UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY
June 14, 2012
UNITED STATES OF AMERICA, MITCHELL KURLANDER AND ALAN ABESHAUS,
The opinion of the court was delivered by: Walls, Senior District Judge
On May 10, 2011, Defendants Mitchell Kurlander and Alan Abeshaus were indicted by a federal grand jury in a twenty-two count indictment. Count One charged both Defendant Abeshaus and Defendant Kurlander with conspiring to commit mail and wire fraud contrary to 18 U.S.C. §§ 1341 and 1343, in violation of 18 U.S.C. § 1349. Counts Two through 22 charged Defendant Kurlander with substantive acts of mail and wire fraud. Before this Court are two motions: 1) Defendants' Motion to Suppress Electronically Stored and Paper Documents and Records Seized on or about May 7, 2007 ("Motion to Suppress") and 2) Defendant Abeshaus's Motion to Dismiss the Indictment as Barred by the Statute of Limitations ("Motion to Dismiss"), joined by Defendant Kurlander. The Court heard oral argument on May 9, 2012. Defendants' Motion to Suppress and Motion to Dismiss are denied.
FACTUAL AND PROCEDURAL BACKGROUND
Defendant Kurlander was the Chief Financial Officer ("CFO") and, for a time, part owner of Circle System Group Inc. ("Circle"), a privately owned Pennsylvania corporation engaged in the business of selling and reconditioning athletic equipment, uniforms, and apparel, primarily football equipment. Indictment ¶¶ 1-2. As CFO, Kurlander was responsible for overseeing and managing the company's accounts payables, accounts receivables, billing, and submission of bids and quotes to customers. Id. ¶ 1. Defendant Abeshaus was the de facto Chief Executive Officer ("CEO") of Circle and its largest single shareholder. Id. ¶ 2. He was responsible for setting the policies and framework for the company's operations and knew of company developments. Id. Circle marketed its services nationally, but most of its sales were made to schools, colleges, and youth sports programs in New Jersey. Id. ¶¶ 2-3. Circle was acquired by Schutt Holdings in September 2005. Id. ¶ 3.
Count One charges the Defendants with conspiracy to commit mail and wire fraud during the time period from in or about August 1997 to in or about June 2007. Id. ¶ 4. Specifically, this count alleges that Defendants conspired to obtain money and other things of value from the schools through several fraudulent business practices including:
A) retaining, and converting to Circle's own use, duplicate payments by the Schools that should have been returned or credited to the Schools;
B) submitting fake quotes to the School Athletic Officials so that their purchases from Circle would seemingly comply with applicable laws, regulations, and policies; and C) submitting fraudulent invoices to the Schools in order to: i) recoup money that Circle had expended for donations to the Schools and the School Athletic Officials; ii) pay for personal gifts given to the School Athletic Officials; iii) ensure that Circle achieved its desired profits on goods and services that had been intentionally "underpriced;" and iv) hide the nature and timing of purchases by School Athletic Officials when requested to do so by the School Athletic Officials.
Id. ¶ 5. Counts Two through 22 charge only Kurlander with the substantive acts of mail and wire fraud in furtherance of the conspiracy charged in Count One. Id. ¶ 33.
On or about October 20, 2006, two employees of Circle (identified as "CI-1" and "CI-2" and collectively, "CIs") filed a qui tam action under seal against Circle pursuant to the Civil False Claims Act ("FCA Complaint"). Opp'n to Mot. 1. The two Circle employees provided a disclosure statement to the Government with material evidence and information related to the FCA Complaint. Id. The United States Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation ("FBI"), and the Office of the Inspector General -- United States Department of Education then began a covert grand jury investigation in the District of New Jersey. Id. at 1-2. Sometime about April 2007, the FBI interviewed CI-1 about the allegations in the FCA Complaint and Disclosure Statement, wherein CI-1 provided details about fraudulent schemes at Circle and identified approximately 30 individuals who could confirm various aspects of these schemes. Id. at 2. The FBI then began covertly gathering information to substantiate CI-1's allegations, including consensually recording conversations between Circle employees and CI-1, searching the abandoned trash can at Kurlander's residence, and conducting surveillance of Kurlander. Id.
On May 8, 2007, the FBI executed five search and seizure warrants at Kurlander's residence in Allentown, Pennsylvania and four buildings owned by Abeshaus in Easton, Pennsylvania. Mot. to Suppress 5. The warrants authorized the seizure of every business and banking record pertaining to Circle's business with the schools between January 1, 2001 and the date of the search, as well as the seizure of any electronic device at each of the five locations. Id. at 6. These warrants were issued by United States Magistrate Judge Henry Perkin based upon the Probable Cause Affidavit of FBI Special Agent Joel Mack. Id. The Affidavit contained information provided by the CIs, as well as information from parts of consensually recorded conversations between CI-1 and a then current and a then former Circle employee. Cert. of Gina M. Ameci ¶¶ 7-8.
At the same time the search warrants were executed, Circle was served with a grand jury subpoena, seeking the same information that was seized under the search warrants. Opp'n to Mot. 3. The Government continued its investigation and presented the information to a grand jury, which indicted Defendants on May 10, 2011. Id. Several of the Defendants' co-conspirators, including Circle's former President David Drill, have pled guilty to participating in the mail and wire fraud conspiracy. Id.
MOTION TO SUPPRESS
Defendants argue that the Affidavit of Agent Mack submitted to the Magistrate Judge did not provide, and should have provided, information as to the confidential informants' credibility or reliability. Ameci Cert. ¶ 7; Mot. to Suppress 3. The information that Defendants argue should have been included is:
1) In 2005, the CIs filed gender discrimination and related retaliation charges against Circle with the Pennsylvania Human Relations Commission and United States Equal Employment Opportunity Commission, followed by a lawsuit in the Pennsylvania Court of Common Pleas. Ameci Cert. ¶ 9. The CIs sought $300,000 from Circle. Id. ¶¶ 9-10. This suit was ongoing when the CIs provided the information in the Affidavit. Id.
2) Before the Affidavit was submitted, CI-1 allegedly denied and recanted his allegations of fraudulent practices at issue in this case against Circle during a meeting of Circle shareholders and officers, and his allegations were found to be unsupported by independent counsel retained by Circle. Id.
3) CI-1 is a convicted felon. Id. ¶ 10. In 1987, while employed as a prison guard in North Carolina, CI-1 suffocated a federal inmate, which resulted in his death. Id. CI-1 pled guilty to assault and served a nine-year prison term. Id.
4) CI-1 was employed with the Massachusetts Prison System after his release from prison. Id. After the state of Massachusetts learned of CI-1's prior conviction, he was terminated, but CI-1 obtained a $40,000 settlement after claiming his termination was discriminatory. Id.
5) While employed at Circle, CI-1 impregnated a fellow employee. This woman was later arrested and charged with controlled substance offenses, and CI-1 facilitated her escape from custody. Id. Neither CI-1 nor the woman was charged. Id.
Defendants also argue that the Affidavit only included portions of CI-1's conversations with the then current and then former Circle employees which lacked context. Mot. to Suppress 12-14.
I.Standard of Review
In assessing an affidavit for probable cause, the magistrate judge is to make a practical, common sense decision whether, given all the circumstances set forth in that affidavit before him . . . there is a fair probability that contraband or evidence of a crime will be found in a particular place. And the duty of the reviewing court is simply to ensure that the magistrate had a 'substantial basis . . . for conclud[ing]' that probable cause existed.
United States v. Kepner, 843 F.2d 755, 762 (3d Cir. 1988) (quoting Illinois v. Gates, 462 U.S. 213, 238-39 (1983)). The reviewing court is to afford great weight and deference to the neutral magistrate's determination, and uphold the warrant so long as the magistrate judge had a "substantial basis" for concluding by a "fair probability" that contraband or evidence of a crime would be found in a particular place. United States v. Conley, 4 F.3d 1200, 1205, n.5 (3d Cir. 1993).
"[W]here the defendant makes a substantial preliminary showing that a false statement knowingly and intentionally, or with reckless disregard for the truth, was included by the affiant in the warrant affidavit, and if the allegedly false statement is necessary to the finding of probable cause, the Fourth Amendment requires that a hearing be held at the defendant's request." Franks v. Delaware, 438 U.S. 154, 155-56 (1978). The same requirements for a hearing apply where the case concerns omissions. United States v. Frost, 999 F.2d 737, 743 n.2 (3d Cir. 1993). "In order to make this preliminary showing, the defendant . . . must present an offer of proof contradicting the affidavit, including materials such as sworn affidavits or otherwise reliable statements from witnesses." United States v. Yusuf, 461 F.3d 374, 383 (3d Cir. 2006). At the Franks hearing, the defendant must prove by a preponderance of the evidence: "(1) that the affiant knowingly and deliberately, or with a reckless disregard for the truth, made false statements or omissions that create a falsehood in applying for a warrant; and (2) that such statements or omissions were material, or necessary to the probable cause determination." Sherwood v. Mulvihill, 113 F.3d 396, 399 (3d Cir. 1997) (citing Franks, 438 U.S. at 171-72).
The Defendants "must prove by a preponderance of the evidence that probable cause does not exist under the corrected affidavit, i.e., that the deficiency in the affidavit was material to the original finding." Yusuf, 461 F.3d at 384. When faced with an omission, as here, the court "must remove the falsehood created by the omission by supplying the omitted information to the original affidavit." Id. (quotations omitted). If the defendant meets this burden, "the Fourth Amendment requires that . . . the fruits of the search [must be] excluded to the same extent as if probable cause was lacking on the face of the affidavit." Frost, 999 F.2d at 743 (quoting Franks, 438 U.S. at 156).
"Informants are not presumed to be credible, and the government is generally required to show by a totality of the circumstances either that the informant has provided reliable information in the past or that the information has been corroborated through independent investigation." Yusuf, 461 F.3d at 384. In a case involving narcotics, the Third Circuit did not require suppression of evidence where an affidavit omitted information about the informant, including that the informant was a parolee during the investigation, had been arrested during it, was a fugitive from an arrest warrant, and kept these charges hidden from the Agent. United States v. Sanchez, 246 F. App'x 803, 805 (3d Cir. 2007). The court held that "[a]t best, the omitted information establishes that the Informant is an unsavory character with a questionable moral compass. This fact does not, per se, doom a finding of probable cause." Id. "Courts . . . may consider both the reliability of the informant and the reliability of the information provided by the informant," and should look at the totality of the circumstances. Id. at 805-06. Here, although the historical information omitted about the CIs certainly reflects negatively upon them, it does not alone prove that probable cause would not exist if it was included. Additionally, looking at the totality of the circumstances, the information provided by CI-1 was corroborated through independent investigation, including the recordings with the former employees, documents evidencing the fraud found in the trash can outside Kurlander's home, and physical surveillance of Kurlander. As to the omitted context about the recorded conversations, the information omitted would not be material to the Magistrate Judge's finding of probable cause. The Government was not obligated to include the entire conversation nor independently interview the employees and they were recorded without their knowledge.
Defendants have not proved by a preponderance of the evidence that the omitted information was material to the original affidavit. A magistrate judge could still determine that a corrected affidavit including the omitted information establishes probable cause to issue the warrants. The Motion to Suppress is denied.
MOTION TO DISMISS
Defendant Abeshaus, joined by Defendant Kurlander, argues that the Indictment should be dismissed as to him because it is barred by the five-year statute of limitations set forth in 18 U.S.C. § 3282(a). Mot. to Dismiss 4. Abeshaus argues that the Indictment implicates him only in the "scheme to collect and retain duplicate payments from Circle's customers by billing them twice for the same service," referred to as the "duplicate payment scheme." Id. Abeshaus insists that the Indictment alleges that this scheme began in 1997 and ended in August 2003, nearly eight years before the Indictment was returned in May 2011. Id. Although the duplicate payment scheme is charged as part of a single overarching conspiracy that included multiple schemes and continued into the limitations period, Abeshaus argues that the Court should find on the basis of the facts alleged that the duplicate payment scheme constituted a separate, time-barred conspiracy charge. Reply to Mot. to Dismiss 7. Abeshaus further argues that dismissal is appropriate because the Indictment does not adequately charge that he knowingly participated in the remaining schemes included in the conspiracy count and he is not charged in any of the remaining counts of the Indictment. Mot. to Dismiss 6.
I.Standard of Review
Federal Rule of Criminal Procedure 12(b) permits pretrial consideration of "any defense, objection, or request that the court can determine without a trial of the general issue." Fed. R. Crim. P. 12(b)(2). A defendant may make a pretrial motion to dismiss a charged offense based on an affirmative defense that prosecution is barred by the statute of limitations. Id. See United States v. Birks, 656 F. Supp. 2d 454, 458 (D.N.J. 2009). A defendant may also make a pretrial motion to dismiss "alleging a defect in the indictment or information," including that a charge is insufficient because it "fails . . . to state an offense." Fed R. Crim. P. 12(b)(3)(B).
The Third Circuit has recently emphasized that the district court's review of a defendant's motion to dismiss is a "narrow, limited analysis geared only toward ensuring that legally deficient charges do not go to a jury." United States v. Bergrin, 650 F.3d 257, 268 (3d Cir. 2011). The motion to dismiss is not "a permissible vehicle for addressing the sufficiency of the government's evidence." United States v. DeLaurentis, 230 F.3d 659, 660-61 (3d Cir. 2000). The district court must dismiss a charge only "if 'the specific facts alleged in the charging document fall beyond the scope of the relevant criminal statute, as a matter of statutory interpretation.'" Bergrin, 650 F.3d at 271 (quoting United States v. Panarella, 277 F.3d 678, 685 (3d Cir. 2002)). In making this determination, the district court must accept as true all factual allegations based on a "common sense construction" of the language of the charging document. United States v. Hodge, 211 F.3d 74, 76 (3d Cir. 2000). The analysis may not include an "inquiry into what the Government will ultimately be able to prove at trial." Bergrin, 650 F.3d at 271. See United States v. Mosberg, No. 08-cv-0678, 2011 WL 5433749, at *8 (D.N.J. Nov. 9, 2011) ("Bergrin makes clear that, although an indictment fails to state an offense if the facts alleged fall beyond the scope of the criminal statute 'as a matter of statutory interpretation,' no deeper inquiry into the veracity or evidentiary value of the indictment's allegations is permitted.") (internal citations omitted).
a.Duplicate Payment Scheme
The statute of limitations provides that a defendant shall not be prosecuted for mail or wire fraud offenses "unless the indictment is found .within five years next after such offense shall be committed." 18 U.S.C. § 3282(a). See United States v. Hoffecker, 530 F.3d 137, 157 (3d Cir. 2008). The Third Circuit has held that "[a]n indictment is found when it is returned by a grand jury and filed." Id. For purposes of a conspiracy to commit mail and wire fraud, the offense is deemed to have been committed and the statute of limitation begins to run "when the conspirators commit the last overt act in furtherance of the conspiracy." Id. (citing United States v. Jake, 281 F.3d 123, 129 n.6 (3d Cir. 2002)).
If charged as a separate conspiracy or substantive crime, the duplicate payment scheme would fall outside the statute of limitations because the Indictment was filed three years after the statute of limitations had run on that offense. See 18 U.S.C. § 3282(a). However, the duplicate payment scheme is not all that Abeshaus is charged with here. Count One of the Indictment charges Abeshaus with an overarching conspiracy to commit mail and wire fraud, the principal object of which "was to obtain money and other things of value from the Schools for Circle. . . ." Indictment ¶¶ 8-9. Defendants argue, however, that despite the general language of the Indictment, the Indictment charges at least two separate agreements with discrete objects: 1) the duplicate payment scheme to fund payments to Abeshaus to pay off a business property mortgage and 2) the fake quote and fraudulent invoices schemes to increase Circle's profitability, which Defendants argue Abeshaus is not implicated. Reply to Mot. to Dismiss 4. Defendants further claim that, given these allegedly separate conspiracies, the fake quote scheme cannot be used to extend the statute of limitations to the time-barred duplicate payment scheme, and Abeshaus must be dismissed. Id. at 2.
The issue of whether or not the Indictment alleges the existence of a single conspiracy and whether the statute of limitations has run for Abeshaus is an issue that turns on the sufficiency of the government's proof that cannot be determined at this stage of the proceedings.
See DeLaurentis, 230 F.3d at 660-61. Taking the Indictment as true, as now required pursuant to Rule 12(b), the Government has alleged sufficient facts so that it is not clearly wrong to state at this time that Kurlander and Abeshaus have been charged in a single conspiracy by the Indictment. See Hodge, 211 F.3d at 76.
An indictment charges a single, unified conspiracy when "the evidence proves that the essential feature of the existing conspiracy was a common plan or scheme to achieve a common, single, comprehensive goal." U.S. v. Continental Group, Inc., 456 F.Supp. 704, 715-16 (E.D. Pa. 1978), aff'd, 603 F.2d 444 (3d Cir. 1979) (citing Blumenthal v. United States, 332 U.S. 539, 554-59 (1947)). A single, continuing conspiracy may involve a "series of offenses, or be compromised of a series of steps in the formation of a larger, general conspiracy." Continental Group, Inc., 456 F. Supp. at 716. A single conspiracy "may be committed in alternative ways," and "[w]hether the object of a single agreement is to commit one or many crimes, it is in either case that agreement which constitutes the conspiracy." United States v. Rigas, 605 F.3d 194, 208, 209 (3d Cir. 2010) (citing Braverman v. United States, 317 U.S. 49, 53 (1942)).
To determine whether there are two agreements or only one, and whether the indictment charges a single conspiracy, the Third Circuit applies the totality of the circumstances test, considering:
a) whether the "locus criminis" of the two alleged conspiracies is the same;
b) whether there is a significant degree of temporal overlap between the two conspiracies charged;
c) whether there is an overlap of personnel between the two conspiracies (including unindicted as well as indicted coconspirators);
d) the overt acts charged; and
e) the role played by the defendant according to the two indictments are similar. Rigas, 605 F.3d at 213 (citing United States v. Liotard, 817 F.2d 1074, 1078 (3d Cir. 1987)). "[T]his list is not exhaustive and 'different conspiracies may warrant emphasizing different factors" and the Court "must look into the full scope of activities described and implied in the indictments." Id. (internal citations omitted). "Other factors that may prove helpful in determining whether an indictment charges one or more conspiracies [include] whether there was a common goal among the conspirators . . . whether the agreement contemplated bringing to pass a continuous result that will not continue without the continuous cooperation of the conspirators. . . [essentially] whether there was evidence that the activities of one group were necessary or advantageous to the success of another aspect of the scheme or to the overall success of the venture . . . [and] the extent to which the participants overlap in the various dealings." Id. (internal citations omitted). "Locus criminis is defined very simply as the locality of the crime; the place where a crime was committed." United States v. Smith, 82 F.3d 1261, 1268 (3d Cir. 1996). "When the evidence indicates that the activities of the alleged conspiracies are not interdependent or mutually supportive, and that there are major participants in each conspiracy who lack knowledge of, or any interest in, the activities of the other, this factor weighs heavily in favor of a conclusion that two conspiracies exist." Id.
The Indictment charges Defendants with conspiracy to further a common goal, namely to "obtain money and other things of value" from the schools to Circle. See Indictment ¶¶ 8-9. Although employing more than one scheme, including duplicate payment and fake quote, the underlying purpose of these activities was to create profit for Circle. While Abeshaus may have used the money gained in the duplicate payment scheme to pay down the principal balance on a mortgage he held for Circle's use, the end of this scheme ultimately increased money flow and profit for Circle. Id. ¶ 14. See U.S. v. Brassington, No. 09-cr-45, 2010 WL 3982036, at *4 (D.N.J. Oct. 8, 2010) (finding a common underlying goal of increasing profit and single conspiracy between a scheme to operate as an unlicensed flight company and a scheme to fill aircraft with cheaper fuel). Additionally, both schemes took place at Circle headquarters. Abeshaus did have knowledge and interest via his approval as CEO of the fake quote scheme, and Kurlander was directly involved in the duplicate payment scheme and other schemes. Unnamed and unindicted Circle employees, as well as employee David Drill, were also involved in these schemes.
As to temporal overlap, while the duplicate payment scheme allegedly took place between 1997 and 2003, and activity as part of the fake quote scheme occurred as early as 2002, this potential temporal distinction does not necessarily demonstrate that there were multiple conspiracies. See Brassington, 2010 WL 3982036, at *5 ("this temporal distinction [of approximately one year] is not indicative of two separate conspiracies, but rather the evolution and continuation of a single conspiracy to illegally operate as a jet charter company"). At this stage, it is not clearly wrong to state that, given what is charged in the Indictment, Defendants are charged with a single conspiracy that consisted of several schemes that continued over time to ultimately increase profit for Circle. Any further inquiry goes toward the sufficiency of the Government's proof which is inappropriate now.
b.Fake Quote Scheme
Nevertheless, even if the duplicate payment scheme is ultimately found to constitute a separate conspiracy, the conspiracy charge against Abeshaus cannot be dismissed because he is also charged with participating in the fake quote scheme that is alleged to have occurred within the limitations period. In arguing that this charge should be dismissed, Abeshaus insists that the facts alleged regarding the fake quote scheme are insufficient alone as a matter of law to state an offense against him for conspiracy to commit mail and wire fraud. Abeshaus does not generally challenge the sufficiency of the Indictment's allegations that Abesahus's alleged co-conspirators made an agreement to commit mail or wire fraud through the alleged fake quote scheme or that at least one of the alleged conspirators took an overt step in furtherance of that scheme. See Reply to Mot. to Dismiss 4 n.1 (citing United States v. Reed, 350 F. App'x 675, 678 (3d Cir. 2009)). Abeshaus says instead that his alleged knowledge and approval of the fake quote scheme alone cannot establish that he "knowingly and voluntarily joined the conspiracy." Id. At this time, the Court finds that the Indictment adequately charges Abeshaus's knowing participation in the conspiracy and the conduct alleged does not fall outside the scope of conspiracy law.
To be convicted of conspiracy to commit mail or wire fraud under 18 U.S.C. § 1349, the individual must have knowingly and voluntarily participated in the conspiracy. United States v. Pearlstein, 576 F.2d 531 (3d Cir. 1978) (explaining that "defendants must either have devised the fraudulent scheme themselves, . . . or have willfully participated in it with knowledge of its fraudulent nature"). To satisfy this requirement, the Government must prove that the individual made an explicit or tacit agreement "to participate in the conspiracy and further its unlawful goals." United States v. Fullmer, 584 F.3d 132, 161 (3d Cir. 2009). The evidence must also establish "two different types of intent[:] the basic intent to agree, which is necessary to establish the existence of the conspiracy, and the more traditional intent to effectuate the object of the conspiracy." United States v. Shoup, 608 F.2d 950, 959 n.9 (3d Cir. 1979). The Supreme Court has defined "the shadowy border between lawful cooperation and criminal association" by explaining that the necessary finding of "intent and agreement" requires "more than suspicion, more than knowledge, acquiescence, carelessness, indifference, lack of concern." Direct Sales Co. v. United States, 319 U.S. 703, 713 (1943). Criminal association must be based at least on evidence of "informed and interested cooperation, stimulation, instigation," or "encouragement."
Id. In drawing this line, an individual's "stake in the venture" is relevant but not essential. Id. (citing United States v. Falcone, 109 F.2d 579, 581 (2d Cir. 1940)).
The Indictment here is sufficient to charge Abeshaus's participation in the conspiracy offense and provides sufficient factual detail to support this charge. Under Federal Rule of Criminal Procedure 7(c)(1), an indictment must include "a plain, concise, and definite written statement of the essential facts constituting the offense charged." The Third Circuit has explained that the indictment is sufficient where it "(1) contains the elements of the offense intended to be charged, (2) sufficiently apprises the defendant of what he must be prepared to meet, and (3) allows the defendant to show with accuracy to what extent he may plead a former acquittal or conviction." United States v. Vitillo, 490 F.3d 314, 321 (3d Cir. 2007). "[N]o greater specificity than the statutory language is required so long as there is sufficient factual orientation to permit the defendant to prepare his defense and to invoke double jeopardy in the event of a subsequent prosecution." United States v. Kemp, 500 F.3d 257, 280 (3d Cir. 2007).
The language of the Indictment sufficiently charges as an element of the offense that Abeshaus knowingly and voluntarily joined the alleged conspiracy. In pertinent part, the Indictment states that defendant Abeshaus "knowingly and intentionally combined, conspired, confederated and agreed" with defendant Kurlander and others at Circle "to devise a scheme and artifice to defraud, and to obtain money and property" from the school districts "by means of a number of fraudulent business practices" from at least August 1997 to June 2007. Indictment ¶¶ 8-9. The Indictment further provides sufficient factual detail regarding the fake quote scheme for Abeshaus to prepare his defenses to those allegations. The Indictment alleges that:
Circle sales representatives, with the knowledge and approval of Circle's management, including defendants Kurlander and Abeshaus, represented to the School Athletic Officials that, if the School Athletic Officials wanted to purchase goods and services from Circle but needed to obtain additional price quotes to justify doing so, Circle could provide those additional price quotes for the files of the School Athletic Officials or the Schools' business administrators.
Id. ¶ 17. Without specific reference to Abeshaus, the Indictment also alleges that the sales representatives notified "Circle's management" when the school officials requested fake quotes. Id. ¶ 18. Defendant Kurlander and another alleged co-conspirator then allegedly worked with Circle's sales representatives to prepare and submit the fake quotes to at least 100 schools. Id. ¶¶ 18-20. In the context of the Indictment as a whole, Abeshaus has sufficient notice of the charges against him to raise several factual defenses here in his pretrial motion.
Having otherwise established the sufficiency of the charge, the scope of the Court's review is narrow and limited to assessing whether the "specific facts" alleged in the Indictment regarding the fake quote scheme "fall beyond the scope" of the crime of conspiracy "as a matter of statutory interpretation." Bergrin, 650 F.3d at 271. The key question is whether Abeshaus's alleged approval of the fake quote scheme as de facto CEO and principal shareholder of Circle can constitute knowing and voluntary participation in the alleged conspiracy as a matter of law. Based on a plain reading of the allegations of the Indictment as a whole, the Court finds that the conduct alleged is sufficient to state a conspiracy offense against Abeshaus.
The underlying verb "to approve" encompasses multiple definitions. In one context, approval can signal the opinion of the individual towards a particular activity or outcome. In this sense, "to approve" is "to consider right or good; think or speak favorably of." American Heritage Dictionary 90 (3d ed. 1996). Alternatively, approval can constitute a more affirmative action relative to the activity or outcome. "To approve" is "to consent to officially or formally; confirm or sanction." Id. While the simple expression of a positive opinion regarding the acts or objectives of a particular conspiracy by an otherwise disinterested party does not constitute the individual's participation in the conspiracy, an individual's more affirmative consent, confirmation, or sanctioning under certain circumstances can demonstrate that the individual joined the conspiracy.
To the extent that courts have suggested that passive approval of the acts or objectives of the conspiracy alone is insufficient to establish culpability, the reference has been used to emphasize the requirement that a defendant must have knowingly and voluntarily participated in the conspiracy. In a Prohibition-era case cited by Abeshaus, the Third Circuit found that a purchaser could not be convicted of conspiracy to transport alcohol across state lines where the transport was "a mere incident in the sale" and the purchaser could not otherwise be liable for the purchase. Norris v. United States, 34 F.2d 839, 842 (3d Cir. 1929). Such a finding was based on stipulated facts that the purchaser's conduct was insufficient to demonstrate "active cooperation between the seller and the buyer." The Third Circuit reasoned that conspiracy requires "an intentional participation in the attempt to commit the offense." Id. The court explained for contrast that "knowledge, acquiescence, or approval of the act is not sufficient." Id.
Other Circuits have also more recently cited passive approval as conduct that is insufficient alone to establish participation in a conspiracy. The Second Circuit echoed this sentiment in reversing the conviction of a heroin and cocaine supplier for lack of evidence that he conspired with one of his dealers to bribe a public official to protect a separate illegal green card scheme. United States v. Ceballos, 340 F.3d 115, 124 (2d Cir. 2003). Although the supplier may have known that the proceeds of the scheme were used to fund the dealer's drug purchases, the court explained that conspiracy requires "something more than mere knowledge, approval of or acquiescence in the object or the purpose of the conspiracy." Id. (internal quotations omitted). Because "the defendant's attitude toward the forbidden undertaking must be more positive," the defendant "must in some sense promote their venture himself, make it his own, have a stake in its outcome or make an affirmative attempt to further its purposes." Id. (internal quotations omitted). See also United States v. Jones, 371 F.3d 363, 366 (7th Cir. 2004) (finding evidence insufficient to convict a defendant for conspiracy based on defendant's "mere presence" at the illegal sale of the firearm on the grounds that "knowledge and approval" of the sale alone cannot establish participation in the conspiracy); United States v. Dellosantos, 649 F.3d 109, 122 (1st Cir. 2011) (overturning the conviction against members of a cocaine distribution conspiracy who were "indifferent" to a related marijuana distribution conspiracy because "simple knowledge, approval of, or acquiescence in the object or purpose of the conspiracy . . . is not sufficient to make one a conspirator").
By contrast, where the defendant has a stake in an organization and more affirmatively approves or encourages the illegal activity within that organization, the Third Circuit has found that this can demonstrate the individual's knowing and voluntary participation in the conspiracy. In United States v. McKee, the Third Circuit upheld the conviction of a partner in a small carpentry business for conspiracy to obstruct a government function when the partnership concealed taxable wages paid to employees who similarly opposed the United States tax system for supporting unjust wars. 506 F.3d 225, 243 (3d Cir. 2007). Noting McKee's position as "a name partner" in a small partnership with "day-to-day involvement" in many functions of the business and a close relationship with others involved, the evidence supported an inference that McKee "participated in the scheme" because he "knew and consented to" the partnership filing false tax returns. Id. at 242. The court found that McKee had "both a financial and a philosophical motive" for the conspiracy because it allowed him and the other name partner "to have an income without compromising their opposition to the tax system." Id. Although McKee had "significantly less" responsibility for the daily management of the business than his partner who directly supervised the preparation of fraudulent tax materials, the court emphasized that McKee was not an "absentee partner who knew nothing of the [p]artnership's activities" and that "there is much more here than mere association." Id. at 243. In United States v. Provenzano, the Third Circuit similarly upheld a union official's conviction for a labor kickback conspiracy where he partially financed a company that legally supplied vehicles and drivers to a trucking company but also illegally extorted additional payments for non-existent "ghost drivers" in exchange for "labor peace." 620 F.2d 985, 999-1000 (3d Cir. 1980). The court found the evidence at trial supported the conclusions that the defendant "knew of the scheme, contributed money to it, approved of it, and therefore was a participant." Id. at 1000.
Based on Abeshaus's alleged management position, policy-making role, and financial stake in Circle, the allegations that he knew and approved of the fake quote scheme demonstrate an affirmative role consistent with the charge that he knowingly and voluntarily participated in the conspiracy to defraud the schools. During the duration of the alleged conspiracy from August 1997 to June 2007, the Indictment alleges that Abeshaus "was responsible for setting the policies and framework for Circle's operations" while "serving as the de facto Chief Executive Officer ('CEO')." Indictment ¶ 2. In this role, Abeshaus allegedly "was kept abreast of the company developments by Circle's employees." Id. ¶¶ 1-2. These employees specifically included Abeshaus's alleged co-conspirator and now co-defendant Kurlander, who was Circle's CFO and also his son-in-law. Id. The Indictment further alleges that Absehaus "was the largest single shareholder" of Circle during the relevant period, at least until September 2005 when the company was allegedly acquired by Schutt Holdings. Id. ¶¶ 2-3. The overall "principal object of the conspiracy," as set forth in the Indictment, was "to obtain money and other things of value from the Schools for Circle." Id. ¶ 9. Within this conspiracy, the fake price quotes in particular were allegedly part of "an effort to increase Circle's sales and profits." Id. ¶ 17. It follows then that Abeshaus would have had a financial interest in the company's performance and, by extension, the success of the conspiracy. While a jury may ultimately find the evidence presented at trial insufficient to prove beyond a reasonable doubt that Abeshaus knowingly and voluntarily joined the conspiracy, the Court finds at this stage that his knowledge and approval of the fake quote scheme as de facto CEO and principal shareholder of Circle does not fall beyond the scope of the crime of conspiracy to commit mail and wire fraud.
The Motion to Dismiss is denied because the Indictment adequately charges Abeshaus's participation in the alleged conspiracy to commit mail and wire fraud within the statute of limitations based on his knowing and voluntary participation in the fake quote scheme.
Defendants' Motion to Suppress is denied and Defendants' Motion to Dismiss is denied.
William H. Walls United States Senior District Judge
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