Petition for Writ of Certiorari — Rosengarten v. United States

am 7

IN THE DEC @> 1988

Supreme Court of the United States. +

OCTOBER TERM, 1988

—-

SAMUEL ROSENGARTEN, STANISLAW ORLICKI,

and LEONARD NACHTMAN,

Petitioners,

—V.—

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

MINNA SCHRAG

Counsel of Record

~ LARRY M. LAVINSKY

MARTHA E. GIFFORD

KATHLEEN M. Woop

Proskauer Rose Goetz

& Mendelsohn

300 Park Avenue

Of Counsel: New York, New York 10022

RICHARD S. BERNE (212) 909-7000

305 Madison Avenue Counsel for Petitioners

New York, New York 10165

KENNETH I. SCHACTER

Solin & Breindel P.C.

501 Fifth Avenue

New York, New York 10017

QUESTION PRESENTED

Can conduct that occurs after the passage of a statute, but

ceases before its effective date, be criminally punished as a con-

spiracy to defraud the United States even though the conduct,

at the time it occurs, violates no law and does not defeat any

lawful function of the government?

TABLE OF CONTENTS

PAGE

OPINIONS BELOW |... o.ccsacane spn peewee Cees hee cans 1

JURISDICTION «4.404500 nce ere eee ee 1

CONSTITUTIONAL AND STATUTORY PROVI-

SIONS INVOLVED? occ cou x awe ne oe eee bees es eeas 1

STATEMENT OF THE CASE.......-.ccccee.ceeees 2

REASONS FOR GRANTING THE WRIT ........... 4

I. The Decision Is In Conflict With This Court’s

Prior Decisions Construing The Ex Post Facto

Clause .. oo oa cuddeeec ener eee 5

Il. The Decision Is In Conflict With Decisions By

Other Circuits And By The Second Circuit Itself 9

Ill. The Second Circuit’s Decision Permits Unlim-

ited Expansion Of The General Conspiracy Stat-

UWE ..ccucseeeue ke ba ee ee 11

CONCLUSION . «cadaver ees 15

APPENDIX :

Opinion Of The Court of Appeals ........... A-1

Opinion Of The District Court...........---. A-10

Order Denying Petition For Rehearing........ A-18

Indictment ..<schknsnxdu seen eee ee eee eeaeaes A-20

Constitutional Provision .......cccccecsesess A-23

Statutes ..... csi kone eee neenee te eeae es A-23

ii

TABLE OF AUTHORITIES

Cases PAGE

Abney v. United States, 431 U.S. 651 (1977) .......... 4

Pouie v. City of Columbia, 378 U.S. 347 (1964)....... 5

Buccino v. Continental Assurance Co., 578 F. Supp.

Ee ED a 8

Burgess v. Salmon, 97 U.S. 381 (1878) ............... yt

Calder v. Bull, 3 U.S. (3 Dall.) 386 (1798) ............ 5, 6

Christianson v. United States, 226 F.2d 646 (8th Cir.

1955), cert. denied, 350 U.S. 994 (1956) ............ 9

Dennis v. United States, 384 U.S. 855 (1966).......... 11-12

Grunewald v. United States, 353 U.S. 391 (1957) ...... 12

Haas v. Henkel, 216 U.S. 462 (1910)................. 13

Hammerschmiadt v. United States, 265 U.S. 182 (1924) . 13

foevvemas ¥. People, 22 N.Y. 95 (1660)... .........605; 7-8

Helstoski v. Meanor, 442 U.S. 500 (1979) ............ 4

em ie Gee, 298 U.S. 160 (IBRD) . woo ccc cccscces 6, 11

Kring v. Missouri, 107 U.S. 221 (1883).............. 7, 8, 11

Krulewitch v. United States, 336 U.S. 440 (1949) ...... 12

Leyvas v. United States, 371 F.2d 714 (9th Cir. 1967)... y

Louis Vuitton S.A. v. Spencer Handbags Corp., 765

I Ns wk e ca senscsuccesadacse 11

ill

McNally v. United States, 107 S. Ct. 2875 (1987)...... 12

Midland Asphalt Corp. v. United States, 840 F.2d 1040

(2d Cir.), cert. granted, 108 S. Ct. 2869 (1988) ...... 4

Miller v. Florida, 107 S. Ct. 2446 (1987). ............. 8

Morrison v. Olson, 108 S. Ct. 2597 (1988)............ 4

Rewis v. United States, 401 U.S. 808 (1971)........... 12

Roth vy. Pritikin, 710 F.2d 934 (2d Cir.), cert. denied,

PRO Eh. re rr rer rrr rrr 8

United States v. Anderson, 579 F.2d 455 (8th Cir. 1978) 10

United States v. Annoreno, 460 F.2d 1303 (7th Cir.),

cont. Gad, GP UTE. BAe CUR ae ents vcawrsasesses 9

United States v. Binder, 453 F.2d 805 (2d Cir. 1971),

cert. denied, 407 U.S. 920 (1972).............. 3, 4, 10, 11

United States v. Brown, 555 F.2d 407 (Sth Cir. 1977),

cart. Gated. 435 05.5. See CGT a ne ck cetaderviveas 9

United States v. Carruth, 699 F.2d 1017 (9th Cir. 1983),

cert. denied, 464 U.S. 1038 (1984) ................. 15

United States v. Cogswell, 637 F. Supp. 295 (N.D. Cal.

Ss sia nba ke ecco obeteeeenuecss ee ckesaeaenen 14

United States v. Enmons, 410 U.S. 396 (1973)......... 12

United States v. Everett, 692 F.2d 596 (9th Cir. 1982),

cart. Gombe, 460 U.S. WOOT CIGESD oa nc cic cncaccsces 15

United States v. Ferrara, 458 F.2d 868 (2d Cir.), cert.

Sa SS TIS. Sat Ci tae snc kan caensessdsadescas 10-11

United States v. Goldberger, 197 F.2d 330 (3d Cir.), cert.

ane, SOG US. Bae Ce ook oo ve nares daeeescaen 9

iv

United States v. Gradwell, 243 U.S. 476 (1917)........ 10

United States v. Johnson, 537 F.2d 1170 (4th Cir. 1976) 9

United States v. Klein, 247 F.2d 908 (2d Cir. 1957), cert.

HOMER, F55 S.B, Sae Ce ks 6k Kaka eden ka wen 14

United States v. Marchesani, 457 F.2d 1291 (6th Cir.

SPIO kbc 8 8003Ks vise skp edee eee ee y)

United States v. Porter, 591 F.2d 1048 (Sth Cir.

SOUTER io.cnbeceanenvsnudsaeseeee 10, 13, 14

United States v. Rosenblatt, 554 F.2d 36 (2d Cir.

DPT v0.40 vh dee enksdanaeeeee eee 12, 13, 14

United States v. Russo, 442 F.2d 498 (2d Cir. 1971), cert.

Ganied,, 494 US. MF Gta ok hho dhs anne cas 11

United States v. Sanzo, 673 F.2d 64 (2d Cir.), cert.

Gaming, 459 U.S. GHG CAGED « ic vk 00k adds caawincsccs 15

United States v. Smith, 464 F.2d 1129 (2d Cir.), cert.

Gamiad, 409 U.S. 1076 C9TE ooo ccvcccdccns ccsesnxs 11

United States v. Tarnopol, 561 F.2d 466 (3d Cir.

RPT Es 4:5444:440- 9400 be ba ee eee ee 13, 14

United States v. Turkish, 623 F.2d 769 (2d Cir. 1980),

cart, Gantag, 449 U.S. 1OTT C1981) once cece cacasess 15

Weaver v. Graham, 450 U.S. 24 (1981)............... 8

Williams v. United States, 458 U.S. 279 (1982) ........ 12

Constitutional Provisions

Cc. CO OE SO Oe DS gcc cieea eee ..3

PAGE

Statutes

18 U.S.C. § 371 (1966).......... were rer r rs Te 1, 2, 4, 11-14

26 U.S.C. § 46D (IGE) 5 occa ce eesancccussevesvuaces i, 2

28 U.S.C. § 1254(1) (19GB). oo cans csccavsccacescsees ]

Tax Reform Act of 1986, Public Law 99-514 (100 Stat.

22233), S01 anc vicissescwnsisnneaeeseee ie Se

Other Authorities

Developments in the Law—Criminal Conspiracy, 72

Harv. L. Rev. 920 C1959) 6 occ cvcsventusenasanvess 11

The Federalist Papers, No. 84 (R. Fairfield 2 ed. 1966). 5

Goldstein, Conspiracy to Defraud the United States, 68

Yale L.3. 405 C1999) ova ccc ds eceacecusesuceccasses 10, 11

Johnson, The Unnecessary Crime of Conspiracy, 61

Calif. L. Rev. 1137 C2978) sccucsssacesouseussncees 11

Memorandum of Law of the United States filed by the

Department of Justice as Amicus Curiae, United States

v. North, Crim. No. 88-0080-02 (D.D.C. filed Nov. 18,

Note, Conditional Objectives of Conspiracies, 94 Yale

L.J5. O93 CIGES) oo vccccvsuesccevecsuceeseneeeeee 11

Sayre, Criminal Conspiracy, 35 Harv. L. Rev. 393 (1922) 11

2 Sutherland Stat. Const. (Sands 4th Ed. 1986)........ 7,8

1988 U.S. Code Cong. & Admin. News (102 Stat.), Vols.

1-8 (April 1988-November 1988) .............-0-05: 8

vi

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

OPINIONS BELOW

The opinion and order of the Court of Appeals for the Sec-

ond Circuit reversing the decision of the District Court was ren-

dered on September 6, 1988. That opinion, reported at 857 F.2d

76, is reproduced at A-1.' The November 25, 1987 Memoran-

dum and Order of the District Court for the Southern District

of New York dismissing the indictment is reproduced at A-10.

JURISDICTION

The September 6, 1988 order of the Court of Appeals for the

Second Circuit was entered on that date. Rehearing was denied

on October 6, 1988. (A-18.) This petition for certiorari was

filed within 60 days of the date of the denial of rehearing. This

Court’s jurisdiction is invoked pursuant to 28 U.S.C. § 1254(1).

CONSTITUTIONAL AND STATUTORY PROVISIONS

INVOLVED

The following provisions of the Constitution and statutes are

cited in this petition, and are reproduced in the Appendix at the

pages shown:

U.S. Const. art. 1, § 9, cl. 3, at A-23. \

18 U.S.C. § 371, at A-26.

26 U.S.C. § 469 (in pertinent part), at A-23.

Tax Reform Act of 1986, Public Law 99-514, § 501 (in

pertinent part), at A-23.

1 Page references to the Appendix to this Petition are cited as ‘‘A-

STATEMENT OF THE CASE

This petition presents significant questions concerning the

interpretation of the ex post facto clause of the Constitution

and the application of the federal conspiracy statute, 18 U.S.C.

§ 371.

The Second Circuit has held that an indictment charging a

conspiracy to defraud, the goal of which was to circumvent and

defeat the Internal Revenue Service’s (‘‘IRS’’) collection of rev-

enue under a particular statute, is valid even though the con-

spiracy was abandoned before that statute became effective and

had no continuing consequence after the statute’s effective

date. The Second Circuit’s conclusion that the indictment does

not violate the ex post facto clause is at variance with decisions

of this Court and of other circuits, and with its own earlier deci-

sions. The Second Circuit’s conclusion effectively denies due

process: it holds that a person can be convicted of conspiracy to

defraud for actions performed at a time when there was no law-

ful government function that the actions could have impeded.

The Indictment

Congress passed the Tax Reform Act of 1986 on October 22,

1986. Section 501, codified as 26 U.S.C. § 469, governs losses

and credits from passive business activities. That section disal-

lows deductions from salary and active business income for pas-

sive losses generated by transactions entered into after October

22, 1986; limitations on deductions for passive losses generated

by interests already held on October 22, 1986 are phased in

gradually. Congress provided for § 501 to be effective on Janu-

ary 1, 1987, ten weeks after the October 22 enactment date.

The single count indictment charges that the defendants con-

spired, in violation of 18 U.S.C. § 371, to defraud the United

States and the IRS and that the goal of the conspiracy was ‘‘to

circumvent and defeat the provisions of the Tax Reform Act of

1986.’ (A-21.)

The indictment alleges as overt acts a series of meetings and

telephone conversations among the defendants and IRS agents

(acting in an undercover capacity) concerning the sale of inter-

ests in a real estate tax shelter, and the proposed backdating of

documents evidencing the sale. (A-21-22.) All of the overt acts

alleged in furtherance of the conspiracy occurred between Octo-

ber 22, 1986 and December 9, 1986. The last overt act of the

conspiracy was a December 9, 1986 meeting with an undercover

agent where backdating was discussed. Although the govern-

ment waited until March 20, 1987 to arrest the defendants, no

backdating ever occurred.

In the proceedings before the District Court, the government

did not dispute the assertion that it had no evidence whatever of

any conspiratorial acts undertaken after December 9, 1986—

some three weeks before the effective date of § 501. (Joint

Appendix at 162, United States v. Rosengarten, 857 F.2d 76 (2d

Cir. 1988) (No. 88-1002) (Nov. 10, 1987 Hearing before Hon.

Charles L. Brieant).) In short, the indictment charges a conspir-

acy to circumvent § 501 at a time when that statute had no force

or effect.

The Opinions Below

Three of the defendants moved to dismiss the indictment on

the ground that it violates the defendants’ constitutional rights

as an ex post facto application of § 501 of the Tax Reform Act.’

The District Court agreed and dismissed the indictment, hold-

ing that United States v. Binder, 453 F.2d 805 (2d Cir. 1971),

cert. denied, 407 U.S. 920 (1972), requires the indictment to

charge ‘‘some act in furtherance of the conspiracy occurring

after the effective date of the statute, in order not to violate the

ex post facto clause.’’ (A-17.) In Binder, the Second Circuit

had upheld convictions for conspiracy to defraud based on the

actions defendants took after the effective date of the relevant

tax statute. (See discussion infra at pp. 10-11.)

2 +A fourth defendant pleaded guilty and is expected to testify for the

government.

In reversing the District Court’s order here, the Second Cir-

cuit reasoned that Binder does not require dismissal, since the

conduct of these defendants took place after the statute’s enact-

ment, albeit before its effective date. (A-9.) The Second Cir-

cuit concluded that the indictment did not violate the ex post

facto clause because ‘‘the effective date of section 501. . . was

not determinative of whether appellees committed the crime of

conspiring to defraud the United States. Appellees were not

charged with violating section 501.’’ (A-7.)

Appellees sought rehearing, arguing that the panel’s opinion

was irreconcilable with previous decisions construing the ex

post facto clause, and that the effect of the decision is to permit

the government virtually unlimited discretion to indict under 18

U.S.C. § 371 for conspiratorial conduct that ceased before the

alleged goal of the conspiracy ever became criminal. Rehearing

was denied without opinion.

REASONS FOR GRANTING THE WRIT

This petition presents a significant question, and one likely to

recur with some frequency (see note 6, infra), concerning the

constitutional guarantee against enactment of ex post facto

laws, namely, whether conduct occurring between the enact-

ment and the effective date of a statute can be the basis for a

conspiracy to defraud indictment.’

The government alleges that the defendants conspired to

defraud the IRS by agreeing with an undercover IRS agent to

backdate subscription documents for a tax shelter limited part-

nership. Such backdating, had it taken place, would have

enabled the agent’s ‘‘clients’’ to take deductions for losses

3. + This Court has reviewed interlocutory claims regarding similar basic

constitutional rights. E.g., Abney v. United States, 431 U.S. 651 (1977)

(double jeopardy clause); Helstoski v. Meanor, 442 U.S. 500 (1979)

(speech and debate clause). See also Morrison v. Olson, 108 S. Ct.

2597 (1988); Midland Asphalt Corp. v. United States, 840 F.2d 1040

(2d Cir.), cert. granted, 108 S. Ct. 2869 (1988).

4

derived from the partnership during the phase-in period of

§ 501 of the Tax Reform Act. However, the backdating never

occurred, and § 501 was not in effect at the time of the alleged

agreement to backdate the documents. It necessarily follows

that no crime was committed. Convicting defendants whose

conduct violated no substantive statute or rule, where at the

time of their conduct there was not yet any governmental func-

tion in effect that they could have interfered with, would plainly

violate the ex post facto clause of the Constitution.

POINT I

THE DECISION IS IN CONFLICT WITH THIS COURT'S

PRIOR DECISIONS CONSTRUING THE EX POST FACTO

CLAUSE

Article I, § 9 of the Constitution provides simply that ‘‘No

Bill of Attainder or ex post facto law shall be passed.’’ This

Court has read the prohibition against ex post facto laws to

encompass not only laws which on their face impose punish-

ment for acts that were not punishable when committed, but

also the retrospective application of laws by the courts. Bowie v.

City of Columbia, 378 U.S. 347, 352-53 (1964). Bouie and other

decisions of this Court have given force to the intent of the

framers of the Constitution that the clause protect individuals

from charges based on actions that were not punishable when

undertaken.*

This Court first addressed the principles underlying the ex

post facto clause in Calder v. Bull, 3 U.S. (3 Dall.) 386 (1798),

where Justice Chase found that the prohibition was intended to

correct a variety of evils, and that it applied, inter alia, to:

4 As Alexander Hamilton wrote, ex post facto laws are one of ‘‘the

favorite and most formidable instruments of tyranny.’’ The Federalist

Papers, No. 84, at 261 (R. Fairfield 2 ed. 1966).

Every law that makes an action done before the passing of

the law, and which was innocent when done, criminal; and

punishes such action. .

3 U.S. (3 Dall.) at 390.

The Second Circuit here in effect gave undue weight to Jus-

tice Chase’s use of the phrase ‘‘before the passing of the law.”’

It reasoned that the ex post facto prohibition has no application

because the Tax Reform Act had already been passed, and

therefore these defendants had notice that their conduct (if it

continued) would violate the Tax Reform Act once it became

effective.’ (A-7-8.)

But notice is not determinative. An early decision of this

Court makes clear (as do the decisions of the Courts of Appeals

discussed in Point I]) that the effective date, and not the date of

passage, is determinative, and that conduct occurring between

the enactment and effective dates of a statute cannot, by itself,

trigger the application of that statute. This Court held in Jn re

Medley, 134 U.S. 160 (1890) that a Colorado sentencing law,

enacted on April 19, 1889 but by the state constitution not

effective until 90 days after passage, was not ‘‘in force prior to

the 19th of July, 1889, and that the crime, having been commit-

ted in May of that year, was to be governed in all particulars

. . . by the law then in force. .. .”’ 134 U.S. at 166. Thus,

those provisions of the new sentencing law which disadvantaged

the defendant were ex post facto and unenforceable as to him.

Id.

Other decisions of this Court emphasize the importance in ex

post facto analysis of the relationship between the conduct at

issue and the effective date of the relevant statute, thus making

it clear that the ex post facto clause serves interests beyond

5 The government’s argument below, that an indictment for conspir-

acy to defraud under § 371 cannot present ex post facto problems

because § 371 has been in effect for decades, ignores the role played by

the Tax Reform Act in the indictment. Brief for the United States of

America at 1-2, United States v. Rosengarten, 857 F.2d 76 (2d Cir.

1988) (No. 88-1002). See infra at pp. 13-14.

6

notice. Burgess v. Salmon, 97 U.S. 381 (1878) involved a law

raising the tax on tobacco which took effect when it was signed

by the President on the afternoon of March 3, 1875. Tobacco

on which the lower tax had_been paid was removed from a

warehouse before noon. This Court held that civil or criminal

penalties for nonpayment of the higher tax were barred by the

ex post facto clause. The holding turned on the technical point

of when the law became effective, not on notice.

In Kring v. Missouri, 107 U.S. 221 (1883), the defendant,

charged with first-degree murder, pleaded guilty to second-

degree murder based upon a negotiated sentence. He was sen-

tenced to a longer term than that to which he had agreed,

appealed, and won. After remand, he refused to withdraw his

guilty plea but was nonetheless tried and convicted on the first-

degree murder charge. Under the law in effect at the time of the

murder, the defendant could not be tried on the first-degree

murder charge after his guilty plea. Between the time of the

murder and the guilty plea, an amendment to the state constitu-

tion authorizing such a trial became effective. Thus, while the

defendant had notice at the time of his guilty plea, this Court

held that the application of the amendment violated the ex post

facto clause. 107 U.S. at 225-26.

Other authorities agree with this analysis:

Whether it is ex post facto to apply an act to a particular

offense depends on the relation between the time of the

offense and the time when the act takes effect, regardless

of the time of its promulgation or publication or of notice

of it given to or received by the public.

2 Sutherland Stat. Const. § 42.01 at 442 & n.12 (Sands 4th Ed.

1986) (footnote omitted; emphasis added). See also Hartung v.

People, 22 N.Y. 95, 104 (1860) (‘‘No one can be criminally pun-

ished in this country, except according to a law prescribed for

his government by the sovereign authority, before the imputed

offense was committed, and which existed as a law at that

time’’), quoted with approval in Kring v. Missouri, 107 U.S. at

230-31 (emphasis in original).

The Second Circuit’s disregard for the difference between the

enactment and effective dates of the statute is thus contrary to

substantial precedent.® Although the government has conceded

that the defendants could not have been charged with a conspir-

acy to evade taxes in violation of § 501 because to do so would

violate the ex post facto clause,’ § 501 is nevertheless the linch-

pin of the indictment. Without it, the government would bear

the impossible task of demonstrating that an agreement merely

to backdate documents constituted a conspiracy to defraud the

United States. Absent § 501, there would not have been any

indictment.

6 Where Congress specifically includes an effective date as an integral

part of a statute, that date is controlling:

The power to enact laws includes the power to fix a future effective

date. A statute with a definite effective date commences operation

from that time.

2 Sutherland Stat. Const. § 33.07 at 16 (Sands 4th ed. 1986) (footnotes

omitted). See also Roth v. Pritikin, 710 F.2d 934, 939 (2d Cir.), cert.

denied, 464 U.S. 961 (1983); Buccino v. Continental Assurance Co.,

$78 F. Supp. 1518, 1527 (S.D.N.Y. 1983) (citing Ocean & Atmospheric

Science, Inc. v. Smyth Van Line, Inc., 446 F. Supp. 1158, 1159

(S.D.N.Y. 1978)). In 1988, Congress passed at least 17 laws that con-

tained delayed effective dates. (Figure compiled from 1988 U.S. Code

Cong. & Admin. News (102 Stat.), Vols. 1-8 (April 1988-November

1988).)

Although some cases in this Court recite the prohibition against ex

post facto laws in terms of the enactment date of the relevant statute,

e.g., Miller v. Florida, 107 S. Ct. 2446 (1987); Weaver v. Graham, 450

U.S. 24 (1981), a reading of those decisions demonstrates that the ter-

minology was not important because the enactment and effective dates

were identical.

7 Brief for the United States of America at 14, United States v.

Rosengarten, 857 F.2d 76 (2d Cir. 1988) (No. 88-1002).

POINT II

THE DECISION IS IN CONFLICT WITH DECISIONS BY

OTHER CIRCUITS AND BY THE SECOND CIRCUIT

ITSELF

The Third, Fourth, Fifth, Sixth and Ninth Circuits have each

held that, in order to avoid violating the ex post facto clause, a

conviction for conspiracy to violate a law requires evidence that

the conspiracy continued by overt acts into the effective period

of the underlying statute that made the conspiracy criminal.*

8

E.g., United States v. Goldberger, 197 F.2d 330 (3d Cir.), cert.

denied, 344 U.S. 833 (1952) (convictions under § 371 did not constitute

ex post facto application of law increasing penalty for conspiracy

where some acts occurred after law’s effective date); United States v.

Johnson, §37 F.2d 1171, 1175 (4th Cir. 1976) (Comprehensive Drug

Abuse Prevention and Control Act was not applied ex post facto where

conspiracy to violate law continued after statute took effect); United

States v. Brown, 555 F.2d 407 (Sth Cir. 1977), cert. denied, 435 U.S.

904 (1978) (convictions on charges of conspiring to violate racketeering

statute were reversed because jury was not instructed that it had to find

that at least one overt act took place after law’s effective date); United

States v. Marchesani, 457 F.2d 1291 (6th Cir. 1972) (indictment was

not ex post facto application of law where conspiracy continued ‘‘well

past’’ the statute’s effective date); Leyvas v. United States, 371 F.2d

714 (9th Cir. 1967) (conspiracy to violate narcotics laws continued past

effective date of amendment to statute, and therefore imposition of

greater penalty authorized by amendment was not ex post facto appli-

cation of law). See also United States v. Annoreno, 460 F.2d 1303,

1307 (7th Cir.), cert. denied, 409 U.S. 852 (1972) (convictions for con-

spiracy to commit federal offense upheld notwithstanding that evi-

dence was admitted of transactions predating applicable statute, since

jury was charged that it had to find that overt act occurred after enact-

ment of the statute); Christianson v. United States, 226 F.2d 646 (8th

Cir. 1955), cert. denied, 350 U.S. 994 (1956) (conviction for conspiracy

to violate statute prohibiting interstate transportation of gambling

devices upheld because defendants reaffirmed conspiracy through

Overt acts after statute’s effective date).

There is no reason to treat conspiracies to defraud differently from

conspiracies to commit an offense. In both kinds of cases, some refer-

ence point external to the conspiracy statute must be identified in order

United States v. Binder, 453 F.2d 805 (2d Cir. 1971), cert.

denied, 407 U.S. 920 (1972), on which the District Court relied,

is consistent with these authorities and directly conflicts with

the decision below. Between July 19, 1963 and September 2,

1964, aware of the imminent passage of a new tax which would

be retroactive to the date of the speech proposing it (July 19,

1963), defendants created a series of sham transactions. The

speech, like passage of the Act here, put defendants on notice

of an intended change in the tax laws. But, unlike the defen-

dants here, where no overt act was committed after the effective

date of § 501, the Binder defendants committed other overt acts

after September 2, 1964 for the purpose of evading the tax.

The Second Circuit’s rejection of defendants’ argument that

their convictions violated the ex post facto clause rested

squarely on their post-September 2 conduct:

[T]here is substantial evidence that each of the [defen-

dants] was a participant in the conspiracy and that each

had engaged in overt acts after September 2, 1964. The evi-

dence relating to pre-September 2, 1964 acts was admissi-

ble to prove the existence and purpose of the conspiracy.

Since each appellant reaffirmed his participation in the

conspiracy after September 2, 1964 the convictions do not

violate the ex post facto clause.

453 F.2d at 808 (emphasis added).

s

for there to be a valid indictment. A conspiracy to defraud under § 371

must be defined by reference to some other statute, rule or particular

government function, to avoid constitutional due process objections

on grounds of vagueness. See United States v. Gradwell, 243 U.S. 476

(1917); United States v. Porter, 591 F.2d 1048, 1055-56 (Sth Cir. 1979);

United States v. Anderson, 579 F.2d 455 (8th Cir. 1978) (impeded law-

ful governmental function derived from requirements of statute and

regulations). See generally, e.g., Goldstein, Conspiracy to Defraud the

United States, 68 Yale L.J. 405 (1959); Memorandum of Law of the

United States filed by the Department of Justice as Amicus Curiae at

8-10, United States v. North, Crim. No. 88-0080-02 (D.D.C. filed Nov.

18, 1988).

9 Other decisions in the Second Circuit before and after Binder are in

accord with the analysis utilized in that case. E.g., United States v.

10

Binder and the cases cited in footnotes 8 and 9 are in direct

conflict with the decision below. The principle on which these

cases rest—that notice alone is not sufficient to save an indict-

ment from the prohibition against ex post facto laws, and that

the goal of the conspiracy must be an effective law or existing

governmental function—is the principle inherent in this Court’s

decisions in Jn re Medley, Burgess v. Salmon and Kring v. Mis-

souri, supra. In holding that Binder does not dictate the result

here, the Second Circuit has failed to distinguish these authori-

ties.

POINT Il

THE SECOND CIRCUIT’S DECISION PERMITS

UNLIMITED EXPANSION OF THE GENERAL

CONSPIRACY STATUTE

Over the years, 18 U.S.C. § 371 has been criticized by courts

and scholarly commentators who have concluded that the

sweeping language of the statute, particularly the provision

criminalizing conspiracies to defraud, poses significant poten-

tial for abuse.'°

Ferrara, 458 F.2d 868, 874 (2d Cir.), cert. denied, 408 U.S. 931 (1972)

(convictions for conspiring to violate the Taft-Hartley Act as amended

in 1959 did not violate the ex post facto clause because ‘‘. . . the con-

spiracy, and overt acts in furtherance thereof, continued long after the

1959 amendment to the statute.’’); United States v. Smith, 464 F.2d

1129 (2d Cir.), cert. denied, 409 U.S. 1076 (1972); United States v.

Russo, 442 F.2d 498 (2d Cir. 1971), cert. denied, 404 U.S. 1023 (1972);

see Louis Vuitton S.A. v. Spencer Handbags Corp., 765 F.2d 966 (2d

Cir. 1985) (to avoid ex post facto and due process questions, court con-

strued treble damages provision of trademark law prospectively).

10 See, e.g., Sayre, Criminal Conspiracy, 35 Harv. L. Rev. 393 (1922);

Goldstein, supra note 8; Johnson, The Unnecessary Crime of Conspir-

acy, 61 Calif. L. Rev. 1137 (1973); Develcpments in the Law—

Criminal Conspiracy, 72 Harv. L. Rev. 920 (1959); Note, Conditional

Objectives of Conspiracies, 94 Yale L.J. 895 (1985); Dennis v.

1]

|

Justice Jackson’s celebrated concurrence in Krulewitch v.

United States, 336 U.S. 440 (1949), aptly warned against the

statute’s undue extension:

[T]his case illustrates a present drift in the federal law of

conspiracy which warrants some further comment because

it is characteristic of the long evolution of that elastic,

sprawling and perverse offense. Its history exemplifies the

‘tendency of a principle to expand itself to the limit of its

logic.’ The unavailing protest of courts against the grow-

ing habit to indict for conspiracy in lieu of prosecuting for

the substantive offense itself, or in addition thereto, sug-

gests that loose practice as to this offense constitutes a seri-

ous threat to fairness in our administration of justice.

336 U.S. at 445 (footnotes omitted).

Given the general rule of construction that ‘‘ambiguity con-

cerning the ambit of criminal statutes should be resolved in

favor of lenity,’’'' this case presents an appropriate occasion

for -clarifying the limits beyond which § 371 cannot be

stretched.

The government acknowledged in its brief to the Second Cir-

cuit that it could not bring an indictment under the first prong

of the general conspiracy statute, which makes unlawful an

agreement to commit an offense against the United States,

because such an indictment would violate the ex post facto

United States, 384 U.S. 855, 860 (1966); Grunewald v. United States,

353 U.S. 391, 404 (1957), and cases cited therein. The Second Circuit

has cautioned that an indictment charging conspiracy to defraud under

§ 371 must be carefully scrutinized to protect against ‘‘very real

infringements on basic values of our criminal law’’ inherent in such a

charge. United States v. Rosenblait, 554 F.2d 36, 40-41 (2d Cir. 1977).

11 Rewis v. United States, 401 U.S. 808, 812 (1971). See McNally v.

United States, 107 S. Ct. 2875 (1987); Williams v. United States, 458

U.S. 279 (1982) (limited, technical, rather than expansive, reading of

criminal statute controls); United States v. Enmons, 410 U.S. 396

(1973) (criminal laws are to be strictly construed).

12

seaiienieceeeeenneninneeneeeial

clause. See note 7, supra. But by employing the conspiracy to

defraud prong of the statute to seek convictions for actions that

are not themselves unlawful under any other statute or regula-

tion, and that are not intended to circumvent any lawful gov-

ernmental function that is defined by a specific law or rule, the

government is attempting to circumvent otherwise constitution-

ally insurmountable obstacles to indictment—a violation of the

due process guarantee.

Although conviction for conspiracy to defraud does not

require proof that some other statute or rule has actually been

violated (see, e.g., United States v. Rosenblatt, 554 F.2d at 40-

41), courts have insisted that there be a specific law, rule, regu-

lation or practice, which defines the particular governmental

function the conspiracy is intended to obstruct. See note 8,

supra.”

Courts have limited the reach of § 371 by dismissing indict-

ments or reversing convictions where the underlying conduct is

not legally culpable or does not interfere with a specific govern-

ment function. In United States v. Tarnopol, 561 F.2d 466, 474-

75 (3d Cir. 1977), the court held that merely omitting certain

transactions from corporate books, standing alone, did not

amount to conduct sufficient to sustain a charge of conspiracy

to defraud. The government made no showing that the defen-

dant had some otherwise cognizable duty to make the entries on

which the successful carrying out of a lawful government func-

tion depended. In United States v. Porter, 591 F.2d 1048, the

12. +The principal decisions of this Court construing § 371 have empha-

sized that something more than a bare allegation of fraud is required.

Thus, in Haas v. Henkel, 216 U.S. 462, 479-80 (1910), where it upheld

a charge of conspiracy to defraud, this Court emphasized that particu-

lar laws and departmental regulations gave the government a “‘lawful

right and duty’’ to release certain information at a time and in a man-

ner specified. Cf. Hammerschmidt v. United States, 265 U.S. 182, 188-

89 (1924) (‘‘mere open defiance of the government purpose’’ by urging

others to violate a law was not within the terms of the conspiracy stat-

ute, as it did not amount to the impairment or obstruction of a ‘‘lawful

function’’ by ‘‘deceit, craft, or trickery’’).

13

Fifth Circuit reversed the conviction of defendants who partici-

pated in a scheme to receive bribes or kickbacks from Medicare

reimbursements, because the conduct did not fall ‘‘plainly and

unmistakably’’ within the proscription of § 371. The govern-

ment asserted that it was ‘‘defrauded of its right to have the

Medicare program conducted honestly and fairly’’, but the

court found this insufficient to satisfy the requirement that

some actual lawful function had been impaired, obstructed or

defeated. 591 F.2d at 1056. See United States v. Cogswell, 637

F. Supp. 295, 299 (N.D. Cal. 1985) (conspiracy indictment

under both parts of § 371 fails because conduct could not have

violated the Currency and Foreign Transaction Act and no par-

ticulars of fraud are alleged other than scheme to evade that

statute.)'?

The indictment here recites a single aim of the conspiracy: to

‘‘circumvent and defeat the provisions of the Tax Reform Act

of 1986’’. (A-21.) In upholding this indictment, the Second

Circuit has sanctioned the further expansion of § 371 to incho-

ate ‘‘crimes’’ in conflict with the ex post facto and due process

guarantees.“

13. See also United States v. Rosenblatt, 554 F.2d at 40 (§ 371 requires

the government to plead and prove a particular fraudulent scheme).

The cases cited in the text and the Second Circuit’s decision here

present a conflict in the circuits concerning the definition of a lawful

governmental function. United States v. Tarnopol makes clear that this

indictment would not be upheld in the Third Circuit.

14. __—iIn every case cited by the government below to support its argument

that an indictment under § 371 is sufficient if it merely alleges a general

scheme to defraud by frustrating the IRS’ ability to collect taxes, the

means contemplated by the conspiracies were already prohibited at the

time an illicit agreement was reached. In United States v. Klein, 247

F.2d 908, 915-16 (2d Cir. 1957), cert. denied, 355 U.S. 924 (1958),

taxes sought to be collected were required by laws in effect at the time

of the alleged conspiracy; defendants had altered corporate books,

physically removed assets, made false statements on tax returns, and

14

CONCLUSION

Petitioners respectfully request this Court to issue the writ

and consider the merits of their claim.

Respectfully submitted,

MINNA SCHRAG

Counsel of Record

LARRY M. LAVINSKY

MARTHA E. GIFFORD

KATHLEEN M. Woop

PROSKAUER ROSE GOETZ & MENDELSOHN

300 Park Avenue

New York, New York 10022

(212) 909-7000

Attorneys for Petitioner

Leonard Nachtman

gave false answers to government interrogatories and investigators’

questions. In United States v. Turkish, 623 F.2d 769 (2d Cir. 1980),

cert. denied, 449 U.S. 1077 (1981), the manipulation of commodity

prices in order to create artificial tax losses was ‘‘evidence of federal

offense,’’ id. at 771, which was already existing and defined by the tax

and commodities regulation statutes. Thus, when entered into, the con-

Spiracy was effectuated and its object illegal. Similarly, in United

States v. Sanzo, 673 F.2d 64 (2d Cir.), cert. denied, 459 U.S. 858

(1982), the acts (including payments of ‘‘hush money”’ and false book

entries) were committed to evade existing personal and corporate

income taxes. In United States v. Carruth, 699 F.2d 1017 (9th Cir.

1983), cert. denied, 464 U.S. 1038 (1984), the conspiracy was to claim

deductions, for fictitious cattle breeding activities, which had already

been taken on tax returns and reflected on a fraudulent schedule K-1.

And in United States v. Everett, 692 F.2d 596 (9h Cir. 1982), cert.

denied, 460 U.S. 1051 (1983), backdating was performed and money

exchanged for the purpose of creating fraudulent shelters of income

earned in prior years. At the time of the backdating, as well as when

the agreement was entered into, the crime of evasion of prior years’

taxes on income earned in those years was clearly defined. None of

these cases addressed the issue presented here.

15

-

Of Counsel

RICHARD S. BERNE

305 Madison Avenue

New York, New York 10165

Attorney for Petitioner

Samuel Rosengarten

KENNETH I. SCHACTER

Solin & Breindel P.C.

501 Fifth Avenue

New York, New York 10017

Attorneys for Petitioner

Stanislaw Orlicki

December 5, 1988

16

APPENDIX

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

wt

No. 959—August Term, 1987

(Argued April 15, 1988 Decided September 6, 1988)

Docket No. 88-1002

>

UNITED STATES OF AMERICA,

Appellant,

—V.—

SAMUEL ROSENGARTEN, STANISLAW ORLICKI,

JAMES C. NICHOLAS, and LEONARD NACHTMAN,

* Defendants,

SAMUEL ROSENGARTEN, STANISLAW ORLICKI, and

LEONARD NACHTMAN,

Defendants-A ppellees.

Before:

VAN GRAAFEILAND, NEWMAN and WINTER,

Circuit Judges.

>

Appeal from an order of the United States District

Court for the Southern District of New York (Brieant,

C.J.) dismissing an indictment charging conspiracy to

A-l

defraud the United States (18 U.S.C. § 371) on the ground

that conviction on the charge would violate the prohibi-

tion against ex post facto laws. Reversed and remanded

with instructions to reinstate the indictment.

—

ELKAN ABRAMOWITZ, New York, N.Y.,

(Obermaier, Morvillo, Abramowitz &

Iason, P.C., and Alan J. Brudner, New

York, N.Y., of Counsel), for Defendant-

Appellee Leonard Nachtman.

(Kronish, Lieb, Weiner & Hellman, Alan

Levine and William J. Schwartz, New

York, N.Y., of Counsel), for Defendant-

Appellee Samuel Rosengarten.

(Solin & Breindel, P.C., and Kenneth I.

Schacter, New York, N.Y., of Coun-

sel), for Defendant-Appellee Stanislaw

Orlicki.

JOHN F. SAVARESE, Assistant United States

Attorney, Southern District of New York,

New York, N.Y. (Rudolph W. Giuliani,

United States Attorney, and Vincent L.

Briccetti, Assistant United States Attor-

ney, Southern District of New York, New

York, N.Y., of Counsel), for Appellant.

aad

VAN GRAAFEILAND, Circuit Judge:

The United States appeals from an order of the United

States District Court for the Southern District of New

A-2

York (Brieant, C.J.) which dismissed an indictment charg-

ing appellees Samuel Rosengarten, Stanislaw Orlicki and

Leonard Nachtman with conspiracy to defraud the United

States. 18 U.S.C. § 371. The district court dismissed on

the ground that conviction on the charge would violate the

Constitution’s ban on ex post facto laws. U.S. Const. art.

1, $3, 2. 3.

The indictment, filed on August 13, 1987, charged

appellees and one James Nicholas,’ with conspiracy to

defraud the United States by ‘‘impeding, impairing,

defeating, and obstructing the lawful governmental func-

tions of the Internal Revenue Service in the ascertainment,

evaluation, assessment, and collection of income taxes’’ in

violation of 18 U.S.C. § 371. The aim of the alleged con-

spiracy was to create false income tax deductions by back-

dating documents relating to a real estate tax shelter

investment, thus frustrating the ascertainment and collec-

tion of taxes in accordance with section 501 of the Tax

Reform Act of 1986, 26 U.S.C. § 469. Relying solely on

dictum in United States v. Binder, 453 F.2d 805 (2d Cir.

1971), cert. denied, 407 U.S. 920 (1972), the district court

granted appellees’ motion to dismiss because the indict-

ment alleged no overt act occurring after January 1, 1987,

the effective date of section 501. For the reasons that fol-

low, we reverse.

Congress enacted the Tax Reform Act of 1986 on Octo-

ber 22, 1986. Section SOl(a) of the Act, 26 U.S.C.

§ 469(a), substantially eliminated the deductibility of

losses arising out of traditional tax shelter investments.

This section no longer permits taxpayers to deduct losses

or credits generated by ‘‘passive’’ activities—those busi-

ness activities in which the taxpayer does not personally

| Nicholas pleaded guilty and is not a party to this appeal.

A-3

participate on a substantial, regular, and continuc.s

basis—from income generated by salary, interest, divi-

dends, and active business income. It eliminates the finan-

cial incentive of many taxpayers for investing in

traditional tax shelter programs.

Although enacted on October 22, 1986, the Act did-not

become effective until the taxable years beginning after

December 31, 1986. Tax Reform Act of 1986, Pub. L. No.

99-514, § SOl(c), 100 Stat. 2085, 2241. To ameliorate the

effect of the Act, Congress provided favorable tax treat-

ment for those taxpayers already holding investments in

tax shelters on the date of enactment by gradually phasing

in the passive activity loss rules for such investments.

Under the phase-in provisions, any interests in activities

acquired after the date of enactment were made fully sub-

ject to the passive activity loss rules. For investments made

before the date of enactment, up to 65 percent of passive

activity losses or credits was allowed for the 1987 taxable

year, and decreasing amounts were allowed thereafter

until 1991, when all allowances would cease. U.S.C. 26

§ 469(m).

The facts alleged by the Government, as hereinafter set

forth, are accepted as true for purposes of this appeal.

United States v. Pacione, 738 F.2d 567, 568 (2d Cir. 1984).

In 1986, Rosengarten operated a tax shelter sales organiza-

tion in Armonk, New York. Orlicki and Nicholas were

salesmen in the organization. After the Tax Reform Act

was enacted on October 22, 1986, Rosengarten and Orlicki

met with a Special Agent (Agent 1) of the Internal Reve-

nue Service, who was working undercover as one of

Rosengarten’s salesmen. At that meeting, Rosengarten

and Orlicki indicated a willingness to backdate subsequent

sales of interests in a limited partnership, tax shelter pro-

A-4

gram syndicated by the Island Planning Corporation of

America, so that purchasers could take advantage of the

phase-in allowances. Appellee Nachtman, a principal of

Island Planning, was privy to the proposed arrangement.

Later that evening, Orlicki and Agent 1 met with a sec-

ond undercover Special Agent (Agent 2), who was posing

as the representative of three prospective investors. At this

meeting, Orlicki made a sales pitch concerning the Island

Planning program and offered to backdate the sale of a

$150,000 one-half unit interest in the limited partnership.

In several telephone conversations that followed, Orlicki

informed Agent 2 that the Island Planning deal still was

available and that subscription documents could be back-

dated. Agent 2 was told that his check would be ‘‘time and

date stamped”’ and that Island Planning would provide a

notary public to notarize the subscription document’s exe-

cution to a date preceding October 22, 1986.

Pursuant to instructions received from Orlicki and

Nicholas at a December 8 meeting, Agent 2 met with

Nachtman on December 9, 1986. At that meeting, Nacht-

man told Agent 2 that all documents would be backdated

to October 18, 1986 in order to create the scenario that the

parties had come into Island Planning’s offices on a Satur-

day to sign the documents. Nachtman also told Agent 2

that the notary was ‘‘in place’’ and that ‘‘we never had this

conversation.’’ The arrests of the several defendants fol-

lowed.

DISCUSSION

In pertinent part, the general federal conspiracy statute,

18 U.S.C. § 371, proscribes conspiracies ‘‘to defraud the

United States, or any agency thereof in any manner or for

A-5

any purpose... .’’ The term ‘‘defraud’’ when used in

section 371 is interpreted much more broadly than when it

is used in the mail and wire fraud statutes, 18 U.S.C.

§§ 1341 and 1343. To be guilty of violating the latter stat-

utes, a defendant must have used fraud or deception to

deprive another of a property right. McNally v. United

States, 107 S. Ct. 2875 (1987). Violation of the former

may be predicated upon a conspiracy to impair, obstruct

or defeat the lawful function of any governmental depart-

ment. Dennis v. United States, 384 U.S. 855, 860-61

(1966); Hammerschmidt v. United States, 265 U.S. 182,

188 (1924); Haas v. Henkel, 216 U.S. 462, 479 (1910).

Moreover, the impairment or obstruction of a governmen-

tal function contemplated by section 371’s ban on conspir-

acies to defraud need not involve the violation of a

separate statute. Haas v. Henkel, supra, 216 U.S. at 479-

81; United States v. Brasco, 516 F.2d 816, 817-18 (2d

Cir.), cert. denied, 423 U.S. 860 (1975); United States v.

Peltz, 433 F.2d 48, 51 (2d Cir. 1970), cert. denied, 401

U.S. 955 (1971); Falter v. United States, 23 F.2d 420, 423

(2d Cir.), cert. denied, 277 U.S. 590 (1928). Although an

indictment charging a section 371 conspiracy to defraud

the United States may aver the breach of a specific statute,

such breach usually is treated as ‘‘a way of consummating

the conspiracy and. . . like the use of a gun to effect a

conspiracy to murder, is purely ancillary to the substantive

offense.’’ Glasser v. United States, 315 U.S. 60, 67 (1942)

(quoting United States v. Manton, 107 F.2d 834, 839 (2d

Cir. 1939), cert. denied, 309 U.S. 664 (1940)).

A conspiracy to frustrate or obstruct the IRS’s function

of ascertaining and collecting income taxes falls clearly

within the ban of section 371. United States v. Klein, 247

F.2d 908, 915-18 (2d Cir. 1957), cert. denied, 355 U.S. 924

(1958); United States v. Everett, 692 F.2d 596, 599 (9th

A-6

——— rt C”t~“SOTSTSS

Cir. 1982), cert. denied, 460 U.S. 1051 (1983). This is so

even though the contemplated substantive acts, standing

alone, would not constitute a federal offense. United

States v. Turkish, 623 F.2d 769, 771 (2d Cir. 1980), cert.

denied, 449 U.S. 1077 (1981). ‘‘[A] conspiracy to defraud

the government, though it may be directed to the revenue

as its object, is punishable by the general law against all

conspiracies, and can hardly be said, in any just sense, to

arise under the revenue laws.’’ United States v. Hirsch,

100 U.S. 33, 35 (1879). Indeed, to be actionable, a conspir-

acy need not be carried to a successful conclusion, United

States v. Ingredient Technology Corp., 698 F.2d 88, 98 (2d

Cir.), cert. denied, 462 U.S. 1131 (1983); it is complete

when any of the coconspirators commits an overt act.

Hyde v. Shine, 199 U.S. 862, 76 (1905).

Application of the foregoing well-accepted principles

makes it clear that the effective date of section 501 of the

Tax Reform Act was not determinative of whether appel-

lees committed the crime of conspiring to defraud the

United States. Appellees were not charged with violating

section 501. They were charged with a section 371 conspir-

acy to defraud the Government by impeding and obstruc-

tion the functions of the IRS in the ascertainment and

collection of income taxes.

The indictment did not violate the Constitution’s pro-

scription against ex post facto laws. Article I, section 9, of

the Constitution provides that ‘‘[nJo Bill of Attainder or

ex post facto Law shall be passed.’’ This clause prohibits

any prosecution by the Government for conduct that was

innocent when performed. United States v. Gibbs, 813

F.2d 596, 602 (3d Cir. 1987). It is based on the principle

that ‘‘persons have a right to fair warning of that conduct

which will give rise to criminal penalties. . . .’’ Marks v.

A-7

United States, 430 U.S. 188, 191 (1977); see also Casillas

v. Scully, 769 F.2d 60, 65 (2d Cir. 1985). Nothing about

appellees’ indictment violates this principle. As the district

court observed:

[Defendants were painfully aware of the enactment

- of Sec. 501 of the Tax Reform Act of 1986, and its

effect on their livelihood as promoters of real estate

tax shelters. Their plans to backdate documents in

order to take illegal advantage of the phase-in provi-

sion of the new law was in direct response to the terms

of the law itself.

The ex post facto clause did not preclude the Govern-

ment from protecting itself against appellees, who would

have prevented the IRS from properly administering its

affairs by conspiring to violate an already-enacted revenue

statute prior to its effective date.

This Court’s opinion in United States v. Binder, supra,

does not require a different result. In Binder, the defen-

dants allegedly conspired to defraud the United States by

participating in transactions designed to evade a new

excise tax, the Interest Equalization Tax (‘‘I.E.T.’’),

imposed on certain types of stock transactions. The I.E.T.

statute, which was enacted on September 2, 1964, imposed

the I.E.T. retroactively on all affected transactions from

July 19, 1963, the date on which the President proposed

the tax to Congress. Binder and his coconspirators

engaged in transactions both before and after the statute

was enacted which were designed to evade the I.E.T. They

argued on appeal that their convictions violated the ex

post facto clause because the Government was permitted

to prove what the defendants had done prior to the pas-

sage of the Act. We affirmed, holding that ‘‘appellants’

action prior to the enactment of the I.E.T. did not provide

A-8

the basis for their convictions, but was admitted to prove

the existence of the conspiracy and its purpose.’’ 453 F.2d

at 808. We concluded that the convictions were constitu-

tional because they were based entirely on post-enactment

conduct. It is possible to read the opinion as conveying the

negative implication that any pre-enactment conduct

could not have been the basis for a valid conviction. If

such an implication was made, it was dictum, since the

conduct alleged to be unlawful all occurred post-

enactment. We need not decide whether such dictum is or

ought to be the law of this Circuit because the pending

indictment does not allege any conduct occurring prior to

enactment of the Tax Reform Act. Appellants are con-

tending that the ex post facto clause insulates them from

conviction for conduct designed to defraud the Govern-

ment occurring after enactment but prior to the start of

the first tax year to which the statute applies. Neither the

holding nor the arguably inferrable dictum in Binder lends

any support to that claim.

The order of the district court is reversed and the matter

is remanded to the district court with instructions to rein-

state the indictment.

MEMORANDUM AND ORDER

87 Cr. 662 (CLB) FILED: Nov. 25, 1987

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

>

UNITED STATES OF AMERICA

—against—

SAMUEL ROSENGARTEN, STANISLAW ORLICKI,

JAMES C. NICHOLAS and LEONARD NACHTMAN,

Defendants.

Brieant, Chief Judge

By indictment filed on August 13, 1987, defendants

Rosengarten, Orlicki, Nicholas and Nachtman were charged

with conspiring to defraud the United States. The indictment

cites the general conspiracy statute, 18 U.S.C. Sec. 371.

The Grand Jury charged that the defendants ‘‘unlawfully,

wilfully, and knowingly did combine, conspire, confederate,

and agree together with others to defraud the United States of

America and the Internal Revenue Service by impeding, impair-

ing, defeating, and obstructing the lawful governmental func-

tions of the Internal Revenue Service in the ascertainment,

evaluation, assessment, and collection of income taxes.’’ The

indictment describes the goal of the conspiracy as to create false

federal income tax deductions for other persons not named, by

backdating documents relating to a real estate tax shelter invest-

ment so as to circumvent and defeat the provisions of the Tax

A-10

Reform Act of 1986. Eight overt acts are pleaded as allegedly

committed by the defendants in furtherance of the conspiracy.

Defendant Nicholas pled guilty to the one count indictment

on October 13, 1987, and proposes to testify for the Govern-

ment. By motion heard and fully submitted on November 10,

1987, all remaining defendants move to dismiss the indictment

under Fed. R. Crim. P. 12 on two grounds. First, they assert

that the indictment fails to allege any overt act independent of

the alleged agreement itself, and is therefore insufficient. Sec-

ond, they contend that this prosecution is barred by the ex post

facto clause of the United States Constitution, which states

that: ‘‘No Bill of Attainder or ex post facto law shall be

passed.’’ Const., Art I, Sec. 9. Following dictum of the Second

Circuit in United States v. Binder, 453 F.2d 805 (2d Cir. 1971),

cert. denied, 407 U.S. 920 (1972), the Court concludes that the

indictment violated the ex post facto clause since it alleges no

overt act occurring after the effective date of the tax statute,

and therefore, the motion to dismiss the indictment on that

ground is granted.

There is no disputed issue of fact. Rosengarten operated a tax

shelter investment sales organization from his home in

Armonk, New York, in this district, where Orlicki and Nicholas

worked as tax shelter investment salesmen. One of the tax shel-

ter program syndicators with which they did business was

Island Planning Corporation of America (‘‘Island Planning’’).

Nachtman was a principal of Island Planning.

During the summer and fall of 1986, the defendants, being in

the business of tax shelter sales, followed closely the progress in

Congress of the pending so-called tax reform legislation. With

much public fanfare, Section 501 of the Tax Reform Act of

1986, codified at 26 U.S.C. Sec. 469, was enacted on October

22, 1986. This statute expressly provided that it would become

effective as to taxable years beginning after December 31, 1986.

Sec. 501 provides essentially that losses and credits from cer-

tain ‘‘passive’’ business activities amenable to tax shelter invest-

ments generally can no longer be deducted from unrelated

business income such as salary, interest and dividends. The

A-11

intention is to limit drastically the deductibility of losses gener-

ated by traditional limited partnership tax shelter programs.

Congress, however, provided for a phase-in period for the limi-

tations as to the deductibility of passive losses for investments

or enterprises held on or before the date of enactment, October

22, 1986. Accordingly, for taxable years beginning in 1987

through 1990, a taxpayer who entered into a tax shelter transac-

tion on or before October 22, 1986, is eligible to take limited

deductions against unrelated income for passive income losses

generated thereby. See 26 U.S.C. Sec. 469 (/).

The Government contends that the defendants conspired to

take advantage of the phase-in rule by fraudulent means. The

defendants’ scheme as presented by the Government on this

motion, and assumed by the Court to be true, is that on Octo-

ber 23, 1986, the day after the enactment of the so-called Tax

Reform Act of 1986, Rosengarten and Orlicki met with an

undercover IRS agent (Agent 1), who was posing as an associate

investment salesman, to review a sales pitch for a real estate tax

shelter program syndicated by Island Planning. At this meeting

they discussed the need to backdate documents relating to the

sale of interests in real estate tax shelters in order to take advan-

tage of the phase-in provision of the new tax bill and thereby

make the deal more attractive to potential investors. Later that

evening, Orlicki, accompanied by Agent 1, traveled to Newark,

New Jersey, and made the sales pitch to another undercover

IRS agent (Agent 2), who was posing as a representative of

three prospective tax shelter customers. As part of the sales

pitch, Orlicki offered to backdate the sale documents, explain-

ing to the investors the illegal benefits which could be obtained

thereby.

Over a month later, on December 5, 1986, Agent 2 had tele-

phone conversations with both Orlicki and Nicholas. Orlicki

assured him that the real estate offering syndicated by Island

Planning was still available, and that subscription documents

still could be backdated since a paperwork back-up at Island

Planning would prevent anyone from discovering when the fal-

sified documents had been submitted. Nicholas told Agent 2

A-12

that he could get his check time and date stamped, emphasizing

the importance of making it appear as if he had committed to

the deal prior to October 22, 1986.

A few days later, on December 8, 1986, Agent 2 met with

Orlicki and Nicholas at their office to discuss how to consum-

mate the sale. At the meeting Nicholas telephoned Nachtman at

Island Planning, and discussed the scheme with him. Nachtman

directed that the customer should backdate his check to Satur-

day, October 18th, since he was an out-of-town customer, and

such customers often came into the office on weekends. Nacht-

man also said that Island Planning would arrange for a notary

public to notarize all the backdated documents, so that they

would appear genuine. Nicholas and Orlicki then instructed

Agent 2 to take the subscription documents to Nachtman’s

offices the next day.

Agent 2 met with Nachtman on December 9, 1986. Nachtman

explained that the notary public was in place, and that he

picked the October 18th date because it was a Saturday, thus

making it easy to explain why no one ever saw him in the

offices. This was their last meeting. The backdated sale was

never consummated.

One ground upon which the defendants move for dismissal of

the indictment is that it fails to allege an overt act in furtherance

of the conspiracy. They contend that all eight acts in the indict-

ment amount to nothing more than conversations effecting the

formation, reiteration or refinement of the illegal agreement,

and not acts in furtherance of it. The defendants motion for

dismissal on this ground is denied.

It is a well established principle that an indictment returned

by a legally constituted grand jury, if valid on its face, is enough

to call for trial of the charges on the merits. Costello v. United

States, 350 U.S. 359, 363 (1956); see e.g., United States v.

Calandra, 414 U.S. 338, 345 (1974); United States v. Contreras,

776 F.2d 51, 54 (2d Cir. 1985); United States v. Ciambrone, 601

F.2d 616, 623 (2d Cir. 1979). A facially valid indictment ‘‘need

do little more than track the language of the statute charged and

state the time and place (in approximate terms) of the alleged

A-13

crime, although in the case of conspiracy. . . at least one overt

act must be set forth.’’ United States v. Tramunti, 513 F.2d

1087, 1113 (2d Cir.), cert. denied, 423 U.S. 832 (1975).

The indictment alleged eight overt acts in furtherance of the

conspiracy. At oral argument on the defendants’ motion to dis-

miss the indictment, the Government conceded that the act des-

ignated ‘‘(a)’’ in the indictment, the October 23rd meeting

between Agent 1 and Orlicki and Rosengarten to discuss the

backdating of documents, was part of the formation of the

agreement, and therefore, not an overt act. The Government

argued, however, that the remaining acts alleged would satisfy

the statutory requirement for an overt act.

The remaining overt acts are sufficient to make the indict-

ment facially valid, and therefore, call for a trial on the merits.

While none of the acts involved the backdating or signing of tax

shelter subscription documents, a telephone call or conversa-

tion alone can amount to an overt act in furtherance of a con-

spiracy. See, e.g., Melia v. United States, 667 F.2d 300, 304 &

n.4 (2d Cir. 1981) (telephone call); United States v. Armone,

363 F.2d 385, 401 (2d Cir.), cert. denied, 385 U.S. 957 (1966)

(conversation). The various telephone calls and conversations

within the indictment appear to be more than a refinement or

reiteration of an illegal agreement. They amounted to specific

acts taken in furtherance of the agreement. For example, act (h)

in the indictment alleges that: ‘‘On or about December 9, 1986,

in New York, New York, LEONARD NACHTMAN, the defen-

dant, told U/C that he (NACHTMAN) would arrange to notarize

U/C’s signature on backdated documents.’’ The transcript of

the tape of this meeting, which I assume to be valid for the pur-

poses of this motion, reveals that Nachtman had already made

arrangements to get the documents notarized. He stated that he

had already put a notary public in place. We conclude that this

act amounts to more than refinement of an agreement.

The motion to dismiss the indictment on the ground that it

alleges no sufficient overt act, therefore, is denied.

The defendants, however, also move to dismiss the indict-

ment because its application of Section 501 of the Tax Reform

A-14

Act of 1986 violates the ex post facto clause of the United States

Constitution. They argue the alleged overt acts included in the

indictment for conspiracy all occurred between October 23 and

December 9, 1986, prior to the Act becoming effective, which is

with regard to taxable years beginning after December 31, 1986,

26 U.S.C. Sec. 469, and therefore, the agreement and acts were

not criminal at the time they were done.

The ex post facto clause prohibits Congress from enacting

any law which imposes a punishment for an act which was not

punishable at the time it was committed. Weaver v. Graham,

450 U.S. 24, 28 (1981). The Supreme Court first considered the

scope of the ex post facto prohibition in Calder v. Bull, 3 Dall.

386, 390 (1798), and the current Court’s understanding of the

clause is largely derived from that case. Miller v. Florida, 55

U.S.L.W. 4814, 4815 (1987). Justice Chase in Calder v. Bull

explained that the meaning of ex post facto included: ‘‘1st.

Every law that makes an action done before the passing of the

law, and which was innocent when done, criminal; and pun-

ishes such action.’’ Calder, 3 Dall. at 390. More recently, the

Supreme Court has explained that the principle upon which the

clause is based is ‘‘the notion that persons have a right to fair

warning of that conduct which will give rise to criminal penal-

ties.’’ Marks v. United States, 430 U.S. 188, 191 (1977); see also

Weaver, 450 U.S. at 28.

The principles behind the ex post facto clause have not been

violated or offended by the defendants’ indictment for conspir-

acy to defraud the United States under 18 U.S.C. Sec. 371. That

statute prohibiting such conspiracies has been in effect for

many years. Furthermore, defendants were painfully aware of

the enactment of Sec. 501 of the Tax Reform Act of 1986, and

its effect on their livelihood as promoters of real estate tax shel-

ters. Their plans to backdate documents in order to take illegal

advantage of the phase-in provision of the new law was in direct

response to the terms of the law itself. There is, therefore, no

concern here of the sort foreseen by the founding fathers, that

the defendants were committing innocent acts with no notice or

fair warning that what they were doing would later be made

A-15

criminal by the Legislative power. That is the abuse, well

known in early English history, which the ex post facto clause

seeks to prevent. Calder, 3 Dall. at 389 (Chase, J.)

While this Court recognizes the policy behind the ex post

facto clause is not disturbed by the defendants’ indictment, we

may not ignore the Second Circuit’s dictum in United States v.

Binder, 453 F.2d 805 (1971), cert. denied, 407 U.S. 920 (1972),

which appears to require us to grant the defendants’ motion.

In Binder, the defendants were convicted under 18 U.S.C.

Sec. 371 for conspiring to defraud the United States by evading

the recently enacted interest equalization tax (‘‘IET’’), 26

U.S.C. Sec. 4911. The IET was originally proposed by Presi-

dent Kennedy in a speech on July 19, 1963, in order to correct a

perceived undesirable flow of short-term fixed yield investment

funds from the United States. Binder 453 F.2d at 806. The stat-

ute levied an excise tax of up to 15% on the acquisition of

foreign-issue stock by United States citizens from non-citizens.

Id. The IET statute became effective on the date of its enact-

ment, September 2, 1964, but applied retroactively to transac-

tions entered into after the speech by President Kennedy. Jd. In

the months prior to the enactment of the statute, and as its pas-

sage began to appear likely, American-owned foreign stock sold

to American citizens commanded a premium since no IET

would become due on those sales. Jd.

The defendants in Binder developed a fraudulent scheme to

take illegal advantage of this arbitrage opportunity. Beginning

in March, 1964, prior to the effective date of the statute, they

set up dummy corporations to sell foreign-owned foreign stock

at American-owned foreign stock, thereby selling the stock at a

premium. Jd. After passage of the statute, from September,

1964 until March, 1965, the defendants used an American citi-

zen iiving in Canada to sign the necessary papers and serve as a

front to sell foreign-owned stock as American owned. Jd.

The Court of Appeals in Binder determined that the defen-

dants’ convictions of conspiracy did not violate the ex post

facto clause. Id. at 808. The panel upheld the conviction, find-

ing that it was based only on attempts to evade the tax after it

A-16

became due. Jd. The court emphasized that the acts which took

place prior to the enactment date did not provide the basis of

the conviction, but were properly admitted to prove the exist-

ence and purpose of the conspiracy, and the wilfulness of their

evasion. Id.

We note that the original intent or policy behind the ex post

facto clause is not implicated in this case, as in Binder since the

defendants’ activities were in direct response to the imminent

passage of the statute. The surplus language in Binder, how-

ever, indicates that in this Circuit the indictment must allege

some act in furtherance of the conspiracy occurring after the

effective date of the statute, in order not to violate the ex post

facto clause. See 453 F.2d at 808 (especially fn. 4). Despite

doubts concerning the sense of such a rule, this Court can not

disregard such a clear expression of legal opinion when to do so

would cause the defendants to submit to the agony of a trial of

an indictment to which they have no defense.

The defendants’ motion to dismiss the indictment as an

unconstitutional violation of the ex post facto clause is there-

fore granted, based solely on the dictum of the Court of

Appeals in Binder.

So ordered.

White Plains, New York -

November 25, 1987

CHARLES L. BRIEANT

Chief Judge

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

+

At a stated Term of the United States Court of Appeals for

the Second Circuit, held at the United States Courthouse in the

City of New York, on the sixth day of October one thousand

nine hundred and eighty-eight.

Present: Hon. ELLSWORTH A. VANGRAAFEILAND,

HON. JON O. NEWMAN,

HON. RALPH K. WINTER,

Circuit Judges,

Filed: Oct. 6, 1988 Elaine B. Goldsmith, Clerk

Docket No. 88-1002

i

UNITED STATES OF AMERICA,

Appellant,

V

SAMUEL ROSENGARTEN, STANISLAW ORLICKI,

JAMES C. NICHOLAS, and LEONARD NACHTMAN,

Defendants,

SAMUEL ROSENGARTEN, STANISLAW ORLICKI, and

LEONARD NACHTMAN,

Defendants Appellees.

A-18

A petition for a rehearing having been filed herein by

Defendants-Appellants SAMUEL ROSENGARTEN, STANISLAW

ORLICKI and LEONARD NACHTMAN,

Upon consideration thereof, it is

Ordered that said petition be and it hereby is DENIED.

Elaine B. Goldsmith,

Clerk

by: Fred Cassidy

Chief Deputy Clerk

A-19

INDICTMENT

87 Cr. 662 Filed: Aug. 13, 1987

~

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

>

UNITED STATES OF AMERICA

—_vV—

SAMUEL ROSENGARTEN, STANISLAW ORLICKI,

JAMES C. NICHOLAS and LEONARD NACHTMAN,

Defendants.

The Grand Jury charges:

1. From on or about October 1, 1986, through the filing

of this Indictment, in the Southern District of New York

and elsewhere, SAMUEL ROSENGARTEN, STANISLAW ORLICKI,

JAMES C. NICHOLAS, and LEONARD NACHTMAN, the defen-

dants, and others known and unknown to the Grand Jury,

unlawfully, wilfully, and knowingly did combine, conspire,

confederate, and agree together and with others to defraud the

United States of America and the Internal Revenue Service by

impeding, impairing, defeating, and obstructing the lawful gov-

ernment functions of the Internal Revenue Service in the ascer-

tainment, evaluation, assessment, and collection of income

taxes.

A-20

2. It was a goal of the conspiracy that the conspirators would

create false federal income tax deductions by backdating docu-

ments relating to a real estate tax shelter investment so as to cir-

cumvent and defeat the provisions of the Tax Reform Act of

1986.

OVERT ACTS

3. In furtherance of the conspiracy, and to effect its objects,

the defendants and their co-conspirators committed the follow-

ing overt acts, among others, in the Southern District of New

York and elsewhere:

(a) On October 23, 1986, SAMUEL ROSENGARTEN and

STANISLAW ORLICKI, the defendants, met in Armonk, New

York, and discussed the backdating of sales of a real estate tax

shelter investment.

(b) On or about October 23, 1986, STANISLAW ORLICKI, the

defendant, traveled from Armonk, New York, to Newark, New

Jersey.

(c) On or about October 23, 1986, in Newark, New Jersey,

STANISLAW ORLICKI, the defendant, offered to an undercover

agent of the Internal Revenue Service (‘‘U/C’’) to backdate the

sale of an interest in a real estate iax shelter investment.

(d) On or about December 5, 1986, in Armonk, New York,

JAMES C. NICHOLAS, the defendant, made a telephone call to

the promoters of the real estate tax shelter investment.

(e) On or about December 8, 1986, STANISLAW ORLICKI and

JAMES C. NICHOLAS met with U/C in Armonk, New York, and

discussed how to backdate documents related to U/C’s proposed

purchase of an interest in a real estate tax shelter investment.

(f) On or about December 8, 1986, in Armonk, New York,

JAMES C. NICHOLAS, the defendant, placed a telephone call to

and spoke to LEONARD NACHTMAN, the defendant.

A-21

(g) On or about December 8, 1986, in Armonk, New York,

STANISLAW ORLICKI and JAMES C. NICHOLAS, the defen-

dants, told U/C to meet LEONARD NACHTMAN in New York,

New York, on December 9, 1986.

(h) On or about December 9, 1986, in New York, New York,

LEONARD NACHTMAN, the defendant, told U/C that he

(NACHTMAN) would arrange to notarize U/C’s signature on

backdated documents.

(Title 18, United States Code, Section 371.)

FOREMAN RUDOLPH W. GIULIANI

United States Attorney

A-22

CONSTITUTIONAL PROVISION

Article I, Section 9, Clause 3:

No Bill of Attainder or ex post facto Law shall be passed.

STATUTES

Section 501 of Public Law 99-514 provides in pertinent part:

(c)(1) In general.—The amendments made by this section shall

apply to taxable years beginning after December 31,

1986.

Title 26, U.S.C. § 469 provides in pertinent part:

§ 469. Passive activity losses and credits limited

(a) Disallowance.—

(1) In general.—If for any taxable year the taxpayer is

described in paragraph (2), neither—

(A) the passive activity loss, nor

(B) the passive activity credit,

for the taxable year shall be allowed.

(2) Persons described.—The following are described in

this paragraph:

(A) any individual, estate, or trust,

(B) any closely held C corporation, and

(C) any personal service corporation.

(b) Disallowed loss or credit carried to next year.—Except as

otherwise provided in this section, any loss or credit from an

activity which is disallowed under subsection (a) shall be treated

as a deduction or credit allocable to such activity in the next tax-

able year.

A-23

(c) Passive activity defined.—For purposes of this section—

(1) In general.—The term ‘“‘passive activity’’ means any

activity—

(A) which involves the conduct of any trade or

business, and

(B) in which the taxpayer does not materially par-

ticipate.

(2) Passive activity includes any rental activity.—The

term ‘‘passive activity’’ includes any rental activity.

(3) Working interests in oil and gas property.—

(A) In general.—The term ‘‘passive activity’’ shall

not include any working interest in any oil or gas

property which the taxpayer holds directly or through

an entity which does not limit the liability of the tax-

payer with respect to such interest.

(B) Income in subsequent years.—If any taxpayer

has any loss for any taxable year from a working

interest in any oil or gas property which is treated as a

loss which is not from a passive activity, then any net

income from such property (or any property the basis

of which is determined in whole or in part by refer-

ence to the basis of such property) for any succeeding

taxable year shall be treated as income of the tax-

payer which is not from a passive activity.

(4) Material participation not required for paragraphs

(2) and (3).—Paragraphs (2) and (3) shall be applied with-

out regard to whether or not the taxpayer méterially par-

ticipates in the activity.

(5S) Trade or business includes research and experimen-

tation activity.k—For purposes of paragraph (1)(A), the

term ‘‘trade or business’’ includes any activity involving

research or experimentation (within the meaning of section

174).

A-24

nm

(6) Activity in connection with trade or business or pro-

duction of income.—To the extent provided in regula-

tions, for purposes of paragraph (1)(A), the term “‘trade

or business’’ includes—

(A) any activity in connection with a trade or busi-

ness, or

(B) any activity with respect to which expenses are

allowable as a deduction under section 212.

~ ~ ~

(m) Phase-in of disallowance of losses and credits fer inter-

ests held before date of enactment.—

(1) In general.—In the case of any passive activity loss

or credit for any taxable year beginning in calendar years

1987 through 1990 which—

(A) is attributable to a pre-enactment interest, but

(B) is not attributable to a carryforward to such tax-

able year of any loss or credit which was disallowed

under this section for a preceding taxable year,

there shall be disallowed under subsection (a) only the

applicable percentage of the amount which (but for this

subsection) would have been disallowed under subsection

(a) for such taxable year.

(2) Applicable percentage.—For purposes of this sub-

section, the applicable percentage shall be determined in

accordance with the following table:

A-25

In the case of taxable The applicable

years beginning in: percentage is:

MT AON a Kee ab sddebe cane babe ake 35

POPC Te eT eee Ce Tee ee ee CT eT ee SE 60

| MEE Pee CUC EP EE eT TT CTR OT RCC rr ere 80

SE ke 44 hes hence saek eS kona ukeseencues 90*

~ ~ ~

Title 18, U.S.C. § 371:

Conspiracy to commit offense or to defraud United States

If two or more persons conspire either to commit any offense

against the United States, or to defraud the United States, or

any agency thereof in any manner or for any purpose, and one

or more of such persons do any act to effect the object of the

conspiracy, each shall be fined not more than $10,000 or

imprisoned not more than five years, or both.

If, however, the offense, the commission of which is the

object of the conspiracy, is a misdemeanor only, the punish-

ment for such conspiracy shall not exceed the maximum punish-

ment provided for such misdemeanor. June 25, 1948, c. 645, 62

Stat. 701.

° The remainder of (m) has been omitted.

A-26