U.S. v. Shellef

Citation732 F.Supp.2d 42
Decision Date05 August 2010
Docket NumberNo. 03-CR-0723 (JFB)(ETB),03-CR-0723 (JFB)(ETB)
PartiesUNITED STATES of America v. Dov SHELLEF, Defendant.
CourtU.S. District Court — Eastern District of New York

James B. Nelson and Mark W. Kotila, United States Department of Justice, Washington, DC, for the Government.

Henry E. Mazurek, Weinstein & Mazurek PLLC, and Jane Anne Murray, Law Office of Jane Anne Murray, New York, NY, for the Defendant.

MEMORANDUM AND ORDER

JOSEPH F. BIANCO, District Judge.

Defendant Dov Shellef (hereinafter "defendant" or "Shellef") was convicted following a jury trial on all counts of an 86-count indictment, alleging: conspiracy to defraud the government, 18 U.S.C. § 371; filing a false tax return, 26 U.S.C. § 7206(1); wire fraud, 18 U.S.C. § 1343; and money laundering, 18 U.S.C. §§ 1956(a)(1)(A)(i), (a)(1)(A)(ii), (a)(1)(B)(i). All of the charges relate to a scheme by defendant to avoid paying excise taxes on CFC-113, an industrial chemical. Before the Court is defendant's motion for a judgment of acquittal under Rule 29 of the Federal Rules of Criminal Procedure or for a new trial under Rule 33. For the reasons set forth below, defendant's Rule 29 motion is granted in part and denied in part. Specifically, the Court concludes that the evidence was insufficient to support the conviction on the money laundering charged in Counts 46-50, 52-63, 65-68, 70-75, and 77-82 because the counts were duplicative of several wire fraud counts and the evidence was insufficient to show that those transactions involved the proceeds of earlier unlawful activity. The evidence was sufficient to support the jury's verdict on all of the other counts, and defendant's motion, therefore, is denied in all other respects. Defendant's motion for a new trial under Rule 33 is denied.

As set forth in more detail below, CFC-113 is a highly regulated industrial chemical. The manufacturer of that chemical is required to pay excise taxes on sales of the material unless: (1) the material is sold for export, or (2) the material is recycled or "reclaimed." In Count One of the Indictment, Shellef is charged with conspiring to defraud the United States with respect to the collection of excise taxes on CFC-113. There was evidence presented at trial that Shellef agreed with coconspirator William Rubenstein (hereinafter "Rubenstein") to avoid paying excise taxes on CFC-113 that they had purchased from two manufacturing companies, Elf Atochem and Allied Signal. Although the material was purchased tax-free for export, Shellef and Rubenstein eventually worked together to sell the material domestically without telling the manufacturers or paying the excise taxes themselves. For the reasons set forth below, the evidence was sufficient to support the jury's verdict of guilty on Count One.

In Count Two of the Indictment, Shellef is charged with willfully filing a false tax return under 26 U.S.C. § 7206(1). There was evidence presented at trial that Shellef did not report as income on his company's 1999 tax return any of the money received on the domestic sales of Allied Signal CFC-113. Although he provided his accountant with various records to aid in the preparation of the return, he did not disclose to his accountant any of this income, nor did he disclose to his accountant that he had certain bank accounts that held this income. Thus, the Court concludes that the evidence was sufficient to support the jury's verdict of guilty on Count Two.

In Counts 3-45 of the Indictment, Shellef is charged with wire fraud in connection with his purchase of CFC-113 from Allied Signal. The contract between Shellef and Allied provided that Shellef was to export the material to a designated area. Because the material was sold for export, Allied Signal did not charge Shellef withthe cost of any excise taxes. The contract provided, however, that if any unanticipated taxes became due, Allied Signal had the right to collect the amount of those taxes from Shellef. In November 1998, Shellef reaffirmed his obligation to export the material, even though he had already begun selling the material domestically and continued to do so. There was evidence presented at trial that Shellef never told Allied about the domestic sales and never paid the taxes himself. For the reasons set forth below, the evidence was sufficient to support the jury's verdict of guilty on Counts 3-45.

Finally, Shellef was charged with multiple counts of money laundering in Counts 46-86. However, the financial transactions charged as money laundering in Counts 46-50, 52-63, 65-68, 70-75, and 77-82 are also charged as wire fraud in earlier counts of the Indictment. Defendant argues that these alleged money laundering transactions did not, by definition, involve the proceeds of unlawful activity because those same transactions were alleged to generate the unlawful proceeds in the first place. For the reasons set forth below, the Court agrees with defendant and concludes that the evidence was insufficient to support the conviction of defendant on these counts. The remaining money laundering charges, Counts 51, 64, 69, 76, and 83-86, involve placing the proceeds of earlier wire fraud into bank accounts, including foreign bank accounts, about which Shellef did not tell his accountant. Shellef did not report any of the money involved in these transactions in his company's 1999 corporate tax return. Because there was sufficient evidence for the jury to rationally conclude that Shellef engaged in these transactions with the purpose of concealing the attributes of the funds involved and with the purpose of committing tax fraud, the Court denies defendant's motion with respect to these counts.

The Court also concludes that none of the alleged errors at trial, whether taken individually or collectively, warrant a new trial under Rule 33.

I. Background
A. The Trial Evidence

Familiarity with the trial record is presumed. The Court summarizes the evidence relevant to the instant motion infra in connection with discussion of the specific counts of the Indictment. Because all of the counts relate to the collection of excise taxes on CFC-113, the Court briefly describes here the regulatory framework for that chemical. As the Second Circuit has explained:

CFC-113 is a highly regulated, ozone depleting industrial solvent commonly used to remove grease from metal. Global regulation of CFC-113 began in earnest following the ratification of the Montreal Protocol on Substances that Deplete the Ozone Layer (the "Montreal Protocol") in 1987.... Pursuant to the Montreal Protocol, Congress sharply limited American production of CFC-113 as part of the Clean Air Act, 42 U.S.C. §§ 7401 et seq. The Act implemented a phased ban ... of the "production and consumption" of the substance in the United States. See 42 U.S.C. § 7671c. Previously stockpiled CFC-113 could, however, still lawfully be used in the United States. As an incentive for discontinuance of such use, Congress imposed an excise tax on any CFC-113 "sold or used by the manufacturer ... thereof." See 26 U.S.C. § 4681(a)(1) (imposing a tax on sales of ozone-depleting chemicals); 26 U.S.C. § 4682(a)(2) (including CFC-113 within the definition of ozone-depleting chemicals).

United States v. Shellef, 507 F.3d 82, 89 (2d Cir.2007).

There are two exceptions to the application of the excise tax that are relevant to this case. First, the excise tax does not apply to "sale[s] by the manufacturer or producer of [CFC-113] for export, or for resale by the purchaser to a second purchaser for export." 26 U.S.C. § 4662(e)(1)(A). In order to qualify for the export exemption, parties must meet various procedural requirements, which are discussed in more detail infra. Typically, when a manufacturer sells CFC-113 to a purchaser who plans to sell the material domestically, the manufacturer pays the excise tax and passes that cost on to the purchaser. (1/11/10 Trial Transcript (hereinafter "Tr.") 1579-80.) 1

Second, the excise tax does not apply to CFC-113 that has been "diverted or recovered in the United States as part of a recycling process (and not as part of the original manufacturing or production process)." 26 U.S.C. § 4682(d)(1). The tax code does not define the phrase "recycling process." The industry generally refers to CFC-113 that has been used and is then recycled as "reclaimed." ( See, e.g., 12/15/09 Tr. 104-05; 12/22/09 Tr. 884.) The industry generally refers to CFC-113 that has never been used as "virgin." ( See, e.g., 12/15/09 Tr. 102-04; 12/22/10 Tr. 868.)

B. Procedural History

Defendant was initially charged in a 91-count indictment on June 24, 2003. Following a jury trial in June-July 2005 before the Honorable Joanna Seybert, United States District Judge, defendant was convicted, along with co-defendant William Rubenstein, of all counts. Both Shellef and Rubenstein appealed their convictions. The Second Circuit held that certain tax charges against Shellef were improperly joined with the other charges against both defendants under Rule 8 of the Federal Rules of Criminal Procedure. See United States v. Shellef, 507 F.3d 82, 88 (2d Cir.2007). The Second Circuit also held that the joinder of Shellef and Rubenstein as defendants was improper. See id. 2 Familiarity with that decision is presumed.

The case was remanded to the district court on March 5, 2008, and was reassigned to the Honorable Thomas C. Platt, Senior United States District Judge. On June 17, 2009, the case was reassigned to the undersigned. The Indictment was reduced to 86 counts to eliminate the portions of the Indictment rejected by the Second Circuit. ( See Govt. Letter, Dec. 31, 2009, Dkt. 384.) The Court denied defendant's motion to dismiss the Indictment.

A five-week jury trial was held beginning on December 15, 2009 on the 86-count Indictment. The government introduced numerous documents as well as testimony from several witnesses. Pursuant to a plea agreement executed after the Second Circuit's decision in this case, defendant's coconspirator, ...

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