United States v. Herman

• Decision Date: 06 May 2021
• Docket Number: No. 19-50830,19-50830
• Parties: UNITED STATES of America, Plaintiff—Appellee, v. Michael HERMAN; Cynthia Herman, Defendants—Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

997 F.3d 251

UNITED STATES of America, Plaintiff—Appellee,

v.Michael HERMAN; Cynthia Herman, Defendants—Appellants.

No. 19-50830

United States Court of Appeals, Fifth Circuit.

FILED May 6, 2021

Gregory Victor Davis, Attorney, Yael T. Epstein, Elissa Righter Hart-Mahan, Samuel Robert Lyons, U.S. Department of Justice, Tax Division, Washington, DC, Alexander Patrick Robbins, U.S. Attorney's Office, Central District of California, Los Angeles, CA, for Plaintiff - Appellee.

Kristin L. Davidson, Assistant Federal Public Defender, Maureen Scott Franco, Federal Public Defender, Federal Public Defender's Office, Western District of Texas, for Defendant - Appellant Michael Herman.

Jennifer Sheffield Freel, Vinson & Elkins, L.L.P., Austin, TX, for Defendant - Appellant Cynthia Herman.

Before Dennis,Higginson, and Willett, Circuit Judges.

Stephen A. Higginson, Circuit Judge:

Appellants Michael and Cynthia Herman owned and operated three restaurants in Texas. In early 2013, the Internal Revenue Service initiated an undercover operation to determine whether the Hermans’ business tax returns understated gross receipts and whether the Hermans claimed personal expenses as business expenses on those returns. Following a four-day trial, a jury convicted the Hermans on one count of conspiracy to defraud the United States. The jury also convicted Michael of five counts and Cynthia of two counts of willfully filing false tax returns. The Hermans timely appealed.

On appeal, the Hermans argue that the district court erred when it excluded defense exhibits, excluded the Hermans’ expert witness's testimony, and limited the Hermans’ cross-examination of two Government witnesses. In addition, they argue that the district court's cumulative errors deprived them of a fair trial. Separately, Cynthia also argues that Count One of the indictment was legally insufficient. For the reasons articulated below, we AFFIRM.

I.

Michael and Cynthia Herman, husband and wife, owned and operated three restaurants in Bastrop County, Texas: Cindy's Gone Hog Wild, Cindy's Downtown, and Hassler Brothers Steakhouse. Michael is a retired medic from the Houston Fire Department with an M.B.A. in marketing, and Cynthia is a former secretary with a high school degree. Both worked in and actively managed the restaurants.

A. IRS Investigation

The Internal Revenue Service ("IRS") has a program called the Business Opportunity Project, which is designed to identify businesses that underreport income. Through this program, the IRS initiated an undercover investigation of the Hermans in early 2013. The IRS investigated the Hermans because they had listed one of their restaurants, Cindy's Gone Hog Wild, for sale at an asking price that appeared high compared to its reported gross receipts. IRS Special Agent Daniel Vela assumed the identity of "Daniel Ramirez" and posed as an interested buyer. Over the course of the investigation, Agent Vela had three in-person meetings with the Hermans on May 9, 2013; May 30, 2013; and August 8, 2013. He also had phone conversations and exchanged text messages with Michael. Agent Vela was "wired" for all the meetings and phone conversations, and he recorded 10 hours and 14 minutes of video and audio clips.

During the undercover investigation, Michael and Cynthia made various statements to Agent Vela that suggested they did not include all the cash receipts generated by their restaurants on their financial reports and tax returns. For example, Michael told Agent Vela: "Because, you know, the cash, that's something that ... you can deal with and, and never has to make it to the bank." The Hermans also suggested they used business funds to pay for their personal expenses. For example, Michael told Agent Vela: "[T]he IRS is not going to allow us to run this business the way we were running it. Paying our house, paying our utility, paying our car notes, paying everything without us showing we were making something."

The Hermans’ account of their interactions with Agent Vela as "Daniel Ramirez" is that he was a "sleazy buyer" who "repeatedly" asked about "unreported cash." They argue that any inculpatory statements they made were because they were trying to respond favorably to an interested buyer and sell their restaurant. The Hermans point to various exculpatory statements they also made to Agent Vela, including: "what you do with [the cash flow] is your business," and "we've put every dime in the bank to make sure our business stays solid and solvent."

After the undercover operation, the IRS executed search warrants on the Hermans’ home and three restaurants. IRS Special Agent Daniel Fannin became the lead agent coordinating the investigation. He concluded that the Hermans had not deposited all cash into their bank accounts and had paid personal expenses with business funds.

B. Procedural History

In 2017, a grand jury indicted Michael and Cynthia with one count of conspiring to defraud the United States in violation of 18 U.S.C. § 371 (Count One) and separate counts of willfully filing materially false tax returns in violation of 26 U.S.C. § 7206(1) (Counts Two through Seven). Counts Two through Four pertained to personal tax returns and charged both Michael and Cynthia; Counts Five through Seven pertained to corporate tax returns and charged only Michael because only he signed those returns.

In 2019, Michael and Cynthia proceeded to trial, at which neither testified. After a four-day trial, the jury convicted both defendants on the conspiracy count (Count One), convicted Michael on five false return counts (Counts Two, Three, and Five through Seven), and convicted Cynthia on two false return counts (Counts Two and Three). Both Hermans were acquitted on one false return count for their 2012 personal tax returns (Count Four).

The district court sentenced Michael to 21 months’ imprisonment followed by three years of supervised release. The district court sentenced Cynthia to five years’ probation. Both were ordered to pay $157,719 in restitution to the IRS.

II.

The Hermans first argue that the district court erred when it excluded (1) certain audio recording excerpts of their conversations with IRS Agent Vela and (2) a transcript of the recorded conversations redacted to show only Agent Vela's questions.¹

A. Defense Exhibits

Before trial, the Government provided the Hermans with 16 audio clips it intended to play at trial totaling about 25 minutes of recorded conversations between the Hermans and Agent Vela (Government Exhibits 57A through 57P). In response, the Hermans provided the Government with 18 supplemental audio clips totaling an additional 43 minutes of conversation pulled from the same set of recordings (Defense Exhibits 32A through 32O).²

In urging the district court to admit their 18 supplemental audio clips, the Hermans relied on Federal Rule of Evidence 106. Premised on fairness, Rule 106 allows a party to introduce the remainder of a written or recorded statement when its adversary has selectively introduced another portion of that writing or recorded statement in a way that creates a misleading impression. See FED. R. EVID. 106. The Hermans asserted that their proffered clips provided necessary context for the jury, arguing that the Government had cherry-picked recordings of their incriminating statements but left out clips in which they made contradictory statements or clips in which Agent Vela prompted them to make the incriminating statements. The Government objected to the supplemental recordings as inadmissible hearsay, arguing that the Hermans were attempting to use their own out-of-court statements to establish certain facts and mitigate other damaging admissions without testifying at trial. In addition, the Government argued that Rule 106 was inapplicable because many of the clips the Hermans had moved to introduce were not made during the same conversation—or even the same day—as the inculpating statements they sought to mitigate.

The district court ruled that the Hermans could present supplemental audio recording clips on cross-examination as long as they were recorded on the same date and were about the same subject matter as the Government's audio recordings. At trial, during the cross-examination of Agent Vela, the Hermans moved to admit 15 supplemental audio recordings into evidence. The district court denied their motion.³

On appeal, Michael argues that the district court erred by excluding 13 of the audio recordings, while Cynthia argues error for only ten of the excluded recordings. Cynthia also asserts that the district court erroneously excluded a 35-page redacted transcript of recorded conversations that contained only the undercover agent's questions to the Hermans. This redacted transcript contains Agent Vela's questions from all his meetings and phone calls with the Hermans. Cynthia explains that the redacted transcript addressed the Government's hearsay objections by removing the Hermans’ statements and leaving only Agent Vela's questions and showed Agent Vela repeatedly asked questions about unreported cash in order to inculpate the Hermans.

B. Standard of Review

We review the district court's exclusion of the Hermans’ exhibits as an evidentiary ruling for abuse of discretion, United States v. Branch , 91 F.3d 699, 727 (5th Cir. 1996), subject to harmless error review, United States v. Portillo , 969 F.3d 144, 177 (5th Cir. 2020). "A district court abuses its discretion if it bases its decision on an error of law or a clearly erroneous assessment of the evidence." Portillo , 969 F.3d at 168 (quoting United States v. Insaulgarat , 378 F.3d 456, 464 (5th Cir. 2004) ). For an evidentiary ruling to constitute reversible error, it must have affected the defendant's "substantial right."

FED. R. EVID. 103(a) ; see United States v. Sanders , 343 F.3d 511, 519 (5th Cir. 2003). "Error is harmless if, in light of the whole record, the contested evidence did not contribute to the verdict." United States v. Dixon , 185 F.3d...