United States v. Lee, Kenneth

In the

United States Court of Appeals

For the Seventh Circuit

Nos. 06-3029, 06-3040 and 06-3438

U NITED S TATES OF A MERICA,

Plaintiff-Appellee,

v.

K ENNETH L EE AND M YUNG O. L EE,

Defendants-Appellants.

Appeals from the United States District Court

for the Northern District of Illinois, Western Division.

Nos. 05 CR 50007 and 05 CR 50010—Philip G. Reinhard, Judge.

A RGUED JANUARY 9, 2008—D ECIDED M ARCH 11, 2009

Before W OOD , S YKES, and T INDER, Circuit Judges.

T INDER, Circuit Judge. This case involves two

defendants, Myung Ok Lee and Kenneth Lee.1 The Lees

are unrelated and were tried in separate cases con-

solidated here on appeal. While separate cases, they

involve similar facts and overlapping legal issues. Both

1

To avoid confusion we will refer to Myung Ok Lee as “Ms.

Lee” and Kenneth Lee as “Mr. Lee.”

2 Nos. 06-3029, 06-3040 and 06-3438

defendants were involved with “spas” which were fronts

for prostitution businesses in the Rockford, Illinois area.

Both were charged, in separate but similar two-count

superceding indictments, with conspiracy to use inter-

state facilities in violation of 18 U.S.C. §§ 371 and 1952(a)

as Count One and conspiracy to commit money

laundering in violation of 18 U.S.C. § 1956(h) as Count

Two. They were convicted, following jury trials, on both

Counts, and they now appeal. The Lees make a joint

argument concerning “proceeds” in challenging the

money laundering conspiracy convictions, and they

argue that identical errors occurred in both of their sen-

tencing calculations. Mr. Lee independently argues that

there was insufficient evidence with respect to his mem-

bership in the conspiracies in both Counts, and Ms. Lee

contests the admission of witness Anna Kim’s allegedly

“unfairly prejudicial” testimony in her trial.

I. Background

The spas and prostitution businesses with which the

Lees were involved were all operated in the same manner.

Upon arrival, customers would pay the receptionist an

entrance fee for a massage. This would be recorded in the

spa’s “books.” After making special arrangements in the

individual “massage” rooms, customers could then pay

an additional fee directly to a “masseuse” for sex acts. The

masseuses would record these exchanges in the books but

with a missing zero—thus, an additional $200 was re-

corded as $20. Some customers would pay these extra

fees and/or the entrance fees with credit cards. The cards

Nos. 06-3029, 06-3040 and 06-3438 3

were swiped through credit card machines connected

to interstate telephone facilities to receive payment autho-

rization. These funds were deposited into business check-

ing accounts. The masseuses split the prostitution profits

with the owners/operators 50/50, with the masseuses’

portion usually taken out of the available cash. The

funds deposited in the business accounts were used to

pay for various business and promotional expenses,

including utilities, rent, and advertising.

Mr. Lee was involved in two spas—the Pine Tree Spa

and the Paradise Health Spa. Young Ja Hwang was in

charge of both businesses, Pine Tree between June 2002

and October 2003, and Paradise between January 2004 and

February 2005. Eun Sook Choi, Hwang’s sister-in-law,

served as a front for the business, signing the building

leases and serving as the signatory on the Paradise bank

account. Mr. Lee, who was romantically involved with

Hwang, assisted in the operation of these massage par-

lors. He often translated for her and other employees who

spoke Korean. He also did construction work and mainte-

nance on the businesses’ premises and was involved with

obtaining licenses and massage permits for the spa. Mr.

Lee would also frequently send postal money orders on

behalf of the masseuses. More details of his involvement

are discussed below.

Ms. Lee owned and operated the Tokyo Oriental Health

Spa as a front for a prostitution business between Decem-

ber 2002 and February 2005. She ran the day-to-day

operations including paying the bills, arranging advertis-

ing, hiring masseuses, and so forth. Ms. Lee’s co-defendant,

4 Nos. 06-3029, 06-3040 and 06-3438

Mia Deboer, did the cooking and cleaning and collected

money from the masseuses when Ms. Lee was out of town.

In both cases the use of the credit card machines and

interstate telephone facilities to promote the prostitution

businesses served as the basis for the convictions under

18 U.S.C. §§ 371 and 1952. The payments out of the busi-

ness checking accounts were used to establish the

money laundering violations.

II. “Proceeds”

Both Ms. Lee and Mr. Lee challenge their convictions

under the money laundering statute. They argue that

under the term “proceeds”—meaning “net” rather than

“gross” as outlined in our circuit cases Scialabba and Santos

and recently affirmed by the Supreme Court 2 —there was

insufficient evidence for conspiracy to commit money

laundering. In reviewing for sufficiency of the evidence,

we consider the evidence in the light most favorable to

the government, drawing all reasonable inferences in the

government’s favor. United States v. Morris, 498 F.3d 634,

637 (7th Cir. 2007). We will reverse only if a rational trier

of fact could not have found the essential elements of the

crime beyond a reasonable doubt. United States v. Malone,

484 F.3d 916, 920 (7th Cir. 2007).

The evidence used by the government at both trials to

establish the money laundering violations focused on

2

United States v. Scialabba, 282 F.3d 475 (7th Cir. 2002); Santos

v. United States, 461 F.3d 886 (7th Cir. 2006), aff’d, United States

v. Santos, 128 S. Ct. 2020 (2008).

Nos. 06-3029, 06-3040 and 06-3438 5

expenditures made out of the business checking account

for each spa. Records were also introduced from the

publications in which the spas advertised. At both trials,

Mr. Murray, an IRS accountant, testified regarding the

checking accounts and provided a summary of the with-

drawal activity. The funds in these accounts consisted,

in large part, of the deposits from the credit card payments

by massage parlor customers. From the summaries, it

appears that a substantial portion of the funds in the

business checking accounts was spent on advertising,

and in Mr. Lee’s case there was also evidence that Mr. Lee

told FBI Agent David Childre in a recorded conversation

that they spent about $18,000 a month on advertising.

Other payments out of the accounts included rent, phone

bills, and some wages.

The relevant language from the money laundering

statute is as follows:

(a)(1) Whoever, knowing that the property in-

volved in a financial transaction represents the

proceeds of some form of unlawful activity, con-

ducts or attempts to conduct such a financial

transaction which in fact involves the proceeds of

specified unlawful activity—(A)(i) with the intent

to promote the carrying on of specified unlawful

activity . . . ; or (B) knowing that the transaction is

designed in whole or in part—(i) to conceal or

disguise the nature, the location, the source, the

ownership, or the control of the proceeds of speci-

fied unlawful activity . . . shall be sentenced . . . .

18 U.S.C. § 1956(a)(1). Here the defendants were prose-

cuted under subpart (a)(1)(A) for promotion, rather than

6 Nos. 06-3029, 06-3040 and 06-3438

under (B) for concealment. Accordingly, to make its case,

the government had to show that the defendants were

in fact part of the conspiracy to launder money,3 and that

the defendants “(1) conducted a financial transaction

with the proceeds of an illegal activity; (2) knew the

property represented illegal proceeds; and (3) conducted

the transaction with the intent to promote the carrying on

of the unlawful activity.” Malone, 484 F.3d at 920 (quoting

United States v. Febus, 218 F.3d 784, 789 (7th Cir. 2000)).

Under the first prong, the payments out of the business

checking accounts clearly meet the definition of “financial

transaction.” It is also clear, since the credit card prostitu-

tion fees were deposited into the accounts, that the

money was from an “illegal activity.” (No one contests

that the “extras” offered by the masseuses amounted to

illegal prostitution under Illinois law.) It is equally obvi-

ous, under the third prong, that the advertising pur-

chases promoted the carrying on of the use of interstate

telephone facilities in aid of the commission of illegal

prostitution operations. “[T]he promotion element can be

met by ‘transactions that promote the continued pros-

perity of the underlying offense’ . . . .” Malone, 484 F.3d

at 921 (quoting Febus, 218 F.3d at 790); see also Santos v.

United States, 461 F.3d 886, 893 (7th Cir. 2006) (explaining

that reinvesting net income to promote the carrying on

of the criminal operation constitutes money laundering)

3

The conspiracy issue is discussed separately in the next sec-

tion regarding Mr. Lee. Ms. Lee did not put forth any argu-

ment challenging the conspiracy aspect of this charge.

Nos. 06-3029, 06-3040 and 06-3438 7

aff’d, United States v. Santos, 128 S. Ct. 2020 (2008). Pur-

chasing advertising inherently promoted the prosperity

of the underlying offense. The government also alleges that

the “future rent” payments out of the account also

amounted to money laundering. Those payments clearly

satisfy the requirement that the transactions were made

with the intent to promote the carrying on of the underly-

ing illegal operation as well. See Malone, 484 F.3d at 921

(“[A]t least some activities that are part and parcel of the

underlying offense can be considered to promote the

carrying on of the unlawful activity.”); see also Febus,

219 F.3d at 790.

The more difficult issue before us is whether the gov-

ernment established that the transactions involved

illegal “proceeds.” We spoke at great length on the mean-

ing of the statutory term “proceeds” in Scialabba and Santos.

In Scialabba the underlying business enterprise was an

illegal coin gambling business. Scialabba, 282 F.3d at

475-76. Participants put coins into gaming machines and

then received onscreen credits if they won. They could

continue to play with these credits or redeem them at

retail outlets for cash. Id. The acts in question, for launder-

ing purposes, were giving some of the money in the

coin boxes to the outlets’ owners and spending some of the

money to meet business expenses like leasing the video

machines and obtaining licenses. Id. We found, relying

on the rule of lenity, that “at least when the crime entails

voluntary, business-like operations, ‘proceeds’ must be

net income; otherwise the predicate crime merges into

money laundering (for no business can be carried on

without expenses) and the word ‘proceeds’ loses opera-

8 Nos. 06-3029, 06-3040 and 06-3438

tional significance.” Id. at 475, 477. We found that these

were not “proceeds” because they did not amount to

profit. The money laundering convictions were vacated.

We viewed Santos essentially as a head-on re-litigation

of Scialabba and declined to overrule Scialabba. Santos, 461

F.3d at 888-89. In Santos the defendant operated an

illegal lottery—a “bolita.” Gamblers would place bets with

bolita runners, who turned the money over to collectors,

who, in turn, gave the money to Santos. The runners, the

collectors, and the winners all were paid out of the total

amount collected. Id. at 888. The district court vacated

the convictions following Scialabba. On appeal we

found that these transactions were “conceptually indistin-

guishable” from those in Scialabba. Id. at 891. We acknowl-

edged that the First, Third, and Eighth Circuits had

concluded differently. Id. at 891-92. We also recognized

the legitimacy of the government’s contention that there

would be evidentiary problems in reading “proceeds” to

mean net income as well as disparities in the sentences

for the underlying offense and the money laundering. Id.

at 893. But none of these concerns warranted overturning

Scialabba. Id. at 893-94. We did clarify and confirm that

the statute does indeed prohibit both concealment of net

proceeds and the reinvestment of net proceeds to

promote the illicit activity; Scialabba had not suggested

otherwise. Id. at 892-93; see also 18 U.S.C. § 1956(a)(1)(A)(i),

(B)(i).

In affirming our decision in Santos, the Supreme Court

agreed that an illegal lottery’s payments to winners and

employees are not “proceeds” within the meaning of

Nos. 06-3029, 06-3040 and 06-3438 9

§ 1956(a)(1). 128 S. Ct. at 2031. A plurality of four Justices

also adopted Scialabba’s definition of proceeds as a busi-

ness’ net “profits,” rather than its gross “receipts.” Id. at

2025 (plurality opinion). However, in his controlling

concurrence, Justice Stevens declined to “pick a single

definition of ‘proceeds’ applicable to every unlawful

activity.” Id. at 2032 (Stevens, J., concurring). For Justice

Stevens, the meaning of “proceeds” should turn on

whether legislative history indicates that Congress in-

tended to reach the gross revenues of a specified crime.

Id. at 2032.

Finally, in an opinion released today, United States v.

Hodge, Nos. 06-3458 & 06-3052 (7th Cir. Mar. 11, 2009), we

examine the application of § 1956(a)(1) to prostitution

businesses similar to the spas operated by the Lees. The

government in Hodge obtained a jury conviction of

money laundering after introducing evidence of the

businesses’ rent, utilities, and advertising expenses.

Hodge, slip op. at 3. We conclude that the evidence of

rent and utilities is insufficient to support the convic-

tion. These costs are essential operating expenses, which,

under both Scialabba and Santos, do not count as “pro-

ceeds” within the meaning of § 1956(a)(1). Id. at 3-4.

We also note in Hodge that the question of whether the

businesses’ advertising expenses may qualify as proceeds

is more difficult. Although ordinary advertising costs

would not fall within Scialabba’s net-profits definition of

proceeds, treating these costs as proceeds may be consis-

tent with Justice Stevens’ crime-specific interpretation of

§ 1956(a)(1). Id. at 4-6. Nonetheless, we do not decide

10 Nos. 06-3029, 06-3040 and 06-3438

whether the advertising expenses in Hodge count as

proceeds because of a problem with the jury’s general

verdict. The jury instructions did not distinguish

between advertising and other expenses. Thus, the jury

may have convicted based on evidence of the businesses’

rent and utilities—expenses that, as a matter of law, do

not constitute proceeds under § 1956(a)(1). Id. at 8.

Because it is impossible to tell whether the jury relied

on the legally insufficient evidence of rent and utilities

or the possibly legally sufficient evidence of advertising

costs, we conclude that the general verdict in Hodge cannot

stand. Id. (citing Yates v. United States, 354 U.S. 298 (1957)).

With this backdrop, the issue now before the court in the

instant case is whether there was sufficient evidence of

financial transactions involving proceeds upon which to

convict the Lees. In these massage parlor operations, the

masseuses’ take of the prostitution money was paid to

them primarily out of the spas’ cash. The cash was also

used to buy “supplies.” The credit card income and some

cash were deposited in the businesses’ accounts. Various

bills were paid out of the accounts. These payments

appear to include bills, some wages, rent, and advertising

expenses, according to the checking account summaries

submitted by the government.

As in Hodge, we find that the evidence in these two

cases of the spas’ rent, utilities, and wages is insufficient

to support a conviction of money laundering. Because

these costs are regular expenses that are essential to

the spas’ operation, they are not “proceeds” within the

meaning of § 1956(a)(1).

Nos. 06-3029, 06-3040 and 06-3438 11

The government argues that the evidence showed that

future rent payments came out of net rather than gross

proceeds because they represented reinvestment transac-

tions, rather than past operational expenses. Under

this view, net proceeds include all of the revenues left

after the spas paid the prostitutes’ salaries and bills for

past expenses.

This temporal approach for distinguishing between net

and gross proceeds is inconsistent with Scialabba’s and

Santos’ focus on net profits. An ordinary and necessary

business expense does not come out of net profits merely

because it relates to a future event. And paying rent for

a physical location to house a business is rightly con-

sidered an ordinary and necessary expense. It is not

logical or persuasive to say, as the government asserts,

that simply because rent is paid for the upcoming

month, before use, and utilities are paid at the end of the

month, for the amount used, that one is paid for with

gross income and one paid for with net. The issue is

whether the payments were reinvestment of net proceeds

to promote the carrying on of the operation or the act of

paying the operation’s expenses out of gross income.

We also note that this is not an instance where rent

was paid months in advance as some sort of capital

investment, or where an operation expanded and rented

new space, or even where a business had a month-

to-month tenancy with each month the decision being

made anew whether to invest their profits into another

month of business or to cash out (all cases in which, at

least arguably, rent might be properly considered paid

12 Nos. 06-3029, 06-3040 and 06-3438

out of net income). Rather, the government’s account

summaries simply show regular, approximately monthly,

payments. This is how rent is typically paid under a

lease, each month in advance.

Although the spas’ rent clearly does not qualify as

“proceeds,” the question of whether the spas’ advertising

expenses qualify is more difficult in light of the Supreme

Court’s decision in Santos. As we explain in Hodge, treating

the advertising costs of certain illegal operations as

“proceeds” may be consistent with Justice Stevens’

crime-specific interpretation of § 1956(a)(1). Hodge, slip

op. at 6-8. And even under the Santos plurality’s net-

profits definition of proceeds, there may be some situa-

tions where advertising could be paid for out of “net”

income. For example, if a business decides to expand

into a new market—that initial expenditure on new

advertising might be a “reinvestment of net proceeds.” Cf.

Santos, 128 S. Ct. at 2029 n.7 (“[I]t will be up to the Gov-

ernment to select that period of time for which it can

most readily establish the necessary elements of the

charged offenses, including (if money laundering is one

of them) profitability.”); id. at 2029 (“[T]he Government

will have to prove the profitability of just three offenses,

selecting (again) those for which profitability is clearest.

And of course a prosecutor will often be able to charge

the underlying crimes instead of the overarching enter-

prise crime.”).

In the Lees’ cases, however, it is unnecessary to decide

whether the spas’ advertising expenses may qualify as

proceeds because, as in Hodge, we encounter a problem

Nos. 06-3029, 06-3040 and 06-3438 13

with the juries’ general verdicts. The jury instructions in

these cases did not distinguish between advertising

expenses and other regular business expenses. It is im-

possible to tell whether the juries based their verdicts

on the legally insufficient ground that rent and utilities

are net proceeds, or the possibly legally sufficient ground

that advertising costs are net proceeds. Thus, the juries’

general verdicts cannot stand. See Yates v. United States,

354 U.S. 298, 311-12 (1957).

The government points out that the jury instructions

in the Lees’ cases correctly defined “proceeds” as “net

rather than gross proceeds.” While that is a notable

distinction from the instructions in Hodge, see Hodge,

slip op. at 8, the instructions were not specific enough

to tell the juries that ordinary rent and utilities do not

count as net proceeds. So if the government’s theory at

trial was that evidence of rent and utilities could support

a conviction of money laundering, the instructions do not

permit us to assume that the juries did not rely on that

theory to convict the Lees. Cf. United States v. Van Allen,

524 F.3d 815, 824 (7th Cir. 2008) (rejecting the argument

that a conviction for concealment of assets was based on

a legally insufficient theory, where the government

did not argue that theory to the jury); United States v.

Watson, 525 F.3d 583, 590 (7th Cir. 2008) (concluding that

a line in the government’s indictment that contained a

legally insufficient theory of jurisdiction did not

invalidate a Hobbs Act conviction, where the govern-

ment “never even mentioned” that theory to the jury).

The prosecution in these cases introduced evidence of

the spas’ advertising expenses alongside evidence of

14 Nos. 06-3029, 06-3040 and 06-3438

rent and utilities, and no argument that advertising in

particular was paid for out of net rather than gross

income was ever presented to the juries. (In fact the

account summaries submitted by the government in

both cases included utility payments—which the govern-

ment now concedes on appeal were payments out of

gross income—right along with rent payments and ad-

vertising payments. At no point did the prosecution

argue which of these items were paid for with net or

which with gross.) On these facts, the government’s

theory of its money laundering case was that all of the

spas’ business expenses could be “proceeds” within the

meaning of § 1956(a)(1). And the jury instructions, while

correctly referring to “net proceeds,” were not specific

enough to tell the juries which of the government’s evi-

dence they could rely on. Because the juries may have

based their general verdicts on the legally insufficient

theory that rents and utilities count as proceeds, Yates

requires that these verdicts be set aside.

III. Mr. Lee’s Conspiracy Challenges

Mr. Lee makes two other sufficiency-of-the-evidence

arguments. Here, too, in reviewing for sufficiency of the

evidence, we consider the evidence in the light most

favorable to the government, drawing all reasonable

inferences in the government’s favor, Morris, 498 F.3d at

637, reversing only if a rational trier of fact could not

have found the essential elements of the crime beyond a

reasonable doubt, Malone, 484 F.3d at 920. Mr. Lee

argues that there was insufficient evidence to convict

Nos. 06-3029, 06-3040 and 06-3438 15

him of the money laundering conspiracy at all (regard-

less and apart from the net versus gross argument, dis-

cussed above), and that there was insufficient evidence to

convict him of the conspiracy to use interstate facilities.

Basic to both claims, he argues the evidence was insuffi-

cient to establish that he knowingly joined the con-

spiracies in question. We need not consider his argument

with respect to the money laundering claim, due to our

discussion supra in which we determined that conviction

could not stand. We disagree, however, with Mr. Lee’s

argument with respect to the conspiracy to use interstate

facilities, finding ample evidence on which a jury could

conclude he knowingly joined and participated in the

charged conspiracies.

In order to prove Mr. Lee guilty of conspiracy, the

government had to show (1) that the conspiracy charged

in the superceding indictment existed; (2) that Mr. Lee

knowingly became a member of the conspiracy with

an intention to further the conspiracy; and (3) that an

overt act was committed by at least one conspirator in

furtherance of the conspiracy. E.g., United States v. Hickok,

77 F.3d 992, 1004-05 (7th Cir. 1996). Mr. Lee disputes the

second element. He argues that he was merely a handy-

man and a translator and that he did not agree to use

interstate facilities. To the contrary, however, the gov-

ernment showed that Mr. Lee was intimately involved

in the entire massage parlor enterprise.

Mr. Lee was frequently at the spas and contributed in

many ways. There was testimony at trial that he did

construction and remodeling for the spas. Mr. Lee dealt

16 Nos. 06-3029, 06-3040 and 06-3438

with the Rockford City Zoning Division on zoning and

licensing issues for the spas. He helped the masseuses by

sending postal money orders for them, usually charging

1%. He would pick the masseuses up at the airport. Co-

defendant Mi Ran Park testified that Mr. Lee helped

her learn to use the credit card machine and placed news-

paper ads when Park later began managing the spa

under a different owner. His number was also posted

next to the phones/credit card machine along with

Hwang’s, from which it could be inferred that he was

someone the employees could call for assistance or to

report problems. A detective recovered $77,000 in cash,

some Mr. Lee’s and some Hwang’s, from a safe deposit

box in Mr. Lee’s name; Mr. Lee told FBI Agent Randall

Sealby these funds derived from the Pine Tree Spa.

During meetings with undercover FBI Agent David

Childre, Mr. Lee described the business in detail, fre-

quently using the term “we” and specifically explaining

that they do a lot of credit card business and that they

spend close to $18,000 a month on advertising. Mr. Lee

also participated by translating for Hwang and other

employees and attended meetings with Hwang.

This was enough for a jury to reasonably conclude he

joined the interstate facilities conspiracy with full knowl-

edge and intent that the prostitution business would be

advanced with the usage of the credit card machine.

Importantly, the government did not have to prove that

Mr. Lee himself used the credit card machine. It is well

established that circumstantial evidence is sufficient to

establish membership in the conspiracy. See, e.g., United

States v. Miller, 405 F.3d 551, 555 (7th Cir. 2005) (“The

Nos. 06-3029, 06-3040 and 06-3438 17

government may establish these elements through ‘cir-

cumstantial evidence and the reasonable inferences

therein concerning the parties’ relationships, their overt

acts, and their overall conduct.’ ” (quoting United States v.

Navarrete, 125 F.3d 559, 562 (7th Cir. 1997))). One could

easily infer based on his statements and evidence of his

extensive involvement that Mr. Lee knowingly agreed to

and furthered the conspiracy to use the credit card ma-

chines in carrying on the prostitution business. Particu-

larly, his statements alone about using credit cards and

the testimony about him teaching someone to use the

machine were sufficient evidence from which the jury

could infer he knowingly became a member of that con-

spiracy.

Given the defendant’s very heavy burden here on

appeal and the amount of evidence showing that he was

involved in the entire massage parlor business, he

simply cannot prevail on this argument.

IV. Admissibility of Rule 404(b) Evidence as to

Ms. Lee

Ms. Lee challenges certain evidence admitted under

Federal Rule of Evidence 404(b). At Ms. Lee’s trial, the

government called Insika “Anna” Kim to testify. Anna

Kim had been a “masseuse” at the Tokyo Spa in

Rockford and at the Rainbow Spa that Ms. Lee purportedly

operated in Toledo, Ohio, from 1999-2000. Ms. Lee filed a

pretrial motion in limine to keep out Kim’s testimony

regarding the Rainbow Spa. Ms. Lee’s objection was to

18 Nos. 06-3029, 06-3040 and 06-3438

the pattern/propensity nature of the testimony, arguing

that it was prejudicial when Ms. Lee was charged only

in connection with the Tokyo Spa in Rockford. The gov-

ernment asserted that the evidence was admissible

under Rule 404(b). Ms. Lee’s defense was going to

include an argument that she was unaware of the prostitu-

tion at the Tokyo Spa. Therefore, the government argued

to the district judge, Ms. Lee’s prior experience became

relevant and Kim’s testimony should be admitted for

that limited purpose of demonstrating knowledge. The

district judge decided that the evidence would be ad-

missible under Rule 404(b) with a limiting instruction.

Ms. Lee did make such a defense as early as opening

statements, and Kim did testify. The judge gave the jury

a limiting instruction, tracking the familiar Seventh

Circuit pattern criminal instruction 3.04, both at the time

of the testimony and again following closing statements.

Kim testified about the operations of both the Toledo

and Rockford spas, explaining the bookkeeping system

at both spas, how condoms were obtained and disposed

of at the Rockford spa, and so forth. Kim’s testimony,

both on direct and cross-examination, also included

references to “forced sex.” She mentioned during her

direct examination that she was pushed into a room on

her first day at the Rainbow Spa in Toledo to observe

and then on subsequent days to perform sexual acts. On

cross-examination, she elaborated further, even stating

she was put in metal chains.

Ms. Lee now argues on appeal that Kim’s “forced sex”

testimony should have been excluded pursuant to Rules

Nos. 06-3029, 06-3040 and 06-3438 19

403 and 404(b), and that given the “shocking and devastat-

ing” nature of the testimony, the limiting instruction

was not enough to counter the prejudice. The district

court admitted Kim’s Rainbow Spa testimony under

Rule 404(b). We review for abuse of discretion. United

States v. Ross, 510 F.3d 702, 713 (7th Cir. 2007). Admissibil-

ity under Federal Rule of Evidence 404(b) is governed by

a four-part test: Whether,

(1) the evidence is directed toward establishing a

matter in issue other than the defendant’s propen-

sity to commit the crime charged;

(2) the evidence shows that the other act is similar

enough and close enough in time to be relevant to

the matter in issue;

(3) the evidence is sufficient to support a jury

finding that the defendant committed the similar

act; and

(4) the probative value of the evidence is not

substantially outweighed by the danger of unfair

prejudice.

Id.; United States v. Zapata, 871 F.2d 616, 620-21 (7th Cir.

1989). Under all four prongs, the district judge’s conclu-

sion to admit Kim’s Rainbow Spa testimony in general

was correct. The evidence went directly to Ms. Lee’s

knowledge—an issue other than the defendant’s pro-

pensity to commit the crime charged. Ms. Lee herself

made knowledge an issue by arguing she was unaware of

the prostitution. Thus, under the first prong, Kim’s testi-

mony was properly admitted to prove knowledge and

20 Nos. 06-3029, 06-3040 and 06-3438

lack of mistake or accident. The second prong was also

met; the Toledo spa operation was practically identical

in operation to the Rockford spa at issue in the present

case. The time frame was within two years, close enough

to be relevant to the matter in issue. See, e.g., United States

v. Best, 250 F.3d 1084, 1092 (7th Cir. 2001) (finding a

prior identical cocaine offense two years earlier was

sufficiently similar); United States v. Tringali, 71 F.3d

1375, 1379 (7th Cir. 1995) (concluding evidence within

ten years was admissible to show present knowledge).

Kim’s first-hand testimony was sufficient to satisfy prong

three, and Ms. Lee did not argue otherwise. The fourth

prong is the most contentious.

Ms. Lee argues that Kim’s testimony was overly prejudi-

cial. The district court judge concluded that it was not. He

acknowledged that some people may not like that kind of

operation, but that the probative value was not substan-

tially outweighed by the danger of unfair prejudice. We

agree with that determination. Admitting testimony

regarding Ms. Lee’s business at the Rainbow Spa did not

present unfair prejudice—it was essentially the very

same behavior she was charged with in connection

with the Rockford spa operation. Eliciting testimony

about her previous experience in an identical operation

to show her knowledge is not such that its probative

value would be substantially outweighed by the danger of

unfair prejudice. Therefore, as to Kim’s testimony about

the Rainbow Spa generally, the district court’s Rule 404(b)

determination was correct.

In her brief, Ms. Lee focuses on the prejudice of the

“forced sex” testimony in particular. The fourth prong

Nos. 06-3029, 06-3040 and 06-3438 21

of the Rule 404(b) test excludes evidence only when the

danger of unfair prejudice substantially outweighs the

probative value. The fact that Kim said she was pushed

into a room to watch and/or engage in sexual acts in the

Rainbow Spa is probative, establishing Ms. Lee’s knowl-

edge of the spa prostitution, as we already discussed.

Arguably the forced aspect of it is more prejudicial than

prostitution generally as it could be construed as rape.

Furthermore, that specific testimony added little new

probative evidence, since Kim’s other testimony re-

garding the Rainbow Spa had already established

Ms. Lee’s knowledge. However, given the circumstances,

which we discuss further in the following paragraphs,

there was simply no true “danger of unfair prejudice” that

would induce the jury to decide the case on some

improper basis. Admitting the testimony was not plain

error.4 Morever, even if we were to conclude that the

4

It appears that Ms. Lee really did not preserve her objection to

the “forced sex” testimony. As admitted at oral argument, no

objection was raised during trial when the forced-sex testimony

came out. Ms. Lee argues that the issue was preserved via her

pretrial motion in limine to preclude Kim’s Rainbow Spa

testimony altogether. This, however, was insufficient because

with that objection came no indication that there would be any

testimony about forced sex—Ms. Lee simply objected to the

pattern/propensity aspect of the testimony. See United States v.

Swan, 486 F.3d 260, 264 (7th Cir. 2007); Wilson v. Williams,

182 F.3d 562 (7th Cir. 1999); Fed. R. of Evid. 103 (requiring a

party to state a “specific ground” of the objection). The ramifica-

tions of failing to preserve the issue for appeal is to downgrade

(continued...)

22 Nos. 06-3029, 06-3040 and 06-3438

forced-sex aspect of the testimony was admitted in error

under Rule 404(b), that admission, at its worst, would

most certainly be harmless, for the following reasons.

First, the majority of the forced-sex details came out

during cross-examination (notably not by the govern-

ment during direct) in an attempt by the defense to dis-

credit Kim. And this attempt to discredit was rather

successful in providing plenty for the defense to argue

to the jury about Kim’s credibility.5 Given the unusual

4

(...continued)

the standard of review from abuse of discretion to plain

error. United States v. Blount, 502 F.3d 674, 677-78 (7th Cir.

2007). Discussing this in more detail, however, is not worth-

while. Ms. Lee’s claim here is not meritorious, for the reasons

explained infra, regardless of what standard applies.

5

Kim’s testimony during cross was rather unusual at times as

she discussed her life and employment history. In addition to

elaborating on her “forced sex” testimony, she testified that she

had worked previously as a partner in a Tampa restaurant

business; was owner of a major medical health insurance

business in Houston; became a partner on a shrimp boat in

Biloxi; owned an apartment building; worked as a dental

technician, walking some 35 miles each way to and from

work daily; and became a contractor by reading a library book,

to name only a few of her accomplishments. Kim also testified

that she tried to sell one of her kidneys for $26,000 at a market

in Houston. She described how she came to work at the

Toledo spa, explaining that a woman in a Mississippi hair

salon gave her a phone number. After calling that number, she

took a bus to Flint, Michigan. Apparently she was not their

(continued...)

Nos. 06-3029, 06-3040 and 06-3438 23

nature of her testimony, any prejudicial impact or imper-

missible emotional pull of the forced-sex allegations

seems negligible. After hearing Kim discuss her life, any

reasonable juror was likely to carefully consider what

weight to give her testimony.

More importantly, the forced-sex testimony elicited on

direct and cross comprised only a mere handful of sen-

tences out of Kim’s half-day-long testimony in a four-day

trial. There was also an abundance of other evidence

on which the jury could pin Ms. Lee’s guilt. Additionally,

the government did not argue the forced sex in its sum-

mation—there was absolutely no pull on the jurors’

emotions asking them to convict her because she in

some way was affiliated with rape. The government

asked the jury to convict her on the evidence, of which

there was plenty. See United States v. Dennis, 497 F.3d 765,

770 (7th Cir. 2007) (mentioning the “overwhelming evi-

dence of [the defendant’s] guilt” apart from evidence

admitted under Rule 404(b) in determining that any

Rule 404(b) error would have been harmless); United States

v. Mallett, 496 F.3d 798, 802 (7th Cir. 2007) (mentioning the

“overwhelming evidence of [the defendant’s] guilt” apart

from evidence admitted under Rule 404(b)); United States

v. Best, 250 F.3d 1084, 1093-94 (7th Cir. 2001) (discussing the

importance of other “compelling” evidence on which to

convict the defendant, aside from Rule 404(b) testimony).

5

(...continued)

“type,” so, after another call, she went to the Rainbow Spa in

Toledo. The details she described of her life were truly nothing

short of odd.

24 Nos. 06-3029, 06-3040 and 06-3438

There are also the limiting instructions to consider.

Perhaps Ms. Lee has a point—that in some extreme in-

stances a limiting instruction may be insufficient to

quell the prejudice and the pull to convict on an impermis-

sible emotional basis. However, if such a case exists, this

is certainly not it; the mention of forced sex in Kim’s

testimony in context appears neither “shocking” nor

“devastating” despite how Ms. Lee attempts to spin it in

her briefs. The judge gave a limiting instruction before

Kim’s Rainbow Spa testimony instructing the jury that it

was only to be considered for the limited purpose of

establishing Ms. Lee’s knowledge. At the conclusion of

the Rainbow Spa testimony and before Kim began her

testimony regarding the Rockford Spa, the judge again

emphasized the limitation on the Rainbow Spa testimony.

The limiting instruction was also given again at the end

of closing arguments. “Absent any showing that the jury

could not follow the court’s limiting instruction, we

presume that the jury limited its consideration of the

testimony in accordance with the court’s instruction.”

Mallett, 496 F.3d at 802. The extensive instruction was

more than sufficient to fully counter the slim chance

that Kim’s testimony had a prejudicial effect. See, e.g.,

Dennis, 497 F.3d at 769 (mentioning the mitigating impact

of limiting instructions on any risk of prejudicial impact

on the jury); Best, 250 F.3d at 1094 (mentioning the

limiting instruction).

Therefore, there does not appear to be any danger of

prejudice from the forced-sex testimony (let alone

unfair prejudice). Nevertheless, even if there was, it was

harmless error. “Error in admitting Rule 404(b) evidence

Nos. 06-3029, 06-3040 and 06-3438 25

may be deemed harmless if we are convinced that the

error did not influence the jury, or had but very slight

effect, and can say with fair assurance . . . that the judg-

ment was not substantially swayed by the error.”

Dennis, 497 F.3d at 769-70 (internal quotations omitted).

Given the circumstances, the forced-sex testimony had

no noticeable impact on Ms. Lee’s conviction.6

6

Ms. Lee also appeals the admission of “finger cot testimony”

from FBI Agent Richman and the reference in FBI Agent Sealby’s

testimony to a newspaper article. These two arguments barely

warrant discussion. The newspaper article itself was never

shown to the jury. Instead an agent simply testified that an

article in the Rockford Register Star instigated the investiga-

tions. This one minor mention was certainly harmless, and the

jury was of course instructed not to look at any outside materi-

als.

The finger cot testimony is also insignificant. After telling the

jury where she seized finger cots at the spa, Agent Richman

described that they were “basically condoms, tiny little

condoms that go over one’s finger, and are used to insert in

someone’s anus to stimulate the prostate gland. . . .” Ms. Lee

then objected for lack of foundation and hearsay. Following

the objection, the testimony was stricken from the record. Later,

in the jury’s absence, Ms. Lee moved for a mistrial, which

the district judge denied. Considering that Ms. Lee was charged

in connection with running a brothel, and since finger cots

were mentioned, permissibly, to the jury as items found at the

spa, explaining what a finger cot is to the jury was not

unfairly prejudicial. The testimony was stricken and that

sufficiently dealt with any problem the testimony could have

presented.

26 Nos. 06-3029, 06-3040 and 06-3438

V. Sentencing Issues

We review the application of sentencing guidelines de

novo. United States v. Acosta, 474 F.3d 999, 1001 (7th Cir.

2007). Mr. Lee was convicted on both counts of the

superceding indictment—the conspiracy to use interstate

facilities and the conspiracy to commit money launder-

ing—on March 20, 2006. On July 17, 2006, he was sen-

tenced to 51 months of imprisonment on both counts to

run concurrently, three years’ supervised release, a

$250 fine, and a $200 special assessment. Ms. Lee was also

convicted of both counts, on March 30, 2006. She was

sentenced, on July 20, 2006, to 63 months of imprison-

ment on both counts to run concurrently, plus three

years of supervised release, a $500 fine, and a $200

special assessment.

Both defendants’ base offense levels for Count Two, the

money laundering count, were calculated under U.S.S.G.

§ 2S1.1(a)(2), with cross-reference to U.S.S.G. § 2B1.1 to

determine how many levels should be added. Following

the sentencings, however, the trial judge determined

that this calculation in Mr. Lee’s case was erroneous and

expressed this in a proceeding on August 24, 2006. The

same error occurred in Ms. Lee’s case. The government in

its brief concedes that this calculation was erroneous,

explaining that the base offense levels should have been

calculated under U.S.S.G. § 2S1.1(a)(1). All parties seem

to agree with this point, and because a sentence must

be based on an accurate guideline calculation, United

States v. Garrett, 528 F.3d 525, 527 (7th Cir. 2008), the

sentences must be vacated with the cases remanded

Nos. 06-3029, 06-3040 and 06-3438 27

for resentencing. Accordingly, all other arguments ad-

vanced with respect to sentencing are moot.

Moreover, given our conclusions above, overturning the

convictions with respect to the money laundering counts,

the Lees must be resentenced anyway, in light of that,

upon remand.

VI. Conclusion

We A FFIRM the convictions on the interstate facilities

conspiracy claim and R EVERSE the convictions for the

money laundering conspiracy. With respect to the Lees’

sentences, we V ACATE and R EMAND for resentencing.

3-11-09