MEMORANDUM AND ORDER
This memorandum is based on the transcript of the decisionrendered orally on February 28, 2005, in which the court allowedthe defendants' motions for judgment of acquittal pursuant toFederal Rule of Criminal Procedure 29(a). This memorandum addssome citations, clarifies some language, and refines somediscussion.
I. SUMMARY
The Superceding Indictment alleges that defendants ArthurPappathanasi and Nicholas Scangas, both executives of West LynnCreamery ("WLC"), conspired with Dunkin' Donut franchisees tohelp them evade taxes in violation of 18 U.S.C. § 371. Thealleged conspiracy involved a rebate program for the sale oflight cream by WLC to Dunkin' Donut stores, in which WLCallegedly gave franchisees inflated invoices and then rebated thedifference back to them in checks and cash. The franchisees thenwere able to pocket the rebate money without declaring it on therelevant income tax returns.
On July 9, 2004, the defendants filed a motion to dismiss theoriginal indictment. The court denied that motion on November 23,2004. The government subsequently filed the SupercedingIndictment on December 16, 2004. On January 4, 2005, thedefendants filed a motion to dismiss the Superceding Indictment,and the court denied that motion on January 24, 2005.
After the government presented its case in a four-week jurytrial, the defendants moved for judgments of acquittal.
II. ANALYSIS
In considering a motion for judgment of acquittal under FederalRule of Criminal Procedure 29(a): [T]he court must look at the evidence in the light most favorable to the government. This evidence includes both direct evidence and circumstantial evidence. The court must draw reasonable inferences in favor of the government. It must resolve all credibility questions and evidentiary conflicts in favor of the government. The court must decide if the evidence is sufficient to permit a rational jury to find each essential fact to have been proven beyond a reasonable doubt. The government is not bound by all of the evidence it presents. However, if the government introduces evidence contrary to the inferences it wants the jury to draw, it must introduce other direct or circumstantial evidence to relieve itself of the effect flowing from the evidence introduced. The evidence must be sufficient to prove the fact at issue beyond a reasonable doubt. However, the government does not have to rule out every hypothesis congenial to a finding of innocence.United States v. Sampson, 335 F.Supp.2d 166, 201 (D. Mass.2004) (citing First Circuit cases) . The First Circuit has addressed the standard for appellatereview of the sufficiency of evidence in terms that are alsorelevant to the instant Rule 29 motion: A reviewing court should refrain from second guessing the ensuing conclusions as long as, one, the inferences derived support a plausible rendition of the record; two, the conclusions flow rationally from those inferences. However, juries do not have carte blanche. The appellate function, properly understood, requires the reviewing court to take a hard look at the record and to reject those evidentiary interpretations and illations that are unreasonable, insupportable, or overly speculative. This function is especially important in criminal cases, given the prosecution's obligation to prove every element of an offense beyond a reasonable doubt.United States v. Spinney, 65 F.3d 231, 234 (1st Cir. 1995).
Jury verdicts have significant value to the administration ofjustice and this court has very rarely granted a motion for ajudgment of acquittal. However, Federal Rule of CriminalProcedure 29(a) expressly states that the court must enter averdict of acquittal if the evidence is insufficient to sustainthe verdict. See Burks v. United States, 437 U.S. 1, 10, n. 5(1978). The court has scrutinized the trial record in the contextof the complex law and has concluded that it does not have thelegitimate discretion to allow the jury to decide this casebecause the evidence presented is not sufficient.
The defendants are charged with participating in a § 371Klein conspiracy. In essence, a conspiracy is an agreement,spoken or unspoken, to commit a crime. To prove a conspiracy, thegovernment must prove beyond a reasonable doubt that: (1) theagreement specified in the agreement and not some other agreement existedbetween at least two people; (2) that the defendant being focusedupon willfully joined that agreement; and (3) that one of theconspirators committed an overt act, meaning an act that was aneffort to achieve the purpose of the conspiracy. First CircuitPattern Jury Instructions (Criminal) § 4.18.371(1) (2003);United States v. Rivera-Santiago, 872 F.2d 1073, 1078-80(1st Cir. 1989); United States v. Piper, 35 F.3d 611,614-15 (1st Cir. 1994).
To act willfully means to act knowingly and not by accident ormistake, with specific intent to disobey or disregard the law.First Circuit Pattern Jury Instructions (Criminal) § 4.18.371(1).
In this case, the defendants, Pappathanasi and Scangas, areaccused of conspiring with Dunkin' Donuts franchisees tooverstate the expenses and conceal some of the taxable income ofthose franchisees in order to assist the franchisees indefrauding the IRS and paying less taxes than the franchiseesactually owed. To prove this charge, the government must provethat a particular defendant had both an intent to agree withspecific Dunkin' Donuts franchisees and an intent to assist thefranchisees' efforts to defraud the Internal Revenue Service.See First Circuit Pattern Jury Instructions (Criminal): §4.18.371(1) (2003); United States v. Adkinson, 158 F.3d 1147,1155 (11th Cir. 1998).
It is not sufficient for the government to prove only that adefendant acted in a way that would have furthered the goals of aconspiracy if there was one. Adkinson, 158 F.3d at 1155. Inthis case, the government must prove by independent evidence thatthere was a tax conspiracy in progress and that a defendantknowingly and voluntarily joined that conspiracy. Id.
The government also must prove that a purpose of the conspiracywas to interfere with the proper functioning of the IRS and thatany fraud was not merely a foreseeable consequence of aconspiratorial agreement. See United States v. Goldberg,105 F.3d 770, 773, 774 (1st Cir. 1997); Adkinson,158 F.3d at 1155.
The mere collateral effects of jointly agreed-to activity, evenif generally foreseeable, are not necessarily an object of theconspiracy. Id. In Goldberg, for example, the First Circuitstated that it would not be sufficient for the government toprove only that a defendant agreed to pay someone under the tableknowing that he had no intention of reporting the money to theIRS. Goldberg, 105 F.3d at 774. Rather, the government mustprove beyond a reasonable doubt that a defendant entered into aspoken or unspoken agreement with the taxpayer and that a purposeof that agreement was to assist the taxpayer to defraud the IRS.Id.
The most important paragraphs of the Superseding Indictmentinclude paragraphs 8 and 9, under the caption, "The Conspiracy."They are the paragraphs that describe the conspiracy alleged inthis case. Paragraph 8, particularly, describes the conspiracy ofwhich the government must prove a defendant was a member. Itstates: Beginning at least as early as 1987, continuing until at least in or about December 1998, in Lynn and elsewhere in the District of Massachusetts, the defendants, Arthur J. Pappathanasi and Nicholas A. Scangas, did knowingly, willfully, and unlawfully combine, conspire, and agree together and with others known and unknown to the grand jury to defraud the United States by impeding, impairing, obstructing, and defeating the lawful governmental functions of the Internal Revenue Service (the "IRS") of the United States Department of the Treasury in the ascertainment, computation, assessment, and collection of revenue, to wit, income taxes of Dunkin' Donuts franchises, their owners, and others, by concealing taxable income from the IRS and overstating expenses.
Superceding Indictment, ¶ 8. Therefore, the government must provea conspiracy between the defendants and Dunkin' Donutsfranchisees to conceal taxable income from the IRS.
In paragraph 9 of the Superceding Indictment, the grand juryalleged that "the essence of the conspiracy was an agreement, anunderstanding among the defendants and the coconspirators, todefraud the United States by means of a sham rebate program, inwhich WLC issued falsely inflated invoices to Dunkin' Donutscustomers and others for light cream and other products and thenrebated the amount of the falsely inflated invoice in a formwhich the customer would use to evade taxation" (emphasisadded).
In the original indictment, paragraph 9 alleged that West LynnCreamery had a sham rebate program that Dunkin' Donutsfranchisees "could" use to evade taxes. After the November 2004hearings on the motion to dismiss, the government realized thatit would be insufficient to prove only that the defendants knewthat the rebate program "could" be used by Dunkin' Donutsfranchisees to evade taxes, rather than that it "would" be usedto evade taxes. See Goldberg, 105 F.3d at 774. Therefore, the government obtainedthe Superseding Indictment that substituted the word "would" forthe word "could" in paragraph 9. Nevertheless, the originalmisconception regarding what is required to prove a Kleinconspiracy may have contributed to the government's problems inthis trial.
Paragraph 25 of the Superseding Indictment, under the caption"Manner and Means," states that "WLC would and did make effortsto conceal the `rebate' program from the IRS." Paragraph 43, thelast paragraph in the "Overt Acts" section of the SupercedingIndictment, states that: [i]n or about December 1998, WLC failed to produce in response to a subpoena, and concealed from the IRS, numerous WLC records relating to the rebate program, including yellow checks, blue checks, blue check registers, cash receipt journals, rebate instruction documents, portions of monthly rebate files, and other rebate related documents.
While paragraph 8 charged a conspiracy to conceal income fromthe IRS, it did not allege that the purported original agreementincluded an agreement between defendants and Dunkin' Donutsfranchisees that WLC would, if necessary, not produce records tothe IRS. WLC responded to an October 1997 subpoena for recordsrelated to franchisee Michael Gavriel. It is not alleged that theresponse to the Gavriel subpoena constituted an overt act infurtherance of the conspiracy. Nor is there evidence that wouldsupport such an allegation.
The evidence viewed in the light most favorable to the government would be sufficient to prove the following. Beginningin the 1960s, WLC had a rebate program in which Dunkin' Donutsfranchisees and some others were billed at a high price and laterreceived rebates, usually by check, that could have been used bythe franchisees to conceal income and evade taxes. Somefranchisees used the program for this purpose. This program wasestablished by Bob Walsh of WLC.
There is no evidence that any Dunkin' Donuts franchiseediscussed the tax implications of the rebate program with BobWalsh or told him that they were not paying taxes on the rebatemoney. However, one franchisee, Paul Govostes, testified that BobWalsh told him that the rebate program was "very safe" or"bullet-proof".
Bob Walsh agreed to pay several of the Dunkin' Donutsfranchisees in cash. He caused his son, Jim Walsh, to delivercash to some of the franchisees.
In 1987, Pappathanasi became the chief executive officer ofWLC, and Scangas became a sales executive. The men are cousins.WLC was a company that was founded by Nicholas Scangas' fatherand the elder Scangas' brothers, the uncles of Pappathanasi andScangas.
Pappathanasi and Scangas each knew that the rebate programexisted and that it could be used by Dunkin' Donuts franchiseesto evade federal taxes. They knew that the fact that the invoicesexisted at higher prices would facilitate tax evasion if thefranchisees did not report the rebates to the IRS. Pappathanasiand Scangas regarded the program as a service to franchisees. The rebate program also had other purposes, includingfacilitating credit to Dunkin' Donuts franchisees and providingWLC with a "float," meaning the use of money it would nototherwise have, without interest, for 30 to 60 days.
There is not any direct evidence that Pappathanasi or Scangasever discussed the tax implications of the rebate program forfranchisees before the October 1997 grand jury subpoena forGavriel's records. There is also no direct evidence thatPappathanasi or Scangas discussed the tax implications of therebate program with Bob Walsh or Jim Walsh.
The circumstantial evidence is not sufficient to prove thatPappathanasi and Scangas discussed these matters with each otheror with anybody else. Bob Walsh did report to Pappathanasi whenPappathanasi became the Chief Executive Officer of WLC. Manyother employees reported to Pappathanasi as well.
Pappathanasi and Scangas attended some meetings together.Pappathanasi signed checks and other rebate documents regularly.Scangas also signed some of the rebate checks.
There is no evidence that Pappathanasi and Scangas everdiscussed with each other any of the Dunkin' Donuts franchiseesidentified in the Bill of Particulars as their coconspirators:Paul Govostes, Ted Foundas, Michael Gavriel, Gus Dettore, RobertWeiss, Carlos Andrade, Jason Dubinsky, Mark Dubinsky, and HaroldCrockett.
With the exception of Foundas, discussed below, neitherPappathanasi nor Scangas ever spoke to a Dunkin' Donutsfranchisee about taxes or whether the rebate program was being used to evadetaxes. In fact, most of the alleged coconspirators, includingDettore and Weiss, Mark Dubinsky, Gavriel, and Govostes,identified in the Bill of Particulars never spoke to Pappathanasior Scangas regarding anything.
Scangas authorized Jim Walsh to pay Andrade's rebate monthly incash. No one told Pappathanasi prior to the October 1997 subpoenafor Gavriel documents that cash payments were being made toAndrade or anybody else. After the October, 1997 subpoena and aninvestigation by WLC's attorney, Michael Altman, Pappathanasitold Jim Walsh to stop making cash payments.
As discussed later in the context of the necessaryPetrozziello rulings, the court does not find that thegovernment has proven by a preponderance of the evidence thatFoundas had a conversation of the sort he described withPappathanasi on the golf course. For the purposes of the Rule 29motion, however, the court must and does assume that the golfcourse conversation occurred. Therefore, the court assumes forthe purpose of the Rule 29 analysis that the jury could believeFoundas and find that in 1994, on the golf course, Foundas saidto Pappathanasi, "I am concerned about the amount of money we aregetting and not paying taxes on. I hope we are not going to getcaught by the federal government." The court also assumes thatPappathanasi responded, as Foundas testified, that Foundas"should not worry because we are not going to get caught becausethere are two sets of books." There is no evidence that Pappathanasi told Scangas about this purportedconversation.
WLC had records of the rebate program. It was widely known atWLC. It was not kept secret.
When the grand jury issued a subpoena for the Gavriel rebaterecords in October 1997, WLC produced the required documents.Pappathanasi had all of the rebate records assembled after thatinitial subpoena and had them put in an office next to his. Therebate program was ended in January or February 1998.
Pappathanasi and Scangas knew that Gavriel had pled guilty andwas cooperating with the government's investigation of WLC. Allof the WLC rebate records were subpoenaed by the grand jury forproduction in December 1998. Some were produced, but many checksand some other records were not produced and have not been found.
There is no evidence that Pappathanasi or Scangas discussed the1998 subpoena or the failure to produce documents with anyDunkin' Donuts franchisee. There is no evidence that Bob Walsh oranyone else ever spoke with Dunkin' Donuts franchisees regardingwhat WLC would do if there was a government investigation of therebate program. There is also no evidence that Scangas wasinvolved in responding to the 1998 subpoena or that he discussedthat subpoena with Pappathanasi.
The facts viewed in the light most favorable to the governmentare not sufficient to prove a § 371 Klein conspiracy, as such aconspiracy was defined by the First Circuit in Goldberg, 105 F.3d at 774. As the First Circuit explained, a conspiracy can havemultiple purposes. Interfering with government functions must beproven to be a purpose of a conspiracy and not just a foreseeableeffect of joint action taken for other reasons. See id. at774-75.
Goldberg involved both the use of false invoices and thefiling of false tax documents with the Internal Revenue Serviceby Goldberg. In finding the evidence sufficient to sustain theguilty verdict, the First Circuit wrote: [W]e leave untouched the general precept, namely, that mere collateral effects of jointly agreed-to activity, even if generally foreseeable, are not mechanically to be treated as an object of the conspiracy. This would be a different case if, without filing false tax documents, Goldberg had agreed with his partners to pay Jones under the table, knowing that Jones had no intention of reporting the money to the IRS. If the difference is in degree then, here the degree matters.Id. at 774 (emphasis added). The First Circuit characterizedGoldberg as falling within "the outer bounds" of § 371. Id.at 775.
In this case, neither of the defendants nor WLC filed any falsedocuments with the IRS, though such a filing is not alwaysessential to proving a Klein conspiracy. Some of the Dunkin'Donuts franchisees' rebates were paid in cash, and it could beinferred that Scangas knew that they might not pay taxes on themoney and that the invoices would facilitate any effort by afranchisee to evade taxes. The First Circuit in Goldberg,however, indicated that foreseeing that the franchisees might notpay taxes would not be enough to prove participation in a Kleinconspiracy. Id. at 774. The government characterizes thepertinent statement by Judge Boudin for the First Circuit as dicta. However, even if dicta, itwas written to provide guidance, and it guides this court.
The lack of sufficient evidence of an agreement by Pappathanasior Scangas to enter a Klein conspiracy, however, is not theonly fatal flaw in the government's evidence. Even if WLC wasengaged in a Klein conspiracy with the Dunkin' Donutsfranchisees, the evidence viewed in the light most favorable tothe government is not sufficient to prove that Pappathanasi andScangas intended to agree with each other and Dunkin' Donutsfranchisees to become members of that conspiracy.
The government has to prove beyond a reasonable doubt that adefendant intended to agree with at least one allegedcoconspirator. Adkinson, 158 F.3d at 1153. Although theconnection of the defendant to the alleged tax conspiracy neededonly to be slight, the government must demonstrate withsubstantial proof that there was in fact some connection. Id.at 1152, n. 10. The government must prove a meeting of the mindsto commit an unlawful act. Id. at 1154. It may do so withdirect and/or circumstantial evidence. Id.
In Adkinson, the government "was unable to point to oneconversation between the defendants regarding taxes, much lessdemonstrating an intent to avoid them." Id. This lack of aconversation contributed to the finding that the direct andcircumstantial evidence was insufficient to prove theirmembership in the alleged conspiracy. With the exception of the purported golf course conversationbetween Pappathanasi and Foundas, the same is true here. UnitedStates v. Gurary, 860 F.2d 521, 524 (2nd Cir. 1988), a caseon which the government has relied, involved direct evidenceindicating that the defendants knew fictitious invoices were usedto prepare fraudulent tax returns. Gurary explained the illegaltax advantages to a middleman. Id. The defendants also met todiscuss the IRS investigation, instructed witnesses on theirtestimony, and continued the scheme after those discussions.Id. There is no comparable evidence in this case.
The evidence is sufficient to prove that the defendants knewthat the rebate program could be used by some franchisees ifthe franchisees decided to evade taxes. Indeed, such knowledgewas alleged in the original indictment to be the essence of theconspiracy. There is no evidence, however, that Pappathanasi andScangas discussed the use of the program to evade taxes with eachother or with any Dunkin' Donuts franchisee. The direct andcircumstantial evidence viewed most favorably to the governmentis sufficient only to show that some franchisees decided on theirown to evade taxes. With the exception of Foundas, none of themclaimed to have discussed doing so with either defendant.
The evidence is not sufficient to prove that Bob Walsh and WLCentered into a Klein conspiracy, as defined in Goldberg.However, even assuming that the evidence is adequate to provethat WLC and Bob Walsh were coconspirators, the facts that thedefendants knew about the rebate program and took actions to perpetuate it arenot sufficient to prove that they intended to agree with eachother and the Dunkin' Donuts franchisees to join a conspiracy toimpede the IRS. The direct and circumstantial evidence, even whenviewed in the light most favorable to the government, isinsufficient to prove the necessary meeting of the minds.
It is a close question whether the purported golf courseconversation between Foundas and Pappathanasi would be sufficientto prove a conspiracy between the two of them to impede the IRS,but it is a close question that is not material in the context ofthe charges in this case. There is no evidence connecting Scangasto the conversation or to a possible narrower conspiracy betweenPappathanasi and Foundas.
Moreover, a conspiracy between Pappathanasi and Foundas is notthe conspiracy alleged in the Superceding Indictment. AllowingPappathanasi to be convicted of this narrower conspiracy wouldviolate his substantial rights and would, therefore, beimpermissible. See Kotteakos v. United States, 328 U.S. 750(1946); United States v. Fenton, 367 F.3d 14 (1st Cir.2004); United States v. Portela, 167 F.3d 687 (1st Cir.1999); United States v. Glenn, 828 F.2d 855 (1st Cir.1987).
Because a single conspiracy was alleged, the court allowedtestimony from about five groups of Dunkin' Donut franchisees.The evidence is insufficient, however, to establish a singleconspiracy under Kotteakos and its progeny. Rather, theevidence, at best, relates to a possible hub, WLC, with independent spokes, each ofthe Dunkin' Donuts franchisees who evaded taxes. This would be,at best, multiple conspiracies, the hub and spoke without therim.
Among other things, a single conspiracy requires aninterdependence among participants. Portela, 167 F.3d at 695.To be interdependent, "activities of one aspect of the schememust be necessary or advantageous to the success of anotheraspect of the scheme. Each individual must think the aspects ofthe venture interdependent, and each defendant's state of mind,and not his mere participation in some branch of the venture, iskey," Id.; see also United States v. Wilson, 116 F.3d 1066,1076 (5th Cir. 1997); Glenn, 828 F.2d at 857-59.
The totality of the circumstances that the evidence could provein this case is insufficient to establish that the Dunkin' Donutsfranchisees conspired with each other in one conspiracy with WLCat the hub. The success of one franchisee in evading taxes didnot depend on the efforts of any others, and there is no evidencethat the franchisees thought it did.
It is true that if one franchisee got caught, that couldgenerate an investigation which might lead to the identificationof other franchisees who were evading taxes. However, this isalso true of thieves selling to a common fence, which the SupremeCourt in Kotteakos stated would be insufficient to establishone conspiracy. See 328 U.S. at 755. In essence, the SupremeCourt was saying that if one robber who sold to a particularfence was caught and the evidence led to the fence, the identification of thefence could foreseeably lead to other people doing business withthe fence, but that is not sufficient to establish a singleconspiracy. Id. Similarly, the evidence in this case is notsufficient to prove the required interdependence.
If Pappathanasi had been charged only with conspiring withFoundas, the court would not have permitted any evidence by theother Dunkin' Donuts franchisees. The issue would have required aFederal Rules of Evidence 404(b) and 403 analysis. The testimonyof the other franchisees who did not claim to have had anyconversations about the rebate program with Pappathanasi wouldnot have been relevant to his intent, because he did not discussrebates or taxes with them. If the court had been persuaded thatthere was some special probative value that would permit theadmission of their testimony under Rule 404(b), it would havefound Rule 403 to have operated to exclude this evidence becausethe risk of unfair prejudice to both Pappathanasi and Scangaswould have substantially outweighed its probative value.
The evidence regarding franchisees other than Foundas wouldalso not have been admissible against Scangas if he were analleged coconspirator in a narrower Pappathanasi-Foundasconspiracy. The jury, however, heard from many franchisees otherthan Foundas. No limiting instruction could cure the unfairprejudice of that at this point.
Pappathanasi's and Scangas' substantial rights have been irreparably injured. The government essentially acknowledged thisfact on February 25, 2005, when it agreed that it would be verydifficult to justify submitting a conspiracy with only Foundas tothe jury. Therefore, a judgment of acquittal is necessary andappropriate. See Kotteakos, 328 U.S. at 754-55; UnitedStates v. Dworken, 855 F.2d 12, 24 (1st Cir. 1988).
Although it is not material to the final analysis that ajudgment of acquittal for both defendants is proper, the courtfinds also that they have been unfairly prejudiced by theadmission of substantial evidence concerning WLC's failure toproduce documents in response to the December 1998 subpoena forall rebate records, which is charged as an overt act in paragraph43 of the Superceding Indictment.
The evidence is insufficient to prove beyond a reasonable doubtthat any destruction of documents as part of a cover-up was partof any original conspiratorial agreement to help the franchiseesevade taxes rather than an effort to protect WLC, and possiblyPappathanasi, Scangas, and others after an investigation of thefranchisees had begun.
There are distinct requirements for evidence of a cover-up tobe included in the initial conspiracy, which were established bythe Supreme Court in Grunewald v. United States, 353 U.S. 391,402-405 (1957), and addressed by the First Circuit in UnitedStates v. Twitty, 72 F.3d 228 (1st Cir. 1995). In Twitty,the First Circuit wrote: [W]e read Grunewald to impose a special burden to show that an express agreement to conceal was, or at least became, part of the central conspiratorial agreement and that the later acts relied upon were in furtherance of this agreement.
Id. at 234.
In Grunewald, the facts included the following. The allegedconspiracy was to fix tax cases by bribing a person in the IRS.The indictment specifically alleged that it was part of theconspiracy that the defendants would make continuing efforts toavoid detection and prosecution by lying and covering up.353 U.S. at 394, n. 3.
It was also alleged that the conspiracy continued until afterthe statute of limitations for assessing taxes expired. Id. at398. The evidence showed that after the investigation started,the defendants caused the disappearance of records and repeatedlywarned taxpayers to keep quiet. Id. at 403.
The Supreme Court held that circumstantial evidence that aconspiracy was kept secret and coconspirators took care to coverup their crime to escape detection and punishment was not enoughto prove that concealment of the crime was part of the initialagreement among the coconspirators. Id. at 402. The Courtemphasized that there was no direct evidence to show an expressoriginal agreement to cover up. Id. at 403-4. Thus, on thegovernment's first theory, the evidence was inadequate.
The Court did remand the case for a retrial on the issue ofwhether the central object of the conspiracy had been achieved at the time of the cover-up. Id. at 415. The Court held that onthe evidence presented, a properly instructed jury might havefound that the object of the original conspiracy was to protectthe taxpayers until the statute of limitations expired. Id. at410-11. Therefore, it ordered a retrial so that a properlyinstructed jury could decide if the acts of concealment were toprotect the defendant's interests and had only an incidentaleffect on protecting the taxpayers or if they were part of theoriginal conspiracy. Id. at 415.
In the instant case, in paragraphs 8 and 9, which describe theconspiracy, the Superceding Indictment does not allege that acover-up, if necessary, was part of the original agreement. Inaddition, the Superceding Indictment alleges in paragraph 8 thatthe conspiracy ended in 1998, not three or six years later whenthe time for assessing taxes for statute of limitations purposeswould have expired. This absent allegation in the SupercedingIndictment suggests that the grand jury did not intend to allegethat an agreement to cover-up was part of the originalconspiracy.
There is no evidence of any discussion of a possible cover-upbefore the Gavriel investigation was disclosed to the defendantsin 1997. There is no evidence of any discussion of a cover-upwith any any of the Dunkin' Donuts franchisees at any time.
According to Foundas, in the purported conversation on the golfcourse, Pappathanasi said to Foundas that WLC had two sets ofbooks. Foundas did not claim that Pappathanasi said that the records would be destroyed or not produced if an investigationbegan. There is no evidence that Scangas and Pappathanasidiscussed the production of documents with each other inconnection with the 1998 subpoena.
Thus, there is no express agreement to cover-up that could beproven by the evidence. Indeed, there is no evidence that Scangaswas involved in responding to the 1998 subpoena, although if hewere a coconspirator and that were an overt act in furtherance ofthe conspiracy, he would be responsible for it.
It is undisputed that WLC complied with the Gavriel subpoena in1997. This strongly suggests that a failure to produce documentsin 1998 was not part of any original conspiracy but, at most, wasthe result of a decision in 1998 to attempt to protect WLC.
In these circumstances, the evidence is not sufficient to provebeyond a reasonable doubt that the failure to produce documentswas part of any original conspiratorial agreement.
Finally, the defendants' substantial rights have beenprejudiced because the court conditionally admitted many hearsaystatements which do not constitute admissible coconspiratorhearsay under Federal Rule of Evidence 801(d)(2)(E), and alimiting instruction would not be effective at this point.Essentially, the court anticipated this outcome in November 2004when it noted on several occasions that it would conditionallyadmit, over the defendants' arduous objections, the testimonythat the government sought to introduce under Federal Rule ofEvidence 801(d)(2)(E), but the court expected that such evidence would be so pervasivethat if it decided it was not properly admitted, no limitinginstruction would cure the prejudice.
To admit those statements finally, the court would have to findthat they were made in furtherance of a conspiracy of which adefendant was or became a member. See Fed.R. Evid.801(d)(2)(E); United States v. Petrozziello, 548 F.2d 20, 23(1st Cir. 1977). It does not have to be the conspiracyalleged in the indictment. Dworken, 855 F.2d at 24. However,the conspiracy must be proven by a preponderance of the credibleevidence. Petrozziello, 548 F.2d at 23.
With regard to Petrozziello rulings, the court does not lookat the evidence in the light most favorable to the government;rather, it must assess credibility. Earle v. Benoit,850 F.2d 836, 842 (1st Cir. 1988); United States v. Dray,659 F. Supp. 1426, 1436 (D. Mass. 1987). As explained earlier, in thiscase the evidence viewed in the light most favorable to thegovernment is insufficient to prove beyond a reasonable doubtthat the charged conspiracy existed or that Pappathanasi andScangas agreed to become members of any such conspiracy. Thecredible evidence also does not prove by a preponderance that thecharged Klein conspiracy existed or that Scangas orPappathanasi was a member of any such conspiracy.
In addition, the credible evidence does not prove by apreponderance that the purported conversation on the golf course between Foundas and Pappathanasi occurred in the course of anarrower conspiracy between them. Indeed, the government has notproven by a preponderance of the credible evidence that the golfcourse conversation occurred at all. It has not proven thatFoundas told Pappathanasi that he was not paying his taxes on therebate money and expressed concern. It has also not proven by apreponderance of the credible evidence that Pappathanasi toldFoundas not to worry because there were two sets of books.
As the court regularly instructs juries, statements ofcooperating witnesses must always be scrutinized carefullybecause of their incentive to lie and blame others. First CircuitPattern Jury Instructions (Criminal) § 2.08 (2003); UnitedStates v. Simonelli, 237 F.3d 19, 29 (1st Cir. 2001). Thecourt had the opportunity to observe Foundas. His demeanor didnot suggest that he was a credible person, and his testimony didnot suggest that he was a credible person. He regularly shiftedblame to other people on a range of issues. He did not originallyremember if the purported conversation on the golf course waswith Pappathanasi or Angie Scangas, or the year that it occurred.Subsequently, as time passed, somehow his memory got better andbetter. He remembered that: he spoke with Pappathanasi and notAngie Scangas; that the conversation occurred in 1994; and attrial he said, apparently for the first time, that theconversation occurred on the sixteenth hole at a particular pointon the fairway.
The court finds that Foundas was not truthful, that he was inventing facts he did not recall in an effort to assist thegovernment and try to help himself in connection with hissentencing.
For all of the foregoing reasons, Pappathanasi and Scangas'Rule 29 motions are meritorious. They are, therefore, herebyALLOWED. Accordingly, judgments of acquittal shall be entered.