Joseph A. Lamendella, Chicago, Ill., for defendant-appellant.

James R. Thompson, U.S. Atty., Gary L. Starkman and Ann P. Sheldon, Asst. U.S. Attys., Chicago, Ill., for plaintiff-appellee.

Before SWYGERT, Chief Judge, SPRECHER, Circuit Judge, and CAMPBELL, Senior District Judge.*

WILLIAM J. CAMPBELL, Senior District Judge.

Defendant Robert E. Cleveland was convicted on each count of a three count indictment charging tax evasion in violation of 26 U.S.C. 7201. On appeal (Cleveland I), this court held that the district judge, in understandable reliance upon the language of United States v. Keig, 334 F.2d 823, 825 (7th Cir. 1964), had erroneously concluded that the Special Agent's Report (SAR) was not a 'statement' producible under the provisions of the Jencks Act, 18 U.S.C. 3500. Stating that 'we . . . expressly disapprove of the language of that (Keig) opinion insofar as it may be read to imply that a Special Agent's Report is not a statement within subsection (e) (of 3500),' 477 F.2d at 316, this court vacated the judgment of conviction and remanded the case with directions that the trial judge conduct an in camera inspection of the SAR to determine whether the content of that statement 'relates to the subject matter as to which the witness has testified.' 18 U.S.C. 3500(b). The district court was directed to enter a fresh judgment of conviction if it determined that 'no part of the report need be produced.' 477 F.2d at 316. On the other hand, if any portion of the report was found to relate to the subject matter of the witness' testimony, the defendant was to be granted a new trial, unless 'it is perfectly clear that the defense was not prejudiced' by the government's failure to tender '3500 material' upon request. 477 F.2d at 316, n. 9.

On remand, a hearing was held at which Special Agent Carey1 testified regarding the nature and composition of the multi-volume report, and the district judge conducted a general in camera inspection of the documents contained therein. Subsequently, the court entered a fresh judgment of conviction, holding that certain portions of the report did not relate to the witness' direct testimony or were outside the scope of the defendant's 3500 request, and that the remaining documents were either reviewed by the defendant prior to trial or were summaries and partial duplications of such documents. With respect to the latter, the court held that it was perfectly clear that the defendant had not been prejudiced by the fact that they were not produced in response to his motion. We reverse.

I.

The district court's order discloses that, for the purposes of the remand proceedings, the SAR was subdivided into four exhibits, designated Government's Exhibits One, Two, Three and Four (hereafter, GX-1, 2, 3 and 4). GX-1 comprises Volume One of the SAR. GX-2 contains those documents taken from Volumes Two through Ten of the SAR which had been used as exhibits during the trial. GX-3 consists of those exhibits and memoranda of interview taken from Volumes Two through Ten of the SAR which were not introduced into evidence during the trial. Finally, GX-4 is a group of index cards listing defendant's clients, their addresses and other data.

The district court found that all documents introduced into evidence in the course of the trial (GX-2) were reviewed by the defendant prior to trial. Apparently, the index cards (GX-4) were also made available to the defense before trial. Although the district court did not specifically determine whether these documents related to the agent's direct testimony, the district judge did conclude that it was perfectly clear that defendant had suffered no prejudice, since he had an opportunity to review, and in fact did review, these materials on an earlier occasion.

For the reasons and in the respects stated in Part II of this opinion, we hold that such materials do relate to the direct testimony of a witness such as Agent Carey. The district court's failure to specifically so find, however, is without consequence, since we agree that defendant's review of these materials prior to trial establishes clearly that he was not prejudiced by the fact that they were not tendered in response to his motion.2

GX-3, constituting those portions of Volumes Two through Ten which were not introduced into evidence, was found by the district court upon 'general inspection' to consist of 'memoranda of interview of the defendant, his personal representative and his former wife, summary schedules of certain exhibits, the originals of which were introduced into evidence, certain affidavits, the contents of which were stipulated to during the trial, (and) documents in support of the computations of the defendant's additional civil tax liability.'

With respect to these materials, the district court held as follows:

'The only items in Government's Exhibit Three which were not made available to the defendant prior to trial were the memoranda of interview of defendant's former wife and his personal representative and the documents in support of the summary computations pertaining to defendant's civil tax liability. Defense counsel specifically excluded interviews with third parties from the scope of his 3500 request. Furthermore, the court finds that the memoranda of interview and civil tax liability documents did not relate to the subject matter about which the witness testified.'

Again, regarding materials contained in GX-3 which the defendant reviewed prior to trial, the district court did not specifically determine whether these documents related to the agent's direct testimony. However, as in the case of GX-2, we agree with the district court's implicit determination that the defendant was certainly not prejudiced by their nondisclosure at trial, since they were reviewed by the defense prior to trial.

We must disagree, however, with the finding that 'defense counsel specifically excluded interviews with third parties from the scope of his 3500 request.' Although the trial transcript does contain some support for this position,3 defendant's original request for the production of the SAR did not exclude memoranda of interviews with all third parties. In the course of presenting the 3500 motion, defense counsel stated:

'I would call for the production of the Special Agent's report as a 3500 Statement. I do not want that portion of the report that contains exhibits and interviews with third party witnesses, I only want that which is related to the testimony of the Special Agent in this case.' (Tr. Transcript, p. 3).

In response to the government's objection, the court stated 'I will not require you (the government) to do it.' Thus, the request which resulted in the district court's adverse ruling was a request for the documents contained in the SAR, other than interviews with third party witnesses. Memoranda pertaining to interviews with other third parties were included among the documents requested.

With respect to Volume One of the SAR (GX-1), the district court held that:

'the administrative review portions of that volume, together with the summary schedules pertaining to the defendant's civil tax liability, do not relate to the subject matter as to which the witness has testified. The remaining portion of this volume is merely a summary or partial duplication of the items contained in Volumes Two through Ten . . ..'

After reviewing Volume One and those portions of GX-3 which the defense did not review prior to trial, we hold that the district judge's findings regarding Volume One, as well as his determination that portions of GX-3 do not relate to the witness' direct testimony, were clearly erroneous.

Special Agent Carey testified that, in the course of his official duties, he conducted an investigation concerning Robert E. Cleveland, the purpose of which was to 'determine the accuracy of the income tax returns filed for the years 1964, 1965 and 1966;4 that he computed defendant's income tax for those years, as well as for 1961, 1962, and 1963, using the net worth and expenditure method;5 and that his investigation started in 1966 and continued 'to the beginning of these proceedings.'6 He was permitted to testify regarding determinations made by him in the course of his investigation,7 and identified Government's Exhibit 100 as a net worth schedule which 'reflects generally the results of the investigation I conducted.'8

Among other things, Agent Carey testified regarding (1) the employment status of defendant's former wife before and during their marriage; (2) defendant's business income; (3) ownership by defendant of specifically identified securities; (4) accounts maintained by defendant in various brokerage firms; (5) defendant's membership on the Chicago Board of Trade; (6) defendant's indebtedness resulting from commodities trading and a judgment entered against defendant as a result thereof; (7) assets which allegedly remained in the possession of defendant's former wife prior to divorce proceedings; (8) defendant's real estate holdings; (9) his saving accounts; (10) automobiles owned at various times by defendant; (11) accounts held in the names of others, in which defendant allegedly had an interest; (12) nontaxable income and sources thereof; (13) debts paid to Cleveland by various clients; (14) identification of exhibits relating to assets, liabilities and expenditures attributed to defendant; (15) various loan applications prepared by the taxpayer.

A comparison of the Carey testimony with those documents which were not reviewed by defense counsel prior to trial refutes the district court's conclusion that they are not sufficiently related to one another to warrant production under the Jencks Act. For example among the documents included in GX-3 which defense counsel was not allowed to review prior to trial are transcripts and memoranda pertaining to interviews with defendant's former wife. Presumably relied upon by Agent Carey to assist in his determination of defendant's assets, liabilities and expenditures for the purpose of ascertaining defendant's net worth, the information contained in these documents includes references to assets allegedly owned by Mrs. Cleveland prior to the marriage, the sources of certain funds held during the marriage in her name, expenditures of funds for rent, food, entertainment and alimony (paid to defendant's first wife), the purchase price of their home and an apartment building, and other asset and liability information highly pertinent to a determination of defendant's net worth. The memorandum of interview prepared by Agent Carey also contains information relevant to the credibility of defendant's former wife, and would no doubt have been of assistance to defense counsel in challenging the validity of the information relied upon by the agent in reaching his conclusions as to defendant's net worth.

We similarly disagree with the district court's conclusion that those portions of the SAR which pertain to civil tax liability are unrelated to the subject matter of the agent's testimony. The testimony of Agent Carey was central to the government's case, since it was the long arduous investigation of this witness which formed the basis for the government's contention that defendant had understated his income in 1964, 1965 and 1966, and had thereby evaded the payment of income taxes. As the Second Circuit stated in United States v. O'Connor, 273 F.2d 358 (1959):

'In this setting, it is quite plain that the agents' reports relating to O'Connor's asset, income and expenditure position during the entire tax period in question, whether prepared for criminal or civil tax purposes, were necessary to defendant's preparation and conduct of his defense in two respects, to determine whether any statements of fact therein were inconsistent with or contradictory to testimony on the stand of the makers of the reports, and to test their expertness in preparation of the charts and computations used by them respectively on the stand'. 273 F.2d at 360.

Since the information which formed the basis for civil tax liability schedules was obtained by the agent in the course of his investigation, and since the nature and result of that investigation constituted the substance of this witness' direct testimony, we conclude that these documents were sufficiently related to the witness' testimony to warrant production under the Jencks Act.

Turning to Volume One of the SAR (GX-1) the district court held that the 'remaining portion of this volume' is merely a summary or partial duplication of information contained in Volumes Two through Ten. Included among this 'remaining portion' are reports prepared by Agent Carey dated April 8, 1969, April 16, 1970 and July 24, 1970, none of which was examined by defense counsel prior to the remand proceedings. The April 8th report is a firty-five page statement with additional appendices and exhibits. Subsequent to the agent's transmittal of this 'final' report, he prepared the similar but somewhat less cumbersome 'supplemental' reports of April 16, 1970 and July 24, 1970.

Our review of these documents does not support the view that they are mere summaries of material contained in other volumes of the SAR. They include, for example, conclusory statements by the agent as to the identity and value of the defendant's assets and liabilities, and detailed explanations regarding the factors which were considered in arriving at these conclusions. Rather than constituting a summarization of other documents, these reports disclose the manner in which the contents of those documents were employed by the agent to arrive at his conclusions regarding defendant's assets, liabilities and expenditures during each of the taxable years. The materials thus relate to the agent's direct testimony not only in their specific content, but also in what they disclose about the deductive process which led to the agent's conclusions. Indeed, where the agent's investigation comprises the very foundation of the government's case, as it invariably does in 'net worth' prosecutions, such reports can be as important to the defense for what they do not say as for what they do; cross examination might well be structured to challenge not only the factual determinations made by the agent, but the very sufficiency of his investigation.

It is not for this court to speculate as to the manner in which these statements might have assisted defense counsel in the course of cross examination. Clancy v. United States, 365 U.S. 312, 316, 81 S. Ct. 645, 5 L. Ed. 2d 574 (1961); Alderman v. United States, 394 U.S. 165, 182, 89 S. Ct. 961, 22 L. Ed. 2d 176 (1968). We confine our attention, as we should, to a determination of whether the statements relate to the witness' direct testimony and, if so, whether it is perfectly clear that defendant was not prejudiced by their nondisclosure. We find that the SAR is replete with materials prepared by Agent Carey which relate to his direct testimony, and we do not think it is at all clear that cross examination of this witness was not hampered by denial of defendant's 3500 request. In accordance with the mandate of this court in Cleveland I, the conviction must therefore be vacated and defendant must be granted a new trial.

II.

Having determined that the mandate of Cleveland I requires that appellant's conviction be vacated, we turn to a more troublesome question: given the particular method which the government employs in 'net worth' cases to prove that the taxpayer has understated his taxable income, and given the scope, content and nature of the typical Special Agent's Report,9 should the district court be required to carefully examine each of the thousands of pages contained in such multi-volume investigative reports in order to determine which documents contained therein relate to the direct testimony of the agent who has prepared the report. For the reasons and in the respects stated herein, we hold that such an inspection is not required, and that in the future, upon motion timely made by the defendant pursuant to 18 U.S.C. 3500, the government shall tender the SAR directly to the defendant.

Our holding in this regard is dictated by the interrelationship of several factors unique to prosecutions for tax evasion based upon the net worth method of proof.10 These factors include:

1. The circumstantial nature of the evidence presented by the government in net worth cases, and the inferences and conclusions which must be drawn therefrom in order to conclude that the defendant has willfully evaded the payment of taxes.

2. The purpose, nature and importance of the Special Agent's testimony; the nature and scope of Special Agent's investigation; and the unique relationship of the SAR to both the investigation and the purpose and nature of the agent's testimony.

3. The impairment of judicial economy implicit in a procedure which requires the district judge to carefully examine thousands of documents in the midst of a trial.

4. The strong possibility of error implicit in the most careful of screening processes, the consequences of which may well be the reversal of numerous convictions on the ground that the defendant's constitutional right of confrontation has been impaired.

(1) The Circumstantial Nature Of The Government's Proof.

Above all, it must be borne in mind that net worth tax cases are entities unto themselves, a fact made abundantly clear by the Supreme Court in Holland v. United States, 348 U.S. 121, 75 S. Ct. 127, 99 L. Ed. 150 (1954). Mr. Justice Clark, speaking for an unanimous Court, noted that certiorari was granted in that case specifically for the purpose of reviewing the propriety of the net worth method of proof, stating that:

'In recent years . . . tax-evasion convictions obtained under the net worth theory have come here with increasing frequency and left impressions beyond those of the previous unrelated petitions. We concluded (in granting certiorari) that the method involved something more than the ordinary use of circumstnatial evidence in the usual criminal case. Its bearing, therefore, on the safeguards traditionally provided in the administration of criminal justice called for a consideration of the entire theory', 348 U.S. at 124, 125, 75 S. Ct. at 130.