United States v. Lee, Kenneth

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 06-3029, 06-3040 and 06-3438
U NITED S TATES OF A MERICA,
Plaintiff-Appellee,
v.
K ENNETH L EE AND M YUNG O. L EE,
Defendants-Appellants.
Appeals from the United States District Court
for the Northern District of Illinois, Western Division.
Nos. 05 CR 50007 and 05 CR 50010—Philip G. Reinhard, Judge.
A RGUED JANUARY 9, 2008—D ECIDED M ARCH 11, 2009
Before W OOD , S YKES, and T INDER, Circuit Judges.
T INDER, Circuit Judge. This case involves two
defendants, Myung Ok Lee and Kenneth Lee.1 The Lees
are unrelated and were tried in separate cases con-
solidated here on appeal. While separate cases, they
involve similar facts and overlapping legal issues. Both
1
To avoid confusion we will refer to Myung Ok Lee as “Ms.
Lee” and Kenneth Lee as “Mr. Lee.”
2 Nos. 06-3029, 06-3040 and 06-3438
defendants were involved with “spas” which were fronts
for prostitution businesses in the Rockford, Illinois area.
Both were charged, in separate but similar two-count
superceding indictments, with conspiracy to use inter-
state facilities in violation of 18 U.S.C. §§ 371 and 1952(a)
as Count One and conspiracy to commit money
laundering in violation of 18 U.S.C. § 1956(h) as Count
Two. They were convicted, following jury trials, on both
Counts, and they now appeal. The Lees make a joint
argument concerning “proceeds” in challenging the
money laundering conspiracy convictions, and they
argue that identical errors occurred in both of their sen-
tencing calculations. Mr. Lee independently argues that
there was insufficient evidence with respect to his mem-
bership in the conspiracies in both Counts, and Ms. Lee
contests the admission of witness Anna Kim’s allegedly
“unfairly prejudicial” testimony in her trial.
I. Background
The spas and prostitution businesses with which the
Lees were involved were all operated in the same manner.
Upon arrival, customers would pay the receptionist an
entrance fee for a massage. This would be recorded in the
spa’s “books.” After making special arrangements in the
individual “massage” rooms, customers could then pay
an additional fee directly to a “masseuse” for sex acts. The
masseuses would record these exchanges in the books but
with a missing zero—thus, an additional $200 was re-
corded as $20. Some customers would pay these extra
fees and/or the entrance fees with credit cards. The cards
Nos. 06-3029, 06-3040 and 06-3438 3
were swiped through credit card machines connected
to interstate telephone facilities to receive payment autho-
rization. These funds were deposited into business check-
ing accounts. The masseuses split the prostitution profits
with the owners/operators 50/50, with the masseuses’
portion usually taken out of the available cash. The
funds deposited in the business accounts were used to
pay for various business and promotional expenses,
including utilities, rent, and advertising.
Mr. Lee was involved in two spas—the Pine Tree Spa
and the Paradise Health Spa. Young Ja Hwang was in
charge of both businesses, Pine Tree between June 2002
and October 2003, and Paradise between January 2004 and
February 2005. Eun Sook Choi, Hwang’s sister-in-law,
served as a front for the business, signing the building
leases and serving as the signatory on the Paradise bank
account. Mr. Lee, who was romantically involved with
Hwang, assisted in the operation of these massage par-
lors. He often translated for her and other employees who
spoke Korean. He also did construction work and mainte-
nance on the businesses’ premises and was involved with
obtaining licenses and massage permits for the spa. Mr.
Lee would also frequently send postal money orders on
behalf of the masseuses. More details of his involvement
are discussed below.
Ms. Lee owned and operated the Tokyo Oriental Health
Spa as a front for a prostitution business between Decem-
ber 2002 and February 2005. She ran the day-to-day
operations including paying the bills, arranging advertis-
ing, hiring masseuses, and so forth. Ms. Lee’s co-defendant,
4 Nos. 06-3029, 06-3040 and 06-3438
Mia Deboer, did the cooking and cleaning and collected
money from the masseuses when Ms. Lee was out of town.
In both cases the use of the credit card machines and
interstate telephone facilities to promote the prostitution
businesses served as the basis for the convictions under
18 U.S.C. §§ 371 and 1952. The payments out of the busi-
ness checking accounts were used to establish the
money laundering violations.
II. “Proceeds”
Both Ms. Lee and Mr. Lee challenge their convictions
under the money laundering statute. They argue that
under the term “proceeds”—meaning “net” rather than
“gross” as outlined in our circuit cases Scialabba and Santos
and recently affirmed by the Supreme Court 2 —there was
insufficient evidence for conspiracy to commit money
laundering. In reviewing for sufficiency of the evidence,
we consider the evidence in the light most favorable to
the government, drawing all reasonable inferences in the
government’s favor. United States v. Morris, 498 F.3d 634,
637 (7th Cir. 2007). We will reverse only if a rational trier
of fact could not have found the essential elements of the
crime beyond a reasonable doubt. United States v. Malone,
484 F.3d 916, 920 (7th Cir. 2007).
The evidence used by the government at both trials to
establish the money laundering violations focused on
2
United States v. Scialabba, 282 F.3d 475 (7th Cir. 2002); Santos
v. United States, 461 F.3d 886 (7th Cir. 2006), aff’d, United States
v. Santos, 128 S. Ct. 2020 (2008).
Nos. 06-3029, 06-3040 and 06-3438 5
expenditures made out of the business checking account
for each spa. Records were also introduced from the
publications in which the spas advertised. At both trials,
Mr. Murray, an IRS accountant, testified regarding the
checking accounts and provided a summary of the with-
drawal activity. The funds in these accounts consisted,
in large part, of the deposits from the credit card payments
by massage parlor customers. From the summaries, it
appears that a substantial portion of the funds in the
business checking accounts was spent on advertising,
and in Mr. Lee’s case there was also evidence that Mr. Lee
told FBI Agent David Childre in a recorded conversation
that they spent about $18,000 a month on advertising.
Other payments out of the accounts included rent, phone
bills, and some wages.
The relevant language from the money laundering
statute is as follows:
(a)(1) Whoever, knowing that the property in-
volved in a financial transaction represents the
proceeds of some form of unlawful activity, con-
ducts or attempts to conduct such a financial
transaction which in fact involves the proceeds of
specified unlawful activity—(A)(i) with the intent
to promote the carrying on of specified unlawful
activity . . . ; or (B) knowing that the transaction is
designed in whole or in part—(i) to conceal or
disguise the nature, the location, the source, the
ownership, or the control of the proceeds of speci-
fied unlawful activity . . . shall be sentenced . . . .
18 U.S.C. § 1956(a)(1). Here the defendants were prose-
cuted under subpart (a)(1)(A) for promotion, rather than
6 Nos. 06-3029, 06-3040 and 06-3438
under (B) for concealment. Accordingly, to make its case,
the government had to show that the defendants were
in fact part of the conspiracy to launder money,3 and that
the defendants “(1) conducted a financial transaction
with the proceeds of an illegal activity; (2) knew the
property represented illegal proceeds; and (3) conducted
the transaction with the intent to promote the carrying on
of the unlawful activity.” Malone, 484 F.3d at 920 (quoting
United States v. Febus, 218 F.3d 784, 789 (7th Cir. 2000)).
Under the first prong, the payments out of the business
checking accounts clearly meet the definition of “financial
transaction.” It is also clear, since the credit card prostitu-
tion fees were deposited into the accounts, that the
money was from an “illegal activity.” (No one contests
that the “extras” offered by the masseuses amounted to
illegal prostitution under Illinois law.) It is equally obvi-
ous, under the third prong, that the advertising pur-
chases promoted the carrying on of the use of interstate
telephone facilities in aid of the commission of illegal
prostitution operations. “[T]he promotion element can be
met by ‘transactions that promote the continued pros-
perity of the underlying offense’ . . . .” Malone, 484 F.3d
at 921 (quoting Febus, 218 F.3d at 790); see also Santos v.
United States, 461 F.3d 886, 893 (7th Cir. 2006) (explaining
that reinvesting net income to promote the carrying on
of the criminal operation constitutes money laundering)
3
The conspiracy issue is discussed separately in the next sec-
tion regarding Mr. Lee. Ms. Lee did not put forth any argu-
ment challenging the conspiracy aspect of this charge.
Nos. 06-3029, 06-3040 and 06-3438 7
aff’d, United States v. Santos, 128 S. Ct. 2020 (2008). Pur-
chasing advertising inherently promoted the prosperity
of the underlying offense. The government also alleges that
the “future rent” payments out of the account also
amounted to money laundering. Those payments clearly
satisfy the requirement that the transactions were made
with the intent to promote the carrying on of the underly-
ing illegal operation as well. See Malone, 484 F.3d at 921
(“[A]t least some activities that are part and parcel of the
underlying offense can be considered to promote the
carrying on of the unlawful activity.”); see also Febus,
219 F.3d at 790.
The more difficult issue before us is whether the gov-
ernment established that the transactions involved
illegal “proceeds.” We spoke at great length on the mean-
ing of the statutory term “proceeds” in Scialabba and Santos.
In Scialabba the underlying business enterprise was an
illegal coin gambling business. Scialabba, 282 F.3d at
475-76. Participants put coins into gaming machines and
then received onscreen credits if they won. They could
continue to play with these credits or redeem them at
retail outlets for cash. Id. The acts in question, for launder-
ing purposes, were giving some of the money in the
coin boxes to the outlets’ owners and spending some of the
money to meet business expenses like leasing the video
machines and obtaining licenses. Id. We found, relying
on the rule of lenity, that “at least when the crime entails
voluntary, business-like operations, ‘proceeds’ must be
net income; otherwise the predicate crime merges into
money laundering (for no business can be carried on
without expenses) and the word ‘proceeds’ loses opera-
8 Nos. 06-3029, 06-3040 and 06-3438
tional significance.” Id. at 475, 477. We found that these
were not “proceeds” because they did not amount to
profit. The money laundering convictions were vacated.
We viewed Santos essentially as a head-on re-litigation
of Scialabba and declined to overrule Scialabba. Santos, 461
F.3d at 888-89. In Santos the defendant operated an
illegal lottery—a “bolita.” Gamblers would place bets with
bolita runners, who turned the money over to collectors,
who, in turn, gave the money to Santos. The runners, the
collectors, and the winners all were paid out of the total
amount collected. Id. at 888. The district court vacated
the convictions following Scialabba. On appeal we
found that these transactions were “conceptually indistin-
guishable” from those in Scialabba. Id. at 891. We acknowl-
edged that the First, Third, and Eighth Circuits had
concluded differently. Id. at 891-92. We also recognized
the legitimacy of the government’s contention that there
would be evidentiary problems in reading “proceeds” to
mean net income as well as disparities in the sentences
for the underlying offense and the money laundering. Id.
at 893. But none of these concerns warranted overturning
Scialabba. Id. at 893-94. We did clarify and confirm that
the statute does indeed prohibit both concealment of net
proceeds and the reinvestment of net proceeds to
promote the illicit activity; Scialabba had not suggested
otherwise. Id. at 892-93; see also 18 U.S.C. § 1956(a)(1)(A)(i),
(B)(i).
In affirming our decision in Santos, the Supreme Court
agreed that an illegal lottery’s payments to winners and
employees are not “proceeds” within the meaning of
Nos. 06-3029, 06-3040 and 06-3438 9
§ 1956(a)(1). 128 S. Ct. at 2031. A plurality of four Justices
also adopted Scialabba’s definition of proceeds as a busi-
ness’ net “profits,” rather than its gross “receipts.” Id. at
2025 (plurality opinion). However, in his controlling
concurrence, Justice Stevens declined to “pick a single
definition of ‘proceeds’ applicable to every unlawful
activity.” Id. at 2032 (Stevens, J., concurring). For Justice
Stevens, the meaning of “proceeds” should turn on
whether legislative history indicates that Congress in-
tended to reach the gross revenues of a specified crime.
Id. at 2032.
Finally, in an opinion released today, United States v.
Hodge, Nos. 06-3458 & 06-3052 (7th Cir. Mar. 11, 2009), we
examine the application of § 1956(a)(1) to prostitution
businesses similar to the spas operated by the Lees. The
government in Hodge obtained a jury conviction of
money laundering after introducing evidence of the
businesses’ rent, utilities, and advertising expenses.
Hodge, slip op. at 3. We conclude that the evidence of
rent and utilities is insufficient to support the convic-
tion. These costs are essential operating expenses, which,
under both Scialabba and Santos, do not count as “pro-
ceeds” within the meaning of § 1956(a)(1). Id. at 3-4.
We also note in Hodge that the question of whether the
businesses’ advertising expenses may qualify as proceeds
is more difficult. Although ordinary advertising costs
would not fall within Scialabba’s net-profits definition of
proceeds, treating these costs as proceeds may be consis-
tent with Justice Stevens’ crime-specific interpretation of
§ 1956(a)(1). Id. at 4-6. Nonetheless, we do not decide
10 Nos. 06-3029, 06-3040 and 06-3438
whether the advertising expenses in Hodge count as
proceeds because of a problem with the jury’s general
verdict. The jury instructions did not distinguish
between advertising and other expenses. Thus, the jury
may have convicted based on evidence of the businesses’
rent and utilities—expenses that, as a matter of law, do
not constitute proceeds under § 1956(a)(1). Id. at 8.
Because it is impossible to tell whether the jury relied
on the legally insufficient evidence of rent and utilities
or the possibly legally sufficient evidence of advertising
costs, we conclude that the general verdict in Hodge cannot
stand. Id. (citing Yates v. United States, 354 U.S. 298 (1957)).
With this backdrop, the issue now before the court in the
instant case is whether there was sufficient evidence of
financial transactions involving proceeds upon which to
convict the Lees. In these massage parlor operations, the
masseuses’ take of the prostitution money was paid to
them primarily out of the spas’ cash. The cash was also
used to buy “supplies.” The credit card income and some
cash were deposited in the businesses’ accounts. Various
bills were paid out of the accounts. These payments
appear to include bills, some wages, rent, and advertising
expenses, according to the checking account summaries
submitted by the government.
As in Hodge, we find that the evidence in these two
cases of the spas’ rent, utilities, and wages is insufficient
to support a conviction of money laundering. Because
these costs are regular expenses that are essential to
the spas’ operation, they are not “proceeds” within the
meaning of § 1956(a)(1).
Nos. 06-3029, 06-3040 and 06-3438 11
The government argues that the evidence showed that
future rent payments came out of net rather than gross
proceeds because they represented reinvestment transac-
tions, rather than past operational expenses. Under
this view, net proceeds include all of the revenues left
after the spas paid the prostitutes’ salaries and bills for
past expenses.
This temporal approach for distinguishing between net
and gross proceeds is inconsistent with Scialabba’s and
Santos’ focus on net profits. An ordinary and necessary
business expense does not come out of net profits merely
because it relates to a future event. And paying rent for
a physical location to house a business is rightly con-
sidered an ordinary and necessary expense. It is not
logical or persuasive to say, as the government asserts,
that simply because rent is paid for the upcoming
month, before use, and utilities are paid at the end of the
month, for the amount used, that one is paid for with
gross income and one paid for with net. The issue is
whether the payments were reinvestment of net proceeds
to promote the carrying on of the operation or the act of
paying the operation’s expenses out of gross income.
We also note that this is not an instance where rent
was paid months in advance as some sort of capital
investment, or where an operation expanded and rented
new space, or even where a business had a month-
to-month tenancy with each month the decision being
made anew whether to invest their profits into another
month of business or to cash out (all cases in which, at
least arguably, rent might be properly considered paid
12 Nos. 06-3029, 06-3040 and 06-3438
out of net income). Rather, the government’s account
summaries simply show regular, approximately monthly,
payments. This is how rent is typically paid under a
lease, each month in advance.
Although the spas’ rent clearly does not qualify as
“proceeds,” the question of whether the spas’ advertising
expenses qualify is more difficult in light of the Supreme
Court’s decision in Santos. As we explain in Hodge, treating
the advertising costs of certain illegal operations as
“proceeds” may be consistent with Justice Stevens’
crime-specific interpretation of § 1956(a)(1). Hodge, slip
op. at 6-8. And even under the Santos plurality’s net-
profits definition of proceeds, there may be some situa-
tions where advertising could be paid for out of “net”
income. For example, if a business decides to expand
into a new market—that initial expenditure on new
advertising might be a “reinvestment of net proceeds.” Cf.
Santos, 128 S. Ct. at 2029 n.7 (“[I]t will be up to the Gov-
ernment to select that period of time for which it can
most readily establish the necessary elements of the
charged offenses, including (if money laundering is one
of them) profitability.”); id. at 2029 (“[T]he Government
will have to prove the profitability of just three offenses,
selecting (again) those for which profitability is clearest.
And of course a prosecutor will often be able to charge
the underlying crimes instead of the overarching enter-
prise crime.”).
In the Lees’ cases, however, it is unnecessary to decide
whether the spas’ advertising expenses may qualify as
proceeds because, as in Hodge, we encounter a problem
Nos. 06-3029, 06-3040 and 06-3438 13
with the juries’ general verdicts. The jury instructions in
these cases did not distinguish between advertising
expenses and other regular business expenses. It is im-
possible to tell whether the juries based their verdicts
on the legally insufficient ground that rent and utilities
are net proceeds, or the possibly legally sufficient ground
that advertising costs are net proceeds. Thus, the juries’
general verdicts cannot stand. See Yates v. United States,
354 U.S. 298, 311-12 (1957).
The government points out that the jury instructions
in the Lees’ cases correctly defined “proceeds” as “net
rather than gross proceeds.” While that is a notable
distinction from the instructions in Hodge, see Hodge,
slip op. at 8, the instructions were not specific enough
to tell the juries that ordinary rent and utilities do not
count as net proceeds. So if the government’s theory at
trial was that evidence of rent and utilities could support
a conviction of money laundering, the instructions do not
permit us to assume that the juries did not rely on that
theory to convict the Lees. Cf. United States v. Van Allen,
524 F.3d 815, 824 (7th Cir. 2008) (rejecting the argument
that a conviction for concealment of assets was based on
a legally insufficient theory, where the government
did not argue that theory to the jury); United States v.
Watson, 525 F.3d 583, 590 (7th Cir. 2008) (concluding that
a line in the government’s indictment that contained a
legally insufficient theory of jurisdiction did not
invalidate a Hobbs Act conviction, where the govern-
ment “never even mentioned” that theory to the jury).
The prosecution in these cases introduced evidence of
the spas’ advertising expenses alongside evidence of
14 Nos. 06-3029, 06-3040 and 06-3438
rent and utilities, and no argument that advertising in
particular was paid for out of net rather than gross
income was ever presented to the juries. (In fact the
account summaries submitted by the government in
both cases included utility payments—which the govern-
ment now concedes on appeal were payments out of
gross income—right along with rent payments and ad-
vertising payments. At no point did the prosecution
argue which of these items were paid for with net or
which with gross.) On these facts, the government’s
theory of its money laundering case was that all of the
spas’ business expenses could be “proceeds” within the
meaning of § 1956(a)(1). And the jury instructions, while
correctly referring to “net proceeds,” were not specific
enough to tell the juries which of the government’s evi-
dence they could rely on. Because the juries may have
based their general verdicts on the legally insufficient
theory that rents and utilities count as proceeds, Yates
requires that these verdicts be set aside.
III. Mr. Lee’s Conspiracy Challenges
Mr. Lee makes two other sufficiency-of-the-evidence
arguments. Here, too, in reviewing for sufficiency of the
evidence, we consider the evidence in the light most
favorable to the government, drawing all reasonable
inferences in the government’s favor, Morris, 498 F.3d at
637, reversing only if a rational trier of fact could not
have found the essential elements of the crime beyond a
reasonable doubt, Malone, 484 F.3d at 920. Mr. Lee
argues that there was insufficient evidence to convict
Nos. 06-3029, 06-3040 and 06-3438 15
him of the money laundering conspiracy at all (regard-
less and apart from the net versus gross argument, dis-
cussed above), and that there was insufficient evidence to
convict him of the conspiracy to use interstate facilities.
Basic to both claims, he argues the evidence was insuffi-
cient to establish that he knowingly joined the con-
spiracies in question. We need not consider his argument
with respect to the money laundering claim, due to our
discussion supra in which we determined that conviction
could not stand. We disagree, however, with Mr. Lee’s
argument with respect to the conspiracy to use interstate
facilities, finding ample evidence on which a jury could
conclude he knowingly joined and participated in the
charged conspiracies.
In order to prove Mr. Lee guilty of conspiracy, the
government had to show (1) that the conspiracy charged
in the superceding indictment existed; (2) that Mr. Lee
knowingly became a member of the conspiracy with
an intention to further the conspiracy; and (3) that an
overt act was committed by at least one conspirator in
furtherance of the conspiracy. E.g., United States v. Hickok,
77 F.3d 992, 1004-05 (7th Cir. 1996). Mr. Lee disputes the
second element. He argues that he was merely a handy-
man and a translator and that he did not agree to use
interstate facilities. To the contrary, however, the gov-
ernment showed that Mr. Lee was intimately involved
in the entire massage parlor enterprise.
Mr. Lee was frequently at the spas and contributed in
many ways. There was testimony at trial that he did
construction and remodeling for the spas. Mr. Lee dealt
16 Nos. 06-3029, 06-3040 and 06-3438
with the Rockford City Zoning Division on zoning and
licensing issues for the spas. He helped the masseuses by
sending postal money orders for them, usually charging
1%. He would pick the masseuses up at the airport. Co-
defendant Mi Ran Park testified that Mr. Lee helped
her learn to use the credit card machine and placed news-
paper ads when Park later began managing the spa
under a different owner. His number was also posted
next to the phones/credit card machine along with
Hwang’s, from which it could be inferred that he was
someone the employees could call for assistance or to
report problems. A detective recovered $77,000 in cash,
some Mr. Lee’s and some Hwang’s, from a safe deposit
box in Mr. Lee’s name; Mr. Lee told FBI Agent Randall
Sealby these funds derived from the Pine Tree Spa.
During meetings with undercover FBI Agent David
Childre, Mr. Lee described the business in detail, fre-
quently using the term “we” and specifically explaining
that they do a lot of credit card business and that they
spend close to $18,000 a month on advertising. Mr. Lee
also participated by translating for Hwang and other
employees and attended meetings with Hwang.
This was enough for a jury to reasonably conclude he
joined the interstate facilities conspiracy with full knowl-
edge and intent that the prostitution business would be
advanced with the usage of the credit card machine.
Importantly, the government did not have to prove that
Mr. Lee himself used the credit card machine. It is well
established that circumstantial evidence is sufficient to
establish membership in the conspiracy. See, e.g., United
States v. Miller, 405 F.3d 551, 555 (7th Cir. 2005) (“The
Nos. 06-3029, 06-3040 and 06-3438 17
government may establish these elements through ‘cir-
cumstantial evidence and the reasonable inferences
therein concerning the parties’ relationships, their overt
acts, and their overall conduct.’ ” (quoting United States v.
Navarrete, 125 F.3d 559, 562 (7th Cir. 1997))). One could
easily infer based on his statements and evidence of his
extensive involvement that Mr. Lee knowingly agreed to
and furthered the conspiracy to use the credit card ma-
chines in carrying on the prostitution business. Particu-
larly, his statements alone about using credit cards and
the testimony about him teaching someone to use the
machine were sufficient evidence from which the jury
could infer he knowingly became a member of that con-
spiracy.
Given the defendant’s very heavy burden here on
appeal and the amount of evidence showing that he was
involved in the entire massage parlor business, he
simply cannot prevail on this argument.
IV. Admissibility of Rule 404(b) Evidence as to
Ms. Lee
Ms. Lee challenges certain evidence admitted under
Federal Rule of Evidence 404(b). At Ms. Lee’s trial, the
government called Insika “Anna” Kim to testify. Anna
Kim had been a “masseuse” at the Tokyo Spa in
Rockford and at the Rainbow Spa that Ms. Lee purportedly
operated in Toledo, Ohio, from 1999-2000. Ms. Lee filed a
pretrial motion in limine to keep out Kim’s testimony
regarding the Rainbow Spa. Ms. Lee’s objection was to
18 Nos. 06-3029, 06-3040 and 06-3438
the pattern/propensity nature of the testimony, arguing
that it was prejudicial when Ms. Lee was charged only
in connection with the Tokyo Spa in Rockford. The gov-
ernment asserted that the evidence was admissible
under Rule 404(b). Ms. Lee’s defense was going to
include an argument that she was unaware of the prostitu-
tion at the Tokyo Spa. Therefore, the government argued
to the district judge, Ms. Lee’s prior experience became
relevant and Kim’s testimony should be admitted for
that limited purpose of demonstrating knowledge. The
district judge decided that the evidence would be ad-
missible under Rule 404(b) with a limiting instruction.
Ms. Lee did make such a defense as early as opening
statements, and Kim did testify. The judge gave the jury
a limiting instruction, tracking the familiar Seventh
Circuit pattern criminal instruction 3.04, both at the time
of the testimony and again following closing statements.
Kim testified about the operations of both the Toledo
and Rockford spas, explaining the bookkeeping system
at both spas, how condoms were obtained and disposed
of at the Rockford spa, and so forth. Kim’s testimony,
both on direct and cross-examination, also included
references to “forced sex.” She mentioned during her
direct examination that she was pushed into a room on
her first day at the Rainbow Spa in Toledo to observe
and then on subsequent days to perform sexual acts. On
cross-examination, she elaborated further, even stating
she was put in metal chains.
Ms. Lee now argues on appeal that Kim’s “forced sex”
testimony should have been excluded pursuant to Rules
Nos. 06-3029, 06-3040 and 06-3438 19
403 and 404(b), and that given the “shocking and devastat-
ing” nature of the testimony, the limiting instruction
was not enough to counter the prejudice. The district
court admitted Kim’s Rainbow Spa testimony under
Rule 404(b). We review for abuse of discretion. United
States v. Ross, 510 F.3d 702, 713 (7th Cir. 2007). Admissibil-
ity under Federal Rule of Evidence 404(b) is governed by
a four-part test: Whether,
(1) the evidence is directed toward establishing a
matter in issue other than the defendant’s propen-
sity to commit the crime charged;
(2) the evidence shows that the other act is similar
enough and close enough in time to be relevant to
the matter in issue;
(3) the evidence is sufficient to support a jury
finding that the defendant committed the similar
act; and
(4) the probative value of the evidence is not
substantially outweighed by the danger of unfair
prejudice.
Id.; United States v. Zapata, 871 F.2d 616, 620-21 (7th Cir.
1989). Under all four prongs, the district judge’s conclu-
sion to admit Kim’s Rainbow Spa testimony in general
was correct. The evidence went directly to Ms. Lee’s
knowledge—an issue other than the defendant’s pro-
pensity to commit the crime charged. Ms. Lee herself
made knowledge an issue by arguing she was unaware of
the prostitution. Thus, under the first prong, Kim’s testi-
mony was properly admitted to prove knowledge and
20 Nos. 06-3029, 06-3040 and 06-3438
lack of mistake or accident. The second prong was also
met; the Toledo spa operation was practically identical
in operation to the Rockford spa at issue in the present
case. The time frame was within two years, close enough
to be relevant to the matter in issue. See, e.g., United States
v. Best, 250 F.3d 1084, 1092 (7th Cir. 2001) (finding a
prior identical cocaine offense two years earlier was
sufficiently similar); United States v. Tringali, 71 F.3d
1375, 1379 (7th Cir. 1995) (concluding evidence within
ten years was admissible to show present knowledge).
Kim’s first-hand testimony was sufficient to satisfy prong
three, and Ms. Lee did not argue otherwise. The fourth
prong is the most contentious.
Ms. Lee argues that Kim’s testimony was overly prejudi-
cial. The district court judge concluded that it was not. He
acknowledged that some people may not like that kind of
operation, but that the probative value was not substan-
tially outweighed by the danger of unfair prejudice. We
agree with that determination. Admitting testimony
regarding Ms. Lee’s business at the Rainbow Spa did not
present unfair prejudice—it was essentially the very
same behavior she was charged with in connection
with the Rockford spa operation. Eliciting testimony
about her previous experience in an identical operation
to show her knowledge is not such that its probative
value would be substantially outweighed by the danger of
unfair prejudice. Therefore, as to Kim’s testimony about
the Rainbow Spa generally, the district court’s Rule 404(b)
determination was correct.
In her brief, Ms. Lee focuses on the prejudice of the
“forced sex” testimony in particular. The fourth prong
Nos. 06-3029, 06-3040 and 06-3438 21
of the Rule 404(b) test excludes evidence only when the
danger of unfair prejudice substantially outweighs the
probative value. The fact that Kim said she was pushed
into a room to watch and/or engage in sexual acts in the
Rainbow Spa is probative, establishing Ms. Lee’s knowl-
edge of the spa prostitution, as we already discussed.
Arguably the forced aspect of it is more prejudicial than
prostitution generally as it could be construed as rape.
Furthermore, that specific testimony added little new
probative evidence, since Kim’s other testimony re-
garding the Rainbow Spa had already established
Ms. Lee’s knowledge. However, given the circumstances,
which we discuss further in the following paragraphs,
there was simply no true “danger of unfair prejudice” that
would induce the jury to decide the case on some
improper basis. Admitting the testimony was not plain
error.4 Morever, even if we were to conclude that the
4
It appears that Ms. Lee really did not preserve her objection to
the “forced sex” testimony. As admitted at oral argument, no
objection was raised during trial when the forced-sex testimony
came out. Ms. Lee argues that the issue was preserved via her
pretrial motion in limine to preclude Kim’s Rainbow Spa
testimony altogether. This, however, was insufficient because
with that objection came no indication that there would be any
testimony about forced sex—Ms. Lee simply objected to the
pattern/propensity aspect of the testimony. See United States v.
Swan, 486 F.3d 260, 264 (7th Cir. 2007); Wilson v. Williams,
182 F.3d 562 (7th Cir. 1999); Fed. R. of Evid. 103 (requiring a
party to state a “specific ground” of the objection). The ramifica-
tions of failing to preserve the issue for appeal is to downgrade
(continued...)
22 Nos. 06-3029, 06-3040 and 06-3438
forced-sex aspect of the testimony was admitted in error
under Rule 404(b), that admission, at its worst, would
most certainly be harmless, for the following reasons.
First, the majority of the forced-sex details came out
during cross-examination (notably not by the govern-
ment during direct) in an attempt by the defense to dis-
credit Kim. And this attempt to discredit was rather
successful in providing plenty for the defense to argue
to the jury about Kim’s credibility.5 Given the unusual
4
(...continued)
the standard of review from abuse of discretion to plain
error. United States v. Blount, 502 F.3d 674, 677-78 (7th Cir.
2007). Discussing this in more detail, however, is not worth-
while. Ms. Lee’s claim here is not meritorious, for the reasons
explained infra, regardless of what standard applies.
5
Kim’s testimony during cross was rather unusual at times as
she discussed her life and employment history. In addition to
elaborating on her “forced sex” testimony, she testified that she
had worked previously as a partner in a Tampa restaurant
business; was owner of a major medical health insurance
business in Houston; became a partner on a shrimp boat in
Biloxi; owned an apartment building; worked as a dental
technician, walking some 35 miles each way to and from
work daily; and became a contractor by reading a library book,
to name only a few of her accomplishments. Kim also testified
that she tried to sell one of her kidneys for $26,000 at a market
in Houston. She described how she came to work at the
Toledo spa, explaining that a woman in a Mississippi hair
salon gave her a phone number. After calling that number, she
took a bus to Flint, Michigan. Apparently she was not their
(continued...)
Nos. 06-3029, 06-3040 and 06-3438 23
nature of her testimony, any prejudicial impact or imper-
missible emotional pull of the forced-sex allegations
seems negligible. After hearing Kim discuss her life, any
reasonable juror was likely to carefully consider what
weight to give her testimony.
More importantly, the forced-sex testimony elicited on
direct and cross comprised only a mere handful of sen-
tences out of Kim’s half-day-long testimony in a four-day
trial. There was also an abundance of other evidence
on which the jury could pin Ms. Lee’s guilt. Additionally,
the government did not argue the forced sex in its sum-
mation—there was absolutely no pull on the jurors’
emotions asking them to convict her because she in
some way was affiliated with rape. The government
asked the jury to convict her on the evidence, of which
there was plenty. See United States v. Dennis, 497 F.3d 765,
770 (7th Cir. 2007) (mentioning the “overwhelming evi-
dence of [the defendant’s] guilt” apart from evidence
admitted under Rule 404(b) in determining that any
Rule 404(b) error would have been harmless); United States
v. Mallett, 496 F.3d 798, 802 (7th Cir. 2007) (mentioning the
“overwhelming evidence of [the defendant’s] guilt” apart
from evidence admitted under Rule 404(b)); United States
v. Best, 250 F.3d 1084, 1093-94 (7th Cir. 2001) (discussing the
importance of other “compelling” evidence on which to
convict the defendant, aside from Rule 404(b) testimony).
5
(...continued)
“type,” so, after another call, she went to the Rainbow Spa in
Toledo. The details she described of her life were truly nothing
short of odd.
24 Nos. 06-3029, 06-3040 and 06-3438
There are also the limiting instructions to consider.
Perhaps Ms. Lee has a point—that in some extreme in-
stances a limiting instruction may be insufficient to
quell the prejudice and the pull to convict on an impermis-
sible emotional basis. However, if such a case exists, this
is certainly not it; the mention of forced sex in Kim’s
testimony in context appears neither “shocking” nor
“devastating” despite how Ms. Lee attempts to spin it in
her briefs. The judge gave a limiting instruction before
Kim’s Rainbow Spa testimony instructing the jury that it
was only to be considered for the limited purpose of
establishing Ms. Lee’s knowledge. At the conclusion of
the Rainbow Spa testimony and before Kim began her
testimony regarding the Rockford Spa, the judge again
emphasized the limitation on the Rainbow Spa testimony.
The limiting instruction was also given again at the end
of closing arguments. “Absent any showing that the jury
could not follow the court’s limiting instruction, we
presume that the jury limited its consideration of the
testimony in accordance with the court’s instruction.”
Mallett, 496 F.3d at 802. The extensive instruction was
more than sufficient to fully counter the slim chance
that Kim’s testimony had a prejudicial effect. See, e.g.,
Dennis, 497 F.3d at 769 (mentioning the mitigating impact
of limiting instructions on any risk of prejudicial impact
on the jury); Best, 250 F.3d at 1094 (mentioning the
limiting instruction).
Therefore, there does not appear to be any danger of
prejudice from the forced-sex testimony (let alone
unfair prejudice). Nevertheless, even if there was, it was
harmless error. “Error in admitting Rule 404(b) evidence
Nos. 06-3029, 06-3040 and 06-3438 25
may be deemed harmless if we are convinced that the
error did not influence the jury, or had but very slight
effect, and can say with fair assurance . . . that the judg-
ment was not substantially swayed by the error.”
Dennis, 497 F.3d at 769-70 (internal quotations omitted).
Given the circumstances, the forced-sex testimony had
no noticeable impact on Ms. Lee’s conviction.6
6
Ms. Lee also appeals the admission of “finger cot testimony”
from FBI Agent Richman and the reference in FBI Agent Sealby’s
testimony to a newspaper article. These two arguments barely
warrant discussion. The newspaper article itself was never
shown to the jury. Instead an agent simply testified that an
article in the Rockford Register Star instigated the investiga-
tions. This one minor mention was certainly harmless, and the
jury was of course instructed not to look at any outside materi-
als.
The finger cot testimony is also insignificant. After telling the
jury where she seized finger cots at the spa, Agent Richman
described that they were “basically condoms, tiny little
condoms that go over one’s finger, and are used to insert in
someone’s anus to stimulate the prostate gland. . . .” Ms. Lee
then objected for lack of foundation and hearsay. Following
the objection, the testimony was stricken from the record. Later,
in the jury’s absence, Ms. Lee moved for a mistrial, which
the district judge denied. Considering that Ms. Lee was charged
in connection with running a brothel, and since finger cots
were mentioned, permissibly, to the jury as items found at the
spa, explaining what a finger cot is to the jury was not
unfairly prejudicial. The testimony was stricken and that
sufficiently dealt with any problem the testimony could have
presented.
26 Nos. 06-3029, 06-3040 and 06-3438
V. Sentencing Issues
We review the application of sentencing guidelines de
novo. United States v. Acosta, 474 F.3d 999, 1001 (7th Cir.
2007). Mr. Lee was convicted on both counts of the
superceding indictment—the conspiracy to use interstate
facilities and the conspiracy to commit money launder-
ing—on March 20, 2006. On July 17, 2006, he was sen-
tenced to 51 months of imprisonment on both counts to
run concurrently, three years’ supervised release, a
$250 fine, and a $200 special assessment. Ms. Lee was also
convicted of both counts, on March 30, 2006. She was
sentenced, on July 20, 2006, to 63 months of imprison-
ment on both counts to run concurrently, plus three
years of supervised release, a $500 fine, and a $200
special assessment.
Both defendants’ base offense levels for Count Two, the
money laundering count, were calculated under U.S.S.G.
§ 2S1.1(a)(2), with cross-reference to U.S.S.G. § 2B1.1 to
determine how many levels should be added. Following
the sentencings, however, the trial judge determined
that this calculation in Mr. Lee’s case was erroneous and
expressed this in a proceeding on August 24, 2006. The
same error occurred in Ms. Lee’s case. The government in
its brief concedes that this calculation was erroneous,
explaining that the base offense levels should have been
calculated under U.S.S.G. § 2S1.1(a)(1). All parties seem
to agree with this point, and because a sentence must
be based on an accurate guideline calculation, United
States v. Garrett, 528 F.3d 525, 527 (7th Cir. 2008), the
sentences must be vacated with the cases remanded
Nos. 06-3029, 06-3040 and 06-3438 27
for resentencing. Accordingly, all other arguments ad-
vanced with respect to sentencing are moot.
Moreover, given our conclusions above, overturning the
convictions with respect to the money laundering counts,
the Lees must be resentenced anyway, in light of that,
upon remand.
VI. Conclusion
We A FFIRM the convictions on the interstate facilities
conspiracy claim and R EVERSE the convictions for the
money laundering conspiracy. With respect to the Lees’
sentences, we V ACATE and R EMAND for resentencing.
3-11-09