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United States v. Yusuf

August 24, 2006

UNITED STATES OF AMERICA; GOVERNMENT OF THE VIRGIN ISLANDS, APPELLANTS
v.
FATHI YUSUF MOHAMMED YUSUF A/K/A FATHI YUSUF; WALEED MOHAMMED HAMED A/K/A WALLY HAMED; WAHEED MOHAMMED HAMED A/K/A WILLIE YUSUF; MAHER FATHI YUSUF A/K/A MIKE YUSUF; ISAM MOHAMAD YOUSUF A/K/A SAM YOUSEF; UNITED CORPORATION D/B/A PLAZA EXTRA; NEJEH FATHI YUSUF



On Appeal from the District Court for the Virgin Islands Division of St. Croix (D.C. No. 05-cr-00015). District Judge: Honorable Raymond L. Finch.

The opinion of the court was delivered by: Fisher, Circuit Judge

PRECEDENTIAL

Argued May 11, 2006

Before: FISHER, COWEN and ROTH,*fn1 Circuit Judges.

OPINION OF THE COURT

Defendants, a Virgin Islands corporation and several of its owners and operators, were charged in a seventy-eight count indictment with various criminal offenses, including money laundering, currency structuring, tax violations, mail fraud, obstruction of justice, and conspiracy.*fn2 In connection with securing various search warrants, an FBI special agent submitted an affidavit that contained admittedly inaccurate information, which had been supplied by the Virgin Islands Bureau of Internal Revenue ("VIBIR") pursuant to a court order. The District Court held a hearing pursuant to Franks v. Delaware, 438 U.S. 154 (1978), and determined that certain statements in the affidavit were made with reckless disregard for the truth. The District Court then excised those statements from the affidavit and found that the reconstituted affidavit would have lacked probable cause. As a result, the District Court suppressed all of the evidence seized during the execution of the search warrants, effectively dismissing the Government's case.

We find that the disputed representations in the affidavit were not made with reckless disregard for the truth because the FBI agent did not have an "obvious reason to doubt the truth" of the information supplied by VIBIR. The District Court erred by failing to recognize that government agents should generally be able to presume that information received from a sister governmental agency is accurate. To demonstrate that a government official acted recklessly in relying upon such information, a defendant must first show that the information would have put a reasonable official on notice that further investigation was required. If so, a defendant may establish that the officer acted recklessly by submitting evidence: (1) of a systemic failure on the agency's part to produce accurate information upon request; or (2) that the officer's particular investigation into possibly inaccurate information should have given the officer an obvious reason to doubt the accuracy of the information. As we will explain herein, defendants in this case have failed to make this requisite showing, and, as a result, we find that the District Court erred in excising the disputed representations from the affidavit.

In addition, even assuming that portions of the affidavit should be excised, we conclude that the District Court clearly erred in concluding that the reformulated affidavit lacked probable cause. The reformulated affidavit contained sufficient allegations of money laundering to provide probable cause to search the three grocery stores for specific types of corporate business records alleged to have been involved in the money laundering enterprise. It is clear that the District Court's analysis on this point cannot be supported by the record. Furthermore, the warrant does not fail as an unconstitutional general warrant. The listing of the corporate items to be searched in the warrant application was not unconstitutionally overbroad, particularly considering this Court's repeated pronouncements to give greater flexibility in making the probable cause determination in the context of large-scale, document-intensive corporate offenses.

For these reasons, we will reverse the decision of the District Court and remand the case for further proceedings consistent with this opinion.

I.

In seven deposits made between April 16-19, 2001, United placed $1,940,000 in currency in $50 and $100 denominations into its account with the Bank of Nova Scotia (the "Bank"). (App. 408). Because this activity was inconsistent with United's normal business banking activity, the Bank generated a Suspicious Activity Report on May 17, 2001, which was forwarded to the FBI's St. Thomas office on July 20, 2001. Based on that information, the FBI immediately opened a criminal investigation to investigate, inter alia, possible money laundering violations. (Id.) Federal grand jury subpoenas were issued to the Bank in mid-August 2001, and the Bank began producing documents relating to United's operating account on August 31, 2001. (Id.)

The FBI's investigation culminated several weeks later in an application for search warrants submitted to a magistrate judge.*fn3 That application contained a sworn affidavit that detailed, in thirty-six numbered paragraphs and two exhibits, the Government's investigation to that point. The affidavit contained some background information regarding past immigration violations at the Plaza Extra stores. In 1999, United paid a $20,000 fine to settle an administrative proceeding brought by the Immigration and Naturalization Service (INS)*fn4 regarding its failure to fill out employee I-9 forms. Also in 1999, Fathi Yusuf pled guilty to three counts of unlawful employment of unauthorized aliens; he was subsequently sentenced in September 2001 to six months of house confinement. During that investigation, INS agents who searched the supermarkets found large amounts of U.S. currency inside the safe of one of the stores. A manager of the store who opened the safe told the agents that the money, which was in denominations of $50 and $100, totaled between $3 million and $7 million. Bank records obtained in the investigation revealed that United never made any large-scale currency deposits of that magnitude in 1999. (App. 395.)

The affidavit also utilized the financial records provided by the Bank to profile United's average currency deposits over an eighty-seven week period between January 2000 and August 2001, which reflected a pattern of currency deposits of $300,000 to $500,000 per week. During that time span, currency deposits dipped below $300,000 on five occasions, the lowest total cash deposit being $140,000. (App. 396.) In contrast, nineteen weekly deposits exceeded $614,000, and seven of those deposits exceeded $920,000, which FBI Special Agent Thomas Petri, the FBI agent in charge of the investigation, characterized as "excessive when compared to the normal currency deposit pattern of United Corp." (Id.)*fn5

The affidavit focused in detail on the deposits made during the week ending April 21, 2001. According to the affidavit, the seven cash deposits made between April 16 and 19 were inconsistent with the normal pattern of deposits made by United in three respects: (1) the large total amount of $1.94 million deposited over a four-day period; (2) the fact that the deposits consisted solely of $50 and $100 bills; and (3) the fact that each deposit slip was marked "Cash (Stockholder's Investment)." (App. 396.) Moreover, the deposits themselves contained certain similarities. Each deposit was made in rounded amounts: $225,000, $250,000 (2 deposits), $300,000 (3 deposits), and $315,000. Although each of the deposits was made between April 16 and 19, the deposit slips were filled out in advance, dated April 12 through 19. According to the affidavit, all of this information "strongly implie[d] that the $1,940,000 cash was originally structured into smaller deposit amounts in order to create an appearance of deposits more consistent with the normal business activity, as opposed to a one-time cash deposit." (App. 397.)

The affidavit further noted that United issued two checks totaling $1.9 million to "Hamdan Diamond Corp." on August 17 and 19, 2001. The checks were signed by Waleed Hamed and marked "loan payment" and "partial payment" respectively. Hamdan is a retail business located in St. Maarten, Northern Antilles, owned in part by Fathi Yusuf. The affidavit noted that Fathi Yusuf is the sole signatory of Hamdan's Virgin Islands account, and that Hamdan shares the same Virgin Islands post office box as United. Moreover, the affidavit recounts information from a purportedly reliable foreign services agency which stated that Fathi Yusuf was a member of a network of Middle Eastern merchants who had made cash deposits in St. Maartens in 2000 in excess of $2.2 million. The agency told the FBI that these cash deposits were consistent with money laundering because "the amount of cash deposited appeared to far exceed the legitimate cash proceeds of their retail sales in St. Maartens." (App. 398.)

In addition, the affidavit contained information purportedly from three reliable confidential informants and one anonymous source. The first confidential source ("CS #1"), who had purportedly provided the Government with reliable information in the past, told the FBI that a known drug trafficker was in direct contact with the management of Plaza Extra in order to launder drug proceeds through the supermarket. A second confidential informant ("CS #2") informed the FBI that Waheed Hamed illegally purchased food stamps from stores owned by persons of Middle Eastern descent who were not authorized to collect reimbursements, in violation of federal law. In addition, a third confidential source ("CS #3"), who the affidavit stated was willing to testify, told the FBI that Waleed Hamed had arranged to smuggle more than $2 million in U.S. currency in Muslim robes to Sadaam Hussein during the first Persian Gulf War. CS #3 also described a conversation with Fathi Yusuf in which he said that "[a]ny man who can't take out $1 million a year in cash from a business like this is a fool." (App. 399.) Finally, the affidavit stated that the FBI received an anonymous phone call on October 12, 2001, in which the caller stated that the Yusuf had contacted a pilot, who had been previously convicted of alien smuggling, to transport two separate shipments of U.S. currency totaling $2.1 million from St. Thomas to St. Maarten. According to the caller, the money was destined for Afghanistan.

The portion of the affidavit upon which the parties have focused in this appeal are the allegations of tax fraud made in paragraphs 23 and 24. The Government now concedes that these allegations were inaccurate.*fn6 After receiving United's bank records, the Government moved the District Court to grant an ex parte order compelling VIBIR to produce United's tax returns based on the Employer Identification Number (EIN) listed in the Suspicious Activity Report. The District Court signed the order on September 21, 2001, and VIBIR began producing records in October 2001. VIBIR initially provided the Government with a copy of United's 1998 U.S. corporate income tax return and computer transcripts reflecting the gross receipts reported by United on monthly Virgin Islands returns filed during 1999 and 2000.*fn7 United's 1998 U.S. corporate tax return reported gross receipts of approximately $41 million for 1998. In contrast, the computer transcripts provided by VIBIR reflected that United had reported gross receipts of $270,000 in 1998. (App. 672-73.) Thus, for the year 1998, there appeared to be a difference of over $40 million between the gross receipts reported on the 1998 U.S. corporate tax return and the 1998 Virgin Islands gross receipts returns. In addition, computer transcripts provided by VIBIR reflected that United reported gross receipts of $3.7 million in 1999 and $8.3 million in 2000. The Government, however, had copies of loan documents that United had furnished to the Bank in February 2000, stating gross receipts of approximately $47 million in 1999 and forecasting gross receipts of $54 million for 2000. (App. 397.)

VIBIR did not produce United's 1999 and 2000 U.S. corporate tax returns, and, prior to the time that the Government filed an application for the search warrant, VIBIR officials repeatedly informed the FBI agents investigating the case that United had not filed corporate tax returns for 1999 and 2000. (App. 397, 552-53.) Those representations turned out to be inaccurate. VIBIR later learned that United's tax returns were maintained under more than one EIN, and the agency conceded that it mistakenly did not produce all of the documents requested under the ex parte order. These tax returns, uncovered after a search of the Plaza Extra stores, revealed that United had reported $39,120,091 in gross receipts in 1998, as opposed to the $270,000 reflected on the computer printouts; $43,967,171 on its 1999 returns; and $49,211,159 on its 2000 returns. In addition, the search yielded United's U.S. corporate tax returns from 1998 through 2000. When all of these documents were uncovered, it became clear that the search warrant affidavit erroneously set forth that United underreported its income on the Virgin Islands gross receipts returns by $54 million, when in actuality the alleged difference was $7,159,580. (See Goverment's Br. at 12-13.)

B.

The grand jury handed down the original indictment in this case on September 18, 2003. On September 9, 2004, the grand jury returned a seventy-eight count superseding indictment that charged defendants with various federal criminal offenses. Thereafter, defendants filed a motion to suppress evidence, or in the alternative a motion for a Franks hearing, to determine whether Agent Petri made knowingly false or reckless misrepresentations in the affidavit of probable cause. After extensive briefing from both parties, an evidentiary hearing, and oral argument, the District Court found that Agent Petri had made the false statements in paragraphs 23 and 24 with reckless disregard for the truth.

The District Court then reformulated the affidavit, striking out paragraphs 23 and 24. The District Court concluded that, without those paragraphs, the affidavit did not contain sufficient allegations to establish probable cause that defendants engaged in money laundering. It stated that the allegations regarding the discovery of $7 million in a safe during a raid of the St. Thomas Plaza Extra store in 1999 did not support an inference that United was laundering money, but rather that an equal inference could be drawn that United was "holding the money for some other legal purpose -- such as paying vendors or cashing customer's and employee's checks. . . . If anything, this tends to show that the money viewed in the safe in 1999 was periodically deposited between January 2000 and August 2001, controverting the Affiant's money laundering insinuation." (App. 20.) The District Court also dismissed the evidence of currency deposit fluctuations throughout the course of 2000 and 2001, explaining that the currency fluctuations and the checks to Hamdan could have been to repay a loan. Finally, the District Court dismissed the allegations in paragraph 25 regarding the $2.2 million deposited by the middle eastern merchants in St. Maarten as vague because the warrant affidavit did not "indicate what evidence would likely be found in the locations to be searched that would prove or disprove that Fathi Yusuf deposited money in St. Maarten as part of a money laundering scheme." (App. 21.) Notably, the District Court did not even bother to address in its opinion the fact that the money was deposited solely in $50 and $100 denominations.

As a result of these findings, the District Court suppressed all of the evidence that was obtained as the fruits of the search warrants. This decision effectively dismissed the Government's case. The Government appealed.*fn8

II.

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