardona, Acting United States Attorney, for plaintiff-appellee, United States of America.

Mary F. Gibbons (argued), Toms River, NJ; Phillip A. Treviño, Law Offices of Phillip A. Treviño, Los Angeles, CA, for defendant-appellant, James L. Graf.

Appeal from the United States District Court for the Central District of California, Margaret M. Morrow, District Judge, Presiding. D.C. No. CR-04-00492-MMM-1.

Before: DIARMUID F. O'SCANNLAIN and RICHARD C. TALLMAN, Circuit Judges, and FREDERIC BLOCK,^* District Judge.

TALLMAN, Circuit Judge:

Once again we examine the complex relationship between corporate employees and corporate counsel-a delicate issue that can become particularly problematic when the latter are called to testify in opposition to the former during a criminal trial against the corporation's former officers. Defendant-Appellant James L. Graf was a founder of, and ostensible consultant to, Employers Mutual LLC (“Employers Mutual”), a Nevada corporation that purported to provide health care benefits coverage to more than 20,000 plan members. In reality, the company was part of an elaborate scheme to defraud the individuals and small businesses who purchased Employers Mutual health insurance plans.

Graf was indicted for his involvement in the fraudulent operation of Employers Mutual. The district court held an evidentiary hearing on Graf's motion in limine to exclude the attorneys' testimony and, after evaluating the briefing, written declarations, and oral testimony presented, issued an order allowing several attorneys who had represented Employers Mutual to testify against Graf at his criminal trial. The court found as fact that the attorneys represented only Employers Mutual and that Graf had no individual attorney-client relationship to establish a privilege that would be violated by the proffered testimony.

After the month-and-a-half long jury trial in Los Angeles, Graf moved for a judgment of acquittal pursuant to Federal Rule of Criminal Procedure (“Rule”) 29 challenging the ten counts charging misappropriation in connection with a health care benefit program in violation of 18 U.S.C. § 669. The district court reserved ruling on the motion until after the jury returned its verdict. The jury found Graf guilty of conspiracy, mail fraud, misappropriation, conducting unlawful monetary transactions, and obstruction of justice. The district court then denied Graf's Rule 29 motion and sentenced Graf to 300 months' imprisonment, with three years of supervised release, ordered a $2,300 special assessment, and imposed restitution of $20,458,419.47.

Graf now appeals his convictions. We have jurisdiction under 28 U.S.C. § 1291, and we affirm.

I

A

In the fall of 2000, Graf, William Kokott and Graf's then-girlfriend, Kari Hanson,¹ formed Employers Mutual and sixteen related trade associations (the “Trade Associations”). Although the companies were organized under the laws of Nevada, Kokott, Graf, and Hanson all lived in California, and Graf originally operated Employers Mutual out of his home in Canyon Lake, California. Kokott filed all of the paperwork to incorporate the various entities; Graf was not listed as an employee, officer, or director of any of the companies. This is likely because Graf had previously been banned from insurance work in the state of California for misconduct in violation of state insurance laws.²

Evidence at trial nonetheless showed Graf was heavily involved in all facets of the corporation's operations. Between fall 2000 and December 2001 Graf, Kokott, and Hanson sold health care coverage to more than 20,000 people who joined health care benefit plans that Employers Mutual offered to members of the Trade Associations (the “Plans”). The Plans were designed as multiple employer welfare arrangements (“MEWAs”), which allow small businesses to band together to purchase health insurance for their employees at lower rates than the businesses could arrange individually.³ See 29 U.S.C. § 1002(40). According to promotional materials prepared by Graf, customers who joined the Trade Associations, which were loosely based around a number of industries, could obtain low-cost medical benefits through the Association's health benefits plan.⁴

Graf and Employers Mutual marketed the Plans to insurance agents, who in turn sold the Plans to individuals and employers. To convince the agents to purchase Employers Mutual's health care coverage, Graf misrepresented to insurance agents and the public that the Plans were insured through Sun Life of Canada, United Wisconsin Life Insurance Co., or Golden Rule Insurance Co. None of these companies ever insured Employers Mutual or any of the Plans. In making these misrepresentations, Graf ignored advice given by Employers Mutual's attorneys that the marketing of the Plans violated state and federal law.

In connection with his operation of Employers Mutual, Graf incorporated Colombia Health Network, Inc. (“Colombia”). Colombia was created to appear to be a preferred provider organization (“PPO”), an entity that contracts with doctors, hospitals, and other health care providers to arrange discounted payments for services for the PPO's customers. This allowed Graf and Hanson to funnel money from Employers Mutual into Colombia in exchange for services the company allegedly rendered to Employers Mutual. Colombia was actually a shell company designed to hide the diversion of approximately three-quarters of a million dollars in premiums paid to Employers Mutual. Graf and Hanson then used this money to purchase jewelry, a sports car, and a house.

In May 2001, Employers Mutual came to the attention of the Employee Benefits Security Administration of the U.S. Department of Labor (the “DOL”), which began investigating the company. Graf obstructed the DOL investigation in several ways. He told attorneys representing Employers Mutual to inform the DOL that the marketing of the Plans had ceased, even though Graf knew that to be false. He also told Employers Mutual employees to hide documents and information from DOL investigators conducting an on-site visit in October 2001. In response to DOL subpoenas to Colombia, Graf produced documents that purported to show that Colombia was a PPO, run by Hanson, that provided services to Employers Mutual. Graf knew this information to be false.

In December 2001, the DOL filed a civil suit in the District of Nevada to: (1) remove Graf and Kokott from Employers Mutual; (2) install an independent fiduciary to operate the company; and (3) freeze the assets of Employers Mutual, Graf, and Kokott. On December 13, 2001, the Nevada district court installed an independent fiduciary, Thomas Dillon, to run Employers Mutual, and froze the assets of, among others, Employers Mutual, the Trade Associations, Colombia, Graf, and Kokott.

During its year of operation, Employers Mutual collected about $14 million in payments from individuals and employers for medical coverage. Of that amount, only $1,749,725.63 was used to pay medical providers who treated patients covered by the Plans. The amount of unpaid claims as of December 10, 2001, was a little over $20 million.

That $20 million represents thousands of victims whose medical bills were not paid by Employers Mutual. People who had purchased health insurance expecting to receive benefits instead received collection notices. A kidney dialysis patient was unable to receive a kidney transplant because Employers Mutual refused to process the request or even pay for his required dialysis. A woman suffering from breast cancer almost had her life-saving chemotherapy cancelled, and her reconstructive surgery was postponed for over a year due to Employers Mutual's failure to pay her medical bills. Several victims testified that they were unable to receive health care from their regular doctors because of thousands of dollars in unpaid medical bills. Others had trouble renting homes because of their ruined credit.

B

Graf was indicted for his role in the Employers Mutual fraud on April 29, 2004. Dillon, the independent fiduciary, waived Employers Mutual's attorney-client privilege with regard to all communications between Employers Mutual and the company's legal counsel: (1) Hugh Alexander and Stephen Fitzsimmons, (2) Michael Connors, and (3) Ralph Agnello.⁵ Graf moved to exclude the testimony of these named attorneys,⁶ arguing that he was a joint holder of the attorney-client privilege and had not waived the privilege. The district court held a hearing on October 4, 2005, to hear testimony and argument regarding the privilege issue.

After the hearing, U.S. District Judge Margaret M. Morrow denied Graf's motion to exclude the attorneys' testimony in a thoughtful and considered twenty-five page order issued October 11, 2005. First, she determined that Graf did not have a personal attorney-client relationship with the named attorneys to support his assertion of privilege over the relevant testimony because he had not sought personal legal advice from the corporate attorneys. Second, Judge Morrow determined that Graf's subjective belief that Employers Mutual's attorneys represented him personally was insufficient to create a personal privilege because that belief was either unreasonable or was not manifested to those attorneys.

C

Graf's jury trial began on October 5, 2005. The government presented over 100 witnesses, including Fitzsimmons, Connors, and Agnello. Alexander did not testify. During his testimony, Connors twice mentioned that Graf's behavior with regard to Employers Mutual...