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United States of America v. Harry S. Stonehill

September 28, 2011

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,
v.
HARRY S. STONEHILL, THE ESTATE OF; ROBERT P. BROOKS, THE ESTATE OF, DEFENDANTS-APPELLANTS.



Appeal from the United States District Court for the District of Oregon Owen M. Panner, Senior District Judge, Presiding D.C. No. 3:65-cv-00127-PA

The opinion of the court was delivered by: W. Fletcher, Circuit Judge:

FOR PUBLICATION

OPINION

Argued and Submitted March 18, 2011-San Francisco, California

Before: Alex Kozinski, Chief Judge, Thomas M. Reavley,*fn1 and William A. Fletcher, Circuit Judges.

Opinion by Judge William A. Fletcher

OPINION

Harry Stonehill and Robert Brooks ("Taxpayers") appeal the district court's denial of their Rule 60(b) motion to vacate a 1967 tax judgment against them. Based on evidence discovered through the Freedom of Information Act ("FOIA"), Taxpayers argue that the government committed fraud on the court during their 1967 suppression hearing, United States v. Stonehill, 274 F. Supp. 420 (S.D. Cal. 1967) ("Stonehill I"), and their subsequent appeal to this court, United States v. Stonehill, 405 F.2d 738 (9th Cir. 1968) ("Stonehill II"). We conclude that, although the evidence uncovered by Taxpayers shows some misconduct on the part of the government, it is insufficient to demonstrate fraud on the court. Taxpayers also argue that the judgment should be vacated under United States v. Throckmorton, 98 U.S. 61 (1878), because William Saunders, Taxpayers' business associate who sometimes served as their attorney, gave information to the government. Because Taxpayers have not shown Saunders was their attorney rather than their business associate at the time he informed on Taxpayers, we reject Taxpayers' Throckmorton claim.

As will become apparent during the course of this opinion, this litigation has been extraordinarily protracted. We have written an unusually detailed opinion in the hope that we may thereby finally lay this litigation to rest. For the reasons that follow, we affirm the district court.

I. Background

We begin with a general overview of the facts and procedural history. We then discuss in more detail the evidence uncovered at each stage of the litigation.

A. General Overview

Harry Stonehill was stationed in the Philippines during World War II. During and shortly after the war, Stonehill made tens of thousands of dollars buying and reselling army surplus cars, and importing Christmas cards from the United States. After the war, Stonehill briefly returned to his native Chicago, but returned to the Philippines several years later. Upon his return, Stonehill began what became an enormously successful business career, eventually becoming Robert Brooks's partner.

The Philippines became independent on July 4, 1946. The early years of Philippine independence were notable for their tumultuous politics and extensive corruption. Taxpayers began their business ventures during these years. Taxpayers eventually owned sixteen different corporations in the Philippines, the most prominent of which was the United States Tobacco Company ("U.S. Tobacco"). U.S. Tobacco was the first company to produce American-style cigarettes in the Philippines. U.S. Tobacco's success was aided by the Philippine government's drastic limitation of the importation of American cigarettes in 1949. Stonehill, not surprisingly, supported (and, according to some, purchased) this limitation. U.S. Tobacco, as well as Taxpayers' many other business ventures, were extremely successful, and Taxpayers became wealthy and influential figures in the Philippines.

Taxpayers' success attracted attention from both Philippine and U.S. authorities. The U.S. State Department became interested in Stonehill's operations as early as 1950. The State Department requested that the U.S. Embassy in Manila conduct a "discreet investigation" into Stonehill's operations. In its report to the State Department, the Embassy observed that Stonehill's businesses were conducted "just within or just beyond the limits imposed by law," and that Stonehill "has the reputation of not paying his full income tax." Over the next decade, U.S. authorities became convinced that Stonehill did not pay income taxes he owed to the United States. In 1960, the IRS sent Stonehill's 1958 tax return for audit to Robert Chandler, the IRS representative to the Far East stationed in Manila. However, Chandler took no action because he had insufficient resources to conduct an extensive investigation.

Philippine attention to Taxpayers began in the late 1950s. It intensified after the election of President Diosdado Macapa- gal in 1961. Macapagal was elected on a reformist, anti-corruption platform. Although, as we discuss below, Macapagal and his party were not free from corruption themselves (including corruption involving Stonehill), Macapagal focused, at least rhetorically, on rooting out the influence of corrupt foreign businessmen. During this period, the Philippine government conducted wiretaps of Taxpayers' activities.

In late 1961, Menhart Spielman contacted Robert Hawley, an FBI agent stationed as the Legal Attache in Manila. Spielman had been the Executive Vice President of U.S. Tobacco, but had recently resigned from that position after a violent altercation with Taxpayers. Spielman told Hawley that he had confronted Taxpayers about massive illegalities in U.S. Tobacco. It is equally or more likely, however, that Spielman had attempted to blackmail Taxpayers by threatening to go to the authorities if they did not give him an ownership share in the company. Either way, Taxpayers responded by beating Spielman unconscious, resulting in his hospitalization.

Spielman told Hawley that he could give the FBI information concerning illegal activity at U.S. Tobacco. Hawley concluded that, to the extent Spielman's information suggested violations of U.S. law, it was U.S. tax law. Hawley therefore asked if Spielman would speak to IRS Agent Chandler. Spielman agreed to do so. Although Spielman's information suggested violations of U.S. tax law, it primarily suggested violations of Philippine law. Chandler and Hawley therefore told Spielman that he should talk to the Philippine National Bureau of Investigation ("NBI"), the Philippine equivalent of the FBI. Spielman was reluctant to do so for fear that the NBI was in league with Taxpayers. Spielman said that if Taxpayers found out he was talking to the authorities, they would kill him.

Hawley and Chandler eventually convinced Spielman to talk to Colonel Jose Lukban, the Director of the NBI. In a series of discussions at Chandler's house, Spielman gave Luk- ban significant information about where Taxpayers kept records and illegally imported material for making cigarettes that would demonstrate various violations of Philippine law. Some of these meetings were attended by Philippine Secretary of Justice Jose Diokno. The information provided by Spielman eventually led to a massive NBI raid on all of Taxpayers' businesses on March 3, 1962. Approximately two hundred NBI agents raided approximately seventeen different corporations.

After the raid, the NBI made many of the seized documents available to U.S. officials. The extent of U.S. access to the documents is contested, and we discuss the evidence concerning U.S. access in detail below. The documents to which U.S. officials had access were analyzed by Chandler, with William Ragland, an IRS Agent, and Sterling Powers, an IRS Assistant Revenue Service Representative. Ragland and Powers had been sent to Manila shortly before the NBI raid specifically to aid Chandler in the Stonehill investigation.

On April 22, 1962, Menhart Spielman disappeared. Spielman had apparently been dissatisfied with his treatment by the NBI and had approached Stonehill's lawyers in search of some sort of deal. Spielman then attempted to flee the Philippines, assisted by men associated with Stonehill. Philippine authorities eventually obtained confessions from the crewmen of a boat called the "Kingdom." The crewmen claimed they attacked Spielman on the boat while he was asleep and threw him semi-conscious into the shark-infested waters of the Sulu Sea. The U.S. government was somewhat skeptical of this story. It is, however, certain that Spielman disappeared.

Philippine enforcement proceedings against Taxpayers were complicated by Philippine politics, by a Philippine Supreme Court decision that the March 3 raid violated the Philippine Constitution's equivalent of the Fourth Amendment, and by the disappearance of Spielman, their primary witness. After negotiations with Philippine authorities, Tax- payers agreed to leave the country voluntarily in exchange for the government's agreement not to pursue criminal charges. Taxpayers left the Philippines on August 4, 1962.

The documents seized in the March 3 raid were sufficient, even without testimony from Spielman, to trigger a series of legal actions in U.S. courts against Taxpayers, as well as against Ira Blaustein, Taxpayers' New York agent. The United States filed a civil tax case against Taxpayers in January 1965 in the District Court for the Southern District of California. The government sought federal tax liens securing federal income tax liabilities outstanding against Taxpayers for the years 1958 through 1961. Taxpayers moved to suppress the documents seized in the NBI raid. The proceedings in that motion form the basis of the present dispute.

B. Suppression Proceedings and Opinions

At the time the U.S. government filed this case against Taxpayers, the Philippine Supreme Court had already held that the raid violated the Philippine Constitution's version of the Fourth Amendment. Stonehill I, 274 F. Supp. at 423-24. The United States did not contend that the NBI's search warrants were lawful under either Philippine or U.S. law, but argued that under the "silver platter" doctrine the evidence should not be suppressed because United States agents did not instigate or participate in the raid. See id. at 426 (documents seized in violation of the Fourth Amendment should not be suppressed "if the illegal search and seizure is made by foreign government officers").

The major issue in the suppression motion in the district court was the extent of U.S. participation in the planning and execution of the raid. See id. at 424-25. Taxpayers argued that United States agents, primarily Chandler and Hawley, had sufficiently participated in the planning and execution of the raid to make the "silver platter" doctrine inapplicable.

Taxpayers filed their motion to suppress on March 13, 1967. The hearing on the motion to suppress was held between June 12 and June 23, 1967. Nine witnesses provided live testimony, and testimony was read from numerous depositions. The transcript from the hearing totaled 1,257 pages.

Much of the evidence at the suppression hearing came from Hawley's and Chandler's testimony. The district court denied Taxpayers' motion to review all government memoranda concerning the raid, granting them access only to "all documents which were made from records seized in the Philippines." However, the government did introduce some internal documents and cables dealing with preparations for the raid, as well as summaries of other documents and cables. It is unclear from the current record exactly what the government disclosed, but it was likely a small percentage of what is now available. Included in the documentary evidence introduced by Taxpayers were two pages of paper containing notes about sites that the NBI should raid. Some of the notes were in Chandler's handwriting. These pages were part of a set of photographs, maps, and notes of raid sites. These pages were not provided by the United States but, rather, had been leaked to Taxpayers by someone in the NBI. We refer to these documents as the Picture Folder, which we discuss in detail below.

We begin by describing the most important testimony by Hawley and Chandler. We then describe the district court's findings concerning the history of U.S. involvement in the raid, and our conclusions on appeal in 1968. We then describe Taxpayers' subsequent motions to suppress.

1. Hawley's Testimony

Hawley's testimony was introduced through his deposition, which had been taken on January 17, 18, and 31, 1967. The parties have introduced relatively small selections of Hawley's deposition into the record before us in the current proceeding. We describe those selections, and fill in some details based on descriptions in the district court's 1967 opinion and our 1968 opinion.

Hawley served as Legal Attache at the American Embassy in the Philippines starting in August 1961. Spielman met with Hawley alone on December 14, 15, and 16, 1961. Most of the information Spielman gave to Hawley concerned violations of Philippine law. Hawley testified, however, that some of Spielman's evidence suggested violations of U.S. law. For example, Spielman told Hawley that Stonehill, together with his agent Ira Blaustein in New York, had mislabeled a machine used to slit cigarette paper in order to pay the lower Philippine import duty for agricultural machinery. Such mislabeling would have constituted a violation of the U.S. Bill of Lading Act. Hawley reported this potential violation to Washington.

Hawley testified that he concluded that the majority of potential violations of U.S. law were tax law violations. Hawley therefore suggested that Spielman meet Chandler. See Stonehill I, 274 F. Supp. at 421. Hawley and Chandler together met Spielman on December 18, 20, and 23, 1961. Chandler and Hawley eventually convinced Spielman to talk to Philippine authorities. Stonehill II, 5405 F.2d at 741. The first such meeting occurred on January 27, 1962. Present at the meeting were Lukban, Damaso Nocon (Lukban's right-hand man), Spielman, Chandler, and Hawley. We describe these meetings in detail in discussing Chandler's testimony.

Hawley testified that during the period before the raid, Lukban provided him with copies of wiretaps the NBI had placed on Taxpayers. Hawley testified that he had not asked for these transcripts and that he stopped receiving wiretap transcripts after the raid. He also testified that he showed Chandler some of the wiretaps and technical surveillance reports that Lukban had made available to him.

Hawley testified that at some time prior to February 24, 1962, the date the raid was originally scheduled, Secretary Diokno had casually mentioned to him that the raid had been planned. Hawley testified that he had no specific knowledge concerning what was going to be raided, and that Diokno had not asked him for his recommendations as to locations that the NBI should raid. He also testified that he did not ask Diokno to provide him with any information that the NBI recovered in the raid.

The raid was postponed. Hawley testified that he had not been told of the postponement. He "remember[ed] wondering why by the following Monday, I hadn't seen anything in the paper about [the raid]." Further, Hawley testified that he was never told the final date for the raid. He was asked, "On March 3, you didn't know anything about the raids?" He responded, "No." He testified that he had scheduled a party for March 4. Even on the day of the raid he had "no idea of any kind of projected raids or anything." The night of the raid he was home with his wife after spending some time at the office. He testified that he first learned of the raid in the Sunday copy of The Manila Times the day after the raid. He had the following exchange with Stonehill's counsel:

Q When did you first find out that Stonehill was arrested and that the raids had taken place?

A I think it was in the Sunday paper, the Manila

Times.

Q That was when you found out and that was delivered to you in the morning when you woke up?

A Yes.

Q At that time, you knew nothing about either the raids or Stonehill's arrest until the time you read it in the Times?

A No.

Q What was your reaction?

A Interested that it had come about.

Q You knew it was planned, actually? You knew it was?

A Yes, but I had no positive date at all.

Q You had no positive date?

A No.

2. Chandler's Testimony

Chandler testified in person at the suppression hearing. He testified that he was assigned to examine Stonehill's 1958 tax return in 1960. He testified that the only time he saw a wiretap transcript was in December 1961, and that Hawley showed it to him. Much of Chandler's testimony included in the record on appeal in 1968 focused on his activity coordinating communications between Spielman and Lukban, and his activity during the days surrounding the raid. Chandler testified that the initial meetings between Lukban and Spielman took place at Chandler's home. Chandler said that Spielman requested that the meetings be there because Spielman "wouldn't go near a Philippine government office at that time." Hawley and Diokno attended the meetings "once or twice." Chandler testified that he did not set the date for the raid, and that he had not been asked to participate in the raid or to assign any agent to the raid. He was told the date of the raid would be February 24 by someone in the NBI, probably Nocon.

During cross-examination, Chandler was asked a series of questions about whether he saw any pictures of potential raid sites. At this point in the hearing neither Chandler nor the government knew that the defense had part of the Picture Folder. Chandler first testified that he had never himself taken or had others take any pictures of the buildings to be raided. Chandler and Taxpayers' attorney then had the following exchange:

Q. Mr. Chandler, did you ever see any pictures of any of the locations at which the raids were to be made?

A. I don't remember. I had - it seems to me that I had heard the NBI had photographed some of the - had made some photographs. I don't recall whether I ever saw them.

Q. Isn't it a fact, Mr. Chandler, that the NBI made picture folders of each of the locations to be made, and showed them to you?

A. I don't recall seeing pictures, no.

Q. But you do have some recollection of the NBI taking pictures?

A. Yes, I have a recollection that they did do -

Q. Did you recollect that you were told that by Mr. Danny Nocon?

A. I think probably Danny, yes.

They continued on the same subject shortly thereafter:

Q. Do you recall seeing some files or documents which were called picture folders on March 2?

A. I don't recall seeing pictures, and yet I may have.

Q. But you are clear -

A. I may have seen these pictures at some time . . .

[b]ut I wouldn't recall if it was March 2nd.

Q. But you are clear that any pictures you saw would have been made by the NBI?

A. Oh, yes.

Taxpayers' attorney then asked Chandler if he had ever made a sketch of several of the buildings to be raided and had given that sketch to Nocon or another NBI agent. Chandler said he may have helped Spielman make a sketch, but he would not have made one on his own. If there were such a sketch, he would have given it to Spielman, not directly to the NBI.

Taxpayers then introduced the parts of the Picture Folder in their possession. This consisted of two pages. The first page was divided into three parts. The bottom two parts each contained a sketched floor plan of a building. There were five circled numbers identifying various locations within the two buildings. The top part of the paper had five instructions, which corresponded to the five circled numbers. Next to number one was written, "Check cigarette case for stamps." Next to number two was written, "Check dummy wall for door." Next to number three was written, "Rolls of paper t/b checked - is it actually cigarette paper for slitting[?]" Next to number four was written, "Check closely all items area for stamps." Next to number five was written, "Check all packing material for stamps."

The page consisted solely of writing and was titled, "U.S. Tobacco Co. - Picture Folder." It included a list of circled numbers, one through twenty, with comments after the numbers. These comments each seemed to correspond to something different, perhaps to a different picture. For example, next to number one was written "No comment." Next to number two was written, "Motor Pool, no significance." Next to number four was written, "Goodyear Bldg. - John Brook's - Confiscate records in separate small adjoining bldg. - This is bldg. from which John Brooks carried stamps at night." Next to number nine was written, "Goodrich Bldg. - Chambon Slitting Machine Evening News Newsprint supply."

Chandler testified that although he had no recollection of preparing these documents, the handwriting on both pieces of paper was his. He testified that the language is "Spielman's language." When asked why he would be preparing such a document for an informer, Chandler responded, "Spielman was an unusual individual. He pestered the life out of you on things and I figured on something of that nature, I don't know what reason he would have given me, why I should write it down rather than he should write it down, because it was his information." The following three exchanges provide a sense of Chandler's testimony during cross-examination concerning the Picture Folders:

Q. Does this language [instructions to "check" several places from the first piece of paper] recall to you that you did give instructions to the NBI prior to the raids or advice?

A. Well, I did relay some - did help Spielman get some of his information to them, because they didn't understand each other.

Q. And you did this to help with the raiders, is that correct?

A. I presume that would probably be used in the raids, yes.

A second exchange was:

Q. Now, I call your attention that each of these items I read on the first sheet, "Check, check, check, check," and one that says "To be checked," I think that is what it means, are numbered 1, 2, 3, 4, 5, and these numbers are placed in certain areas on these diagrammatic sketches of the buildings. Are these numbers in your handwriting also?

A. Yes, those numbers are in mine.

Q. So, in other words, those numbers were placed on these three sheets by you. Does that refresh your recollection to the effect that you were trying to specify for the NBI exactly where the places were that the agents and team leaders were to go?

A. Well, undoubtedly I was trying to set down Spielman's information.

In the third exchange, the questions are coming from the court:

Q. Now, can you tell me, how did you know that location 1 was a place to be checked for stamps, location 2 was a dummy wall, location 5 was packing material, how did you know all of that?

A. I had listened to Mr. Spielman talk about that for weeks, this type of thing.

Q. And you mean to say you got all your information about this building and these ...


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