United States District Court, D. Idaho
MEMORANDUM DECISION AND ORDER
B. LYNN WINMILL, Chief District Judge.
The Court has before it several post-trial motions filed by the defendants. The motions are fully briefed and ready for decision. For the reasons explained below, the Court will deny the defendants' motions.
After the government rested its case-in-chief, each of the four defendants made an oral motion for judgment of acquittal pursuant to Rule 29(a). Defendants Doug Swenson, David Swenson and Jeremy Swenson also filed a written motion for judgment of acquittal on Count 3 - conspiracy to commit money laundering. The Court denied all Rule 29(a) motions, except the motion for acquittal on Count 3. As to that count, the Court granted it as it related to the IRS refund amount deposited into Code Six accounts, and denied it on all other grounds. Dkt. 487.
On April 14, 2014, the jury returned its verdict. The jury convicted all four defendants on 44 securities fraud counts. It also convicted Doug Swenson on 34 wire fraud counts. The jury acquitted all defendants on the sole count of conspiracy to commit fraud, and acquitted David Swenson, Jeremy Swenson and Mark Ellison on the 34 wire fraud counts. The jury also acquitted Doug Swenson, David Swenson, and Jeremy Swenson on the money laundering count.
On April 22, 2014, all four defendants filed a single Rule 29(c) and Rule 33 motion. The motion listed nine substantive issues, but was otherwise without detail. Dkt. 522. In the motion, the defendants requested the Court set a reasonable briefing schedule so they could obtain transcripts before filing their briefs. Three days later, all parties filed a stipulation regarding a briefing schedule for the motions. Dkt. 529. That schedule was slightly modified by stipulation during a status conference with the Court a few weeks later. Ultimately, by agreement, opening briefs were due June 6, 2014, response briefs were due July 7, 2014, and reply briefs were due July 14, 2014. The motions are now fully briefed and before the Court.
As noted above, all four defendants were convicted on 44 counts of securities fraud. Additionally, Doug Swenson was convicted on 34 counts of wire fraud. The elements of securities fraud are,
(1) The defendant willfully used a device or scheme to defraud someone, made an untrue statement of a material fact, failed to disclose a material fact that resulted in making the defendant's statements misleading, or engaged in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person;
(2) Acts were undertaken, the statement was made, the failure to disclose was done, or the deceptive practice was engaged in connection with the purchase or sale of the specific security offering alleged in the count under consideration;
(3) The defendant directly or indirectly used an instrument or facility of interstate commerce or the mails, in connection with the scheme, the statement, the failure to make disclose, or the deceptive practice; and
(4) The defendant acted knowingly.
Ninth Circuit, Manual of Model Criminal Jury Instructions § 9.9. The elements of wire fraud are,
(1) The defendant knowingly participated in, devised, or intended to devise a scheme or plan to defraud, or a scheme or plan for obtaining money or property by means of false or fraudulent pretenses, representations, or promises;
(2) The statements made or facts omitted as part of the scheme were material;
(3) The defendant acted with the intent to defraud, that is, the intent to deceive or cheat; and
(4) The defendant used, or caused to be used, the wires in interstate commerce to carry out or attempt to carry out an essential part of the scheme.
Ninth Circuit, Manual of Model Criminal Jury Instructions § 8.124.
The defendants ask the Court for a judgment of acquittal of these counts under Rule 29. In resolving a Rule 29 motion, the Court "must consider the evidence presented at trial in the light most favorable to the prosecution." U.S. v. Grasso, 724 F.3d 1077, 1085 (9th Cir.2013). The Court "must presume - even if it does not affirmatively appear in the record - that the trier of fact resolved... conflicts in favor of the prosecution, and must defer to that resolution." Id. at 1085-86. The Court must determine whether the evidence, viewed in that manner, "is adequate to allow any rational trier of fact to find the essential elements of a crime beyond a reasonable doubt." Id.
The defendants also ask for a new trial under Rule 33. Rule 33 states that "[u]pon the defendant's motion, the Court may vacate any judgment and grant a new trial if the interest of justice so requires." Fed.R.Crim.P. 33(a). The power to grant a motion for a new trial "is much broader than its power to grant a motion for judgment of acquittal." U.S. v. Alston, 974 F.2d 1206, 1211 (9th Cir.1992). "The district court need not view the evidence in the light most favorable to the verdict; it may weigh the evidence and in so doing evaluate for itself the credibility of the witnesses." Id. "If the court concludes that, despite the abstract sufficiency of the evidence to sustain the verdict, the evidence preponderates sufficiently heavily against the verdict that a serious miscarriage of justice may have occurred, it may set aside the verdict, grant a new trial, and submit the issues for determination by another jury." Id. at 1211-12.
I. All Four Defendants' Motions for Acquittal or New Trial
The government presented evidence at trial sufficient to convict all four defendants of the securities fraud counts, and to convict Doug Swenson of the wire fraud counts. Below, the Court will first set forth the general nature of the evidence presented at trial, including a description of the defendants' business activities. The evidence will then be analyzed as it relates to each defendant and to the elements of both securities fraud and wire fraud. Because some of the evidence supports more than one element of a crime or elements of both crimes, the Court will address them together where appropriate instead of repeating itself throughout this decision.
A. Overview Of Evidence
The defendants were all principals in or employed by DBSI, or one of its subsidiaries. DBSI was primarily engaged in the marketing of Tenant-In-Common (TIC) interests in real estate - including shopping centers, apartment buildings, office buildings and raw land. The TIC interests were sold to investors who were endeavoring to make a like-kind exchange under provisions of the Internal Revenue Code which would allow them to defer taxation. The DBSI investment products were sold through private placement memoranda (PPMs) and other marketing materials. The PPMs and marketing materials contained DBSI Housing, Inc.'s financial statements and were distributed to investors. The government presented competent and substantial evidence at trial of five different misrepresentations and/or omissions contained in the marketing materials and financial statements.
1. Master Lease Portfolios
DBSI's marketing approach was to sell a TIC interest in the property to the investor, and then lease the property back from the TIC investors pursuant to a master lease in which the investors would be guaranteed a set return - typically 7% - on their investment. DBSI would then manage the property - keeping any profits beyond the guaranteed payment to the investors, but also subsidizing the property if it operated at a loss. As one means of assuring the investors that their guaranteed return would be paid, DBSI consolidated all of the TIC investment properties which it managed into a Master Lease Portfolio. DBSI promoted the Master Lease program as providing less risk for the investor by spreading any risk over DBSI's entire portfolio - the investor would receive his guaranteed return even if his property did not generate a positive cash flow, because the overall profitability of the portfolio backed each investor's right to a guaranteed return. However, this was only true if the Portfolio itself cash-flowed positive or broke even.
The evidence at trial established that, throughout the time period covered by the indictment, DBSI continuously represented, through PPMs and other marketing materials, that the Master Lease Portfolio was self-sustaining and profitable. However, beginning in 2005, DBSI stopped reporting to the investment community the performance of the Master Lease Portfolio because it began to cash flow negative. By 2006, the Master Lease Portfolio had losses of more than $21 million. In 2007, the losses were $38 million. These losses were so substantial, that DBSI was only able to continue functioning through the infusion of cash from the sale of new TIC Investments. These facts were not disclosed to the investment community.
2. Misrepresentations Concerning DBSI Master Leaseco.
DBSI, through PPMs and other marketing materials, represented that its Master Lease program was backed up by a subsidiary - DBSI Master Leaseco - which had an audited net worth of $15.4 million in cash or otherwise immediately available assets. It also represented that, although Master Leaseco could loan money to DBSI affiliates on a short-term basis of not more than 180 days, if those loans were not repaid within that period, DBSI Housing, Inc., would make an additional capital contribution to Master Leaseco in an amount equal to the unpaid loans.
The evidence at trial showed that, despite these representations, very little cash or liquid assets were maintained in Leaseco. Millions in cash were deposited into Master Leaseco's accounts at the end of each year just before the annual audit was completed. But, the bulk of that money would then be removed in early January, so that Master Leaseco had virtually no cash on hand for the remainder of the year.
3. Misrepresentation of DBSI's Net Worth
DBSI represented in its marketing materials that DBSI Housing, Inc., had a net worth of more than $105 million. However, the largest part of DBSI's net worth was approximately $225 million owed to it by technology companies - companies in which Defendant Doug Swenson had a substantial interest. Those loans were of questionable value since none of the technology companies had ever made a material repayment of the loan principal or interest. This questionable and very speculative asset was hidden by netting it against the monies DBSI owed to its bond and note holders, so as to show a very small netted number on its balance sheet. In essence, a very speculative asset was paired with a very real liability, so as to mask the speculative nature of the asset and substantially overstate DBSI's actual net worth. Several DBSI accountants complained about the misleading nature of this accounting process to DBSI management, including the defendants.
4. Undisclosed Misuse of Accountable Reserves.
DBSI collected from investors what was called "Accountable Reserves" which the marketing materials indicated would be used exclusively for tenant improvements, leasing commissions and capital improvements - all of which were expenditures benefitting the investor's property. The marketing materials further represented that the Accountable Reserves would be repaid to the investors to the extent they were not used during the term of the lease. However, the evidence at trial showed that, contrary to the representations in the marketing materials, DBSI spent the bulk of the accountable ...