U.S.A. v. Zanghi

• Decision Date: 03 February 1999
• Docket Number: No. 98-1047,98-1047
• Citation: 189 F.3d 71
• Parties: (1st Cir. 1999) UNITED STATES OF AMERICA, Appellee, v. PHILIP S. ZANGHI, II, Defendant, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 71

189 F.3d 71 (1st Cir. 1999)

UNITED STATES OF AMERICA, Appellee, v. PHILIP S. ZANGHI, II, Defendant, Appellant.

No. 98-1047.

United States Court of Appeals for the First Circuit.

Heard Feb. 3, 1999.

Decided Aug. 30, 1999.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Owen S. Walker, Federal Defender Office, for appellant.

Patty Merkamp Stemler, with whom Corey Smith, Andrew Levchuck, Assistant United States Attorney, Donald K. Stern, United States Attorney, and the Department of Justice were on brief for appellee.

Before Selya, Stahl and Lipez, Circuit Judges.

LIPEZ, Circuit Judge.

Philip S. Zanghi, II, appeals from his conviction and sentence on twenty-three counts of securities fraud, tax evasion, engaging in monetary transactions involving the proceeds of unlawful activity, and violation of the money laundering statutes. The two money laundering counts alleged that he transferred proceeds of the securities fraud from corporate accounts to his own use with intent to evade taxes.¹ On appeal, Zanghi argues that there was insufficient evidence to convict him on the money laundering counts. The jury instructions on those counts went beyond the statute's requirements and stated incorrectly that the jurors could convict only if they found tax evasion to be Zanghi's sole intent in making the transfers. Zanghi claims that this instruction became the law of the case, and that our review should thus ask if the evidence was sufficient to meet the higher standard set by the erroneous instruction. This unusual contention is important to the outcome of this appeal because the evidence met the lower statutory standard but would not have met the higher standard proposed by the instruction. We conclude that the erroneous instruction should not become the law of the case, and reject Zanghi's sufficiency challenge.

Zanghi also protests the prosecutor's closing exhortation to the jury to "send a message" to him from his victims, and the court's admission of evidence of his other crimes and his flight from justice. Finally, Zanghi claims that the court erred in computing the sentencing range on certain counts by grouping those counts together under the guidelines. Since this sentencing issue requires us to resolve some apparent differences between other courts of appeals concerning how the applicable guidelines provision should be interpreted, we address the question in some detail. We affirm.

I.

We briefly sketch the broad outlines of the facts of this case, adding detail below as it becomes necessary to the legal discussion. This case involves a business venture to revive the "Indian Motocycle," a brand of motorcycle manufactured in Springfield, Massachusetts from the early 1900s to the mid-1950s. In 1990, Zanghi obtained an interest in the Indian trademark, not then in use, from its owner Carmen DeLeone, with the stated intention of reviving the manufacture of Indian Motocycles. Zanghi then formed the Indian Motocycle Company, Inc. ("Indian"), and moved to Springfield where he established an office and operated the company.

Indian was not authorized by its articles of incorporation to issue preferred shares. Nonetheless, Zanghi sold preferred shares in Indian to numerous investors. Zanghi also sold options to purchase 80,000 shares of common stock in a related apparel and accessories company Zanghi founded, which was authorized to issue only 10,000 shares of common stock. He licenced the Indian trademark to various businessmen who wished to sell clothing, jewelry and other items bearing the Indian logo, and in several cases sold "exclusive" rights to use the mark in a region to more than one licencee. Zanghi transferred much of the funds raised through the fraudulent sale of securities and the licencing deals into his personal accounts. He also financed various personal expenditures, including the rental of two houses in Avon, Connecticut, using funds withdrawn directly from Indian accounts.

Although he realized substantial income from these transfers, Zanghi paid no personal income taxes in 1991 and 1992, and only minimal amounts in 1990. He also signed and filed false corporate income tax returns on behalf of Indian, significantly under reporting Indian's corporate income. (Zanghi was the sole shareholder of Indian, a subchapter S corporation, making Indian's income taxable to him.) Zanghi frequently recorded income to Indian and related corporations² (from, e.g., the licencing arrangements and advance royalties paid by various prospective Indian motorcycle distributors) as loans from himself to the corporations, thus (1) allowing the corporations to characterize the income as non-taxable proceeds of borrowing rather than taxable corporate income, and (2) allowing him to justify withdrawing the amounts from the corporate accounts for his personal use, while (3) characterizing these withdrawn amounts as loan repayments, which would not be taxable income to him.

Zanghi moved briefly to Raleigh, North Carolina in 1993 and then fled to Spain in January 1994 as the Indian venture began to unravel. He was ultimately arrested in New York City. A grand jury issued a 23 count indictment against him, charging him with securities fraud, tax evasion (under 26 U.S.C. § 7201), filing false corporate income tax returns, engaging in monetary transactions involving the proceeds of unlawful activity (specifically, the securities fraud), and violation of one of the money laundering statues (18 U.S.C. § 1956(a)(1)(A)(ii)). After a jury trial,³ Zanghi was convicted on all counts. This appeal followed.

II.

A. The Money Laundering Counts

Counts 18 and 19 of the indictment alleged that Zanghi twice withdrew $25,000 from Indian Motocycle Company accounts. The indictment alleged that these funds were the proceeds of securities fraud, and that Zanghi withdrew them knowing that the funds represented the proceeds of some form of illegal activity with "the intent to engage in conduct constituting tax evasion," a crime under the federal money-laundering prohibitions of 18 U.S.C. § 1956(a)(1)(A)(ii):

§ 1956. Laundering of monetary instruments

(a)(1) Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity--

(A)(i) with the intent to promote the carrying on of specified unlawful activity; or

(ii) with intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; [is subject to fine, imprisonment up to twenty years, or both.]

Counts 18 and 19 asserted that Zanghi had "the intent to engage in conduct constituting tax evasion" in violation of section 7201 of the Internal Revenue Code ("Code"), the general provision of the Code directed at preventing tax evasion:

§ 7201. Attempt to evade or defeat tax

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

26 U.S.C. § 7201.

At trial the government produced evidence on Count 18 that Zanghi wrote a $25,000 check (No. 7943, written February 15, 1992) on an Indian account, making it payable to himself, and deposited this check into his personal account. Zanghi wrote "Repayment of Loan" on the check, making it appear that the check was a repayment of a personal loan from Zanghi to Indian. The government also produced evidence on Count 19 that Zanghi wrote a $25,000 check (No. 7955, February 28, 1992) on the same Indian account, making it payable to Paul Brazeau, an individual to whom Zanghi owed large personal debts predating the Indian venture. Zanghi wrote "Loan Repayment" on the check, making it appear that the check was in repayment of a loan by Brazeau to Indian.

The trial court instructed the jury that, in order to find a violation under § 1956(a)(1)(A)(ii), the jury was required to find that Zanghi had (1) engaged in a financial transaction, (2) which he knew involved the proceeds of securities fraud, and (3) that "defendant conducted a financial transaction charged in the Indictment with the intent of furthering income tax evasion." The court then elaborated on this last element as follows:

The third and final element which the government must prove beyond a reasonable doubt in order to convict the defendant of money laundering is that the defendant conducted a financial transaction charged in the Indictment with the intent of furthering income tax evasion. The defendant acted intentionally, if he acted willfully, not by mistake or accident and with the deliberate purpose of promoting, facilitating or assisting in carrying on the income tax evasion.

In order to convict the defendant [on] either or both counts of money laundering you must agree that the defendant conducted the financial transaction charged in the Indictment with the purpose of evading taxes and not for any lawful or other unlawful purpose.

(Emphasis added.) Zanghi argues that the evidence was insufficient to sustain a conviction on the basis of this instruction. Specifically, he claims that the instruction mandated that the jury find that Zanghi's sole intent in conducting the transactions in question was to evade taxes,⁴ and that although there might have been sufficient evidence to show that tax evasion motivated Zanghi, there was enough evidence that he had another motive (to disguise his theft of funds from Indian) to foreclose a jury from finding that tax evasion was his sole intent.

B. Error in the jury instruction

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