United States v. Yitschak Ebert ( 1999 )

Volume 1 of 2
UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
YITSCHAK EBERT, a/k/a Isaac, d/b/a
No. 96-4871
M&I Distributors, Incorporated,
a/k/a Isaac Ebert, a/k/a Issac Ebert,
a/k/a Yitzchok Ebert,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
MICHAEL KAZINEC, a/k/a Mike, d/b/a
No. 96-4886
M&I Distributors, Incorporated,
a/k/a Mike Kazinec, a/k/a Michael
Paul Kazinec,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
No. 96-4887
JOHN WAYNE FOSTER, JR., a/k/a
Wayne,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
No. 96-4888
BERNARD WILLIAM CRUSE, III, a/k/a
Bill, d/b/a The Food Outlet, a/k/a
Bill Cruse,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
MARK DAVID EIDELMAN, d/b/a
No. 96-4889
American Drug Wholesale, d/b/a
American International Wholesale
Drug,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
No. 96-4947
JOHN WAYNE FOSTER, SR., a/k/a
Johnny Foster,
Defendant-Appellant.
2
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
No. 96-4948
ROBERT WILLIAM SPITTEL, a/k/a Bob
Spittel, d/b/a North Bridge Salvage,
d/b/a Closeouts, Incorporated,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
No. 96-4949
STEVEN MICHAEL HALE, a/k/a Stevie
Michael Hale, a/k/a Steve Michael
Hale, d/b/a North Bridge Salvage,
Defendant-Appellant.
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
No. 96-4975
MARVIN JUNE PHILLIPS, a/k/a Jay;
BEST DEAL LIQUIDATORS,
INCORPORATED,
Defendants-Appellants.
3
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
No. 97-4016
BARRY GORDON YORK, d/b/a HBA
Liquidators,
Defendant-Appellant.
Appeals from the United States District Court
for the Eastern District of North Carolina, at Raleigh.
W. Earl Britt, Senior District Judge.
(CR-95-84-BR)
Argued: May 8, 1998
Decided: May 3, 1999
Before MURNAGHAN, NIEMEYER, and MICHAEL,
Circuit Judges.
_________________________________________________________________
Affirmed in part, reversed in part, vacated in part, and remanded with
instructions by unpublished opinion. Judge Michael wrote the major-
ity opinion, in which Judge Murnaghan joined. Judge Niemeyer wrote
a dissenting opinion.
_________________________________________________________________
COUNSEL
ARGUED: Carlos Marco Recio, Washington, D.C.; David W. Long,
POYNER & SPRUILL, L.L.P., Raleigh, North Carolina; Allen C.
Brotherton, KNOX, KNOX, FREEMAN & BROTHERTON, Char-
lotte, North Carolina; Daniel Smith Johnson, Winston-Salem, North
Carolina; David I. Schoen, Montgomery, Alabama, for Appellants.
Anne Margaret Hayes, Assistant United States Attorney, Raleigh,
North Carolina, for Appellee. ON BRIEF: Joseph E. Zeszotarski, Jr.,
4
POYNER & SPRUILL, L.L.P., Raleigh, North Carolina, for Appel-
lant Eidelman; Valerie S. Amsterdam, New York, New York, for
Appellant Kazinec. Lynn Broadway, Lawndale, North Carolina, for
Appellant York. J. Douglas McCullough, STUBBS, PERDUE &
AYERS, P.A., Raleigh, North Carolina, for Appellant Cruse; Nils
Edward Gerber, Winston-Salem, North Carolina, for Appellant Spit-
tel. Janice McKenzie Cole, United States Attorney, Banumathi Ran-
garajan, Assistant United States Attorney, Raleigh, North Carolina,
for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
MICHAEL, Circuit Judge:
This case involves an alleged conspiracy to buy and sell stolen
over-the-counter drugs (OTC), like aspirin, nasal spray and cough
syrup, and health and beauty aids (HBA), like razor blades, shampoo,
and toothpaste. The eleven defendants who appeal here -- Jay Phil-
lips, Johnny Foster, Wayne Foster, Best Deal Liquidators, Inc., Barry
York, Bill Cruse, Steve Hale, Bob Spittel, Mark Eidelman, Isaac
Ebert, and Mike Kazinec -- were all convicted of conspiracy to trans-
port or receive stolen goods. The defendants all operated businesses
that bought and sold OTC and HBA. Each defendant bought some
OTC and HBA from (or sold some OTC and HBA with) government
informant Donald Thomas. Thomas, who held himself out as a sup-
plier of salvaged and liquidated OTC and HBA, actually was a large-
scale fence who bought stolen OTC and HBA from a number of shop-
lifters and smalltime fences. Thomas covered his tracks well though,
and there was evidence that only four of the defendants, Ebert, Kazi-
nec, Eidelman, and York, actually knew that his OTC and HBA was
stolen. Thus, in addition to asserting that four defendants knew
Thomas sold stolen merchandise, the government argued that all
defendants deliberately closed their eyes to the true source of Thom-
5
as's OTC and HBA. Yet, the government did not offer any admissible
direct evidence of deliberate ignorance, or even any individualized
circumstantial evidence of deliberate ignorance. Rather, the govern-
ment proceeded on the dubious theory that the defendants were delib-
erately ignorant to the true source of Thomas's OTC and HBA
because Thomas's operation was "highly suspicious."
We conclude that the evidence at trial was legally insufficient to
support the government's theory. The government did not show that
Thomas's operation was highly suspicious, and even if it had, there
was no proof that any of the defendants (except the four who had
actual knowledge) had their own suspicions aroused. As a result, the
convictions of Phillips, the Fosters, Best Deal, and Cruse cannot
stand. Absent deliberate ignorance, there was simply no evidence that
any of these defendants knew Thomas sold stolen OTC and HBA. We
also reverse Hale and Spittel's convictions. Although there was evi-
dence that Hale actually knew some of the OTC and HBA he sold
was stolen and evidence that both Hale and Spittel consciously
avoided viewing transactions in stolen OTC and HBA, this evidence
should not have been admitted as substantive evidence of the charged
conspiracy because the particular transactions in OTC and HBA were
unrelated to Thomas's operation. We affirm the conspiracy convic-
tions of Ebert, Kazinec, and Eidelman, and we affirm the money laun-
dering and receiving stolen property convictions of Kazinec and
Eidelman. The government presented testimony that these three
defendants actually knew Thomas sold stolen OTC and HBA. We
must, however, vacate Ebert's convictions for money laundering and
receiving stolen property because North Carolina was an improper
venue to try these charges.
In summary, we reverse the convictions of Phillips, the Fosters,
Best Deal, Cruse, Hale, and Spittel, and we remand for the entry of
judgments of acquittal as to them. We affirm the convictions of Kazi-
nec and Eidelman on all charges, and we affirm Ebert's conspiracy
conviction. We vacate Ebert's convictions for money laundering and
receiving stolen property.1 We remand for dismissal (for improper
venue) of the money laundering and receiving stolen property charges
_________________________________________________________________
1 We have considered the other claims presented on appeal by Ebert,
Kazinec, and Eidelman and find them to be without merit.
6
against Ebert and for his resentencing. York presents a special situa-
tion requiring a limited remand, and we take that up first.
I. THE TIMING OF BARRY YORK'S
NOTICE OF APPEAL
York filed his notice of appeal a few days late. To preserve the
right to appeal, a criminal defendant must file a notice of appeal
within 10 days after the entry of judgment. Fed. R. App. Proc. 4(b).
However, upon a showing of excusable neglect, a district court may
extend the time for filing by up to 30 days. Id. Judgment was entered
against York on December 12, 1996, and he filed his notice of appeal
on January 6, 1997. The 10-day deadline therefore had expired. How-
ever, because York filed the notice within 30 days of the expiration
of the original appeal period, the district court had the discretion to
grant an extension upon a showing of excusable neglect for the
untimely filing. See United States v. Reyes, 759 F.2d 351, 353 (4th
Cir. 1985). We therefore remand as to York to give him the opportu-
nity to make such a showing before the district court.
II. BACKGROUND
A. The Alleged Conspiracy
Donald Thomas owned and operated a tool store, D&C Imports, in
Garner, North Carolina. J.A. 1213. Thomas was considered a "trusted
and reliable" member of his community. J.A. 1337. Colonel R. A.
Barefoot, Commander of the North Carolina State Highway Patrol,
was a close friend of Thomas's, and a frequent visitor to D&C
Imports. J.A. 1061-65. Thomas even threw a party for Colonel Bare-
foot (which Jay Phillips and Wayne Foster attended) when he was
promoted to lead the highway patrol. J.A. 1048B-48C; 1063-67.
Thomas also was a friend of a former North Carolina Attorney Gen-
eral. J.A. 1061-64. Thomas was proud of his relationships with these
state law enforcement officials and mentioned these relationships to
some of his business associates, including Steve Hale. J.A. 1065. As
a result of these relationships, Thomas was known about town as a
"friend of law enforcement." J.A. 1064, 1066-67. Thomas cultivated
this image with the part-time employment of a Raleigh police officer,
Mark O'Shields, who helped operate D&C Imports. J.A. 180-81.
7
Thomas also regularly employed off-duty highway patrol officers to
assist him with loading and unloading tools and other merchandise.
J.A. 1048-1048A.
Thomas started out as a legitimate businessman, selling used tools
at flea markets around North Carolina. He got started in the stolen
property business in about 1986 by obtaining tools from shoplifters,
whom he called "boosters," at a flea market in Fayetteville, North
Carolina. J.A. 791-93, 1412-13. Thomas's wife and daughter helped
him sell these stolen tools at various flea markets around North Caro-
lina. J.A. 794. Thomas, however, was extremely secretive about the
illegitimate source of his tools. Indeed, his daughter did not realize
that she was selling stolen tools for the first three years she worked
for him. J.A. 720-21. Despite his good relationship with the police,
Thomas was constantly worried that he was being investigated. J.A.
1004-4B. Yet there was no evidence that any of Thomas's friends in
law enforcement (except O'Shields, who was indicted along with the
other defendants, J.A. 145) knew about Thomas's stolen property
business.
After a short time Thomas was successful enough to open up his
own tool store. J.A. 795. He continued to buy and sell tools at the flea
markets, but he also began to buy other merchandise from the boost-
ers he knew. The boosters began selling Thomas items like videos,
batteries, electronic equipment, as well as name-brand OTC and
HBA, like Tylenol. J.A. 802. After a time, Thomas asked these boost-
ers to tell their friends that he would buy anything that they could
steal, and soon his network grew to include 20 to 25 boosters. J.A.
792-95. The boosters often brought the stolen merchandise to Thomas
at his home in Garner. J.A. 796-97.
In order to minimize booster traffic to his home, Thomas rented a
trailer in Fayetteville and installed a fence, Curly Johnson, there to
buy stolen goods from boosters on a full-time basis. J.A. 797-98.
Curly Johnson bought a great deal of stolen name-brand OTC for
Thomas. J.A. 802-05. Later, after his stolen OTC and HBA business
was booming, Thomas also purchased stolen OTC and HBA from
other, independent fences. J.A. 276, 796, 797, 800-02. Two such
fences were Bob O'Neal, who operated tables at various flea markets
around North Carolina, J.A. 1236-40, and Toby Johnson, who owned
8
a pawn shop in Durham, North Carolina. J.A. 1169. Thomas sold
much of his stolen OTC and HBA to two local wholesalers. J.A. 802-
04.
In 1992 Thomas met defendant Jay Phillips at a flea market in Lex-
ington, North Carolina. Rec. Vol. 75, at 170. Phillips and a partner
operated defendant Best Deal Liquidators, Inc. (Best Deal) in Sher-
rills Ford, North Carolina. J.A. 2146-51. Phillips told Thomas that he
had heard that Thomas sold brand-name OTC and HBA and gave
Thomas a list of OTC and HBA that he would like to buy. J.A. 803-
05. Thomas soon started selling all of his OTC and HBA to Best Deal
because Phillips promised to buy all the OTC and HBA that he
(Thomas) could find, at a higher price than his former customers paid.
J.A. 805. At first Phillips paid Thomas for the OTC and HBA in cash,
J.A. 806, but soon he began paying Thomas by check, J.A. 810-11,
2725-28, 2730, 2763. At trial Thomas testified that he was just one
of fourteen suppliers of Best Deal's OTC and HBA; Thomas could
not say if the other suppliers sold Best Deal stolen goods. See Rec.
Vol. 91, at 179 (citing Thomas's testimony). Thomas also said that he
was diligent in not revealing his sources of stolen merchandise to his
customers, because he feared that once his customers knew from
whom he bought his goods, they would cut him out by buying the
goods directly from his sources. J.A. 998-99, 1549.
After a while, the Fosters (defendants Wayne Foster and Johnny
Foster) bought out Phillips's partner. J.A. 807-08, 1420-21, 2144.
Wayne Foster helped Phillips with the day-to-day operation of Best
Deal, J.A. 810, 820, 895-96, but Johnny Foster, an auto dealer and
auctioneer in Lake Norman, North Carolina, was essentially a silent
partner, Foster Supp. Br. 4. Johnny Foster did sell a number of auto-
mobiles to Thomas, for which Thomas paid mainly cash but also pro-
vided some tools and electronics equipment in partial payment. J.A.
283-84, 872-81. Although some of the merchandise Thomas
exchanged for these cars was stolen, much of it was not, J.A. 854-55,
880, and there was no evidence that Johnny Foster knew any of it was
stolen.
Thomas sold about $1 million worth of stolen OTC and HBA to
Best Deal between August 1992 and November 1993. J.A. 277, 2723.
During this time, Best Deal usually received shipments of OTC and
9
HBA from Thomas two times a week. J.A. 2725, 2763. Sometimes
Phillips (or occasionally Wayne Foster or Johnny Foster, J.A. 810,
820, 1368-70) would pick up additional OTC and HBA from Thomas
at D&C Imports or at flea markets. J.A. 808-09, 820. After Best Deal
bought the stolen OTC and HBA from Thomas, the merchandise was
"cleaned." The cleaning process involved the use of razor blades, cot-
ton swabs, matches, and alcohol (or other solvents) to take all price
stickers, security devices, and any other identification marks off the
OTC and HBA. J.A. 502-03. After the OTC and HBA was cleaned
and repackaged, Best Deal transported it to Brooklyn, New York, and
sold it to various redistributors, including Joseph Parisi. J.A. 1419-26,
2735-39. Best Deal employed defendant Barry York, Johnny Foster's
brother-in-law, J.A. 810, to help clean this merchandise and deliver
it to New York. J.A. 834, 885-86, 1393-94. Thomas stopped doing
business with Best Deal in October 1993 when he and Phillips fell out
because Phillips paid Thomas only $60,000 for two loads of stolen
OTC and HBA that Thomas valued at $80,000. J.A. 516-17, 825-30,
Tr. Vol. 13 at 12-13.
Defendant Steve Hale operated North Bridge Salvage, Inc. (North
Bridge) in Terrell, North Carolina. J.A. 277, 2152-55. Hale had origi-
nally planned to invest (with Phillips) in Best Deal in 1992, but the
deal fell through. Hale then went into business for himself and hired
his friend, defendant Bob Spittel. J.A. 830, 1442. At that time Hale
contacted several of Phillips's sources of OTC and HBA, including
Thomas, to offer higher prices if they would sell to North Bridge
instead of to Best Deal. J.A. 747-55. Thomas declined to sell any
OTC and HBA to Hale because he (Thomas) still had a good relation-
ship with Phillips. J.A. 755. But when Thomas broke off his relation-
ship with Best Deal, he called Steve Hale and offered to sell North
Bridge all of his OTC and HBA. J.A. 830-31.
Thomas sold stolen OTC and HBA to North Bridge for just over
a month, from late November 1993 to early January 1994. During that
time Thomas sold approximately $320,000 worth of stolen OTC and
HBA to North Bridge. J.A. 2158, 2728. North Bridge received deliv-
eries of OTC and HBA from Thomas's operation twice weekly. Usu-
ally, Spittel met Thomas's wife in a parking lot or at the flea market
in Lexington to pick up the OTC and HBA. J.A. 757-59. Sometimes,
however, Spittel picked up the merchandise at D&C Imports. J.A.
10
760-61. North Bridge always paid for Thomas's OTC and HBA by
check. J.A. 2778. Indeed, North Bridge functioned above board: it
paid taxes, maintained detailed business records, was listed in the
white pages, and even had an 800 number. J.A. 1590-91.2 Indeed, dur-
ing its one year of operation, North Bridge sold $6 million in OTC
and HBA to wholesalers, only 5 percent of which came from Thomas.
J.A. 2778, 2779-83; Hale Br. 9. The government offered no proof that
all (or even a substantial portion) of North Bridge's sales involved
stolen merchandise. Only two other sources of North Bridge's OTC
and HBA, small-time fences Bob O'Neal and Toby Johnson, testified
at trial, and the government offered no proof that these two fences
accounted for more than a small fraction of North Bridge's business.
Like Curly Johnson, Thomas's fence in Fayetteville, both O'Neal
and Toby Johnson bought OTC and HBA directly from boosters. J.A.
1176, 1180-81; Rec. Vol. 61, at 171, 177. However, unlike Curly
Johnson, who was in business with Thomas, J.A. 485; Rec. Vol. 74,
at 181, O'Neal and Toby Johnson did not operate on behalf of just
one buyer. Rather, they sold to whichever buyer offered to pay them
the most for their merchandise. O'Neal and Toby Johnson also com-
peted with each other, and with Thomas, for boosters. Rec. Vol. 74,
at 18; Rec. Vol. 61, at 26, 181-82. Yet, at different times, when they
were not selling stolen OTC and HBA to North Bridge, O'Neal and
Toby Johnson sold their goods directly to Thomas. 3
_________________________________________________________________
2 There was no evidence that any of the other defendants' businesses
operated any differently.
3 O'Neal originally sold to Thomas when Thomas was selling to Phil-
lips, but O'Neal stopped selling to Thomas because he did not get along
with Thomas and Phillips. Rec. Vol. 74, at 181-185; Rec. Vol. 61, at
170-72. Later, after Thomas was no longer involved with North Bridge,
O'Neal also sold stolen OTC and HBA to Hale and Spittel. J.A. 1239.
Rec. Vol 61, at 173; J.A. 1241-44, 1246-48. Toby Johnson originally
sold stolen OTC and HBA to defendant Bill Cruse, but he switched from
Cruse to North Bridge because he liked Hale better than Cruse. J.A.
1170-71, 1174-75, 1180-82. Later, when Thomas was buying OTC and
HBA to sell directly to New York buyers, Johnson sold stolen OTC and
HBA to him for two months before he (Thomas) was arrested. J.A. 285,
1193-94. Johnson had not conducted business with Thomas before
because they were competitors and did not like each other. J.A. 1193.
But Thomas offered Johnson a much better price on OTC and HBA than
Hale paid, so Johnson switched from North Bridge to Thomas. J.A. 1194.
11
Among the purchasers of North Bridge's OTC and HBA were two
sister companies located in Beltsville, Maryland, American Whole-
sale Drug and American International Wholesale Drug (collectively,
American Drug). J.A. 1165, 1194-1200. North Bridge also resold
Thomas's stolen OTC and HBA to redistributors in New York, like
Parisi. J.A. 1443-46. Before selling the OTC and HBA that it bought
from Thomas, O'Neal and Johnson to Parisi or American Drug, North
Bridge cleaned the product thoroughly at its warehouse. J.A. 1166-67.
In December 1993 York suggested that Thomas could get back at
Phillips for underpaying for OTC and HBA earlier that fall by selling
OTC and HBA directly to Best Deal's customers in New York.
Thomas did not know whom Best Deal's customers were, J.A. 999,
but York did (because he worked for Best Deal), and he (York)
agreed to introduce Thomas to them for a fee, see J.A. 278. York also
agreed to help Thomas clean and package the OTC and HBA prop-
erly, so that the New York wholesalers would accept the goods. J.A.
885, 1392, 706, 834, 526. For this venture, York and Thomas formed
a company, HBA Liquidators. J.A. 662, 709, 891, 995-96, 2141.
Under the auspices of HBA Liquidators, York and Thomas delivered
several loads of stolen OTC and HBA to wholesalers in New York.
J.A. 886, 1255-57. York also helped unload stolen OTC and HBA
from the vehicles of various fences who delivered to Thomas. J.A.
1393.
For advice on how to deal with the New Yorkers, Thomas and
York contacted defendant Bill Cruse. J.A. 834, 1378. Cruse operated
a salvaged goods grocery store, The Food Outlet, in Shelby, North
Carolina. One of Cruse's main sources of merchandise was Family
Dollar Stores, Inc., a national chain of small grocery stores. J.A. 1589.
Cruse gave Thomas and York some advice on starting a salvaged
goods business, J.A. 834, and provided Thomas and York with some
sample letterhead for HBA Liquidators, J.A. 890, 2141.4
_________________________________________________________________
4 Cruse did not often buy salvaged OTC and HBA from Family Dollar,
but he did buy two large shipments of it, see infra part III.B.1.a. The only
OTC Cruse bought from Thomas, though, was a box of Tylenol that
Thomas told Cruse he purchased from the Garner police department. J.A.
1346-47.
12
From the start, Thomas and his wife suspected that York was work-
ing undercover for the police. See Rec. Vol. 91, at 187 (discussing
Thomas's testimony). In February 1994, after just one month of work
with York, Thomas excluded York from his business. J.A. 891, 2158.
Thomas then contacted Cruse and offered to pay Cruse a fee to help
find new customers in New York to buy OTC and HBA. J.A. 278,
897. Cruse agreed, and he also helped Thomas deliver the OTC and
HBA to New York. J.A. 897-903. Subsequently, Cruse introduced
Thomas to defendant Isaac Ebert and defendant Mike Kazinec, who
operated M&I Distributors, Inc. (M&I) in Brooklyn, New York. J.A.
278, 733, 900-903. Thomas and Cruse delivered the first shipment of
Thomas's stolen OTC and HBA to M&I in March 1994. J.A. 901,
2158. After making a couple of trips with Cruse, Thomas decided that
it was too expensive to continue paying him, so he cut Cruse out and
began dealing with M&I directly. J.A. 998. Thomas, along with an
associate, Henry Spikes, J.A. 731-32, delivered OTC and HBA to
M&I approximately every other week. J.A. 2771, 2143. Between
March 1994 and July 1994, M&I purchased over $700,000 in stolen
OTC and HBA from Thomas, paying both in cash and by check. J.A.
734, 914, 2158, 2771. M&I resold this merchandise to Allou Distribu-
tors, Inc., a large, publicly traded wholesale company. J.A. 1494,
1512. Allou sells a wide range of OTC and HBA, some of which it
obtains from "secondary sources with access to close-out purchases
from retailers." J.A. 2933.
While doing business with M&I, Thomas often quarreled with
Ebert and Kazinec about "damaged" OTC and HBA, that is, anything
that could not be passed off to M&I's customers as brand new,
including "short-dated" goods (items with less than 12 months until
the expiration date). J.A. 736. M&I would not buy damaged OTC and
HBA, J.A. 2932, because it would not sell. Ebert and Kazinec con-
stantly found OTC and HBA that they considered damaged in Thom-
as's shipments, and they refused to pay his set price. Fed up with
Ebert and Kazinec's incessant complaining about damaged goods,
Thomas stopped selling his OTC and HBA to M&I. J.A. 931.
In July 1994 Hale brought Thomas to Beltsville, Maryland, to meet
Joshua Gilat, the owner of American Drug, J.A. 937-39, and defen-
dant Mark Eidelman, a buyer for the company, J.A. 947-50. While in
Beltsville, Thomas sold $110,000 worth of stolen OTC and HBA to
13
American Drug. J.A. 938, 1260-62. Thereafter, until September 1994
Thomas made regular deliveries to American Drug, selling it a total
of $617,000 in stolen OTC and HBA. J.A. 2158. American Drug paid
for all of this merchandise by check. Rec. Vol. 39, at 52. Eidelman
helped arrange these transactions and helped to make sure that Thom-
as's merchandise was in good condition for sale. J.A. 954-56. Ameri-
can Drug ran a cleanup operation to take price stickers and other
identification marks off the OTC and HBA before it was resold. Like
M&I, American Drug would not accept merchandise with"now" cou-
pons (coupons redeemable at the check-out counter) on it, because
manufacturers tracked such coupons and would know that the mer-
chandise had not been sold by the company to which it originally had
been delivered. J.A. 954-56.
Like North Bridge, American Drug was operated as a legitimate
enterprise. Under Eidelman's direction American Drug bought mil-
lions of dollars of salvaged OTC from at least seventeen suppliers,
many of which the government conceded were legitimate suppliers of
secondary market goods. J.A. 1835, 2684-86, 2779-83; Rec. Vol. 39,
at 52.
B. The Indictment
Thomas was arrested on October 31, 1994, during a police raid of
D&C Imports. The police had been investigating him for over a year.
Thomas immediately agreed to cooperate with the authorities, and he
recorded a series of telephone conversations with Eidelman and oth-
ers. J.A. 966, 2099-2140. As a result of Thomas's cooperation, all the
defendants who appeal here were indicted for one count of conspir-
acy, in violation of 18 U.S.C. §§ 371 and 1956(h). The third supersed-
ing indictment charged a single conspiracy among Thomas, the
defendants, and Thomas's boosters and fences, which operated
between 1992 and October 31, 1994. J.A. 271-72. This conspiracy's
three alleged objects were to (1) transport and (2) receive stolen
goods worth more than $5,000.00 in interstate commerce, and
(3) engage in financial transactions affecting interstate commerce
with the proceeds of the transportation or receipt of stolen goods for
the purpose of furthering the transportation or receipt of more stolen
goods (that is, money laundering). J.A. 271-73, 285. The indictment
explained the conspiracy's operation in detail and set forth eighty-one
14
overt acts. J.A. 275-79, 279-85. The indictment described the flow of
stolen OTC and HBA quite specifically: the merchandise passed from
fences and boosters -- through Thomas-- to Best Deal, North
Bridge, M&I, and American Drug. J.A. 275-85.
The third superseding indictment also charged most of the individ-
ual defendants with substantive counts of (1) knowing transportation
of stolen goods in interstate commerce, in violation of 18 U.S.C.
§ 2314, (2) knowing receipt of stolen goods in interstate commerce,
in violation of 18 U.S.C. § 2315, and (3) money laundering, in viola-
tion of 18 U.S.C. § 1956(a)(1)(A)(I). All of the substantive counts
involved transactions between one or more of the eleven defendants
and Thomas (or the laundering of the proceeds of the transactions
between these defendants and Thomas), and none related to transac-
tions between the defendants and other fences, like Bob O'Neal and
Toby Johnson. J.A. 285-301. In fact, the indictment made no mention
of any transactions in stolen property other than those between
Thomas and his fences and those between Thomas and the defen-
dants.
C. The Trial
The defendants were tried together. At trial the government did not
claim that any of the defendants were involved with the network of
boosters and fences, so the defendants offered to stipulate that the
OTC and HBA they bought from Thomas (or helped him sell) was
stolen. The government refused and devoted about three weeks of the
trial to proving that the OTC and HBA the defendants bought from
Thomas was stolen. Thomas testified for eight days and spent much
of that time explaining how he obtained his OTC and HBA from
boosters and fences. Among other things, Thomas said that he often
gave the boosters, many of whom were drug addicts, money to buy
heroin. See J.A. 1124. Thomas never said that he told any of the
defendants the source of his OTC and HBA, although he indicated
that four defendants, York, Ebert, Kazinec, and Eidelman, knew that
he dealt in stolen OTC and HBA. See infra part III.C.1. Thomas's
wife and his daughter also testified about the family's stolen property
operation. They backed up much of what Thomas said about his own
illegal activities, but they did not implicate any of the defendants for
knowingly buying (or selling) stolen property.
15
In addition, the government put on several fences who sold stolen
OTC and HBA to Thomas, including Thomas's partner Curly Johnson
and independent fences O'Neal and Toby Johnson. Curly Johnson
explained how he bought stolen property for Thomas from drug-
addicted boosters and said that he and Thomas helped out the boosters
by lending them money to buy heroin. J.A. 795; Rec. Vol. 66, at 125-
30. O'Neal and Toby Johnson testified solely about their own opera-
tions, including some of their own, separate OTC and HBA transac-
tions with North Bridge. None of these fences testified that any of the
defendants knew Thomas sold stolen OTC and HBA.
The government then introduced testimony from a lineup of Thom-
as's boosters to confirm that Thomas bought OTC and HBA shop-
lifted from various drug stores. Yet none of Thomas's boosters knew
any of the defendants (and there was no evidence that any of these
boosters sold to O'Neal or Toby Johnson). The government also
adduced testimony from security personnel at several drug store
chains in North Carolina concerning the amount of OTC and HBA
stolen from their stores during Thomas's time in business. However,
the government did not connect this stolen merchandise to Thomas,
his fences, or any of the defendants.
At trial the defendants did not contest that Thomas ran a conspiracy
to shoplift OTC and HBA from drug stores and resell it for profit. Nor
did the defendants dispute that they bought OTC and HBA from
Thomas that turned out to be stolen. In the case of York and Cruse,
they did not dispute that they helped Thomas with the sale of OTC
and HBA that also turned out to be stolen. Thomas and the defendants
had documented their transactions in OTC and HBA as legitimate
businesses would, with price lists, invoices, canceled checks and other
detailed records. The defendants simply argued that they were legiti-
mate businessmen, who unwittingly bought stolen OTC and HBA
from (or sold stolen OTC and HBA with) Thomas.
Thus, the defendants' trial strategy was twofold. First, they
attempted to introduce evidence of their own legitimate business
activities (some of which was excluded by the trial court) and infor-
mation about other legitimate companies that dealt in "secondary mar-
ket" OTC and HBA, like Allou Distributors.5 Second, the defendants
_________________________________________________________________
5 According to the defendants, the secondary market "exists to deal
with seasonable merchandise, unsold inventory, going out of business
sales, and short[ ]-dated merchandise." Appellant Br. 10 n.13.
16
mounted a vigorous attack against Thomas. Through the cross-
examination of Thomas the defendants established that he lied on his
income tax returns, J.A. 1125-26; hired thugs to beat up a former
associate who planned to testify against him, J.A. 980, 1128, 1131;
hired an associate to shoot up another former associate's trailer home
to "discourage" him from competing in the OTC and HBA business,
J.A. 971-73, 1128-29, 1131-32; hired his son-in-law to set fire to Jay
Phillips's house, J.A. 993, 1130; contributed to the delinquency of a
minor, his own grandson, J.A. 1132-33; committed insurance fraud,
J.A. 1133; avoided paying sales tax on what he sold, J.A. 1133; aided
and abetted boosters in committing food stamp fraud, J.A. 1134; and
hired someone to burn down the house of his daughter's former boy-
friend, J.A. 990-92.
In its summation the government did not anchor its case on Thom-
as's testimony. Indeed, the government acknowledged that it would
not have prosecuted the defendants if the case had been only a "finger
pointing match between Dan Thomas and just about anybody on the
planet." J.A. 1712. At the end the government was insisting that
"Thomas was not the star witness," J.A. 1711, saying that its evidence
either went beyond what he had to say or was corroborated by other
witnesses or documentary evidence. J.A. 1711-12. Thus, the govern-
ment also relied on the testimony of four "industry" witnesses, T.
Wayne Daniels, Fred Simmons, Jimmy Thompson, and Dan Kane.
Daniels was manager of a Winn Dixie "reclaim center," which han-
dled damaged and discontinued products from 85 Winn Dixie stores
(a discount drug store chain) in the Raleigh, North Carolina, area. J.A.
536. Simmons was coordinator of the Charlotte, North Carolina,
reclaim center that serviced all 2,600 Family Dollar Stores in the
Eastern United States. J.A. 640-41. Thompson operated his own sal-
vaged goods company in Garner and bought 75 percent of his mer-
chandise from Simmons at Family Dollar. Kane was chief operations
officer of Nassi Bernstein Company, which conducted liquidation
sales for retailers around the country. J.A. 1358. Each of these wit-
nesses testified, in substance, that he had not encountered a market for
salvaged or liquidated OTC and HBA in his own line of work. See
infra part III.B.1.a. This testimony, the government claimed, proved
that there was no legitimate market for salvaged and liquidated OTC
and HBA, J.A. 1709-10, 1714-15, 1831-33; Rec. Vol. 97, at 55-57,
134; Rec. Vol. 100, at 97-101, or at least that the flow of good quality
17
salvaged or liquidated OTC and HBA was a "trickle" not a "river,"
J.A. 1834. Indeed, the government went so far as to argue that there
was no secondary market whatsoever in OTC and HBA. Rec. Vol.
100, at 105-07. Since there was no secondary market for OTC and
HBA, the government said, then all of the defendants were engaged
in an elaborate "ruse," J.A. 1689, and their claim to sell secondary
market OTC and HBA was just a cover -- "a bunch of bull," Rec.
Vol. 97, at 57. Indeed, the government seemed to argue that everyone
who purported to sell secondary market OTC and HBA was just a
fence masquerading as an entrepreneur.
However, when pressed to explain what evidence showed that the
defendants knew they were selling stolen OTC and HBA, the govern-
ment turned to a different argument: all the defendants were guilty
because they averted their eyes to the fact that the OTC and HBA
Thomas sold was stolen. To support this claim, the government
referred back to the testimony of Daniels, Simmons, Thompson, and
Kane. According to the government, the testimony of these four wit-
nesses proved that salvage and liquidation sales simply could not
explain the volume and variety of new looking OTC that Thomas
sold. J.A. 1709-10, 1829-30, 1832-33; Rec. Vol. 97, at 79, 81; Rec.
Vol. 100, at 75, 99-101. Since the high volume and wide variety of
quality OTC that Thomas sold could not have come from any legiti-
mate source, the government urged, the only possible explanation for
this was an "army of boosters and street thieves." Rec. Vol. 97, at 60;
J.A. 705. Indeed, the government said the volume and variety of OTC
that Thomas sold spoke for itself: due to the absence of a legitimate
secondary market for OTC, the government argued, the defendants
must have suspected that the real source of Thomas's stolen OTC was
boosters. J.A. 1699, 1714-15, 1831-33; Rec. Vol. 97, at 59-60, 97,
122-27, 128, 134; Rec. Vol. 100, at 98-101, 104. Accordingly, the
government argued, the defendants were "posturing ostriches," J.A.
1710, who "st[u]ck their fat head[s] in the sand" to avoid knowing
that the OTC they bought from Thomas (or helped him sell to others)
was stolen by shoplifters. J.A. 1689. This was the central theory that
the government pressed in its closing argument.
To support this "indict the industry" type of theory, the government
asked the district court to instruct the jury that it (the government)
could meet its burden of proving that the defendants knew that Thom-
18
as's OTC and HBA was stolen if it proved the defendants were "deli-
berate[ly] or intentional[ly] ignoran[t]" of the source of Thomas's
OTC and HBA. Rec. Vol. 37, at 19. The district court agreed. J.A.
1844. To prove this, the court said, the government was required to
show that each defendant "deliberately closed his eyes to what would
otherwise have been obvious to him." J.A. 1844.
All of the defendants who appeal here were convicted on the con-
spiracy count. The jury found that Phillips, Johnny Foster, Wayne
Foster, Best Deal, Hale, Spittel, and York conspired to transport
stolen goods and launder money, that Cruse conspired to transport
stolen goods, and that Eidelman, Ebert, and Kazinec conspired to
receive stolen goods and launder money. J.A. 1862-73. In addition,
all of the defendants who were charged with substantive counts of
transporting or receiving stolen goods or with laundering money were
convicted on all of those counts, J.A. 1976-86, 2034-36, except Phil-
lips, Wayne Foster, and Best Deal, who were acquitted on some of the
money laundering counts, and Johnny Foster, who was acquitted on
all of the money laundering counts, J.A. 2026-32.
The district court sentenced each defendant to prison (except Best
Deal, which received probation, J.A. 2042-44). Ebert received 67
months, Kazinec 63 months, J.A. 1992-94, Eidelman 46 months, Hale
60 months, Spittel 57 months, J.A. 2053-55, Phillips 87 months,
Wayne Foster 70 months, Johnny Foster 46 months, J.A. 2001-2,
2020-21, and York and Cruse each received 27 months, J.A. 2008,
2049. (Thomas, the kingpin of the conspiracy, was sentenced to just
30 months in prison. J.A. 971-73.)
III. ANALYSIS
On appeal the defendants argue that the district court committed
reversible error by allowing the government to proceed under a delib-
erate ignorance theory.6 We agree as to all defendants except Ebert,
_________________________________________________________________
6 In the alternative, the defendants argue that there was a variance
between the evidence at trial and the allegations in the indictment. They
claim that the government failed to prove the existence of the single con-
spiracy that was alleged to exist between Thomas and all the defendants.
19
Kazinec, and Eidelman, as to whom a deliberate ignorance instruction
was harmless error. As we explain in detail below, there was no direct
or circumstantial evidence supporting the instruction. Since the gov-
ernment offered no evidence whatsoever that seven of these defen-
dants knowingly dealt in stolen OTC and HBA, we reverse their
convictions. The district court should have directed a verdict for the
seven defendants against whom the government offered no direct or
circumstantial evidence of guilt. However, we conclude that instruct-
ing the jury on deliberate ignorance was harmless error for three of
the other four defendants because there was evidence of their actual
knowledge that the goods were stolen.
A. The Doctrine of Deliberate Ignorance
The central question on appeal is whether the government proved
that the defendants knew Thomas was selling stolen OTC and HBA.
In order to prove all the crimes charged -- transportation of stolen
_________________________________________________________________
According to the defendants, the evidence proved (if anything) up to six
conspiracies between Thomas and various defendants, plus a conspiracy
between Steve Hale and Bob Spittel and two others. Since the trial court
gave the jury a multiple conspiracy instruction, J.A. 1837-38, the ques-
tion whether the proof showed one or many conspiracies was an issue for
the jury. See United States v. Urbanik, 801 F.2d 692, 695 (4th Cir. 1986).
The convictions must stand unless the evidence, taken in the light most
favorable to the government, did not permit a rational jury to conclude
that the defendants were part of a single conspiracy. Id.Below, we conclude that a side conspiracy not alleged in the indict-
ment, involving Hale and Spittle and two fences, Toby Johnson and Bob
O'Neal, was proved at trial. See infra part III.B.2. But we need not
decide whether the proof of this conspiracy was a prejudicial variance,
and we need not address the other multiple conspiracy claims, because
we reverse the convictions of Hale and Spittel on other grounds. See
infra.
Because we reverse the convictions of seven defendants on legal suffi-
ciency grounds, these defendants may not be retried for any of the crimes
charged. See Burks v. United States, 437 U.S. 1, 17 (1978) (holding that
retrial of a defendant whose conviction was reversed due to legal insuffi-
ciency violates the Double Jeopardy Clause).
20
goods, receipt of stolen goods, money laundering, and conspiracy to
transport or receive stolen goods or launder money-- the government
had to show that each defendant had knowledge that Thomas sold
stolen OTC and HBA. See 18 U.S.C. §§ 2314, § 2315,
1956(a)(1)(A)(I), 371, 1956(h). In this case, the district court
instructed the jury that proof of the defendants'"deliberate or inten-
tional ignorance" would suffice for knowledge. J.A. 1844.
"Deliberate ignorance" (or "willful blindness") is a mental state dis-
tinct from actual knowledge that satisfies the requirement of many
criminal statutes that a defendant have "knowledge" of an operative
fact in order for his conduct to be criminal. See, e.g., United States
v. Whittington, 26 F.3d 456, 463 (4th Cir. 1994) (transportation of
stolen property); United States v. Campbell, 977 F.2d 854, 859 (4th
Cir. 1992) (money laundering). A defendant's deliberate ignorance of
an operative fact will suffice for actual knowledge of that fact if (1)
the defendant was aware of a high probability of the existence of the
fact (2) yet deliberately avoided learning whether the fact existed (3)
with the conscious purpose of evading criminal liability, (4) unless
the defendant genuinely believed that the fact did not exist. See Robin
Charlow, Wilful Ignorance and Criminal Culpability, 70 Tex. L. Rev.
1351, 1413-18 (1992); cf., e.g., United States v. Baron, 94 F.3d 1312,
1318 n.3 (9th Cir. 1996); United States v. Cunningham, 83 F.3d 218,
221 (8th Cir. 1996); Whittington, 26 F.3d at 461-62; United States v.
Fingado, 934 F.2d 1163, 1167 (10th Cir. 1991); United States v.
Giovannetti, 919 F.2d 1223, 1228 (7th Cir. 1991); United States v.
Mang Sun Wong, 884 F.2d 1537, 1543 (2d Cir. 1989); United States
v. Caminos, 770 F.2d 361, 365 (3d Cir. 1985); United States v.
Restrepo-Granda, 575 F.2d 524, 528 n.2 (5th Cir. 1978). The deliber-
ate ignorance doctrine allows a jury to impute guilty knowledge to a
defendant who strongly suspects (but does not know for sure) the
existence of the operative fact that makes his conduct unlawful and
"deliberately close[s] his eyes" to the existence of that fact in an
attempt to avoid criminal liability, United States v. Mancuso, 42 F.3d
836, 846 (4th Cir. 1994). This doctrine is premised on the notion that
a person who attempts to cheat the justice system by consciously pre-
serving a lack of actual knowledge of a subjectively obvious fact is
just as culpable as a person who has actual knowledge of that fact. See
United States v. Sanchez-Robles, 927 F.2d 1070, 1073 (9th Cir.
1991); Giovannetti, 919 F.2d at 1228. A jury instruction on deliberate
21
ignorance is often called an "ostrich instruction," see, e.g., United
States v. Forbes, 64 F.3d 928, 934 (4th Cir. 1995), or a "Jewell
instruction," see, e.g., Sanchez-Robles, at 927 F.2d 1072, after the
important Ninth Circuit case, United States v. Jewell, 532 F.2d 697,
700 (9th Cir. 1976) (en banc).7
Although an ostrich instruction "soften[s] somewhat" the govern-
ment's burden of proving that the defendant had actual knowledge of
a fact, such an instruction is not meant to reduce the level of intent
to a showing of mere recklessness or negligence. See Campbell, 977
F.2d at 857. The doctrine of deliberate ignorance does not allow a
jury to impute actual knowledge of the operative fact to a defendant
just because he should have known of the existence of that fact. See
id.; see also United States v. Heaps, 39 F.3d 479, 484 (4th Cir. 1994).
Nor does the doctrine allow a jury to attribute actual knowledge to a
defendant because he acted with reckless disregard to the possibility
of the fact's existence. See, e.g., Whittington, 26 F.3d at 462; United
States v. Martin, 773 F.2d 579, 584 (4th Cir. 1985). A genuine mis-
take of fact does not warrant conviction under a willful blindness the-
ory, because a subjective belief that the operative fact does not exist,
even if unreasonable, negates actual knowledge of that fact. See
United States v. Sicignano, 78 F.3d 69, 71 (2d Cir. 1996); United
States v. One 1973 Rolls Royce, 43 F.3d 794, 808 (3d Cir. 1994);
Jewel, 532 F.2d at 707 (Kennedy, J., dissenting). To reiterate, knowl-
edge is imputed on a willful blindness theory only when the defendant
strongly suspects (but has no settled belief about) the truth and delib-
erately keeps himself ignorant of it in order to avoid punishment. See
Baron, 94 F.3d at 1318 n.9.
Courts are "wary" of giving the ostrich instruction because of the
possibility that the instruction might mislead the jury into believing
that it may convict the defendant for his negligent or reckless disre-
gard of the truth. Mancuso, 42 F.3d at 845; accord Giovannetti, 919
F.2d at 1228 ("The most powerful criticism of the ostrich instruction
is, precisely, that its tendency is to allow juries to convict upon a find-
_________________________________________________________________
7 A "Jewell instruction" actually blends the principles set forth in the
Jewell opinion with those advanced by the Jewell dissent, authored by
then-Judge Anthony Kennedy. See United States v. One 1973 Rolls
Royce, 43 F.3d 794, 808 n.11 (3d Cir. 1994).
22
ing of negligence for crimes that require intent."); see also One 1973
Rolls Royce, 43 F.3d at 809 n.13; Hilliard , 31 F.3d at 1517; United
States v. Cassiere, 4 F.3d 1006, 1023 (1st Cir. 1993); United States
v. Barnhart, 979 F.2d 647, 652 (8th Cir. 1992). Another serious con-
cern is that the instruction might shift the burden to the defendant and
force him to prove his innocence. See United States v. Sasser, 974
F.2d 1544, 1552 (10th Cir. 1992). Indeed, "[t]he effect of a Jewell
[deliberate ignorance] instruction in a case in which no facts point to
deliberate ignorance may be to create a presumption of guilt." United
States v. Murrieta-Bejarano, 552 F.2d 1323, 1324 (9th Cir. 1977);
accord United States v. de Francisco-Lopez, 939 F.2d 1405, 1411
(quoting Murrieta-Bejarano). Because of these potentials for harm, an
ostrich instruction should be employed only "in those comparatively
rare cases" where the facts "point in the direction of deliberate igno-
rance." Sanchez-Robles, 927 F.2d at 1073 (internal quotation omit-
ted); cf. also Mancuso, 42 F.3d at 845 (citing Sanchez-Robles, 927
F.2d at 1073). An ostrich instruction is not allowed when the evidence
shows that the defendant either had actual knowledge of the fact in
question or no knowledge of that fact, and there is no evidence that
the defendant was deliberately ignorant of the fact. See Alvarado, 838
F.2d at 314; United States v. Lara-Velasquez, 919 F.2d 946, 951 (5th
Cir. 1990); United States v. Diaz, 864 F.2d 544, 550 (7th Cir. 1988);
United States v. Manriquez Arbizo, 833 F.2d 244, 248-49 (10th Cir.
1987). Unless the evidence "support[s] the inference that the defen-
dant was aware of the high probability of the existence of the fact in
question and purposely contrived to avoid learning all of the facts in
order to have a defense in the event of a subsequent prosection," the
instruction is inappropriate. United States v. Brandon, 17 F.3d 409,
452 (1st Cir. 1994) (quoting Alvarado, 838 F.2d at 314); Barnhart,
979 F.2d at 652 (same); de Francisco-Lopez, 939 F.2d at 1409
(same).
This is not to say that the evidence supporting a Jewell instruction
cannot be circumstantial. The circumstantial evidence of a defen-
dant's conscious avoidance of the truth may be sufficiently strong to
warrant an ostrich instruction. See, e.g., Whittington, 26 F.3d at 463.
For example, such an instruction is appropriate when highly suspi-
cious circumstances made the defendant aware of the high probability
of the existence of a fact, yet he failed to act on an obvious opportu-
nity to learn of the fact's existence. See Barnhart, 979 F.2d at 652;
23
see also, e.g., United States v. Guay, 108 F.3d 545, 551 (4th Cir.
1997); Whittington, 26 F.3d at 463-64; Cunningham, 83 F.3d at 222.
In such a case the jury could infer that the defendant took strides to
keep from knowing the truth because the only way he could have
avoided knowing the truth was by making a conscious effort to do so.
Or the jury could conclude that the defendant engaged in deliberate
psychological avoidance of the truth by closing his mind to it. See
Giovannetti, 919 F.2d at 1228-29. In either case the jury could impute
knowledge to the defendant (so long as the facts showed that he
avoided obtaining actual knowledge in order to evade criminal liabil-
ity, and not for some other, innocent reason). Still, when a court gives
an ostrich instruction based on circumstantial evidence of deliberate
ignorance, the concern that makes courts "wary" of an ostrich instruc-
tion -- that the jury might convict the defendant based on a negligent
(or reckless) failure of curiosity -- is heightened.
B. The District Court's Ostrich Instruction
We review a trial court's decision to instruct the jury on willful
blindness for an abuse of discretion. See Whittington, 26 F.3d at 463.
When deciding whether an ostrich instruction was warranted, we view
the evidence in support of the instruction in the light most favorable
to the government and grant the government all favorable inferences
that can reasonably be drawn from the evidence. See id. at 463 n.6.
Of course, no ostrich instruction may be given based on impermissi-
ble or unsupported inferences.
The defendants claim that giving the ostrich instruction was error
because it was unsupported by the evidence. They say there was no
properly admitted evidence that any of them consciously avoided
knowing that Thomas sold stolen OTC and HBA. The only direct evi-
dence of willful blindness, they say, was improperly admitted evi-
dence about some unrelated bad acts committed by Steve Hale and
Bob Spittel. Further, the defendants argue that there was no circum-
stantial evidence of willful blindness. The government does not dis-
pute that the evidence relating to Hale and Spittel, which it claims
was properly admitted as substantive evidence of the larger conspir-
acy, was the only direct evidence of deliberate ignorance. However,
the government contends that a considerable amount of circumstantial
evidence supported the ostrich instruction for all the defendants.
24
According to the government, certain "highly suspicious circum-
stances" surrounded the defendants' interactions with Thomas, and
these circumstances allowed the jury to infer that the defendants
deliberately ignored that Thomas's OTC and HBA was stolen. The
defendants retort that these circumstances simply did not exist, or
even if they did exist, they were not highly suspicious.
We conclude that the government did not prove that Thomas's
OTC and HBA business was highly suspicious to the defendants, and
thus there was no circumstantial evidence showing the defendants'
deliberate ignorance. Also, we conclude that Hale and Spittel's willful
blindness related to a separate conspiracy. Accordingly, no properly
admitted evidence supported the ostrich instruction.
1. Circumstantial Evidence of Deliberate Ignorance:
The Allegedly "Highly Suspicious" Circumstances
The government advanced five allegedly "highly suspicious cir-
cumstances" as proof that the defendants were deliberately ignorant
of the real source for Thomas's OTC and HBA, retail theft. First, the
government contended that there was only a small amount and a lim-
ited variety of good quality salvaged or liquidated OTC available.
This allegation formed the basis for the government's claim that there
was no possible legitimate secondary market source for OTC of the
volume and variety that Thomas sold. Second, the OTC and HBA
Thomas sold was usually packed in plain brown boxes and plastic
bags rather than in factory cartons. Third, both Thomas and the defen-
dants took steps to make the OTC and HBA they purchased from
Thomas suitable for resale by removing old identification stickers,
price tags, and security devices. Fourth, the government contended
that the price the defendants paid to Thomas for supposedly salvaged
or liquidated OTC and HBA was lower than the price that wholesalers
paid to manufacturers for the same products, brand new. Fifth, the
government said, the defendants only accepted OTC and HBA that
could be passed off as new and refused to accept OTC and HBA with
the "normal indicia" of salvaged goods.
We conclude that the evidence at trial was insufficient to establish
the existence of circumstance one and that there was no evidence that
the defendants knew about circumstances one (if it existed), three, and
25
four. Also, circumstances two through five were not shown to be
highly suspicious because circumstances two through four were
entirely innocuous, while circumstance five could only have been evi-
dence of actual knowledge. Thus, the government utterly failed to
show that the defendants were aware of highly suspicious circum-
stances and refused to act on an obvious opportunity to investigate
them. Without such proof there was no circumstantial evidence of
deliberate ignorance. See, e.g., Baron , 94 F.3d at 1318; Barnhart, 979
F.2d at 652.
a. Circumstance One: "No Legitimate Secondary Market
in OTC"
The first supposedly suspicious circumstance -- that the actual
market in salvaged and liquidated OTC produced only a small amount
and limited variety of high quality OTC compared to what Thomas
sold -- was the crux of the government's circumstantial case of delib-
erate ignorance. Much of the government's summation and rebuttal
was devoted to this argument, J.A. 705, 1699, 1709-10, 1714-15,
1831, 1832-33; Rec. Vol. 97, at 55-59, 120; Rec. Vol. 100, at 97-99,
101. In support of its claim that there was no legitimate secondary
market for OTC, the government offered the testimony of T. Wayne
Daniels, Fred Simmons, Dan Kane, and Jimmy Thompson. Daniels,
manager of the Raleigh-area Winn Dixie reclaim center, testified that
Winn Dixie had an agreement with McNeill Industries, the maker of
Tylenol products, to sell back recalled, damaged, or discontinued
products, J.A. 538-36, and that Winn Dixie had similar agreements
with some unspecified number of other national manufacturers of
OTC, J.A. 550. Daniels also said that Winn Dixie almost never sold
OTC products like Tylenol as salvage. J.A. 538-39. Simmons, coordi-
nator of Family Dollar's sole reclaim center, testified that at Family
Dollar only damaged, defective, or out-of-date merchandise was sent
to the reclaim center. J.A. 642. Simmons also explained that at Family
Dollar "99.9%" of all unsold national brands of OTC were returned
to the manufacturer or vendor. J.A. 642. Further, Simmons testified
that during any 30-day period his reclaim center handled only about
two hundred pieces of national brand OTC like Tylenol. J.A. 644.
Thompson, the salvage dealer who bought most of his merchandise
from Family Dollar, testified that he found "very little" good quality
OTC at drug store sales, that he had never possessed at one time even
26
a hundred bottles of any "name brand" OTC, J.A. 639, and that he had
never known of a salvage dealer who dealt exclusively in OTC, J.A.
638. Kane, who handled hundreds of liquidations a year between
1991 and 1995, J.A. 1359-60, testified that at the liquidation sales he
conducted, "a large portion" of national brands of OTC was "gone
during the early stages" of the sale. Kane also said that OTC was vir-
tually non-existent after it was discounted by over 30 percent off the
retail price. J.A. 1361.
We conclude that the testimony of Daniels, Simmons, Thompson,
and Kane offered no support for an ostrich instruction because their
testimony was insufficient to prove that there was no market for high-
quality salvaged and liquidated OTC. Moreover, even if this testi-
mony had shown that there was no market in such goods, it did not
prove that this fact aroused the defendants' suspicions about the OTC
Thomas sold.
i. The Failure to Prove That There Was No Secondary Market
In its rebuttal closing argument, the government stated with regard
to the legitimate secondary market for OTC, "you will have a trickle
of this kind of product, but what you are not going to have is a river."
J.A. 1834. However, neither Daniels, Simmons, Thompson nor Kane
said that the flow of OTC to the secondary market was a "trickle"
rather than a "river." Indeed, none of these witnesses could have made
such a statement since none of them professed to have personal
knowledge about the size of the secondary market for OTC. See Fed.
R. Evid. 602 (witnesses may only testify about personal knowledge).
Of course, if there was absolutely no legitimate secondary market for
OTC, these witnesses could not have had personal knowledge about
its size. But none of these four witnesses testified that there was no
legitimate secondary market for OTC. Nor could they have done so.
Testimony about the non-existence of a legitimate secondary market
in OTC would have been "negative evidence," that is, evidence of the
non-existence of a fact. Negative evidence lacks probative value
unless the proponent first lays a proper foundation to show that the
witness would have been aware of the fact if it did exist. See 2 John
Henry Wigmore, Evidence in Trials at Common Law § 664, at 907-08
(James H. Chadbourne rev. 1979); 31A C.J.S. Evidence § 209, at 406-
07 (1965). Here, the government laid no foundation to show that Dan-
27
iels, Simmons, Thompson, and Kane would have known of the
absence of a legitimate secondary market for OTC, so testimony to
that effect from these witnesses would have been inadmissible.
Of course, an expert on the secondary market for OTC (or, perhaps,
an expert on secondary markets generally) could have testified about
the size of that market. Experts, unlike ordinary witnesses, are given
"wide latitude" to offer opinions not based on first-hand knowledge
or observation when the subject matter is within their competency.
Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 592 (1993); see
Fed. R. Evid. 702, 703. But Daniels, Simmons, Thompson, and Kane
were not qualified at trial as experts on the secondary market for
OTC, or even as experts on secondary markets generally. Quite to the
contrary, these four witnesses were anything but experts. A review of
their testimony shows that none of them dealt with OTC very often
and that all of them admitted that they had no knowledge about sec-
ondary markets, in OTC and HBA or otherwise. Further, none of
these four witnesses even implied that they had knowledge beyond his
own experience, since all four confined their testimony to their own
personal experience. In fact, each witness admitted that he did not
even know whether, in his own line of business, the experience of oth-
ers with OTC was similar to his own. J.A. 562-63, 583-84, 593, 629-
30, 646, 654.
The government admits that Daniels, Simmons, Thompson, and
Kane were not experts, but argues that there was no need to qualify
them as such. Appellee Br. 40-41. According to the government, these
four witnesses were "a representative sample of persons who were
knowledgeable about how OTC was handled," and their testimony
"support[ed] the reasonable inference that no significant and legiti-
mate secondary market existed for OTC." Appellee Br. 41. The gov-
ernment apparently means that, although neither Daniels, Simmons,
Thompson, or Kane personally knew anything about the size of the
secondary market for OTC, the combined testimony of these wit-
nesses was an adequate basis for the jury to extrapolate about the size
of that market. This argument fails because Daniels, Simmons,
Thompson, and Kane were not a representative sample of anything
and because the government's reading of their testimony is seriously
flawed.
28
Volume 2 of 2
UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
YITSCHAK EBERT, a/k/a Isaac, d/b/a
No. 96-4871(L)
M&I Distributors, Incorporated,
a/k/a Isaac Ebert, a/k/a Issac Ebert,
a/k/a Yitzchok Ebert,
Defendant-Appellant.
(1) Why the Witnesses Were Not a Representative Sample
(a) They Did Not Represent Persons in the Salvage and Liqui-
dation Industry
Even if the jury could have concluded that Daniels, Simmons,
Thompson, and Kane saw no OTC (or just a small amount) in or
headed for the secondary market, it could not have concluded that
there was no "river" of secondary market OTC because the govern-
ment did not show that these four witnesses' experience was represen-
tative of others in their occupations.
Thompson was a single salvage vendor. Although he said that he
rarely saw good quality salvaged OTC available for sale, the govern-
ment offered no evidence that this experience was common among
salvage vendors. Without such evidence the jury had no basis to infer
that there was little salvaged OTC to be found anywhere.8 This same
problem rendered irrelevant Thompson's statements that he rarely
dealt in salvaged OTC and that he never met a salvage dealer who
dealt exclusively in OTC. Since Thompson never said whether he
knew a lot of salvage dealers, the fact that he rarely dealt in OTC and
had met no salvage vendors who did so exclusively also proved noth-
ing. From his testimony, a jury could not know whether other salvage
vendors rarely sold OTC or whether he was an exception to the rule.
Moreover, there was no reason for the jury to know whether Thomp-
son's failure to know OTC-only salvage vendors was attributable to
there being none or to his knowing the wrong people. Indeed, the gov-
ernment's concession that Thompson was not an expert on the salvage
industry suggests that his experience in that industry was not repre-
sentative of his profession as a whole.
_________________________________________________________________
8 Thompson's statement that he rarely saw salvaged OTC was not pro-
bative of whether such OTC was available because it was negative evi-
dence without a foundation. See Wigmore, supra, at 907-08. The
government did not show that Thompson ever looked for salvaged OTC
or that he looked for it in the right place at the right time. Without this
foundation, Thompson's testimony was irrelevant because reasons other
than the non-availability of salvaged OTC could explain why he rarely
saw it. He may have looked for salvaged OTC in the wrong place or at
the wrong time, he may not have looked carefully, or he may not have
looked at all.
30
Kane's testimony does not support the government's claim that
there was no secondary market for OTC because he, too, offered no
evidence that his experience with OTC was universal in his line of
work. Kane offered his own, entirely anecdotal, perspective on the
liquidation sale industry. He testified that OTC disappeared early at
the liquidation sales he conducted; however, this gave the jury no rea-
son to conclude that the same thing happened at other liquidation
sales. He said nothing that would allow the jury to conclude that his
experience was representative of what others in his line of work saw.
In fact, the government's admission that Kane's own experience did
not qualify him as an expert on liquidation sales leads us to conclude
that the government did not prove that his experience was representa-
tive of others in that industry.
The testimony of Daniels and Simmons (the reclaim center manag-
ers) also was insufficient to support the inference, urged by the gov-
ernment, that little or no national brand OTC is sold as salvage
because it all goes back to the manufacturer. Although the govern-
ment offered two reclaim center managers (and only one salvage ven-
dor and one liquidation sale professional), the government did nothing
to prove that the experiences that the reclaim center managers, Sim-
mons and Daniels, had with OTC were the same as other reclaim cen-
ter managers, for three reasons. First, only Simmons, Family Dollar's
sole reclaim center coordinator, could say that most of the OTC sent
to his company's reclaim center was sent back to the manufacturer.
Daniels was just one of any number of Winn Dixie reclaim center
managers, and he only knew what happened at his own reclaim cen-
ter. Daniels did not say whether vendors besides McNeill Industries
required Winn Dixie to return or destroy undesirable OTC, and he did
not even know if other Winn Dixie managers complied with
McNeill's wishes. Thus, although Daniels himself rarely sold OTC to
salvage dealers, there was no evidence that this was the general rule
at Winn Dixie. Second, Family Dollar and Winn Dixie were only two
retailers who sell OTC. Daniels himself testified that at least seven
other major drug store chains in North Carolina alone operated
reclaim centers, and the jury could not have known whether there
were reclaim center managers for these stores (or others not men-
tioned) whose experience differed from that of Daniels and Simmons.
Plus, the government offered no evidence to suggest that these other
retailers treated OTC the same as Family Dollar and Winn Dixie did.
31
The simple fact that two retailers contracted with some OTC manu-
facturers to return undesirable OTC for a store credit does not support
an inference that all (or even most) other retailers had the same type
of agreement with all (or even most) other OTC manufacturers. Only
one company, McNeill Industries, was shown to have announced a
policy requiring return of all unsold OTC, and there was no evidence
that McNeill wrote that policy into its contract with all retailers.
Third, neither Daniels nor Simmons, both of whom obtained their
positions in 1993 and 1994, respectively (when Thomas's stolen OTC
and HBA operation was already in full swing), knew whether his
company returned OTC to the manufacturer prior to his tenure. In
fact, Daniels admitted on cross-examination that McNeill changed its
policy in June 1993, before which time McNeill apparently did not
demand that Winn Dixie return all unsold OTC. Therefore, neither
Daniels nor Simmons even knew whether his own company returned
all OTC to McNeill (or other OTC manufacturers) for much of the
time that Thomas's stolen property ring existed.
(b) The Witnesses Did Not Testify About Accidents
Even if Daniels, Simmons, Thompson, and Kane had spoken with
authority about their own occupations, they all only testified about
two possible sources of the secondary market for OTC, salvage and
liquidation sales. As a result, the government offered no evidence to
foreclose other possible legitimate sources of secondary market OTC
like that Thomas sold (that is, individual items, not factory cases).
One source of single-piece OTC comes immediately to mind: inci-
dents where the factory carton is destroyed or damaged in an accident
and the product is sold off in individual lots (perhaps because the
retailer will not accept individual items, even if the packaging is
intact). Such accidents could occur in a number of ways (a forklift
ripping a box, a truck wrecking on the highway and spilling its cargo,
an employee dropping a carton off a shelf in the warehouse), and it
is not unreasonable to think that the combined fruits of such accidents
could produce a large source of secondary market OTC. Although the
government insisted that accidents led to just a trickle of OTC, Rec.
Vol. 97, at 60, it offered no proof to back up this claim, and the jury
could not simply guess that accidents are not common. The govern-
ment simply failed to prove that there was no thriving secondary mar-
ket in OTC resulting from accidents.
32
(2) Why the Government Misread the Witnesses' Testimony
Moreover, even if the testimony of Daniels, Simmons, Thompson,
and Kane had been sufficient to support an inference about the size
of the secondary market for OTC, a rational jury could not have
drawn an inference from the testimony that there was no legitimate
market for such OTC (or that it was a trickle rather than a stream).
If Daniels and Simmons's testimony had been sufficient to support
any conclusion about a secondary market for OTC, the only conclu-
sion a rational jury could have drawn was that there was a secondary
market in OTC. This is because, even assuming Kane's testimony was
sufficient evidence from which a rational jury could have inferred that
liquidation sales were not a source for secondary market OTC, Dan-
iels and Simmons's testimony suggests just the opposite with regard
to salvaged OTC.
A thorough review of the record reveals that Daniels said many
things that undermined the government's argument that there was no
large secondary market in good quality salvaged OTC. Daniels testi-
fied that the reclaim center sometimes received"really good [OTC]
but maybe they are changing the size of the package." J.A. 539, 570.
In fact, he said that when merchandise is sent to the reclaim center
as "damaged," often only one item in a package that contains multiple
items would be damaged -- the rest had "nothing wrong with them."
Rec. Vol. 98, at 25. Daniels also explained that when undesirable
merchandise was shipped from Winn Dixie stores to the reclaim cen-
ter, the store was automatically credited (and the vendor was automat-
ically charged) for the full price of each item, no matter whether the
vendor received that merchandise or not. J.A. 537-39. Daniels said
that Winn Dixie gave the vendor 30 days to pick up undesirable mer-
chandise, including OTC, and that Winn Dixie disposed of unclaimed
merchandise by (among other things) dumping it in the trash or sell-
ing it to salvage dealers. J.A. 537. Further, although Daniels testified
that Winn Dixie's contract with most OTC vendors required that
undesirable OTC be destroyed or returned, he admitted that Winn
Dixie sold "some" OTC to salvaged goods dealers "at [its] own dis-
cretion." J.A. 550. Indeed, Daniels sold an unspecified amount of
undamaged, unexpired OTC to Jimmy Thompson, J.A. 550-51, which
Thompson resold to another salvage dealer, J.A. 620-22. Daniels also
acknowledged that Winn Dixie "destroyed" OTC by discarding it into
33
a dumpster, and he did not know what happened to the OTC after
that. J.A. 551.
Some of Simmons's testimony also undermined the government's
contention that the market in salvaged OTC was negligible. Simmons
acknowledged that sometimes OTC was recalled when it did not sell
well, Rec. Vol. 68, at 47-48, 105-06, 137, or when the manufacturer
decided to change the packaging, Rec. Vol. 68, at 124; Rec. Vol. 68,
at 159-60. He also admitted that, while stores were supposed to return
only defective or damaged OTC to the reclaim center, Rec. Vol. 68,
at 46, 86, sometimes large crates of OTC were sent to the reclaim
center as "damaged" when only a few individual boxes in the crate
were damaged. Rec. Vol. 68, at 103. Simmons admitted that often the
real reason this merchandise was sent back to the reclaim center was
that it was a slow seller. Rec. Vol. 68, at 104. Simmons also admitted
that while most national brands of OTC were supposed to be returned
to the manufacturer, J.A. 643; Rec. Vol. 68, at 158, and while Family
Dollar's policy was to always "return" recalled national brand OTC
to the manufacturer, Family Dollar sometimes handed the product
over to an independent broker working on the manufacturer's behalf,
who was supposed to return or destroy the OTC, J.A. 125; Rec. Vol.
68, at 95, 128. In general, Simmons did not know what brokers did
with these products after they left Family Dollar. Rec. Vol. 68, at 141.
However, he knew of instances where brokers received OTC from a
retailer on the manufacturer's behalf, obtained a credit from the man-
ufacturer, and then resold the product instead of destroying it (as the
broker's contract with the manufacturer required). Rec. Vol. 68, at 95,
96. In addition, Simmons said that sometimes Tylenol and other
national brands of OTC got mixed in with other merchandise that was
sold to salvage dealers, J.A. 650, 651. Indeed, Simmons admitted that
Family Dollar sold Bill Cruse a huge load (13 pallets worth) of sal-
vaged OTC and HBA in January 1995. Rec. Vol. 69, at 49, 52-54.
Simmons then explained that he later sold another huge load of OTC
and HBA to Cruse (18 pallets, or 340 cartons, Rec. Vol. 68, at 87-88),
J.A. 653, Rec. Vol. 68, at 153-54. The OTC he sold to Cruse included
some perfectly good product that had been returned or had sold
poorly. Rec. Vol. 68, at 62-75.
In fact, Simmons's testimony about the OTC he sold to Cruse sug-
gests that there could be a large market in salvaged OTC. Simmons
34
testified that he sold OTC to Cruse even though he was supposed to
dispose of OTC in accordance with Family Dollar's agreement with
the manufacturer, which specified that the product was to be
destroyed, J.A. 642, 647-51. Simmons said that this was a "common"
practice at Family Dollar, which the manufacturer tolerated. Rec. Vol.
68, at 99, 127, 130. Simmons also said it was "common sense" that
any reclaim center would sell OTC, rather than destroy it, to make a
profit for the company. He also added that Family Dollar approved
of his decision to sell the OTC to Cruse in violation of its contract for
just that reason. Rec. Vol. 68, at 128-29. In addition, Simmons said
that the markup on pharmaceuticals was low, and further, that Family
Dollar charged the vendor a handling fee in addition to the price of
the merchandise whenever OTC was returned to the reclaim center,
J.A. 644. As a result, Simmons admitted, Family Dollar could make
more money by recalling slow moving OTC and selling it for salvage
than it could make by selling the product in the store. Rec. Vol. 68,
at 131, 157.
In sum, Daniels and Simmons both admitted that on occasion they
sold OTC to salvage dealers, despite their companies' contractual
duty to destroy it. Daniels and Simmons also did not know what hap-
pened to undamaged OTC once they "destroyed" it or sent it back to
the manufacturer. If other reclaim center managers operated the same
as Daniels and Simmons, it is very possible that much OTC found its
way into the secondary market. Further, Simmons admitted that in his
experience it was common and accepted practice for retailers to sell
salvaged OTC that was supposed to be destroyed, and indeed, it made
economic sense to do so. Even taken in the light most favorable to the
government, this testimony could only be interpreted in one way: that
contrary to the government's claims, it was likely that there was an
active secondary market for good quality OTC, which retailers had
promised to destroy but instead sold as "salvage."
ii. The Failure to Prove the Defendants Knew There Was No
Secondary Market
Even if the government had proved that there was no legitimate
market in salvaged and liquidated OTC, it still failed to prove that the
defendants were aware of the non-existence of this market. Daniels,
Simmons, Thompson, and Kane said nothing about the defendants'
35
knowledge of the secondary market for OTC, and there was no other
evidence in the record that any of the defendants knew any fact that
would have suggested to them that there was no secondary market for
salvaged or liquidated OTC.
None of the defendants were shown to know any of the facts testi-
fied to by Daniels, Thompson, Simmons, and Kane, which led the
government to contend that there is no secondary market for OTC.
There was no evidence that the defendants knew Thompson did not
see much salvaged OTC or that he had never known a salvage dealer
who specialized in salvaged OTC. Indeed, since Thompson did not
know Thomas, even if the defendants knew what Thompson knew,
the defendants could still believe that they all knew one salvage
dealer who specialized in OTC -- Thomas. Also, none of the defen-
dants were shown to know how the reclaim center for Winn Dixie or
Family Dollar (or any other drug store chain) operated. Specifically,
the defendants were not shown to know how often these reclaim cen-
ters sold OTC to salvage while under Daniels and Simmons' manage-
ment (or at any other time). Indeed, the only defendant, Cruse, who
purchased salvaged goods from Simmons and Daniels bought OTC
from both men. Moreover, no evidence was produced to show that
any of the defendants knew McNeill Industries (or any other manu-
facturer of OTC) required Winn Dixie and Family Dollar (or any
other retailer) to return its unsold products. So there was no proof that
the defendants knew Simmons returned any of the Tylenol (or other
OTC) that was recalled, much less "99.9%" of it. Finally, none of the
defendants were shown to know that OTC "disappeared" by the time
it was 30 percent off the retail price at the liquidation sales that Kane
(or anyone else) conducted. After scouring the record, we conclude
that there was no evidence that the defendants knew anything about
the salvage and liquidation industries. As a result, there was abso-
lutely no reason to conclude that the volume and variety of Thomas's
OTC sales actually signaled to the defendants that this OTC was
stolen. Therefore, the government failed to prove that the defendants
had their own suspicions aroused, yet refused to investigate. See, e.g.,
United States v. Lara-Velasquez, 919 F.2d 946, 952-53 (5th Cir.
1990). Since the defendants were not shown to know that highly
suspicious circumstances existed, the jury could not reasonably have
inferred that the defendants failed to know the true source of Thom-
as's goods because they purposely contrived to remain ignorant. See,
36
e.g., United States v. Baron, 94 F.3d 1312, 1371 (9th Cir. 1996);
United States v. Hilliard, 31 F.3d 1509, 1516 (10th Cir. 1994).
The government maintains, without further explanation, that the
high volume and wide variety of OTC that Thomas sold was, by
itself, adequate circumstantial proof of the defendants' willful blind-
ness to support an ostrich instruction. Here, the government could be
relying on one of two theories, both of which we reject. First, the gov-
ernment could be suggesting that a rational jury could have inferred
that the defendants simply knew that the high volume of good quality
OTC Thomas sold was suspicious, in other words, that the volume of
OTC Thomas sold "spoke for itself." This is a circular argument. This
case is unlike the typical circumstantial case of willful blindness,
where the government shows that the defendant knew of certain cir-
cumstances and a rational jury could infer that knowing those circum-
stances made the defendant himself suspicious because the
circumstances were suspect on their face. See, e.g., United States v.
Guay, 108 F.3d 545, 551 (4th Cir. 1997) (concluding that the ostrich
instruction was proper when the defendant "claimed that he accepted
$20,000 to transport, without inquiry as to the contents, several bags
belonging to a man he met at a truck stop"). Here, although the defen-
dants certainly knew the volume and variety of OTC they bought
from Thomas, that fact was not suspicious on its face. This is con-
firmed by the government's own argument about why the testimony
of Thomas's boosters and fences was necessary at trial. According to
the government, "absent this testimony, the jury would have lacked
a basis upon which to believe that the magnitude of OTC handled by
Thomas could have been generated by retail thefts." Appellee Br. 44.
If an average juror could not be expected to know that Thomas's OTC
was stolen simply from the large volume he sold, then neither could
the defendants.
Second, even if a reasonable person would have known all the facts
testified to by Daniels, Simmons, Thompson, and Kane (and there-
fore, that the volume and variety of OTC Thomas sold was suspi-
cious), an ostrich instruction was still inappropriate. When it comes
to knowledge, a criminal defendant is not required to be a reasonable
person. Mere negligence does not equate to actual knowledge, and an
ostrich instruction does not change that. See United States v.
37
Campbell, 977 F.2d 854, 857 (4th Cir. 1992); United States v. Heaps,
39 F.3d 479, 484 (4th Cir. 1994).
Finally, even if it was assumed that each of the defendants was a
professional fence posing as a legitimate businessman, the govern-
ment still failed to prove that the defendants were willfully blind to
the source of Thomas's OTC. This is because Thomas's OTC opera-
tion was of such an unusual size that even a fence who bought stolen
OTC and HBA for a living thought it must have been legitimate.
According to government witness Zeki Butris, a fence from Detroit
who bought stolen OTC from shoplifters and sold it to wholesalers in
New York, he simply could not believe that retail theft could produce
the volume and variety of OTC that Thomas's operation produced.
Rec. Vol. 97, at 88, 129. Since Butris, an experienced fence from a
major city (and the only person who testified on this subject at trial),
believed that the volume and variety of Thomas's OTC indicated that
it was not stolen, a jury would reasonably conclude that the defen-
dants must have thought the same, even if they, too, were professional
fences.
b. Circumstance Two: Plain Brown Boxes
The second "highly suspicious" circumstance posited by the gov-
ernment, that Thomas sold and stored OTC and HBA in plain brown
boxes rather than in manufacturer's packaging, was not objectively
suspicious. Thomas claimed to deal in salvaged OTC and HBA, so it
was quite apparent that his goods did not come straight from the fac-
tory. A reasonable person would expect that OTC and HBA might be
salvaged from any number of places (for example, at a retailer's going
out of business sale or in a dumpster behind a wholesaler's ware-
house) where individual products are unlikely to be in any large con-
tainer, much less neatly packed in their factory boxes. Even if the
goods had been kept in their original cartons, one would expect that
this packaging might be damaged or destroyed in the event (such as
fire, water, or accident in a warehouse) that led to its being given up
as salvage. Indeed, it is hard to conceive of a situation where true sal-
vaged goods would retain their original packaging. So a reasonable
person would expect that after a salvage dealer salvaged the OTC
from wherever he found it, he would pack it in different containers,
like brown boxes.
38
The evidence in the record also lends support to this view. Accord-
ing to government witness Wayne Daniels, whenever Winn Dixie
sold merchandise to salvage dealers, including when it sold salvaged
OTC and HBA to Bill Cruse, the merchandise was "all mixed up" in
previously used banana boxes, not neatly packed in the manufactur-
er's cartons. J.A. 559-60, 570, 608-09. Although Daniels' testimony
about his own personal experience was insufficient to prove that sell-
ing salvaged OTC and HBA in banana boxes was the general practice
among grocery stores, J.A. 579, his testimony foreclosed the implica-
tion of the government's argument, that salvaged OTC and HBA was
sold in factory cartons.
Moreover, even if the packaging of Thomas's OTC and HBA may
have been suspicious, the government produced no direct or circum-
stantial evidence that the defendants themselves suspected that Thom-
as's OTC and HBA was stolen because it was stored in non-factory
boxes. Thus, the packaging of Thomas's OTC and HBA did not offer
any support for the district court's ostrich instruction.
c. Circumstance Three: Cleanup Operations
The third supposedly "highly suspicious" circumstance, that
Thomas and the defendants all "cleaned" the stolen OTC and HBA by
removing price tags, anti-theft devices, and marks made by the prod-
uct's previous owner, was not in reality suspicious. First, as Thomas
himself testified, secondary market businessmen keep the sources of
their supply secret so that their customers do not cut them out and buy
directly from the sources. (Indeed, Thomas's own actions proved how
easy it is to cut out the middleman to increase one's own profits:
Thomas himself repeatedly dumped his own customers in order to sell
to their customers.) Thus, even if Thomas salvaged OTC from local
retailers, the defendants could have expected him to take any identifi-
cation marks off the product to conceal their origin. Second, if a sal-
vage dealer does not take the retailer's price tags off the merchandise
when he buys and sells it for less than the retail price, his buyer could
cause the retailer to lose money by returning it to the retailer in
exchange for the full retail price. For this very reason, the govern-
ment's own witness, Fred Simmons, testified that whenever Family
Dollar sold merchandise to salvage vendors, including when it sold
OTC and HBA to Bill Cruse, the salvage dealer was contractually
39
obligated to remove all price tags and other Family Dollar labels from
the merchandise before reselling it. Rec. Vol. 68, at 91-92, 93, 94,
125, 144, 150-52. As a result, Simmons agreed that"the fact that
somebody has a clean-up operation is in no way sinister or bad or
showing any evil intent." J.A. 652A, 2810. Third, common sense tells
us that anyone who buys secondhand goods from a salvage dealer
would have more luck reselling them to the public if they were
cleaned to look like new, instead of goods from another store. Finally,
since some of the defendants apparently were trying to pass off sal-
vaged OTC as new (or were selling to redistributors who did so), it
makes sense that they had cleanup operations. This type of upscale
salvage selling, while deceptive, does not support a criminal convic-
tion in this case.
In addition, the government produced no evidence that the defen-
dants suspected that Thomas's cleaning operation, and the need for
their own cleaning operations, meant that Thomas's OTC and HBA
was stolen. As a result, the cleaning of Thomas's OTC and HBA
offered no support for the ostrich instruction.
d. Circumstance Four: Price Below Wholesale
The government also failed to prove the existence of the fourth
allegedly suspicious circumstance, that the prices that several of the
defendants paid to Thomas for OTC and HBA were below the whole-
sale prices of these products. After a thorough review of the record,
we find no evidence that the prices that the defendants paid Thomas
for OTC and HBA were below wholesale prices in eastern North Car-
olina. The government offered evidence of the price the defendants
paid for various of Thomas's OTC items, see J.A. 2597-2722, but it
adduced no proof regarding the wholesale price of these items in
North Carolina. Although there was evidence that some of the defen-
dants resold some of the OTC they bought from Thomas to wholesal-
ers, J.A. 2722, 2655-66, there was no evidence that the defendants
bought or sold these goods at the accepted wholesale price. Even if
a jury could infer that the defendants sold their goods at less than the
wholesale price because they were selling to wholesalers, this was not
suspicious because the defendants were buying OTC in eastern North
Carolina and selling it in New York City or the Washington, D.C.,
area. It is commonly known that prices may be higher in major metro-
40
politan areas in the Northeast than in smaller cities in the South. In
fact, government witness Joe Parisi testified that the "wholesale" price
he paid to Thomas for stolen Tylenol in Brooklyn was higher than the
"retail" price for the same product at a Wal-Mart in the South. J.A.
1549-51. Therefore, even if the defendants paid Thomas less than the
wholesale price in New York and Washington, they may have
believed that Thomas made his money by taking advantage of
regional price differentials.9
Moreover, even if the defendants paid less than wholesale for OTC
and HBA, this was not, by itself, objectively suspicious. Common
sense dictates that if there is a market for salvaged or liquidated OTC
and HBA, the price of goods in that market would necessarily be
below the price that retailers pay wholesalers for the same goods. If
not, no one would ever buy secondhand merchandise in bulk to resell
to retailers. If a wholesaler could buy brand new merchandise for the
same price (or a lower price) as secondhand merchandise, he surely
would do so, since he is likely to be able to sell the former at a higher
price.
Finally, even if a reasonable person would have been suspicious at
the prices the defendants paid, the government offered no evidence
that the defendants themselves were suspicious of these prices. There
was simply no evidence that the defendants knew that the prices they
paid were "too good to be true." Compare United States v. Trigg, 119
_________________________________________________________________
9 Indeed, there is a large market in so-called "diverted goods" (that is,
products sold by the manufacturer to wholesalers in one market for a
lower price than in a second market, which are then resold in the second
market by the wholesaler). See, e.g., Johnson & Johnson Products, Inc.
v. DAL Int'l Trading Co., 798 F.2d 100 (3d Cir. 1986); United States v.
Weinstein, 762 F.2d 1522, 1527 (11th Cir. 1985); Clairol, Inc. v. Boston
Discount Ctr., 608 F.2d 1114 (6th Cir. 1979). These goods are called
"gray market" goods because their resale is prohibited not by law but
rather by the contract between the wholesaler and the manufacturer. Of
course, the defendants admitted at trial that Thomas's operation did not
resemble a large-scale diversion operation because Thomas sold individ-
ual items rather than factory cases. See Rec. Vol. 99 at 101 (referring to
the defendants' admission). Nevertheless, the defendants could have still
believed that Thomas tried to optimize the profits of his salvage opera-
tion by reselling salvaged goods in markets in the Northeast.
41
F.3d 493, 504-05 (7th Cir. 1997) (holding that a deliberate ignorance
instruction was proper when the defendant was shown to know that
the prices he paid for stolen computers were "too good to be true").
Therefore, the price the defendants paid for Thomas's goods did not
support the giving of the ostrich instruction.
e. Circumstance Five: Refusal to Buy Damaged Goods
The government's fifth "highly suspicious" circumstance, that the
defendants refused to buy goods that were slightly damaged, is nei-
ther highly suspicious nor evidence of willful blindness. First,
although the government argues that salvaged goods are normally
marked or damaged in some way, it did not prove this at trial. The
only evidence in the record on this point was an offhand comment by
Jimmy Thompson that people paid less for the items he sold because
they were often damaged or out of date. However, there is no reason
to believe that Thompson's experience was representative of most sal-
vaged goods dealers. See supra part III.B.1.a. Plus, Daniels and Sim-
mons's testimony suggested that a great deal of undamaged salvaged
goods exist. Id. Further, the government is simply wrong to argue that
the defendants all portrayed themselves as salvaged goods dealers, yet
refused to accept even slightly damaged goods. The evidence at trial
showed that the only defendants who complained to Thomas about
"damages" were Eidelman, Ebert, and Kazinec. These three defen-
dants did not hold themselves out as salvaged goods dealers. Rather,
these defendants worked for wholesale companies, American Drug
and M&I, respectively, which did not represent to their customers,
wholesalers like Allou Distributors, that they sold salvaged goods.
Therefore, it only makes sense that these companies, and the defen-
dants that operated them, would not accept damaged goods.
Moreover, even if the government had proved that the defendants
knew that their refusal to buy "damaged" OTC and HBA from
Thomas was highly suspicious to others, this was no reason to give
an ostrich instruction. The defendants' own refusal to accept damaged
goods could not have been a highly suspicious fact to them because,
of course, the defendants knew why they refused to buy damaged
OTC and HBA from Thomas. The defendants either refused to buy
damaged OTC and HBA because they were fences posing as salvage
vendors, in which case they knew Thomas's OTC and HBA was
42
stolen, or because they only purchased (what they believed to be)
good-as-new salvaged goods, in which case they did not know that
Thomas sold stolen OTC and HBA. Either way, the defendants'
refusal to accept damaged goods could not have been evidence that
the defendants were willfully blind to the source of Thomas's OTC
and HBA.10 Rather, it was (if anything) circumstantial evidence that
the defendants actually knew Thomas's OTC and HBA was stolen.11
Thus, it was improper to give an ostrich instruction. See e.g., United
States v. Sanchez-Robles, 927 F.2d 1070, 1075 (9th cir. 1991) (hold-
ing that a Jewell instruction was inappropriate when defendant either
had actual knowledge or not; he either smelled marijuana and realized
what he was transporting, or he did not recognize the smell and did
not know what he was carrying). The facts simply required the jury
"to make a ``binary choice' between ``actual knowledge' and ``complete
innocence,' [so] the ostrich instruction should not [have] be[en]
given." United States v. Giovannetti, 919 F.2d 1223, 1228 (7th Cir.
1991); accord United States v. Erickson, 75 F.3d 470, 481 (9th Cir.
1996).
2. Direct Evidence of Willful Blindness: Hale and Spittel
Although the government did not make out a circumstantial case
of willful blindness, there was direct evidence about acts of deliberate
ignorance by two defendants, Steve Hale and Bob Spittel, in transac-
tions that did not involve Thomas's operations. We conclude that this
evidence was inadmissible. Toby Johnson and Bob O'Neal, two
fences from Durham who bought stolen HBA and OTC from boosters
and sold it to North Bridge, testified that Hale and Spittel both looked
the other way, literally, to avoid watching transactions with boosters.
According to O'Neal, on several occasions either Hale or Spittel was
visiting his home to buy a load of OTC and HBA when a booster
stopped by to sell some merchandise. Each time, O'Neal said, Hale
_________________________________________________________________
10 Although evidence of deliberate ignorance can also be circumstantial
evidence of a defendant's actual knowledge, all circumstantial evidence
of actual knowledge is not necessarily evidence of deliberate ignorance.
11 Since the government offered no evidence that the defendants knew
that salvaged OTC and HBA is usually damaged, we conclude the evi-
dence was not even circumstantial evidence of the defendants' actual
knowledge.
43
or Spittel avoided witnessing his transaction with the booster by walk-
ing out of the house, sitting on his porch, and playing with his dog.
After the booster left, O'Neal explained, Hale or Spittel came back
inside and completed the purchase of OTC and HBA. J.A. 1243-45.
Toby Johnson testified that Hale and Spittel frequently stopped by his
pawn shop to buy OTC and HBA when boosters were at the front
counter selling him what was "obviously" stolen OTC and HBA.
Each time, Johnson said, Hale or Spittel would avoid watching his
transactions with the boosters by going in the back room of the pawn
shop where the OTC and HBA was stored in crates. On these occa-
sions, Johnson said, he went to the back room after he finished buying
OTC and HBA from the boosters and sold a load of OTC and HBA
to Hale or Spittel. J.A. 1179-80, 1189. Johnson also testified that he
had a tacit understanding with Hale and Spittel not to discuss the
source of the OTC and HBA he sold to them. J.A. 1180.
The government contends that O'Neal and Johnson's testimony
was direct evidence of willful blindness which supported an ostrich
instruction for Hale and Spittel. In addition, the government argues
that since an ostrich instruction was warranted for some defendants,
it was proper for the district court to give the instruction without lim-
iting its application to any specific defendants. We need not address
either of these arguments, however, because we conclude that O'Neal
and Johnson's testimony was not "intrinsic evidence" of the conspir-
acy charged but was instead "extrinsic" evidence admitted in violation
of Federal Rule of Evidence 404(b).
a. Rule 404(b): "intrinsic" and "extrinsic" evidence
Evidence of a criminal defendant's prior bad acts or crimes other
than the crime charged (that is, "extrinsic" acts) tends to prove that
the defendant had bad moral character or a propensity to commit
crimes. Although such evidence is relevant in a criminal proceeding
on the theory that the defendant's bad character or criminal propensity
made it more likely than not that he committed the crime charged, it
is strictly inadmissible on this theory. See Fed. R. Evid. 401, 404(b);
United States v. Falls, 117 F.3d 1075, 1077 (8th Cir. 1997), cert.
denied, 118 S. Ct. 1083 (1998); United States v. Murray, 103 F.3d
310, 316 (3d Cir. 1997), cert. denied, 119 S. Ct. 254 (1998). There-
fore, unless the government first shows that (among other things) evi-
44
dence of the defendant's prior bad acts is relevant to prove something
other than his bad character or propensity to commit crime, such evi-
dence must be excluded. See United States v. Queen, 132 F.3d 991,
994 (4th Cir. 1997), cert. denied, 118 S. Ct. 1572 (1998). Here, the
government claims that Johnson and O'Neal's testimony showed that
Hale and Spittel deliberately avoided knowing whether OTC and
HBA they purchased from Johnson and O'Neal was stolen. If so, this
evidence tended to show that Hale and Spittel had bad moral charac-
ter or a propensity to buy stolen OTC and HBA. It had no other rele-
vance to their transactions with Thomas. Although this evidence was
relevant to show that Hale and Spittel had the bad moral character or
criminal propensity to buy stolen OTC and HBA, the district court
should have excluded it unless the government showed that it was rel-
evant to prove something other than Hale and Spittel's bad character
or propensity to commit crimes. See Queen, 132 F.3d at 994. How-
ever, the government made no effort to do this. The government made
no mention of Johnson and O'Neal's testimony in its pre-trial request
to admit certain 404(b) evidence, and it did not notify the defendants
of its intent to introduce this testimony as Rule 404(b) requires. The
government also did not argue in district court that Johnson and
O'Neal's testimony was relevant to prove some thing other than Hale
and Spittel's bad character or propensity to commit crimes. Further,
the government does not even advance a Rule 404(b) argument before
us.
Instead, the government argues that the Rule 404(b)'s prohibition
on evidence of bad character or criminal propensity does not apply
here because Hale and Spittel's acts of avoidance before buying OTC
and HBA from Johnson and O'Neal were "intrinsic" to the charged
conspiracy. Two types of prior bad acts, both labeled "intrinsic," are
excluded from the ambit of Rule 404(b). First, a defendant's prior bad
acts other than the crime charged that are"inextricably intertwined"
with the charged crime do not fall within the ambit of Rule 404(b).
United States v. Chin, 83 F.3d 83, 88 (4th Cir. 1996). Other bad acts
are "inextricably intertwined" with the crime charged when "both [the
crime charged and the other bad acts] are part of a single criminal epi-
sode" or when "the other acts were necessary preliminaries to the
crime charged." Id. The "inextricably intertwined" exception to Rule
404(b) keeps witnesses from having to testify on tiptoe. It allows
them to mention a defendant's unrelated prior bad acts or crimes that
45
come up naturally as part of the story of the crime charged because
the facts of the prior bad acts or crimes are inseparably woven with
the facts of the crime charged. It also allows the prosecution to offer
a "coherent and comprehensible story regarding the commission of
the crime," which may include a discussion of a defendant's bad acts
or crimes that necessarily precede a discussion of the crime charged.
Without this exception a witness might be forced to redact his narra-
tive and render it incoherent (thereby intolerably hindering the pre-
sentation of evidence), just to avoid mentioning acts for which the
defendant is not being tried, even though they were part of the same
transaction as, or set the stage for, the crime charged. See United
States v. Vizcarra-Martinez, 66 F.3d 1006, 1012-13 (9th Cir. 1995).
As a result of this exception, it is often said that evidence of a defen-
dant's unrelated prior bad acts or crimes that are"necessary to com-
plete the story of the crime" are admissible, even though this evidence
was unnecessary, strictly speaking, to prove any element of the crime
charged. See, e.g., United States v. Love, 134 F.3d 595, 603 (4th Cir.),
cert. denied, 118 S. Ct. 2332 (1998); Chin, 83 F.3d at 88; United
States v. Masters, 622 F.2d 83, 87 (4th Cir. 1980). However, this is
a narrow exception, see United States v. Hill , 953 F.2d 452, 456 n.1
(9th Cir. 1991), which only allows admission of bad acts that form the
basic factual setting of the crime or some other"integral part of the
crime charged," United States v. Heidebur, 122 F.3d 577, 579 (8th
Cir. 1997), as necessary to give "a coherent picture of the facts" of
the crime charged, id. The exception is not a broad license to intro-
duce gratuitous evidence about a defendant's prior bad acts that are
unlinked in time and space to the crime charged under the guise of
providing the jury with assorted "background information."
The second category of evidence that is excluded from the scope
of Rule 404(b) is evidence of prior bad acts that are not unrelated to
the crime charged, but rather are direct proof of the crime charged.
See, e.g., United States v. Loayza, 107 F.3d 257, 263-64 (4th Cir.
1997); United States v. Dozie, 27 F.3d 95, 97 (4th Cir. 1994); United
States v. Brewer, 1 F.3d 1430, 1436 (4th Cir. 1993); United States v.
Dudley, 941 F.2d 260, 262-63 (4th Cir. 1991). This type of bad act
evidence falls outside of the scope of Rule 404(b) because the acts at
issue are, by definition, not extrinsic acts; they are part and parcel of
the crime charged. Since Rule 404(b) excludes only evidence of prior
bad acts that was admitted for no other purpose than to prove bad
46
character or criminal propensity, see Queen, 132 F.3d at 994, a defen-
dant's prior bad acts that are introduced to prove an element of the
crime charged are not be excluded just because they also tend to show
that the defendant had bad moral character or a criminal propensity.12
b. Johnson and O'Neal's testimony fits neither definition of "in-
trinsic"
The government argues that the testimony of Johnson and O'Neal
fits both definitions of "intrinsic." First, it says that Johnson and
O'Neal's testimony helped tell the story of the crime because it "dem-
onstrated how the relationships between various conspirators were
formed and helped establish how the conspiracy operated." Appel-
lee's Br. 63. Second, the government claims that Johnson and
O'Neal's testimony was evidence of the crime itself because it "show-
[ed] that Hale and Spittel . . . were willfully blind to the stolen nature
of the goods [they] later purchased from Thomas . . . [and] fell within
the conspiracy charged in the indictment . . . ." We reject both of
these assertions.
In support of its first claim, the government reminds us that O'Neal
and Johnson both joined Thomas's conspiracy to sell stolen OTC and
HBA, which Hale and Spittel also allegedly joined. Both O'Neal and
Johnson were charged as co-conspirators with Thomas before they
pleaded guilty because both O'Neal and Johnson sold stolen OTC to
Thomas at one time or another during the time frame of the charged
conspiracy. However, just because Johnson, O'Neal, Hale, and Spittel
were all charged as co-conspirators does not automatically render
every interaction between any of these four during the time of the
charged conspiracy either "inextricably intertwined" with or a "neces-
_________________________________________________________________
12 A common example of this second type of "intrinsic evidence" is tes-
timony about a defendant's prior bad acts or crimes that were committed
in furtherance of a charged conspiracy. Such evidence is not subject to
the strictures of Rule 404(b) because it describes an overt act of the
charged conspiracy (even if the act itself is not charged). See, e.g.,
United States v. Kennedy, 32 F.3d 876, 885 (4th Cir. 1994); United
States v. Bailey, 990 F.2d 119, 122 (4th Cir. 1993); United States v.
Mark, 943 F.2d 444, 448 (4th Cir. 1991); United States v. Rawle, 845
F.2d 1244, 1247 n.4 (4th Cir. 1988).
47
sary preliminary" to the story of the charged conspiracy. Johnson and
O'Neal's testimony was about facts "inextricably intertwined" with
the charged conspiracy only if the testimony was necessary for them
to explain their interactions with Hale and Spittel as part of the gov-
ernment's proof of either the conspiracy or one or more of the sub-
stantive crimes charged in the indictment. That was not the case.
Neither Johnson nor O'Neal testified about any of the defendants
besides Hale and Spittel (and Cruse, who did business with Hale), so
their testimony was not necessary to prove that any of the other defen-
dants committed the crimes charged. Further, O'Neal and Johnson did
not testify about Hale or Spittel's relationship with Thomas. They
said nothing about any of the overt acts of the conspiracy committed
by Hale or Spittel or about any of the substantive money laundering
or receiving stolen property counts with which Hale and Spittel were
charged. In fact, the only point of O'Neal and Johnson's testimony
was that Hale and Spittel were deliberately ignorant during the trans-
actions involving these four. As such, there is no possibility that John-
son or O'Neal's testimony was inextricably intertwined with the facts
of the crime charged. Johnson and O'Neal's testimony"had nothing
whatsoever to do with the factual setting" of the crime charged,
Heidebur, 122 F.3d at 580, and was not "vital to an understanding of
the context of the government's case against" the defendants or even
"an integral and natural part of an account of the crime" that was
"linked in time and circumstances with the charged crime," United
States v. McLean, 138 F.3d 1398, 1403 (11th Cir.), cert. denied, 119
S. Ct. 221 (1998). The crime charged was conspiracy to buy OTC and
HBA from (or sell OTC and HBA with) Thomas, and neither Johnson
nor O'Neal said anything relevant about the defendants' participation
in that conspiracy for which their testimony about Hale and Spittel
was a necessary preliminary or with which it was inseparably woven.
Johnson and O'Neal's testimony about Hale and Spittel's willful
blindness also was not part of the proof of the crime charged. The
indictment made no mention of the sale of stolen goods between Hale
and Spittel and fences besides Thomas. Indeed, the indictment was
quite specific about how Thomas's conspiracy operated: Thomas
bought OTC and HBA from fences, like O'Neal and Johnson, and
then resold it to the defendants, including Hale and Spittel's company,
North Bridge. J.A. 275-79. Johnson and O'Neal were only mentioned
in the indictment for their own, separate dealings with Thomas. J.A.
48
272, 285. None of the alleged overt acts of the conspiracy involving
Hale and Spittel, nor any of the substantive counts with which they
were charged, related to Hale and Spittel's dealings with Johnson or
O'Neal. J.A. 293-96. All of the overt acts and substantive counts in
the indictment related to Hale and Spittel's direct dealings with
Thomas (or his wife). Of course, it is not necessary for every "intrin-
sic" act mentioned at trial to be charged as an overt act in furtherance
of the conspiracy. However, in order to be part of the proof of the
crime charged, the purportedly intrinsic act must be an act in
furtherance of the conspiracy. Cf. United States v. Garcia Abrego,
141 F.3d 142, 175 (5th Cir. 1998). Other bad acts by Hale and Spittel
which were not in furtherance of the conspiracy are not admissible,
even if they occurred during the time frame of the charged conspir-
acy.
In this case, we conclude that Hale and Spittel's actions testified
to by O'Neal and Johnson were not part of the charged conspiracy,
but rather were part of an unrelated conspiracy. It was uncontested at
trial that Johnson and O'Neal dealt with Hale and Spittel at times
when neither Johnson nor O'Neal were dealing with Thomas. In fact,
when Johnson and O'Neal were selling to North Bridge, they were
Thomas's competitors. Although the dealings between North Bridge
and O'Neal and Johnson involved the same subject matter as Thom-
as's conspiracy, stolen OTC and HBA, there was no evidence tending
to show that Johnson and O'Neal's dealings with North Bridge were
part of Thomas's conspiracy. But plenty of evidence suggested other-
wise. Johnson and O'Neal's sales to Hale and Spittel did not follow
the specific pattern of the indictment, which alleged that the sale of
stolen OTC and HBA from fences and boosters always passed
through Thomas -- and only Thomas -- to the defendants. Also,
unlike Curly Johnson, who was essentially a hired fence for Thomas,
O'Neal and Toby Johnson were independent mercenary fences who
sold to the highest bidder. Further, neither O'Neal nor Johnson sold
to Thomas while North Bridge was part of Thomas's conspiracy, but
rather before and after (respectively) Thomas sold to North Bridge.
From this evidence it is clear that Johnson and O'Neal's activities
with North Bridge were a side deal, entirely unrelated to their
involvement in the Thomas conspiracy.
Because Johnson and O'Neal's testimony was neither"inextricably
intertwined" with the story of the crime charged or proof of the crime
49
itself, the evidence was not admissible as "intrinsic" evidence. With-
out this direct evidence of Spittel and Hale's willful blindness, there
was no direct evidentiary support for the district court's ostrich
instruction.
***
Having reviewed all the evidence, both direct and circumstantial,
that the government offers in support of the district court's ostrich
instruction, we find no support in the record for that instruction. The
only question at trial was whether or not the defendants knew that
Thomas sold stolen OTC and HBA. "The ostrich instruction did not
advance this inquiry; it confused it, by pointing the jury to circum-
stances of deliberate avoidance of knowledge that did not exist."
Giovannetti, 919 F.2d at 1228. Therefore, the giving of the ostrich
instruction was error.
C. Prejudicial Impact of the Ostrich Instruction
The government further claims that the giving of the unsupported
ostrich instruction was harmless error because the trial court "condi-
tioned application of the instruction on a finding of proof beyond a
reasonable doubt that the defendants kept themselves ignorant" that
Thomas's OTC and HBA was stolen. Appellee Br. 97 (citing United
States v. Stone, 9 F.3d 934, 937-42 (11th Cir. 1993)). Here the gov-
ernment apparently means to argue that we should follow Stone. See
United States v. Whittington, 26 F.3d 456, 464 n.8 (4th Cir. 1994)
(declining to reach issue of whether to follow Stone).
In Stone "[t]he evidence of [the defendant's] actual knowledge . . .
was sufficient to support a guilty verdict but was not overwhelming,"
9 F.3d at 937, and the jury was instructed (as it was here, J.A. 1844)
that "a precondition to its application of the deliberate ignorance
instruction was proof beyond a reasonable doubt that[the defendant]
deliberately kept himself ignorant," id. at 938. Under these circum-
stances, the Stone court held that the giving of an unsupported ostrich
instruction was harmless error.
Stone offered two bases for its holding. First, the court adopted the
"fundamental . . . presumption that juries obey .. . ``the instructions
50
given them by the trial judge.'" Id. at 938 (quoting Marshall v.
Lonberger, 459 U.S. 422, 438 n.6 (1983)). This presumption, Stone
reasoned, necessarily rendered the error of giving the ostrich instruc-
tion harmless, because "[i]f . . . there was insufficient evidence of
deliberate ignorance to prove that theory beyond a reasonable doubt,
then the jury, following the instruction, as we must assume it did, did
not convict on deliberate ignorance grounds." Id. at 938. Thus, Stone
reasoned, "[b]ecause we presume that the jury followed its instruc-
tions, it follows that the jury disregarded the deliberate ignorance
instruction and that the guilty verdict was based on the only remain-
ing theory: [the defendants'] actual knowledge." Id. at 940.
The Stone court also opined that its holding was dictated by Griffin
v. United States, 502 U.S. 46, 49 (1991). See Stone, 9 F.3d at 939,
938-41. In Griffin the Supreme Court held that when a defendant was
convicted by general verdict of conspiracy and the evidence was
legally sufficient to establish his guilt for one of the conspiracy's two
charged objects, the Due Process Clause did not require reversal sim-
ply because the jury was instructed on both objects. See 502 U.S. at
47-48, 56-57. This holding was an attempt to harmonize the rule of
Turner v. United States, 396 U.S. 398, 420 (1970) ("[W]hen a jury
returns a guilty verdict on an indictment charging several acts in the
conjunctive . . . the verdict stands if the evidence is sufficient with
respect to any one of the acts charged."), with the rule of Yates v.
United States, 354 U.S. 298, 312 (1957) ("[A] verdict [must] be set
aside in cases where the [it] is supportable on one ground, but not on
another, and it is impossible to tell which ground the jury selected."),
and Stromberg v. California, 283 U.S. 359, 361 (1931) (requiring
reversal of general-verdict convictions that may have rested on an
unconstitutional ground). See Griffin, 502 U.S. at 52-60. The Griffin
court explained that these two rules apply in different circumstances:
the rule of Yates and Stromberg, which requires reversal of a general
verdict when there is some uncertainty that the verdict rested on the
erroneous ground, applies only to legal errors, constitutional or other-
wise, while the rule of Turner applies to factual errors. See id. at 58-
59. And, for the purpose of this distinction, the Griffin court said,
legal insufficiency is "factual" error, not"legal" or constitutional
error. Id. at 59. According to the Stone court, "the lesson of Griffin
is that due process is not violated when ``a trial court instruct[s] a jury
on two different legal theories, one supported by the evidence, the
51
other not.'" Stone, 9 F.3d at 939 (quoting Sochor v. Florida, 504 U.S.
527, 538 (1992)). Therefore, Stone held that when the evidence "was,
as in Griffin, sufficient to support a conviction on one theory (actual
knowledge) but insufficient to support a conviction on the other the-
ory (deliberate ignorance) . . . we can assume that jurors will reject
the ``factually inadequate theory,' and convict based on alternative
grounds for which the evidence was sufficient." 9 F.3d at 939 (quot-
ing Griffin, 502 U.S. at 59) (omission in the original, some internal
quotations omitted).
At least two other circuits have adopted Stone 's rule that an unsup-
ported ostrich instruction is harmless error per se. See United States
v. Mari, 47 F.3d 782, 785-87 (6th Cir. 1995) (following Stone);
United States v. Adeniji, 31 F.3d 58, 63-64 (2d Cir. 1994) (following
Stone, but also concluding that the evidence of actual knowledge was
overwhelming); cf. also United States v. Scott , 37 F.3d 1564, 1578
(10th Cir. 1994) (holding that it was harmless error when the court's
general ostrich instruction was supported only for some of the defen-
dants and citing Stone). However, four circuits have expressed the
view that the giving of an unsupported ostrich instruction can be
reversible error even if there was sufficient evidence to support the
conviction on an alternative basis. See, e.g. , United States v.
Covington, 133 F.3d 639, 645 (8th Cir. 1998); United States v.
Aguilar, 80 F.3d 329, 333 (9th Cir. 1996); United States v. Hilliard,
31 F.3d 1509, 1517 (10th Cir. 1994); United States v. Barnhart, 979
F.2d 647, 652-53 n.1 (8th Cir. 1992); United States v. Mapelli, 971
F.2d 284, 285-87 (9th Cir. 1992); United States v. Ojebode, 957 F.2d
1218, 1228-29 (5th Cir. 1992); United States v. Sanchez-Robles, 927
F.2d 1070, 1075-76 (9th Cir. 1991); United States v. de Francisco-
Lopez, 939 F.2d 1405, 1412-13 (10th Cir. 1991).
1. Three defendants: ostrich instruction was harmless error
The split in authority over Stone is more apparent than real. The
persuasive value of the cases holding that an unsupported ostrich
instruction can be prejudicial error is limited, since most of these
opinions predate Stone, and none of the more recent decisions discuss
Stone, much less refute it. Further, if we assume (as Stone counsels)
that a jury follows its instructions, there is no worry that a jury will
be led to convict a defendant based on negligence or recklessness just
52
because the ostrich instruction was unwarranted, since the standard
ostrich instruction expressly prohibits the jury from doing this. Cf.
Stone, 9 F.3d at 940. We therefore apply Stone and hold that an
unsupported ostrich instruction is harmless error when the jury is
instructed (as it was here) that a precondition to its application is
proof beyond a reasonable doubt of deliberate ignorance.
The government presented ample evidence that Ebert, Kazinec, and
Eidelman actually knew that Thomas sold stolen OTC and HBA.13 All
of this evidence came from testimony of the government's witness,
Donald Thomas. This evidence was sufficient for a reasonable jury to
find these defendants guilty.
First, Thomas testified that both Ebert and Kazinec knew about his
illegal operations. According to Thomas, in June 1994 Ebert traveled
to North Carolina to visit D&C Imports and inspect Thomas's cleanup
operation. J.A. 926, 1258, 2156-57. Thomas described how Ebert
took a particular interest in ensuring that all security sensors were
removed from the merchandise. JA 927. During this visit, Ebert asked
Thomas how many "boosters" worked for him; Thomas refused to
say. J.A. 926-29. Thomas testified that Kazinec asked him the very
same question when Thomas and an associate were delivering a ship-
ment of OTC and HBA to M&I in New York. J.A. 921. Kazinec also
suggested to Thomas that he take his vacations in the summertime
"because people can't wear the big coats to get the merchandise out."
J.A. 922. In addition, when Kazinec and Ebert refused to pay Thomas
for a shipment of goods, Kazinec mockingly asked what Thomas was
"going to do; call the police?" J.A. 935.
Second, Thomas's testimony revealed that although Eidelman
worked for a legitimate wholesaler, American Drug, Eidelman knew
that the merchandise American Drug bought from Thomas was stolen.
_________________________________________________________________
13 Thomas also testified that York was an insider in the stolen property
ring. He explained that one night, while York was helping him and his
family clean OTC and HBA in his basement, he received a telephone call
warning him that he was going to be raided by the police. York and other
members of Thomas's operation immediately loaded the merchandise
into various vehicles and took it to York's house in Grover, North Caro-
lina. JA 819, 891-94, 896.
53
When Hale took Thomas to American Drug in Beltsville, Thomas ini-
tially refused to deal with the company. Thomas saw some merchan-
dise at American Drug that he thought he recognized from a recent
undercover investigation by the Raleigh police. Fearing a setup,
Thomas would not sell his stolen OTC and HBA to American Drug
until Gilat reassured him that the police were not involved. J.A. 944-
45. Eidelman was present when Gilat reassured Thomas, and Eidel-
man even lent his own reassurance (as paraphrased by Thomas) that
"[American Drug] had done business with Steve Hale so long that he
knew that [Hale] wouldn't do anything to hurt them with the police
or anything." J.A. 945. Eidelman also told Thomas, when giving him
a tour of American Drug, that all of American Drug's invoices were
on the computer "and if any of the police or anybody ever came in
on them, that they had something there that [the secretary] could push
and it erased [the invoices]." J.A. 946.
From this evidence, the jury could conclude that Ebert, Kazinec,
and Eidelman knew Thomas was selling stolen OTC and HBA. We
therefore find the unsupported ostrich instruction to be harmless error
as to these three defendants.
2. Seven defendants: no evidence of actual knowledge
For the remaining seven defendants who filed timely appeals, Stone
by its own terms does not apply. The key assumption underlying
Stone is that the jury was presented with two grounds for its decision,
actual knowledge and deliberate ignorance, and there was sufficient
evidence to support a jury verdict on the former theory but not on the
latter. See Stone, 9 F.3d at 938-399. That is not the case for seven
defendants.
Our review of the trial record has not unearthed, and the govern-
ment does not point to, sufficient evidence from which a rational jury
could find that Jay Phillips, Johnny Foster, Wayne Foster, Best Deal,
Bill Cruse, Steve Hale, and Bob Spittel had actual knowledge that
Thomas was selling stolen OTC and HBA. There was, without ques-
tion, no direct evidence that any of these seven defendants knew the
real source of Thomas's goods. Of all the government's witnesses in
this case, none could say that these seven defendants knew that the
OTC and HBA Thomas sold was stolen. Thomas, the kingpin of the
54
stolen OTC and HBA ring, who was on the witness stand for eight
days, never testified that he told any of these defendants that he was
selling stolen property. In fact, Thomas testified that told several of
these defendants, including Steve Hale, he was not selling them stolen
OTC and HBA. J.A. 1161, 1070. Thomas also admitted that he was
highly secretive about the sources of his OTC and HBA. No member
of Thomas's stolen property operation testified that any of these seven
defendants knew Thomas's OTC and HBA was stolen, either. More-
over, the government offers no circumstantial proof from which the
jury could have inferred that these defendants knew Thomas's OTC
and HBA was stolen. None of the defendants ever saw any of Thom-
as's dealings with his boosters, and although some defendants (Hale,
Spittel, the Fosters, and Phillips) saw Thomas buy OTC and HBA
from his fences, nothing about these transactions indicated that the
OTC and HBA was stolen, not salvaged. Further, there was no indica-
tion that any of these seven defendants knew that Thomas's OTC and
HBA operation was not a legitimate salvaged goods operation. As we
have explained at length, there was nothing suspicious about Thom-
as's operation. See supra part III.B.1. Although Thomas did not oper-
ate his business in a formal or structured way (for example, he often
transacted business in cash, he delivered his merchandise in parking
lots, and he sold at flea markets), this is not a crime. And there is
nothing in the record to indicate that these seven defendants viewed
his business as a criminal operation, rather than a legitimate business.
The government argues, however, that some testimony of Joseph
Parisi, a wholesaler in New York who bought OTC and HBA from
North Bridge and other defendants, was direct evidence that Steve
Hale knew Thomas sold stolen OTC and HBA. Parisi testified that he
had a conversation with Hale regarding stolen OTC and HBA -- not
obtained from Thomas -- that North Bridge sold to him, in which
Hale said that he (Parisi) could not possibly be so"naive" as to not
"know where the stuff was coming from." J.A. 1448. (Parisi testified
that he did not answer Hale because he knew that the goods in ques-
tion were stolen. J.A. 1448.)
However, we conclude that Parisi's testimony about Hale was
improperly admitted for the same reason that O'Neal and Toby John-
son's testimony about Hale and Spittel was improperly admitted. See
supra part III.B.2. Although Parisi's testimony may have been admis-
55
sible under Fed. R. Evid. 404(b) to prove Hale knew Thomas sold
stolen OTC and HBA, we need not decide this. The government made
no effort to admit the evidence under Rule 404(b), and the district
court gave no limiting instruction telling the jury that the evidence
was admissible solely for the purpose of showing Hale's knowledge,
Rec. Vol. 27, at 142, 145-46; J.A. 1842-43. Thus, like O'Neal and
Johnson's testimony, Parisi's testimony was admitted as substantive
evidence of the charged conspiracy between Thomas and the defen-
dants.
Yet there was no evidence that Parisi joined in the charged conspir-
acy. Parisi was in New York, he did not work for any of the defen-
dants' companies, and he was not part of Thomas's booster network.
He was not indicted along with the other defendants or even men-
tioned in any of the indictments. Indeed, there was very little evidence
at trial about Parisi, other than his own testimony and evidence that
OTC and HBA he bought from various defendants had been stolen.
And, there was no evidence that Parisi knew that any of these defen-
dants, except Hale, sold him stolen OTC and HBA. Since the govern-
ment did not prove that Parisi was part of the charged conspiracy, his
testimony about his prior dealings with Hale was neither evidence of
the charged conspiracy nor inextricably intertwined with the charged
conspiracy. See supra part III.B.2.
Since there was no properly admitted evidence that Phillips,
Johnny Foster, Wayne Foster, Best Deal, Hale, or Spittel actually
knew that the OTC and HBA they bought from Thomas, or that Cruse
knew that the OTC and HBA he helped Thomas sell was stolen, the
government did not prove the intent element for any of the crimes
charged. Therefore, submitting the case against them to the jury on a
willful blindness theory was reversible error.
IV. VENUE: MONEY LAUNDERING AND RECEIVING
STOLEN PROPERTY CHARGES AGAINST EBERT
North Carolina was an improper venue to prosecute Ebert for
money laundering and receiving stolen property. We must therefore
56
vacate his convictions on those counts and remand for dismissal for
improper venue.14
The Eastern District of North Carolina was an improper venue to
prosecute this defendant for money laundering because the offense
charged was allegedly committed entirely in New York and Mary-
land. See United States v. Cabrales, 118 S. Ct. 1772, 1775, 1776-77
(1998) (rejecting the holding of United States v. Heaps, 39 F.3d 479,
482 (4th Cir. 1994), that a money laundering offense is a "continuing
offense" under 18 U.S.C. § 3237(a), which may be prosecuted in
either the district where the charged financial transaction occurred or
the district where the predicate act of generating funds occurred). We
also conclude that venue in North Carolina was improper on the
charge of receiving stolen property. Although we previously held that
receipt of stolen property is a continuing offense under § 3237(a),
prosecutable in either the district where the charged receipt of prop-
erty occurred or the district where the predicate act of stealing that
property occurred, see United States v. Melia , 741 F.2d 70, 72 (4th
Cir. 1984), we must reconsider our prior holding in light of Cabrales.
Cabrales counsels that the crime of receiving stolen property, like the
crime of money laundering, is not a continuing offense and therefore
may not be prosecuted in the district where the predicate act occurred.
However, venue in North Carolina was proper on the conspiracy
charge based on the overt acts of a coconspirator there. See Cabrales,
118 S. Ct. at 1776-77.
We therefore vacate Ebert's money laundering and receiving stolen
property convictions. We remand for dismissal of these charges for
improper venue and for his resentencing.
V. CONCLUSION
For these foregoing reasons, we reverse the convictions of, and
remand for entry of judgment of acquittal for, Best Deal, Jay Phillips,
Johnny Foster, Wayne Foster, Steve Hale, Bob Spittel, and Bill Cruse.
We affirm the conspiracy convictions of Isaac Ebert, Mike Kazinec,
and Mark Eidelman. We also affirm the convictions of Kazinec and
_________________________________________________________________
14 Although Kazinec and Eidelman were also convicted on those
charges, only Ebert raised this point on appeal.
57
Eidelman for money laundering and receiving stolen property but
vacate Ebert's convictions on these charges. We remand for dismissal
of the money laundering and receiving stolen property charges against
Ebert and for his resentencing.15
AFFIRMED IN PART, REVERSED IN
PART, VACATED IN PART, AND
REMANDED WITH INSTRUCTIONS
NIEMEYER, Circuit Judge, dissenting:
This appeal involves 11 defendants and some 30 issues. The trans-
actions involved are numerous and different for each defendant. They
occurred at different times and at different places. The evidence
showed, for instance, that transactions involving North Bridge Sal-
vage in Terrell, North Carolina (involving defendants Hale and Spit-
tel) occurred during the period from late 1993 to early 1994, whereas
transactions involving American International Wholesale Drug in
Beltsville, Maryland (involving defendant Eidelman) occurred during
the period from July 1994 to September 1994. The relationship
between many defendants was thin or nonexistent, and it is not alto-
gether clear from the record that the transactions between Thomas, at
the core of this conspiracy, and the defendants were of the same
nature and involved the same conspiracy.
Even when the facts are laid out by the parties in their briefs, their
attribution to any given defendant is nearly impossible to keep
straight and therefore to understand. It would surely have been a yet
more difficult task for the jury to have kept these matters straight for
each of the defendants during the course of trial.
Most of the assignments of error arose from the confusion that
existed with respect to the differing liabilities of the various defen-
_________________________________________________________________
15 We grant the government's motion to submit the supplemental brief
that it tendered before oral argument. The government has also moved
to strike the June 15, 1998, letter to the clerk from defense counsel that
enclosed a Wall Street Journal article about a gray market in retail
goods. Because we have not considered the letter or article, the govern-
ment's motion to strike is denied as moot.
58
dants. While the majority has undertaken the courageous effort of
attempting to assign proven facts to individual defendants, I cannot
be sure that it has been fair to the government in this effort, particu-
larly when the government is entitled to have all of the inferences
drawn in its favor.
For these reasons, I am not prepared, on this record, to acquit any
defendants as the majority has done with respect to several. Rather,
I would order new trials, directing the district court to determine
whether this case could be broken down into perhaps three separate
cases, thereby limiting the government's proof to evidence with
respect to fewer defendants in each case. It may very well turn out
following this kind of endeavor that the jury would find the evidence
as to some of the defendants insufficient. But as the record stands, I
am not satisfied that we can be sufficiently sure of such a conclusion.
Because I would vacate the judgments and remand this case, I
respectfully dissent.
59