U.S. v. Pharis

• Decision Date: 26 July 2002
• Docket Number: No. 00-2855.,00-2855.
• Citation: 298 F.3d 228
• Parties: UNITED STATES of America, Appellant, v. David M. PHARIS; Edward J. Habina; William M. Dull; Harry Gangloff.
• Court: U.S. Court of Appeals — Third Circuit

298 F.3d 228

UNITED STATES of America, Appellant, v. David M. PHARIS; Edward J. Habina; William M. Dull; Harry Gangloff.

No. 00-2855.

United States Court of Appeals, Third Circuit.

Argued May 31, 2001.

Reargued En Banc February 13, 2002.

Filed July 26, 2002.

As Amended September 30, 2002.

COPYRIGHT MATERIAL OMITTED

Michael R. Stiles, United States Attorney, Walter S. Batty, Jr., Robert A. Zauzmer (argued), Amy L. Kurland, Kathleen Rice, Assistant United States Attorneys, Philadelphia, PA, for appellant.

Peter Goldberger (argued), Law Office of Peter Goldberger, Ardmore, PA, for appellee David M. Pharis, John Rogers Carroll, Ellen C. Brotman, Carroll & Carroll, Philadelphia, PA, Thomas A. Bergstrom, Malvern, PA, for appellee William M. Dull, Thomas Colas Carroll, Carroll & Cedrone, Philadelphia, PA, for appellee, Harry Gangloff, John W. Morris, Philadelphia, PA, for appellee, Edward J. Habina.

Argued May 31, 2001.

Before: SLOVITER, FUENTES and COWEN, Circuit Judges.

Reargued En Banc February 13, 2002.

Before: BECKER, Chief Judge, SLOVITER, MANSMANN,^* SCIRICA, NYGAARD, ALITO, ROTH, McKEE, RENDELL, BARRY, AMBRO, FUENTES and COWEN, Circuit Judges.

Filed July 26, 2002.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

After the jury for this federal criminal case had been sworn, after two witnesses had testified, and after the testimony of a third witness had been stipulated, the Government filed a notice of appeal from an adverse ruling by the District Court. The issue before us is whether we can hear its appeal.

I. FACTS AND PROCEDURAL BACKGROUND

On November 23, 1999, a federal grand jury returned a six-count indictment charging that from January 1988 until June 1995 David Pharis, Edward Habina, William Dull, and Harry Gangloff (Defendants) committed mail fraud, in violation of 18 U.S.C. § 1341 (2001), by inflating consulting bills that they submitted to insurance companies. Defendants' business, S.T. Hudson International, Inc., and its affiliates specialized in providing services to insurance companies which had large influxes of claims following disasters. Pharis was the CEO and president of Hudson, Habina the vice president, Dull an associate, and Gangloff a computer consultant.

According to the indictment, Defendants began their fraudulent scheme in 1989 by manually changing consulting bills. Specifically, the indictment alleged that starting in 1989 and continuing until February 1994, Pharis, Habina, and Dull "manually changed, or instructed their employees to manually change, the `pre-bills' that accurately reflected the consultants' billings, by inflating the number of hours the consultant worked." App. at 14. The indictment further alleged that in February 1994, Pharis directed Gangloff to develop a computerized billing program, known as the "gooser," that automatically multiplied the hours each consultant worked by a factor of 1.15 and then added an additional half hour to the total hours billed. App. at 15. In payment of bills produced by this computer program, Hudson's clients mailed to Hudson the six checks that form the basis for the Government's charge of mail fraud.

The trial was scheduled to start on Monday, September 25, 2000. When the Government filed its trial memorandum on Wednesday, September 20, it included a motion in limine seeking to offer, under either Federal Rule of Evidence 402 or 404(b), evidence of an incident of uncharged misconduct by Dull (specifically, the wrongful retention of a client's over-payment) that appears to be unrelated to the alleged inflation of any client's bill. On Friday, September 22, Habina responded in opposition to the Government's in limine motion, arguing that the proposed evidence was "utterly irrelevant." App. at 47. That motion was among the matters addressed in the order entered by the District Court on September 26, 2000 and was denied. The Government does not press that matter on appeal.

Also on Friday, September 22, Pharis filed a Joint Trial Motion to Redact Indictment and Motion In Limine No. 1 (hereafter "Motion to Redact"), accompanied by a supporting memorandum of law from all Defendants. In that memorandum, Defendants argued that the Government exhibits revealed that there were really two separate schemes — the manual billing scheme which ended in February 1993 and the computerized billing scheme which began in February 1994. Defendants claimed that the schemes differed in methodology, scope, and participants, that the statute of limitations barred criminal liability for the manual billing scheme, that there was no federal jurisdiction alleged as to that manual billing because there were no related mailings alleged and that only the computerized billing scheme was actionable as federal mail fraud. The motion, which specifically alleged that the Government was improperly charging two separate fraud schemes, requested that the District Court redact from the indictment all references to the earlier scheme and exclude all evidence relating to it or, in the alternative, that the court direct the Government to show the admissibility of such evidence under Rule 404(b) by demonstrating that the probative value of the pre-1994 evidence was substantially greater than its prejudicial effect. Defendants sought by their Motion to Redact to preclude the Government from presenting any evidence about the manual changes to bills that occurred from 1989 to February 1994, a period that covers all but roughly a year and a half of the time described in the indictment.

On Monday, September 25, the Government responded to the Motion to Redact, defending the indictment's allegation of a single scheme. The jury was sworn in that afternoon.

On Tuesday, September 26,¹ after the jury had been given preliminary instructions but before opening statements in the trial, the District Court granted Defendants' Motion to Redact. In its memorandum, the District Court, in addressing the Government's motion regarding the evidence of Dull's wrongful retention of a client's overpayment, discussed the circumstances under which evidence of uncharged misconduct could be admitted pursuant to Rule 404(b). Interspersed with the District Court's discussion of that evidence were comments more pertinent to the issue raised by the Defendants' Motion to Redact. Thus, the court stated, "Here, the Government seeks to introduce evidence of acts allegedly occurring between 1989 and February 1994." United States v. Pharis, No. 99-CR-743, slip op. at 3, 2000 WL 1469330 (E.D.Pa. filed Sept. 26, 2000) [hereinafter Sept. 26 order].

After additional comments on the wrongfully retained payment, the court then shifted to a discussion of the scope of the federal mail fraud statute, stating that the statute reaches "only those limited instances in which the use of the mails is part of the execution of the fraud." Id. at 3-4. The court, noting that "`[t]he mailings in this case are checks that customers sent to Hudson in payment for Hudson's services'" and that "`[t]he scheme was not complete until Hudson received the fruits of the scheme, that is, the checks,'" concluded that inasmuch as all six counts in the indictment relate to mailings in 1994 and 1995, those "acts relating to conduct other than that alleged in the indictment constitute other acts that do not demonstrate violations of the mail fraud statute, but show other acts of Defendants' bad character." Id. at 4 (quoting Government's in limine motion) (first alternation in original). This led the District Court to hold that evidence of such other acts was inadmissible under Rule 404(b) and to conclude, after performing the balancing test required under Rule 403, that the probative value of such evidence was substantially outweighed by the danger of unfair prejudice. Id. at 5.

After the District Court granted Defendants' motion, Government counsel, prior to delivering her opening statement, requested a sidebar conference for clarification of the court's order. The court denied this request. Counsel then presented her opening statement and called a witness. During this testimony, the District Court reiterated that the Government would not be permitted to prove any acts of altering of bills prior to 1994. App. at 174-76. After the Government's first witness, the court recessed until the following morning.

On September 27, the day after the District Court's original ruling was announced but before the trial continued, the Government filed a motion for reconsideration. In that motion the Government made essentially the same arguments it has raised before us on appeal. The District Court declined the Government's request for a continuance until the motion for reconsideration was ruled upon. The Government proceeded to call another witness and the parties agreed to a stipulation about the testimony of a third witness.

The following day, September 28, in rejecting the motion for reconsideration, the District Court again quoted Rule 404(b) at length, said the manually changed bills were a "collection of uncharged bad acts... [that are] utterly unrelated to the offenses which are charged," United States v. Pharis, No. 99-CR-743, slip op. at 3 (E.D.Pa. Sept. 28, 2000) [hereinafter Sept. 28 order] (emphasis added), and held those "prior bad acts" to be inadmissible. Id. at 4-5. And again, citing Rule 403, the District Court, using the language of Rule 404(b), repeated that, although the evidence could be used to show Defendants' "motive, intent, plan, scheme or course of conduct," the probative value of the evidence was substantially outweighed by the danger of unfair prejudice. Id. at 3-4. The Court concluded:

To the extent to which the Court's prior Order intimated that it redacted the indictment, the Court now clarifies its prior order. First, the Court based its decision to bar admission of any evidence during the period 1989 to 1992 on the basis of Federal Rules of Evidence 403, rather than on any authority to redact the...