United States v. Drage , 681 F. App'x 654 ( 2017 )

FILED
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS March 7, 2017
Elisabeth A. Shumaker
TENTH CIRCUIT
Clerk of Court
UNITED STATES OF AMERICA,
Plaintiff - Appellant,
v. No. 15-4190
(D.C. No. 2:09-CR-00460-DS-BCW-4)
NATHAN WHITNEY DRAGE, D. Utah
Defendant - Appellee.
ORDER AND JUDGMENT *
Before BRISCOE, EBEL, and MURPHY, Circuit Judges.
I. Introduction
A jury found defendant-appellee, Nathan Drage, guilty of three counts of
willful failure to file corporate tax returns and one count of conspiracy to impair
and impede the Internal Revenue Service. The district court acquitted Drage of
the conspiracy conviction, concluding the government’s evidence was not
sufficient to show Drage had an unlawful agreement with any coconspirator. The
*
This order and judgment is not binding precedent except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
district court also conditionally granted Drage’s motion for a new trial as to the
conspiracy count. See Fed. R. Crim. P. 29(d). The government appeals.
Exercising jurisdiction pursuant to 18 U.S.C. § 3731, this court reverses
the district court’s rulings and remands the matter to the district court to reinstate
the guilty verdict.
II. Background
Drage and three other individuals—Lester H. Mower, Eva Jeanette Mower, 1
and Adrian A. Wilson—were charged in a superseding indictment with, inter alia,
conspiracy to impede “the lawful government functions of the Internal Revenue
Service in the ascertainment, computation, assessment, and collection of . . .
federal income taxes.” See 18 U.S.C. § 371. The alleged objective of the
conspiracy was the concealment of income from the IRS. The charges arose from
a reverse merger 2 business in which Drage, Lester Mower, and Wilson were
engaged for many years. Drage was also charged with multiple counts of willful
failure to file corporate income tax returns. See 26 U.S.C. § 7203.
1
According to Drage, the charges against Ms. Mower were dismissed
pursuant to Fed. R. Crim. P. 48(a).
2
“A reverse merger is a transaction in which a privately-held corporation
acquires a publicly-traded corporation [the “shell company”], thereby allowing
the private corporation to transform into a publicly-traded corporation without the
necessity of making an initial stock offering.” SEC v. M & A West, Inc., 538 F.3d
1043, 1046 (9th Cir. 2008).
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The prosecution against Drage proceeded to trial in February 2015. The
government’s theory as to the conspiracy charge was that Drage conspired with
Mower and Wilson to impede the IRS by concealing information necessary for the
IRS to properly assess income taxes against him. The government argued the
deception “occurred at every phase of [the reverse merger] business” and the
concealed information included the ownership and taxable sales of stock.
The government’s evidence demonstrated the scheme worked as follows.
Drage, Mower, and Wilson obtained a controlling interest in a publically traded
company “with minimal assets and liabilities and no actual operations,” i.e., a
“shell company.” SEC v. M & A West, Inc., 538 F.3d 1043, 1046 (9th Cir. 2008).
They then installed nominees to serve as officers and directors of the shell
company. These nominees had no function other than to sign documents on
behalf of the shell companies; all decisions with respect to the shell companies
were actually made by Drage, Mower, and Wilson. Drage’s role included
preparing documents necessary to transfer stock in the shell companies to
individual nominees and entities controlled by him, Mower, and Wilson. A
privately held company was then merged into the shell company and the nominees
became stockholders in the post-merger company.
The government’s evidence showed that once the reverse mergers were
complete, Drage prepared the legal documents necessary for the nominees to
transfer shares in the post-merger corporation to him, Mower, and Wilson or to
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entities controlled by them. One witness, who served as an officer and director of
a post-merger corporation known as NetAmerica International Corporation
(“NetAmerica”), gave an example of how these transfers were effectuated. He
testified that Drage prepared documents directing the issuance of shares in
NetAmerica intended for a nominee 3 to instead be issued to “Nathan Drage” and
“Nathan W. Drage, trustee.” Drage also prepared documents necessary for shares
in NetAmerica to be transferred to a company controlled by Wilson known as A-
Vision Financial Corp. A unanimous consent prepared by Drage stated that A-
Vision Financial was being reimbursed for post-merger legal expenses it allegedly
financed. The witness, however, testified that Drage provided all the legal
services for the NetAmerica reverse merger. In other post-merger documents
prepared by Drage, additional shares of stock in NetAmerica were issued to A-
Vision Financial and A-Business Funding Corp., an entity controlled by Mower,
allegedly as repayment for bridge loans. The witness testified that the decision as
to how many new shares should be registered or the individuals or entities to
whom shares in NetAmerica would be issued was made by Drage or Wilson.
3
Pursuant to a document Drage prepared and filed with the SEC, the shares
were initially issued to a nominee named Michael Labertew. Labertew testified
he never received the stock because Mower and Wilson, instead, paid him $1000
cash as compensation for his role as nominee. He endorsed a blank irrevocable
stock power based on representations made to him by Mower and Wilson that the
shares would be returned to NetAmerica.
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Once stock in the post-merger company was issued, the shell game began. 4
First, shares in the post-merger companies held by nominees were transferred by
the nominees to multiple brokerage accounts controlled by Drage, Mower, and
Wilson. The government presented evidence that Wilson controlled eleven
brokerage accounts that were managed by four different brokerage firms. His
name was listed on only two of these accounts although he had authority over all
eleven. Mower controlled seven accounts that were managed by three different
brokerage firms. Two were in his name. Drage had account authority over six
accounts with three brokerage firms. One was in his name. Twelve additional
brokerage accounts were controlled by family members, many of whom also
served as nominees in the reverse merger business. For example, Mower’s sister,
Lisa Valerio, frequently served as a nominee and controlled four brokerage
accounts. Mower’s mother, who also served as a nominee on several transactions,
controlled two brokerage accounts; neither was in her name.
In an exhibit titled, “Story of a Stock Certificate,” the government provided
the jury with an example of how the post-merger actions of Drage, Mower, and
4
Steve Roberts, one of the IRS revenue agents who worked on the civil
audit of Drage, Mower, and Wilson, examined more than one thousand documents
relating to eighteen reverse mergers. He testified that he reviewed the entire set
of documents “four or five times” and each time it took him two weeks. Another
witness, who was employed as a special agent in the IRS criminal investigations
unit, testified that a team of eleven agents spent two days looking through the
evidence obtained during the search of Drage’s office in an attempt to locate
Drage’s tax returns.
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Wilson impeded the ability of the IRS to determine their tax liability by masking
the true ownership of the stock. The government’s example involved a certificate
for 380,000 shares of stock in NetAmerica that was issued to Lisa Valerio on
October 15, 1998. Valerio received the stock as compensation for serving as a
nominee officer and director. 5 Valerio testified her tasks as nominee included
attending one or two meetings, signing documents, and “trying to learn more and
more” about the company.
Valerio broke the NetAmerica certificate into eight separate certificates of
various denominations on the “guidance” of Drage and Mower. All eight
certificates were issued in Valerio’s name. Valerio deposited two of the
certificates into her brokerage account at Alpine Securities and thereafter sold
those shares on the advice of Mower and/or Drage. After the shares were sold,
disbursements totaling $1,025,908 were made from the Alpine Securities
brokerage account to Valerio’s personal bank account at Salt Lake Credit Union.
On May 7, 1999, Valerio wrote a check from her bank account to Robert Kroft in
the amount of $50,000. She testified this check was written at the direction of
5
Valerio, who is Mower’s sister, served as the Vice President of
NetAmerica and received the 380,000 shares as compensation for her role in that
capacity. The shares were eventually sold for many millions of dollars. Another
nominee, Michael Labertew served as President of NetAmerica. He testified he
received only $1,000 as compensation for his services as a nominee. See supra
n.3.
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either Drage or Mower and she could not remember its purpose although it may
have been for services Kroft performed for the reverse merger business.
On August 8, 2000, Valerio wrote a $200,000 check from her bank account
to Nathan Drage Law Firm. The memo line on the check indicated the amount
was a loan with an eighteen percent annual interest rate. Valerio testified that
despite the size of the loan, there was no loan agreement and Drage provided no
collateral. She also testified she converted the loan to an investment on the
advice of Drage, Wilson, and Mower. As to this “investment,” Valerio’s 2000
income tax return indicated she acquired stock in Digital Power on August 8,
2000—the date she made the loan to Drage. Her return also reflected that the
stock was sold on December 31, 2000, at a loss of $200,000. None of her
brokerage account statements, however, reflected either the purchase or sale of
stock in Digital Power. During closing argument, the government asked the jury
to infer from this evidence that the transaction was, in reality, a transfer of
$200,000 from the NetAmerica reverse merger to Drage that was improperly
treated as both a tax-free loan to Drage and as an income tax write-off for
Valerio.
The government’s exhibit also detailed the steps taken to convert the
remaining NetAmerica certificates issued to Valerio into cash and transfer that
cash to Drage, Mower, and Wilson. For example, Valerio cancelled two
certificates, each representing 100,000 shares, and had them reissued in the name
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of DHM Enterprises, LLC, a company Valerio and Mower set up for the benefit
of their mother. Valerio testified this was done “under the guidance” of either
Mower or Drage. Proceeds from the sale of these shares totaled $3,232,895 and
were transferred into bank accounts controlled by DHM Enterprises. Checks for
substantial amounts were written from the DHM Enterprises accounts to Nathan
Drage Law; Lester Mower; Jeanette Mower; Nathan W. Drage Trust; Nathan W.
Drage, P.C.; A-Business Funding; and Global Funding Group, Inc., an entity
controlled by Wilson. An additional $746,228 in proceeds from the sale of the
NetAmerica stock issued to Valerio was transferred to a bank account controlled
by Mower’s wife, Jeanette Mower.
Matthew Curtis, a special agent with the IRS also testified at Drage’s trial.
In June 2004, Curtis was assigned to investigate Mower and his wife. The
investigation related to stock sales conducted through Alpine Securities that were
not correctly reported on the Mowers’ tax returns. Curtis’s investigation included
gathering and analyzing brokerage and bank accounts. He eventually obtained a
warrant to search the office occupied by Drage, Wilson, and Mower. By the time
Curtis’s review of the records obtained from the office was complete, the
investigation had expanded to include Drage and Wilson.
Curtis testified he attempted to catalogue disbursements made between
1999 to 2006 from brokerage accounts controlled by Drage, Wilson, and Mower
to bank accounts also controlled by the three men. The brokerage accounts
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contained stock received by Drage, Mower, and Wilson, or their nominees from
the reverse merger business. Curtis testified the proceeds from the sale of that
stock were co-mingled with other funds in the bank accounts and the funds were
repeatedly moved between accounts owned or controlled by Drage, Mower, and
Wilson. Specifically, Curtis testified that between 1999 and 2006, Drage, Mower,
and Wilson directed 1029 6 separate bank account transfers involving the proceeds
from stock they or their nominees received from reverse mergers. Government
Exhibit 60-29 detailed these 1029 transfers.
Curtis’s testimony also detailed disbursements subsequently made from
bank accounts or controlled entities which had received either a brokerage
account disbursement or a transfer of funds from a bank account into which
brokerage account disbursements had been received. These disbursements were
for personal expenses incurred by Drage, Mower, and Wilson. The payments
benefitting Mower totaled $1,509,986 and they included the sum of $173,668.12
for mortgage payments on Mower’s residence; home improvement expenses
totaling $383,980; disbursements from an account controlled by Drage to pay
Mower’s back taxes; payments covering education expenses for Mower’s
children, including $53,982 to Intermountain Christian School and $12,536 to
Azusa Pacific University; checks from the A-Business Funding account to BMW
6
Curtis’s summary of disbursements was limited to those involving $1000
or more.
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of Palm Springs for Jeanette Mower’s BMW automobile in the total amount of
$25,502; other automobile expenses including $43,511 for Mower’s Porsche 911
automobile, $1027 for Jeanette Mower’s Mercedes CLS 500C, and $2137 for
Jeanette Mower’s Hummer H2; and disbursements totaling $509,732 directly to
Mower, some of which were drawn on a bank account in the name of Nathan W.
Drage, P.C. Payments benefitting Wilson totaled $2,298,888 and were very
similar to those that benefitted Mower. They included mortgage payments
totaling $291,852; home improvement expenses totaling $69,283; payments for
luxury automobiles totaling $278,969; credit card payments totaling $294,503;
private school tuition totaling $28,700; disbursements of $95,000 to Las Vegas
casinos; $743,142 in cash disbursements made directly to Wilson and his wife
from entities and accounts controlled by either Wilson or Drage; and transfers
totaling $329,136 to a joint personal account controlled by Wilson and his wife.
Like Mower and Wilson, Drage also received more than a million dollars
from the bank accounts analyzed by Curtis to pay remarkably similar expenses.
The disbursements benefitting Drage included mortgage payments of $189,869;
home improvement expenses totaling $19,080; charitable donations of $97,865;
payments for private school tuition totaling $15,202; cash disbursements to
Drage’s wife totaling $668,545 and disbursements to Drage totaling $144,100;
expenses relating to the purchase and maintenance of a boat in the amount of
$46,043; payments for automobiles totaling $109,836; credit card payments of
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$286,064; and three payments for two airplane hangers in the total amount of
$125,000. Curtis testified the total of all disbursements benefitting Drage was
$1,701,610.
Despite the millions of dollars flowing to Drage, Wilson, and Mower from
the reverse merger business, all three failed to file individual income tax returns
for many of the relevant years or report any stock sales. Neither Drage nor
Wilson filed personal or corporate income tax returns from 2000 to 2006. Mower
filed no individual returns from 2003 to 2006.
The jury convicted Drage on both the conspiracy and the failure-to-file
counts. Mower and Wilson were tried in a separate proceeding presided over by
the same judge. They were convicted of failing to file corporate tax returns but
were acquitted of conspiracy. After the judgment in the Mower/Wilson trial,
Drage filed a motion for a judgment of acquittal, asking the court to enter an
acquittal on the conspiracy count. In the alternative, he asked for the court to
vacate the jury’s verdict on all counts and grant him a new trial. The district
court granted Drage’s motion for acquittal, concluding the government did not
present “sufficient evidence to prove the existence of an agreement between
Drage and Mower and Wilson in furtherance of a conspiracy.” The court also
conditionally granted Drage’s request for a new trial as to the conspiracy count,
stating as follows: “Based on the unique circumstances of having heard the
evidence in both separate trials of the alleged co-conspirators, there is a serious
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danger that a miscarriage of justice has occurred.” It is from these rulings that
the government appeals.
III. Discussion
A. Jurisdiction
Before proceeding to the merits, it is necessary to determine whether this
court has jurisdiction over this appeal. 7 Although the district court vacated
Drage’s conspiracy conviction, his convictions for violating 26 U.S.C. § 7203 by
willfully failing to file corporate tax returns have not been vacated. Because he
has not yet been sentenced on those convictions, this appeal is interlocutory.
United States v. Stallings, 810 F.2d 973, 974 (10th Cir. 1987) (“[A] criminal case
is not final until sentencing is completed.”). Our jurisdiction arises, if at all,
under 18 U.S.C. § 3731. That statute states, in relevant part: “In a criminal case
an appeal by the United States shall lie to a court of appeals from a decision,
7
The parties were asked to brief this issue in an order dated January 13,
2016. Curiously, Drage argues this court should not “exercise its jurisdiction” to
hear the appeal until after he is sentenced, implying that jurisdiction exists but the
matter should be abated. We could find no authority for this approach and Drage
cites none. He also argues 18 U.S.C. § 3731 does not permit a government appeal
from the grant of a motion for judgment of acquittal because Rule 29 is not
mentioned in § 3731. This argument is foreclosed by decades-old Supreme Court
and Tenth Circuit precedent. United States v. Wilson, 420 U.S. 332, 352-53
(1975) (reading § 3731 as permitting a government appeal from a post-verdict
judgment of acquittal); United States v. Calloway, 562 F.2d 615, 616-17 (10th
Cir. 1977) (same); see also United States v. Martin Linen Supply Co., 430 U.S.
564, 568 (1977) (holding “appeals by the Government from . . . judgments of
acquittal” entered under Rule 29 are authorized by 18 U.S.C. § 3731 “unless
barred by the Double Jeopardy Clause of the Constitution”).
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judgment, or order of a district court dismissing an indictment or information or
granting a new trial after verdict or judgment, as to any one or more counts, or
any part thereof . . . .” Id. (emphasis added).
The plain language of § 3731 permits the government to appeal from a
post-verdict ruling reversing only one of several convictions. The statute also
instructs that the government’s appeal from such a ruling must be “taken within
thirty days after the decision, judgment, or order has been rendered.” Id.
Because it is typically not possible to sentence a criminal defendant within the
thirty-day period, these two provisions, when read together, support the
conclusion that this court’s jurisdiction over interlocutory criminal appeals is not
affected by the fact a defendant has not yet been sentenced on any remaining
counts. See United States v. Carrillo-Bernal, 58 F.3d 1490, 1491-92 (10th Cir.
1995) (“Section 3731 governs interlocutory government appeals in a criminal case
. . . .”). Accordingly, we have jurisdiction and proceed to the merits of the
government’s appeal.
B. Judgment of Acquittal
Rule 29(c)(2) of the Federal Rules of Criminal Procedure permits a court to
set aside a guilty verdict and enter a judgment of acquittal. The grant of a Rule
29(c)(2) post-verdict acquittal is reviewed de novo. United States v. Ching Tang
Lo, 447 F.3d 1212, 1221 (9th Cir. 2006). Here, the district court ruled the
government’s evidence was insufficient to sustain Drage’s conspiracy conviction.
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When this court reviews the sufficiency of the evidence presented at trial, we
draw all reasonable inferences “therefrom in the light most favorable to the
government.” United States v. Hale, 762 F.3d 1214, 1222 (10th Cir. 2014). In
conducting our review, we defer to the jury’s verdict and do not weigh conflicting
evidence or consider witness credibility. United States v. Dewberry, 790 F.3d
1022, 1028 (10th Cir. 2015). A conviction should be reversed “only if no rational
trier of fact could have found the essential elements of the crime beyond a
reasonable doubt.” Hale, 762 F.3d at 1222-23 (quotation omitted). Thus, the
district court’s post-verdict acquittal is improper if a rational jury could have
found Drage guilty of conspiracy beyond a reasonable doubt.
Drage was charged with, and convicted of, violating 18 U.S.C. § 371,
which makes it a federal crime for two or more persons to conspire to defraud the
United States. The indictment alleged the objective of the conspiracy was to
defraud the United States “by impeding, impairing, obstructing, and defeating the
lawful government functions of the Internal Revenue Service in the
ascertainment, computations, assessment, and collection of revenue, that is,
federal income taxes.” To secure a conviction on the § 371 conspiracy charge,
the government was required to show (1) Drage agreed with another person to
violate the law; (2) he knew the essential objective of the conspiracy; (3) his
involvement was knowing and voluntary; (4) there was interdependence among
the coconspirators; and (5) an overt act in furtherance of the conspiracy was
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committed. United States v. Bedford, 536 F.3d 1148, 1156 (10th Cir. 2008). In
his motion for judgment of acquittal, Drage argued there was insufficient
evidence he had an agreement with either Mower or Wilson to impair or impede
the IRS.
In its order granting Drage’s request for an acquittal, the district court was
influenced, in part, by the notion that Drage, Mower, and Wilson all reported
some income from stocks sales during the relevant period and “there were several
returns prepared for many of the years at issue.” Drage repeats this justification
in his appellate brief. The district court’s statement is erroneous for two reasons.
First, and most glaring, is that the evidence showed Drage and Wilson never
reported any income from stock sales from 1999 to 2006. 8 Mower reported stock
sales on joint returns he filed in 2000, 2001, and 2002. Mower did not file a joint
or individual return in 1999 or 2003 to 2006 and, thus, reported no income from
stock sales.
Second, although the district court correctly noted tax returns were
prepared for many of the years at issue, that fact does not support the court’s
conclusion that Drage, Mower, and Wilson “made full disclosures of the income
attributable to each” to their individual accountants. Contrary to the court’s
statement, there was no evidence Drage fully disclosed his income to Mark
8
Neither Drage nor Wilson filed individual income tax returns from 2000 to
2006. On the returns they filed in 1999, each reported zero income from stock
sales.
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Berrett, the accountant he retained in 2004. Mr. Berrett prepared Drage’s returns
based on information he received from Drage. He testified the 2001 personal
income tax return he prepared for Drage showed one sale of stock in that year,
resulting in a long term capital gain of $232. Drage’s 2002 return showed no
capital gains and no stock sales. Mower’s accountant, Kent Fitzgerald, and
Wilson’s accountant, James Downward, testified they were retained in 2004 and
2005, respectively, to prepare prior years’ returns based on documents supplied
by Mower and Wilson. There was no testimony or other evidence confirming that
the records Drage, Mower, and Wilson provided to their accountants were
accurate or complete. In light of the government’s evidence showing Drage,
Mower, and Wilson were the beneficial owners of stock held and sold by
nominees, the jury could reasonably conclude, contrary to the district court’s
statement, that the information the three men provided to their accountants as to
their capital gains from stock sales was inaccurate or incomplete. Further, there
was no evidence Drage, Mower, or Wilson ever filed the returns prepared by
Berrett, Fitzgerald, and Downward.
Even assuming Drage, Mower, and Wilson provided their accountants with
full and accurate information, the failure of all three to file the prepared returns
supports the government’s position they had a common agreement to violate the
law. Specifically, the evidence showed (1) Drage, Mower, and Wilson rarely, if
at all, filed income tax returns during the relevant period; (2) all three men
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retained accountants to prepare prior years’ returns only after the government
began investigating Mower and his wife; and (3) none of the men filed those
returns. Construed in the light most favorable to the government, a reasonable
jury could infer from this similar, yet unusual, behavior that Drage, Mower, and
Wilson had an agreement not to file the prior years’ returns because they would
provide the IRS with information it could use to accurately assess their tax
liability. 9 The district court erred by weighing conflicting evidence as to Drage,
Mower, and Wilson’s tax returns and failing to view all the evidence in the light
most favorable to the government. United States v. White, 673 F.2d 299, 301-02
(10th Cir. 1982) (reiterating that the district court must view all the evidence in
the light most favorable to the government and is precluded from weighing
conflicting evidence).
“To demonstrate the existence of a conspiratorial agreement it simply must
be shown that there was a single plan, the essential nature and general scope of
which was known to each person who is to be held responsible for its
consequences.” Snell v. Tunnell, 920 F.2d 673, 702 (10th Cir. 1990) (quotations
and alteration omitted). Further, a conspiratorial agreement may be implicit and a
“jury may infer conspiracy from the defendants’ conduct and other circumstantial
evidence indicating coordination and concert of action.” United States v. Dazey,
9
Steve Roberts, an IRS revenue agent, testified that a nominee does not
recognize any income from the sale of stock. The income, instead, must be
recognized by the beneficial owner.
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403 F.3d 1147, 1159 (10th Cir. 2005). The government presented evidence that
Drage, Mower, and Wilson had a close working relationship and were all involved
in the same reverse merger business. William Chipman, an individual who played
a role in at least one reverse merger testified Wilson found the deals, Mower
structured them, and Drage prepared all the legal documents. The government’s
evidence showed that all three men engaged in identical post-merger conduct: all
received stock in the post-merger company (or proceeds from the sale of that
stock) directly or indirectly from a nominee in the form of distributions to
brokerage accounts they owned or controlled; all engaged in the very unusual
activity of repeatedly moving the proceeds from the sale of the stock from one
bank account to another, co-mingling the proceeds with other monies in the bank
accounts; all used the proceeds to pay personal expenses; and none reported the
income from the stock sales. Based on evidence Drage, Mower, and Wilson all
engaged in post-merger conduct that was unusual and coordinated, the jury could
reasonably infer the three men did not each independently devise the same post-
merger process but that they collectively formulated a common plan intended to
obfuscate the beneficial ownership of stock. The government’s evidence also
showed that Drage, Mower, and Wilson had ample opportunity to devise and
perpetuate this scheme. There was testimony the three men shared office space, a
receptionist, a main phone line, and support staff. The receptionist testified the
three “made their decisions together” and met daily behind closed doors.
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Properly considered in the light most favorable to the government, this evidence
is sufficient to support a finding Drage, Mower, and Wilson had a conspiratorial
agreement.
Having concluded the evidence was sufficient to show an agreement, we
next consider whether that agreement was unlawful. The district court ruled in
Drage’s favor on this point, assuming there was an agreement but concluding
there was insufficient evidence the objective thereof was to impede the IRS. The
court was persuaded by Drage’s argument that none of the post-merger activity in
which he, Mower, or Wilson engaged was illegal. Specifically, there was no
evidence of any illegality in the reverse mergers themselves, the use of nominees
to facilitate reverse mergers, the use of nominees to hold stock, or the repeated
transfers of money from bank account to bank account. According to the district
court, this lack of evidence was fatal to the government’s case because “[m]aking
the job of the IRS more difficult is not tantamount to conspiring to violate the
law.” The court identified the only evidence of illegality as the failure of Drage,
Mower, and Wilson to file returns for some of the years in question. It concluded
that lone fact was insufficient to support the jury’s verdict.
The district court is correct that there was nothing unlawful about the
majority of the individual acts in which Drage, Mower, and Wilson engaged and
the government does not argue otherwise. The government, however, is not
required to show that all the individual acts in which coconspirators engaged were
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themselves illegal. Evidence is sufficient to show an unlawful agreement for
purposes of § 371 if it indicates the obstruction of lawful governmental functions
was accomplished by “deceit, craft or trickery, or at least . . . means that are
dishonest.” Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).
In United States v. Brunetti, this court affirmed the convictions of
individuals charged with conspiring to defraud the IRS in violation of § 371, who
devised “a plan to purchase and sell stock at a gain without reporting it as taxable
income.” 615 F.2d 899, 903 (10th Cir. 1980). The evidence showed the
defendants engaged in the following activities: “Purchases of stock were made at
a low price from unknowledgable sellers. The shares thus purchased were
transferred into shares of subsidiary or related corporations. Stock splits ensued.
Transfers were often through nominees, who arranged the ultimate sale of the
stock thus acquired.” Id. Although none of those individual acts were unlawful,
this court held the evidence was “legally sufficient” to support the defendants’
convictions. Id. The district court’s ruling on the legality of the coconspirators’
individual acts is inconsistent with Brunetti. Consequently, the district court
erred in refusing to consider the considerable evidence showing the agreement
between Drage, Mower, and Wilson was illegal even if that evidence did not show
anything “per se illegal about the alleged business activity between Mower,
Wilson, and Drage.”
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The jury heard extensive evidence from which it could find that Drage,
Mower, and Wilson knowingly agreed to engage in identical post-merger activity
that impeded the ability of the IRS to trace beneficial ownership of the stock or
the proceeds from its sale. As an example, evidence showed that the nominee
who served as president in the NetAmerica reverse merger received $1000 as
compensation whereas a second nominee, Mower’s sister Lisa Valerio, received
328,000 shares of stock in NetAmerica as compensation for her role as vice-
president. Additional evidence showed that Valerio subsequently transferred this
stock or some of the proceeds from the sale of the stock to Drage, Mower, and
Wilson, or entities controlled by them. She did so at their direction. From this
evidence, the jury could reasonably infer that stock received by nominees was
actually held for the benefit of Drage, Mower, and Wilson. The evidence further
showed that (1) the stock beneficially owned by Drage, Mower, and Wilson was
held in multiple brokerage accounts, many of which were not in their names; (2)
during the relevant period, the three men repeatedly, and without any apparent
justification, moved funds between more than thirty bank accounts managed by
multiple banks, many of which were not in their names; (3) money was
distributed from the bank accounts to pay personal expenses; and (4) Drage and
Wilson failed to file income tax returns or report any stock sales to the IRS from
2000 to 2006 and Mower failed to report stock sales from 2003 to 2006. Viewed
as a whole and properly construed in the light most favorable to the government,
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this evidence is sufficient to show the scheme in which Drage, Mower, and
Wilson engaged was designed to obfuscate the true ownership of both stock and
any gains from the sale thereof in a way that would impede the ability of the IRS
to compute each man’s income taxes. A jury could infer from the coordination
and complexity of the financial maneuvering undertaken by Drage, Mower, and
Wilson—much of which was atypical and made the operation of their reverse
merger business unnecessarily complicated—coupled with the failure of all three
men to report income from the stock sales, that the purpose of the maneuvering
was to avoid paying income taxes by making it impossible for the IRS to trace
their ownership of the stock.
Having reviewed all the relevant evidence in the light most favorable to the
government, we have no hesitation concluding a reasonable jury could find that
Drage conspired with Mower and Wilson to engage in coordinated action to
achieve the common goal of receiving income from a reverse merger business and
impeding the ability of the IRS to correctly calculate that income.
C. New Trial
Rule 29(d)(1) of the Federal Rules of Criminal Procedure provides that “[i]f
the court enters a judgment of acquittal after a guilty verdict, the court must also
conditionally determine whether any motion for a new trial should be granted if
the judgment of acquittal is later vacated or reversed.” Under Rule 33, a court
may order a new trial “if the interest of justice so requires.” Fed. R. Crim. P. 33.
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After granting Drage’s motion for judgment of acquittal, the district court also
conditionally granted his request for a new trial. We review the grant of a motion
for new trial under the abuse of discretion standard. United States v. Evans, 42
F.3d 586, 593 (10th Cir. 1994).
The district court’s discussion on the matter of a new trial was brief. It
stated: “Based on the unique circumstances of having heard the evidence in both
separate trials of the alleged co-conspirators, there is a serious danger that a
miscarriage of justice has occurred.” It further noted that a miscarriage of justice
occurs when “an innocent person has been convicted.” Because we have already
concluded the evidence was sufficient to support the jury’s guilty verdict, there
was no miscarriage of justice of the type identified by the district court. In any
event, after a thorough review of the record, we have no doubt it would be
unreasonable to conclude Drage’s conspiracy conviction is against the great
weight of the evidence. See United States v. Gabaldon, 91 F.3d 91, 93-94 (10th
Cir. 1996). Instead, as described at length above, the jury’s verdict is amply
supported by the evidence. Accordingly, the district court abused its discretion
when it conditionally granted Drage a new trial.
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IV. Conclusion
The judgment of the district court is reversed. The matter is remanded to
the district court with instructions to reinstate the verdict of the jury and deny
Drage’s motion for a new trial.
ENTERED FOR THE COURT
Michael R. Murphy
Circuit Judge
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