U.S. v. Warshak, No. 1:06-CR-00111.

• Decision Date: 13 May 2008
• Docket Number: No. 1:06-CR-00111.
• Parties: UNITED STATES of America, v. Steven E. WARSHAK, et al.
• Court: U.S. District Court — Southern District of Ohio

562 F.Supp.2d 986

UNITED STATES of America, v. Steven E. WARSHAK, et al.

No. 1:06-CR-00111.

United States District Court, S.D. Ohio, Western Division.

May 13, 2008.

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Anne L. Porter, Deborah Diane Grimes, Karl Paul Kadon, III, United States Attorney's Office, Cincinnati, OH, Mark L. Josephs, U.S. Department of Justice Office of Consumer Litigation, Washington, DC, for Steven E. Warshak, et al.

Vipal Patel, United States Attorney's Office, Dayton, OH, for USA.

OPINION AND ORDER

S. ARTHUR SPIEGEL, Senior District Judge.

This matter is before the Court on the following motions: Defendants Steven Warshak, Berkeley Premium Nutraceuticals ("Berkeley") and TCI Media's Motion for Judgment of Acquittal or for New Trial (docs. 405, 331), the government's Response (doc. 440), and Defendants' Reply (doc. 452); Defendant Harriet Warshak's Motion for Judgment of Acquittal or for New Trial (doc. 395), the government's Response (doc. 441), and Defendant's Reply (doc. 469); Defendant Paul Kellogg's Motion for Judgment of Acquittal or for New Trial (doc. 395), the government's Response (doc. 439), and Defendant's Reply (doc. 453); Defendant Steven Pugh's Motion for Judgment of Acquittal (doc. 400) and the government's Response (doc. 438); Defendants Steven Warshak, Berkeley and TCI Media's Motion to Vacate Preliminary Order of Forfeiture (doc. 419), and the government's Response (doc. 430); Defendants Steven Warshak, Berkeley, and TCI Media's Motion to Set Aside Forfeiture Verdicts (doc. 413), the government's Response (doc. 443), and Defendants' Reply (doc. 459); Defendant Steven Warshak, Berkeley, and TCI Media's Motion for New Trial on All Forfeiture Issues (doc. 414), the government's Response (doc. 443), and Defendants' Reply (doc. 458); and Defendant Harriet Warshak's Motion to Set Aside Forfeiture Verdicts or for New Trial on All Forfeiture Issues (doc. 415), and the government's Response (doc. 449).

For the reasons indicated herein, the Court denies all of Defendants' motions.

I. Background

On February 25, 2008 the jury returned guilty verdicts as to four of the individual and two of the corporate Defendants in this case, thereby finding the government had proven beyond a reasonable doubt a massive fraud scheme involving false representations to consumers, numerous fraudulent "autoship" charges to consumer credit cards for products the consumers did not order, money laundering, schemes to conceal transaction abnormalities from banks, and obstruction of two federal agency proceedings. The verdicts on 101 counts and forfeiture charged in the Indictment came after a six-week long trial in which at least eight very capable lawyers defended their clients strenuously, in which the government presented some ninety different witnesses, and after a pre-trial process in which discovery issues and the government's conduct in bringing the case were challenged and briefed extensively (docs. 73, 96, 97, 157, 180, 225, 247). Subsequent to the guilty verdicts, the Court held forfeiture proceedings as to property the government alleges bears relation to the fraud scheme and money laundering. The jury found a nexus or connection between all such property and the criminal activity (docs. 397, 389). The Court therefore entered a preliminary Order of forfeiture and asked the parties to prepare for a hearing on May 14, 2008, at which time it would hear the parties' positions on exactly what portions, if any, of the assets should be forfeited to the government (docs. 418, 420, 425). Defendants now challenge such preliminary Order as premature (doc. 419).

The majority of Defendants' pending motions, however, challenge the validity of both the guilty verdicts and the jury's forfeiture findings. The same standards of review apply to all of the motions, so the Court finds it appropriate to review such standards from the outset.

Each of the motions challenging the guilty verdicts do so under two theories, first, that the evidence was insufficient to support the guilty verdicts. Under such theory, the applicable rule, Fed.R.Crim.P. 29, poses a very heavy burden on Defendants. United States v. Owens, 426 F.3d 800, 808 (6th Cir.2005). After viewing all evidence in the light most favorable to the prosecution, the Court must determine whether any rational trier of fact could have found the elements of the crime beyond a reasonable doubt (Id.). The Court's task in the context of these present motions, therefore, is to review the essential elements of each crime, and to determine whether the evidence at trial was sufficient for a rational jury to find each element beyond a reasonable doubt.

Defendants' second theory is that the guilty verdicts were against the manifest weight of the evidence, thus justifying a new trial under Fed.R.Crim.P. 33. Defendants can prevail under this theory only where the evidence preponderates heavily against the verdict. United States v. Hughes, 505 F.3d 578, 592 (6th Cir.2007). The Court's task in relation to this challenge, therefore, is to review the evidence and to determine whether such evidence so strongly militates against the verdict that the Court is compelled to grant a new trial.

Defendants Warshak, BPN and TCI next raise specific issues as to the government's closing argument and references to the grand jury, which arose after the first phase of the trial. The Court will address such issues in Part III of this Order.

Finally, Defendants Steven Warshak, Berkeley, TCI, and Harriet Warshak similarly challenge the jury's forfeiture findings under the same theories that the verdicts were not rationally supported and were against the manifest weight of the evidence. The government argues that forfeiture is a part of the sentence, so no new trial can be granted on forfeiture absent the granting of a new criminal trial. The Court finds the entire inquiry premature, as it has yet to determine how much, if any, of the assets the jury found a nexus to exist with criminal activity, are subject to forfeiture. However, out of an abundance of caution, the Court will briefly address Defendants' arguments as to forfeiture in Part IV of this Order. The Court will devote further attention to the question of forfeiture at and subsequent to the upcoming May 14, 2008 hearing.

II. Defendants' Motions for Judgment of Acquittal and for New Trial

Defendants ask the Court to overturn the jury's verdict and to grant them a new trial on the following grounds because in their view, the evidence is insufficient to sustain the verdict and the evidence preponderates against the verdicts. The Court will address Defendants' arguments count by count.

A. Count 1, Conspiracy

The jury found Steven Warshak, Harriet Warshak, and Berkeley guilty as charged in Count 1 of the Indictment, for conspiring to commit mail fraud, wire fraud, and/or bank fraud (docs. 1, 373, 375, 385). As the Court instructed the jury, the essential elements necessary to convict a defendant of conspiracy must be proven beyond a reasonable doubt, and they are 1) that two or more persons made an agreement to commit the crimes of mail fraud, wire fraud, and/or bank fraud; and 2) that the defendant knew the unlawful purpose of the agreement and joined it wilfully, with the intent to further the unlawful purpose (doc. 371).

Defendants Steven Warshak and Berkeley argue as they did at trial that Berkeley experienced explosive growth and they made attempts to manage such growth and remedy mistakes (doc. 331). Defendants frame the case as not one involving criminal intent, but mere growing pains (Id.). Harriet Warshak argues that she merely "hit the button" to process credit card transactions, but that she was not privy to email conversations with the rest of Berkeley employees (doc. 398). She further argues that although testimony showed that she signed merchant bank applications, there was no evidence that she knew what she was signing or even that she had read them (Id.).

The government responds that Defendants' company growth claims are arguments and not evidence, which offer no valid basis for a Rule 29 motion, and fail to show that the weight of the evidence goes against the jury's verdicts (doc. 440). Specifically as to Count 1, the government emphasizes that it presented the testimony of five former officers or employees of Berkeley, all of whom gave detailed testimony about the conspiracy, and all of whom have entered pleas of guilty to the Count 1 conspiracy charge (Id.). All five testified that Berkeley's continuity program entailed enrolling customers automatically, without disclosure, into a program in which the customers were charged and shipped products they did not order (Id.).

Former chief information officer Jim Teegarden testified that later disclosures of continuity were drafted to be intentionally misleading, and that he fabricated false advertising claims under Steve Warshak's direction concerning customer satisfaction and product results (Id.). Defendants stipulated at trial that Stanford and Harvard University medical schools had no admission or faculty records for the names of doctors that Berkeley's advertising claimed developed their product Enzyte (Id.). Teegarden further testified that Warshak directed a policy to avoid giving customers refunds or credits for unauthorized charges (Id.). Former Berkeley President Greg Cossman testified that Steve Warshak directed that money-back guarantees made in advertising not be honored, and that complaining customers were directed to a fictitious director of customer care (Id.).

Several of the witnesses testified that because of high chargebacks to Berkeley's merchant bank accounts due to unauthorized charges and the policy against refunds, Steve Warshak directed a number of schemes to manipulate the chargeback ratio (Id.).¹ Cossman and Teegarden testified that it was crucial to manage the chargeback ratio because high chargeback ratios could...