MICHAEL H. SIMON, District Judge.
Defendants Dan Heine ("Heine") and Diana Yates ("Yates") are charged in this criminal action with conspiracy to commit bank fraud and making false bank entries, reports, and transactions during the time that they were affiliated with The Bank of Oswego (the "Bank"). A fifteen-day joint jury trial is set to begin on November 1, 2016. Before the Court are Heine and Yates's separate motions for severance, pursuant to Fed. R. Crim. P. ("Rule") 14(a). Dkt. 109 (Heine's Motion for Severance); Dkt. 110 (Yates's Motion for Severance). For the reasons that follow, both motions are denied.
Rule 8(b) provides that two or more defendants may be charged together "if they are alleged to have participated in the same act or transaction or in the same series of acts or transactions constituting an offense or offenses." Defendants charged together "`are, prima facie, to be jointly tried.'" United States v. Mariscal, 939 F.2d 884, 885 (9th Cir. 1991) (quoting United States v. Doe, 655 F.2d 920, 926 (9th Cir. 1980)). Joint trials "promote efficiency and `serve the interests of justice by avoiding the scandal and inequity of inconsistent verdicts.'" Zafiro v. United States, 506 U.S. 534, 537 (1993) (quoting Richardson v. Marsh, 481 U.S. 200, 210 (1987)); see also United States v. Lane, 474 U.S. 438, 449 (1986) (quoting Bruton v. United States, 391 U.S. 123, 134 (1968)) (stating that joint trials "`conserve state funds, diminish inconvenience to witnesses and public authorities, and avoid delays in bringing those accused of crime to trial'"). Thus, "[i]t is well-established that in the federal system there is a preference for joint trials where defendants have been jointly indicted." United States v. Hernandez-Orellana, 539 F.3d 994, 1001 (9th Cir. 2008) (citing Zafiro, 506 U.S. at 537).
The Federal Rules of Criminal Procedure, however, also recognize that proper joinder under Rule 8(b) may result in prejudice to either the government or a defendant. Thus, Rule 14(a) provides that "[i]f the joinder of offenses or defendants in an indictment, an information, or a consolidation for trial appears to prejudice a defendant or the government, the court may . . . sever the defendants' trials. . . ." It is within the district court's discretion to determine the risk of prejudice posed by a joint trial. Zafiro, 506 U.S. at 541.
Importantly, Rule 14(a) does not require severance even if a defendant or the government demonstrates that they would be prejudiced by a joint trial; rather, Rule 14(a) "leaves the tailoring of the relief to be granted, if any, to the district court's sound discretion." Id. at 538-39. Severance is warranted only when "joinder is so manifestly prejudicial that it outweighs the dominant concern with judicial economy and compels the exercise of the court's discretion to sever." United States v. Brashier, 548 F.2d 1315, 1323 (9th Cir. 1976). The Ninth Circuit notes that joints trials are "particularly appropriate where the co-defendants are charged with conspiracy, because the concern for judicial efficiency is less likely to be outweighed by possible prejudice to the defendants when much of the same evidence would be admissible against each of them in separate trials." United States v. Fernandez, 388 F.3d 1199, 1242 (9th Cir. 2004).
The Supreme Court adds that severance should not be granted unless "there is a serious risk that a joint trial would compromise a specific trial right of one of the defendants, or prevent the jury from making a reliable judgment about guilt or innocence." Zafiro, 506 U.S. at 539. Such trial rights include the ability to present an individual defense and the Sixth Amendment right to confront one's accusers. See United States v. Escalante, 637 F.2d 1197, 1201 (9th Cir. 1980). "[D]efendants are not entitled to severance merely because they may have a better chance of acquittal in separate trials." Zafiro, 506 U.S. at 540.
The Ninth Circuit provides a four-part test to aid a district court's determination of whether severance is appropriate. The relevant considerations are:
Hernandez-Orellana, 539 F.3d at 1001 (quoting United States v. Sullivan, 522 F.3d 967, 981 n.9 (9th Cir. 2008)). "The most important factors are whether the jury can compartmentalize the evidence against each defendant and the judge's diligence in providing evidentiary instructions to the jury." Sullivan, 522 F.3d at 981-82. "The prejudicial effect of evidence relating to the guilt of codefendants is generally held to be neutralized by careful instruction by the trial judge." Escalante, 637 F.2d at 1201. As a general proposition, "juries are presumed to follow their instructions." Zafiro, 506 U.S. at 540 (quoting Richardson, 481 U.S. at 211).
In 2004, Heine and Yates co-founded the Bank, a financial institution engaged in the business of personal and commercial banking and lending. The Bank is headquartered in Lake Oswego, Oregon. Heine served as the Bank's President and Chief Executive Officer. As President and Chief Executive Officer, Heine was responsible for overseeing the Bank's affairs and managing the Bank's day-to-day operations. Heine was also a member of the Bank's Board of Directors (the "Board"). Heine left the Bank in 2014. Yates, a certified public accountant, served as the Bank's Executive Vice President and Chief Financial Officer. As Chief Financial Officer, Yates was responsible for ensuring the Bank's compliance with state and federal regulations. Yates was also the Secretary of the Board. She resigned from the Bank in March 2012.
Both Heine and Yates were responsible for ensuring that the Bank operated in a sound and safe manner and for keeping the Board informed about the Bank's financial condition and the adequacy of the Bank's policies, procedures, and internal controls. Additionally, Heine and Yates were members of the Bank's Internal Loan Committee (the "ILC"). The duties of the ILC included approving loans that were outside the authority of individual Bank loan officers, ensuring the quality of the Bank's loan portfolio, and minimizing risks in the Bank's loan portfolio.
On June 24, 2015, a federal grand jury issued a twenty-seven count indictment (the "Indictment") against both Heine and Yates for conduct related to their time with the Bank. The Indictment charges Heine and Yates with one count of conspiracy to commit bank fraud, in violation of 18 U.S.C. § 1349, and twenty-six counts of making false bank entries, reports, and transactions, in violation of 18 U.S.C. § 1005. The Indictment alleges that beginning in about September 2009 and continuing through at least September 2014, Heine and Yates conspired to defraud the Bank by means of materially false representations and promises. The Indictment further alleges that the purpose of the conspiracy was to conceal the true financial condition of the Bank from the Board, the Bank's shareholders, regulators, and the public. According to the Indictment, Heine and Yates reported false and misleading information about loan performance, concealed information about the status of foreclosed properties, made unauthorized transfers of Bank proceeds, and failed to disclose material facts about loans to the Board, shareholders, and regulators, all in an effort to conceal the Bank's financial condition.
The Indictment also names Geoffrey Walsh ("Walsh") as a person who played a role in the alleged conspiracy. Walsh was the former Senior Vice President of Lending at the Bank. Yates was Walsh's manager. In May 2012, Heine terminated Walsh for cause, in part based on Walsh's misconduct concerning lending practices. Walsh was indicted and charged in a separate case, United States v. Walsh, 3:13-cr-00332-SI-1 (D. Or. 2013), for conspiracy to commit wire fraud, wire fraud, and conspiracy to make false entries in bank records, among other charges. On July 22, 2015, Walsh pleaded guilty to certain charges alleged in a superseding indictment and a second superseding information. In Walsh's plea agreement, he accepted responsibility for acts related to those described in the Indictment against Heine and Yates. Walsh is currently awaiting sentencing.
The Indictment describes five schemes that purportedly advanced the alleged conspiracy's purpose of creating a healthier appearance of the Bank's finances than actually existed:
The Indictment further alleges that Heine and Yates knowingly made twenty-six false entries in the books, reports, and statements of the Bank with the intent to injure and defraud the Bank. According to the Indictment, Heine and Yates did so by omitting material information about the true status of loans and assets from the "Call Reports" and reports to the Board.
Heine argues that his trial should be severed from the trial of his codefendant Yates for three reasons: (1) a joint trial will infringe on Heine's right to present an individual defense to the jury; (2) Yates's admissions will violate Heine's Confrontation Clause rights in a joint trial; and (3) Heine will be severely prejudiced by the mutually antagonistic defenses that he and Yates will present at a joint trial.
The opportunity to present an individual defense is a substantive trial right. United States v. Tootick, 952 F.2d 1078, 1082 (9th Cir. 1991) (citing Escalante, 637 F.2d at 1201). Heine argues that a joint trial will improperly prejudice his ability to present an individual defense because much of the evidence that he intends to present at trial risks exclusion as unfairly prejudicial to Yates. A district court must determine, "`before admitting other acts evidence, whether the probative value of the evidence is substantially outweighed by the danger of unfair prejudice under [Fed. R. Evid.] 403.'" United States v. McElmurry, 776 F.3d 1061, 1068 (9th Cir. 2015) (quoting United States v. Curtin, 489 F.3d 935, 958 (9th Cir. 2007) (en banc)). Fed. R. Evid. 403 permits the district court to "exclude relevant evidence if its probative value is substantially outweighed by a danger of . . . unfair prejudice."
Heine asserts that the evidence that he intends to present includes: (1) evidence of Yates's bad acts outside the scope of the Indictment, including the results of both an FDIC investigation and an internal Bank investigation into allegations of Yates's misconduct while she served as a Bank executive; (2) Yates's personal relationship with Walsh; and (3) Yates's personal issues, including her overextended personal finances. Heine argues that this evidence is highly relevant to his defense theory that Yates acted alone, or at times jointly with Walsh, with regard to the misconduct alleged in the Indictment. In other words, Heine argues that the evidence he intends to present will show Yates's modus operandi to engage in wrongdoing, often in concert with Walsh, but without involving or informing Heine.
In Zafiro, the Supreme Court cautioned that severance may be warranted "when evidence that the jury should not consider against a defendant and that would not be admissible if a defendant were tried alone is admitted against a codefendant." 506 U.S. at 539. "Conversely, a defendant might suffer prejudice if essential exculpatory evidence that would be available to a defendant tried alone were unavailable in a joint trial." Id. In Grisby v. Blodgett, 130 F.3d 365 (9th Cir. 1997), the Ninth Circuit considered whether evidence was "essential[ly] exculpatory." In Grisby, the defendant was convicted at a joint trial of aggravated murder and assault. Id. at 367. In his petition for a writ of habeas corpus, the defendant argued that his joint trial prevented him from presenting "essential exculpatory evidence," because if he had been tried individually he would have been allowed to introduce a third-party statement that incriminated his codefendant. Id. at 370. The trial court excluded this statement at the joint trial. Id. The Ninth Circuit held that the excluded testimony was not clearly exculpatory, because it merely confirmed that the codefendant "initiated the shooting and shot each victim." Id. Thus, the statement "has no substantial bearing on the critical question of [the defendant's] participation in the murders." Id.
The Court finds here that Heine has not made a showing that "essential exculpatory evidence" will be excluded in a joint trial. See Zafiro, 506 U.S. at 539 (emphasis added). The evidence that Heine asserts he will seek to introduce—instances of Yates's bad acts outside the scope of the Indictment, Yates's relationship with Walsh, and Yates's personal issues—does not substantially bear on Heine's innocence or guilt with regard to the conspiracy and false bank entries charges. Thus, even if this evidence were to be excluded from a joint trial as unfairly prejudicial to Yates, the evidence is tangential to the "critical question" of Heine's participation in the crimes alleged in the Indictment.
Heine also argues that severance is required because certain admissions made by Yates, if received in evidence in a joint trial, will violate Heine's constitutional rights under the Confrontation Clause. Under Bruton v. United States and its progeny, "`the admission of a statement made by a non-testifying codefendant violates the Confrontation Clause when that statement facially, expressly, or powerfully implicates the defendant.'" Hernandez-Orellana, 539 F.3d at 1001 (quoting United States v. Mitchell, 502 F.3d 931, 965 (9th Cir. 2007)). A statement does not facially incriminate a codefendant unless it has "a sufficiently `devastating' or `powerful' inculpatory impact." United States v. Olano, 62 F.3d 1180, 1195 (9th Cir. 1995).
In support of his argument, Heine identifies one statement that Yates made to government investigators. Yates's statement refers to events that occurred at a dinner involving Yates, Heine, and Walsh. Heine asserts that Yates's statement implicates both herself and Heine. The government responds that it will not seek to admit the statement that Heine describes. The government asserts that it will not introduce those portions of Yates's statement that may facially incriminate Heine. In addition, the Court finds that to the extent that this statement or other statements may be subject to Bruton or may implicate Heine's rights at a joint trial under the Confrontation Clause, the Court will be able to employ appropriate remedial measures, such as proper limiting instructions and redactions, if necessary.
Heine further argues that severance is required because he will be severely prejudiced by the mutually antagonistic defenses that he and Yates will present at a joint trial. "Mutually antagonistic defenses are not prejudicial per se." Zafiro, 506 U.S. at 538. Rather, "[t]o warrant severance on the basis of antagonistic defenses, codefendants must show that their defenses are irreconcilable and mutually exclusive." United States v. Angwin, 271 F.3d 786, 795 (9th Cir. 2001), overruled on other grounds by United States v. Lopez, 484 F.3d 1186 (9th Cir. 2007) (en banc), (citing United States v. Sherlock, 962 F.2d 1349, 1363 (9th Cir. 1992)). "Defenses are mutually exclusive when `acquittal of one codefendant would necessarily call for the conviction of the other.'" Id. (quoting Tootick, 952 F.2d at 1081). A "defendant must show that the core of the codefendant's defense is so irreconcilable with the core of his own defense that the acceptance of the codefendant's theory by the jury precludes acquittal of the defendant." United States v. Throckmorton, 87 F.3d 1069, 1072 (9th Cir. 1996). The Ninth Circuit, however, has rejected a per se rule against joinder even where defendants maintain mutually exclusive defenses at trial. Tootick, 952 F.2d at 1083. But see Scott Hamilton Dewey, Irreconcilable Differences: The Ninth Circuit's Conflicting Case Law Regarding Mutually Exclusive Defenses of Criminal Codefendants, 8 Boalt J. Crim. L. 2, ¶ 8 (2004) (noting that without overruling Tootick, subsequent Ninth Circuit decisions "repeatedly have cited the earlier per se rule rejected in Tootick").
The Ninth Circuit has described the "`prototypical example'" of mutually exclusive defenses as when "`each of the two defendants claims innocence, seeking to prove instead that the other committed the crime.'" Tootick, 952 F.2d at 1081 (quoting United States v. Holcomb, 797 F.2d 1320, 1324 (5th Cir. 1986)). In United States v. Tootick, three individuals—Hart, Tootick, and Frank—traveled to a secluded area, where Hart was stabbed and then run over by an automobile. Id. at 1080. Hart survived the assault and testified at Tootick and Frank's joint trial that Frank stabbed him. Id. Frank testified that Tootick was responsible for the assault. Id. at 1081. Tootick did not testify, but his counsel argued that Tootick was highly intoxicated and unconscious during the assault. Id. The Ninth Circuit explained that:
Id. Thus, the defenses were mutually exclusive. The Ninth Circuit reversed the convictions of Frank and Tootick, concluding that the "jury could not have been able to assess the guilt or innocence of the defendants on an individual and independent basis" because the prejudicial effect of the mutually exclusive defenses was not cured by appropriate jury instructions. Id. at 1083.
In the Alberts Declaration filed under seal with the Court,
For example, both Heine and Yates assert that they were unaware of the "straw buyer" purchase of the A Avenue Property described in the Indictment. The Indictment alleges that "DEFENDANTS" provided D.W. with two checks from Bank funds to fund the purchase of the home. Dkt. 1 at 7. Heine argues that because the government intends to present evidence that these Bank funds could only have been accessed by Heine or Yates, a jury's conclusion that one of the defendants did not access the funds at issue requires the conclusion that the other defendant did, resulting in a situation where "`acquittal of one codefendant would necessarily call for the conviction of the other.'" Angwin, 271 F.3d at 795 (quoting Tootick, 952 F.2d at 1081). Yates, however, asserts her intent to present a defense that she had no expertise in real estate lending and relied on the judgment of other Bank employees, including Heine and Walsh, in matters relating to loans and real estate. A jury could find that Yates acted through mistake and negligence, but without an intent to deceive, and thus could "acquit [Heine] without disbelieving [Yates]." See Tootick, 952 F.2d at 1081.
The Court finds that although Heine and Yates intend to blame each other for the crimes with which they are each charged, their defenses are not so mutually antagonistic as to mandate severance. This case is not like Tootick, where there was no evidence to support a finding that someone other than the two defendants was responsible for the crime. The Indictment here alleges that Heine and Yates often acted in concert with other unnamed individuals both known and unknown to the Grand Jury. Walsh has already accepted responsibility for certain misconduct during his time at the Bank related to actions described in the Indictment, including the straw buyer purchase of the A Avenue Property. Thus, unlike in Tootick, the jury in a joint trial of Heine and Yates will have the flexibility to find that someone other than Heine or Yates is responsible for the crimes alleged.
Additionally, to the extent that Heine and Yates will present conflicting defenses, any resulting prejudice can be mitigated by appropriate instructions to the jury. Even in Tootick, the Ninth Circuit recognized that severance would not have been required had the court provided the jury with appropriate cautionary instructions. Id. at 1086 ("The joint trial of defendants pleading mutually exclusive defenses raises heightened risks that the defendants may be prejudiced. . . . Safeguards were inadequate in this case. Because the defendants have demonstrated that the trial, as conducted, resulted in manifest prejudice, we hold that the trial court's failure to sever constituted an abuse of discretion.") (emphasis added); see also Zafiro, 506 U.S. at 537-38 (declining to adopt a "bright-line rule . . . mandating severance whenever codefendants have conflicting defenses"). Thus, the Court finds that severance is not required on the grounds that Heine and Yates may present conflicting defenses at trial.
Based the benefits of having a joint trial, especially when codefendants are charged with conspiracy, the Court finds that these benefits outweigh any possible prejudice that Heine may face in being tried together with Yates. See Fernandez, 388 F.3d at 1242. Additionally, any prejudice to Heine that may result from a joint trial can, and will, be mitigated by appropriate and diligent instructions to the jury. See id. at 1243 ("We have repeatedly held that a district court's careful and frequent limiting instructions to the jury, explaining how and against whom certain evidence may be considered, can reduce or eliminate any possibility of prejudice arising from a joint trial."). The Court believes that a jury will be able to compartmentalize the evidence against each of Heine and Yates and make a reliable judgment regarding each of their separate innocence or guilt. See Sullivan, 522 F.3d at 981-82. Heine's motion for severance is denied.
Yates argues that a joint trial will improperly prejudice her ability to present an individual defense because much of the exculpatory evidence that she intends to present at trial risks exclusion as unfairly prejudicial to Heine under Fed. R. Evid. 403. See Zafiro, 506 U.S. at 539 (stating that "a defendant might suffer prejudice [under Rule 14(a)] if essential exculpatory evidence that would be available to a defendant tried alone were unavailable in a joint trial."). Yates asserts that the exculpatory evidence that she intends to introduce evidence at trial includes Heine's bad acts and misconduct outside the scope of the Indictment, including inappropriate behavior with other Bank employees, fraudulently taking a tax deduction on his personal taxes for a charitable donation that the Bank and not Heine personally had made, and making an unauthorized $50,000 charitable deduction on behalf of the Bank, among other acts. Yates argues that this evidence is relevant to her defense because it will support her theory of Heine's character trait of dishonesty, his tendency to shift blame, and his motive to engage in Bank fraud, but that it risks exclusion at a joint trial as unfairly prejudicial to Heine.
Thus, Yates makes substantially similar arguments in her motion for severance that Heine makes in his motion. Specifically, Yates argues that she intends to present evidence at trial of Heine's alleged bad acts and conduct and asserts that she may not be permitted to do so at a joint trial. Like Heine, however, Yates fails to make a showing that "essential exculpatory evidence" will be excluded in a joint trial. See id. (emphasis added). The evidence that Yates asserts that she will seek to introduce—primarily, instances of Heine's alleged misconduct outside the scope of the Indictment—does not substantially bear on Yates's innocence or guilt with respect to the crimes with which she is charged. Thus, even if this evidence were to be excluded at a joint trial as unfairly prejudicial to Heine, the evidence is only tangential to the "critical question" of Yates's participation in the crimes alleged in the Indictment.
Yates also argues that severance is required to avoid the prejudice that would result were Heine allowed to admit bad character evidence of Yates. See Zafiro, 506 U.S. at 539 (stating that prejudice under Rule 14 may result "when evidence that the jury should not consider against a defendant and that would not be admissible if a defendant were tried alone is admitted against a codefendant"). Yates's argument is speculative; she does not identify any specific evidence likely to be admitted that would result in unfair prejudice to her. Additionally, any prejudice that may result from the Court's rulings on the admissibility of evidence can, and will, be mitigated by appropriate instructions to the jury. See Escalante, 637 F.2d at 1201 ("The prejudicial effect of evidence relating to the guilt of codefendants is generally held to be neutralized by careful instruction by the trial judge."). Thus, severance is not warranted on this basis.
In Yates's reply, she argues that severance is also required because she and Heine intend to present mutually exclusive defenses. Yates's argument regarding mutually exclusive defenses is nearly identical to Heine's argument on this point, which the Court discussed earlier. Thus, for the reasons already stated, the Court finds that severance is not required on the grounds that Heine and Yates may intend to present conflicting defenses at trial.
The Court concludes that the benefits presented by a joint trial outweigh any possible prejudice that Yates may face in being tried with Heine. See Fernandez, 388 F.3d at 1242. Additionally, any prejudice to Yates will be mitigated by appropriate jury instructions. See id. at 1243. Further, the Court believes that a jury will be able to evaluate Yates's culpability individually from Heine's. Accordingly, Yates's motion for severance is denied.
Heine's Motion for Severance (Dkt. 109) and Yates's Motion for Severance (Dkt. 110) are each DENIED.