United States v. Schmidt ( 2000 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 99-30082
_____________________
UNITED STATES OF AMERICA,
Plaintiff-Appellee
Cross-Appellant,
versus
ERIC SCHMIDT; MICHAEL O’KEEFE, SR.;
JOHN O’BRIEN; GARY BENNETT,
Defendants-Appellants
Cross-Appellees,
PAUL SCHMITZ,
Defendant-Appellant.
_______________________________________________________
Appeal from the United States District Court for
the Eastern District of Louisiana
(USDC No. 95-CR-106-2-S)
_______________________________________________________
August 11, 2000
Before REAVLEY, DAVIS and BARKSDALE, Circuit Judges.
REAVLEY, Circuit Judge:*
*
Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion should not be
published and is not precedent except under the limited circumstances set forth in 5TH CIR. R.
Five defendants appeal their convictions for conspiracy, mail and wire fraud, and
money laundering in connection with a fraudulent insurance scheme. Michael O’Keefe,
Eric Schmidt, John O’Brien, and Gary Bennett were convicted on the overarching count 1
conspiracy count and other counts. Paul Schmitz was convicted on a single mail fraud
count. O’Brien also appeals his sentence, and the government cross-appeals on two
sentencing matters. We affirm.
BACKGROUND
The evidence presented at trial supports the following events. O’Keefe, despite
two prior fraud convictions, was selected to operate the management company of
Physicians National Risk Retention Group, Inc. (“PNRRG”), a Louisiana medical
malpractice insurer. The management company was named Associated Auditors (AA).
Schmidt, O’Keefe’s son-in-law, served as president of PNRRG. Bennett and O’Brien
were also involved in the management of the PNRRG, and Schmitz was a claims
manager.
PNRRG became insolvent and the state of Louisiana moved to liquidate it. The
defendants arranged to have Builders and Contractors Insurance Limited (BCI), a
dormant Bahamian corporation under the control of Charles Donaldson, act as a
reinsurer. Defendants promised that coverage of PNRRG’s physicians would continue
and that all claims would be paid by BCI. PNRRG and the Louisiana Department of
47.5.4.
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Insurance authorized the transfer of over $10 million in cash assets of PNRRG to a trust
account of O’Keefe’s law firm, with the funds to be held on behalf of BCI. Defendants
entered into a reinsurance contract with Sphere Drake, an established reinsurance
company, but this contract was canceled a few months later. The defendants failed to
maintain coverage and pay claims for the insured physicians as promised.
Instead, Associated Insurance Consultants, Inc. (AIC), a company owned by
defendants Schmidt, Bennett, and O’Brien, signed a secret management contract with
BCI. Ultimately, over $5 million in assets of PNRRG ended up in the personal bank
accounts of the Schmidt, Bennett, and O’Brien.
The five defendants were charged in a multi-count indictment which included
conspiracy, wire fraud, mail fraud, and money laundering counts. Two of the main
government witnesses were Donaldson and Johnny Moore, participants in the scheme.
An FBI “302 report” was prepared prior to trial. The report documented an
interview of Donaldson by an FBI agent. According to the report, someone had stated
that “O’Keefe suggested that BCI’s shareholders meeting minutes be altered to make it
appear that Donaldson had authority to enter into the PNRRG/BCI contract.” At trial,
Donaldson testified and the government turned the 302 report over to defendants, as
required by the Jencks Act, 18 U.S.C. § 3500. The government did not ask any questions
about the 302 report. However, on cross-examination, Donaldson admitted that he had
falsely accused O’Keefe of altering the minutes. Donaldson also, arguably, perjured
himself at the trial by first claiming that he had altered the minutes, then stating that he
3
could not remember if he had accused O’Keefe of altering the minutes, and finally
admitting that he had falsely told the FBI that O’Keefe had suggested that the minutes be
altered. Judge Sear concluded after the trial that (1) Donaldson had falsely accused
O’Keefe of participating in altering the minutes, (2) the government knew about this
falsehood, (3) the government had failed to notify defendants of Donaldson’s falsehood,
and (4) defendants were therefore entitled to a new trial. Judge Sear recused himself after
granting the new trial, but later denied a motion for reconsideration. The basis of the new
trial was that even though the government did not try to prove that O’Keefe had altered
the minutes, Donaldson had falsely accused O’Keefe of doing so, and this lie went to the
credibility of Donaldson, a key witness.
The government appealed the order for new trial, and we reversed. United States
v. O’Keefe, 128 F.3d 885 (5th Cir. 1997) (O’Keefe I). We concluded that a new trial was
not warranted, noting that the jury was fully informed of Donaldson’s false statements,
and that the government had not relied on the false statements in presenting its case. See
id. at 896-98. After we remanded the case to the district court, the district court
considered motions for new trial on grounds of newly discovered evidence relating to
Moore and Donaldson. Donaldson had allegedly received a secret $45,000 payment from
the government which contradicted the government’s statement to the jury that it had
offered no promises or inducements to Donaldson beyond his plea agreement. Judge
Lemmon denied the new trial motions, and entered judgments of conviction and
sentenced the defendants.
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DISCUSSION
A. Sufficiency of Evidence
All five defendants challenge the sufficiency of the evidence. The verdict will be
upheld if a rational jury could have found the essential elements of the offense beyond a
reasonable doubt. See United States v. Walters, 87 F.3d 663, 667 (5th Cir. 1996). We
view the evidence, including all reasonable inferences drawn therefrom and all credibility
determinations, in the light most favorable to the verdict. See id.
1. Conspiracy Count
Count 1 alleged a conspiracy to commit wire and mail fraud. To sustain a
conspiracy conviction under 18 U.S.C. § 371, the government must prove (1) an
agreement between two or more persons, (2) to commit a crime, and (3) an overt act
committed by one of the conspirators in furtherance of the conspiracy. See United States
v. Gray, 96 F.3d 769, 772-73 (5th Cir. 1996). The elements of mail fraud under 18
U.S.C. § 1341 consist of (1) a scheme to defraud, (2) the use of the mails to execute the
scheme, and (3) the specific intent of the defendant to commit fraud. See United States v.
Salvatore, 110 F.3d 1131, 1136 (5th Cir. 1997). Wire fraud under 18 U.S.C. § 1343 can
be established upon proof of (1) a scheme to defraud, and (2) the use of interstate wire
communications in furtherance of the scheme. See Gray, 96 F.3d at 773. The Supreme
Court has stated that because the mail and wire fraud statutes share the same language in
relevant part, the same analysis applies to each. See Carpenter v. United States, 484 U.S.
19, 25 n.6 (1987).
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Defendants O’Keefe, Schmidt, O’Brien, and Bennett were convicted on the
overarching conspiracy count. The indictment charged a wide-ranging scheme to use
mail and wire facilities to execute a fraudulent scheme “(a) to defraud [PNRRG], its
insured physicians and patients making medical malpractice claims against those
physicians; (b) to obtain money and property by means of false pretenses, promises, and
representations; and (c) to deprive [PNRRG] of its right to the honest services of its
President, Eric Schmidt.”
Evidence, some disputed and some undisputed, supports the following events and
is sufficient to support the conspiracy convictions. O’Keefe, with two prior convictions,
operated and owned AA, the management company of PNRRG. PNRRG had been
organized by a group of physicians to provide themselves with liability insurance. AA
became the management company after the Louisiana Department of Insurance (DOI)
insisted that existing management be ousted in an attempt to financially salvage PNRRG.
Though PNRRG had substantial assets, it became statutorily insolvent and the DOI
moved to liquidate it. The DOI had decided to place PNRRG in liquidation by late 1991.
Prior to this decision the DOI had placed PNRRG in “conservation” under Louisiana law,
through a judicial order by a state court. O’Keefe and Schmidt advised the PNRRG
board to liquidate PNRRG and transfer the assets to a new insurer.
The defendants arranged to have BCI, a Bahamian corporation under the control of
Charles Donaldson, act as a reinsurer. BCI was a dormant Bahamian insurance company
at the time. An Agreement of Reinsurance between BCI and PNRRG was approved by
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the PNRRG board and the DOI. Donaldson had worked with Bennett in the past.
Donaldson pleaded guilty to misrepresenting his authority to execute the reinsurance
agreement. Defendants falsely promised that coverage of PNRRG’s physicians would
continue and that all claims would be paid by BCI.
The board of PNRRG and the DOI authorized the transfer of over $10 million in
cash assets of PNRRG to BCI, but the assets were to be held on American soil in a trust
account of O’Keefe’s law firm. As promised, defendants entered into a reinsurance
contract with Sphere Drake Insurance p.l.c., an established British reinsurance company,
but this contract was canceled a few months later, at O’Brien’s suggestion, without
notifying the DOI or the insured physicians or their agents. The district court concluded,
properly under the evidence, that “a reasonable jury could have found that the defendants
created a false impression that Sphere Drake was covering the risks when, in fact, the
contract was canceled and the defendants received substantial profits realized by the
cancellation.”
The defendants failed to maintain coverage and pay claims for the insured
physicians as promised, and misrepresented that certain claims would be the reinsurers’
responsibility. Instead, AIC, a company owned by defendants Schmidt, Bennett, and
O’Brien, signed a secret management contract with BCI. O’Keefe acted as AIC’s
attorney. According to Bennett, AIC was originally formed by O’Keefe and Schmidt.
Under the AIC/BCI agreement, 90 percent of any profit to BCI flowed to AIC. Schmidt,
Bennett and O’Brien received over $5 million in “profits” from the O’Keefe trust
7
account, after these funds passed through an account in the Bahamas. Funds went from
the O’Keefe trust account to a Bahamian company called “Captive Managers,” a sole
proprietorship owned by Donaldson, who received a fee of $150,000. The funds were
then almost immediately wired back to a bank account in New Orleans and largely
distributed to Schmidt, Bennett, and O’Brien. District judge Lemmon concluded that
defendants used AIC as a vehicle to divert PNRRG’s funds “in a bogus reinsurance
agreement” with BCI. The district court fairly summarized the evidence in concluding
that defendants paid Donaldson “to sign agreements and other documents on behalf of
[BCI] and to funnel [$5.6 million] from the United States through [a Bahamian bank
account] and to return the funds to the AIC bank account in New Orleans.”
Defendants failed to disclose to the DOI and the PNRRG board that they would
realize millions of dollars through their management of the reinsurance plan, and at one
point denied that they would benefit financially from their efforts for the physicians.
Of the $10.7 million transferred to the O’Keefe trust account as the sum necessary
to fund the reinsurance plan, defendants received over $5 million in “profits” in addition
to almost $2 million paid in management fees to AIC. The PNRRG board never
authorized defendants to personally receive such profits. The “profits” were funds
available because defendants had canceled the Sphere Drake contract, canceled coverage
for physicians, and refused to pay claims. BCI, the company that was supposedly behind
the reinsurance program, received no funds. These “profits” vastly exceeded the amount
paid in claims.
8
No action was taken by the DOI when it discovered that defendants were
canceling policies because O’Keefe promised Johnny Moore, the attorney for PNRRG’s
estate who was responsible for taking action, that he would use his political influence to
help Moore retain his position, and that Moore could use over $500,000 placed in trust
with Moore as part of the reinsurance agreement. Moore and O’Keefe had negotiated the
reinsurance contract. Moore is a private attorney who had been hired by the DOI to
represent it in the conservation and liquidation of PNRRG. He took over $500,000 held
in trust for personal use and pleaded guilty to a state bribery charge and a federal mail
fraud count. In a recorded conversation, O’Keefe urged Moore not to reveal that he had
taken the money.
To be sure, some of the evidence recited above was disputed. Nevertheless, we
conclude that this evidence is sufficient to support the conspiracy convictions, in that a
rational jury could find under this evidence that Schmidt, O’Keefe, O’Brien, and Bennett
engaged in a fraudulent scheme to surreptitiously siphon off millions of dollars in
PNRRG assets. Defendants make numerous sufficiency arguments which we find
unavailing.
O’Keefe argues that under Neder v. United States, 527 U.S. 1 (1999), decided
after the trial, the Court held that mail and wire fraud statutes require that the
misrepresentation or concealment concern a material fact, id. at 20-25, and that in the
pending case any misrepresentations or omissions were not material. The jury was not
instructed on the element of materiality, a matter discussed further below, but here we
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reject O’Keefe’s argument that the evidence is insufficient to establish that defendants
made material misrepresentations and omissions. In general, a false statement is material
if it has a natural tendency to influence, or is capable of influencing, the decision of the
party to which it was addressed. Id. at 16. The government’s theory, supported by the
evidence, was that defendants hatched a scheme to steal the assets of PNRRG. To this
end, defendants misrepresented or failed to disclose material facts discussed above. For
example, they misrepresented that coverage of PNRRG’s physicians would continue and
that all claims would be paid by BCI, misrepresented that they would not personally
profit from the transactions, failed to disclose that they had canceled excess coverage, and
failed to disclose their plan to transfer millions of dollars intended to capitalize the new
insurance venture to their personal bank accounts. One government witness, DOI actuary
Scruggs, testified that if the DOI had known what the defendants were going to cancel
doctors’ coverage, it would not have entered into the reinsurance agreement with
defendants and would have saved $8 million for the company in liquidation. We think
these misrepresentations and nondisclosures were certainly capable of influencing the
PNRRG board and the DOI.
Appellant Bennett devotes his appeal to sufficiency of the evidence, and presents
an alternative version of events that is completely at odds with the government’s theory of
the case. Briefly, he argues as follows. Professionals at the DOI, on the advice of
numerous outside professionals, had agreed on the plan in which the defendants
participated. Under this plan, some of the low risk doctors insured by PNRRG were to be
10
separated into a new company, and some of PNRRG’s assets were to be transferred to
this new company. This idea actually came from an insurance expert from Missouri,
William O’Bryan, whom the DOI had sought out. BCI was intended to serve only as a
temporary place to “park” the insurance policies of the low risk doctors until a permanent
American company could be found. An estimate was made of how much cash was
needed to capitalize this new company, based on complex risk assumptions. Contracts
were signed, and the defendants operated within the confines of these agreements. The
defendants received a large profit not because of fraud, but only because the anticipated
claims were higher than the actual claims, and there was no contractual provision for the
return of profits to the DOI or the estate of PNRRG. No one, including defendants, had
anticipated the windfall. Moore was a thief who stole money from an attorney trust
account, and testified against the defendants for a reduction in sentence. Donaldson was
caught misrepresenting his authority to act for BCI and entered into a plea bargain. He
lied to the FBI and again in federal court, resulting in the new trial granted by Judge Sear.
AIC was a legitimate company responsible for all the administration of the claims and
policies. BCI did not have the capacity to perform such functions. The profits of AIC
were personal profits of defendants O’Brien, Schmidt, and Bennett because AIC was a
subchapter S corporation under the tax laws, and all income to such a corporation was
taxable to the owners. The owners paid taxes and then used the remainder to capitalize
Lemé Reinsurance Limited, a company formed to provide permanent coverage for the
physicians.
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While Bennett’s version of events is not wholly implausible, we note that much of
his argument is made without citation to the record. In any event, the evidence described
above is more than sufficient to uphold the jury verdict. Donaldson and Moore were
extensively cross-examined, and the jury was entitled to weigh their credibility.
The jury is the final arbiter of the credibility of witnesses. See United States v. Restrepo,
994 F.2d 173, 182 (5th Cir. 1993). A guilty verdict may be sustained if supported only
by the uncorroborated testimony of a coconspirator, even if the witness is interested due
to a plea bargain, unless the testimony is incredible or insubstantial on its face. See
United States v. Gadison, 8 F.3d 186, 190 (5th Cir. 1993); United States v. Hernandez,
962 F.2d 1152, 1157 (5th Cir. 1992). Testimony is incredible as a matter of law only if it
relates to facts that the witness could not possibly have observed or to events which could
not have occurred under the laws of nature. See Gadison, 8 F.3d at 190; United States v.
Hoskins, 628 F.2d 295, 297 (5th Cir. 1980). Insofar as Donaldson lied to the FBI and in
court (which the government disputes), those lies were rejected as a ground for a new
trial in O’Keefe I. A rational jury could conclude that Moore, the attorney who was
supposed to regulate defendants, was bribed or at least encouraged by O’Keefe to raid his
trust account.
Given the totality of the evidence presented, a rational jury simply was not
required to accept Bennett’s explanation on appeal for why millions of dollars ended up
in his personal bank account and the accounts of other defendants. The assets of PNRRG
were placed with BCI in a trust account in the United States, yet over $5 million in
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“profits” was funneled through the Bahamas and back to the United States in transactions
the jury could have found fraudulent. There was evidence that defendants had
represented that there would be no profits, and that they concealed the agreement
between BCI and AIC. Though defendants including Bennett claim the contractual
arrangement between BCI and AIC was disclosed, there was ample evidence to the
contrary. The jury could have reasonably concluded that defendants were able to secure
“profits” from an insolvent insurer only because reinsurance from an established
company was canceled, claims were not paid, and coverage for the insured physicians
was not renewed. In the words of Judge Sear, the defendants’ profit reversion “was
confected by the defendants.” Bennett insists that BCI had a contractual right to
terminate the reinsurance coverage with Sphere Drake, and that canceling the coverage
was legitimate when claims that came in were smaller than expected, especially since the
cost of the Sphere Drake coverage was very high. However, the district court concluded
that “a reasonable jury could have found that the defendants created a false impression
that Sphere Drake was covering the risks when, in fact, the contract was canceled and the
defendants received substantial profits realized by the cancellation.”
O’Brien and Bennett argue that certain testimony, such as testimony concerning
which claims BCI was supposed to cover, are contradicted by the terms of the
PNRRG/BCI written contract of reinsurance and are therefore inadmissible under the
parol evidence rule. They cite no federal law that a criminal wire or mail fraud
13
conviction cannot rest on misrepresentations that are inconsistent with the final written
terms of an agreement. We see no merit to this argument.
2. Other Counts
The convictions on counts 2 and 4-8 are mail and wire fraud convictions of the
four defendants—O’Keefe, Schmidt, O’Brien, and Bennett—convicted on the count 1
conspiracy count. They relate to various mailings and wire communications “for the
purpose of executing the scheme set forth above,” i.e., the count 1 conspiracy. The
convictions on counts 14-23 are money laundering convictions of these four defendants
under 18 U.S.C. § 1956(a)(2)(A). These counts allege money wire transfers “with the
intent to promote the carrying on of specified unlawful activity, that is mail and wire
fraud as set forth in Counts 2 through 13.” The defendants argue that since they are all
tied to the conspiracy count, they must fail if the conspiracy conviction is reversed, since
there was no fraudulent scheme that will support them. These defendants offer no
independent reason why the evidence was insufficient on these other counts if, as we
hold, the evidence is sufficient to support their convictions on count 1.
Schmitz challenges his mail fraud conviction on count 12. He was convicted
solely on this count, and the other defendants were acquitted on this count. It alleged that
“for the purpose of executing the scheme set forth above,” i.e., the count 1 conspiracy,
Schmitz sent a letter to Mark Wham, falsely stating that Schmitz was acting at the
direction of the principals of Builders and Contractors Insurance, Ltd., a Bahamian
Corporation, in offering a settlement for nuisance value, when the defendants had total
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control over disbursements of funds for the payment of claims. Wham was a personal
injury lawyer with a claim against a physician who had coverage originally with PNRRG
and whose coverage was transferred to BCI. Wham testified that Schmitz, acting as a
claims manager, had pressured Wham to settle for nuisance value by telling Wham that
he was dealing with a company out of the Bahamas with limited funds. Schmitz sent a
letter as part of this negotiation. The government claims that Schmitz’s conduct was
fraudulent because he falsely stated in the letter that he was acting at the request of BCI,
and he knew that there was money set aside in the United States to pay claims.
Ultimately the physician in question was forced to settle the case out of his own pocket
and Wham received no fees. Judge Sear noted that Schmitz testified before the grand
jury “that he did not and was not going to contact anyone at BCI and representations to
this effect contained in the letter to Wham and others were not true.”
We conclude that the evidence is sufficient to support Schmitz’s mail fraud
conviction on count 12. A rational jury could find that Schmitz’s conduct was part of a
scheme to stop paying claims and transfer the assets of PNRRG to defendants.
Schmitz’s acquittal on the conspiracy count and the acquittal of the other
defendants on count 12 does not help him. Even if the jury’s verdict is inconsistent, and
we are not persuaded that it is, such an inconsistency does not require reversal of his
conviction. See United States v. Powell, 469 U.S. 57, 62 (1984); Dunn v. United States,
284 U.S. 390, 393 (1932). Both the interest and the appearance of justice are fully
vindicated as long as the reviewing court assures itself, as we do, that regardless of an
15
acquittal on some other count, the evidence is legally sufficient to support a guilty verdict
on the count of conviction. See Powell, 469 U.S. at 66-69. Given “the Government’s
inability to invoke review, the general reluctance to inquire into the workings of the jury,
and the possible exercise of lenity . . . the best course to take is simply to insulate jury
verdicts from review on this ground.” Id. at 68-69.
B. Jury Charge and Response to Jury Question
1. Materiality Instruction
Defendants complain that the jury charge was flawed because it did not instruct
the jury on the issue of materiality with respect to mail and wire fraud. As explained
above, the Supreme Court held in Neder, decided after the trial of the pending matter, that
materiality is a element under the wire and mail fraud statutes. As the government points
out, there is some language in the jury instructions regarding materiality, such as the
instructions that intent to defraud may be found “from a material misstatement of fact
made with reckless disregard of the facts,” and that “[a] statement is or representation is
‘false’ within the meaning of the wire fraud and mail fraud statutes when it constitutes a
half truth, or effectively conceals a material fact, provided it is made with intent to
defraud.” However, the jury charge did not plainly explain that materiality of falsehood
is a separate element of the mail and wire fraud statutes. Defendants did not object to the
trial court’s failure to so instruct the jury.
The omission of the materiality element of the crime in the jury charge is subject
to harmless error review if the defendant objected to the error. See Neder, 527 U.S. at 4-
16
6. In the absence of an objection to the jury charge, however, the omission of the element
is reviewed for plain error even if the law changed after the trial. See Johnson v. United
States, 520 U.S. 461, 463-66 (1997). Under this limited review, there must (1) exist an
“error,” (2) that is “plain,” and that (3) affects the substantial rights of the defendant. Id.
at 466-67. In discussing whether an error affected the defendant’s “substantial rights,”
the Supreme Court explained that in most cases this means that the error “must have
affected the outcome of the district court proceedings.” United States v. Olano, 507 U.S.
725, 734 (1993). Even if these requirements are met, an appellate court may in its
discretion correct a plain error only if the error seriously affects the fairness, integrity or
public reputation of judicial proceedings. Johnson, 520 U.S. at 467.
Defendants do not establish reversible error under the plain error standard. As
discussed above, we conclude that the evidence would support a jury finding that the
misrepresentations and omissions were in fact material. Defendants do not show that the
inclusion of a materiality instruction in the already complex charge would have altered
the outcome of the jury’s deliberations. While defendants put on a vigorous defense, the
jury obviously accepted the government’s theory that defendants schemed to fraudulently
siphon off the assets of PNRRG from the inception of their dealings with PNRRG and the
DOI. There was clear evidence of materiality.
2. Response to Jury Question
Schmitz complains of the district court’s response to a jury question. During
deliberations, the jury asked: “Can a defendant be found guilty of count 12 without
17
knowingly furthering the scheme set forth in the indictment?” The court answered: “I
cannot respond any better than I have in the charge which I gave you. Read it as it
applies to this count.”
A trial judge enjoys wide latitude in deciding how to respond to a question from
the jury. See United States v. Stevens, 38 F.3d 167, 170 (5th Cir. 1994). We have
explained that “[w]hen evaluating the adequacy of supplemental jury instructions, we ask
whether the court’s answer was reasonably responsive to the jury’s question and whether
the original and supplemental instructions as a whole allowed the jury to understand the
issue presented to it.” Id. Further, since Schmitz did not object to the court’s
supplemental instruction, our review is for plain error. See United States v. Rogers, 126
F.3d 655, 660 (5th Cir. 1997). We see no plain error. Schmitz does not show that the
original charge was defective, so we fail to see how referring the jury back to the original
charge could amount to plain error. Furthermore, the original charge answers the jury’s
question, since it plainly states that count 12 is based on a letter allegedly mailed on or
about the date stated in the indictment “for the purpose of executing the scheme charged
in the indictment . . . .” The jury could find the answer to its question by reading the
charge.
C. Indictment
Schmitz complains that the superseding indictment does not set out the substantive
offenses in counts 2-23 with sufficient particularity. We review de novo questions of the
sufficiency of the indictment. See United States v. Cabrera-Teran, 168 F.3d 141, 143
18
(5th Cir. 1999). The government points out that this objection was not made until after
trial, but challenges based on the failure to charge an offense may be made at any time.
See United States v. Fitzgerald, 89 F.3d 218, 221 (5th Cir. 1996). We have however
found that review is more limited if there was no objection until after the trial began,
agreeing with other circuits that in such circumstances “indictments are liberally
construed in favor of validity where they are tardily challenged.” United States v. Green,
964 F.2d 365, 374 (5th Cir. 1992).
An indictment is sufficient when it (1) contains the elements of the offense
charged, (2) fairly informs the defendant of the charges he must meet, and (3) there is no
risk of future prosecutions for the same offense. See United States v. Arlen, 947 F.2d
139, 144 (5th Cir. 1991). In assessing the sufficiency of an indictment, we focus on
practical, not technical, considerations. See United States v. Chaney, 964 F.2d 437, 446
(5th Cir. 1992).
Schmitz does not establish that the indictment is defective under these standards.
He complains that the substantive counts only incorporated paragraph B of count 1 and
failed to incorporate paragraph C of the same count. We see no merit to this argument.
Paragraph C was not incorporated because it listed numerous overt acts which would not
have made sense if included in each separate substantive count. Each substantive count,
alleges that specified defendants “for purposes of executing the scheme set forth above,”
committed specific overt acts in violation of the wire, mail, or money laundering statutes.
Defendants were fairly informed of the charges.
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D. Admission of Prior Convictions
O’Keefe complains that the district court erred in admitting evidence of his two
prior fraud convictions. Other defendants also complain that they were prejudiced by this
evidence. Schmidt complains that he was particularly prejudiced because he is O’Keefe’s
son-in-law. The only evidence of the prior convictions was the judgments of conviction
themselves, and the district court instructed the jury to limit its consideration of the prior
convictions to the issue of O’Keefe’s intent.
The government and O’Keefe disagree on whether a proper objection was made
below. We assume without deciding that a timely objection was made. Assuming such
an objection, admission of prior bad acts evidence under Fed. R. Evid. 404(b) is reviewed
for clear abuse of discretion. See United States v. Guerrero, 169 F.3d 933, 943 (5th Cir.
1999).
Rule 404(b) provides that “[e]vidence of other crimes, wrongs, or acts is not
admissible to prove the character of a person to show action in conformity therewith. It
may, however, be admissible for other purposes, such as proof of motive, opportunity,
intent, preparation, plan, knowledge, identity, or absence of mistake or accident . . . .”
This court has established a two-prong test that governs the admissibility of Rule 404(b)
evidence. First, the evidence must be relevant to an issue other than the defendant’s
character. Second, the probative value of the evidence must not be substantially
outweighed by its undue prejudice and the evidence must meet the other requirements of
Rule 403. See United States v. Beechum, 582 F.2d 898, 911 (5th Cir. 1978) (en banc).
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The district court applied this test, and in so doing analyzed the similarity of the
prior and charged offenses. It did not clearly abuse its discretion in admitting the
convictions as evidence of intent. We have frequently held that prior convictions are
admissible under Rule 404(b) to prove intent, particularly in conspiracy cases. See
United States v. Prati, 861 F.2d 82, 86 (5th Cir. 1988); United States v. Henthorn, 815
F.2d 304, 308 (5th Cir. 1987). “[I]n a conspiracy case the mere entry of a not guilty plea
raises the issue of intent sufficiently to justify the admissibility of extrinsic act evidence.”
Prati, 861 F.2d at 86. As we explained in United States v. Roberts, 619 F.2d 379 (5th
Cir. 1980), evidence of a prior conviction is admissible to prove intent in a later
conspiracy case involving the same criminal activity, given the unique difficulties in
proving intent in a conspiracy case:
Charges of conspiracy involve considerations not present in other criminal
prosecutions. . . . Unequivocal evidence that a defendant committed a
substantive offense may justify the inference that he intended to do so, but
it does not plainly support the conclusion that he agreed and planned with
others to commit the crime. Evidence of a defendant’s association and
dealings with a group of conspirators, even when he knows they intend to
commit a crime, does not alone show that he himself had the requisite intent
to join the conspiracy. In every conspiracy case, therefore, a not guilty plea
renders the defendant’s intent a material issue and imposes a difficult
burden on the government. Evidence of such extrinsic offenses as may be
probative of a defendant’s state of mind is admissible unless he
affirmatively takes the issue of intent out of the case.
Id. at 382-83 (brackets, citation, quotation marks omitted).
O’Keefe cites United States v. Brown, 71 F.3d 1158 (5th Cir. 1995), in which we
reversed a conviction for possession of cocaine with intent to distribute. The defense had
21
put on one defense witness, and the prosecutor asked her whether she was aware of the
defendant’s prior drug conviction. Brown is distinguishable because it was not a
conspiracy case and the government conceded that the prior conviction was admissible, if
at all, as probative only on the issue of the defendant’s identity. We held that the prior
conviction was not probative on the issue of the witness’ identification, and that the
district court had erroneously instructed the jury. See id. at 1162-63. In the pending case
the prior convictions were admitted to prove intent, a purpose we have sanctioned in
conspiracy cases, as discussed above, and the jury was properly instructed.
E. Severance Motion
Schmidt complains that the district court erred in denying his motion for
severance. He argues that he moved for severance after he learned that the government
intended to introduce O’Keefe’s prior convictions. He also complains in his brief that
“[t]he spillover effect of the connection between O’Keefe and Donaldson and O’Keefe
and Moore presented a direct threat to Schmidt at trial.”
The district court’s denial of a motion to sever is reviewed for an abuse of
discretion. See United States v. Pena-Rodriguez, 110 F.3d 1120, 1128 (5th Cir. 1997).
To demonstrate an abuse of discretion, the defendant “bears the burden of showing
specific and compelling prejudice that resulted in an unfair trial and such prejudice must
be of a type against which the trial court was unable to afford protection.” Id. (quoting
United States v. Faulkner, 17 F.3d 745, 759 (5th Cir. 1994)). We have further noted that
“[t]he rule, rather than the exception, is that persons indicted together should be tried
22
together, especially in conspiracy cases,” and that “the mere presence of a spillover effect
does not ordinarily warrant severance.” United States v. Pofahl, 990 F.2d 1546, 1483
(5th Cir. 1983).
We have stated that “acquittals as to some defendants on some counts support an
inference that the jury sorted through the evidence and considered each defendant and
each count separately.” United States v. Ellender, 947 F.2d 748, 755 (5th Cir. 1991). In
this case all the defendants were acquitted on one or more counts. We have further noted
that appropriate instructions can reduce the possibility that the jury will improperly
transfer proof of guilt from one defendant to another. Id. at 755. Instructions to consider
separately each count and the evidence pertaining to it, and to give separate consideration
to the evidence as to each defendant, have been held sufficient to eliminate the possibility
of undue prejudice. See Faulkner, 17 F.3d at 759. In the pending case the jury was given
standard instructions to consider separately the evidence as to each defendant.
The district court did not abuse its discretion in denying the motion for severance.
F. New Trial Motion Relating to Donaldson
Defendants moved for new trial based on newly discovered evidence concerning
Donaldson. They argue that they discovered at sentencing, for the first time, that the
government consented to Donaldson’s use of $45,000 to pay court-ordered restitution of
$150,000. The $45,000 was allegedly funds that remained in Donaldson’s lawyer trust
account. They claim that this information is impeachment evidence under Brady v.
Maryland, 373 U.S. 83 (1963), and Giglio v. United States, 405 U.S. 150 (1972), and
23
therefore should have been disclosed by the prosecution. They also claim that the failure
to provide this information gave a false impression, since the plea agreement stated that
there were “no other promises or inducements” to Donaldson.
Generally, we review the denial of a motion for new trial based on newly
discovered evidence exclusively for abuse of discretion. Such motions are disfavored and
are reviewed with great caution. In order to merit a new trial, the defendant must prove
that (1) the evidence is newly discovered and was unknown to him at the time of trial, (2)
the failure to discover the evidence was not due to his lack of diligence, (3) the evidence
is not merely cumulative, but is material, and (4) the evidence would probably produce an
acquittal. See United States v. Jaramillo, 42 F.3d 920, 924 (5th Cir. 1995).
To establish a Brady claim, the defendant must show that the government
suppressed evidence favorable to him. See United States v. Ellender, 947 F.2d 748, 756
(5th Cir. 1991). The prosecution is not obligated to produce evidence or information
already known to the defendant, or that could be obtained through the exercise of
reasonable diligence. See Brown v. Cain, 104 F.3d 744, 750 (5th Cir. 1997). In the
pending case the government argues that defendants were aware of the $45,000 because it
originated with O’Brien, and denies that there was any “secret deal” whereby the
government consented to use of the $45,000 to pay the restitution order. According to the
government, the sentencing judge simply became aware of it and ordered its payment to
victims.
24
Assuming without deciding that the government suppressed evidence, a Brady
violation only occurs when the government suppresses material evidence, including
impeachment evidence, favorable to the accused. See Giglio, 405 U.S. at 154; Brady,
373 U.S. at 87. Such evidence is material if there is a reasonable probability that the
outcome of the trial would have been different if the evidence had been disclosed. See
United States v. Bagley, 473 U.S. 667, 682 (1985). Bagley established that even a direct,
undisclosed payment to a witness is not a reversible per se Brady violation, if the court
finds under the materiality requirement that the defendant has not shown a reasonable
probability that the result of the trial would have been different if the evidence had been
disclosed. See id. at 671-72, 682.
The district court did not err in denying a new trial based on Donaldson’s alleged
use of funds from his lawyer’s trust account to make restitution. Donaldson told the jury
of his conviction and was extensively cross-examined. The jury was well aware that he
was testifying in hopes of leniency. Donaldson’s credibility on the stand was the subject
of O’Keefe I. We noted, in reversing an order for new trial, that Donaldson had been
subjected to “devastating cross-examination,” and that “given the degree of impeachment
of Donaldson on the stand, any further impeachment of the type that the defense now
desires would merely have been cumulative.” 128 F.3d at 896-97. We also noted that
“the testimony of Donaldson was overwhelmingly corroborated by other witnesses.” Id.
at 897. For these same reasons, defendants are not now entitled to a new trial on similar
grounds. While Donaldson was an important witness, whether he was allowed to pay
25
restitution from a trust account strikes us as a relatively minor matter. Defendants have
not shown a reasonable probability that the outcome of the trial would have been
different if this evidence had been disclosed.
O’Keefe also complains that the district court erred in denying his request for an
evidentiary hearing on the new trial motion. Denial of a hearing on a motion for new trial
is reviewed for abuse of discretion. See United States v. MMM Corp., 954 F.2d 1040,
1046 (5th Cir. 1992). We see no abuse of discretion. Assuming that O’Keefe’s factual
allegations regarding this point are entirely accurate, he did not show that he was entitled
to a new trial.
O’Keefe separately argues that the prosecution concealed its “active efforts” to
hide Donaldson’s false statements. While characterizing this claim as one of newly
discovered evidence, this argument strikes us at least in part as a rehash of questions
raised in O’Keefe I, namely, whether Donaldson falsely accused O’Keefe of altering
certain corporate minutes and whether the government suppressed its knowledge of the
false statement. Our earlier panel has already ruled that Donaldson’s false statements did
not entitle defendants to a new trial. O’Keefe argues that there was some kind of a secret
agreement that the government would not prosecute Donaldson for his perjury, but he
offers nothing but conjecture that such an agreement existed.
G. New Trial Motion Relating to Moore
O’Keefe argues that after the trial, in civil cases arising out of the liquidation of
PNRRG, Moore’s counsel filed a statement taking the position that the DOI owed Moore
26
$400,000 in legal fees, and therefore his use of $400,000 of the $527,000 in his trust
account was legitimate. The district court denied the motion for new trial based on this
alleged newly discovered evidence. At the trial, defendants cross-examined Moore and
he testified that he had taken the position that he had spent the money from the trust
account because his legal bills had not been paid. Hence, the evidence was not newly
discovered and it came out at the trial. In any event, even if Moore changed his story,
and now claims that he stole less PNRRG money than he told the jury, defendants do not
show that the alleged newly discovered evidence would probably produce an acquittal.
See United States v. Jaramillo, 42 F.3d 920, 924 (5th Cir. 1995).
O’Keefe also claims that at trial Moore testified that money in the trust account
was BCI’s money, while in the later civil proceeding he claimed that the funds belonged
to the PNRRG estate. There is trial testimony where Moore stated, on cross-examination,
that the money he held in trust belonged to BCI, because it had been transferred to BCI
“for me to hold until such time as the accounting was made.” So again there is no newly
discovered evidence. Further, O’Keefe does not explain convincingly why it matters
whether the funds were held in trust for BCI or PNRRG.
This evidence, even if newly discovered, does not change the fundamental facts
that Moore admitted he stole money from his trust account with O’Keefe’s blessing, and
had pleaded guilty to such and was testifying pursuant to a plea agreement. The district
court did not abuse its discretion in denying a new trial.
27
O’Keefe also complains that the district court erred in denying a hearing on this
motion, but again, assuming that O’Keefe’s factual allegations regarding this point are
accurate, he did not show that he was entitled to a new trial.
H. Due Process Claim Regarding District Court’s Rulings Following Remand
Schmidt raises a due process argument. As we understand it, he argues first that
Fifth Circuit erroneously restricted the district court from considering Brady questions
which were raised in the district court but were not addressed in the O’Keefe I appeal,
and argues second that even if the Fifth Circuit did not so err, the district court
erroneously interpreting our rulings as prohibiting it from considering these Brady
questions. The only alleged Brady violations about which appellants complain in the
pending appeal are discussed above.
We first disagree with any suggestion that our prior rulings prohibited the district
court from considering these Brady questions. In O’Keefe I we remanded the case to the
district court for consideration of those grounds for new trial which the district court had
not yet reached. 128 F.3d at 899. In a later mandamus proceeding in this court brought
by the government, we granted certain mandamus relief, but made clear that our order
“does not deal with the motion for new trial based on newly discovered evidence, which
is not before this court.”
The district court duly ruled on the motions for new trial which were before it after
remand. For the reasons explained above, the district court did not err in denying the new
trial motions.
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I. Cumulative Error
O’Keefe argues that the cumulative effect of all the district court’s errors warrants
reversal. We have recognized that a conviction may be reversed for cumulative errors,
regardless of “whether any one of the errors standing alone would be sufficient to justify
reversal.” United States v. Riddle, 103 F.3d 423, 435 (5th Cir. 1997). For the reasons
discussed above, O’Keefe has not demonstrated cumulative trial errors which would
justify a reversal under the cumulative error doctrine.
J. Enhancement of O’Brien’s Sentence for Special Skills
O’Brien complains of the sentence enhancement he received for use of a special
skill under U.S.S.G. § 3B1.3. This enhancement applies to one who “abused a position
of public or private trust, or used a special skill, in a manner that significantly facilitated
the commission or concealment of the offense.” Application note 3 states that a special
skill “refers to a skill not possessed by members of the general public and usually
requiring substantial education, training or licensing. Examples would include pilots,
lawyers, doctors, accountants, chemists, and demolition experts.”
O’Brien argues that there was no proof that he used his special skills “in a manner
that significantly facilitated the commission or concealment of the offense” under the
guideline. “The government generally must prove factors for enhancement of sentencing
by a preponderance of the evidence.” United States v. Canada, 110 F.3d 260, 263 (5th
Cir. 1997). Whether O’Brien used his special skills is a question of fact. We accept the
district court’s fact findings regarding sentencing unless they are clearly erroneous. See
29
18 U.S.C. § 3742(e). “A factual finding is not clearly erroneous as long as it is plausible
in light of the record as a whole.” United States v. Krenning, 93 F.3d 1257, 1269 (5th
Cir. 1996). A district court’s finding of fact will be deemed clearly erroneous only if we
are left with the definite and firm conviction that a mistake has been made. See United
States v. Graves, 5 F.3d 1546, 1556 (5th Cir. 1993). This court examines the district
court’s factual finding regarding sentencing for clear error and affords great deference to
the court’s application of the guidelines to its factual findings regarding sentencing. See
United States v. Snell, 152 F.3d 345, 346 (5th Cir. 1998).
The enhancement rested on the presentence report (PSR) and the court’s finding
that O’Brien was a MBA, a CPA, and a certified underwriter with experience in the
insurance industry. Initially, the PSR found that O’Brien “used his extensive skills in
business, insurance and accounting to facilitate the commission of the offense.” In an
addendum, the probation officer added that by O’Brien’s own admission in a pleading he
searched for a stop-gap insurer, worked toward establishing a doctor-controlled pool,
rejected certain companies, contacted a broker in the Bahamas and worked Sphere Drake
into the agreement. He also testified that he “was in charge of operations” at PNRRG.
There was evidence that it was O’Brien who recommended canceling Sphere Drake, and
that he drafted or at least worked on the BCI/AIC contract, the secret contract that
allowed the defendants to siphon off the “profits” of the BCI/PNRRG reinsurance
agreement. The district court did not clearly err in imposing this sentencing
enhancement.
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K. Cross-Appeal on Sentencing
The government cross-appeals, arguing that the district court erred in failing to
find that the victims were particularly vulnerable, and in calculating loss figures used for
restitution that were too low.
The government argues that injured patients were vulnerable victims under
U.S.S.G. § 3A1.1(b)(1). The district court reasoned that the “victims” were physicians
who “were exposed to claims for medical malpractice for which they were not protected
by insurance,” rather than patients. “The determination that a victim is vulnerable is a
factual finding which the district court is best suited to make.” United States v. Burgos,
137 F.3d 841, 843 (5th Cir. 1998). We see no clear error. Patients became indirect
victims of the fraud only if physicians were unable to obtain alternative insurance or
cover the losses personally. The district court did not clearly err in concluding, in effect,
that it could not hold that the defendants knew or should have known of such an indirect
harm to patients. Further, while injured patients are certainly entitled to sympathy, it
does not necessarily follow that they are “unusually vulnerable” under the guideline. See
U.S.S.G. § 3A1.1 n.2.
On the loss calculation issue, the government argues that the district court should
not have excluded about $4 million that defendants invested in other insurance companies
which ultimately failed. The district court ordered restitution of a little over $1 million
from each defendant other than Schmitz. A district court’s order imposing restitution is
reviewed for abuse of discretion. See United States v. St. Gelais, 952 F.2d 90, 97 (5th
31
Cir. 1992); see also United States v. Hughey, 147 F.3d 423, 436 (5th Cir. 1998) (“Once
we have determined that an award of restitution is permitted by the appropriate law, we
review the propriety of a particular award for an abuse of discretion.”).
The district court was concerned that the $4 million did not benefit defendants; it
was reinvested in other insurance companies that also failed and were seized by
government officials. Schmidt claims, and the government does not dispute, that of the
over $5 million that was initially transferred from the O’Keefe trust account to
defendants, all of this money was either paid to the federal government in the form of
income taxes or was seized by the Louisiana DOI. On this record we cannot say that the
district court abused its discretion in limiting restitution as it did.
AFFIRMED.
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