United States v. Donna Fallon ( 2022 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______________
No. 19-2775
______________
UNITED STATES OF AMERICA
v.
DONNA FALLON,
Appellant
______________
No. 19-2788
______________
UNITED STATES OF AMERICA
v.
DEAN VOLKES,
Appellant
______________
No. 19-2792
______________
UNITED STATES OF AMERICA
v.
DEVOS LTD LLC d/b/a GUARANTEED RETURNS,
Appellant
______________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(District Court Nos. 2-14-cr-00574-003, 2-14-cr-00574-002,
& 2-14-cr-00574-001)
District Judge: Petrese B. Tucker
______________
Argued: March 16, 2021
______________
Before: KRAUSE, PHIPPS, and FUENTES, Circuit Judges.
(Filed: September 30, 2022)
Robert J. Cleary [ARGUED]
William C. Komaroff
James R. Anderson
Proskauer Rose LLP
11 Times Square
New York, NY 10036
Counsel for Appellant Donna Fallon
Lisa A. Mathewson [ARGUED]
The Law Offices of Lisa A. Mathewson, LLC
123 S. Broad Street, Suite 810
Philadelphia, PA 19109
2
Counsel for Appellant Dean Volkes
Douglas E. Grover
Richard H. Dolan [ARGUED]
Thomas A. Kissane
Schlam Stone & Dolan LLP
26 Broadway
New York, NY 10004
Counsel for Appellant DEVOS, LTD
William M. McSwain
Robert A. Zauzmer
Patrick J. Murray
Elizabeth M. Ray
Nancy Rue [ARGUED]
Office of United States Attorney
615 Chestnut Street, Suite 1250
Philadelphia, PA 19106
Counsel for Appellee United States of America
______________
OPINION OF THE COURT
______________
FUENTES, Circuit Judge.
The three Appellants—Devos LTD LLC, which trades
under the name “Guaranteed Returns”; Dean Volkes, the
company’s owner and Chief Executive Officer; and Donna
Fallon, the company’s Chief Financial Officer and Volkes’s
sister—appeal their convictions arising from multiple schemes
to defraud their clients, including the United States
3
Government. For the reasons explained herein, we will vacate
Appellants’ conviction for conspiracy to launder money,
vacate the sentences, and remand for resentencing, including a
recalculation of the forfeiture award. For all other convictions,
we will affirm.
I. Background
A. Factual Background
Guaranteed Returns was a “reverse distributor” of
pharmaceutical products. It provided inventory management
services to healthcare providers (such as hospitals, pharmacies,
long-term care facilities, and doctors’ offices) by returning
unused or expired pharmaceutical drugs to the drug
manufacturers, for which the provider can normally receive a
refund. Because healthcare providers need multiple
pharmaceuticals from a variety of manufacturers, each with
different return policies for their products, reverse distributors
perform this service for their clients in exchange for a fee,
which is typically a percentage of the return value of the drugs.
To obtain a refund, the provider must either physically
return the pharmaceutical to the manufacturer, or certify that it
has been destroyed. The manufacturer then issues the refund,
either in the form of a credit to the healthcare provider’s
account at the relevant wholesaler, 1 or as a money refund by a
wire transfer or check. Reverse distributors like Guaranteed
1
Most healthcare providers purchase their pharmaceutical
products through wholesale distributors rather than through
individual manufacturers. A healthcare provider therefore may
have an account with a wholesaler of a drug, not with the
manufacturer of the drug.
4
Returns manage this process for their clients: a provider sends
its pharmaceuticals to the reverse distributor who returns the
drugs on the provider’s behalf. As a consequence, both the
drugs and the funds that reverse distributors receive from
manufacturers for returning those drugs are the property of the
healthcare-provider clients.
Providers will also send non-returnable pharmaceuticals
to reverse distributors. These include unexpired
pharmaceuticals that the providers no longer need but that may
become eligible for a refund upon expiration. These are
commonly known as “indates.” 2 Reverse distributors can keep
track of these indates, “age” them until they are returnable, and
then submit them for a refund when the time comes.
To run their operations efficiently, reverse distributors
return all pharmaceuticals eligible for a refund to a single
manufacturer in one “batch.” These batches can be comprised
of different drugs submitted on behalf of different healthcare
providers. The manufacturer, in accordance with its policy,
will then either credit the individual healthcare provider’s
account at the relevant wholesaler, or remit a lump-sum
payment to the reverse distributor who then issues refunds—
less a service fee—to its healthcare-provider clients whose
drugs were in the batch. For Guaranteed Returns, the lump-
sum refunds were wired directly to the company’s general
operating account, and the company then issued refund checks
from that account to the relevant clients, less a service fee. 3
2
These products are still “in date,” meaning that they are not
yet expired.
3
The operating account was used to receive and distribute
money relating to the operation of the business, including to
make vendor payments and to pay operating expenses such as
5
Guaranteed Returns used a database management software
called FilePro to track the information necessary to determine
how much money to remit to which clients from the lump-sum
refunds. Each healthcare-provider client had a separate account
in FilePro. This software tracked the pharmaceuticals
received, to which client they belonged, the date they arrived,
and the date of return, among other information. For indates,
FilePro also tracked the date on which these pharmaceuticals
would become eligible for a refund.
In 2001, the Government started doing business with
Guaranteed Returns. The Department of Defense (“DoD”)
contracted with Guaranteed Returns to handle pharmaceutical
returns for a number of government facilities. DoD and
Guaranteed Returns entered into another agreement in 2007.
Guaranteed Returns’s proposal for the second contract
specifically stated that it would inventory, warehouse, and age
the Government’s indates, and then return the indates when
eligible, for its usual fee. Guaranteed Returns’s 2001 contract
did not refer to indates by name, but the company specifically
included indates in the 2007 contract. The company also
required its clients to use a return authorization form when
sending drugs for credit that purported to give Guaranteed
Returns wide discretion concerning pharmaceuticals that were
not “immediately creditable.” 4
freight, payroll, and expenses related to the company’s
facilities.
4
App. 6101–02 (“Guaranteed Returns reserves the right, in its
sole discretion, to dispose, remit, donate and/or otherwise
receive product that it believes not to be in an immediately
creditable state without claim for remuneration.”).
6
The Government began investigating Guaranteed
Returns after the District of Columbia noticed that it did not
receive the full refund on a return of some of its
pharmaceuticals. 5 The Defense Criminal Investigative Service
investigated, and the Government eventually uncovered a
series of schemes that Guaranteed Returns used to defraud its
clients. Four such schemes are described below.
1. The Indates Scheme
Volkes devised and implemented a scheme to return
indated drugs to manufacturers on Guaranteed Returns’s own
behalf—not on behalf of the client who owned the drugs—and
to keep the refund money. To do this, in 2007, Volkes
instructed his IT staff to change the programming in FilePro to
divide each of Guaranteed Returns’s clients into two
categories: “managed” and “unmanaged.” “Managed” clients
were thought to pay close attention to whether they received
refunds or credits for indates, while “unmanaged” clients were
thought not to do so. The computer program diverted indates
from unmanaged clients by reclassifying them as the property
of Guaranteed Returns, listing them in FilePro as the property
of a non-existent client labeled “GRX Stores.” The program
did not affect the indates for “managed” clients. When
Guaranteed Returns received the lump-sum payment from
manufacturers for returning a batch of pharmaceuticals, it
would pay “managed” clients the amount owed but kept for
itself the amount that should be owed to “unmanaged” clients
for the indate refunds. To ensure that the scheme was not
uncovered, when submitting batches of pharmaceuticals to
5
The return in question was for $600,000 worth of recently
expired Cipro, which the District of Columbia had stockpiled
for availability in case of an anthrax attack.
7
manufacturers for refunds, Guaranteed Returns attributed each
drug to the healthcare provider from whom Guaranteed
Returns had diverted the drug.
2. The G-13 Scheme
Volkes also devised a scheme to divert indates from
managed clients. In late 2010, he instructed his IT staff to
reclassify every thirteenth expiring indate product of a
managed client as the property of GRX Stores, if the value of
the product was less than $3,000. Volkes wanted to avoid
stealing products that were so valuable that they might catch
the client’s attention.
3. The Three-Year Cutoff Scheme
In 2011, Volkes developed another scheme to divert
indates from managed clients. Volkes instructed his IT staff to
reclassify indates that were received more than three years
earlier as the property of the GRX Stores.
4. Adjustment Scheme
Not all of Guaranteed Returns and Volkes’s schemes
involved indates. In fall 2010, Volkes directed his IT staff to
create a program that “adjusted” downward the amount of
refunds that were due to certain clients. This adjustment
program skimmed a certain percentage from the lump-sum
refund that was owed to clients and reassigned it to the fictious
GRX Stores. Volkes had the program installed on Fallon’s
computer so that Fallon could decide when to run the
adjustment program and what percentage to skim from the
clients’ refunds. Volkes did this in order to repay a loan he had
taken out to satisfy a civil judgment against him issued by a
Missouri court.
8
5. Money Laundering Conspiracy
In addition to the fraud schemes, the Government
alleged that Guaranteed Returns, Volkes, and Fallon conspired
to launder the fraud proceeds corresponding to the indate
products that had been diverted from clients and reclassified as
belonging to GRX Stores. Since the company received all
refund payments as a lump-sum from manufacturers, the
Government alleged that the fraud proceeds were initially
commingled with the “legitimate” refunds due to clients, as
well as the company’s service fees, in the lump-sum refund
received into the company’s general operating account. Once
clients were paid, the Government alleged that Appellants
transferred the fraud proceeds out of the general operating
account and eventually into Volkes’s personal account through
a series of complex transactions designed to conceal the nature,
location, source, ownership, and control of these proceeds.
B. Procedural History
The Government brought 64 charges against
Guaranteed Returns, Volkes, and Fallon. 6 Counts 1–23
charged Guaranteed Returns and Volkes with wire fraud, 7 and
Counts 24–40 charged them with mail fraud arising from the
same schemes. 8 Counts 41–52 charged all Appellants with
6
The Government obtained a superseding indictment against
Appellants. We refer to this superseding indictment as the
“indictment” for brevity.
7
In violation of 18 U.S.C. § 1343.
8
In violation of 18 U.S.C. § 1341.
9
mail fraud, 9 Count 53 charged Guaranteed Returns and Volkes
with theft of Government property in the form of more than
$27 million worth of pharmaceutical products, 10 and Count 54
charged all Appellants with conspiracy to launder money. 11
After a seven-week trial, Guaranteed Returns was
convicted on all counts; Volkes was convicted on Counts 1–55
and 62–64; and Fallon was convicted on Counts 41–52, 54, and
56–61. The jury acquitted on the remaining counts. All
Appellants moved for a judgment of acquittal or a new trial,
which the District Court denied.
The indictment also listed two forfeiture counts. The
first count sought forfeiture of $180,673,777, and the second
sought forfeiture attributable to Appellants’ money laundering
conspiracy. Both counts sought substitution of other assets if
those sought were commingled or not traceable. After the
jury’s trial verdict, the District Court held a one-day forfeiture
trial, at which the Government sought to proceed against two
bank accounts. The jury found that the funds in those accounts
were subject to forfeiture.
At sentencing, the Court sentenced Fallon to one year
and one day in prison, followed by three years’ supervised
9
In violation of 18 U.S.C. §§ 1341, 1349.
10
In violation of 18 U.S.C. §§ 641, 2. See also App. 383.
11
In violation of 18 U.S.C. § 1956(h). Additionally, Count 55
charged a conspiracy to obstruct justice, while Counts 56–59
and 62–63 charged substantive obstruction of justice, and
Counts 60, 61, and 64 charged making false statements. These
charges are not the subject of any specific challenges on
appeal.
10
release, and sentenced Volkes to five years’ imprisonment,
with three years’ supervised release. 12 The Court sentenced
Guaranteed Returns to five years’ probation with restrictions
on how the company may operate. The Court also ordered
Appellants to pay two restitution awards. The first restitution
amount was $94,737,868.16, to be paid jointly and severally
by Volkes and Guaranteed Returns. The second restitution
amount was $515,221.89, to be paid jointly and severally by
Volkes, Fallon, and Guaranteed Returns. 13 Finally, the Court
entered a forfeiture judgment of $114,832,445.62 against
Guaranteed Returns.
II. Discussion
The District Court had jurisdiction over this federal
criminal prosecution under 18 U.S.C. § 3231. We have
appellate jurisdiction under 28 U.S.C. § 1291 to review the
convictions, and under 18 U.S.C. § 3742 to review the
sentences. Our standard of review varies with each challenge
that Appellants raise to their convictions and sentences. We
address each challenge and the corresponding standard of
review in the sections below.
A. The 2011 Warrant Was Not a General
Warrant
Fallon argues that the very first search warrant that the
Government obtained in the investigation was an
unconstitutional general warrant. This Court reviews the facts
12
Fallon and Volkes do not appeal the custodial aspects of their
sentences.
13
Volkes and Guaranteed Returns were therefore ordered to
pay a total restitution award of $95,253,090.05.
11
determined at a suppression ruling for clear error, but exercises
plenary review over the application of law to those facts. 14
On March 29, 2011, the Government obtained five
search warrants, including one authorizing a search of
Guaranteed Returns’s headquarters in Holbrook, New York. 15
When executing this warrant, the agents found significant
amounts of evidence relating to Guaranteed Returns’s fraud
schemes, including hard drives that Fallon had told
investigators the company did not have. Before trial,
Appellants moved to suppress all the evidence obtained under
the 2011 warrant. 16 They argued that the warrants were
insufficiently particularized and therefore unconstitutional
general warrants, but the District Court disagreed and denied
the motion to suppress. Appellants repeat these contentions on
appeal, but we agree with the District Court that the 2011
warrant was sufficiently particularized.
14
United States v. Perez, 280 F.3d 318, 336 (3d Cir. 2002).
15
Specifically, the Government obtained authorization to
search Guaranteed Returns’s headquarters, warehouse, and a
safe deposit box held at a local bank, as well as the residences
of two employees of the company’s information technology
department.
16
Before trial Appellants also sought to suppress evidence
uncovered under a 2014 search warrant. Appellants’ opening
briefs do not challenge any aspect of the 2014 warrants.
Appellants have thus waived any argument relating to these
warrants. See United States v. Pelullo, 399 F.3d 197, 222 (3d
Cir. 2005), as amended (Mar. 8, 2005) (“It is well settled that
an appellant’s failure to identify or argue an issue in his
opening brief constitutes waiver of that issue on appeal.”).
12
The Fourth Amendment protects the “right of the people
to be secure in their persons, houses, papers, and effects,
against unreasonable searches and seizures.” 17 It also requires
warrants to be supported by probable cause and to “particularly
describ[e] the place to be searched, and the persons or things
to be seized.” 18 Although the phrase “general warrants” does
not appear in the text of the Fourth Amendment, the term refers
to a specific form of authorization abhorred by the founders,
which authorized “a general, exploratory rummaging in a
person’s belongings.” 19 Accordingly, the particularization
requirement was included to prohibit these general warrants. 20
A general warrant is one that is insufficiently particularized in
either the places to be searched or the persons or things to be
seized. 21
Whether a warrant is sufficiently particularized depends
on the nexus between the evidence to be sought or seized and
the alleged offenses. 22 Where a warrant affidavit provides
probable cause to believe that it will uncover evidence of a
wide-ranging and long-lasting scheme with multiple
participants, an equally broad search for such evidence is
permissible. 23 In United States v. Yusuf, this Court held that
17
U.S. Const. amend. IV.
18
Id.19
Coolidge v. New Hampshire, 403 U.S. 443, 467 (1971),
holding modified by Horton v. California, 496 U.S. 128 (1990).
20
Id.21
United States v. Christine, 687 F.2d 749, 753 (3d Cir. 1982).
22
United States v. Yusuf, 461 F.3d 374, 394 (3d Cir. 2006).
23
Id.13
warrants that sought a broad range of documents and records
were not general warrants because “(1) they specified that
agents were searching for evidence of several specifically
enumerated federal crimes; (2) the search was limited in time
to [an eleven-year period]; and (3) the evidence sought was
limited to records pertaining to [specified corporations and
defendants].” 24 The offenses in Yusuf also included mail fraud
and money laundering. 25
The warrant here is strikingly similar to the one in
Yusuf. In both cases, the Government sought a broad range of
business records relating to multi-year schemes of mail fraud
and a money laundering conspiracy. The alleged schemes here
were arguably broader than those in Yusuf since they involved
vastly larger sums and many more defrauded clients, and they
therefore needed much more information to put together.
Despite this greater breadth, the warrants here were precisely
as limited as those in Yusuf: the Government sought
Guaranteed Returns’s records relating to five enumerated
federal offenses, identified by statutes, and limited to a ten-year
period. This warrant is not impermissibly general.
Furthermore, the Government argues that, even if the
warrant was deficient, the good-faith exception would prevent
suppression here. We agree. Under the good-faith exception
to the exclusionary rule, if an officer relies in good faith on a
warrant later found to be deficient, evidence obtained pursuant
to that warrant should be suppressed only if the officer had—
or may be fairly charged with—knowledge of the deficiency. 26
24
Id. at 395.
25
Id. at 378.
26
United States v. Leon, 468 U.S. 897, 922–23 (1984).
14
We have also recognized that an officer’s reliance on a warrant
would not be reasonable and thus would not trigger the good-
faith exception if “the warrant was so facially deficient that it
failed to particularize the place to be searched or the things to
be seized.” 27 The 2011 warrant here is not so deficient. The
warrant contains an extensive recitation of the place to be
searched and the items to be seized, with further hand-written
limitations added by the magistrate judge. Under these
circumstances, suppression would not serve to deter future law
enforcement misconduct, and the evidence seized pursuant to
the 2011 warrant is admissible.
B. Civil Contract Law Expert and Proposed
Jury Instructions
Appellants next argue that the District Court erred in
precluding expert testimony on civil contract law. We review
the District Court’s decision to exclude expert testimony for
abuse of discretion. 28
1. Proposed Testimony of Prof. Finkelstein
Appellants sought to have University of Pennsylvania
Carey Law School Professor Claire Finkelstein testify in their
defense. They argued that her testimony on civil contract law
would oppose that of Guaranteed Returns’s sales
representatives and clients who testified regarding their
understandings of the company’s contracts and return
authorization forms, and would also demonstrate that there was
27
United States v. Zimmerman, 277 F.3d 426, 437 (3d Cir.
2002).
28
United States v. Heinrich, 971 F.3d 160, 163 (3d Cir. 2020).
15
a reasonable interpretation of those documents that was
consistent with Appellants’ good faith.
The Government opposed this testimony, claiming that
contract law could be considered governing, and that the Court
would instruct the jury as to the governing law. Lay witnesses,
on the other hand, discussed the contract terms and other
representations based on their personal knowledge and
involvement, and did not purport to interpret them. The
District Court agreed with the Government, finding that the
expert testimony would be confusing and unnecessary, without
expressly citing to a rule of evidence, but presumably
excluding it under Federal Rules of Evidence 403 and 702,
respectively. Later, in denying Appellants’ motion for a new
trial, the District Court addressed its prior rulings in more
depth, finding that the testimony was properly excluded under
three Federal Rules of Evidence: (1) under Rule 401 because
the testimony was irrelevant to the criminal fraud case before
the jury; (2) under Rule 403 because the marginal probative
value of the testimony would be substantially outweighed by
the danger of confusing the jury; and (3) under Rule 702
because the testimony would not have been helpful to the jury
as expert witness testimony. Appellants attack all three
rationales on appeal but fail to demonstrate an abuse of
discretion.
a) Exclusion as Confusing Under
Rule 403
At trial, the District Court stated that Prof. Finkelstein’s
testimony should be excluded because it “would have a
tendency to confuse the jurors.” 29 Under Rule 403, a district
court may exclude otherwise relevant evidence “if its probative
29
App. 4377.
16
value is substantially outweighed by a danger of . . . confusing
the issues.” 30 The commands of Rule 403 are “inexact,
‘requiring sensitivity on the part of the trial court to the
subtleties of the particular situation, and considerable
deference on the part of the reviewing court to the hands-on
judgment of the trial judge.’” 31 “We will not disturb the
District Court’s ruling unless it was arbitrary or irrational.” 32
Where, as here, the District Court did not explicitly articulate
the balancing test on the record, we may either conclude that
the Court implicitly performed the test; or, if we find that the
District Court did not perform it, we may perform the test
ourselves on review. 33
We find that the District Court implicitly performed the
Rule 403 balancing test. It heard detailed argument on this
question and raised the issue of confusion with defense
counsel, noting that admitting the testimony could “turn this
case into a contract case even though it’s a fraud case.” 34 The
District Court’s concern is understandable: having a well-
credentialed law professor testify as an expert on contract law
would inevitably cause the jury to believe that the contractual
30
Fed. R. Evid. 403.
31
Egan v. Del. River Port Auth., 851 F.3d 263, 275 (3d Cir.
2017) (quoting United States v. Vosburgh, 602 F.3d 512, 537
(3d Cir. 2010)).
32
Vosburgh, 602 F.3d at 537 (quoting United States v. Kellogg,
510 F.3d 188, 197 (3d Cir. 2007) (internal quotation marks
omitted).
33
See Egan, 851 F.3d at 276 (citing United States v. Eufrasio,
935 F.2d 553, 572 (3d Cir. 1991)).
34
App. 4373.
17
terms were at issue in the case. The Government also argued
that the confusion could extend to the relevant source of law,
substituting the expert’s testimony for the District Court’s
instructions. Excluding evidence that could confuse the
dispositive issue in the case is not an abuse of discretion. 35
Additionally, under Rule 403, the risk of confusion to
the jurors must be offset against the probative value of the
evidence, and here the probative value was small. Appellants’
rationale for admitting Prof. Finkelstein’s testimony was to
demonstrate that their interpretations of the contracts were
reasonable, and could support a defense of good faith.
However, as an expert, Prof. Finkelstein could not testify as to
Volkes’s subjective good faith or actual belief; she could only
address what was a reasonable interpretation of the contracts.
And to demonstrate a good faith belief negating his intent,
Volkes did not need to show that he held a reasonable
interpretation of the contracts, only that he did in fact believe
that the contracts entitled him to keep indate refunds. An
unreasonable belief would suffice. 36 Prof. Finkelstein’s
testimony was therefore properly excluded under Rule 403
because it had very limited probative value, which was clearly
outweighed by the risk of confusing the jury.
35
McKenna v. City of Phila., 582 F.3d 447, 461 (3d Cir.
2009) (excluding police directives on use of force in § 1983
case on excessive force as it could confuse the jury as to the
relevant violation under consideration).
36
See Cheek v. United States, 498 U.S. 192, 203–04 (1991);
United States v. Jimenez, 513 F.3d 62, 75 (3d Cir. 2008)
(noting that good faith negates intent to defraud).
18
b) Exclusion as Not Helpful under
Rule 702 and as Irrelevant under
Rule 401
The District Court’s other rationale for exclusion at trial
was that Prof. Finkelstein’s expert testimony would not be
helpful to the jury. 37 Under Rule 702(a), an expert may testify
in the form of an opinion if the expert’s “specialized
knowledge will help the trier of fact to understand the evidence
or determine a fact in issue.” 38 Expert testimony is “helpful”
if it is sufficiently tied to the facts of the case such that it will
help the jury resolve a factual dispute. 39
As previously discussed, the probative value of Prof.
Finkelstein’s expert testimony on contract law was small. The
testimony would not help the jury determine a fact in issue
because there was no genuine factual dispute as to whether
Guaranteed Returns entered into contracts with its clients.
Appellants could be convicted of mail and wire fraud even if
they had behaved consistently with their obligations under the
contracts, because the relevant question was their intent to
defraud. To the extent that Prof. Finkelstein’s opinion bears
on the relevant governing law of the case, it would be unhelpful
under Rule 702 “because it would usurp the District Court’s
pivotal role in explaining the law to the jury.” 40
37
App. 4377 (finding that Prof. Finkelstein’s testimony “is not
something that is necessary to have an expert testify”).
38
Fed. R. Evid. 702(a).
39
United States v. Schiff, 602 F.3d 152, 173 (3d Cir. 2010).
40
Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195, 217 (3d
Cir. 2006).
19
The same rationale indicates why Prof. Finkelstein’s
testimony was not relevant under Rule 401. Evidence is
relevant if it has “any tendency to make a fact [of consequence
in determining the action] more or less probable than it would
be without the evidence.” 41 As Prof. Finkelstein could not
testify to the only fact of consequence—Appellants’ subjective
beliefs—her testimony did not bear on any of Appellants’ guilt.
Prof. Finkelstein’s testimony was therefore properly excluded.
2. Contract Law Jury Instructions
In the alternative, Appellants claim that the District
Court should have instructed the jury on principles of civil
contract law and included an instruction that a breach of
contract is not fraud. We review a denial of a requested jury
instruction for abuse of discretion. 42
Appellants characterize this argument as the denial of a
theory of the defense, but this is not strictly accurate.
Appellants’ theory was that they acted in good faith, and they
claim that principles of civil contract law would support this
inference. Even assuming that this standard applies, the
argument still fails. A defendant is entitled to a theory-of-
defense jury instruction if (1) he proposes a correct statement
of the law; (2) his theory is supported by the evidence; (3) the
theory of defense is not part of the charge; and (4) the failure
to include an instruction of the defendant’s theory would deny
him a fair trial. 43
41
Fed. R. Evid. 401.
42
Jimenez, 513 F.3d at 74.
43
United States v. Sussman, 709 F.3d 155, 178 (3d Cir. 2013).
20
Appellants cannot meet this standard. The good-faith
defense was already part of the jury charge. The District Court
instructed the jury that “[a] person acts in good faith when he
or she has an honestly held belief, opinion, or understanding
that his or her conduct was not unlawful, even though that
belief, opinion, or understanding turns out to be inaccurate or
incorrect.” 44 This is a correct statement of the law that
permitted the jury to find in Appellants’ favor, with or without
concluding that they complied with their contract obligations.
Instructions on civil contract law are not supported by the
evidence here, as they would not bear on Appellants’ good
faith for the reasons discussed above. In addition, Appellants
cannot demonstrate that denying their proposed instruction on
contract law deprived them of a fair trial. The jury was
instructed on the good faith defense, and the District Court
therefore did not err in not instructing the jury on civil contract
law.
C. Constructive Amendment to Indictment’s
Mail Fraud Counts 41–52
Appellants claim that the Government constructively
amended Counts 41–52 by varying their proof at trial from the
charges presented to the grand jury. Our review of a
constructive amendment claim is plenary. 45
A constructive amendment occurs where “the evidence
and jury instructions at trial modify essential terms of the
charged offense in such a way that there is a substantial
44
App. 5428.
45
United States v. Centeno, 793 F.3d 378, 389 n.10 (3d Cir.
2015).
21
likelihood that the jury may have convicted the defendant for
an offense differing from the offense the indictment returned
by the grand jury actually charged.” 46 Trial evidence,
arguments, or the district court’s own instructions can all form
the basis of constructive amendments. 47 A constructive
amendment is per se reversible error because it deprives a
defendant of his Fifth Amendment right to be tried on charges
presented to the grand jury. 48 The “key inquiry” in a
constructive amendment claim “is whether the defendant was
convicted of the same conduct for which he was indicted.” 49
Counts 41–52 charged Appellants with mail fraud. The
indictment claimed that Guaranteed Returns, Volkes, and
Fallon told clients that their negotiated fees were “all
inclusive,” but in reality they charged additional hidden fees. 50
These hidden fees were implemented through changes to
computer code made by the company’s information technology
department, and “[a]mong those programs” was the
“adjustment” scheme that reduced the amount due to a client
by a certain percentage, with Guaranteed Returns keeping that
percentage. 51 Volkes instructed employees to create the
necessary code, and Fallon applied it to certain client refunds.
46
United States v. Daraio, 445 F.3d 253, 259–60 (3d Cir.
2006).
47
United States v. McKee, 506 F.3d 225, 229 (3d Cir. 2007).
48
Daraio, 445 F.3d at 260; Vosburgh, 602 F.3d at 531.
49
Daraio, 445 F.3d at 260 (quoting United States v. Robles-
Vertiz, 155 F.3d 725, 729 (5th Cir. 1998)).
50
App. 379.
51
App. 380.
22
The indictment also identified twelve mailings in furtherance
of the scheme.
Appellants argue that these counts were constructively
amended because the only hidden fee scheme mentioned in the
indictment was the adjustment program, but at trial, the
Government claimed the indictment encompassed additional
schemes. Specifically, they contend that the verdict form and
the Government’s summation permitted the jury to convict
them of other fraudulent schemes.
Appellants’ argument fails as to the verdict form
because the form tracks the language of the indictment
precisely. The indictment claimed that Appellants charged
their clients “additional hidden fees,” despite their
representations to the contrary, while the verdict form claims
that they “charg[ed] undisclosed fees.” 52 The indictment also
charged that this scheme was implemented through changes to
the company’s computer programs, and that “[a]mong those
programs” was the “adjustment” scheme; the verdict form
states that the scheme included “an adjustment program.” 53
There is no material difference between the indictment and the
verdict form, and thus the form cannot be said to have
expanded the scope of the charges in the indictment.
Appellants’ remaining argument is that, because the
indictment charged only the adjustment scheme, the
Government’s references during summation to other hidden
52
Compare App. 379 (indictment) with App. 6368 (verdict
form).
53
Compare App. 380 (indictment) with App. 6368 (verdict
form).
23
fees that could form the basis of these mail fraud counts
constructively amended the indictment. They claim that the
indictment charged only the adjustment scheme because,
despite its references to that scheme being one “among” the
other “programs” that the company used to extract additional
hidden fees, the grand jury testimony only addressed the
adjustment program. Interpreting the indictment’s text in light
of that testimony, Appellants claim that references to other fee
schemes expanded the scope of the indictment.
Appellants offer no basis for looking behind the
indictment’s text in order to interpret it. Relying on two cases
from one of our sister circuits, they argue that, by looking
through the indictment to the testimony before the grand jury,
we may determine that the Government only charged the
adjustment scheme. 54 But neither case supports interpreting
the text of an indictment by looking to grand jury testimony. 55
54
See United States v. Milstein, 401 F.3d 53, 64–66 (2d Cir.
2005); United States v. Cervone, 907 F.2d 332, 345 (2d Cir.
1990).
55
In each case, the Second Circuit did not interpret the text of
the indictment by consulting grand jury testimony. In United
States v. Milstein, the Court found a constructive amendment
without consulting grand jury testimony at all, but merely
noted in passing that the Government had not sought to amend
one charge in that indictment at the same time it sought a
formal amendment to correct a jurisdictional defect. 401 F.3d
at 65–66. In United States v. Cervone, the Court looked to
grand jury testimony because one defendant was charged with
perjury for lying to a grand jury about whether he had engaged
in bid rigging. 907 F.2d at 345. It did not seek to interpret the
indictment by consulting the grand jury testimony.
24
We can also find no basis for looking to anything other
than the text of the indictment itself to determine its meaning.
Doing so would undermine the rationale for constructive
amendment challenges, to guard jealously the grand jury’s
charging role. As the Supreme Court has noted:
If it lies within the province of a court to change
the charging part of an indictment to suit its own
notions of what it ought to have been, or what the
grand jury would probably have made it if their
attention had been called to suggested changes,
the great importance which the common law
attaches to an indictment by a grand jury, as a
prerequisite to a prisoner’s trial for a crime, and
without which the constitution says ‘no person
shall be held to answer,’ may be frittered away
until its value is almost destroyed. 56
This Court has no more authority to subtract a scheme charged
in an indictment than it does to add others, and parsing the
minutes of the grand jury testimony would be to draw a
different conclusion from the very same evidence before it.
This would utterly remove the grand jury’s role and render that
56
Stirone v. United States, 361 U.S. 212, 216 (1960) (quoting
Ex parte Bain, 121 U.S. 1, 10 (1887)).
25
portion of the Fifth Amendment a nullity.57 We must limit
ourselves to the text of the indictment when construing its
meaning. In doing so, we find that the indictment here charged
“hidden fees” schemes, one of which was the adjustment
program, and that the Government’s references to other hidden
fee schemes did not expand the scope of the indictment.
Finally, the District Court’s instructions on mail fraud
would also preclude finding a constructive amendment, as the
instructions limited the jury to the adjustment scheme
anyway. 58 To find Appellants guilty on Counts 41–52, the jury
had to find that each mail fraud count was supported by a
mailing that furthered the scheme. 59 Counts 41–52 identified
twelve such mailings, each alleged to further one of the twelve
counts. The District Court instructed the jury that, in order to
find Appellants guilty, the Government had to prove that “the
use of the United States Mails . . . in some way furthered or
57
We also note that, in the context of challenges to probable
cause findings for pretrial freezes of assets possibly subject to
forfeiture, the Supreme Court has prohibited looking to what
was presented to the grand jury to determine if it actually
amounts to probable cause. Kaley v. United States, 571 U.S.
320, 328 (2014). The same rationale of protecting the grand
jury’s historic role applies equally in this context.
58
See Daraio, 445 F.3d at 261 (“[T]he district court obviated
the possibility of the indictment being constructively amended
by issuing accurate and thorough jury instructions precluding
the jury from convicting [the appellant] for any conduct other
than that which the indictment charged.”).
59
United States v. Cross, 128 F.3d 145, 150 (3d Cir. 1997).
26
advanced or carried out the scheme.” 60 Thus, for Counts 41–
52, the Government had to connect each of the identified
mailings to a scheme to defraud. The evidence demonstrates
that the Government connected each of the mailings referenced
in those counts to checks for batches that had been reduced
through application of the adjustment program. As we
presume that the jury followed the District Court’s instructions,
the jury could not freely conclude that the mailings were in
furtherance of a different scheme. 61 We can thus be certain
that Appellants were convicted on the adjustment scheme.
Accordingly, Appellants’ constructive amendment claim fails.
D. Sufficiency of the Evidence Challenges
Fallon and Volkes also argue that the evidence was
insufficient to support either the mail fraud convictions in
Counts 41–52, or the conviction for the money laundering
conspiracy in Count 54. We review sufficiency of the evidence
challenges under a deferential standard, viewing the evidence
in the light most favorable to the prosecution and asking
whether any rational trier of fact could have found the essential
elements of the offense beyond a reasonable doubt. 62 We
address each challenge in turn.
60
App. 5423.
61
United States v. Givan, 320 F.3d 452, 462 (3d Cir. 2003).
62
United States v. Caraballo-Rodriguez, 726 F.3d 418, 424–
25 (3d Cir. 2013) (en banc).
27
1. Mailings in Furtherance of Fraudulent
Scheme in Counts 41–52
Fallon and Volkes claim that the evidence was
insufficient to support their mail fraud convictions as it did not
demonstrate that the mailings in question were in furtherance
of mail fraud. The mail fraud statute makes it an offense to
make use of the mails “for the purpose of executing” a scheme
or artifice to defraud. 63 The statute is expansive, and does not
require the defendant’s use of the mails to be an essential
element of the scheme. 64 “All that is required is that the
defendants knowingly participated in a scheme to defraud and
caused a mailing to be used in furtherance of the scheme.” 65
To be “in furtherance” of a scheme to defraud, the relevant
mailings “must be sufficiently closely related to the scheme to
bring the conduct within the ambit of the mail fraud statute,”
and the scheme must depend in some way on the charged
mailings. 66 These can include mailings after the scheme has
come to fruition, “if designed to lull the victims into a false
sense of security” or to make it less likely that the scheme
would be discovered. 67
63
18 U.S.C. § 1341.
64
United States v. Pharis, 298 F.3d 228, 234 (3d Cir. 2002), as
amended (Sept. 30, 2002) (en banc).
65
Id.66
United States v. Coyle, 63 F.3d 1239, 1244 (3d Cir. 1995).
67
Id.; see also Schmuck v. United States, 489 U.S. 705, 714
(1989) (mailing registration paperwork to state motor vehicles
department was sufficiently connected to a scheme to defraud
by selling cars with rolled back odometers because failing to
do so could jeopardize the success of the scheme).
28
Fallon and Volkes argue that the twelve checks Fallon
mailed were not in furtherance of the scheme because the fraud
was completed by the time the checks were mailed. The
adjustment scheme worked by having Guaranteed Returns
submit batches of drugs for refunds, and once the company
received the refunds, Fallon used a computer program to
reduce amounts that would otherwise be due to clients by a
percentage. She then authorized mailing checks with the
lower, reduced amounts to Guaranteed Returns’ clients, while
the company kept the difference. This scheme operated by
“essentially skim[ming] a percentage and put[ting] it into” the
fictitious GRX Store account. 68 Because the program allocated
the percentage to Guaranteed Returns before the checks were
mailed, Fallon and Volkes argue that the Government has not
shown that these mailings were in furtherance of the scheme.
But the record shows just the opposite. The point of the
scheme was to divert to Guaranteed Returns a portion of funds
that should rightly go to clients, and the scheme could only be
accomplished if the company’s clients received less than they
were due, in amounts that would not generate suspicion.
Mailing the checks both ensured that Guaranteed Returns’
clients received less than they were due and reduced the
likelihood of detection. The evidence was therefore sufficient
to demonstrate that mailing the checks was in furtherance of
the fraud.
Fallon and Volkes argue that United States v. Altman
from the Second Circuit supports their view, but they misread
that case. In Altman, a court-appointed attorney embezzled
money from two estates to invest in a Brazilian dance show
68
App. 2938.
29
that later collapsed. 69 The attorney was charged and convicted
of mail fraud based on mail sent to him, either by other
attorneys as part of court-ordered accounting proceedings, or
by a bank at which he maintained an account. 70 The Second
Circuit ruled that none of these mailings furthered Altman’s
schemes since they occurred after he had embezzled the funds:
“A mailing cannot be said to be in furtherance of a scheme to
defraud when it occurs after the scheme has reached
fruition.” 71 Reliance on Altman does not help Fallon or Volkes
because the mailings in that case were “insufficiently related
to Altman’s scheme to be said to be in furtherance of it” and
were not “incident to any essential part of [the] scheme to
defraud the estates.” 72 In contrast, mailing the checks here was
a necessary step in depriving clients of their refund amounts.
Rather than happening after the scheme was accomplished,
mailing the checks was “sufficiently closely related to the
scheme,” and in fact was “an essential part of the scheme.” 73
The jury therefore had sufficient evidence to convict
Appellants on the mail fraud charges.
2. Money Laundering Conspiracy in Count
54
Appellants argue that the evidence was insufficient for
a reasonable jury to find that they conspired to engage in
financial transactions designed to conceal the nature or source
of the proceeds from the fraud schemes. We agree.
69
48 F.3d 96, 98–101 (2d Cir. 1995).
70
Id. at 103–04.
71
Id. at 103.
72
Id.73
See Coyle, 63 F.3d at 1244.
30
Appellants were charged with conspiring to commit
concealment money laundering under 18 U.S.C.
§ 1956(a)(1)(B)(i) by laundering the proceeds of the indate
fraud schemes through complex financial transactions
designed “to conceal or disguise the nature, location, source,
ownership and control of the proceeds.” 74 To prove a
conspiracy to launder money, the Government must show (1)
an agreement between two or more persons to launder money;
and (2) that the defendant knowingly became a member of the
conspiracy. 75 The agreement must be one that, if completed,
would satisfy the elements of the underlying substantive
74
See App. 384–86 (Count 54); see also 18 U.S.C.
§ 1956(a)(1)(B)(i) (substantive offense of concealment money
laundering), 1956(h) (conspiracy to violate § 1956).
There are two types of money laundering under 18 U.S.C. §
1956(a)(1), both of which involve financial transactions with
proceeds from unlawful activity. Concealment money
laundering under § 1956(a)(1)(B) is money laundering done
with knowledge that the financial transactions are designed to
conceal the proceeds of specified unlawful activity. United
States v. Omoruyi, 260 F.3d 291, 294–95 (3d Cir. 2001) (citing
18 U.S.C. § 1956(a)(1)(B)). This is the type of money
laundering charged here. In contrast, promotional money
laundering under § 1956(a)(1)(A) is money laundering
conducted with the proceeds of specified unlawful activity
with the intent to promote certain further illegal activity. Id.
(citing 18 U.S.C. § 1956(a)(1)(A)).
75
United States v. Greenidge, 495 F.3d 85, 100 (3d Cir. 2007).
An overt act is not required to prove a conspiracy to violate §
1956(h). Whitfield v. United States, 543 U.S. 209, 219 (2005).
31
offense—in this case, concealment money laundering. 76 The
Government therefore must prove that Appellants knowingly
conspired to engage in (1) an actual or attempted financial
transaction; (2) involving the proceeds of a specified unlawful
activity; (3) with knowledge that the transaction involves the
proceeds of some unlawful activity; and (4) with knowledge
that the transaction was designed in whole or in part to conceal
the nature, location, source, ownership or control of the
proceeds of that activity. 77
There is a fine line between the concealment inherent in
fraud offenses and concealment money laundering. “Congress
did not enact money laundering statutes simply to add to the
penalties for various crimes in which defendants make
money.” 78 This Court has found that 18 U.S.C. § 1956(a)(1)
“addressed this concern, and therefore delineated clearly [the
difference] between the underlying offense and the money
laundering offense, by including an intent requirement,”
namely “the intent to conceal or disguise the nature, source,
ownership and control of the proceeds of the . . . fraud,” as
distinct from the intent to commit the underlying fraud itself. 79
Even the Supreme Court has warned about the danger of
reading the money laundering statute in a way that would
“merge” money laundering with the transactions inherent to
the underlying crime that generates the proceeds to be
laundered because “Congress [did not] want[] a transaction
76
See Ocasio v. United States, 578 U.S. 282, 287 (2016).
77
United States v. Richardson, 658 F.3d 333, 337–38 (3d Cir.
2011).
78
United States v. Conley, 37 F.3d 970, 979 (3d Cir. 1994).
79
Omoruyi, 260 F.3d at 295.
32
that is a normal part of a crime it had duly considered and
appropriately punished elsewhere in the Criminal Code to
radically increase the sentence for that crime.” 80
There are two good reasons to guard the line between
fraud concealment and money laundering concealment. First,
in many cases, “the addition of a money laundering charge can
result in . . . a sentence that is much larger than the sentence for
the predicate offense.” 81 That is because a defendant can be
charged based on the full value of the laundered assets, even if
that defendant did not participate in the underlying fraud that
generated the fraud proceeds.
Second, a money laundering conviction can add
significant financial penalties. Where ill-gotten funds are
commingled with legitimate funds in an account, many of our
sister circuits have held that the Government can take the entire
account, including the value of both the ill-gotten and
legitimate funds, because the account helped “facilitate” the
laundering by concealing the ill-gotten funds. 82 These
financial penalties demonstrate how tacking on a money
laundering charge can vastly extend the prosecution’s reach.
At best, it could subject companies to enormous forfeiture
80
United States v. Santos, 553 U.S. 507, 517 (2008) (Scalia, J.)
(plurality opinion).
81
Rachel Zimarowski, Taking a Gamble: Money Laundering
After United States v. Santos, 112 W. Va. L. Rev. 1139, 1146–
47 (2010).
82
See, e.g., United States v. Hawkey, 148 F.3d 920, 928 n.13
(8th Cir. 1998); United States v. Tencer, 107 F.3d 1120, 1133–
36 (5th Cir. 1997); United States v. Bornfield, 145 F.3d 1123,
1135–36 (10th Cir. 1998).
33
obligations based on relatively minor fraud schemes. At worst,
it could motivate prosecutors to bring money laundering
charges in almost every fraud case. For example, if a company
commits a relatively small fraud, treats the proceeds of that
fraud as revenue, and circulates that money through several
accounts within the company just as it would with legitimate
revenue, every account through which the fraud proceeds pass
could be subject to forfeiture under 18 U.S.C. § 982 for being
“involved in” money laundering. This would be well beyond
the value of the fraud proceeds themselves that would be
subject to forfeiture.
The “classic” money laundering case is where a “drug
trafficker collects large amounts of cash from drug sales and
deposits the drug proceeds in a bank under the guise of
conducting a legitimate business transaction.” 83 In United
States v. Richardson, we also said that “funneling cash through
an ostensibly legitimate business—a classic example of money
laundering—is ordinarily sufficient to prove a design to
conceal the nature and source of the money.” 84 However,
Richardson and the other cases we cited to support this
statement in Richardson all concerned proceeds from illicit
drug dealing being funneled into a completely separate
legitimate business or activity. 85 The fraud schemes and
83
Conley, 37 F.3d at 981 n.14 (quoting under United States v.
LeBlanc, 24 F.3d 340, 346 (1st Cir. 1994)).
84
Richardson, 658 F.3d at 341 (citing United States v. Rivera–
Rodriguez, 318 F.3d 268, 277 (1st Cir. 2003); United States v.
Jackson, 935 F.2d 832, 842 (7th Cir. 1991)).
85
See, e.g., Richardson, 658 F.3d at 334–36 (funneling drug
proceeds into a recording label); Rivera-Rodriguez, 318 F.3d
at 271–72, 276–77 (funneling drug proceeds into a
34
alleged money laundering conspiracy at issue here did not
concern the proceeds of illegitimate drug dealing being
funneled into Guaranteed Returns’s legitimate business.
Concealment money laundering is not limited to the
“classic” example. An essential element of money laundering
is the intent to conceal the nature, location, source, ownership,
or control of the ill-gotten proceeds. Evidence supporting an
intent to conceal can come in many forms, including:
statements by a defendant probative of intent to
conceal; unusual secrecy surrounding the
transaction; structuring the transaction in a way
to avoid attention; depositing illegal profits in the
bank account of a legitimate business; highly
irregular features of the transaction; using third
parties to conceal the real owner; a series of
unusual financial moves cumulating in the
transaction; or expert testimony on practices of
criminals. 86
Other circuits have held that simply moving ill-gotten funds
from one account to another or from one person to another is
not enough, absent evidence that the transfer was outside of
construction company, and using drug proceeds to purchase
and then sell speedboats); Jackson, 935 F.2d at 840–42
(funneling drug proceeds into a church bank account).
86
Richardson, 658 F.3d at 340 (quoting United States v.
Garcia–Emanuel, 14 F.3d 1469, 1475–76 (10th Cir. 1994)).
35
normal operations or that the irregularity was designed to
obscure an aspect of the ill-gotten proceeds. 87
Critically for our purposes, however, concealment
money laundering, whether classic or otherwise, requires
financial transactions involving “proceeds” of the fraud, 88 and
ill-gotten funds do not become “proceeds” until after a
defendant receives them. 89 After that point, transactions in
those funds that are designed to conceal, such as a deliberate
commingling of illicit and lawful funds, can form the basis of
a money laundering charge. But any transactions that occur
before a defendant obtains the fruits of its fraudulent scheme
fall outside of § 1956(a)’s scope. Thus, a defendant’s mere
receipt of funds as a result of a fraudulent transaction cannot
itself constitute money laundering, and that is true even if the
funds received include illicit funds commingled with lawfully
obtained funds.
Here, what constituted normal operations of the
company was established largely through the testimony of
Daniel Stieglitz, the Vice President of Finance in Guaranteed
Returns. He testified at length about the accounting practices
87
See, e.g., United States v. Blankenship, 382 F.3d 1110, 1131
(11th Cir. 2004) (reversing a money laundering conviction
where transactions involved moving funds deposited from one
account bearing the defendant’s name into another); United
States v. Willey, 57 F.3d 1374, 1388 (5th Cir. 1995) (reversing
a money laundering conviction where the transaction involved
transferring funds from a personal brokerage account to a
personal checking account).
88
18 U.S.C. § 1956(a)(1)(B)(i).
89
See Omoruyi, 260 F.3d at 296–97.
36
in the company through his departure from the company in
April 2010. 90 Stieglitz was involved in the financial
transactions in the company, including moving money between
the company accounts, yet he was not aware of the fraud
schemes. He explained that, in the ordinary course of business,
the company would receive refunds for batches of returned
products as lump-sum payments from manufacturers. These
lump-sum payments were wired directly into the company’s
general operating account. The FilePro system would
determine how much to refund to clients, which Fallon would
review and advise Stieglitz of how many checks to distribute
to clients. Stieglitz would transfer the appropriate money from
the general operating account to the customer payment account
to issue refunds.
The company’s service fee was based on a percentage
of the value of the returned product, as determined by the
manufacturer after they received the returned product. This
means that the company did not know what its service fee, i.e.,
its legitimate profit, would be before sending batched returns
to manufacturers. Stieglitz testified that, based on the
accounting, “the difference between what we paid out and what
we received should have been our fee.” 91 Any money left in
the general operating account after sending refund payments to
clients was “assumed” to be legitimate income and thus spent
90
The Government did not elicit testimony from any
Guaranteed Returns employees about the company’s banking
or accounting practices for the relevant time period after
Stieglitz left the company.
91
App. 3406.
37
on operations of the facility, payroll, or distributions to
Volkes. 92
Stieglitz further testified that it is “common for
companies to have multiple bank accounts” at different
financial institutions and to “[f]requently transfer[] funds . . .
among those various bank accounts.” 93 Guaranteed Returns
maintained five accounts at three different financial institutions
during the relevant period of this prosecution: the general
operating account, a business investment account, a payroll
account, and two accounts for making distributions to clients.
Stieglitz moved money between these accounts as needed. In
addition, Stieglitz testified that he was asked “from time to
time” to make distributions to Volkes. 94 Volkes would talk to
Fallon about the amount, who would relay that information to
Stieglitz. Stieglitz would then talk to the accountant and find
out how the distribution was to be made, either through payroll
or as a dividend (i.e., profit), for tax filings. Stieglitz would
first try to make the distribution from the general operating
account, but, if there were not enough funds for the
distribution, he would move funds from the customer payment
account.
The Government argues that Appellants engaged in
“classic” money laundering by commingling their ill-gotten
proceeds with legitimate income, and then transferring the
commingled funds through various company bank accounts
before eventually depositing millions of dollars into Volkes’s
personal account. It pressed these same arguments with the
92
See App. 3405–06.
93
App. 3458.
94
App. 3407.
38
jury at trial. Throughout the prosecution, the Government
repeatedly argued that it was in fact the manufacturers’ lump
sum refund payments to Guaranteed Returns that “concealed”
the illicit funds by making them impossible to trace because
those refunds commingled legitimate and illegitimate funds.
The Indictment charged that Appellants’ “fraud proceeds were
concealed by commingling them” with legitimate refunds.95
At trial, the Government’s witnesses testified that, although
they could trace the stolen indates and all of Guaranteed
Returns’s financial transactions without difficulty, they could
not separate the illicit from the legitimate funds because the
funds were “all combined into one large check” when sent by
manufacturers to Guaranteed Returns 96 and because the
company received its refunds in “a one-lump-sum amount.”97
And in its closing, the Government hammered home that its
primary evidence of Appellants’ alleged intent to conceal,
purportedly supporting the money laundering charge, was the
commingling of legitimate and illicit refunds. 98 The
95
App. 385.
96
App. 4212.
97
App. 3505.
98
See, e.g., App. 4981 (describing how, when refunds were
deposited with the company, “these monies were all co-
mingled. . . . [These] monies[] were all put together, and as a
result you could not tell the difference. And that’s what the
conspiracy was, to launder this money”); id. at 4983
(explaining the purpose of the transactions was to conceal
because the funds “were not put in some separate account; they
were all co-mingled together so the illegal proceeds could not
be detected”); id. at 4984 (“[W]hat this money laundering case
is about is the commingling of funds.”); id. at 4985 (“[W]hat is
at issue here is . . . how [the money] was co-mingled so you
39
Government’s lead investigator, Agent Woodring, testified
that the refunds for both legitimate clients and from diverted
indates were “co-mingled” in the lump-sum payments from
manufacturers. 99
The problem is that, to the extent that the ill-gotten
proceeds were “comingled” with other funds, the commingling
occurred before the money came into Guaranteed Returns’s
accounts. That is, ill-gotten funds were commingled in the
lump-sum payments from manufacturers as part of the fraud
schemes, and, as evident in the foregoing record excerpts, the
theory the Government conveyed to the jury was that
Appellants “caused the proceeds of these [indate] frauds to be
deposited into the Company’s bank accounts,” thereby
suggesting the refunds were “proceeds” of fraud before
manufacturers paid them into Appellants’ bank account in the
first place. 100
But money from unlawful activity does not become
“proceeds” until it is “derived from an already completed
offense, or a completed phase of an ongoing offense.” 101 This
means that a money-laundering transaction can only occur
after funds obtained from unlawful activity (e.g., fraud
could not tell the difference between the illegal money and the
legal money that was laundered, and that’s what the conspiracy
is here.”).
99
App. 4196–97, 6163 (“[T]he stolen indate, the money is
comingled with the money from the other customers that had
returned product legitimately.”).
100
App. 4981 (emphasis added).
101
Conley, 37 F.3d at 980.
40
schemes) are delivered into the defendant’s possession. 102 In
this case, money from the lump-sum payments from
manufacturers did not become “proceeds” until after the lump-
sum payments were deposited into Guaranteed Returns’s
general operating account, and after refund checks were issued
to clients, minus the money from the diverted indates or the
adjustment scheme. At that point, the fraud offenses were
complete. The funds remaining in the general operating
account were the legitimate profits from service fees, the
money “skimmed” as part of the adjustment scheme, and the
proceeds from the indate fraud schemes. Stieglitz testified that
these remaining funds were assumed to be legitimate profit, in
part, because he was unaware of the fraud schemes generating
additional funds beyond the legitimate service fees.
Accordingly, the only relevant financial transactions for
Appellants’ money-laundering charge are the transactions that
occurred after Appellants paid partial refunds to clients from
the lump-sum payments.
As to those transactions, however, there is no evidence
of Appellants’ intent to conceal illicit proceeds separate from
their intent to commit the underlying fraud scheme. We review
a sufficiency of the evidence challenge under a “highly
deferential” standard, 103 considering the evidence “in the light
most favorable to the government.” 104 We can uphold the
convictions only if the Government’s evidence would permit a
102
Omoruyi, 260 F.3d at 296–97.
103
Caraballo-Rodriguez, 726 F.3d at 430.
104
United States v. Iglesias, 535 F.3d 150, 155 (3d Cir. 2008).
41
reasonable jury to “find the essential elements of the crime
beyond a reasonable doubt.” 105
In an effort to show otherwise, the Government argues
that the transactions between the company’s accounts were
irregular and complex, consisting of unnecessary steps on a
convoluted path, with the ultimate goal of transferring ill-
gotten proceeds to Volkes. The Government asserts that the
numerous transfers had no purpose other than concealment of
the ill-gotten proceeds. Based on the totality of the facts,
including the number of transactions and the circumstances
surrounding these transactions, the Government argues that
there was substantial evidence from which the jury could infer
that the transactions were designed, in whole or in part, to
conceal or disguise the nature or source of the ill-gotten
proceeds. 106
The evidence belies the Government’s argument.
Stieglitz testified that it is “common” for companies to have
multiple bank accounts at different financial institutions.
Guaranteed Returns was such a company. In fact, the evidence
shows that Guaranteed Returns was a multi-million-dollar
company with hundreds of clients and more than 200
employees or service representatives. Stieglitz also testified
that he would move money between accounts to pay for
105
United States v. Starnes, 583 F.3d 196, 206 (3d Cir. 2009).
106
Intent to conceal may also be found with respect to the
location, ownership, or control of the ill-gotten proceeds, but
the Government on appeal does not specifically argue that the
transfers were designed to conceal these aspects. Instead, the
Government focuses on the transfers being designed to conceal
the source and nature of the proceeds.
42
customer refunds, payroll, and operating expenses, as well as
to make distributions to Volkes as the owner and CEO. Neither
Stieglitz nor any other witness from Guaranteed Returns
described the transfers as irregular. The Government has not
pointed to any evidence to show that the company having
multiple bank accounts or moving money between them was
irregular.
The Government relies heavily on its exhibit 70-28 to
show the financial transactions between the various company
accounts and Volkes’s personal accounts between 2006 and
2014. The Government’s exhibit 70-28 is not itself evidence;
it is merely a demonstrative aid. Part of the Government’s
argument as to why the transfers between accounts were
unusual was because some transfers moved money back into
the general operating account. However, exhibit 70-28 itself
illustrates that, of the hundreds of transactions moving billions
of dollars between accounts over the multi-year period, only
seven transactions for a total of $11.875 million moved money
from the customer payment account back into the general
operating account. 107 This is a minuscule number, and there is
no evidence to suggest that this is unusual—or indicative of
intent to conceal—based on Stieglitz’s testimony that it was
common to move money between accounts for the general
operation of the business.
The Government also asserts that the numerous
transfers from the general operating account allowed
Appellants to hide the fact that the company was bringing in
millions of dollars more than it would from just the legitimate
107
Five transactions moved $9.375 million in 2006, one
transaction moved $1.5 million in 2009, and one transaction
moved $1 million in 2010.
43
service fees. For the Government’s argument to have any
credence, the intent to conceal must have been to conceal from
Stieglitz, who was the key financial person not involved in the
money-laundering conspiracy. But Stieglitz’s testimony
directly contradicts the inference that the Government wishes
to be drawn.
Stieglitz was well aware of all the money in the general
operating account, how much money was paid to clients from
that account, how much was left over, and how much was
moved between the various accounts. Due in part to the
variable service fee structure, he assumed that what was left in
the general operating account after refunding clients was
legitimate profit. Even if the presence of the fraud proceeds in
the general operating accounts made the assumed profit larger
than what the profit should be without the fraud schemes,
Stieglitz remained unaware of the fraud schemes or the
proceeds generated from them. Stieglitz was even involved in
transferring money between accounts. For distributions to
Volkes, both Stieglitz and an accountant were aware since they
had to determine from which accounts to source the
distribution funds and how to report them to the IRS. The
evidence does not show that the transfers were designed, in
whole or in part, to conceal the fraud proceeds since Stieglitz—
the key financial person not involved in the money-laundering
conspiracy—was aware of all the money in the company and
was involved in the financial transactions, yet he remained
unaware of the fraud schemes.
This also highlights that the financial transactions could
not have been designed to conceal the source of the ill-gotten
proceeds. The source of all money in the company was the
pharmaceutical manufacturers. The legitimate and ill-gotten
funds did not come from different sources. The only difference
44
is that the ill-gotten funds were supposed to go to clients and
instead remained in the company’s general operating account.
Appellants’ conviction for concealment money
laundering under 18 U.S.C. § 1956(a)(1)(B)(i) requires proof
that financial transactions were “designed in whole or in part .
. . to conceal or disguise the nature, the location, the source, the
ownership, or the control” of the ill-gotten proceeds from the
fraud schemes. Viewing the evidence in the light most
favorable to the Government, there is not sufficient evidence
to prove beyond a reasonable doubt that the alleged complex
financial transactions—after the initial receipt of the
“commingled” fraudulent and lawfully obtained funds—were
designed for such concealment. We will therefore vacate the
conviction for all Appellants as to Count 54 for conspiracy to
launder money, vacate Appellants’ sentences, and remand for
resentencing. 108
E. The Government’s Alleged Pattern of
Misconduct
Appellants also argue that prosecutorial misconduct
requires reversal of their convictions and either dismissal of the
indictments or remand for a new trial. Appellants allege three
forms of prosecutorial misconduct: (1) suppression of two
favorable pieces of evidence in violation of Brady; (2) knowing
misstatements by Agent Woodring to the grand jury; and (3)
108
Appellants also argue that the indictment and jury
instructions permitted the jury to convict them on a legally
invalid theory of conspiracy to launder money. Since we
vacate Appellants’ convictions of conspiracy to launder money
due to insufficient evidence, we need not consider this
additional argument challenging the convictions.
45
display of an exhibit not in evidence to the jury. We address
each argument in turn.
1. Brady Violations
This Court reviews a violation of Brady v. Maryland 109
de novo for conclusions of law, but applies a clearly erroneous
standard to findings of fact. 110 To establish a Brady violation,
Appellants must show (1) that the Government suppressed
evidence; (2) that the evidence was favorable to Appellants
either because it was exculpatory or impeaching; and (3) that
the evidence was material to guilt or punishment, meaning that
there is a reasonable probability that, had the evidence been
disclosed to Appellants, the result of the proceeding would
have been different. 111
Appellants claim that the Government suppressed two
pieces of evidence. The first is two pages of notes prepared by
Agent Woodring, memorializing a phone call that she had with
Vincent Valinotti, the DoD chief contracting officer for the
2007 contract. The first page of these notes is dated March 12,
2010, and states that, although reverse distributors “will take
indates,” this “contract is silent” as to indates. 112 The second
page, dated December 17, 2010, states “nothing in contract re
indates + not required,” followed by a few illegible words. 113
109
373 U.S. 83 (1963).
110
United States v. Georgiou, 777 F.3d 125, 138 (3d Cir.
2015).
111
Id. (quoting Pelullo, 399 F.3d at 209).
112
App. 6125.
113
App. 6126.
46
The second piece of evidence is a report of Agent
Woodring’s January 3, 2017 interview of Linda Magazu, the
DoD contracting officer for the 2001 contract. In this report,
Magazu opined that, “based on the statement of work [in the
2001 contract,] Guaranteed Returns was not obligated to store
indated product because storing indated product was not
specifically stated in the statement of work in the contract.” 114
Magazu added that, “if Guaranteed Returns [held] indated
product for the DoD, [it] could not return the product for credit
and keep the credit. Guaranteed Returns could only give credit
to the DoD and earn a service fee.” 115
Appellants concede that the Government produced the
Magazu report on January 27, 2017, after the final pretrial
conference and one business day before jury selection. The
Valinotti notes were not disclosed until February 3, 2017, the
Friday of the first week of trial and the Friday before the week
when Valinotti was expected to testify.
“Where the government makes Brady evidence
available during the course of a trial in such a way that a
defendant is able effectively to use it, due process is not
violated and Brady is not contravened.” 116 Thus, assuming—
without deciding—that these two pieces of evidence qualify as
Brady material, we must consider whether Appellants were
able to use the material and suffered prejudice from an
untimely disclosure. 117 The Magazu interview report was
114
App. 6256.
115
App. 6256.
116
United States v. Johnson, 816 F.2d 918, 924 (3d Cir. 1987).
117
United States v. Moreno, 727 F.3d 255, 262 (3d Cir. 2013)
(finding no violation where alleged Brady material was
47
produced five days before opening statements, and thirty-eight
days before Agent Woodring testified. The Valinotti notes
were produced four days before Valinotti testified.
Guaranteed Returns argues that the suppression of the
Valinotti notes prevented it from discussing the notes in its
opening statement, and that it would have used the notes to
cross examine Robert Dooley, another Government witness.
However, Guaranteed Returns’s counsel mentioned in his
opening that the 2001 DoD contract was silent on indates, and
he made repeated reference to the notion that Guaranteed
Returns’s clients did not expect anything in return for indates.
Guaranteed Returns also had the notes two days before Dooley
testified, 118 and yet the company offers no argument as to how
its cross examination of Dooley would have changed if it had
received the evidence earlier. The company also claims that
the Magazu interview report came too late to integrate the
report into its pretrial strategy, but the company does not
articulate how its strategy would have changed. In particular,
the company does not argue that it would have called Magazu
as a witness had the notes been disclosed earlier. Since
Appellants have failed to demonstrate prejudice from the
delayed disclosure of this evidence, they cannot succeed on
their Brady arguments. 119
produced at 7 p.m. the night before trial because defendant
failed to establish prejudice).
118
The Valinotti notes were produced two days before Dooley
testified.
119
Guaranteed Returns also argues that it would have moved
to dismiss the indictments with these pieces of evidence, but
again, it fails to articulate how this evidence would have
permitted it to do so.
48
2. Misrepresentations to Grand Jury and in
Pursuit of Search Warrants
Appellants also incorrectly claim that Agent Woodring
lied to the grand jury and to a magistrate judge to obtain a
search warrant. They argue that, once Agent Woodring spoke
with Valinotti, she conclusively knew that the 2001 DoD
contract did not “cover” indates, and therefore any statement
that the contract did cover indates was a willful
misrepresentation.
This mischaracterizes Agent Woodring’s notes of her
conversation. Valinotti told Agent Woodring that there was
“nothing re indates” 120 in the 2001 DoD contract, meaning that
the indates were not treated differently than any other
pharmaceutical return under that contract. Valinotti also
testified at trial that, although the 2001 DoD contract did not
use the word “indates,” the company treated indates like any
other drug by either returning the indates to the manufacturer
when they reached their expiration date or by destroying the
indates if they were not returnable under the manufacturer’s
policy. Appellants point to nothing in the record to suggest
that either Valinotti or Agent Woodring understood the
contract differently. The argument that Agent Woodring lied
or made a material misrepresentation every time she claimed
that the 2001 contract covered indates is therefore baseless.
Appellants also claim that Agent Woodring made
similar misrepresentations to the grand jury, but they concede
that they are precluded from challenging their convictions
120
App. 6126.
49
based on grand jury perjury. 121 They only mention this in
support of their argument on general prosecutorial misconduct,
which, as noted below, does not succeed.
3. Display of an Exhibit not in Evidence
Fallon also argues that a mistrial was warranted based
on the Government’s improper reference to an exhibit that was
not in evidence. During the Government’s rebuttal summation,
it displayed a one-page task list that listed Volkes as the
“owner” and listed several tasks that he was apparently to
complete. The Government used the task list to connect the
adjustment scheme to other testimony and evidence,
suggesting that Appellants implemented the adjustment
scheme to increase revenue and thereby enable Volkes to repay
a loan that he took out to satisfy an unrelated Missouri
judgment.
The District Court gave the jurors a curative instruction
to disregard the task list, before other instructions in the
case. 122 After approximately ten hours of deliberation, the
jurors sent a note indicating that they were hung as to Fallon
on Counts 41–52 and 54. The Court reminded them that the
case had taken seven weeks to present, that they may reach
Guaranteed Returns’s Br. at 51; United States v. Mechanik,
121
475 U.S. 66, 73 (1986).
122
The instruction stated that the exhibit was not in evidence
and therefore that “aspect of [the Government’s] argument is
stricken, meaning that you must disregard the document itself
and all arguments relating to it, and neither the document nor
the related arguments may be considered by you in any way
during your deliberations.” App. 5390.
50
different verdicts as to each defendant on each count, and that
they should keep deliberating. The jury then asked to see a
number of exhibits, including the task list not in evidence. The
Court wrote back to the jury, noting that the task list was not in
evidence, and referring them to the appropriate curative
instruction, which they had with them in the jury room. At the
request of Volkes’s counsel, the Court also brought the jurors
back to the courtroom to instruct them again that they should
not consider the task list or any argument the Government
made related to it. The jury then reached a verdict on all
counts.
As we presume that jurors follow curative instructions,
Appellants cannot prevail on this claim. 123 The District Court
gave multiple instructions not to consider the task list,
including a specific reminder after the jury requested it. This
ensured that the jury was aware that they could not consider
the task list. Appellants also concede that any error here is
subject to harmless error analysis. 124 An error is harmless
where the reviewing court possesses a sure conviction that the
error did not prejudice the defendant. 125 We have such a
conviction here. A Government witness had already connected
123
United States v. Franz, 772 F.3d 134, 152 (3d Cir. 2014).
United States v. Molina-Guevara, 96 F.3d 698, 703 (3d Cir.
124
1996)
125
United States v. Cunningham, 694 F.3d 372, 392 (3d Cir.
2012) (quoting United States v. Dispoz-O-Plastics, Inc., 172
F.3d 275, 286 (3d Cir. 1999)).
51
the Missouri judgment to the adjustment scheme, and the jury
did not learn anything new from the task list. 126
4. Cumulative Effect of Prosecutorial
Misconduct
In order to have an indictment dismissed due to a course
of prosecutorial misconduct, Appellants must demonstrate
both prejudice from the misconduct and that there was no less
severe means to remedy that prejudice. 127 Appellants can do
neither. The only prejudice that they have identified was the
Government’s display of an exhibit not in evidence, which the
District Court addressed through curative instructions and was
harmless in any event. Accordingly, Appellants have not
shown that the indictment should be dismissed or that a new
trial is warranted on the basis of alleged prosecutorial
misconduct.
126
In arguing for reversal on this basis, Appellants offer a
different version of events. Appellants contend that, after the
jury was again instructed to disregard the task list, they
provided a note to the Court indicating that they had reached a
verdict and suggesting that they did so before hearing the
curative instruction again. Fallon’s counsel raised this
possibility with the District Court, but the Court clarified that,
while it did receive an envelope when the jury entered to be
reinstructed to disregard the task list, the envelope was empty.
There is no basis in the record for Appellants’ assertions that
the jury reached a verdict before the second curative
instruction.
127
United States v. Wright, 913 F.3d 364, 371 (3d Cir. 2019).
52
F. The Restitution and Forfeiture Awards
Finally, Appellants challenge the District Court’s
restitution and forfeiture awards.
1. Restitution Award
Our review of whether restitution is permitted by law is
plenary, and we review any particular award for abuse of
discretion. 128 We review factual findings as to the amount of
loss for clear error. 129 To set aside an award, Appellants must
demonstrate that the award is “completely devoid of a credible
evidentiary basis or bears no rational relationship to the
supporting data.” 130
At sentencing, the Government sought $157,896,446.94
in restitution for the indate scheme based on the “estimated
return value” of the pharmaceuticals that Guaranteed Returns
misdirected to itself, and $515,211.89 in restitution for the
adjustment scheme. Appellants opposed using the estimated
return value to calculate restitution in the indate scheme since
the “actual return value” of the misdirected indates was readily
available and reflected the proceeds that the company actually
received. Appellants argued that the actual return value was
$94,737,868.16. Appellants further argued that the actual
return value should be reduced by approximately $13 million
to reflect the reasonable fees that the defrauded clients would
128
United States v. Quillen, 335 F.3d 219, 221 (3d Cir. 2003).
129
United States v. Vitillo, 490 F.3d 314, 330 (3d Cir. 2007),
as amended (Aug. 10, 2007).
130
Id. (quoting United States v. Haut, 107 F.3d 213, 218 (3d
Cir. 1997)).
53
have expected to pay for services in connection with the
misdirected indates. Appellants therefore argued for a total
restitution award of approximately $81 million for the indate
scheme. The District Court accepted Appellants’ calculation
of the actual return value of the misdirected indates as the
amount of restitution for the indate scheme. The Court ordered
Appellants to pay two restitution awards: (1) $94,737,868.16
for the indate scheme, to be paid jointly and severally by
Volkes and Guaranteed Returns; and (2) $515,221.89 for the
adjustment scheme, to be paid jointly and severally by Volkes,
Fallon, and Guaranteed Returns. Volkes and Guaranteed
Returns were therefore responsible, jointly and severally, for a
total of $95,253,090.05 in restitution.
Appellants now argue that the restitution award for the
indate scheme was improper because the record did not support
that every single client suffered a loss when Guaranteed
Returns stole indate refunds properly due to them. This
argument fails. A restitution award is only an abuse of
discretion if it is devoid of a credible evidentiary basis or bears
no rational relationship to the supporting data. 131 The District
Court’s use of Guaranteed Returns’s records of the funds it
actually received for the diverted indates satisfies this standard.
The company argues that a low response rate to a victim impact
survey somehow undermines this conclusion, but again, the
District Court’s use of the company’s own records is a
sufficient basis for the restitution calculation. Moreover,
Appellants themselves proposed the $94 million restitution
figure as the actual return value of the misdirected indates.
Appellants have not shown that the District Court abused its
131
Vitillo, 490 F.3d at 330.
54
discretion in imposing any of the restitution awards, so we will
affirm. 132
2. Forfeiture Award
Guaranteed Returns also raises a number of challenges
to the District Court’s forfeiture award. Since the forfeiture
award is based on Appellants’ convictions for conspiracy to
launder money under Count 54, and since we will vacate the
convictions as to Count 54 and vacate the sentences, so too
must the forfeiture award be vacated. To the extent that a
forfeiture award applies to the remaining convictions, we will
remand to the District Court to recalculate any appropriate
forfeiture award. 133
III. Conclusion
For the foregoing reasons, we will vacate the
Appellants’ convictions on Count 54 for the conspiracy to
launder money, but we will affirm the remaining convictions.
132
Since the restitution awards were not calculated based on
the convictions for conspiracy to launder money, the awards
do not need to be recalculated in light of our decision to vacate
these convictions.
133
The parties also agree that the District Court committed a
computational error in calculating the forfeiture award because
the Court did not adjust the award for the $6,313,128.10 in
“direct credits” from the manufacturer that went directly to the
accounts of Guaranteed Returns’s clients. Guaranteed Returns
Br. at 41; Gov’t Br. at 174. To the extent that the District Court
recalculates a forfeiture award absent the convictions for
conspiracy to launder money, this amount in “direct credits”
must be considered.
55
We also will vacate Appellants’ sentences, other than the
restitution award, and remand for resentencing, including a
recalculation of the forfeiture award.
AFFIRMED in part; REVERSED in part; VACATED
in part; and REMANDED for resentencing.
56