United States v. Timothy M. McGinn, David L. Smith , 787 F.3d 116 ( 2015 )

13-3164-cr, 13-3202, 13-3477, 13-3544
United States v. Timothy M. McGinn, David L. Smith
In the
United States Court of Appeals
For the Second Circuit
________
AUGUST TERM 2014
Nos. 13-3164-cr (L), 13-3202(CON), 13-3477(XAP), 13-3544(XAP)
UNITED STATES OF AMERICA,
Plaintiff-Appellee-Cross-Appellant
v.
TIMOTHY M. MCGINN, DAVID L. SMITH
Defendants-Appellants-Cross-Appellees.
________
Appeal from the United States District Court
for the Northern District of New York.
No. 12 CR 28 ¯ David N. Hurd, Judge.
________
ARGUED: FEBRUARY 5, 2015
DECIDED: MAY 22, 2015
________
No. 13-3164-cr
Before: PARKER, HALL, and LIVINGSTON, Circuit Judges.
________
Defendants Timothy M. McGinn and David L. Smith appeal
from judgments of conviction in the United States District Court for
the Northern District of New York (Hurd, J.). The government
cross-appeals the district court’s restitution orders. We affirm the
convictions and sentences. We remand for the limited purpose of
permitting the district court to conform the defendants’ judgments
with the Mandatory Victims Restitution Act (“MVRA”). Affirmed in
part and remanded in part.
JAMES C. KNOX, ESQ., E. Stewart Jones, PLLC,
Troy, NY, for Defendant-Appellant, Cross-Appellee
Timothy M. McGinn
JUSTIN S. WEDDLE (Lauren E. Curry, on the brief),
Brown Rudnick LLP, New York, NY, for
Defendant-Appellant, Cross-Appellee David L. Smith
RAJIT S. DOSANJH (Elizabeth C. Coombe, on the
brief), Assistant United States Attorneys for
Richard S. Hartunian, United States Attorney,
Northern District of New York, Syracuse, NY, for
Plaintiff-Appellee, Cross-Appellant
BARRINGTON D. PARKER, CIRCUIT JUDGE:
After trial in the Northern District of New York (Hurd, J.), a
jury convicted Timothy M. McGinn and David L. Smith of various
securities, mail, and wire fraud and tax charges. On appeal, McGinn
and Smith challenge their convictions, principally contending that
the government’s proof of criminal intent was insufficient. A key
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No. 13-3164-cr
issue relates to the government’s allegedly improper use of a letter
written by Smith a number of years before the events leading to the
indictment. The defendants also challenge the legality of the court’s
charge on the tax counts and McGinn contends that his sentence was
procedurally and substantively unreasonable. Finally, Smith
contends that the court’s restitution and forfeiture orders included
losses related to conduct for which he was acquitted. The
government cross-appeals the district court’s restitution orders.
For the reasons that follow, we affirm the defendants’
convictions and the sentences. As for the government’s cross-
appeal, we remand the case for the limited purpose of correcting the
written judgments to conform them to the requirements of the
MVRA, 18 U.S.C. § 3663A.
BACKGROUND
The charges in this case arise from the operation by McGinn
and Smith of McGinn, Smith & Company, Inc. (“MS&C”), an
Albany-based investment firm and registered broker-dealer. In
October 2012, the government filed a thirty-two count superseding
indictment, charging the defendants with conspiracy to commit mail
and wire fraud as well as substantive counts of mail, wire, and
securities fraud, and filing false tax returns. See 18 U.S.C. §§ 1341,
1343 and 1349; 15 U.S.C. §§ 78j(b) and 78ff; and 26 U.S.C. § 7206(1).
Viewing the evidence, as we must, in the light most favorable
to the government, we find that the evidence adduced at trial
established the following. MS&C was a firm founded and run by the
defendants. From September 2006 to December 2009, Smith was the
Chief Executive Officer and McGinn was Chairman of the Board.
MS&C structured and sold to its clients a range of investment
vehicles, but the charges arose from three types of offerings sold to
MS&C investors. The first consisted of seventeen trusts structured
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No. 13-3164-cr
to securitize streams of receivables, the majority of which concerned
revenue streams from monthly contracts written by home security
and telephone, internet, and cable service providers. The second
was a fund managed by an affiliate, McGinn Smith Transaction
Funding Corporation (“MSTF”), whose objective was primarily to
provide bridge financing for transactions originated and negotiated
by MS&C. The third was a series of four funds that invested more
broadly in various public and private securities (the “Four Funds”).
With respect to the first type of offering, MS&C sold trust
certificates to investors who were promised a specified interest rate
payable in monthly installments over the life of the trust. The terms
of each trust offering were set forth in Private Placement
Memoranda (“PPMs”), which described the operation of the trusts,
including the use of proceeds, the expected rates of return, and the
fees payable to MS&C. Each trust had a “minimum offering,” an
amount which was required to trigger the operation of the trust.
Investor funds were to be held in escrow until the target was
reached, at which point escrow was “broken,”and the funds would
be released and the trust would invest them. In the first type of
investment, MS&C would advance funds to the various service
providers. The advances would be secured by the receivables and
the trust expected to generate profits from the spread between the
amount advanced and the stream of receivables. Alternatively,
some trusts advanced funds to entities that had previously
purchased monthly service accounts and took as security the
underlying contracts.
The government’s proof at trial established that, contrary to
the provisions of the PPMs, the defendants withdrew and diverted
significant sums of money from certain trusts, largely for personal
use. Some of these withdrawals took place even before the trusts
reached their minimum offering and escrow was broken.
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No. 13-3164-cr
Furthermore, the proof showed that when certain of the investments
made by the trusts did not generate sufficient returns to cover
payments owed to investors, McGinn and Smith diverted funds
from one offering to cover shortfalls in another.
At trial, the government devoted significant attention to two
loans made by four of the trusts to a company called Firstline
Security, Inc. that sold security alarm contracts. The government’s
proof established that between October 2007 and June 2008, MS&C
raised approximately $3.2 million that investors were told would be
invested in two Firstline trusts. During the course of raising these
funds, McGinn learned that Firstline was threatened with and then
had filed for bankruptcy, but defendants failed to disclose this
information to existing and new investors. After Firstline defaulted,
McGinn diverted funds from other trusts to cover the shortfall and
knowingly concealed these events through false statements to
investors.
With respect to the second type of offering, the government’s
proof showed that in 2008, MS&C, through MSTF, issued investors
approximately $6.875 million in notes, ostensibly to invest in
transactions originated by MS&C and to invest in other public and
private securities including preferred shares of MS&C.
As to the third type of offering, from 2003 to 2005, MS&C
raised approximately $90 million from investors for the Four Funds.
According to the PPMs, investor money was to be used to acquire a
variety of assets including securities, bonds, loans, leases,
mortgages, equipment leases, and securitized cash flow instruments.
Investors could purchase secured notes, offering between a 5% and
10.25% interest rate.
Although the Four Funds were initially profitable, by late
2007, they were “under water” by about $40 million and MS&C was
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No. 13-3164-cr
unable to make the necessary interest payments. Gov’t App’x 206.
The government proved that, to cover up this lack of profitability
and to continue the interest payments, defendants reduced and
suspended payments to investors, and McGinn diverted funds from
a MSTF escrow account to preferred Four Funds’ investors. The
government also proved that McGinn and Smith failed to disclose
these diversions to investors and attempted to conceal them through
false accounting entries.
Similarly, as the financial condition of MS&C deteriorated in
2008 and 2009, Smith ordered that accounting entries be changed to
conceal the fact that MS&C was failing. Various expenses such as
rent and legal fees were not properly recorded and restricted monies
from the Four Funds accounts were used to meet MS&C’s payroll.
This and similar fraudulent conduct was concealed from investors
and omitted or misstated in required regulatory filings.
The government proved that, while all of this was going on,
the defendants improperly diverted some $4.1 million for the
personal benefit of themselves and another key insider, that they
used this money to fund lavish lifestyles that included luxury
homes, vacation properties, thorough-bred race horses, and
expensive golf memberships, and that they failed to report these
receipts as income on federal tax returns.
As MS&C was unraveling, its financial condition came to the
attention of the Financial Industry Regulatory Authority (“FINRA”),
which, in June 2009, initiated a “cause based” examination of MS&C.
At first, FINRA was concerned about the co-mingling of funds, but
FINRA examiners soon realized that significant amounts of the
diverted money were ending up in the defendants’ personal bank
accounts. The government proved that when questioned about
these transactions (including under oath), Smith and McGinn
6
No. 13-3164-cr
provided the examiners with false explanations and when FINRA
requested documentation, the defendants altered and backdated the
relevant accounting entries in order to conceal the transactions.
Following a four-week trial, the jury convicted both defendants
of conspiracy to commit mail and wire fraud (Count 1); mail and
wire fraud (Counts 8, 9, 10, 14 and 17); securities fraud (Counts 21-
26); and filing false tax returns (Counts 27-29 for McGinn and
Counts 30-32 for Smith). McGinn was also convicted of additional
mail and wire fraud counts (Counts 4-7, 11-13, 15-16, 18-19 and 20).
McGinn was principally sentenced to 180 months’ and Smith to
120 months’ imprisonment on the conspiracy count and the
substantive mail, wire, and securities fraud counts to run
concurrently with 36 month sentences on the tax counts. The district
court ordered McGinn and Smith to pay restitution of $5,992,800 and
$5,989,736, respectively, and to forfeit $6,336,440. This appeal
followed.
DISCUSSION
I. Sufficiency of the Evidence
We begin with defendants’ contentions regarding the
sufficiency of the evidence underlying their convictions. “We
review de novo a challenge to the sufficiency of the evidence and
affirm if the evidence, when viewed in its totality and in the light
most favorable to the government, would permit any rational jury to
find the essential elements of the crime beyond a reasonable doubt.”
United States v. Yannotti, 541 F.3d 112, 120 (2d Cir. 2008) (quotation
marks omitted). “A defendant challenging the sufficiency of the
evidence bears a heavy burden, because the reviewing court is
required to draw all permissible inferences in favor of the
government and resolve all issues of credibility in favor of the jury
verdict.” United States v. Kozeny, 667 F.3d 122, 139 (2d Cir. 2011).
7
No. 13-3164-cr
A. Mail and Wire Fraud (Counts 4-20)
To prove mail or wire fraud, the government must show (1) a
scheme to defraud victims (2) by obtaining their money or property
(3) furthered by the use of interstate mail or wires. Fountain v. United
States, 357 F.3d 250, 255 (2d Cir. 2004), see also 18 U.S.C. §§ 1341 and
1343. The government must further establish that the defendant had
fraudulent intent or “a conscious knowing intent to defraud,” and
that some harm or injury to the property rights of the victim was
contemplated. United States v. Guadagna, 183 F.3d 122, 129 (2d Cir.
1999) (quotation marks omitted).
Both defendants argue that the government did not establish
their intent to defraud and Smith also claims that he was not
involved in certain of the charged transactions. McGinn first
challenges his mail and wire fraud convictions on Counts 4-6 and 11-
13, all of which concern the sales of Firstline certificates, contending
that he was not responsible for losses related to Firstline’s
bankruptcy because he did not know or believe it would occur.
However, the government’s proof showed otherwise. It established
that he was immediately informed of the bankruptcy, and that he
received regular emails regarding post-bankruptcy sales to
investors. Although he testified that he paid very little attention to
these emails, this testimony was belied by examples of his responses
to these messages. Considering the email evidence and the fact that
MS&C had a potent motivation to conceal the bankruptcy because
disclosure of the bankruptcy would have made it exceedingly
difficult, if not impossible, for MS&C to procure investors, the jury
was entitled to reject McGinn’s self-serving testimony and accept the
government’s proof that he knowingly concealed material
information from prospective investors. After all, as we have held, a
defendant’s belief “that ultimately everything would work out so
that no one would lose any money” does not excuse fraudulent
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No. 13-3164-cr
conduct. See, e.g. United States v. Rossomando, 144 F.3d 197, 199-201
(2d Cir. 1998).
Similarly, as to Counts 7, 14-18 and 20, a reasonable jury could
have rejected McGinn’s contentions that the transfers out of the trust
escrow accounts were not improper because the escrow accounts
had been “broken” and so defendants enjoyed unrestricted access to
the funds, and that they were essentially anticipating “profits” that
they would realize over time. The jury was also free to accept the
government’s proof that, contrary to the defendants’ testimony and
to representations in the PPMs, the defendants, without the
necessary disclosures, took funds that were required to remain in
escrow, diverted them for personal use, shored up other trusts, and
funneled money from unrelated entities to make monthly interest
payments and that all of this conduct involved material
misrepresentations or omissions. This evidence was sufficient for
the jury to reasonably infer that defendants intended to defraud
investors, or, in other words, that their conduct was willful.1
The evidence introduced at trial regarding the Four Funds
was also sufficient to support both defendants’ mail fraud
convictions (Counts 8 and 9) and McGinn’s wire fraud conviction
(Count 19). McGinn argues that the monies he and Smith diverted
were fees legitimately owed to them, which, instead of taking, they
applied to other investments in order to forestall losses. The
government, however, proved that these diversions were not
authorized by the PPMs and were not disclosed to investors, and
thus directly called into question their legitimacy. Even more
tellingly, the government’s proof established that the defendants
1
Smith was only convicted of Counts 14 and 17. There was sufficient evidence
demonstrating Smith’s involvement for the jury to have inferred that Smith was a
knowing participant in the fraud and that he knew of a $35,000 wire transfer to his
personal account to find him guilty on those counts.
9
No. 13-3164-cr
caused the creation of false accounting records intended to disguise
the sources of the diverted money and that McGinn applied certain
of the transferred funds to his personal use. Smith’s involvement in
falsifying the relevant accounting records contradicts his argument
that the government did not prove his specific intent with regards to
Counts 8 and 9.
As for Count 10, which relates to the mailing sent to investors
after Firstline’s bankruptcy, the government’s proof established that
the letter falsely identified the source of post-bankruptcy payments
and falsely claimed that Firstline’s management had concealed the
condition of the company. The defendants contend that the letter,
which postdated the bankruptcy by many months, was insufficient
to demonstrate intent to defraud. However, as the government
correctly pointed out, in a mail fraud scheme, a mailing need not
deprive someone of money or property so long as it is in furtherance
of the scheme and the letter in question satisfied that requirement.
See United States v. Lane, 474 U.S. 438, 451-52 (1986) (“[m]ailings
occurring after receipt of the goods obtained by fraud are within the
statute if they were designed to lull the victims into a false sense of
security [or] postpone their ultimate complaint to the authorities”)
(quotation marks omitted).
B. Conspiracy to Commit Mail and Wire Fraud (Count 1)
To prove conspiracy, the government must demonstrate the
existence of the conspiracy and the defendant’s knowing
participation. See United States v. Story, 891 F.2d 988, 992 (2d Cir.
1989). Here, the government adduced sufficient evidence that
defendants knowingly and willingly entered into a conspiracy to
defraud investors. Particularly probative in this regard was the
evidence concerning the defendants’ joint efforts to divert funds,
conceal losses through the creation of false accounting records, and
the submission of false documents to FINRA. Viewing this evidence
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No. 13-3164-cr
in its totality, and in the light most favorable to the government, a
rational jury could have found beyond a reasonable doubt that
defendants were knowing participants in a conspiracy to commit
mail and wire fraud.
C. Securities Fraud (Counts 21-26)
McGinn and Smith also challenge the sufficiency of the
evidence on their securities fraud convictions, arguing principally
that there was insufficient evidence demonstrating their intent to
defraud. In order to establish a criminal violation of the securities
laws, the government must show that defendants acted “willfully.”
15 U.S.C. § 78ff(a). We have defined willfulness in this context as “a
realization on the defendant’s part that he was doing a wrongful act
under the securities laws, in a situation where the knowingly
wrongful act involved a significant risk of effecting the violation that
has occurred.” United States v. Cassese, 428 F.3d 92, 98 (2d Cir. 2005)
(internal quotation marks and citation omitted). As previously
mentioned, the securities fraud charges concerned money that
defendants took for themselves and for one of their business
associates from two of the trusts which MS&C organized. The
government’s evidence showed that McGinn and Smith induced
investors to part with their money on the understanding that their
money would be used by the trust in which they were investing for
the limited purposes specified in that trust’s PPM. Instead,
defendants transferred significant amounts of investors’ money to
their personal accounts and used them for purposes unrelated to the
reasons they were invested. These facts supplied a reasonable basis
upon which the jury could conclude that the defendants acted
willfully.
D. Filing False Tax Returns (Counts 27-32)
Defendants were each convicted on three counts of filing false
tax returns for the years 2006, 2007 and 2008. See 26 U.S.C. § 7206(1).
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No. 13-3164-cr
Essentially, the government contended that a series of advances to
the defendants were not loans but income. The defendants argued
that the advances were, in fact, loans, but that, in any event, the
government’s evidence was insufficient to prove that they acted
willfully and knowingly. Section 7206(1) requires the government to
prove: (1) that the defendant made or caused to be made an income
tax return for the relevant year, which he verified was true; (2) that
the tax return was false as to something material; (3) that the
defendant willfully signed the return knowing it was false; and (4)
that the return stated that it was made under penalty of perjury.
United States v. LaSpina, 299 F.3d 165, 179 (2d Cir. 2002). While a
taxpayer is not ordinarily required to report a loan as income, he
must do so if he does not intend to repay the loan. See United States v.
Rosenthal, 470 F.2d 837, 841 (2d Cir. 1972).
At trial, the government adduced evidence, apparently
accepted by the jury, that Smith did not believe the amounts in
question were loans. The government established that Smith initially
characterized the loans at issue as “fees” when asked about them by
FINRA investigators. McGinn did not disclose the payments as
“loans” on a residential mortgage application and neither defendant
listed the purported loans as liabilities on their financial statements.
Moreover, while McGinn and Smith provided contemporaneous
documentation of other loans with promissory notes, neither of them
memorialized the terms of the unreported loans at issue. The
comptroller for MS&C also testified that the advances were not loans,
but fees, and that Smith had directed him to change the entries of
certain payments from “fees” to “loans” for “tax reasons.” Gov’t
App’x 215-20. Based on this evidence, we have little difficulty
concluding that a jury could have reasonably accepted the
government’s evidence that defendants knew the payments were
income, not loans, and willfully omitted them from their returns.
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No. 13-3164-cr
II. Jury Instruction on Tax Counts
The defendants contend that the district court’s instruction on
the tax counts was generally erroneous and, specifically, that the
charge improperly instructed that good faith was not a defense. The
district court provided the jury with the following “willfulness”
instruction on the tax counts:
The fourth and final element that the
government must prove beyond a
reasonable doubt is that the
defendant under consideration acted
willfully. I have already defined the
term ‘willfully’ for you. In short, the
government must establish that the
defendant under consideration acted
voluntarily and intentionally with the
specific intent to make a false
statement on the tax return involved
in the count under consideration,
despite knowing that it was his legal
duty to answer truthfully.
Smith App’x 495. The court had previously defined the term
willfully as when a person acts “purposely and with an intent to do
something unlawful.” Gov’t App’x 736. Smith argues, citing United
States v. Pirro, 212 F.3d 86, 90-91 (2d Cir. 2000), that this instruction
was not sufficiently specific as to defendants’ willfulness. We do not
believe that Pirro is apposite, but, more to the point, Smith has no
basis for complaint because he requested virtually identical language
in his proposed jury instruction. Moreover, the legal sufficiency of
the instruction delivered on this point by the district court is well
settled. See United States v. Pomponio, 429 U.S. 10, 11 (1976) (finding
that similar instruction given by the trial court was appropriate).
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No. 13-3164-cr
Before issuing the general instruction on the tax counts, the
court, without objection from the defendants, told the jury that “the
defense of good faith is not applicable to the filing of false tax returns
charges.” See Gov’t App’x 738. The government concedes that this
statement was incorrect. The Supreme Court has held that, in
criminal tax cases, the prosecutor must prove “actual knowledge of
the pertinent legal duty,” which “requires negating a defendant’s
claim of ignorance of the law or a claim that because of a
misunderstanding of the law, he had a good faith belief that he was
not violating any of the provisions of the tax laws.” Cheek v. United
States, 498 U.S. 192, 202-03 (1991).
But just before this mistaken instruction, the court instructed
the jury that to act willfully “means to act purposely and with an
intent to do something unlawful.” Gov’t App’x 736. The
government argues that any fair understanding of this definition is
that the jury could not convict the defendants if it found that they
had acted in good faith. We have stated that while “the existence vel
non of culpable intent or lack of good faith is a crucially important
issue” for tax fraud, United States v. Regan, 937 F.2d 823, 827 (2d Cir.
1991), a standard jury instruction on the willfulness element of tax
evasion generally encompasses a good faith defense, United States v.
Evangelista, 122 F.3d 112, 118 n.5 (2d Cir. 1997).
Defendants nonetheless argue that this mistaken reference to
the inapplicability of the good faith defense tainted the entire
instruction and requires vacatur of their convictions on the tax
charges. “A jury instruction is erroneous if it misleads the jury as to
the correct legal standard or does not adequately inform the jury on
the law.” United States v. Dinome, 86 F.3d 277, 282 (2d Cir. 1996)
(quotations marks omitted). If, as here, a defendant does not object to
a charge we review for plain error. See United States v. Kopstein, 759
F.3d 168, 180 n.6 (2d Cir. 2014); see also Fed. R. Crim. P. 30(d), 52(b).
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No. 13-3164-cr
Plain error requires an appellant to show that the error is clear or
obvious, that it affected his substantial rights, which ordinarily
means it affected the outcome of the district court proceedings, and
“seriously affect[ed] the fairness, integrity or public reputation of the
judicial proceedings.” United States v. Vilar, 729 F.3d 62, 70 (2d Cir.
2013) (quotation marks omitted).
We agree with the government that, when examined in the
context of the instructions as a whole, the court’s erroneous statement
does not rise to the level of plain error. “In determining whether the
district court properly instructed the jury, we must not judge any
instruction in isolation but must instead view the charge as a whole. .
. . [W]e will not make our determination on the basis of excerpts
taken out of context.” United States v. Josephberg, 562 F.3d 478, 500 (2d
Cir. 2009) (quotation marks and citations omitted). The district court
properly instructed the jury on the government’s burden of proof,
that the jury had to find that the defendants knew that the payments
they received were not legitimate loans because they lacked a bona
fide intent to repay the money in question, and that the defendants
knew that the declarations on their tax returns were not truthful
because they did not include these payments. The jury instruction
thus conveyed that the defendants’ good faith belief that the
payments were legitimate loans would preclude conviction. Under
plain error review, the district court’s mistaken reference, when taken
in context, did not eviscerate the rest of the instruction. This is
especially so in light of the overwhelming evidence that the
defendants knew their returns were false when they filed them.
Accordingly, we affirm the defendants’ convictions for filing false tax
returns.
III. Admitting Portions of Smith’s 1999 Letter
Before trial and during its case in chief, the government sought
to introduce a document that Smith composed, in 1999, years before
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No. 13-3164-cr
the events underlying the indictment, as evidence of conspiracy and
of the defendants’ knowledge and intent. While the document was
addressed to McGinn, the government did not present evidence
demonstrating that it was ever sent. The document contained
statements such as “if our trusts go into default, everything else will
come apart;” “I, unlike you, feel that we are vulnerable to criminal
prosecution;” “I believe that we are at risk for the continual raising of
investment dollars, that are now clearly unlikely to be repaid in full;”
and characterized what was going on at MS&C as a “Ponzi scheme.”
Gov’t App’x 1625-51.
Initially, the district court held that the document was
inadmissible because it related to conduct that occurred years before
the frauds alleged in the indictment, and did not concern the same
entities as those involved in the charged crimes. The court, however,
warned that the letter could be admitted if the defendants opened the
door by pursuing a good faith defense, blaming what happened on
the financial crisis, or claiming ignorance of the implications of their
conduct.
After McGinn testified, the district court held that the
government could ask McGinn (who had not written the letter) about
certain specific portions of the document relating to the “default” of
the trusts and required disclosures to investors, but could not
introduce the draft letter itself or ask him about events occurring in
1999. Similarly, the district court found that Smith’s testimony had
opened the door to portions of the document and limited the
government’s use to the same portions that were used with McGinn,
as well as several additional sections. McGinn and Smith contend
that the district court abused its discretion by permitting the
government to cross-examine them using portions of a draft letter
that Smith wrote in 1999, and that the government’s use of the
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No. 13-3164-cr
document resulted in a constructive amendment of the indictment or
a prejudicial variance.
A. Cross-Examination Using Smith’s 1999 Letter
We review a district court’s evidentiary rulings under a
deferential abuse of discretion standard, and we will disturb an
evidentiary ruling only where the decision to admit or exclude
evidence was “manifestly erroneous.” United States v. Samet, 466 F.3d
251, 254 (2d Cir. 2006). Moreover, even if a ruling was “manifestly
erroneous,” we will still affirm if the error was harmless. United
States v. Miller, 626 F.3d 682, 688 (2d Cir. 2010). The error was
harmless if it is not likely that it contributed to the verdict. United
States v. Gomez, 617 F.3d 88, 95 (2d Cir. 2010). “The following factors
must be weighed in determining whether the wrongful admission of
evidence constituted harmless error: (1) the overall strength of the
prosecutor's case; (2) the prosecutor’s conduct with respect to the
improperly admitted evidence; (3) the importance of the wrongly
admitted testimony; and (4) whether such evidence was cumulative
of other properly admitted evidence.” Id. (quotation marks omitted).
Upon review of the record, we conclude that allowing portions
of this letter to be read during cross-examination of the defendants,
without context and without any limiting instruction, was
“manifestly erroneous.” Although the letter was never admitted into
evidence, the district court nonetheless permitted the government to
simply read to the jury the most prejudicial and inflammatory
portions of the letter under the guise of asking questions. (See, e.g.,
Gov’t App’x 652 (“Did Mr. Smith, your business partner, write: . . .
?”).) The fact that the 1999 letter was permitted to be used in this
manner in the cross-examination of McGinn, who testified that he
had never received the letter, was especially prejudicial and
improper.
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No. 13-3164-cr
However, to vacate a conviction on this basis, allowing the
prosecution to use the 1999 letter in the manner that it did, cannot
have been harmless – we must be able to “conclude with fair
assurance” that the improper use of evidence “did not substantially
influence the jury.” United States v. Groysman, 766 F.3d 147, 155 (2d
Cir. 2014). Considering the overall strength of the government’s case
and the fact that the letter was cumulative of other properly admitted
evidence, we find that the district court’s treatment of the 1999 letter
was harmless error. As previously noted, the government adduced
substantial evidence that McGinn and Smith, among other things,
directed that money be diverted from various accounts and entities
for improper purposes, ordered MS&C’s accounting staff to make
false entries intended to conceal unauthorized transactions,
misappropriated millions of dollars for themselves and offered false
explanations and directed the creation of false documents in response
to the FINRA investigation. When considered in the context of a
record containing substantial evidence of the defendants’ guilt, we
cannot conclude that the improper use of the document had a
substantial impact on the result of the trial.
B. Whether Reading Portions of the Letter Constituted a
Constructive Amendment or Variance
Because defendants raise their constructive amendment claim
for the first time on appeal, we review it for plain error. United States
v. Bastian, 770 F.3d 212, 219 (2d Cir. 2014). “To prevail on a
constructive amendment claim, a defendant must demonstrate that
the terms of the indictment are in effect altered by the presentation of
evidence and jury instructions which so modify essential elements of
the offense charged that there is a substantial likelihood that the
defendant may have been convicted of an offense other than that
charged in the indictment.” United States v. D’Amelio, 683 F.3d 412,
416 (2d Cir. 2012) (emphasis in original, quotation marks omitted). A
variance occurs when the charging terms of the indictment are not
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No. 13-3164-cr
changed, but the evidence at trial proves facts materially different
from those alleged. However, the “proof at trial need not, indeed
cannot, be a precise replica of the charges contained in an indictment
[and] this court has consistently permitted significant flexibility in
proof, provided that the defendant was given notice of the ‘core of
criminality’ to be proven at trial.” United States v. Heimann, 705 F.2d
662, 666 (2d Cir. 1983).
Defendants’ argument that the use of excerpts from Smith’s
1999 letter constituted a constructive amendment or prejudicial
variance is unavailing. The government’s arguments, the indictment,
and the evidence introduced at trial all related to charged conduct
that occurred from 2006 to 2010. The jurors were further instructed
that, to find the defendants guilty of conspiracy, they had to find that,
for some time between September 29, 2006 and April 20, 2010, the
defendants had entered into an unlawful agreement to commit mail
or wire fraud. McGinn and Smith also had sufficient notice of the
“core of criminality to be proven at trial,” as they had been warned
from the beginning that portions of the letter could be admitted and
the evidence adduced at trial did not establish facts different from
those alleged in the indictment. Heimann, 705 F.2d at 666.
Accordingly, we conclude that there was no constructive amendment
or fatal variance.
IV. McGinn’s Sentence
We review sentences under a “deferential abuse-of-discretion
standard” for procedural and substantive reasonableness. United
States v. Cavera, 550 F.3d 180, 189 (2d Cir. 2008). We review a district
court's interpretation of the Sentencing Guidelines de novo and its
findings of fact for clear error. United States v. Mejia, 461 F.3d 158, 162
(2d Cir. 2006). To impose a procedurally reasonable sentence, a
district court must (1) determine the applicable Guidelines range, (2)
consider the Guidelines and other section 3553(a) factors and (3)
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No. 13-3164-cr
determine whether to impose a Guidelines or a non-Guidelines
sentence. United States v. Villafuerte, 502 F.3d 204, 206-07 (2d Cir.
2007). A sentence is substantively unreasonable only if it “cannot be
located within the range of permissible decisions,” Cavera, 550 F.3d at
189, and would “damage the administration of justice” because it was
shockingly high or low or not legally supportable, United States v.
Rigas, 583 F.3d 108, 123 (2d Cir. 2009).
McGinn argues that his sentence was procedurally
unreasonable because the district court made erroneous factual
findings as to loss calculation; the specific offense characteristics of
the Guidelines impose cumulative punishments and
disproportionately emphasize loss amount; and the district court
failed to adequately consider the section 3553(a) factors. Our
examination of the record, however, indicates that the district court
had reviewed the Pre-Sentence Investigation Report (“PSR”),
considered all of the sentencing submissions, and correctly applied
the Guidelines. The court adopted the PSR’s calculations of loss
amounts, and, consistent with those calculations, did not hold
McGinn accountable for total investor losses. Moreover, the district
court appropriately took into account the fact that, for years, McGinn
had run MS&C with little apparent regard for the legality of his
conduct and that he continued to lack contrition. Thus, we see no
basis for concluding that the district court failed to adequately
consider the section 3553(a) factors or otherwise fashioned a sentence
that was procedurally unreasonable.
Finally, McGinn argues that his sentence was substantively
unreasonable. We see no merit to this contention. Notably, he
received a sentence of 180 months, a sentence that was significantly
lower than his Guidelines range of 210 to 262 months. In any event,
we cannot say that the sentence the district court imposed was
unreasonable in view of the large number of investors who were
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No. 13-3164-cr
defrauded, the large amounts of money that they lost, and the
lengthy time period during which his sophisticated criminal activity
was ongoing.
V. Smith’s Restitution and Forfeiture Orders
Smith contends that the district court incorrectly computed the
amounts he owed as restitution and forfeiture. Because he did not
object below on this ground, we review for plain error. See United
States v. Thorn, 446 F.3d 378, 387 (2d Cir. 2006) (restitution); United
States v. Uddin, 551 F.3d 176, 181 (2d Cir. 2009) (forfeiture). When
determining whether to award restitution, the court should consider
the amount of the loss sustained by the victim as a result of the
offense, the financial resources of the defendant and the financial
needs of the defendant’s dependents, and such other factors as the
court deems appropriate. 18 U.S.C. § 3663(a)(B)(i)(I)-(II). “Any
dispute as to the proper amount or type of restitution shall be
resolved by the court by the preponderance of the evidence” with the
burden of determining loss on the government. 18 U.S.C. § 3664(e).
When the government seeks to impose criminal forfeiture, it must
also establish the requisite nexus between the offense and the assets
to be forfeited by a preponderance of the evidence. United States v.
Capoccia, 503 F.3d 103, 110 (2d Cir. 2007).
Smith argues that his restitution and forfeiture orders
improperly include $600,000 attributable to sales of Firstline
following its bankruptcy and he was acquitted of certain counts
relating to these sales. The fact that he was acquitted on these counts,
he contends, must mean that the jury had determined that he was
unaware of the bankruptcy until after the sales occurred.
But these contentions overlook the fact that he was also
convicted of the conspiracy charged in Count 1, which encompassed
fraud related to the post-bankruptcy Firstline sales and of mail fraud
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No. 13-3164-cr
in Count 10, which pertained to the September 10, 2009, Firstline
post-bankruptcy memorandum. The jury’s determination that he
was acquitted on certain of the substantive mail fraud charges related
to the post-bankruptcy mailings is not inconsistent with a conclusion
that he entered into a conspiracy involving these sales and does not
absolve him of liability for the conspiracy and the losses it caused.
Specifically, the government introduced evidence in support of
Counts 1 and 10 that Smith learned about the Firstline bankruptcy
before the 2009 mailing, and knowingly concealed material
information about Firstline. Accordingly, it was not error, plain or
otherwise, to include the $600,000 in the two orders. We have
considered defendants’ remaining arguments and find them to be
without merit.
VI. Government’s Cross-Appeal
The MVRA provides that the court shall order restitution to
each victim in the full amount of each victim’s losses and, when
calculating restitution, the fact that the victim is entitled to receive
compensation from another source may not be considered. The Act
further provides that any amount paid pursuant to a restitution order
is reduced by any amount later recovered for the same loss by the
victim in any federal or state civil proceeding. See 18 U.S.C. §
3664(f)(1)(A)-(B),(j)(2).
At sentencing, the district court ordered McGinn and Smith
jointly and severally liable for $5,748,722 in restitution to their 841
victims. The court further stated that any restitution “collected thus
far by the receiver . . . may be deducted from the total restitution
amount and may be distributed to the victims by the receiver . . . as
such assets are available for distribution.” Gov’t App’x 1868-69, 1883
(emphasis added). After filing its notice of cross-appeal, the
government moved the district court to clarify its restitution orders,
arguing that they could be understood to provide that the restitution
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No. 13-3164-cr
could be offset by the amount of money collected by the court-
appointed Receiver in the separate SEC action, rather than the
amount that the Receiver actually distributes to these victims. This
reading would violate the MVRA, which only permits offset for
money “recovered” as opposed to “collected” but not necessarily
distributed. 18 U.S.C. § 3664(j)(2).
On January 23, 2015, the district court denied the government’s
motion, holding that the original restitution orders were clear and
there was no need for clarification. The district court stated that,
under the circumstances at the time of sentencings, the restitution
orders should be understood as ordering that “[a]ny sums
distributed to the victims by the Receiver shall be deducted from the
total restitution.” See 12 CR. 28(DNH) (Dckt. Entry 268). The
government, noting that the judgments remain unrevised, argues that
the January 23, 2015 order failed to make clear that funds should be
credited against restitution only when they are distributed to victims
and not when they are merely collected by the Receiver. We agree.
Accordingly, we remand to the district court for the limited purpose
of correcting the judgments to clarify that only the Receiver’s actual
distribution of funds to the victims may offset the defendants’
restitution obligations.
CONCLUSION
The judgments of the district court are AFFIRMED. The case is
REMANDED to the district court for the limited purpose of
correcting the written judgments to conform them to the
requirements of the MVRA.
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