Filed: Dec. 11, 2013
Latest Update: Mar. 02, 2020
Summary: PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 12-4469 UNITED STATES OF AMERICA, Plaintiff - Appellee, v. KEITH FRANKLIN SIMMONS, Defendant - Appellant. Appeal from the United States District Court for the Western District of North Carolina, at Charlotte. Robert J. Conrad, Jr., Chief District Judge. (3:10-cr-00023-RJC-DCK-1) Argued: October 29, 2013 Decided: December 11, 2013 Before NIEMEYER and MOTZ, Circuit Judges, and John A. GIBNEY, Jr., United States District Judge for
Summary: PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 12-4469 UNITED STATES OF AMERICA, Plaintiff - Appellee, v. KEITH FRANKLIN SIMMONS, Defendant - Appellant. Appeal from the United States District Court for the Western District of North Carolina, at Charlotte. Robert J. Conrad, Jr., Chief District Judge. (3:10-cr-00023-RJC-DCK-1) Argued: October 29, 2013 Decided: December 11, 2013 Before NIEMEYER and MOTZ, Circuit Judges, and John A. GIBNEY, Jr., United States District Judge for t..
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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-4469
UNITED STATES OF AMERICA,
Plaintiff - Appellee,
v.
KEITH FRANKLIN SIMMONS,
Defendant - Appellant.
Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte. Robert J. Conrad,
Jr., Chief District Judge. (3:10-cr-00023-RJC-DCK-1)
Argued: October 29, 2013 Decided: December 11, 2013
Before NIEMEYER and MOTZ, Circuit Judges, and John A. GIBNEY,
Jr., United States District Judge for the Eastern District of
Virginia, sitting by designation.
Affirmed in part, reversed in part, vacated in part, and
remanded by published opinion. Judge Motz wrote the opinion, in
which Judge Gibney joined. Judge Niemeyer wrote a dissenting
opinion.
ARGUED: Joshua B. Carpenter, FEDERAL DEFENDERS OF WESTERN NORTH
CAROLINA, INC., Asheville, North Carolina, for Appellant.
William Michael Miller, OFFICE OF THE UNITED STATES ATTORNEY,
Charlotte, North Carolina, for Appellee. ON BRIEF: Henderson
Hill, Executive Director, Ann L. Hester, FEDERAL DEFENDERS OF
WESTERN NORTH CAROLINA, INC., Charlotte, North Carolina, for
Appellant. Anne M. Tompkins, United States Attorney, Amy
Elizabeth Ray, Assistant United States Attorney, OFFICE OF THE
UNITED STATES ATTORNEY, Asheville, North Carolina, for Appellee.
2
DIANA GRIBBON MOTZ, Circuit Judge:
Keith Simmons appeals his convictions on one count of
securities fraud, one count of wire fraud, and two counts of
money laundering, as well as his sentence of fifty years’
imprisonment. We affirm his fraud convictions but reverse his
money-laundering convictions because the transactions prosecuted
as money laundering constituted essential expenses of his
underlying fraudulent scheme. Accordingly, we affirm in part,
reverse in part, vacate his sentence, and remand for further
proceedings consistent with this opinion.
I.
A.
From April 2007 to December 2009, Simmons operated a $35
million Ponzi scheme called Black Diamond Capital Solutions.
With help from a network of self-styled hedge fund managers,
Simmons recruited more than 400 investors by promising to invest
their money in a lucrative and exclusive foreign currency
exchange, or “Forex” fund. Simmons told investors that only ten
or twenty percent of their investment would be at risk at any
given time. He sent them monthly earnings statements reporting
sizeable profits. And he promised them that, after an initial
ninety-day period, they could withdraw their money at will.
3
Numerous investors tested Simmons’s promise and withdrew a
portion of their money after ninety days had passed. Upon the
receipt of these returns, which seemed to evidence Black
Diamond’s legitimacy and profitability, many investors sent even
more money to Simmons. Some recruited their friends to invest
with Simmons as well.
In fact, no Forex fund existed and Simmons never invested a
cent of his victims’ funds. Simmons fabricated the earnings
reports, and he paid the purported returns to early investors
from deposits made by later ones. 1 Rather than investing his
victims’ funds as promised, Simmons treated their investments as
his personal piggy bank. He purchased $4.6 million in real
estate, invested $1.2 million in an extreme fighting venture,
funneled $2.2 million to his other businesses, and bought lavish
gifts and trips for his employees and girlfriends.
Greed provoked the Ponzi scheme, and greed doomed it. As
more investors sought to withdraw their funds, Simmons told a
series of escalating lies to “string out” investors and delay
withdrawals. First, he claimed that withdrawals were
interfering with the fund, and that he would henceforth limit
withdrawals in order to reduce the fund’s volatility. Later, he
1
Simmons paid out a total of $19 million, but only $9
million made its way to actual investors. Corrupt hedge fund
managers, who served as middle-men between Simmons and some of
his investors, siphoned off the rest.
4
asserted that he was negotiating with a German named Klaus
Bruner, who allegedly planned to cash out investors and take
over the account. And Simmons told some investors that the FBI
itself was impeding some withdrawals.
Simmons was lying. In 2009, when investors’ earning
statements reflected a total of more than $292 million, the
Black Diamond bank account had in fact dwindled to $523.60.
Still, Simmons told investors that their money was safe.
By July 2009, Simmons permitted no further withdrawals by
investors. After that date, Simmons managed to attract only one
new investor. Moreover, existing investors began demanding
their money back. And as victim-investors became more alarmed,
Simmons’s dissembling became more desperate. Finally, in
December 2009, the FBI raided his offices. During a long
conversation with an FBI agent, Simmons confessed to the fraud.
Ultimately, Simmons’s Ponzi scheme cost his victims more
than $35 million. Many lost their life savings. Some lost
their families. Many became depressed, even suicidal, after
learning that their money was gone.
B.
The Government indicted Simmons on one count of securities
fraud, one count of wire fraud, and two counts of money
laundering. The fraud counts arose from Simmons’s role in the
Ponzi scheme itself, which, according to the superseding
5
indictment, took place from April 2007 to December 2009. The
indictment did not predicate Simmons’s two fraud charges on
discrete instances of fraud; rather, it charged Simmons with a
two-and-one-half year “scheme to defraud,” specifically claiming
that Simmons executed “what is commonly known as a ponzi
scheme.” Simmons’s money-laundering counts, by contrast, arose
from two discrete payments to investors made in 2008. The
Government alleged that these payments also involved the
“diver[sion of] investor money back to other investors in ponzi-
fashion . . . to induce further investments by investors and
their friends and family members.”
Simmons proceeded to trial in December 2010. Nine of his
victims testified against him, as did certain hedge fund
managers, an IRS agent, and the FBI agent to whom Simmons
confessed. Simmons did not testify. His counsel argued that he
was a neophyte financier who never intended to defraud his
investors. The jury, however, convicted him on all counts.
After Simmons’s conviction, a probation officer drafted a
presentence report calculating Simmons’s recommended term of
imprisonment. The probation officer recommended an offense
level of 43 -- the maximum level permitted under the Guidelines
-- and a criminal history category of I. This offense level and
criminal history category produced a Guidelines-recommended
sentence of 960 months’ imprisonment.
6
The district court varied downward from the probation
officer’s recommendation and sentenced Simmons to 600 months’
imprisonment. Specifically, the court sentenced Simmons to 240
months on the securities-fraud count, a consecutive term of 240
months on the wire-fraud count, and 240-month terms on each of
the two money-laundering counts -- 120 months of which was to be
served consecutively to the fraud counts, and 360 months of
which was to be served concurrently. The court acknowledged
that this was an “enormous” sentence, but explained that it
could not “remember another case that involved such devastating,
life wrecking” greed. The court concluded that a fifty-year
sentence was sufficient, but not greater than necessary, to
accomplish justice.
II.
On appeal, Simmons primarily challenges his money-
laundering convictions. 2 He claims that the trial court erred by
2
Simmons also challenges all of his convictions on the
general ground that the district court violated due process by
admitting three pieces of assertedly irrelevant victim-impact
testimony. Even if the court erred in admitting this evidence,
any error was harmless. Overwhelming evidence supported the
jury verdict. Nine testifying victims traced the fraud directly
to Simmons. He confessed his role in the Ponzi scheme to an FBI
agent, who also testified. And the fraud left a paper trail
that pointed straight to Simmons. Thus, given the wealth of
evidence against Simmons, even if the admission of brief victim-
impact testimony was error, the guilty verdict “was surely
(Continued)
7
declining to grant his motion for judgment of acquittal on those
counts. We review the denial of a motion for judgment of
acquittal de novo. United States v. Mehta, 594 F.3d 277, 279
(4th Cir. 2010).
A.
The federal promotional money-laundering statute makes it a
crime to engage in a “financial transaction” involving “the
proceeds of specified unlawful activity” with the intent to
“promote the carrying on” of that activity. 18 U.S.C.
§ 1956(a)(1)(A)(i) (2006). The statute defines “specified
unlawful activity” to encompass more than 250 predicate crimes,
including securities fraud and wire fraud. Id. at
§ 1956(c)(7)(A).
Both of Simmons’s money-laundering convictions arose from
payments that he made to investors during the course of his
Ponzi scheme. The first conviction was based on a wire transfer
of $150,000 to James Bazluki on March 14, 2008. Bazluki had
invested $250,000 in Black Diamond prior to receiving this
return; after receiving it, Bazluki invested another $70,000.
The second money-laundering conviction was based on a wire
transfer of $16,000 to Till Lux on October 22, 2008. Lux had
unattributable to the error.” Sullivan v. Louisiana, 508 U.S.
275, 279 (1993).
8
invested $40,000 in Black Diamond. He testified that after
recovering the $16,000, he subsequently convinced many of his
friends to invest in Black Diamond. Lux also continued to
withdraw money from Black Diamond, and ultimately turned a small
profit on his investment. Simmons contends that these payments
did not involve “proceeds” of unlawful activity as required to
constitute money laundering.
His argument relies on United States v. Santos, a 4-1-4
decision in which the Supreme Court reversed the money-
laundering convictions of a defendant convicted of both running
an illegal gambling business and money laundering. 553 U.S. 507
(2008). Santos’s gambling counts arose from his operation of an
illegal lottery through a network of local bars and restaurants.
The money-laundering counts were based on payments by Santos to
the “runners” and “collectors” who helped operate the lottery,
and to the lottery winners themselves. The lower court
concluded that these payments involved the “proceeds” of
operating an illegal lottery, and could therefore constitute
grounds for money-laundering convictions.
Five members of the Supreme Court disagreed. A four-
Justice plurality concluded that the term “proceeds” in the
money-laundering statute was ambiguous -- it could mean either
“receipts” or “profits” -- and invoked the rule of lenity to
resolve the ambiguity in favor of the defendant. Id. at 514
9
(plurality opinion). The plurality thus concluded that the
money-laundering statute only covers transactions involving
“profits” of criminal activity. Id. at 524.
In rejecting the statute’s broader interpretation, the
plurality found that construing “proceeds” to mean “receipts”
would create a “merger problem.” Id. at 515. The plurality
explained that those who run illegal gambling businesses must
necessarily pay their accomplices and the lottery’s winners. If
a defendant could commit money laundering merely by “paying the
expenses of his illegal activity,” all illegal gambling
businesses would involve money laundering, and the Government
could punish a defendant twice for an offense that Congress
intended to punish only once.
Id. at 517.
This merger problem, the plurality noted, is not limited to
illegal gambling. Writing for the plurality, Justice Scalia
explained:
Few crimes are entirely free of cost, and costs are
not always paid in advance. Anyone who pays for the
costs of a crime with its proceeds -- for example, the
felon who uses the stolen money to pay for the rented
getaway car -- would violate the money-laundering
statute. And any wealth-acquiring crime with multiple
participants would become money laundering when the
initial recipient of the wealth gives his confederates
their shares. Generally speaking, any specified
unlawful activity, an episode of which includes
transactions which are not elements of the offense and
in which a participant passes receipts on to someone
else, would merge with money laundering.
10
Id. at 516. The plurality concluded that interpreting
“proceeds” to mean “profits” would resolve the merger problem by
ensuring that defendants cannot be convicted of money laundering
merely for paying the essential “crime-related expenses” of the
predicate crime.
Id. at 515.
Justice Scalia devoted much of the plurality opinion to
challenging the dissent’s prediction that applying the “profits”
interpretation would undermine the viability of “the very cases
that money laundering statutes principally target, that is,
cases involving large-scale criminal operations that continue
over a substantial period of time.” Santos, 553 U.S. at 538-39
(Alito, J., dissenting). The dissent warned that, following the
plurality’s approach, the money-laundering statute could not
reach long-term criminal enterprises in which the distinction
between payments of “essential expenses” and payments dispensing
criminal profits may often be unclear. But the plurality
dismissed the dissent’s concerns as baseless. According to the
plurality, determining the lifespan of a long-term criminal
enterprise, for purposes of evaluating whether the enterprise
produced profits, would raise no difficulties because an
enterprise lasts “as long as the Government chooses to charge.”
Id. at 520 n.7 (plurality opinion). Because the Government
selects the lifespan of the predicate crime, it must prove that
payments charged as money laundering during that lifespan
11
involved profits, rather than essential expenses, of the
predicate crime. Id.
Justice Stevens provided the crucial fifth vote to reverse
Santos’s money-laundering convictions, but did not endorse the
plurality’s view that “proceeds” always means “profits.”
Rather, Justice Stevens concluded that courts should resolve the
scope of the term “proceeds” on a case-by-case basis by
reference to congressional intent.
Id. at 525 (Stevens, J.,
concurring). Justice Stevens grounded his conclusion on the
merger problem identified by the plurality. He concluded that
using funds earned through an illegal lottery business to pay
the “essential expenses” of that business cannot constitute
money laundering.
Id. at 528. And he agreed with the plurality
that there was “no explanation for why Congress would have
wanted a transaction that is a normal part of a crime it had
duly considered and appropriately punished elsewhere in the
Criminal Code, to radically increase the sentence for that
crime.”
Id. Justice Stevens concluded that Congress could not
have intended such a perverse result.
Id.
B.
Congress amended the money-laundering statute in May 2009;
that amendment effectively overruled Santos, defining proceeds
to include “gross receipts.” Fraud Enforcement and Recovery Act
of 2009, Pub. L. No. 111–21, § 2(f)(1), 123 Stat. 1617, 1618
12
(2009) (codified at 18 U.S.C. § 1956(c)(9)). However, because
the amendment was not enacted at the time of the conduct giving
rise to Simmons’s money-laundering convictions, this expanded
definition of “proceeds” does not apply in this case. We are
therefore called on to wade into the murky Santos waters, as we
have in three previous published opinions.
In United States v. Halstead, we considered the reach of
Santos in the context of a defendant convicted of healthcare
fraud and money laundering. 634 F.3d 270 (4th Cir. 2011).
Halstead’s fraud convictions arose from his scheme to capitalize
on his patients’ healthcare benefits by making phony medical
diagnoses. His money-laundering conviction, by contrast, arose
from his transfer of the illicit gains into his personal bank
account. He claimed that Santos prohibited his money-laundering
conviction because transferring his ill-gotten gains into his
own coffers constituted an “essential expense[] of operating”
his healthcare fraud.
Santos, 553 U.S. at 528 (Stevens, J.,
concurring).
To resolve Halstead’s argument we first examined what,
exactly, Santos held -- a task complicated by the fractured
disposition. Relying on Marks v. United States, 430 U.S. 188
(1977), we interpreted Santos narrowly to bind lower courts only
in cases where illegal gambling constituted the predicate for
the defendant’s money-laundering conviction. Halstead,
634 F.3d
13
at 279. But, because the merger problem provided the “driving
force” behind both the plurality’s and Justice Stevens’s
opinions, we recognized that Santos compelled us to construe the
money-laundering statute so as to avoid punishing a defendant
twice for the same offense.
Id. at 278-79. We concluded that a
defendant cannot be convicted of money laundering merely “for
paying the essential expenses of operating the underlying
crime.”
Id. at 278 (quotation marks omitted). But if “the
financial transactions of the predicate offense are different
from the transactions prosecuted as money laundering” no merger
problem arises.
Id. at 279-80.
Applying this rule to Halstead, we held that no merger
problem tainted his money-laundering conviction. His healthcare
fraud was “complete” as soon as he received the ill-gotten
healthcare reimbursements. Transferring these reimbursements
into his own account thereafter constituted an altogether
“separate” offense that the Government properly prosecuted as
money laundering. Id. at 280.
After Halstead, we twice returned to Santos and its elusive
merger problem. In United States v. Cloud, we considered a
defendant convicted of mortgage fraud -- for fraudulently luring
home-buyers into making bad real-estate investments -- and money
laundering -- for paying kickbacks to the accomplices who helped
him locate his victims. 680 F.3d 396 (4th Cir. 2012). We
14
reversed Cloud’s money-laundering convictions, concluding that
the kickbacks constituted “essential expenses” of the mortgage-
fraud scheme because “Cloud’s mortgage fraud depended on the
help of others, and their help, in turn, depended upon payments
from Cloud.” Id. at 406. Because Cloud’s scheme “could not
have succeeded” without the kickbacks, we held that convicting
him separately for these transactions would present the very
same merger problem identified in Santos.
Id. at 407.
A few months ago, in United States v. Abdulwahab, we again
relied on Santos to reverse a defendant’s money-laundering
convictions. 715 F.3d 521 (4th Cir. 2013). Abdulwahab had
committed an elaborate investment fraud, and the jury convicted
him of money laundering based on payments he made to his co-
conspirators to carry out that fraud.
Id. at 506-07. As in
Cloud, we found that these payments “were for services that
played a critical role in the underlying fraud scheme” because
they persuaded confederates to participate in the crime.
Id. at
531. Abdulwahab resembled the paradigmatic felon, recognized by
the Santos plurality, who uses “stolen money to pay for the
rented getaway car.”
Id. We therefore concluded that the same
merger problem presented in Santos barred his money-laundering
convictions.
Id.
15
III.
Simmons argues that Santos, Halstead, Cloud, and Abdulwahab
require that we reverse his money-laundering convictions. He
claims that his payments to investors did not involve “proceeds”
of criminal activity but rather “essential expenses” of
maintaining his Ponzi scheme. And he maintains that convicting
him separately of money laundering for payments that were
essential to accomplishing his fraud would raise the same fatal
merger problem identified in Santos. The Government, by
contrast, argues that Simmons’s fraud did not depend on payments
to investors and that these payments were not essential to the
fraud. The Government therefore maintains that Simmons’s money-
laundering convictions should be affirmed.
A.
After considering the record in this case, the parties’
arguments, and controlling law, we conclude that Simmons’s
money-laundering convictions cannot stand. The evidence
admitted at Simmons’s trial irrefutably established that the
ongoing success of his Ponzi scheme depended on payments to
earlier investors, including those payments charged in the
money-laundering counts.
The evidence against Simmons confirmed the commonsense
notion that people generally do not send money into unproven
investment schemes without some evidence that they will see
16
their money again. Early payments from Simmons provided his
victims with just such evidence. Thus, the $9 million dollars
that Simmons paid to early investors was essential to
perpetuating the fraud scheme that ultimately earned him more
than $35 million. Indeed, James Bazluki -- the victim whose
payment formed the basis of Simmons’s first money-laundering
count -- testified that the fact that he “was able to request
money out of the account” convinced him “that this was a good
place to have [his] money” and prompted him to make further
investments. And Till Lux -- whose payment formed the basis of
Simmons’s other money-laundering count -- testified that the
fact that he was able to withdraw from his account made him “100
percent confident” in his investment, convinced him that his
gains were “not just on paper,” and made him encourage his
friends to invest. In sum, the very victims who received the
payments that formed the basis for Simmons’s money-laundering
charges unequivocally testified to the critical importance of
those payments in fostering the (misplaced) confidence necessary
to perpetuate the fraud.
That Simmons’s fraud continued for five months after the
payments to existing investors stopped does not alter this fact.
When payments ceased in July 2009, Simmons managed to attract
only one new investor. And, as soon as the payments ceased,
existing investors started demanding the answers that led to the
17
scheme’s prompt unraveling. That Simmons managed, through lies
and dissembling, to extend a fraud that had endured for more
than two years for an additional five months without paying any
new returns to investors does not prove that those payments were
unnecessary to the scheme. If anything, the rapid unraveling of
the Ponzi scheme when the payments ceased suggests just the
opposite.
Furthermore, we note that throughout its prosecution of
this case, the Government itself treated the payments to
investors as essential to Simmons’s fraud. The superseding
indictment characterized the wire fraud offense as including
transfers to “wire ponzi payment to investors and to their
intermediaries in other States” -- the very transactions that
the Government later prosecuted as money laundering. And in its
closing argument, the Government contended that payments to
investors were necessary to the fraud because they “g[a]ve the
investors confidence” that their investment was sound and
“induce[d] them to put even more money back into the scheme.”
The Government explained that the payments were “one of the ways
the defendant kept the scheme going.”
In addition to the evidence proving that this particular
Ponzi scheme relied on payments to early investors, such
payments are understood to constitute essential features of
Ponzi schemes. In fact, we have defined a Ponzi scheme as one
18
“in which early investors are paid off with money received from
later investors in order to prevent discovery and to encourage
additional and larger investments.” United States v. Loayza,
107 F.3d 257, 259 n.1 (4th Cir. 1997). The Oxford English
Dictionary similarly defines a Ponzi scheme as a “form of fraud
in which belief in the success of a non-existent enterprise is
fostered by payment of quick returns to first investors using
money invested by others.” Ponzi Scheme, Oxford English
Dictionary (2013).
Given these definitions, it is hardly surprising that the
only other appellate court to decide a case involving a Ponzi-
scheme operator convicted of both fraud and money laundering has
reached the same conclusion as we do. In United States v. Van
Alstyne, the Ninth Circuit reversed the defendant’s money-
laundering convictions on the ground that the payments of
purported returns to early investors were “inherent” to the
defendant’s underlying scheme to defraud. 584 F.3d 803, 815
(9th Cir. 2009). The court concluded that the money-laundering
convictions suffered from a merger problem because the very
nature of a Ponzi scheme “require[s] some payments to investors
for it to be at all successful.”
Id. at 815.
Finally, we note that when Congress amended the money-
laundering statute in 2009 to include “gross receipts” within
the law’s definition of “proceeds,” the Senate Report
19
acknowledged that Ponzi scheme payments could not be prosecuted
as money laundering under the existing statute. The Report
bluntly stated that, given the Santos Court’s interpretation of
the existing statute, the “proceeds of ‘Ponzi schemes’ like the
Bernard Madoff case, which by their very nature do not include
any profit, would be out of the reach of the money laundering
statutes.” S. Rep. No. 111-10, at 4 (2009). Of course, the
Senate’s interpretation of Supreme Court case law does not bind
us. It does, however, accord with our conclusion that payments
of purported returns to early investors are understood to
constitute “essential expenses” of Ponzi schemes rather than
transactions dispensing a Ponzi scheme’s profits.
B.
The Government concedes that this case involves a
“difficult line-drawing” issue, Gov’t Br. at 57, but nonetheless
contends that we must affirm. The Government raises three
principal arguments as to why Simmons’s money-laundering
convictions present no merger problem.
First, the Government contends that Simmons’s returns to
investors constitute “the reinvestment of profit to finance
future fraud” rather than “essential expenses” of an ongoing
fraud. Gov’t Br. at 56. Although the line between using
criminal profits to finance a future fraud and using gross
receipts to pay the expenses of an ongoing fraud is less than
20
self-evident, see Santos, 553 U.S. at 544 (Alito, J.,
dissenting), Santos both requires us to draw this line and
offers useful guidance as to where the line falls in this case.
Santos’s gambling scheme and Simmons’s Ponzi scheme
resemble each other in virtually all material respects. Both
constituted ongoing schemes rather than discrete criminal
transactions. The indictments in both cases charged underlying
conduct that spanned a number of years rather than a single
illegal act. And both schemes required occasional payments to
third parties to sustain the crime during its lifespan.
Santos paid his lottery winners, presumably hoping that
reliable paydays would induce winners, losers, and new players
alike to test their luck during the next round of play. Of
course, Santos could have declined to pay his winners and
instead pocketed the cash. Had he done so, however, his
gambling scheme would have been short-lived; it could not have
lasted the six years charged in the indictment. A majority of
the Supreme Court therefore agreed that Santos’s payments to
winners did not amount to the reinvestment of profit to finance
new, discrete gambling crimes. Rather, these payments
constituted expenses necessary to further a crime that, by its
very nature, required periodic payments to survive.
The same is true in this case. Like a bookie who pays his
winners in the hopes of attracting new and repeat gamblers
21
during the course of an ongoing lottery, Simmons paid early
investors in the hopes of attracting new and repeat investors
during the course of an ongoing fraud. Although Simmons could
have absconded with the early investors’ money before paying any
returns, had he done so, his scheme certainly could not have
lasted for the nearly three-year period charged in the
indictment. See Santos, 553 U.S. at 520 n.7 (plurality opinion)
(a criminal enterprise’s profitability must be proved for “as
long as the Government chooses to charge”).
Given this case’s similarity to Santos, we must decline the
Government’s invitation to divide Simmons’s Ponzi scheme into a
successive series of past, present, and future frauds. Rather,
Santos requires that we hold that Simmons’s Ponzi scheme, like
the lottery scheme in Santos, represented a single, ongoing
enterprise that the defendant could sustain only by making
limited payouts.
The Government next argues that payments to innocent third
parties -- rather than to coconspirators -- cannot constitute
essential expenses of a criminal scheme. The Government notes
that in both Cloud and Abdulwahab, the payments we deemed to be
essential were made to the defendant’s criminal accomplices
rather than to innocent outsiders like Simmons’s Ponzi victims.
According to the Government, while paying one’s accomplices is a
typical expense of criminal activity akin to paying for a rented
22
getaway car, paying investors in order to maintain a Ponzi
scheme is a different matter entirely.
This argument ignores the very facts of Santos itself. In
Santos, payments to runners, collectors, and lottery winners
formed the basis of the defendant’s money-laundering
convictions. 553 U.S. at 509. Although the runners and
collectors were accomplices to Santos’s crime, the lottery
winners were not. 3 Manifestly, the Supreme Court therefore did
not believe that the merger problem arises only when the
defendant pays his co-conspirators or accomplices. See
Santos,
553 U.S. at 515-16 (plurality opinion) (“Since few lotteries, if
any, will not pay their winners, the statute criminalizing
illegal lotteries would ‘merge’ with the money-laundering
statute.”). For our part, we have repeatedly explained in
interpreting Santos that the essential nature of the payment --
rather than the identity of the payment’s recipient -- dictates
whether a given transaction raises a merger problem. See
Cloud,
680 F.3d at 407;
Halstead, 634 F.3d at 279.
3
That these winners participated in an illegal lottery, and
were therefore not strictly “innocent,” did not make them
accomplices to Santos’s crime. The illegal gambling statute
criminalizes “conduct[ing], financ[ing], manag[ing],
supervis[ing], direct[ing], or own[ing]” a gambling operation
that violates state law. 18 U.S.C. § 1955 (2006). The statute
thus criminalizes the management of -- rather than the mere
participation in -- an illegal gambling venture. Just like
Simmons’s victims, the lottery winners were therefore not
participants or co-conspirators in Santos’s crime.
23
Finally, perhaps recognizing the similarity between the
payments in this case and those in Santos, the Government
stretches to distinguish them by pointing to the assertedly
unscheduled, discretionary nature of the Ponzi payments. The
Government maintains that although regular payments to lottery
winners -- as in Santos -- can constitute essential expenses of
a criminal scheme, “payments in discretionary amounts made on no
schedule in particular” -- assertedly as in this case -- cannot.
Gov’t Br. at 57.
It is not at all clear that the payments in Santos were
more “scheduled” or less “discretionary” than those here. 4 But
even assuming that Santos made payments according to a strict
schedule, and that Simmons made them at whim, the Government
raises a distinction without a difference. If a criminal scheme
requires certain payments to succeed, it makes no difference
whether these payments arrive regularly or sporadically. A
payment need not be predictable to be essential. Because
Simmons’s Ponzi scheme depended on periodic payments to
4
The payments here were governed by a contract permitting
investors to withdraw funds on the first business day of each
month. To be sure, Simmons failed to honor this contract. But
his ultimate failure to honor his contractual obligations does
not necessarily render the payments that he did make
unscheduled. For its part, the Santos Court never specified
whether Santos paid his winners on a particular schedule. In
any event, in neither case can the payments be characterized as
“discretionary” given that both schemes depended on the payments
to survive.
24
investors, these payments constituted essential expenses of his
criminal enterprise regardless of whether they accrued on a
specified timetable.
IV.
Simmons’s fraudulent scheme, like any typical Ponzi scheme,
depended on attracting new investments through occasional
payouts to existing investors. Without these payouts, there
would have been no new investments and, consequently, no Ponzi
scheme. The Government conceded -- indeed, trumpeted -- this
fact throughout the trial proceedings -- both in its charging
documents and its arguments to the jury. And Congress itself
recognized as much when it amended the money-laundering statute
in 2009 to ensure that Ponzi disbursements like the ones at
issue here could henceforth be punishable as money laundering.
Simmons’s payments to investors, like Santos’s payments to
lottery winners, constitute essential expenses of his underlying
fraud. Punishing Simmons separately for these payments
therefore raises the same merger problem identified in Santos.
For these reasons, while we affirm Simmons’s two fraud
convictions, we must reverse his two money-laundering
25
convictions, vacate his sentence, and remand for further
proceedings consistent with this opinion. 5
AFFIRMED IN PART, REVERSED IN PART,
VACATED IN PART, AND REMANDED
5
We need not address Simmons’s contention that his fifty-
year sentence was procedurally and substantively unreasonable.
And, given that Simmons’s procedural challenge to his sentence
rests on an asserted misapplication of a money-laundering
sentence enhancement, this challenge should be moot on remand in
light of our reversal of the money-laundering convictions on
which it is based.
26
NIEMEYER, Circuit Judge, dissenting:
During the course of this Ponzi scheme, Simmons obtained
money through wire fraud and securities fraud from investing
customers and used a portion of the money so obtained -- the
proceeds of the fraud -- to return $150,000 to James Bazluki and
$16,000 to Till Lux in an effort to conceal the fraud he had
committed on them. By so investing the proceeds of the fraud,
Simmons was able to engage in additional fraud from which he
obtained additional proceeds, because the payments to Bazluki
and Lux deflected potential suspicion that otherwise might arise
with respect to his initial fraudulent transactions.
Under these facts, when Simmons returned money to Bazluki
and Lux, he engaged in “transactions” that constituted money
laundering, in violation of 18 U.S.C. § 1956(a)(1)(A)(i)
(prohibiting financial transactions involving the “proceeds of
specific unlawful activity” (i.e., in this case, wire fraud and
securities fraud)). And the fraud committed by Simmons in
obtaining investors’ money was a distinct, antecedent crime,
completed when Simmons received the money. In these
circumstances, I submit, the two crimes (money laundering and
wire or securities fraud) did not merge so that Simmons was
subjected to punishment twice for the same conduct. See United
States v. Santos, 553 U.S. 507, 517 (2008) (observing that a
“merger problem” would allow prosecutors, in their discretion,
27
to seek the higher penalty for the two merged crimes or both
penalties); United States v. Halstead, 634 F.3d 270, 278-79 (4th
Cir. 2011) (same).
Disagreeing with the majority’s analysis, I would conclude
that the payments to Bazluki and Lux were not the “essential
expenses” of Simmons’ wire fraud. See Santos, 553 U.S. at 528.
The wire fraud did indeed have expenses in marketing and selling
the scheme and paying employees to work the office. But once
the fraudulent statements were made to customers and the
customers sent money to Simmons based on the statements, the
fraud was complete, and Simmons would then be punishable for
violating the wire fraud statute, 18 U.S.C. § 1343. The
subsequent payments back to the investors, who had earlier been
defrauded, were not expenses of the fraudulent act -- they were
not necessary as a matter of fact or law. Rather, they were
acts of money-laundering that indeed would have the effect of
covering up the fraud and thus promoting future frauds.
Our decision in United States v. Cloud, 680 F.3d 396 (4th
Cir. 2012), makes clear the distinction between an expense of
the fraud and a payment to conceal the fraud and promote future
frauds. In Cloud, the proceeds of the fraud were paid to
employed recruiters, as coconspirators of the defendant, who
helped perpetuate the fraud.
Id. at 408. We noted that the
payments to these recruited coconspirators were the “essential
28
expenses of Cloud’s underlying fraud, thus presenting a merger
problem.” Id. at 407. We thus found it essential that the
payments be made to conspiring employees, distinguishing those
payments from payments made to investors for cover-up and future
frauds. As we stated:
In utilizing monies from previous properties to
finance future purchases, Cloud was not paying the
“essential expenses” of the underlying crime.
Cloud, 680 F.3d at 408; see also United States v. Abdulwahab,
715 F.3d 521, 531 (4th Cir. 2013) (likewise holding that
payments made to the defendant’s agents for “services that
played a critical role in the underlying fraud scheme” were
essential expenses of the fraud and recognizing the distinction
made in Cloud that payments to nonparticipating persons to
promote future frauds were not “essential expenses”).
In this case, Bazluki and Lux were not recruiters,
confederates, or coconspirators in the fraudulent scheme. To
the contrary, they were innocent victims of Simmons’ wire or
securities fraud, and the payments made to them were to cover up
Simmons’ past fraud and promote future fraud. Simmons’ ability
to obtain investments based on fraudulent statements subjected
him to punishment under 18 U.S.C. § 1343, as well as 15 U.S.C.
§ 78j(b), and his payments of the fraudulently obtained monies
to victims of the fraud were separate “transactions” that
subjected him to punishment for money laundering under 18 U.S.C.
29
§ 1956(a)(1)(A)(i). In this circumstance, there is no risk of
penalizing Simmons twice for the same conduct.
The majority could only make its analysis work if Simmons
were convicted of some single crime prohibiting a Ponzi scheme
because under a Ponzi scheme, the proceeds from earlier
fraudulent transactions are used to engage in future
transactions. But Simmons was not charged with a crime
prohibiting a Ponzi scheme; he was charged with committing
distinct crimes of wire fraud, securities fraud, and money
laundering, and his payment of monies to investors who had
already been defrauded was not an expense of the fraud; it was a
transaction of money laundering.
Accordingly, I would not find that a merger problem exists
in this case and would affirm on all counts.
30
