U.S. v. Lee

• Decision Date: 11 March 2009
• Docket Number: No. 06-3040.,No. 06-3029.,No. 06-3438.,06-3029.,06-3040.,06-3438.
• Citation: 558 F.3d 638
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Kenneth LEE and Myung O. Lee, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

558 F.3d 638

UNITED STATES of America, Plaintiff-Appellee, v. Kenneth LEE and Myung O. Lee, Defendants-Appellants.

No. 06-3029.

No. 06-3040.

No. 06-3438.

United States Court of Appeals, Seventh Circuit.

Argued January 9, 2008.

Decided March 11, 2009.

Michael F. Iasparro (argued), Joseph C. Pedersen, Office of the United States Attorney, Rockford, IL, for Plaintiff-Appellee.

Paul Flynn, Office of the Federal Defender Program, Chicago, IL, Haneef Omar (argued), Federal Defender Program, Rockford, IL, for Defendant-Appellant, Kenneth Lee.

Allen A. Ackerman (argued), Chicago, IL, Patrick A. Tuite, Arnstein & Lehr, Chicago, IL, Haneef Omar, Federal Defender Program, Rockford, IL, for Defendant-Appellant, Myung O. Lee.

Before WOOD, SYKES, and TINDER, Circuit Judges.

TINDER, Circuit Judge.

This case involves two defendants, Myung Ok Lee and Kenneth Lee.¹ The Lees are unrelated and were tried in separate cases consolidated here on appeal. While separate cases, they involve similar facts and overlapping legal issues. Both defendants were involved with "spas" which were fronts for prostitution businesses in the Rockford, Illinois area. Both were charged, in separate but similar two-count superceding indictments, with conspiracy to use interstate facilities in violation of 18 U.S.C. §§ 371 and 1952(a) as Count One and conspiracy to commit money laundering in violation of 18 U.S.C. § 1956(h) as Count Two. They were convicted, following jury trials, on both Counts, and they now appeal. The Lees make a joint argument concerning "proceeds" in challenging the money laundering conspiracy convictions, and they argue that identical errors occurred in both of their sentencing calculations. Mr. Lee independently argues that there was insufficient evidence with respect to his membership in the conspiracies in both Counts, and Ms. Lee contests the admission of witness Anna Kim's allegedly "unfairly prejudicial" testimony in her trial.

I. Background

The spas and prostitution businesses with which the Lees were involved were all operated in the same manner. Upon arrival, customers would pay the receptionist an entrance fee for a massage. This would be recorded in the spa's "books." After making special arrangements in the individual "massage" rooms, customers could then pay an additional fee directly to a "masseuse" for sex acts. The masseuses would record these exchanges in the books but with a missing zero—thus, an additional $200 was recorded as $20. Some customers would pay these extra fees and/or the entrance fees with credit cards. The cards were swiped through credit card machines connected to interstate telephone facilities to receive payment authorization. These funds were deposited into business checking accounts. The masseuses split the prostitution profits with the owners/operators 50/50, with the masseuses' portion usually taken out of the available cash. The funds deposited in the business accounts were used to pay for various business and promotional expenses, including utilities, rent, and advertising.

Mr. Lee was involved in two spas—the Pine Tree Spa and the Paradise Health Spa. Young Ja Hwang was in charge of both businesses, Pine Tree between June 2002 and October 2003, and Paradise between January 2004 and February 2005. Eun Sook Choi, Hwang's sister-in-law, served as a front for the business, signing the building leases and serving as the signatory on the Paradise bank account. Mr. Lee, who was romantically involved with Hwang, assisted in the operation of these massage parlors. He often translated for her and other employees who spoke Korean. He also did construction work and maintenance on the businesses' premises and was involved with obtaining licenses and massage permits for the spa. Mr. Lee would also frequently send postal money orders on behalf of the masseuses. More details of his involvement are discussed below.

Ms. Lee owned and operated the Tokyo Oriental Health Spa as a front for a prostitution business between December 2002 and February 2005. She ran the day-to-day operations including paying the bills, arranging advertising, hiring masseuses, and so forth. Ms. Lee's co-defendant, Mia Deboer, did the cooking and cleaning and collected money from the masseuses when Ms. Lee was out of town.

In both cases the use of the credit card machines and interstate telephone facilities to promote the prostitution businesses served as the basis for the convictions under 18 U.S.C. §§ 371 and 1952. The payments out of the business checking accounts were used to establish the money laundering violations.

II. "Proceeds"

Both Ms. Lee and Mr. Lee challenge their convictions under the money laundering statute. They argue that under the term "proceeds"—meaning "net" rather than "gross" as outlined in our circuit cases Scialabba and Santos and recently affirmed by the Supreme Court²—there was insufficient evidence for conspiracy to commit money laundering. In reviewing for sufficiency of the evidence, we consider the evidence in the light most favorable to the government, drawing all reasonable inferences in the government's favor. United States v. Morris, 498 F.3d 634, 637 (7th Cir.2007). We will reverse only if a rational trier of fact could not have found the essential elements of the crime beyond a reasonable doubt. United States v. Malone, 484 F.3d 916, 920 (7th Cir.2007).

The evidence used by the government at both trials to establish the money laundering violations focused on expenditures made out of the business checking account for each spa. Records were also introduced from the publications in which the spas advertised. At both trials, Mr. Murray, an IRS accountant, testified regarding the checking accounts and provided a summary of the withdrawal activity. The funds in these accounts consisted, in large part, of the deposits from the credit card payments by massage parlor customers. From the summaries, it appears that a substantial portion of the funds in the business checking accounts was spent on advertising, and in Mr. Lee's case there was also evidence that Mr. Lee told FBI Agent David Childre in a recorded conversation that they spent about $18,000 a month on advertising. Other payments out of the accounts included rent, phone bills, and some wages.

The relevant language from the money laundering statute is as follows:

(a)(1) Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity—(A)(i) with the intent to promote the carrying on of specified unlawful activity . . .; or (B) knowing that the transaction is designed in whole or in part—(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity . . . shall be sentenced . . . .

18 U.S.C. § 1956(a)(1). Here the defendants were prosecuted under subpart (a)(1)(A) for promotion, rather than under (B) for concealment. Accordingly, to make its case, the government had to show that the defendants were in fact part of the conspiracy to launder money,³ and that the defendants "(1) conducted a financial transaction with the proceeds of an illegal activity; (2) knew the property represented illegal proceeds; and (3) conducted the transaction with the intent to promote the carrying on of the unlawful activity." Malone, 484 F.3d at 920 (quoting United States v. Febus, 218 F.3d 784, 789 (7th Cir.2000)).

Under the first prong, the payments out of the business checking accounts clearly meet the definition of "financial transaction." It is also clear, since the credit card prostitution fees were deposited into the accounts, that the money was from an "illegal activity." (No one contests that the "extras" offered by the masseuses amounted to illegal prostitution under Illinois law.) It is equally obvious under the third prong, that the advertising purchases promoted the carrying on of the use of interstate telephone facilities in aid of the commission of illegal prostitution operations. "[T]he promotion element can be met by `transactions that promote the continued prosperity of the underlying offense' . . . ." Malone, 484 F.3d at 921 (quoting Febus, 218 F.3d at 790); see also Santos v. United States, 461 F.3d 886, 893 (7th Cir.2006) (explaining that reinvesting net income to promote the carrying on of the criminal operation constitutes money laundering) aff'd, United States v. Santos, ___ U.S. ___, 128 S.Ct. 2020, 170 L.Ed.2d 912 (2008). Purchasing advertising inherently promoted the prosperity of the underlying offense. The government also alleges that the "future rent" payments out of the account also amounted to money laundering. Those payments clearly satisfy the requirement that the transactions were made with the intent to promote the carrying on of the underlying illegal operation as well. See Malone, 484 F.3d at 921 ("[A]t least some activities that are part and parcel of the underlying offense can be considered to promote the carrying on of the unlawful activity."); see also Febus, 218 F.3d at 790.

The more difficult issue before us is whether the government established that the transactions involved illegal "proceeds." We spoke at great length on the meaning of the statutory term "proceeds" in Scialabba and Santos. In Scialabba the underlying business enterprise was an illegal coin gambling business. Scialabba, 282 F.3d at 475-76. Participants put coins into gaming machines and then received onscreen credits if they won. They could continue to play with these credits or redeem them at retail outlets for cash. Id. The acts in question, for laundering purposes, were giving some of the money in the coin boxes to the outlets' owners and spending some of the money to meet business expenses like leasing the video machines and obtaining licenses. Id. We found, relying...