U.S. v. Paladino

• Decision Date: 25 February 2005
• Docket Number: No. 03-2296.,No. 03-2383.,No. 04-2378.,No. 04-2339.,No. 04-1951.,No. 03-2386.,03-2296.,03-2383.,03-2386.,04-1951.,04-2339.,04-2378.
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Robert D. PALADINO, et al., Defendants-Appellants. United States of America, Plaintiff-Appellee, v. Randy Velleff, Defendant-Appellant. United States of America, Plaintiff-Appellee, v. John Peyton, Defendant-Appellant. United States of America, Plaintiff-Appellee, v. Darrell Turner, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

401 F.3d 471

UNITED STATES of America, Plaintiff-Appellee, v. Robert D. PALADINO, et al., Defendants-Appellants.

United States of America, Plaintiff-Appellee, v. Randy Velleff, Defendant-Appellant.

United States of America, Plaintiff-Appellee, v. John Peyton, Defendant-Appellant.

United States of America, Plaintiff-Appellee, v. Darrell Turner, Defendant-Appellant.

No. 03-2296.

No. 03-2383.

No. 03-2386.

No. 04-1951.

No. 04-2339.

No. 04-2378.

United States Court of Appeals, Seventh Circuit.

Argued February 14, 2005.

Decided February 25, 2005.

COPYRIGHT MATERIAL OMITTED

Jeffrey P. Singdahlsen (argued), Department of Justice, Criminal Division, Appellate Section, Washington, DC, for U.S. in No. 03-2296.

Kathleen Felton, Department of Justice, Office of the General Counsel, Washington, DC, Jeffrey P. Singdahlsen (argued), Department of Justice, Criminal Division, Appellate Section, Washington, DC, for U.S. in Nos. 03-2383, 03-2384, 03-2385, 03-2386.

David E. Bindi (argued), Michael Lang, Office of the U.S. Attorney, Chicago, IL, for U.S. in No. 04-1951.

K. Tate Chambers, Bradley W. Murphy, Thomas A. Keith (argued), Office of the U.S. Attorney, Peoria, IL, for U.S. in No. 04-2339.

William T. Grimmer (argued), Office of the U.S. Attorney, South Bend, IN, for U.S. in No. 04-2378.

Patrick W. Blegen (argued), Thomas A. Durkin, Durkin & Roberts, Chicago, IL, for Defendant-Appellant Robert D. Paladino.

Patrick J. Hanley (argued), Covington, KY, for Defendant-Appellant Monica Iles.

Gerald J. Collins (argued), Chicago, IL, for Defendant-Appellant Randall W. Law.

Kaaren M. Plant (argued), Chicago, IL, for Defendant-Appellant Daniel B. Benson.

Michael J. Levinsohn, Holzman & Levinsohn, Chicago, IL, for Defendant-Appellant Frank L. Peitz.

Donna Hickstein-Foley (argued), Foley & Foley, Chicago, IL, for Defendant-Appellant Randy Velleff.

George F. Taseff (argued), Office of the Federal Public Defender, Peoria, IL, for Defendant-Appellant John Peyton.

Mark S. Lenyo (argued), South Bend, IN, for Defendant-Appellant Darrell Turner.

Before POSNER, WOOD, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge.

We have consolidated for decision several criminal appeals, argued the same day, all of which present the key issue left open by the Supreme Court's decision in United States v. Booker, ___ U.S. ___, 125 S.Ct. 738, ___ L.Ed.2d ___ (2005) — the application of the plain-error doctrine to appeals from sentences rendered under the federal sentencing guidelines before the Supreme Court ruled that they are advisory rather than mandatory. Three of the cases present nonsentencing issues as well, and we begin with them.

Paladino and his codefendants were convicted by a jury of a variety of federal crimes arising out of a scheme to defraud investors that succeeded in fleecing $11 million from the victims. The scheme had two stages, but only the second, which lasted from 1995 to 1997, generates nonsentencing issues. Defendant Iles, whose function was to recruit the investors, to whom she promised absurd returns — more than 100 percent per week for at least 40 weeks — made a variety of false representations. The one most significant to her appeal is that she and James Wardell (who died before he could be indicted) were reputable and experienced investment advisors. In fact Iles had pleaded guilty to federal fraud charges in 1988 and the following year had been banned by the SEC from ever associating with members of the securities industry, while Wardell had been convicted in a state court of theft by fraud in 1975, and in 1972 had consented to an SEC order forbidding him to violate federal securities laws in the offer and sale of stock in a corporation in which he had been involved. The government was permitted to present all these prior "bad acts" to the jury, and also to argue that Iles knew about Wardell's conviction and SEC bar order, though all Wardell had told her, when she informed him of her own SEC bar order, was that he, too, had had problems with the SEC.

Rule 404(b) of the Federal Rules of Evidence forbids the use of evidence of a defendant's history of illegal or unethical acts to prove that he is a person of bad character and likely therefore to have committed the crime of which he is accused in the present case, or perhaps some other, undetected crime for which he should be punished. The government argues that it presented the evidence of Iles's and Wardell's bad acts for the innocent reason that those acts were so "inextricably intertwined" with the conduct of which the defendants were accused in this case that the jury needed to know the bad acts in order to form a complete picture of that conduct. United States v. Spaeni, 60 F.3d 313, 316 (7th Cir.1995); United States v. Ramirez, 45 F.3d 1096, 1102-03 (7th Cir.1995). Such evidence can be proper to enable the jurors to make sense of the evidence pertaining to the criminal activity of which the defendant is currently accused, United States v. Gibson, 170 F.3d 673, 682 (7th Cir.1999), and to avoid puzzling them by making them think that facts important to their understanding of the case are being concealed. But those were not problems here. If the jurors never heard anything about Iles's and Wardell's previous legal troubles, it would not have occurred to them that they were missing anything or have made any of the other evidence in the case unintelligible.

The government's fallback position is stronger — that Iles's failure to disclose Wardell's and her histories was a part of the scheme. But the government overreaches by arguing that anyone who solicits an investment is required, on pain of criminal liability for failing to do so, to disclose any previous conviction for fraud, or for that matter anything else that might give an investor cold feet. If asked by the investor about such things, the solicitor would have to give a truthful answer or be guilty of fraud. E.g., United States v. Tadros, 310 F.3d 999, 1006 (7th Cir.2002); United States v. Ross, 77 F.3d 1525, 1543 (7th Cir.1996); United States v. Kinney, 211 F.3d 13, 17-19 (2d Cir.2000). But to fail to volunteer such information would be fraud only if potential investors would assume that someone soliciting an investment would disclose such a history. We doubt that that would be a reasonable assumption, and in any event the government has made no effort to argue that it would be or to provide cases that support its expansive notion of fraud.

It is true that a fiduciary (which Iles was, as we'll see when we come to the sentencing issues) is required to disclose facts material to his principal, e.g., Carr v. CIGNA Securities, Inc., 95 F.3d 544, 547-48 (7th Cir.1996); United States v. Szur, 289 F.3d 200, 211-12 (2d Cir.2002), and true too that materiality implies merely that disclosure would make a difference to the principal's decision, Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976); Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 180 (2d Cir.2001), and that most principals if they learned that their fiduciary had been convicted of fraud would tell him to take a walk. But pushed to its logical extreme, this reasoning would have required Iles to preface every conversation with a customer with a detailed recitation of everything in her personal history that might alarm or discourage him, on pain of criminal punishment if she intentionally left something out. It would also make a person who had ever been convicted of fraud a leper in the investment business, even if she had not been barred from the industry.

We need not pursue this issue; for what is incontestable is that Iles's history is evidence that the representations she made to potential investors really were misleading. She had represented to them that she was both reputable and experienced and by doing so had implied that she had a clean record, and certainly that she had not been barred from the securities business for life almost a decade earlier, after being convicted of criminal fraud. What made the representation misleading was precisely her history; that history was therefore direct evidence of guilt rather than evidence merely of bad character. United States v. Polichemi, 219 F.3d 698, 709-10 (7th Cir.2000).

The judge should not, however, have permitted the evidence of Wardell's legal troubles to come in without evidence that Iles actually knew about them. All Wardell told her was that he had had problems with the SEC. Many members of the securities business have had problems with the SEC that did not result in their being barred from the business. The SEC does not bring remedial proceedings against everyone whom it investigates and it does not prevail in all the proceedings that it does bring. Anyone who had to defend himself against the agency would acknowledge having had problems with it even if he had been exonerated. The judge's error, however, was harmless, because the evidence against Iles, especially in light of our conclusion that her own previous fraud judgments were properly placed before the jury, was compelling.

Defendant Paladino complains that he was forced to take the stand by an erroneous evidentiary ruling. He had been deposed years earlier in an SEC proceeding, and in the criminal trial the judge allowed the government to present a severely cropped version of the deposition in an effort to demonstrate his guilty knowledge. Some of the deletions were required in order to protect the rights of the other defendants, see Bruton v. United States, 391 U.S. 123, 88 S.Ct. 1620, 20 L.Ed.2d 476 (1968), but not all. An issue of great importance to Paladino's guilt or innocence was whether he knew that money in a certain account was money of investors ("invested money" or "investment money") — which as soon as it was received was checked out to him and the other defendants without ever...