United States v. Dyer

• Decision Date: 13 November 2018
• Docket Number: Nos. 17-6174/6177,s. 17-6174/6177
• Citation: 908 F.3d 995
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Douglas A. DYER (17-6174); James H. Brennan, III, (17-6177) Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

908 F.3d 995

UNITED STATES of America, Plaintiff-Appellee,

v.Douglas A. DYER (17-6174); James H. Brennan, III, (17-6177) Defendants-Appellants.

Nos. 17-6174/6177

United States Court of Appeals, Sixth Circuit.

Argued: October 4, 2018

Decided and Filed: November 13, 2018

Rehearing En Banc Denied December 18, 2018

ARGUED: Mark E. Brown, MENEFEE & BROWN, P.C., Knoxville, Tennessee, for Appellant in 17-6174. Jennifer Niles Coffin, FEDERAL DEFENDER SERVICES OF EASTERN TENNESSEE, INC., Knoxville, Tennessee, for Appellant in 17-6177. Luke A. McLaurin, UNITED STATES ATTORNEY’S OFFICE, Knoxville, Tennessee, for Appellee. ON BRIEF: Mark E. Brown, MENEFEE & BROWN, P.C., Knoxville, Tennessee, for Appellant in 17-6174. Jennifer Niles Coffin, FEDERAL DEFENDER SERVICES OF EASTERN TENNESSEE, INC., Knoxville, Tennessee, for Appellant in 17-6177. James T. Brooks, UNITED STATES ATTORNEY’S OFFICE, Chattanooga, Tennessee, for Appellee.

Before: SUHRHEINRICH, MOORE, and BUSH, Circuit Judges.

SUHRHEINRICH, Circuit Judge.

The Double Jeopardy Clause of the Fifth Amendment protects against multiple criminal prosecutions and punishments for the same offense. Recently, the Supreme Court held that "[d]isgorgement, as it is applied in SEC enforcement proceedings, operates as a penalty under [ 28 U.S.C.] § 2462." Kokesh v. SEC , ––– U.S. ––––, 137 S.Ct. 1635, 1645, 198 L.Ed.2d 86 (2017). In this criminal sentencing appeal, we must consider whether SEC civil disgorgement is now a criminal punishment after Kokesh . It is not, so we AFFIRM Defendants’ sentences.

I.

A. Facts

From 2008 to 2016, James H. Brennan and Douglas A. Dyer (collectively, "Defendants") owned and managed Broad Street Ventures, LLC ("Broad Street"). Brennan and Dyer had a claimed goal of using Broad Street to create and incorporate eight Tennessee corporations that would be known as Scenic City F-10, I–VIII (collectively, "Scenic City"). They induced investment in Scenic City by claiming that once Scenic City was appropriately capitalized, Brennan and Dyer would register the common stock of Scenic City with the SEC by filing a Form 10. They promised to publicly trade Scenic City and use Scenic City to acquire small private businesses. This process is known as a reverse merger and is legal.

Investors sent Brennan and Dyer money by mail and electronic wire from locations outside of Tennessee. As money came in, however, Brennan and Dyer did not invest it into Scenic City. Instead, they moved the funds through Broad Street’s bank accounts and diverted a significant portion of that money to their own personal bank accounts. To fool the investors, Brennan and Dyer issued stock certificates to create the perception that they had handled the investment funds appropriately. Brennan and Dyer mailed these stock certificates to the investors via the United States Postal Service. Yet Brennan and Dyer never filed a Form 10 with the SEC and never completed any reverse mergers. In total, the Government estimated that investors lost $4,942,070.18 in Brennan and Dyer’s scheme.

Brennan and Dyer reported the embezzled funds they received through Broad Street as long-term capital gains, which substantially reduced their personal tax liability each year by capping the tax rate at 15%. The embezzled funds should have been reported as ordinary income subject to a significantly higher tax rate. Brennan and Dyer also made payments to themselves from Broad Street that they treated as nontaxable distributions. These payments made up Brennan and Dyer’s primary source of income for the relevant years. In summary, Brennan and Dyer funneled the embezzled funds through Broad Street, paid out those funds to themselves as nontaxable distributions, and underreported their income to evade paying taxes on it. For the years 2010 through 2014, Dyer owed an additional $312,799 in taxes and Brennan owed an additional $164,542.

B. Procedural History

1. SEC Civil Case Begins

On July 20, 2016, the SEC began a civil enforcement suit against Brennan and Dyer (the "Civil Case"). The SEC alleged that Brennan and Dyer had committed securities fraud in violation of 15 U.S.C. §§ 77(q)(a)(1), 77(q)(a)(2), 77(q)(a)(3), and 78j(b), and Rule 10b-5 of the Securities Exchange Act ( 17 C.F.R. § 240.10b-5 ). Less than a week later, Brennan and Dyer consented to a preliminary injunction freezing their assets and enjoining further securities law violations.

2. Criminal Case Begins and Defendants Plead Guilty

Nine months later, on April 10, 2017, the Government filed an information charging Defendants with conspiracy to commit mail and wire fraud in violation of 18 U.S.C. §§ 371 and 1341 and tax evasion in violation of 26 U.S.C § 7201 (the "Criminal Case"). Dyer was also charged with criminal contempt in violation of 18 U.S.C. § 401(3).¹ On May 3, 2017, Defendants pleaded guilty to the conspiracy to commit wire fraud and mail fraud and tax evasion charges. Dyer also pleaded guilty to the additional count of contempt of court. As part of their plea agreements, Brennan agreed to pay $184,022.84 in restitution to the Internal Revenue Service, and Dyer agreed to pay $354,251.58. Brennan and Dyer stipulated that the amount of loss caused by their conduct was greater than $3,500,000 and waived any double jeopardy defenses to the prosecution.

3. Defendants Consent to Final Judgment in Civil Case

On May 10, 2017—one week after pleading guilty in the Criminal Case—Brennan and Dyer consented to entry of a final judgment in the Civil Case to enjoin them from violating 15 U.S.C. § 78j(b), Rule 10b-5 ( 17 C.F.R. § 240.10b-5 ) and 15 U.S.C. § 77q(a). They also agreed that the court would order disgorgement of ill-gotten gains, pre-judgment interest, and a civil penalty according to 15 U.S.C. § 77t(d) and § 78u(d)(3). The court left open the amount of disgorgement and civil penalty pending a motion by the SEC. As part of the consent judgment, Defendants "waive[d] any claim of Double Jeopardy based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein."² The court entered the final judgment in the Civil Case into the record on August 1, 2017.

4. Criminal Sentencing and Objections

In the Criminal Case, the Presentence Investigation Report ("PSR") applied the Sentencing Guidelines and gave both Defendants a base level of six under USSG § 2B1.1(a)(2). Because the amount of loss exceeded $3,500,000, eighteen levels were added under § 2B1.1(b)(1)(J). Two additional levels were added under § 2B1.1(b)(2)(A) because the offense involved approximately 200 victims. Three levels were subtracted from both Defendants because they accepted responsibility for the crimes in their plea agreements. Dyer had an additional two points added for his contempt of court pursuant to § 2B1.1(b)(9)(C). The final tally set Brennan’s offense level as 23 and Dyer’s as 25. Since neither Defendant had a criminal history score, each received a criminal history category of I. This produced a Guidelines range for Brennan of 46 to 57 months’ imprisonment and for Dyer of 57 to 71 months of imprisonment.

Defendants objected to the PSR calculations based on the Supreme Court’s unanimous decision in Kokesh v. SEC , ––– U.S. ––––, 137 S.Ct. 1635, 198 L.Ed.2d 86 (2017). Decided on June 5, 2017, Kokesh held that in SEC enforcement proceedings, disgorgement is a "penalty" subject to the five-year statute of limitations in 28 U.S.C. § 2462. Kokesh , 137 S.Ct. at 1645. According to Defendants, the 18-level increase of their base offense level violated the Double Jeopardy Clause because Defendants were already punished by disgorgement in the Civil Case. Dyer also argued that the five-year statute of limitations from Kokesh prevented the court from considering conduct that happened more than five years before he was indicted. Finally, Brennan argued for a downward variance based on his status as a first offender.

The district court held a sentencing hearing in the Criminal Case on September 29, 2017 and adopted the recommendations from the PSR. The court denied each objection from Defendants. The court ruled that Kokesh did not apply to Defendants’ Double Jeopardy claims, that the court was allowed to consider "relevant conduct" that could not be prosecuted separately because of the statute of limitations, and that Brennan did not qualify as a first offender given his previous censure by the Financial Industry Regulatory Authority ("FINRA"). The court then analyzed the 18 U.S.C. § 3553(a) factors and sentenced Brennan to 48 months and Dyer to 60 months. The court also ordered Brennan and Dyer to pay restitution in the full amount of loss, $4,942,070.18. Brennan and Dyer were ordered to pay additional amounts of $184,022.84 and $354,251.58, respectively, to the IRS for their tax evasion.

5. Civil Case Disgorgement

On January 30, 2018, the SEC moved for disgorgement in the Civil Case. Two weeks later, the court entered an order of disgorgement against Brennan and Dyer, jointly and severally, in the amount of $4,942,070.18, to be offset by the amount of restitution ordered to be paid in the Criminal Case.

II.

Defendants now appeal their criminal sentences, principally claiming the disgorgement violates the Double Jeopardy Clause under Kokesh . Dyer also appeals the eighteen-level enhancement on collateral estoppel and statute of limitations grounds. Brennan also appeals the district court’s decision not to grant a downward variance based on his first-offender status. We have jurisdiction over the appeal of criminal sentences pursuant to 18 U.S.C. § 3742(a)(2) and 28 U.S.C. § 1291.

III.

A. Double Jeopardy

The Double Jeopardy Clause states: "nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb ...." U.S. Const. amend. V. Criminal defendants are thus protected from "multiple punishments for the same offense." United States v. Ehle , 640 F.3d 689, 694 (6th Cir. 2011) (quoting North Carolina v. Pearce , 395 U.S. 711, 717, 89 S.Ct. 2072, 23...