U.S. v. Stein
| Decision Date | 12 October 2007 |
| Docket Number | No. S1 05 Crim. 0888(LAK).,S1 05 Crim. 0888(LAK). |
| Citation | 521 F.Supp.2d 266 |
| Parties | UNITED STATES of America, v. Jeffrey STEIN, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Rita Marie Glavin, Jonathan Samuel Kolodner, U.S. Atty's Office, S.D.N.Y., Glen Garrett McGorty, John Michael Hillebrecht, U.S. Atty., S.D.N.Y., New York City, for plaintiff.
John B. Harris, Stillman, Friedman & Schechtman, P.C., New York City, for KPMG L LP.
Defendants are charged with conspiring to defraud the United States and multiple counts of tax evasion based on a series of allegedly fraudulent tax shelters. The background of this case is fully set forth in the Court's prior opinions, familiarity with which is assumed.1
The government seeks to introduce in the trial of the four remaining defendants, pursuant to Fed.R.Evid. 404(b), "other act" evidence relating to (1) uncharged tax shelters, (2) side payments from defendants Larson and Pfaff to defendant Ruble, and (3) personal tax evasion by Messrs. Ruble, Pfaff, and Greenberg.2 As the proponent of the evidence, the government has the burden of establishing admissibility.3
As an initial matter, it is important to understand the context in which the government seeks to offer this other act evidence.
This, according to the government, is the largest criminal tax case in U.S. history. Although the case has been dismissed as to thirteen defendants, and the government will not press nineteen counts of the indictment against the remaining defendants, four defendants await trial on twenty-seven counts.4 The government proposes to call approximately 70 witnesses and to offer over 1,200 exhibits consisting of over 128,000 pages. Its most recent estimate is that its case-in-chief will take approximately three months to present. The defendants estimate that they will need forty percent or more again for their cases-in-chief and cross-examination. No one has addressed the duration of any rebuttal case or the time needed for opening statements and closing argument. We thus are on the threshold of a trial of at least four and quite possibly five or more months' duration.
The subject matter at issue is complex. The indictment revolves around four different tax shelters called FLIP ("Foreign Leveraged Investment Program"), OPTS ("Offshore Portfolio Investment Strategy"), BLIPS ("Bond Linked Issue Premium Structure"), and SOS ("Short Option Strategy"), each of which allegedly employed sham transactions to generate phony tax losses.5 In order to evaluate the evidence, it appears that the jury will be called upon to understand complex structures and documents and probably to resolve difficult questions as to the economic realities of the transactions. Compounding this difficulty will be the fact that the government maintains that legal opinion letters with respect to the likelihood that these transactions would pass IRS scrutiny were fraudulent in that, among other things, they failed accurately to portray the transactions as they in fact were implemented. The jury therefore will be called upon to resolve difficult questions as to the correspondence, or lack thereof, between the factual premises of allegedly fraudulent tax opinions and the underlying facts of the transactions.
Indeed, the government in substance has acknowledged the complexity of the evidence involved in proving these transactions. The Court is in the process of sealed Curcio6 proceedings to address issues raised in relation to a cooperating witness. In the course of those proceedings, the government produced a document purporting to recount statements made (a) to two Assistant United States Attorneys [AUSAs] not previously involved in the intricacies of this case (b) by the witness (c) about statements the witness made at an earlier meeting with certain attorneys (d) that described, perhaps among other things, BLIPS or aspects of BLIPS. In substance, the document indicates that the witness told the two AUSAs that he described the transactions at the earlier meeting in a manner that, the government suggests, demonstrated that the transactions were shams, although it is not suggested that the witness used that word.7 The government now, however, says that this is not what the witness told the AUSAs, It explained this inconsistency by stating in essence that the two AUSAs misunderstood what the witness told them because they did not understand the transactions sufficiently to comprehend what the witness in fact now is said to have told them:
8
Surely if two experienced AUSAs could not get the transactions straight, the risk of juror confusion is obvious.
Against that background, the Court proceeds to consider the government's other act evidence.
1. The government argues that evidence relating to uncharged tax shelters is admissible to show knowledge or intent. To carry its burden of establishing admissibility, the government must explain the uncharged transactions, identify similarities between the charged and uncharged transactions, and articulate how the similarities identified support an inference of knowledge or intent.9 At the initial oral argument on this motion, the Court made clear that the government had not carried its burden,10 it nonetheless gave it an opportunity to submit additional briefing. But even this second round of briefing offered only imprecise explanations of why the uncharged transactions were fraudulent and cursory assertions of alleged similarities. And while the record is very sketchy, it is reasonably clear that the uncharged and charged transactions differ in many respects that undermine any inference of intent or knowledge.11
Even if the government had carried its burden under Rule 404(b), Rule 403 considerations counsel exclusion. This evidence risks confusion of the issues and undue delay in a trial that promises to be complex and lengthy even in the absence of any Rule 404(b) evidence. The government attempts to minimize the prejudicial effect of this evidence by arguing that proof of the uncharged shelters would be simple and short.12 But the government is unduly optimistic. It could not avoid tackling the complicated task of explaining the transactions because its probative value, if any, would be contingent upon establishing sufficient similarity.
2. The government argues that evidence of uncharged transactions is admissible to show relationships among alleged co-conspirators. Although this is an appropriate not-for-character purpose under Rule 404(b),13 it is not sufficient for admissibility. The government must show also that the evidence is relevant and that its probative value is not outweighed substantially by its unfair prejudice.
The government has not explained its assertions that these relationships are relevant and that the evidence is probative of them,14 much less why it is necessary or helpful to get into the details of these other transactions beyond simply adducing evidence that the alleged coconspirators in fact had prior relationships involving uncharged transactions.
Even if the Court were to assume that this evidence would be probative of relationships that are relevant, Rule 403 considerations again would counsel exclusion. The government seeks to prove up each of these transactions to show the relevant relationships. That will take time, as will the defendants' inevitable responses, whether by cross-examination alone or by affirmative proof as well. Evidence concerning these matters is likely to divert the jury's attention from the charged transactions, which are sufficiently complicated in themselves, to another set of complex transactions.
3. The government argues that evidence of one of the uncharged shelters is "inextricably intertwined" with evidence of a charged shelter because they were marketed to a testifying witness at the same time.15 But it has not explained why details of the uncharged transaction are necessary to understand the charged transaction.16 It therefore has failed to show that those details are inextricably intertwined with proof of the charged transaction.
* * *
Accordingly, insofar as the government seeks to adduce evidence of uncharged tax shelters, its motion is denied. The matter may be revisited during trial should the matter then appear in a different light.
The government seeks to admit evidence of an August 1999 transaction among Larson, Pfaff, and Ruble.17 Ruble allegedly loaned $100,000 to entities controlled by Larson and Pfaff. Six weeks later, the entities paid Ruble $300,000, an amount purportedly representing repayment of the loan ($100,000) and Ruble's share of the investment profit ($200,000).18
1. The government argues that the transaction "furthered the goals of the conspiracy alleged ... because it served to reward a member whose continued opinion-writing activities were integral to the operation of the scheme."19 "An act that is alleged to have been done in furtherance of the alleged conspiracy ... is not an `other' act within the meaning of Rule 404(b); rather, it is part of the very act charged."20 The transaction therefore is not "other act" evidence under Rule 404(b) with respect to Count One, which charges conspiracy to defraud the United States. This conclusion, however, does not obviate the Rule 403 analysis.
The government argues that this evidence is probative of the conspiracy because the transaction rewarded Ruble for his opinion writing. But the proffered evidence only proves...
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