Wednesday, December 19, 2007

Third Circuit widens circuit split on guilt-assuming hypotheticals; reaffirms breadth of Rule 404(b) in fraud cases

In affirming a mail fraud conviction, the Third Circuit has held in a 2-1 decision that guilt-assuming hypothetical questions may sometimes be asked of defense character witnesses, widening an existing circuit split on this issue. The Court also approved the admission of a substantial amount of other-bad-acts evidence to prove intent, thereby reaffirming the broad reach of Rule 404(b) in fraud cases.

The case, United States v. Kellogg, No. 05-1893, involved allegations that the owner of a water testing laboratory defrauded his customers by reporting to them that certain analyses were performed using one particular EPA methodology when, in fact, a different EPA methodology had been used. Intent to defraud was the principal issue at trial, with the defendant maintaining that any reporting errors as to the methodology used were accidental. Substantial evidence supported the defendant's claim, including a lack of motive arising from the near-identical scope and cost of the two methodologies, and evidence that this type of error could occur through computer glitches.

To prove fraudulent intent, the government presented 404(b) evidence that the defendant's certification to test drinking water had been revoked a year earlier by the Pennsylvania DEP. The decertification resulted from a series of citations for negligent laboratory practices, a small minority of which involved misrepresentations to DEP. The defendant argued that this evidence should have been excluded because the vast majority of it involved alleged negligent (as opposed to deceptive) conduct, and in any event failed the Rule 403 balancing test because it related to public drinking water, which was not at issue in the fraud prosecution.

In order to rebut the government's case of intent, the defendant offered several character witnesses who testified both as to their opinion of the defendant's truthfulness and as to his community reputation for the same. The prosecutor cross-examined at least one of these witnesses by asking him whether he would consider truthful a hypothetical person who had done what the government alleged the defendant had done. The witness promptly answered that such a person would not be truthful.

As to the Rule 404(b) evidence, the Third Circuit ruled it admissible on a theory that deceptive conduct in similar matters close in time to the alleged fraudulent conduct is admissible to prove intent. The Court did not address the defendant's argument that most of the admitted evidence involved alleged negligent, as opposed to intentional, conduct.

As to the guilt-assuming hypothetical, the Court ruled that such questions can never permissibly be asked of a reputation character witnesse (because any answer would be irrelevant), but that there is no "per se rule" prohibiting their use with opinion character witnesses. In the latter instance, the questions are probative of bias and, if properly framed as a hypothetical, do not impermissibly infringe on the presumption of innocence. In so holding, the Third Circuit sided with the D.C. Circuit, against the weight of authority from the Second, Fourth, Seventh, and Eleventh Circuits, all of which hold guilt-assuming hypotheticals improper as to both reputation and opinion character witnesses. Judge Roth disagreed with the majority in Kellogg, but concurred in the result because she deemed the error harmless.

Thursday, December 06, 2007

3d Circuit reverses probationary sentences in fraud case

In United States v. Ali, (3d Cir. Nov. 27, 2007), the Third Circuit reversed probationary sentences in a fraud case, in which defendants Faridah Ali and Lakiha Spicer obtained federal money allocated to a community college to fund an adult education program. The Third Circuit held that the district court erred in its initial Guidelines calculation, that it relied on inappropriate factors for the downward departures, and that the resulting sentences were unreasonable, and thus vacated the sentences and remanded for resentencing.

The Third Circuit determined that the district court erred under step one of the sentencing process, the Guidelines calculation, because it rejected a preponderance standard for the loss calculation in favor of a reasonable doubt standard in Ali’s case and, further, failed to specify an estimate of the loss amount. The district court ultimately assessed a 15-21 month Guideline range (level 14, category I) for Ali, whereas Probation had calculated a 41-51 month range (level 22, category I). The Court also rejected the argument that the preponderance standard as applied to the sentencing calculations raised concerns under the Fifth or Sixth Amendments.

With respect to departure determinations under step two, the Third Circuit determined that the district court erred in granting downward departures on the following grounds: (1) good works and community support; (2) lack of initial intent to defraud; (3) Spicer’s minor role; and (4) the "exculpatory no" doctrine in Spicer’s case. The Court also found the district court’s analysis under step three of the sentencing process to be flawed because it was unable to meaningfully consider the recommended Guidelines range as required by § 3553(a)(4), given that its error at step one and its flawed departure analysis in step two tainted step three.