United States v. Dahlstrom ( 1999 )

Revised July 28, 1999
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
__________________________________________
Nos. 97-21031
97-20237
_________________________________________
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
VERSUS
KARL L. DAHLSTROM AND KARLA D. DAHLSTROM,
Defendants-Appellants.
__________________________________________
Appeals from the United States District Court
for the Southern District of Texas
__________________________________________
July 13, 1999
Before KING, Chief Judge, REYNALDO G. GARZA, and JOLLY, Circuit
Judges.
REYNALDO G. GARZA, Circuit Judge:
Karl Dahlstrom (“Dahlstrom”) and his daughter, Karla
Dahlstrom (collectively “the Dahlstroms”), appeal their
convictions and sentences for securities laws violations.
In February of 1991, Dahlstrom approached Richard Beeman
(“Beeman”), a business associate, to discuss the production and
marketing of Uni-snuff, a gel like substance designed to
extinguish oil well fires like the ones raging in Kuwait at the
time. Prompted by their discussion, Beeman organized a group of
twenty to twenty-five potential investors in Boise, Idaho, for a
meeting with Dahlstrom.
At the meeting, Dahlstrom demonstrated the product by
showing a videotaped recording of the product putting out a mock
oil well fire. He explained that as a result of Saddam Hussain’s
invasion of Kuwait, the Kuwaity government had expressed an
interest in Uni-snuff and that he was looking for investors who
would invest a minimum of $10,000. He stated at the meeting that
the product’s ingredients were approved by the Environmental
Protection Agency (“EPA”), that the product was going to be
studied by a professor at Louisiana State University, and that
contracts for the sale of Uni-snuff were currently pending in
Kuwait. He failed to disclose the risks involved with the
investment, primarily, that the product’s shelf life rendered it
commercially useless.
Approximately ten of the investors gathered at the Boise
meeting decided to invest in the product. On April 10, 1991,
Dahlstrom incorporated Inferno Snuffers, Inc. (“ISI”) for the
sole purpose of producing and marketing Uni-snuff. On April 19,
1991, ISI signed a six-month lease for office space and lab
facilities for $19,000. The office and lab facilities were in a
complex owned by Dahlstrom in Bryan, College Station. Tension
grew as costly expansions were made to the facility, company
vehicles were bought, and large salaries were paid without the
investors’ approval.
2
Dahlstrom authorized demonstrations and encouraged the
selling of securities to meet the ever increasing need for
investment money. Although prior attempts to market the product
in Mexico and in Kuwait had failed, investors were told that the
product was out of the prototype stage and that it had been
successfully tested on all types of fires. Dahlstrom was aware
that the product would separate and rot if it remained in a mixed
solution for a few days. He had also been informed that mixing
the components at the scene of an actual fire had been overly
burdensome and impractical. A report by one of the officers also
showed that, although a freshly mixed batch of Uni-snuff would
put out regular fires on land, the product did not perform as
expected on oil well fires. Despite this information, Dahlstrom
continued to hold demonstrations at ISI’s facility and covered-up
for the product’s deficiencies by mixing a fresh batch of Uni-
snuff on a daily basis. Investors and contract brokers were
continuously reassured that the product was commercially viable.
Karla Dahlstrom was in charge of sending promotional
material to potential investors. The literature falsely stated
that the company had contracts with two fire fighting companies,
when in fact it had negotiated with two contract brokers who were
trying to secure a sales contract for ISI. One of the documents
falsely stated that the product absorbed enormous amounts of heat
without dissipating, which was not true because it evaporated at
the same temperature as water. The materials also stated that
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the flashpoint of the product greatly exceeded the melting point
of aluminum, which was also not true. Claims were made that the
product was nontoxic and environmentally safe, however, samples
of the product had never been sent to the EPA and there was no
data to support this conclusion. Videotapes of the product were
continuously used as promotional material to attract investors.
The recordings falsely stated that the product had passed Kuwait
inspections and that it was the only fire fighting chemical
approved by the Kuwait Oil Company. Investors were told that
multi-million dollar contracts were being negotiated with
potential buyers and that a patent was pending. Except for a few
investors who went to the laboratory and saw the product rotting
away, most of the investors and contract brokers were misled into
believing that the product was in fact commercially viable and
that all of Dahlstrom’s assertions were true.
By July of 1991, ISI had exceeded the number of investors
permitted under securities laws for non-registered corporations.
Rather than turning investors away, investors were placed into
trusts. Richard Lopez, who had previously applied for a license
to sell public securities, became concerned that the
“piggybacking” scheme was illegal and informed the Dahlstroms
about his concerns. Karla Dahlstrom, who was in charge of
placing the investors in the trusts, complained that she was
signing documents that Dahlstrom did not want to sign. Dahlstrom
argued that the thirty-five investor limit could be circumvented
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by placing the added investors into trusts and that it was a grey
area of the law that could never be proven.1
Concerns regarding the unregistered sales of securities by
non-brokers also grew as more people invested and commissions
were paid. Two ISI employees informed Dahlstrom that a license
was required if the person selling the securities received a fee.
Dahlstrom tried to circumvent the law by designating the
commissions as “consulting fees.” Don Ballard (“Ballard”), who
had three million shares of ISI, was paid 10% commission fee off
of the $80,000 to $100,000 he raised for ISI through a trust.
Thirty to forty investors were placed under Ballard’s family
trust though they had no relationship to Ballard. Dahlstrom
hoped to remedy this problem later by merging with a public
corporation.
In September of 1991, Dahlstrom received a letter from the
State Securities Board advising him that it had information that
ISI was offering and selling securities to the general public.
The letter advised that under Texas law, securities offered for
sale to the general public had to be registered and sold by
registered dealers, unless an exemption could be found. The
letter also advised that the antifraud provisions of the
1
Inferno Engineering (“IEC”) was incorporated on July 10,
1991. Dahlstrom created the company to allow for an additional
thirty-five investors because ISI had already reached its thirty-
five investor limit under securities laws. The companies,
however, were intermingled and ISI and IEC were in reality the
same company.
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Securities Act applied to the offer and sale of securities and to
all statements and representations in connection therewith.
Shortly after receiving the letter from the State Securities
Board, Dahlstrom’s attorney suggested that they stop selling
stock until they received proper advise from a competent
securities attorney. A meeting that same month with a law firm
undeniably revealed that the money had been raised improperly and
that a recision offer was needed. The firm informed both
Dahlstrom and Karla Dahlstrom that they had to stop piggybacking
new investors and that the problem with the product’s shelf life
had to be fully disclosed. Furthermore, investors should be
given the opportunity to either: (1) sell back their stock to
ISI; or (2) keep their investment after the disclosure was made.
Despite counsel’s advice, Dahlstrom and Karla Dahlstrom
continued to sell securities through November and October of
1991. An audit later that year revealed that the company had
raised $1.6 million by selling stock through September 30, 1997,
and another $.0458 million through December of 1991. There was a
total of 706 investors who resided in twenty-five different
states. The audit reflected no sales of the product for the
company and a net loss through December of 1991, of $1,036,279
and $2,114,143 through April of 1992. It wasn’t until April of
1992 that a formal recision offer was made available to
stockholders. The company, however, did not have enough money to
fund the recision offer.
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The Dahlstrom were indicted on August 14, 1996, for
committing fraud in connection with the purchase and sale of
securities and in the offer and sale of securities (“Count II and
III”); for selling unregistered securities (“Count IV”); for
acting as an unregistered broker or dealer in the sale or
purchase of securities (“Count V”); for mail fraud (“Count VI
through Count XVI”); and for conspiracy to commit the same
violations (“Count I”) in violation of 15 U.S.C. §§ 77e(a) and
(c), 77q(a), 78o(a)(1), 78j(b), and 18 U.S.C. §§ 2, 371, 1341.
The jury convicted Dahlstrom on Counts II through VI, Counts IX
though XIV, and XVI. Karla Dahlstrom was convicted on Counts IV
and V. Dahlstrom was sentenced to seventy-eight months
imprisonment on Count II and sixty months on the remaining
counts, to run concurrently. Karla Dahlstrom was sentenced to
forty-six months imprisonment. The Dahlstroms were ordered to
jointly pay $1,997,003 in restitution.
This appeal followed.
I.
On May 11, 1992, a group of ISI employees and a Sheriff
arrived at the Dahlstroms’ place of business. The ISI employees
forced themselves into Karla Dahlstrom’s office and proceeded to
remove ISI property. The Dahlstroms argue that the bulk of the
documentary evidence used against them at trial was illegally
seized in violation of their Fourth Amendment rights. They
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contend that the Sheriff’s presence gave the unauthorized act an
air of legality and that this inhibited their attempts to retain
control of the documents. The Dahlstroms also assert that the
district court erred in finding that the ISI employees were not
acting as agents or instruments of the government.
This Court has treated a district court’s determination of
whether a person is acting as a government agent as a factual
finding. United States v. Blocker, 104 F.3d 720, 725 (5th Cir.
1997)(citing United States v. Jenkins, 46 F.3d 447, 460 (5th Cir.
1994)). We review the denial of a motion to suppress the
district court’s factual findings under the clearly erroneous
standard and its conclusion of law de novo. United States v.
Bloker 104 F.3d at 725 (citation omitted). A factual finding is
clearly erroneous if after reviewing the entire evidence this
Court is left with a firm conviction that a mistake has been
committed. Id. n.2, (citing Anderson v. City of Vessemer City,
N.C., 470 U.S. 564, 573 (1985)).
The Fourth Amendment applies only to government action.
Evidence that is retrieved by a private individual may be
admitted at a criminal trial. Walter v. United States, 447 U.S.
649, 656 (1980). It may be determined, however, that an
individual acted on behalf of the state or as an agent or
instrument of the state if the record shows that: (1) the
government has offered the individual some form of compensation
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for the search; (2) if the individual did not initiate the idea
on his own that he would conduct the search; and (3) the
government knew that the individual intended a search. United
States v. Ramirez, 810 F.2d 1338, 1342 (5th Cir.), cert. denied
sub nom. Alegria-Valencia v. United States, 481 U.S. 1072
(1987)(citing United States v. Bazan, Jr., 807 F.2d 1200, 1204
(5th Cir. 1986)).
The Dahlstroms argue that their case is similar to the
Seventh Circuit case, Soldal v. Cook County, Illinois, 506 U.S.
56, 62 (1992), where the Supreme Court held that the unauthorized
towing of a mobile home constituted a Fourth Amendment violation.
In Soldal, the Supreme Court specifically declined to address the
Seventh Circuit’s determination that the individuals’ actions
constituted state action. Id. at n.6. The Supreme Court
reviewed the Fourth Amendment issue on the premise that the state
had removed the mobile home from its location without a warrant.
After reviewing the district court’s decision and record, we
find no evidence supporting the argument that the ISI employees
acted as agents of the state. The individuals conceived the plan
on their own and solely for their own benefit. The officer’s
presence was merely requested to keep the peace. In addition,
the government did not acquire possession of the documents until
much later through proper discovery proceedings. Therefore, we
find no evidence supportive of the Dahlstroms’ argument that the
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ISI employees and the Sheriff colluded to seize the documents.
Accordingly, we hold that the Dahlstroms’ Fourth Amendment rights
were not violated.
II.
The second issue on appeal is whether the involvement of the
same attorney who represented the Securities and Exchange
Commission (“SEC”) in a underlying civil action warrants a
reversal of the convictions in this case. SEC attorney Phillip
W. Offill, Jr. (“Offill”) had previously represented the SEC in a
civil action arising from the same facts. An agreed judgment was
entered in that case which required Dahlstrom to pay
approximately $307,122. A criminal indictment was then presented
by United States Attorney Gaynelle Griffin Jones, by an through
Assistant United States Attorney Quincy L. Ollison. Offill
contributed in the government’s prosecution of the Dahlstroms.
The Dahlstroms maintain that Offill’s participation constitutes
plain error due to an appearance of impropriety by his in-depth
participation. They argue that Offill’s participation violates
their right to prosecution by an impartial prosecutor.
We review whether Offill’s participation in the criminal
proceedings warrants reversal for plain error. United States v.
Carter, 907 F.2d 484, 488 (5th Cir. 1990). Reversal for plain
error is appropriate only where the alleged error was obvious,
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substantial, and, if not corrected, would seriously affect the
fairness, integrity, or public reputation of the judicial
proceedings. United States v. Morrow, No. 96-50958, 1999 WL
329712, at *3 (5th Cir. May 25, 1999).
In Young v. United States ex rel. Vuitton et Fils. S.A., 481
U.S. 787 (1987), the Supreme Court addressed a similar issue.
The Court reversed the Second Circuit because the district court
appointed as a special prosecutor the same attorney who had
previously filed a trademark infringement claim against the
defendants. Id. at 791. The Court noted that a prosecutor’s
duties is to represent the United States and not the party that
is the beneficiary of the court order allegedly violated. Id. at
804. In Young, the court noted that “[t]he prosecutor is
appointed solely to pursue the public interest in vindication of
the court’s authority.” Id. Given that the prosecutor may be
swayed by other interests due to a conflict in roles, the Court
held that counsel for a party that is the beneficiary of a court
order may not be appointed as prosecutor in a contempt action
alleging a violation of that order. Id. at 808.
In United States ex rel. S.E.C. v. Carter, 907 F.2d 484 (5th
Cir. 1990), we reversed the district court because it appointed
as special prosecutors the same attorneys who had previously
represented the SEC in the underlying civil action. In light of
Supreme Court’s holding in Young, we turned to the Ninth
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Circuit’s holding in FTC v. American National Cellular, 868 F.2d
315 (9th Cir. 1989) for guidance. In American National Cellular,
the Ninth Circuit implemented a two-factor test in resolving that
a Federal Trade Commission attorney, who had served in both the
civil and the criminal case, had in fact served the public
interest and not a private interest. Id. at 318. The two
factors considered in reaching this decision were: (1) the level
of participation by the U.S. Attorney; and (2) the extent of the
particular agency attorney’s involvement in the underlying civil
suit. Id. We consider, once again, the Ninth Circuit’s test in
determining whether Offill’s participation in the criminal and
underlying civil suit violated the Dahlstroms’ rights to an
impartial prosecutor.
Although the record shows that Offill had participated
intensely in the civil suit, this Court is unconvinced that he
retained control over the prosecution. As stated in Carter, we
consider whether the prosecuting attorney may have been tempted
to pursue nonmeritorious claims in exchange for useful
information in their underlying civil litigation. Carter, 907
F.2d at 487. In the case before us, it is clear that the United
States Attorney’s Office (“USAO”) was in control of this case and
that Offill’s participation does not merit its reversal. In
Carter, the SEC attorney was the final decision maker and in full
control of the prosecution’s case. Id. at 488. In the present
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case, the record shows that criminal prosecution was initiated by
the USAO and that Offill was essentially assisting a
disinterested prosecutor. The Supreme Court states in Young,
“[t]he familiarity may be put to use in assisting a disinterested
prosecutor in pursing the contempt action, but cannot justify
permitting counsel for the private party to be in control of the
prosecution.” Young, 481 U.S. at 806. Since Offill did not have
control of the prosecution, we hold that the Dahlstroms’ rights
were not violated by Offill’s participation in their criminal
prosecution.
III.
The third issue raised on appeal deals with the sufficiency
of the evidence pertaining to the following counts: Counts II,
fraud in the connection with both the purchase and sale of
securities; Count III, fraud in the offer and sale of securities;
Count IV, the selling of unregistered securities; Count V, acting
as unregistered broker dealers; and Counts VI-XVI, mail fraud
violations in regard to Counts II and III.
This Court will not disturb a jury’s verdict “unless the
record demonstrates that a rational jury could not have found
each of the elements of the offense beyond a reasonable doubt.”
United States v. Peterson, 101 F.3d 378, 379 (5th Cir. 1996),
cert. denied, 520 U.S. 1161 (1997). In applying this standard,
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we must view the evidence, and all inferences reasonably drawn
from it, in the light most favorable to the verdict, regardless
of whether the conviction is based on direct or circumstantial
evidence. Id. (citing United States v. Ruggiero, 56 F.3d 647,
654 (5th Cir.), cert denied sub nom. Parker v. United States, 516
U.S. 951 (1995)).
A review of the record evidence, pertaining to each of the
points raised by the Dahlstroms in their briefs and oral
argument, reveals that the evidence was sufficient to support the
jury’s verdict on each of the counts charged. Therefore, we are
unwilling to disturb the jury’s verdict.
IV.
Dahlstrom argues that the district court erred by allowing
Elena Szilagyi (“Szilagyi”) to testify about another of
Dahlstrom’s investment funded companies. The evidence was
admitted as proof of Dahlstrom’s knowledge of securities law and
the absence of a good-faith mistake. The district judge gave a
standard 404(b) instruction, telling the jury to only consider
the evidence to determine intent or motive. Szilagyi described
how Dahlstrom raised money from investors for a company Dahlstrom
created called OWPEC by demonstrating a chemical formula she
developed to dissolve paraffin in oil fields. She testified that
OWPEC was funded by investors shortly after the Exxon Valdez oil
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spill and that OWPEC was merged with another company in order to
take the stock public. Dahlstrom argues that the prejudicial
effect of the testimony outweighs the probative value of the
testimony. Thus, he maintains that this case must be granted a
new trial.
This Court reviews a district court's ruling regarding the
admissibility of evidence for abuse of discretion and will
reverse a district court's ruling only if it affects a
substantial right of a party. United States v. Ramirez, No. 97-
11208, 1999 WL 261638 at *4 (5th Cir. May 3, 1999).
In order to be admissible under the Federal Rule of Evidence
404(b), the evidence of the defendant’s prior bad acts must be:
(1) relevant to some issue other than the defendant’s character;
and (2) its probative value must be greater than its potential to
unfairly prejudice the jury. United States v. Gonzalez-Lira, 936
F.2d 184, 189 (5th Cir. 1991) (citing United States v. Beechum,
582 F.2d 898, 911 (5th Cir. 1978)(en banc), cert. denied, 440
U.S. 920 (1979)).
A review of the record reveals that the admitted testimony
demonstrates a scheme almost identical to the Uni-snuff plan.
The similarity between the plans is probative of Dahlstrom’s
knowledge or intent while he was actively seeking funding from
investors through ISI. Due to these similarities, coupled with
the fact that the district court specifically instructed the jury
15
that the testimony was admissible only as to evidence of a common
scheme or plan and not as to Dahlstrom’s character, the evidence
was in fact more probative than it was prejudicial. Therefore,
we hold that the district court did not abuse its discretion by
allowing Szilagyi’s testimony into court.
V.
Dahlstrom asserts on appeal that the district court erred by
assessing $1,997,003 against him and by finding that he had
abused a position of trust. Dahlstrom maintains that a twelve
point increase in the presentence report (“PSR”) was erroneous
because the appropriate amount of loss was $145,320. This
represents the amount he personally received as wages and as
expense reimbursements. Dahlstrom’s principal contention is that
ISI and IEC were not worthless companies, and therefore the
district judge should have offset their value against the
deposited amounts. He argues against a two point increase in the
PSR by stating that his control over ISI and IEC should not be
determinative of the trust issue. Dahlstrom contends that the
enhancement should not be applied because he did not owe nor
breach any fiduciary duties.
A sentencing court’s factual findings are reviewed for clear
error. See United States v. Navarez, 38 F.3d 162, 166 (5th Cir.
1994), cert. denied, 514 U.S. 1087 (1995). As long as the
16
finding is plausible in light of the record as a whole, it is not
clearly erroneous. United States v. Sowels, 998 F.2d 249, 251
(5th Cir. 1993), cert. denied, 510 U.S. 1121 (1994).
Interpretations of the Sentencing Guidelines are reviewed de
novo. See United States v. Thomas, 973 F.2d 1152 (5th Cir.
1992).
In United States v. Oates, 122 F.3d 222, 225 (5th Cir.
1997), we stated, “[t]his Court has long adhered to the view,
supported by the relevant application note, that the amount of
loss for the purpose of determining a base offense level in
United States Sentencing Guidelines § 2F1.1(b)(1) is the dollar
amount placed at risk by a defendant’s fraudulent scheme or
artifice.” We interpret comment number seven of § 2F.1 as
specifically stating that the defendant will be held responsible
for the amount of injury he attempted to inflict, even if that
loss is greater than the actual loss. Id.
As to the two point increase for Dahlstrom’s position of
trust within the company, we determine that an abuse of position
of trust is imposed if a defendant’s job places the defendant in
a superior position to commit a crime and the defendant takes
advantage of that superior position to facilitate a crime.
United States v. Brown, 7 F.3d 1155, 1161 (5th Cir. 1993). In
this case, Dahlstrom occupied a position of trust as president
and CEO of ISI. His unique position contributed to the
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commission and concealment of the crimes and toward the
misallocation of ISI’s investment money. Dahlstrom breached his
fiduciary duty to the investors by failing to disclose the
blatant legal problems that afflicted ISI and by failing to
disclose the commercial ineffectiveness of the product.
Accordingly, we hold that the district court did not abuse
its discretion by attributing a twelve point increase against
Dahlstrom for the money that was put at risk of loss and a two
point increase for the position he held within the company.
VI.
The final issue on appeal is whether the district court
erred by ordering that Dahlstrom and Karla Dahlstrom each pay a
total of $1,997,003 in restitution fees. The government argues
that the Victim and Witness Protection Act (“VWPA”), 18 U.S.C. §
3663, authorizes restitution when the subject offense involves a
scheme, conspiracy, or pattern of criminal activity. The
Dahlstroms contend that there is no legal basis for the district
court’s orders and that even if § 3663 were applicable, there is
insufficient evidence to show that they were involved in a common
plan or scheme to defraud the investors.
We review the legality of the district court’s order of
restitution de novo. United States v. Hughey 147 F.3d 423, 436
(5th Cir.), cert. denied, 119 S. Ct. 569 (1998)(citing United
18
States v. Chaney, 964 F.2d 437, 451 (5th Cir. 1992)). “Once we
have determined that an award of restitution is permitted by the
appropriate law, we review the propriety of a particular award
for abuse of discretion.” Id.
A review of the record demonstrates that all of ISI’s
investors were victims of a common scheme to be defrauded. We
note that although in two of Dahlstrom’s counts he was acquitted,
there is an overwhelming amount of evidence that shows that all
of the investors were affected by Dahlstrom’s actions. Since the
whole of the investors shared a common interest in ISI and the
evidence is sufficient to establish that Dahlstrom’s actions
affected all of their investments, we conclude that a common plan
to defraud existed. Therefore, we hold that the district court
did not abuse its discretion by ordering Dahlstrom to pay
restitution.
A review of the record shows that Karla Dahlstrom is subject
to a supervised release as part of her sentence. In United
States v. Bok, 156 F.3d 157, 166 (2d. Cir. 1998), the court
determined that although restitution may not be directly
permitted under § 3663(a), a district court may order restitution
within the context of a supervised release. Title 18 U.S.C. §
3583(d) explicitly provides that the court may order, as a
further condition of supervised release, “any condition set forth
as discretionary condition of probation in § 3563(b)(1) through
19
(b)(10) and (b)(12) through (b)(20), and any other condition it
considers to be appropriate.” 18 U.S.C. § 3583(d). One of the
discretionary conditions referred to in § 3563(b) is the
requirement that the defendant make restitution to a victim of
the offense. 18 U.S.C. § 3563(b)(2). The Second Circuit
interpreted §§ 3583(d) and 3563(b) to permit a restitution award
regardless of the limitations set out in § 3663(a). Id. We
agree with the Second Circuit’s rationale.
In light of the fact that Karla Dahlstrom is subject to a
supervised release, and the presence of evidence in the record
supporting the finding that she was involved in a common plan or
scheme to defraud the investors, we hold that the district court
did not abuse its discretion by ordering her to pay restitution
to the victims.
Accordingly, for the aforementioned reasons, we AFFIRM the
district court’s decision in all respects.
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