United States v. Polichemi, Joseph

In the

United States Court of Appeals

For the Seventh Circuit

Nos. 96-3866, 96-3867, 96-3868, 96-3869, 96-3870

United States of America,

Plaintiff-Appellee,

v.

Joseph Polichemi, et al.,

Defendants-Appellants.

Appeals from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 94 CR 555--William T. Hart, Judge.

Argued January 4, 1999--Decided January 13, 2000/*

Before Flaum, Rovner, and Diane P. Wood, Circuit

Judges.

Diane P. Wood, Circuit Judge. Not everyone has a

perfect understanding of the complex workings of

modern financial markets, and unfortunately,

sometimes unscrupulous individuals manage to

exploit that fact for a period of time. This

case, at its outset, involved seven such

individuals, who allegedly engaged in a

breathtakingly ambitious phony investment scheme

through which they bilked nearly 30 investors out

of more than $15 million. Their largest patsy was

the Chicago Housing Authority, which lost more

than a third of its pension fund, some $13

million, in the scheme. The CHA’s former director

of employee benefits, John Lauer, landed in

prison for fraud and related offenses as a result

of these dealings. See United States v. Lauer,

148 F.3d 766 (7th Cir. 1998).

The present appeal comes to us from the

convictions after a jury trial of four of the

defendants, Joseph Polichemi, Lyle "Pete" Neal,

Oscar William Olson, and Charles Padilla, on

assorted counts of wire fraud, money laundering,

conspiracy, and perjury. A fifth, Larry

Oesterman, who pleaded guilty, argues that his

sentence is too harsh. Although taken together

the four who went to trial have raised nearly a

score of issues for our consideration, we

conclude that the trial court’s handling of the

defendants’ effort to strike a juror for cause

was an error that fundamentally tainted the

fairness of the trial. Under this circuit’s

decision in United States v. Underwood, 122 F.3d

389 (7th Cir. 1997), we have no choice but to

reverse and remand for a new trial. This error

was irrelevant to Oesterman, because of his

guilty plea. Finding no error in the district

court’s sentencing decision, we affirm

Oesterman’s sentence.

I

We need not delve into the details of the

scheme, given the fact that they are not

necessary for our analysis of the jury selection

problem. Briefly, however, they are as follows.

Polichemi, Neal, Olson, Padilla, and Oesterman,

along with others not relevant here, devised a

system under which they marketed so-called "prime

bank instruments" to investors (i.e. victims).

They described these "prime bank instruments" as

multi-million-dollar letters of credit issued by

the top 50 or 100 banks in the world. The

defendants told their victims that they could

purchase these instruments at a discount and then

resell them to other institutions at face value;

the difference in price represented the profits

that would go to the defendants and their

"investors." This was nothing more than a song

and dance: the trades were fictional; there was

no market for the trading of letters of credit;

and nothing capable of generating profits ever

occurred. Somehow, notwithstanding the

implausibility of the "prime bank instruments" to

one familiar with normal business practice for

letters of credit, they managed to persuade their

victims to give them money to finance the

purchase of the phantom discounted instruments.

While this did not earn a cent for any of the

investors, it definitely changed the defendants’

own lifestyles. Polichemi, for example, was

living in his sister’s 2-bedroom condominium in

Florida when things began, but he ended up in a

$6.2 million home. Olson’s and Neal’s stories

were similar.

Between 1991 and 1994, the defendants collected

more than $15 million in this way. As noted

above, their largest source was the CHA, which

turned over more than $13 million of its pension

funds to the defendants, thanks in large part to

the unfaithful Lauer. They passed the monies they

received through various bank accounts (often

Swiss), used some of the money to pay off prior

investors and old debts, and spent the rest on

themselves. Each person had his own role to play.

Polichemi was the president of "Copol," a company

that purportedly traded in the prime bank

instruments. He held himself out to be one of a

handful of people in the world with a license to

trade these "securities." Neal was president of

Konex Holding and Konex Marketing, companies that

marketed Copol’s product through a network of

salespeople. Olson was an attorney for both Copol

and Polichemi, in addition to being a participant

in many of the deals at issue. Padilla was

Copol’s "stateside banker." He served as a

reference for the other defendants and provided

reassurance of Copol’s soundness and success to

potential investors. Oesterman was one of Neal’s

salespeople and a director at Konex marketing.

These five were allegedly joined by Lauer, Edward

Russey (another salesperson for Neal who pleaded

guilty and testified pursuant to a plea

agreement), and John DeVincens, a Konex attorney

who was later acquitted on all charges by the

jury.

II

In the end, the final benefit the defendants

reaped from their scheme was an indictment from

the grand jury in the Northern District of

Illinois. Count 1 of the indictment charged the

entire group with a scheme to defraud in

violation of 18 U.S.C. sec.sec. 1343 and 2.

Counts 2 through 15 charged the individual

defendants with engaging in wire transmissions in

furtherance of the fraud. Count 16 accused

Polichemi, Neal, Olson, and DeVincens of

conspiring to launder money in violation of 18

U.S.C. sec. 371, and Counts 17-26 charged that

individual defendants had committed specific

money laundering offenses in violation of 18

U.S.C. sec.sec. 1956(a)(1)(A)(i),

1956(a)(2)(B)(i), 1957, and 2. Finally, Counts

27-33 involved perjury charges against Padilla

(27-29), DeVincens (30), and Neal (31-33), in

violation of 18 U.S.C. sec. 1621(1). As noted

above, DeVincens was acquitted; Russey pleaded

guilty and is not involved in this appeal;

Oesterman pleaded guilty and raises only

sentencing challenges on appeal; and Polichemi,

Neal, Olson, and Padilla (to whom we refer as the

Polichemi defendants for convenience) were each

convicted on some or all of the charges brought

against them and appeal both their convictions

and sentences.

III

At this court’s direction, the Polichemi

defendants filed one consolidated brief in which

they addressed issues common to all four, and

separate supplemental briefs on their individual

issues. Oesterman, of course, filed his own

brief. Because we find it dispositive of the

appeals of the Polichemi defendants, we address

first their complaint about the jury selection

process. It centers on the district court’s

handling of their request to strike potential

jurors Lorena Nape, John Buck, and David Maines

for cause. Under the system the trial court

adopted, the defendants were to have 10

peremptory challenges collectively, plus one

additional challenge for each two jurors selected

as alternatives. After sixteen potential jurors

had been qualified, the judge would call for

simultaneously submitted peremptory challenges

and then empanel those who were not struck.

Jury selection began on May 15, 1996. A number

of jurors were excused for cause during the

morning session. Among the prospective jurors

called after the lunch break were Nape, Buck, and

Maines. Both Buck and Maines stated, in response

to questions posed during the voir dire, that

they would tend to credit testimony from a law

enforcement officer more than testimony of a lay

witness. Maines noted that his wife’s side of the

family included several police officers, but he

indicated that he did not believe this would

affect his ability to be fair and impartial. On

the other hand, he said that he tended "to have

a less scrutinizing point of view when it comes

to government officials and police officers."

Buck said that he would start out believing the

testimony of a law enforcement agent more than

the testimony of a lay witness. Faced with these

damaging statements, the prosecutor elicited

statements from both men that they could, in the

final analysis, reach a verdict solely based on

the evidence they heard in the courtroom. On that

record, the court denied the defense motions to

excuse Maines and Buck for cause, and the

defendants used two of their remaining peremptory

challenges to strike them from the panel.

Nape’s situation was somewhat different. At the

time of the trial, Nape was a 15-year employee of

the U.S. Attorney’s Office for the Northern

District of Illinois, based in Chicago--precisely

the same office from which the prosecuting

attorneys came. At oral argument and in a letter

filed after argument, the AUSAs (in response to

questions posed by this court) indicated that the

official who signed the indictment did not have

supervisory authority over Nape, because she was

a secretary in the Civil Division. Nonetheless,

it also appears that the sharing of work from

division to division within the U.S. Attorney’s

Office led to varying levels of communication

between the employees of the Civil Division and

of the Criminal Division. See Tr. 176-77 (when

asked whether her work had involved any

assignments from the Criminal Division, Nape

responded "maybe in the asset forfeiture area, of

course, that seems to be slowing down or going

mostly criminal now."); Tr. 179 (Nape admitted to

recognizing the names of the prosecuting

attorneys in the case, and being aware that they

worked in her office.). See generally Attorney

General, Memorandum on Coordination of Parallel

Criminal, Civil, and Administrative Proceedings

(dated July 28, 1997), available at

<http://www.usdoj.gov/ag/readingroom/ 970728.htm>

(calling for information-sharing among divisions

during the investigation and prosecution of

cases, in order for the government to allocate

its resources efficiently and come to effective,

comprehensive settlements).

Based on her affiliation with the prosecutor’s

office, the defendants moved to strike Nape for

cause as well. Even though, in response to

questions, Nape stated that she could be fair and

impartial, the defendants took the position that

at a minimum she was excludable for cause on the

ground of implied bias. As before, the court

denied the motion, and the defendants had to use

a peremptory challenge to remove her from the

jury.

The Polichemi defendants argue that the district

court erred in all three of its rulings rejecting

their challenges for cause, with respect to

prospective jurors Buck, Maines, and Nape. These

errors forced them to use peremptory challenges

to eliminate the objectionable panel members,

which in turn, they argue, violated their Fifth

Amendment due process rights by impairing the

intelligent exercise of their peremptory

challenges. They rely on this court’s decision in

United States v. Underwood, 122 F.3d 389 (7th

Cir. 1997), cert. denied sub nom. United States

v. Messino, 118 S.Ct. 2341 (1988), to show that

this error is a structural one requiring

automatic reversal.

Our analysis of these claims will follow that

basic order. First, we consider whether the

district court erred in any of the three rulings

on the challenges for cause. If not, then we

would have no occasion to proceed further with

this ground of the appeals. Second, assuming at

least one of those decisions was in error (given

the fact that defendants here exhausted all their

peremptory challenges), we must decide whether

the automatic reversal rule of Underwood applies

in these circumstances, or if this was a lesser

error subject to harmless error analysis, as in

our more recent decision in United States v.

Osigbade, 195 F.3d 900 (7th Cir. 1999). If the

automatic reversal rule applies here, then there

is nothing left to do with the Polichemi

defendants but to reverse the convictions and

remand for further proceedings; if not, then we

would proceed to a harmless error analysis.

Before proceeding down this path, we acknowledge

that the circuits have been split on the question

whether the automatic reversal rule of Swain v.

Alabama, 380 U.S. 202, 218 (1965), still applies

to a situation in which trial court error with

respect to challenges for cause forces a

defendant to use up her peremptory challenges,

thus effectively reducing the number of such

challenges below that are permitted in Fed. R.

Crim. P. 24(b). Courts following the automatic

reversal rule include (in addition to our own, as

reflected in Underwood), the Fifth Circuit, in

United States v. Hall, 152 F.3d 381, 408 (5th

Cir. 1998), quoting United States v. Nell, 526

F.2d 1223, 1229 (5th Cir. 1976), the Ninth

Circuit, in United States v. Martinez-Salazar,

146 F.3d 653 (9th Cir. 1998), cert. granted, 119

S.Ct. 2365 (1999), the First Circuit, in United

States v. Cambara, 902 F.2d 144, 147 (1st Cir.

1990), the Third Circuit, in United States v.

Ruuska, 883 F.2d 262, 268 (3d Cir. 1989), the

Fourth Circuit, in United States v. Ricks, 776

F.2d 455, 461 (4th Cir. 1985), and the Sixth

Circuit, in United States v. Hill, 738 F.2d 152,

153-54 (6th Cir. 1984). The Eighth Circuit and

the Tenth Circuit take the opposite approach,

under which they regard errors in denying

challenges for cause as reversible only if the

eventual jury that sat was biased--in other

words, only if the error was not harmless. See

United States v. Sithithongtham, 192 F.3d 1119,

1123 (8th Cir. 1999); Getter v. Wal-Mart Stores,

66 F.3d 1119, 1122 (10th Cir. 1995); see also

Ross v. Oklahoma, 487 U.S. 81, 88 (1988). As we

explain in more detail below, this court has

taken a middle ground, under which some such

errors trigger the automatic reversal rule and

others do not. The Supreme Court will be speaking

soon on the subject, in Martinez-Salazar, but

unless or until we learn that we have erred, we

must follow our own circuit’s precedents.

We can dispose of the challenges to prospective

jurors Buck and Maines relatively easily. In both

those cases, the individuals made some remarks

during voir dire that indicated they would harbor

an actual bias in favor of witnesses from the law

enforcement community, but upon further

questioning, they both promised to evaluate the

evidence fairly and to decide the case based on

what was presented to them. We review a trial

court’s decision whether to dismiss a juror for

cause deferentially, recognizing that the judge

on the scene is in the best position to evaluate

the juror’s ability to serve. United States v.

Beasley, 48 F.3d 262, 266 (7th Cir. 1995); United

States v. Casey, 835 F.2d 148, 151-52 (7th Cir.

1987). We cannot say on this record that the

district court clearly erred when it concluded,

after full questioning, that the defendants had

failed to justify striking prospective jurors

Buck and Maines for cause. Thus, we need not

address the question whether the defendants’

choice to use peremptory challenges for them

infringed their due process rights. Peremptory

challenges are most often used to eliminate from

the jury those whom the defendant has no other

way to remove. Since the district court committed

no reversible error in these two rulings, no

further comment is necessary.

The situation with prospective juror Nape is

significantly different. As a long-time employee

of the same U.S. Attorney’s Office that was

handling the prosecution, Nape could not avoid a

public association with the lawyers for one side

of the case. While she assured the trial judge

that she believed she could be fair and

impartial, such assurances cannot be the last

word in these circumstances. Considering the

deferential standard of review, we do not quarrel

with the district court’s conclusion that Nape

did not consciously harbor ill will toward the

defendants, or good will toward the prosecution.

But the court erred in stopping its inquiries

there. In addition to the kind of overt, actual

bias that the court was looking for, a

prospective juror might be excludable for implied

bias.

While the term "implied bias" is not one that

is used often, the concept is nonetheless well

established in the law. Indeed, the risk of

implied bias lies behind many of the rules that

require excusing a juror for cause. A court must

excuse a juror for cause if the juror is related

to one of the parties in the case, or if the

juror has a financial interest in the case. See,

e.g., United States v. Annigoni, 96 F.3d 1132,

1138 (9th Cir. 1996); Getter, 61 F.3d at 1122. It

is possible, of course, that a particular juror

may be quite capable of maintaining her

objectivity, even if her nephew is a lawyer in

the case, but the relationship is so close that

the law errs on the side of caution. Indeed, much

the same rationale underlies the statute that

requires disqualification of judges when the risk

of at least the appearance of partiality or the

risk of an unconscious tendency to favor one side

is particularly great. See 28 U.S.C. sec. 455(b)

(requiring disqualification when, for example,

the judge or an immediate member of her family

has a financial interest in the case, or when a

close relative of the judge is a party or lawyer

in the case). In many, if not most, such cases,

the judge will in fact be unbiased and capable of

rendering a fair decision, but the need to

prevent even an appearance of partiality leads to

a type of implied bias rule.

In its decision in United States v. Haynes, 398

F.2d 980, 984 (2d Cir. 1968), the Second Circuit

traced the implied bias doctrine back to Chief

Justice John Marshall’s opinion in United States

v. Burr, 25 Fed. Cas. 49 (No. 14692g) (C.C. Va.

1807), one of a series of opinions in the famous

prosecution of Aaron Burr. In Burr the Chief

Justice addressed the ways in which the law

strives to assure an impartial jury:

Why is it that the most distant relative of a

party cannot serve upon his jury? Certainly the

single circumstance of relationship, taken in

itself, unconnected with its consequences, would

furnish no objection. The real reason of the rule

is, that the law suspects the relative of

partiality; suspects his mind to be under a bias,

which will prevent his fairly hearing and fairly

deciding on the testimony which may be offered to

him. The end to be obtained is an impartial jury;

to secure this end, a man is prohibited from

serving on it whose connexion with a party is

such as to induce a suspicion of partiality. The

relationship may be remote; the person may never

have seen the party; he may declare that he feels

no prejudice in the case; and yet the law

cautiously incapacitates him from serving on the

jury because it suspects prejudice, because in

general persons in a similar situation would feel

prejudice.

25 Fed. Cas. at 50. From that time to the

present, the federal courts have included among

the reasons supporting a challenge for cause the

kinds of presumptive sources of bias to which the

Chief Justice referred. In Haynes, the Second

Circuit wrote that

[a]t common law, jurors were challengeable on

principle for bias for partiality due to kinship,

interest, former jury service in the same cause,

or because the prospective juror was a master,

servant, counselor, steward, or of the same

society or corporation. . . . Not only have these

common law grounds for causal challenge retained

their vitality, . . . but to them have been added

others from which prejudice or bias may be

implied.

398 F.2d at 984 (internal citations omitted). See

also United States v. Torres, 128 F.3d 38, 43 (2d

Cir. 1997) (recognizing three possible grounds

for challenges for cause: those based on actual

bias, those based on implied bias, and those

based on "inferable" bias); United States v.

Nell, 526 F.2d at 1229 (5th Cir. 1976); United

States v. Dellinger, 472 F.2d 340, 367-69 (7th

Cir. 1972) (noting that prospective jurors may be

unacceptably biased for a variety of reasons,

and, because they themselves are often unaware of

these actual biases, it is essential to explore

their backgrounds and attitudes in order to

uncover them).

Here, prospective juror Nape was a "servant"--

that is, employee--of the particular office

representing the United States, that of the U.S.

Attorney for the Northern District of Illinois.

We offer no comment on the application of the

implied bias concept to links more remote than

the one she had, such as affiliation with a

different agency of the United States in Chicago,

or affiliation with a different part of the

Department of Justice. In this case,

unfortunately, the fit was perfect. Although the

government has argued that she should be

disqualified only if she was under the actual

supervision of the officer signing the

indictment, we think that fine-tunes matters too

far. The U.S. Attorney has authority over the

entire office and can manage its personnel as he

sees fit. The court therefore erred when it

denied defendants’ motion to dismiss Nape for

cause.

Given this error, what should be its

consequence under our decisions in Underwood and

Osigbade? In Underwood, the district court gave

a confusing explanation of the system it was

planning to use for jury selection. Under a

misapprehension about the actual system, the

defendants used their peremptory challenges on a

number of prospective jurors whom they would not

have chosen had they understood the court’s plan.

This court, noting that the specific right to

peremptory challenges is found in Fed. R. Crim.

P. 24(b), not the Constitution, held that "the

’right’ to peremptory challenges is denied or

impaired only if the defendant does not receive

that which [statutory] law provides." 122 F.3d at

392 (internal quotations and citations omitted).

Recognizing that not all restrictions on the

right to peremptory challenge constitutes the

denial or impairment of the right, the court held

that harmless error analysis was nonetheless

inappropriate when a fundamental denial or

impairment had occurred.

In Underwood, the fact that the entire process

for exercising peremptory challenges had been

misunderstood supported a finding of a denial or

impairment fundamental enough to justify

application of the Swain automatic reversal rule.

This was true even though there was no showing

that the jury that actually sat was biased or

could not be impartial. On the other hand, United

States v. Osigbade presented a case of a clerical

mistake that led to one juror’s being excused and

another being substituted in her place. 195 F.3d

at 901-02. Using the "struck jury" selection

system, both sides had questioned the entire

venire, completed their challenges for cause, and

then had submitted a list of peremptory

challenges to the court. The court reviewed the

peremptory challenges and then compiled the list

of jurors, including alternates, for trial. After

it entertained Batson challenges, it read off a

list of the jurors who had been selected. At that

point the parties alerted the court to the fact

that one juror on that list had already been

excused for cause. The court called the next name

on the list. While waiting for that individual to

return to the courtroom, the parties discovered

that one prospective juror, Rhoda Richardson, had

inadvertently been deleted from the list, because

the court erroneously thought the government had

struck her. Efforts to find her were

unsuccessful, and the court eventually replaced

her with one of the alternates.

These facts, we found, did not add up to such a

basic impairment of the right to use peremptory

challenges that the automatic reversal rule of

Swain and, by then, Underwood, should be applied.

As in Underwood, we recognized that some jury

mistakes justify automatic reversal and others do

not. Id. at 904. In Osigbade, automatic reversal

was not required for several reasons. First, the

defendant did not run out of peremptory

challenges. Second, there was no evidence that

the mistaken dismissal of the one juror resulted

in anyone’s being seated to whom the defendant

would have objected (even with a peremptory

challenge). Third, as the government argued in

Osigbade, the essence of the defendant’s

complaint was that Richardson herself did not sit

on the jury. Defendants have no legally

cognizable right to have any particular juror

participate in their case. See United States v.

Duff, 76 F.3d 122, 125 (7th Cir. 1996).

While we understand that the distinctions here

are fine, we have concluded that the district

court’s error in failing to excuse prospective

juror Nape for cause goes to the fundamental

integrity of the jury, and thus falls on the

Underwood side of the line. Osigbade did not

purport to overrule Underwood, nor could it have

done so under this circuit’s rules without

undergoing circulation to the full court under

the procedures established in Circuit Rule 40(e).

Instead, it sensibly distinguished fundamental

errors that undermine the integrity of the jury

selection system from mere clerical errors that

do not result in the seating of a single

individual to which the defendant would have

objected. (We know this to be the case, because

the court used one of the previously submitted

alternates in Osigbade after the problem became

clear.) Here, not only did the court fail to

consider Nape’s implied bias, but its error

resulted in the subversion of the defendants’

ability to exercise their peremptory challenges

effectively. See Osigbade, 195 F.3d at 904.

Unlike in Osigbade, the defendants ran out of

peremptory challenges; unlike in Osigbade, the

attorneys specifically told the court that the

error resulted in the seating of jurors to whom

they would have objected. These are important

differences. When, under these circumstances, the

court commits the legal error of failing to apply

the principle of implied bias in its

administration of challenges for cause, the

structure of the jury selection process itself is

compromised and the Underwood rule applies.

We therefore conclude that the convictions of

defendants Polichemi, Neal, Olson, and Padilla

must be reversed and the case must be remanded

for a new trial.

IV

The only remaining issue we need consider, in

light of our disposition of those four appeals,

is Oesterman’s challenge to his sentence.

Oesterman pleaded guilty to one count of wire

fraud, without any plea agreement. Although he

was personally responsible for only $450,000,

which he had obtained from victim investors, the

district court relied on the relevant conduct

provisions of the Sentencing Guidelines to hold

him accountable for the entire $10-20 million

loss. It found that he had joined the conspiracy

and increased his offense level by 15, following

U.S.S.G. sec. 2F1.1(b).

We review the district court’s assessment of

relevant conduct for clear error, including its

determination of the questions whether the

defendant participated in jointly undertaken

criminal activity and whether the actions of the

others were reasonably foreseeable to him. See

United States v. Edwards, 115 F.3d 1322, 1325

(7th Cir. 1997); see also U.S.S.G. sec. 1B1.3

(1)(B). The record showed that Oesterman was a

salesman of fraudulent securities for Konex. Neal

solicited the CHA investment, and that investment

was foreseeable to Oesterman according to

evidence showing that Oesterman and Lauer (the

CHA insider) were fellow participants in a Konex

Summit Meeting. Oesterman also used Lauer as a

reference (playing the role of a "satisfied

investor") to facilitate his sales. This evidence

justifies the district court’s finding that

Oesterman participated in the scheme as a whole

and that its activities were reasonably

foreseeable to him. In the absence of clear error

with respect to the relevant conduct calculation,

there is no reason to disturb Oesterman’s

sentence.

V

For the reasons stated, we therefore Reverse the

convictions of Joseph Polichemi, Lyle E. Neal,

Oscar W. Olson, and Charles Padilla and Remand for

further proceedings consistent with this opinion.

We Affirm the sentence imposed on Larry P.

Oesterman.

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