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State v. De Luzio

Decided: June 8, 1993.

STATE OF NEW JERSEY, PLAINTIFF-RESPONDENT,
v.
HARRY DE LUZIO, DEFENDANT-APPELLANT. STATE OF NEW JERSEY, PLAINTIFF-RESPONDENT, V. JOHN KELTY, DEFENDANT-APPELLANT. STATE OF NEW JERSEY, PLAINTIFF-RESPONDENT, V. LOIS SANDERS, DEFENDANT-APPELLANT. STATE OF NEW JERSEY, PLAINTIFF-RESPONDENT, V. DONALD SANDERS, DEFENDANT-APPELLANT. STATE OF NEW JERSEY, PLAINTIFF-RESPONDENT, V. THEODORE WATLEY, DEFENDANT-APPELLANT.*FN1



On appeal from the Superior Court of New Jersey, Law Division, Ocean County.

Before Judges Gaulkin, Havey and Stern.

Stern

The opinion of the court was delivered by STERN, J.A.D.

These appeals involve convictions for offenses arising out of the defendants' involvement in Co-Op Investments, a complex pyramid scheme. Following a jury trial defendants Donald and Lois Sanders were found guilty of conspiracy, N.J.S.A. 2C:5-2 (count one); theft by deception, N.J.S.A. 2C:20-4 (count two); promoting

gambling, N.J.S.A. 2C:37-2 (count three); possession of gambling records, N.J.S.A. 2C:37-3 (count five); tampering with physical evidence, N.J.S.A. 2C:28-6(1) (count twenty-two); tampering with records, N.J.S.A. 2C:21-4a (count twenty-three), and theft by unlawful taking, N.J.S.A. 2C:20-3a (count twenty-six).*fn2 Lois Sanders was also convicted on counts eight through thirteen and fifteen of conferring gifts to public servants, N.J.S.A. 2C:27-6b. Theodore Watley was found guilty under counts two, three and five. Harry DeLuzio, a state police officer, was found guilty on count four, promoting gambling, N.J.S.A. 2C:37-2, and on count seven, official misconduct, N.J.S.A. 2C:30-2b, and John Kelty, also a State Police officer, was found guilty of the same offenses embodied in counts four and six.*fn3

Donald Sanders (Donald) was sentenced to concurrent presumptive four year sentences on counts three and five. On count two he was given a consecutive presumptive four year sentence. Count one was merged into counts two and three. He received concurrent sentences on the other convictions, for an aggregate of eight years imprisonment. After merger of the conspiracy conviction, Lois Sanders (Lois) was sentenced to a presumptive four year term on count three and a concurrent four year term on count five. She received a consecutive four year term on count two. She received concurrent sentences on the remaining counts, for an aggregate eight year sentence. Watley received a presumptive four year sentence on count two and a concurrent four year sentence on count three. He received a concurrent six month term on count five. DeLuzio and Kelty received concurrent probationary terms of one year, were fined an aggregate of

$5,000 and were ordered to forfeit their positions as New Jersey state police officers.

These defendants appeal from the resulting judgments. The issues raised by each defendant are listed in their entirety in the appendix. We reverse the convictions of DeLuzio and Kelty. We reverse the gambling related convictions of Donald, Lois and Watley. We affirm the remaining convictions and sentences as to them. However, with respect to Watley, we also remand for further proceedings relating to the claim that he was denied his right to counsel. If the remand Judge ultimately concludes that Watley was deprived of his constitutional right to counsel, a new trial shall be ordered on count two as well. If the Judge, however, finds that he was not denied his right to counsel, the judgment of conviction on that count shall stand. Following the hearing on remand, the State may seek leave to appeal before any new trial is conducted, and defendant may seek further relief before us by filing a new appeal if the Judge rules that he is not entitled to a new trial on that count.

This case has already been to the Supreme Court on two occasions. The trial Judge granted the Sanders' motion to suppress certain evidence seized in the State of Illinois. Thereafter, pursuant to negotiated pleas, Donald and Lois each pled guilty to counts one, two, three, eight and nine. The remaining counts were dismissed. Both were sentenced to probation for five years, conditioned upon service of 364 days in the Ocean County Jail. Donald was ordered to pay a fine of $30,000, and Lois was ordered to pay a $15,000 fine. State v. Sanders, 212 N.J. Super. 599, 601-602, 515 A.2d 1256 (App. Div. 1986). Because defendants received probationary sentences for second degree crimes, the State appealed, pursuant to N.J.S.A. 2C:44-1f(2), from the sentences imposed on both Donald and Lois.*fn4 We dismissed the appeal because bail pending appeal was not set until thirteen days

following the imposition of sentence while their sentences were "partially executed." State v. Sanders, supra, 212 N.J. Super. at 606. The Supreme Court, however, reversed and remanded for resentencing because the appeal was not precluded by the constitution and "the sentences violated the provisions of the sentencing statute" for the second degree crimes. State v. Sanders, 107 N.J. 609, 622, 527 A.2d 442 (1987).

After the remand the Sanders moved to retract their pleas on the grounds that they did not understand at the time that "there was a presumption of incarceration" and did not expect to be sentenced to state custodial terms. Their motions were granted.*fn5

In the interim the State was granted leave to appeal the order granting suppression of evidence as to other defendants. The Supreme Court ultimately reversed the trial court's determination and ruled that the evidence obtained in Illinois previously subpoenaed here could be used at defendants' trial. State v. Curry, 109 N.J. 1, 16-17, 532 A.2d 721 (1987).

At the Conclusion of the State's case the trial Judge granted various motions for judgments of acquittal. As to the Sanders, he granted the motions addressed to count fourteen (involving a gift to a public servant, N.J.S.A. 2C:27-6b) and counts twenty-four and twenty-five (terroristic threats, N.J.S.A. 2C:12-3a). He granted the motion of the defendants, other than Donald and Lois, with respect to count one, the conspiracy charge, but denied the remainder of the motions as to the other counts. As to Watley, however, he reduced the charges embodied in the second count to third degree theft because the State had not proven that he stole in excess of $75,000. In denying the motion to dismiss the conspiracy charge embodied in count one as to the Sanders, the Judge amended the allegation to only allege a conspiracy to

promote gambling and theft. He did so because he "wanted to keep conspiracy simple."

On June 9, 1988, the twenty-ninth day of trial, while the jury was deliberating, the Sanders moved for a judgment of acquittal on counts one and two, arguing for the first time that the charges embodied in those counts were third degree, not second degree crimes. They asserted that there was no second degree theft above $75,000 at the times alleged in the indictment, and that therefore the conspiracy count, as well as the theft count,*fn6 had to be downgraded. The Judge denied their oral motions at that time. At sentencing he rejected their arguments that the original sentences should be reinstated as appropriate for third degree crimes.

I.

We briefly recite the facts as developed at the trial which lasted thirty days over a period of six weeks in May and June of 1988. In light of our Disposition, a detailed statement of facts is unnecessary. While the Sanders pled guilty in 1985, the facts set forth in our prior opinion on the State's appeal from the sentences then imposed embody the essential facts developed at the subsequent trial. State v. Sanders, supra, 212 N.J. Super. at 602-603.

Lois Sanders and her son, Donald, commenced operating "Co-Op Investment Company" (Co-Op) in New Jersey around December of 1980. The State alleged that Co-Op was a fraudulently operated pyramid scheme, which constituted illegal gambling. Generally, Lois was initially in charge of organization, while Donald was the principal salesman. Kelty and DeLuzio, State

police officers, provided "security" for "Co-Op," and Watley assisted Lois and Donald in running the operation.

The State has described the scheme as follows:

In the Co-Op scheme, the money which an "investor" gave was $650, of which $25 was allegedly a "membership fee" to cover Co-Op expenses, and $625 was an "investment." The "investor" received a membership card with an identification number which was used to track his or her "investment." The "investor's" return generally was supposed to be either $17,500, or $35,000, contingent upon a "star system" designed to encourage paid "investors" to bring new "investors" into the scheme; investors who did so won "stars" on their charts and the reward of higher "dividends." A chart system was established, and, generally, an "investor's" name initially entered a low position on a chart; as new "investors" came in, new charts (subcharts) would be generated and the initial "investor's" name would rise to higher and higher positions until he or she ultimately reached a pay-off position. The term "pyramid" arose from the fact that such chart systems, as they geometrically grew with the influx of new "investors," took on the physical shape of a pyramid.

According to the presentation, Co-Op had a mechanism for "killing the charts," that is, for stopping the geometric "pyramid" growth; namely, the "sale" of charts to charitable organizations, which would "kill" the chart positions by raffling them to their members, who would gain a tax write-off for the cost of the raffle subscription. In fact, this "killing" mechanism was part of the fraud; no one actually understood how it should work, and, more important, defendant Donald Sanders lied when he told potential "investors" that Co-Op knew charitable organizations which were interested in joining this dubious scheme.

According to the State's brief, the investment scheme

constituted gambling because it possessed the three qualities which define gambling: consideration, prize and chance. The consideration was the sum of $650 which each "investor" gave to the program. The prize was the "dividend" of $35,000 which each participant hoped to win. And the "chance," or "future event over which the actor has little or no control" was the contingency that an adequate number of people -- and the number was truly large -- would enter the program after the "investor"' entered, so that he or she would be able to reach a sufficiently high position on the charts to obtain a pay-off.

The State proved that substantial amounts were "invested" by members of the public, and "in excess of one billion people" would have had to invest in "Co-Op" before "dividends" could have been paid to the 400 people who invested at one particular meeting on February 24, 1981. Hence the State alleged that the Co-Op leaders obtained funds by deception and that their literature was fraudulent in representing to investors that there was "minimal risk" involved.

The State further contended that the lottery was fraudulently operated by misrepresenting the number of people who receive the $35,000 prize and by understating the time it took to move up on the charts. There was also proof that "shills" were used to act at public meetings as if they were recipients of cash distributions. There was further proof that the charts were manipulated in favor of certain favored "investors" to expedite their pay-offs and that Donald and Lois were cheating even their co-conspirators by "having secret control of the first ten names on the original charts."

The appearance of State troopers "lent credibility" to the investment program. In addition to DeLuzio and Kelty, other State troopers provided "security" at Co-Op meetings. As DeLuzio and Kelty were supervisors of some of the other troopers, their work for Co-Op gave the impression that this "moonlighting" by State police officers was authorized.

According to the State's case, DeLuzio and Kelty did more than merely provide security. They assisted Co-Op in recruiting other law enforcement officers to provide "security" at Co-Op meetings and in convincing the other troopers that the "moonlighting" was legal. DeLuzio and Kelty were paid for the security efforts and, in turn, paid other troopers they recruited. Kelty accepted a free "membership." DeLuzio paid the $650 membership fee.*fn7 Thus, DeLuzio and Kelty had a financial interest in the investment. There was also evidence that DeLuzio and Kelty knew about the illegal possession of handguns by other conspirators but did nothing about it.

Watley gave a pretrial statement. He testified before the grand jury that he never made any agreement to receive a percentage of the investments received "as a result of [his] solicitation," that he

was "upset" about what he learned concerning the program and that he spoke at a Cherry Hill meeting to "calm down" members of the audience who also wanted their money back. However, there was proof that between March 17, 1981, and March 25, 1981, Watley received $12,000 and deposited $8,000 after revealing to Donald before the Cherry Hill meeting of March 16, 1981, that he knew that several of the top names on the charts were really Donald and Lois and that he wanted money not to "expose all the problems and, basically, that this whole thing was a scam."

There was testimony from James R. Stephens, an employee of the Bureau of Securities, who was deemed qualified as an expert, that the lottery was illegal gambling because it involved "consideration, prize and chance." A $650 payment was the consideration, and the prize was the $35,000 expected return. Chance was involved because of the "structure" and the need for a large number of subsequent investments before a return could be realized. The expert also testified that Co-Op was a "pyramid scheme." The expert noted that for the 400 people who invested on February 24, 1981, "in excess of one billion people" would have had to join the investment in order to permit the investors to obtain a return of $35,000.

The expert also testified that Co-Op was run in a "fraudulent manner." The "pitch sheet" ("sales presentation") falsely referred to "guarantees" and emphasized the "minimal risk to the investor." The organizers did not "advise the prospective investor [of] the true facts" so that the person could make a reasonable decision whether or not they should or should not invest, particularly when there was no explanation about the number of subsequent investors necessary to make a return. Stephens further testified about various tactics and methods used to give a false impression about the nature of the "investment" and the scheme. Included was the appearance of New Jersey state troopers "to provide security." According to the expert, state police officers conveyed "the aura of legitimacy," and thus were "a con man's dream come true."

II.

Each of the defendants claims that the convictions on counts three, four and five must be reversed because the State did not prove the elements of those offenses. We agree. In State v. Bey, 261 N.J. Super. 182, 618 A.2d 373 (App. Div. 1992), we recently held that a pyramid scheme is not a "lottery" within the meaning of N.J.S.A. 2C:37-2 because the elements of a lottery, as defined in N.J.S.A. 2C:37-1h, are not satisfied.

In Bey defendant asserted that she participated in the pyramid investment by investing $1,500 in exchange for a promised return of $12,000. However, because her name was found "on more than one pyramid" the proofs warranted a finding that "she was involved more than as an investor." 261 N.J. Super. at 184. We nevertheless reversed the conviction under N.J.S.A. 2C:37-2, without deciding "the general question of whether promoting a pyramid scheme is promoting gambling," at 185, because "the indictment . . . did not charge defendant merely with promoting gambling. It stated that defendant 'materially aided an illegal lottery scheme, ' (emphasis added), and then specified the illegal conduct." Ibid. (emphasis in original). Here, count four used the very same language, and count three referred to the alleged conduct as an "illegal lottery scheme."

With respect to the definition of lottery in N.J.S.A. 2C:37-1h, Judge Dreier wrote in Bey:

New Jersey's definition specifies elements beyond simply consideration, prize and chance. It specifies that the "chance" must be "represented by and differentiated by numbers or by combinations of numbers or by some other media." N.J.S.A. 2C:37-1h. In addition, the definition specifies that the winning chances are to be "determined by a drawing or by some other method based upon the element of chance." Ibid. Based on this language, we find that the method of play required in the lottery definition is not present in a pyramid scheme.

[261 N.J. Super. at 187.]

And the Bey court further noted:

A criminal statute must be strictly construed. State v. Meinken, 10 N.J. 348, 352-353, 91 A.2d 721 (1952). We do not perceive that a reasonable person reading our statutory lottery definition would understand that a pyramid scheme, as fraudulent as it may be, was prohibited as a "lottery." Indeed, were we to

interpret the lottery definition in N.J.S.A. 2C:37-1h so broadly as to include pyramid schemes, then N.J.S.A. 2C:37-1h likewise could be extended to include receipt of bets on horse racing and organized poker games, even where these activities are addressed separately in the statute.

[Id. at 188-189 (footnote omitted).]

In light of Bey, the convictions of Lois, Donald and Watley on count three must be reversed. Given the Judge's instructions in this case, we cannot conclude that the jury found defendants guilty on count three on any other basis than for their wrongdoing in connection with a lottery, even assuming that another basis of promoting gambling was alleged.*fn8 Moreover, the convictions on count four as to Kelty and DeLuzio, and counts three and five as to Lois, Donald and Watley must be reversed because those counts each refer to promoting gambling and possession of gambling records, respectively, relating to an "illegal lottery scheme." Moreover, our review of the jury instructions makes clear that the jury undoubtedly rendered its verdict on these counts based upon a Conclusion that the defendants were involved in an illegal lottery.

Most of the elements relating to counts two, three, four and five were referred to in the charge relating to the purpose and scope of the conspiracy embodied in count one. The Judge indicated that there could be a conviction for conspiracy if a defendant conspired to violate the gambling laws, and that gambling and possession of gambling records could relate to an illegal lottery. With respect to an illegal lottery, the Judge charged the jury as follows:

Now, was there an agreement here? The agreement does not have to be in writing, it doesn't have to have formality, but there has to be two people, at least two people who have a common purpose. Now, the State says here their common purpose was a theft by deception, and that included in that conspiracy, that agreement to commit theft by deception, was also an agreement that they would

commit that theft by deception by means of an illegal lottery. Now, that's the State's contention. (emphasis added).

With respect to the conspiracy and the substantive offenses they conspired to commit, the Judge advised the jury that a pyramid scheme could constitute an illegal lottery. He said, among other things:

Mr. Stephens, I believe, talked about gambling and talked about price, chance and prize. Now, contest of chance means any contest, game, pool, gambling scheme or gaming device in which the outcome depends in a material degree upon an element of chance, notwithstanding that skill of the contestants or some other persons may also be a factor therein. Gambling means staking or risking something of value upon the outcome of a contest of chance or a future contingent event not under the actor's control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome. Player means a person who engages in any form of gambling solely as a contestant or bettor, without receiving or becoming entitled to receive any profit therefrom other than personal gambling winnings, and without otherwise rendering any material assistance to the establishment, conduct or operation of the particular gambling activity. Something of value means any money or property, any token, object or article exchangeable for money or property, or any form of credit. Lottery means an unlawful gambling scheme in which the players pay or agree to pay something of value for chances, represented and differentiated by numbers or by combinations of number[s] or by some other media, one or more of which chances are to be designated the winning ones; and B, the winning chances are to be determined by a drawing or by some other method based upon the element of chance; and C, the holders of the winning chances are to receive something of value.

Now, we're not talking about bookmaking, we're not talking about numbers. The State is contending through its experts that this investment, that's been called an investment opportunity, called investment scheme, this investment scheme is really what they call a pyramid scheme and pyramid scheme is a lottery. And in New Jersey if you don't have a license, a lottery is unlawful. Unlawful means not specifically authorized by law. Now, I'm not going to repeat everything that the experts said. You saw the charts that were put up, you saw the experts talk, the professor, the doctor talked and accounting and how the charts decide and the number of people needed to help others move up. Mr. Stephens described his years with the postal service, as I recall it, and testified about this operation. He testified it's a pyramid operation and a pyramid is a lottery, it's open-ended at the bottom, chances diminish greatly as the product continues. In other words, somebody who comes in on the first chart may very well end up with his price, but somebody who comes in on the seventieth chart may very well never find enough people to push him up to the top. I'm ...


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