Thorn, Again

United States v. Thorn, No. 11-37-cr (2d Cir. October 20, 2011) (Jacobs, Sack, Raggi, CJJ)

This is Joseph Thorn’s third time in the circuit. Thorn ran an upstate asbestos removal company; he performed dangerous, substandard work, and used the money he earned to grow the business. In 2000, a Northern District jury convicted him of money laundering and environmental crimes, and the district court sentenced him to 65 months’ imprisonment. On the government’s appeal, the circuit vacated the sentence - the guidelines were mandatory then - and on remand the district court downwardly departed to 168 months from what it thought was a 235-month guideline minimum. The government appealed and won again. By this time the guidelines were advisory, however, so while the guideline minimum was now up to 292 months, the district court sentenced Thorn to 144 months.

Three years later, Thorn filed a 2255 motion, seeking to vacate his money laundering conviction as legally insufficient under United States v. Santos, 553 U.S. 507 (2008), which held that the term “proceeds” in the money laundering statute means “net profits,” and not “gross receipts.” The district court granted the motion, vacated the money laundering count, and resentenced Thorn to 132 months on the remaining counts.

On this, the government’s third appeal, the circuit reversed, agreeing that the Santos claim was procedurally barred because Thorn did not raise it on direct appeal, and no exception to procedural default applied.

While Thorn’s direct appeal argued that the money laundering conviction was legally insufficient, he challenged only the “intent to promote” element, not the “proceeds” element. And he could not establish cause and prejudice to excuse the default. Thorn argued that the “proceeds” theory was “so novel that its legal basis [was] not reasonably available to counsel” at the time. But the circuit disagreed. The futility test is strict - it asks not whether it would have been difficult to raise an issue but whether the claim was “available at all.” It was. By the time of Thorn’s direct appeal, several attorneys had argued for a narrow construction of the term “proceeds,” and the question was open in the Second Circuit. Even if it is true that the circuit would likely have rejected the claim had Thorn pursued it, he still could not establish cause - a defendant does not establish cause by showing “simply that a claim was unacceptable to that particular court at that particular time.” Accordingly, since Thorn did not establish cause, the circuit skipped the question of prejudice.

Thorn argued alternatively that he was actually innocent, which can also excuse a procedural default. But actual innocence means “factual innocence,” not mere legal insufficiency. Thorn had to demonstrate that “in light of all of the evidence,” it is “more likely than not that no reasonable juror would have convicted him.” Here, even assuming that Santos would have required proof that Thorn laundered only the profits, and not merely the receipts, of his fraudulent asbestos abatement scheme, he could not meet this standard. The trial evidence clearly established that Thorn’s company used money realized from existing abatement jobs to finance new projects, and the realized monies included profits.

With this, the court vacated the amended judgment and 132-month sentence, and ordered the court to reinstate the money laundering conviction and the 144-month sentence it had previously imposed.

Pill Pains

United States v. Quinones, No. 09-4361-cr (2d Cir. March 29, 2011) (Walker, Straub, Katzmann, CJJ)

Antonio Quinones and his son, Herman, were convicted of conspiring to distribute controlled substances. Antonio was also convicted of a money laundering conspiracy. In this opinion, the Court tries to make sense of a confusing Supreme Court money laundering case and displays a rare difference of opinion over a conscious avoidance jury instruction.

Background

Antonio Quinones entered the internet pharmacy business in 2002 and, for several years, ran websites where customers could purchase prescription drugs with virtually no medical oversight. The purchaser would select the drug he wanted and fill out a brief medical questionnaire. This was then submitted to a doctor who reviewed it and approved the order. The doctors were paid per questionnaire reviewed, and often reviewed more than one hundred per day. Once approved, the prescription was transmitted to an actual pharmacy that Antonio controlled and the medicine was shipped out. Typically, he would send out one thousand orders per day.

Herman’s role was more limited - he filled orders and ran the customer service call center. Eventually, he developed his own “back end” administrative website to help Antonio process payments.

An Eastern District jury convicted them both; the court sentenced Herman to eighteen months’ imprisonment and Antonio to ninety-seven.

The Appellate Court’s Decision

Money Laundering

Taking the issues in reverse order, here the court was required to sort out the confusing array of opinions relating to money laundering in United States v. Santos, 553 U.S. 507 (2008). In Santos, which involved an illegal gambling operation, a four-justice plurality applied the rule of lenity and concluded that the term “proceeds” in the money laundering statute means profits, not gross receipts. The plurality was concerned that if the definition of “proceeds” were not limited to profits, the money laundering would “merge” with the crime of running an illegal gambling business because the essence of the business itself, taking money from bettors and paying the winners, would also be money laundering transactions.

Here, Antonio argued that, under Santos, his money laundering conviction likewise could not stand because his case presented the same “merger problem.” The circuit, addressing a question of first impression, held that Santos does not apply to money laundering offenses that derive from the sale of contraband.

But getting there involved a very detailed look at Santos. The fifth vote in that case came from Justice Stevens, who held that the meaning of the term “proceeds” depended upon the nature of the underlying criminal conduct. His view of the legislative history of the money laundering statute was that Congress intended it to apply to the gross revenues, and not just the profits, of certain other activities, including “the sale of contraband.” The four justices who dissented would have held that the term “proceeds” means “gross receipts” in all circumstances. Accordingly, the circuit, in trying to identify the scope of Santos, looked to the “position taken by those Members [of the Court] who concurred in the judgment on the narrowest grounds.” Some circuits have limited Santos to its facts, while others have indicated that Santos applies more broadly, to any case that presents a “merger problem.”

Here, the court concluded that the Stevens concurrence determined the scope of Santos and thus that the statutory term “proceeds” includes “gross revenue from the sale of contraband.” It accordingly affirmed Antonio’s money laundering conviction.

Conscious Avoidance

To convict the defendants of unlawful distribution of controlled substances, the jury was required to find that they either knew or “reasonably should have known” that their doctors and pharmacists were acting in bad faith; that is, “outside the usual course of professional practice and without a legitimate medical purpose.” Their defense was good faith reliance on the determinations of the doctors and pharmacists. Here, the district court gave a conscious avoidance charge but the charge neglected to mention that the concept of conscious avoidance did not apply if the jury found that the Quinoneses actually believed that the doctors and pharmacists were acting in good faith.

A two-judge majority held that the error was harmless because defendants’ “actual but unreasonable belief in the existence of ... the doctors’ and pharmacists’ good faith” could not absolve the defendants of culpability.

The government introduced “overwhelming evidence that the defendants knew or reasonably should have known that the doctors and pharmacists on whom they relied were acting in bad faith.” The defendants knew that their internet pharmacies permitted no interaction at all between a customer and a doctor. In fact, days after Florida enacted a law prohibiting Florida doctors from writing prescriptions without physically consulting with their patients, Antonio moved his filling pharmacy to New York. Moreover, he regularly changed locations as law enforcement raided or shuttered his pharmacies. Antonio was also aware that someone else in the same business had been arrested and that federal agents had informed some of his employees that his internet pharmacies were illegal.

Accordingly, the majority affirmed on this point as well.

Judge Straub vigorously dissented. In his view, the flawed language of the instruction required a new trial. The “actual belief” language is critical to the conscious avoidance instruction. “When knowledge of the existence of a particular fact is an element of an offense, such knowledge is established if a person is aware of high probability of its existence, unless he actually believes that it does not exist.” This language “must be incorporated into every conscious avoidance charge” and is particularly important in cases like this one, where the defendant “relied on his lack of knowledge of a crucial fact as a central element of his defense.” The conscious avoidance charge here was “completely silent on the Quinones’ actual beliefs” and thus was “wholly deficient and clearly erroneous.”

Judge Straub also found the error to be prejudicial. First, he disagreed with the majority’s premise that the Quinones’ actual but unreasonable belief in the doctors’ and pharmacists’ good faith could not absolve them. In his view, if the jury found that the Quinoneses actually believed that the doctors and pharmacists were acting in good faith, it could not have convicted them on a conscious avoidance theory.

Judge Straub also found significant evidence that the Quinoneses did indeed believe that the doctors and pharmacists were acting in good faith. Antonio testified; he explained the steps he took to ensure that his business was legal, and asserted that he actually believed that the doctors and pharmacists were acting in good faith. He also consulted with an attorney, who conducted an investigation and advised him that the businesses were legal. He moved his business out of states where it was not legal, and had a “block list” to prevent drug abusing customers from repeatedly purchasing pills.

Judge Straub also disagreed with the majority that there was “overwhelming evidence” that the Quinoneses should have known that the practitioners were acting in bad faith. The record here contained “conflicting testimony as to what the Quinoneses knew and believed,” as well as “clear evidence that Antonio consulted with both the doctors [and] attorneys about whether his business was legal.” Accordingly, “a jury should determine whether the Quinoneses are guilty after hearing a proper jury charge.”

High Sierra

United States v. Sierra, No,. 08-2761-cr (2d Cir. March 29, 2010) (Jacobs, Miner, Livingston, CJJ)

Gustavo Sierra pled guilty to one count of drug trafficking and one count of money laundering. The drug count involved 21 kilograms of heroin, while the money laundering count involved the proceeds of the sale of between 2 and 3.5 kilograms. Sierra’s presentence report calculated the base offense level for the money laundering count by using the total amount of the drugs involved in the drug trafficking count. With adjustments, this produced a sentencing range of 135-168 months.

Sierra objected, arguing that the guideline range for the money laundering count should be based only on the drug quantity alleged in that count, which would produce a lower offense level. The district court disagreed, used the higher range, and sentenced him to 135 months’ imprisonment.

On appeal, the circuit affirmed. It characterized Sierra as a “direct money launderer,” which means that he both laundered the money and committed the offense that produced it. And the guideline for direct money launderers, § 2S1.1(a)(1), clearly specifies that the base offense level should be the offense level “for the underlying offense from which the laundered funds were derived” if the defendant either committed the underlying offense or would be accountable for it under the usual relevant conduct principles. Here, the “underlying offense” was indisputably the 21-kilogram heroin conspiracy. Thus, under this instruction, the offense level for that conspiracy became the base offense level for the money laundering count.

The court also rejected Sierra’s novel argument that the guideline’s reference to relevant conduct principles should mitigate his sentence, rather than increase it, because he in fact laundered only the proceeds of 2 to 3.5 kilograms and not the full 21. Under the relevant conduct guideline, a defendant is accountable for “all quantities of contraband with which he was directly involved”; thus, that a defendant “laundered a lesser amount of funds than the value of his entire drug operation” is “immaterial.” Sierra’s argument would also have the effect of “underminin[g] the express purpose of” the money laundering guideline, which is to punish direct money launderers “one to four levels greater than the Chapter Two offense level for the underlying offense.” Finally, the argument is precluded by the language of the guideline itself which, for direct money launderers, does not refer to the value of the laundered funds in any way. Accordingly, Sierra’s guidelines were correctly calculated.

Sierra also argued, for the first time on appeal, that his sentence created an unwarranted disparity with his co-defendants. But the court disagreed, calling the disparities warranted. His co-defendants either had plea agreements, pled guilty only to one of the counts, were “exceptionally honest in admitting to the crimes," or had unique personal circumstances, such as serious illness, that reduced their risk of recidivism.

Money Disorder

United States v. Garcia, No. 08-1621-cr (2d Cir. December 1, 2009) (Jacobs, Sack, Lynch, CJJ)

In Cuellar v. United States, 128 S.Ct. 1994 (2008), the Court held that, for the crime of transportation money laundering under 18 U.S.C. § 1956(a)(2)(B)(i), the government most prove more than that the money was hidden during its transportation. Rather, it must prove that the “purpose,” not merely the effect, of the transportation was to conceal or disguise the nature, location, source, ownership or control of the money. Thus, the government must prove not just how the money was moved, but why it was moved. The Second Circuit has held that this holding applies equally to “transaction” money laundering under 18 U.S.C. § 956(a)(1)(B)(i), which makes it a crime to engage in certain financial transactions, including the transfer or delivery of cash, for those same purposes.

Here, the court held that, in light of these principles, Garcia’s guilty plea to transaction money laundering lacked a factual basis.

During his allocution, Garcia admitted that he “went to get some money” that he believed was dirty. But when the judge asked whether he understood that his picking up cash “was in fact part of a larger scheme to conceal or disguise the source or ownership of the funds,” he replied “no.” His counsel then proffered that Garcia agreed to pick up the money and deliver it to someone else knowing that the funds were the proceeds of illegal activity and would not be declared as income. He also proffered that Garcia concealed the funds in a cargo truck that was also carrying legitimate cargo. After confirming that Garcia knew that the packages of money were wrapped so as to conceal their contents, the district judge accepted his plea.

Although Garcia challenged the sufficiency of his plea for the first time on appeal, the circuit vacated the plea. The court first noted that Garcia's acknowledgment of his understanding of the nature of the charge was not enough. The particular charge was “[]complicated and [not] readily understandable by the average layman.” Moreover, Garcia’s allocution “demonstrated actual confusion about the critical concealment element of the offense.” Nothing in his colloquy showed his understanding “that the transaction [had to] be designed to conceal a listed attribute of the funds - or [contained] an admission that Garcia had such a purpose.”

Having found error, the court had no trouble finding plain error here: “the additional elements necessary for Rule 52(b) relief flow naturally under the present circumstances.” Although Cuellar was not decided until after the plea, whether an error is “plain” is “determined by reference to the law as of the time of the appeal,” by which time it was clearly plain. And the error affected Garcia’s substantial rights. The record presented a “reasonable probability that, had Garcia fully understood the nature of the crime he was charged with, he would not have pled guilty.”

The Pursuit of Happy Ness

United States v. Ness, No. 05-4401-cr (2d Cir. May 8, 2009) (Winter, Calabresi, Pooler, CJJ)

Samuel Ness was convicted of money laundering offenses in connection with his armored car business, which received and distributed millions of dollars in narcotics proceeds. He was sentenced to 15 years in prison. On his first appeal, the circuit affirmed. He then sought certiorari in the wake of Regalado Cuellar v. United States, 128 S.Ct. 1994 (2008), and the Supreme Court vacated the affirmance and remanded the case for further consideration. This time, the circuit found that the evidence was insufficient and reversed the conviction.

Cuellar held that, for transportation money laundering offenses, the government must prove that the defendant’s purpose, “in whole or in part, was to conceal the nature, location, source, ownership or control of the funds.” A showing that a defendant hid funds during transportation is not sufficient to support a conviction, since there is “a difference between concealing something to transport it, and transporting something to conceal it.”

Ness was convicted of two counts. A substantive transaction money laundering count under 18 U.S.C. §§ 1956(a)(1)(B)(i), and a conspiracy with three objects:transaction money laundering, transportation money laundering under 1956(a)(2)(B)(i), and engaging in monetary transactions in unlawful funds under 18 U.S.C. § 1957(a).

With respect to the § 1956 charges, the circuit found no evidence that Ness’ “purpose in transporting the [drug] proceeds was to conceal” the nature, location, source, ownership or control of the money. All the government proved was “how” Ness moved the money, not “why.” Even Ness’ “avoidance of a paper trial” by hiding the proceeds and using code words showed “only that he concealed the proceeds in order to transport them. Under Cuellar, such evidence is not sufficient to prove transaction or transportation money laundering.”

A different analysis doomed the § 1957 object. This statute requires the government to prove a “monetary transaction” that involved a “financial institution.” Here, the evidence on that element was insufficient. “Financial institution” has a long and complex definition, comprising the twenty-six types of institutions listed in 31 U.S.C. § 5312, plus several others described in related regulations. Neither Ness nor his armored car company qualified under any of these definitions.

On appeal, the government relied solely on one of the regulations, 31 C.F.R. § 103.11, which covers money transmitters and the like. The circuit first held that since the government did not present this theory to the jury it “cannot support an affirmance.” In any event, it lacked merit, since Ness’ business lacked the features that the regulation requires of a money transmitter.

Slight Change

United States v. Huezo, No. 07-0033-cr (2d Cir. October 14, 2008) (Newman, Walker, Sotomayor, CJJ)

Defendant Huezo was convicted, after a jury trial, of money laundering and money laundering conspiracy. The district court granted his post-verdict Rule 29 motion, and the government appealed. A divided appellate panel reversed. It also, however, unanimously wrought an important change in conspiracy law: an elimination of the so-called "slight evidence" rule.

Background

On November 5, 2004, two of Huezo’s co-conspirators drove from Connecticut to New York in a Jeep registered to Heuzo to discuss delivering $1 million to an undercover agent, who was posing as a money launderer. Three days later, Huezo drove one of them back to New York, opened the trunk from the driver’s seat, and the agent recovered a bag containing half of the money. It was packaged in bundles, as is typical for money laundering transactions. The two men returned to a house Connecticut, picked up the third co-conspirator, and went out to dinner.

Two days later, Huezo left the house carrying a small back bag that he put in the Jeep. He then left the Jeep and watched as one of his associates put a black suitcase in the back. They drove to New York, but en route, they were pulled over for speeding. The Jeep was registered in Huezo’s name at the address in Connecticut, although the registration was not yet on file, which suggested that it was newly registered. The car was impounded and, during an inventory search, officers discovered $500,000 in the black suitcase and $6000 in Huezo’s own bag.

Further investigation revealed that the three men had traveled from California to Connecticut a few days before the deliveries.

The Majority’s View

Huezo was convicted of “transaction” money laundering, under which the government was required to prove that he knew that “the purpose or intended aim of the transaction was to conceal or disguise a specified attribute of the funds.” This same intent must be proven for aiding-and-abetting and conspiracy. Here, the majority held that there was sufficient evidence for a rational jury to conclude that Huezo had the requisite criminal knowledge and intent.

First, the court noted that there was ample evidence that the money involved in the two deliveries constituted the proceeds of criminal activity - drug trafficking, specifically - and that those deliveries were transactions designed to conceal the nature of the money.

It also concluded that there was sufficient evidence to connect Huezo to the conspiracy and establish both that he knew the conspiracy’s goals and shared his co-conspirator’s specific intent. The evidence here “went well beyond mere presence or association.”

First, while there was no direct evidence that Huezo “saw or knew what was in any of the bags,” there was sufficient circumstantial evidence. His “special treatment” of the small bag was evidence that the $6000 “constituted payment” for his efforts, and the $6000 was packaged in the same way as the rest of the laundered funds. Moreover, Huezo resided in the same house as the co-conspirators, which was also where the money was kept. From this, a jury could “reasonably infer that Huezo had the requisite knowledge and specific intent” to commit money laundering.

In addition, jurors relying “on their common sense and experience in drawing inferences” could reasonably conclude that “the principals in the conspiracy would not have trusted an outsider (with no knowledge of their criminal purpose) to transport $1 million in laundered funds,” to be present when the funds were delivered, and to share their house for several days.

Finally, the court viewed the evidence of the three conspirators' joint travel as further supporting a finding of guilt. It led to a “reasonable inference that the three men traveled from California to Connecticut and met for the express purpose of facilitating the money laundering conspiracy,” and thus that Huezo participated in it by design and not simply by happenstance.”

The Dissent

Judge Sotomayor dissented. In her view there was insufficient evidence that Huezo had either the requisite knowledge or the specific intent to launder. Rather, the evidence only “weakly” supported a view that Huezo “may have known” that the suitcases contained money and that the money was the proceeds of criminal activity, but there was not enough evidence that he knew the purpose of the transactions; that is, that the money was to be laundered.

The “Slight Evidence” Rule

There was one thing, however, that united all three judges, and indeed, the entire court, since the opinion was circulated to all of its judges: a rejection of formulation - invoked by the government here - that, once a conspiracy has been established,” the evidence necessary to link a defendant to it “need not be overwhelming,” or need only be “slight.” This opinion conclusively holds that these “formulations do not accurately describe the government’s burden of proof in conspiracy cases, and the use of [them] should be discontinued.”

Indeed, in his concurrence, Judge Newman, does a terrific job of debunking this language, tracing it back to its origins in a 1930 Fifth Circuit case, where it appeared “without any citation,” then noting that the Fifth Circuit itself found the use of the “slight evidence” formulation in a jury charge to be structural error - that is, one for which no harmless error analysis is required - in 1977.