Petition for Writ of Certiorari — Edelman v. United States
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IN THE :
Supreme Court of the United States
OcTOBER TERM, 1992
BERNHARD F. MANKO,
Petitioner,
VS.
UNITED STATES OF AMERICA,
Respondent.
PETITION FOR WRIT OF CERTIORARI TO THE UNITED
STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
PETITION FOR A WRIT OF CERTIORARI
HAVEN C. ROoOsEVELT*
EarL H. NEMSER
Gary J. MENNITT
BURTON SPIVAK
Curtis L. SyYKEs
CADWALADER, WICKERSHAM & TAFT
100 Maiden Lane
New York, New York 10038
(212) 504-6000
Attorneys for Petitioner
*Counsel of Record Bernhard F. Manko
QUESTIONS PRESENTED
1. Whether, in a criminal case, the prosecutor and trial judge
may engage in a secret ex parte conference if it is said to be
limited to matters of “litigation tactics” — here a conference
in which the government obtained a ruling allowing it to secure
a tactical advantage by highlighting damaging testimony before
the jury in rebuttal summation; and may they keep such a rul-
ing secret from the defense until it is too late for it to counter
the tactic by highlighting contrary favorable testimony?
2. Whether in a criminal tax case the trial judge must in-
struct the jury to evaluate a defendant’s good faith defense under
the subjective standard mandated by the Court in Cheek v.
United States (i.e., defendant’s good faith belief, if credited, must
be accepted even if the belief is considered unreasonable), when
the prosecution improperly argues to the jury, contrary to the
Cheek rule, that the defendant’s good faith defense be rejected
as unreasonable and inconsistent with an objective reasonable
man test?
3. Whether the statutory requirements for an interest deduc-
tion set out in the Internal Revenue Code — genuine debt and
accrual of interest — are sufficient for an interest deduction,
which is the rule in the Fourth, Sixth, and Tenth Circuits, or
whether an additional subjective requirement — profit motive
— may be implied in the statute by judicial gloss in a criminal
case as is now the anomalous rule in the Second Circuit?
iii
TABLE OF CONTENTS
QUESTIONS PRESENTED ...................
TABLE OF AUTHORITIES...................
ME ev heh ck ess se sa esevcaveda's
a
CONSTITUTIONAL PROVISIONS AND
eg 8 A
ES hE
The Secret Ex Parte Conference............
Fetture to Charge Cheek..................
The Erroneous Interest Deduction Standard . .
REASONS FOR GRANTING THE WRIT
I
II
THE COURT OF APPEALS DECISION
CREATES A CONFLICT IN THE
CIRCUITS ON AN ISSUE WHICH HAS AN
IMPORTANT IMPACT ON THE RIGHT
TO ASSISTANCE OF COUNSEL AND
WHICH SHOULD BE ADDRESSED BY
THIS COURT WITHOUT DELAY ........
THE DECISION OF THE COURT BELOW
CONFLICTS WITH THIS COURT'S
HOLDING IN CHEEK THAT A
DEFENDANT’S GOOD FAITH DEFENSE
IS TO BE MEASURED BY A SUBJECTIVE
TEST
ee ae a ee eS et eS eS BOS A Se ee Se |] Se Se OD
10
1]
15
iv
A. Cheek Establishes A Rule Of Subjective
SG oreo eae ae Sarees
B. The Prosecutors’ Argument In
Summation Allowed The Government
To Circumvent The Rule Announced In
Cheek Mandating A Subjective Test ....
1. Prosecution May Not Argue
Incorrect Statements Of The Law. .
2. The Prosecution’s Arguments To
The Jury Circumvented The Rule
Sy eos eee ee ewes
III THE DECISIONS BELOW ARE IN
CONFLICT WITH THE LAW IN OTHER
CIRCUITS CONCERNING THE
REQUIREMENTS FOR AN INTEREST
SR EN i ee Ra Perk aires ac,
SPURIOUS ee ea kd A ek nee ee
APPENDICES
Appendix A - Opinion of the Second Circuit
affirming Criminal Conviction
dated October 9, 1992
Appendix B - Order denying Petition for
Rehearing dated December 4,
1992
Appendix C - Judgment of Criminal
Conviction dated December 5,
1991
Appendix D - Order of the Second Circuit
staying the Mandate dated
December 12, 1992
17
17
18
20
25
Appendix E - Relevant excerpts from the
Southern District Court
Record
vil
TABLE OF AUTHORITIES
CASES:
Berger v. United States, 295 U.S. 78 (1935)......
Brooks v. Kemp, 762 F.2d 1383 (11th Cir. 1985),
cert. granted, judgment vacated on other
grounds, 478 U.S. 1016 (1986), on remand,
judgment reinstated, 809 F.2d 700 (11th Cir.),
cert. denied, 483 U.S. 1010 1987) ............
Cheek v. United States, 111 S. Ct. 604 (1991)....
Crooks v. Harrelson, 282 U.S. 55 (1930) ........
Goldstein v. Commissioner, 364 F.2d 734
(2d Cir. 1966), cert. denied, 385 U.S. 1005
ee RR RRR RT ot ees hes chen geet,
TN oink Keck cere ee eee
Herring v. New York, 422 U.S. 853 (1975) ......
Jacobson v. Commissioner, 915 F.2d 832 (2d Cir.
Tee Pee Dorr ee hay at”
Rg pcavincieeiet ee
Mahorney v. Wallman, 917 F.2d 469 (10th Cir.
oon cate
PAGE(S)
17, 18
18
passim
21
22
18
18
12
10, 23
22
18, 19
Vill
PAGE(S)
Rice’s Toyota World, Inc. v. Commissioner, 752
Fe ee Ce Sa EE 6 ro Peo as ee es 21-22
Rose v. Commissioner, 88 T.C. 386 (1987),
aff'd on other grounds, 868 F.2d 851 (6th Cir.
PSS 6 he Tee Le aed e ae teresa ai 22
Smith v. Commissioner, 937 F.2d 1089 (6th Cir.
DOR gs oe i ee Os Waa ok kes Le eee 22
Stanton v. Commissioner, 34 T.C. 1 (1960)...... 21
Tarpley v. Dugger, 841 F.2d 359 (11th Cir.),
cert. denied, 488 U.S. 837 (1988) ............ 18
Touche Ross ¢& Co. v. Redington, 442 U.S. 560
ES es neds Gas ks We eRe eS 21
United States v. Aitken, 755 F.2d 188 (lst Cir.
ee eee ae eee ae cee 16
United States v. Corona, 551 F.2d 1386 (5th Cir.
DN ee ica are Wow ana ne Tat arn die Wied 17
United States v. Critzer, 498 F.2d 1160 (4th Cir
ee hore ee te eae ae 21
United States v. Cronic, 466 U.S. 648 (1984) .... 12
United States v. GAF Corp., 928 F.2d 1253 (2d
Re Ro a fe es aca uae eee: 6, 18
United States v. Garber, 607 F.2d 92 (5th Cir.
BR PPM ene ary Seng ie ea me cre nen ge 21
United States v. Golitschek, 808 F.2d 195 (2d
ee ee ee ea eee aa 15
ix
Page
United States v. Gurary, 860 F.2d 521 (2d Cir.
1988), cert. denied, 490 U.S. 1035 (1989) ..... 15
United States v. Hammond, 642 F.2d 248 (2d
Oe, | eee nae ant OC Mt SL ae hone Oo 18
United States v. Heller, 830 F.2d 150 (11th Cir.
eek oe io te Nee OOM ete eT Oe, 21
United States v. Manko, 979 F.2d 900 (2d Cir.
on, EE EY OE Ire ola VP E MEL We Re la 2
United States v. Mendel, 746 F.2d 155 (2d Cir.
1984), cert. denied, 469 U.S. 1213 (1985) ..... 10
United States v. Minsky, 963 F.2d 870 (6th Cir.
eg, RTT EN he Lee) ala 14
United States v. Pabisz, 936 F.2d 80 (2d Cir.
PRN bwiGicn wd eee did eae ee Seas 18
United States v. Pomponio, 429 U.S. 10 (1976)... 15
United States v. Powell, 955 F.2d 1206 (9th Cir.
OE Sey ide gua De ee eee pera t 16
United States v. Regan, 937 F.2d 823 (2d Cir.
1991), cert. denied sub nom., 112 S. Ct. 2273
pce PER EAE UE REID RN, PA thetntd done 20
United States v. Solivan, 937 F.2d 1146 (6th Cir.
ce, Ee ee ete CR EES RIL APS 13
United States v. Swanson, 943 F.2d 1070 (9th
CR hie rn ee i ee 12
United States v. Wheeler, 800 F.2d 100 (7th Cir
NE ie oy Wi Gee i Sha ee 17-18
United States v. Young, 470 U.S. 1 (1984) ....... 17, 18
Western Assocs., Inc. v. Niagara Props., Inc.,
130 A.D.2d 964, 516 N.Y.S.2d 381
fg Breer ee ver rer renee ee
STATUTES:
ee EL Ak wows WO 4 CRS x on ea ab o0 8h.6 0 90
SG NS oe ev Pe Neca e en en cecean nee s
Economic Recovery Tax Act of 1981 (“ERTA”),
No eek ee eee Kaas
one iid ca ak
IRC § 183(b)(1) (1988)... ... 2.00. cece eee ee eee
N.Y. U.C.C. § 8-319(c) (McKinney 1992) .......
N.Y. U.C.C. § 8-319(a) (McKinney 1992) .......
F. Lee Bailey & Henry B. Rothblatt, Successful
Techniques for Criminal Trials § 24:11 (2d ed.
_—_ chap RPG agers me ne Pas ag erage nar ve tea oe
PE AS Re hE RR EAA RARE SERS RRA ee
Joseph Isenbergh, Musings on Form and
Substance in Taxation, 49 U. Chi. L. Rev. 859
Pc Secs nd sake gute Chas RSS ee sks wee ee
Albert H. Parnell, “The Effective Use of
Demonstrative Aids in Closing Argument”, For
ee GE, ES SOa See ewes baa xiew
Lee A. Sheppard, “Economic Substance
and the Case of T-bill Rolls”, Tax Notes
Pee Gs SG GC wa UA Gos kabel Ganasaa kak oo
Jacob A. Stein, Closing Argument §§ 206-07
i ere a ae a AG Mesh agi, ean a
13
13
23
13
13
xi
Page
John H. Young, The Role of Motive in Evaluating
Tax Sheltered Investments, 22 Tax Law. 275
Be Beh AR A Keiiat ania Ede 5 ote qinuies Ait 23
James W. Wetzler, “The Tax Treatment of
Securities Transactions Under the Tax Reform
Act of 1984”, Tax Notes, Special Report (Oct.
| EEO er ey orn en 5
No.
IN THE
Supreme Court of the United States
OcToBER TERM, 1992
BERNHARD F. MANKO,
Petitioner,
VS.
UNITED STATES OF AMERICA,
Respondent.
PETITION FOR WRIT OF CERTIORARI TO THE UNITED
STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
PETITION FOR A WRIT OF CERTIORARI
Petitioner Bernhard F. Manko prays that a writ of certiorari
issue to review the judgment of the United States Court of Ap-
peals for the Second Circuit.'
' Petitioner adopts the petition of his co-defendant Jon Edelman, submitted
by his attorneys Williams & Connolly. There were no other parties to this
case at any stage of the proceedings.
OPINION BELOW
The opinion of the United States Court of Appeals for the
Second Circuit is reported at 979 F.2d 900 (2d Cir. 1992). It is
Appendix A to this Petition.
JURISDICTION
The October 9, 1992 judgment of the United States Court
of Appeals for the Second Circuit affirmed petitioner Manko’s
judgment of criminal conviction dated December 5, 1991 (Ap-
pendix C). A petition for rehearing was denied by order dated
December 4, 1992 (Appendix B). The mandate was stayed by
the Court of Appeals on December 12, 1992 (Appendix D). This
Court’s jurisdiction rests upon 28 U.S.C. § 1254(1).
CONSTITUTIONAL PROVISIONS
AND STATUTES INVOLVED
The Fifth Amendment to the United States Constitution
provides in pertinent part:
No person shall . . . be deprived of life, liberty, or
property, without due process of law. . .
The Sixth Amendment to the United States Constitution pro-
vides in pertinent part:
In all criminal prosecutions, the accused shall enjoy
the right to a speedy and public trial by an impartial
jury ... and to have the Assistance of Counsel for his
defense.
26 U.S.C. § 7206 provides in pertinent part:
Any person who -
(1) Willfully makes and subscribes any return, state-
ment, or other document, which contains or is verified
by a written declaration that it is made under the
penalties of perjury, and which he does not believe
to be true and correct as to every material matter; or
(2) Willfully aids or assists in, or procures, counsels,
or advises the preparation or presentation under, or
in connection with any matter arising under, the in-
ternal revenue laws, of a return, affidavit, claim, or
other document, which is fraudulent or is false as to
any material matter, whether or not such falsity or
fraud is with the knowledge or consent of the person
authorized or required to present such return, af-
fidavit, claim or document, . . .
. . .
shall be guilty of a felony and, upon conviction
thereof, shall be fined not more than $100,000
($500,000 in the case of a corporation) or imprisoned
not more than 3 years, or both, together with the costs
of prosecution.
Section 163(a) of the Internal Revenue Code provides:
There shall be allowed as a deduction all interest paid
or accrued within the taxable year on indebtedness.
STATEMENT
This case was tried in the Southern District of New York before
District Judge Mary Johnson Lowe and a jury. The basis for
federal jurisdiction in the district court is 18 U.S.C. § 3231, which
states:
The district courts of the United States shall have
original jurisdiction, exclusive of the courts of the
States, of all offenses against the laws of the United
States.
Petitioner Bernhard Fred Manko and his co-defendant Jon
Edelman were indicted in February 1989 in the Southern District
of New York. In May 1989, a superseding indictment charged
Manko with 27 counts and Edelman with 28 counts of making
and subscribing to false tax returns in violation of 26 U.S.C.
§ 7206(1), aiding and abetting the preparation of false returns
in violation of 26 U.S.C. § 7206(2), and conspiring to violate
the tax laws and to defraud the United States in violation of
18 U.S.C. § 371.
Both defendants were convicted under each statute charged
on various counts and on November 26, 1991, they each were
sentenced to a total term of five years’ imprisonment and fined
$450,000. The judgments of conviction were entered on
December 5, 1991, and notices of appeal were filed on December
4, 1991. After affirming petitioner’s conviction, the Second Cir-
cuit Court of Appeals granted his motion to stay its mandate
for 90 days pending this Court’s ruling on the instant petition
for a writ of certiorari. (Appendix D).?
Defendants’ convictions were based on their management of
syndicated limited partnerships (the “Partnerships”) which in
1982 and 1983 financed the purchase of $51 billion in United
States Treasury bills (“T-bills”) through repurchase agreements
(“repos”) that gave rise to interest expense deductions of $532
million. The government has viewed this case as the largest tax
fraud prosecution ever brought. This is perhaps why it employed
tactics not heretofore considered acceptable and why it sought
to base its case on a tax law theory not universally accepted by
the circuit courts.
The superseding indictment charged essentially that the repo
transactions between two companies that defendants managed,
Government Clearing Company and Government Securities
Trading Corporation (collectively “GCC”), and a counter-party,
TSM Holdings Inc. (“TSMH”), were “pre-arranged, rigged and
fraudulent”. According to the indictment:
[I]n these fraudulent transactions, there were secret
oral agreements with certain [co-]conspirators at
TSM[H], not reflected in the trading confirmations,
that [GCC] would make no money on the transac-
tions and that the colluding entity, TSM[H], would
? Relevant excerpts from the Southern District Court Record are reproduced
in Appendix E.
" NNnnnn
be paid a fee disguised as interest expense and built
into the interest rate for the transactions.
(J.A. 20).?
There were two key issues of fact at trial: (1) whether the
financing transactions (repos) actually took place; and (2)
whether petitioners held a good faith belief that their actions
were lawful. The key issue of law was whether the repos gave
rise to lawful interest expense deductions under Section 163 of
the Internal Revenue Code.* IRC § 163(a) (1988).
After a general verdict of guilty was returned by the jury, and
in an effort to immunize the general verdict from attack, the
district court gave the jury an unusual special interrogatory. The
Court of Appeals relied heavily upon the jury’s response which
purportedly found that the repo transactions were fictitious or
did not take place. (J.A. 481).
The special interrogatory should not inhibit this Court’s is-
suance of a writ of certiorari because the interrogatory could
not cure the defective general verdict. It did not produce find-
ings necessary and sufficient for a conviction and it was answered
>“J.A. ___” refers to the Second Circuit Joint Appendix; “R. ” refers to
the Southern District Court Record; and “T. ___” refers to the trial transcript.
* The Partnerships were formed during the period 1978 through 1983 when
syndicated tax shelters proliferated. In 1981, Congress enacted the Economic
Recovery Tax Act of 1981 (“ERTA”), Pub. L. 97-34 (1981), which eliminated
the tax benefits associated with certain types of low-risk “straddles” transac-
tions. ERTA eliminated the possibility of deferring income by requiring tax-
payers to account for both the income and loss legs of a straddle as one in-
tegrated transaction in the same tax year. While ERTA eliminated specific
shelter transactions, experts believed that the ERTA anti-straddle rules were
likely to cause a dramatic increase in the popularity of another sheltering device
commonly referred to as a “T-bill Roll.” James W. Wetzler, “The Tax Treat-
ment of Securities Transactions Under the Tax Reform Act of 1984,” Tax Notes,
Special Report (Oct. 29, 1984) (noting significant growth in use of leveraged
T-bills to achieve tax deferral after ERTA passed in 1981); Lee A. Sheppard,
“Economic Substance and the Case of T-bill Rolls,” Tax Notes (July 23, 1990).
The criminal charges in this case resulted from the Partnerships’ use of the
“T-bill Roll” as an alternative tax-advantaged trading strategy.
without proper judicial guidance on the law of contract forma-
tion. For example, the special interrogatory did not address the
good faith defense with respect to the transactions, a defense
the jury may have sustained if it was properly instructed. Similar-
ly, it is likely that this finding was influenced by the tactical
advantage secured by the government in an admittedly improper
ex parte conference, as well as the government’s improper
argumentation, and the district court’s failure to instruct the
jury on the law appropriate to determine whether a contract
is formed and a transaction has “taken place”.‘
The Secret Ex Parte Conference
The prosecution sought and obtained a secret ex parte con-
ference with the trial judge and secured an advisory opinion
allowing the use in rebuttal summation of several towering charts
(larger than a person) containing 28 purported paraphrases and
quotations of the record. Although a portion of the conference
was transcribed (Appendix A-17-18), the sealed pages of what
on its face appears to be an incomplete transcription were
not disclosed until after the trial. The charts previewed in
the meeting highlighted damaging out-of-context testimony
* Among other things, the defense argued that if the recollection of witnesses
with respect to ten year old negotiations of Treasury Bill transactions was not
sufficient to establish the formation of a contract, the jury could still find con-
tract formation based on the doctrine of ratification, i.e., if trade confirma-
tions were sent, received and not repudiated by the counter-parties, those
counter-parties were bound. N.Y. U.C.C. § 8-319(c) (McKinney 1992). Paying
only lip service to the rule that a defendant is entitled to a jury instruction
explaining the defense theory (see, e.g., United States v. GAF Corp., 928 F.2d
1253, 1262 (2d Cir. 1991) ), the district court merely advised the jury that the
defense contended that the transactions were “ratified”. It refused to tell the
jury what the term “ratified” meant and the legal requirements of the doc-
trine of ratification. The Court of Appeals erroneously sustained petitioner's
criminal conviction on the ground that the jury charge proposed by defend-
ants improperly set out the law of ratification (Appendix A-21-22); but the
court misapprehended the law by overlooking N.Y. U.C.C. § 3-819(c) and rely-
ing sua sponte on inapplicable law not addressed by the parties. Compare
N.Y. U.C.C. § 3-819(a) (McKinney 1992) (involving authority of agents and
not principal-to-principal transactions); Western Assocs., Inc. v. Niagara
Props., Inc., 130 A.D.2d 964, 516 N.Y.S.2d 381 (4th Dep't 1987).
concerning the issue posed by the special interrogatory, i.e.,
whether the financing transactions (repos) actually took place.
Tactics can have a profound affect on a jury. To assume, as did
the Second Circuit, that this tactic had no affect on the jury im-
perils the right to assistance of counsel and is simply unrealistic.
This admittedly improper and unnecessary ex parte con-
ference occurred before defendants’ summations and without
their knowledge. Moreover, when the prosecutors solicited the
district court’s views on whether to give defendants notice of
their intended use of the imposing charts the district judge clear-
ly demonstrated her favoritism by responding: “I don’t think
you should disclose it.” (Appendix E-6). With respect to several
other incidents the Second Circuit found the district court’s con-
duct “disturbing” and expressed “grave concern” at its “breach
of impartiality”. (Appendix A-15-17). The court then sealed the
transcript of the ex parte conference and refused to unseal it
until over a month after the trial had ended and then only upon
the prosecution’s consent. (Appendix E-7-8; R. 56). Such con-
duct, not heretofore sanctioned by this Court, is now protected
by a safe harbor rule in the Second Circuit, placing it in direct
conflict with the Sixth Circuit.
Defense counsel only discovered the ex parte conference when,
in the middle of defense summations, they received a copy of
the transcript indicating that two missing pages were sealed.
(Appendix E-7-8). They immediately moved to unseal those
pages, but the lower court denied the motion and refused to
reveal the purpose of the conference stating “[t]he prejudice you
will suffer will not be caused by what is sealed, all right?” (Ap-
pendix E-8). Defense counsel learned of the previewed charts
for the first time on the next day during a 45-minute break im-
mediately before the prosecution began rebuttal summation.
Due to the short notice, defense counsel had only one and a half
minutes to review each of the 28 excerpts taken from over 6,000
pages of transcript; first to verify their accuracy and fair con-
text and then to ascertain whether each was within the proper
scope of rebuttal.
It cannot be denied that these charts had an impact on the
jury. For example, several of the enlarged excerpts went to the
heart of the special interrogatory. One purported paraphrase
enlarged on a chart and read to the jury in rebuttal was a highly-
charged, prejudicial and misleading statement of testimony by
a trader involved in the transactions as follows: “Don’t even show
me those tickets, I don’t want to be hauled out of here in hand-
cuffs.” (Appendix E-1; Appendix E-11-12). Defense counsel, if
they were present in the ex parte, would have argued that
the court, in its supervisory powers, should not allow this
sentence to be blown-up for rebuttal because it was not a full
and proper paraphrase. As to the tickets and the remark about
“handcuffs”, the trader testified later on cross-examination that
the comment was not to communicate a serious message, rather
it was “to rattle Joe Bryant’s cage”; and he did not even know
whether the tickets referred to had anything to do with this case.
(Appendix E-2). It is clear that highlighting the quote without
the full context and explanation (which may not have been in
the jury’s ready recal! after a four month trial) had a strong
impact on the jury.
Because the impact of the charts on the jury was palpably
and predictably devastating, the defendants requested remedial
relief in the form of a surrebuttal to put the charts’ excerpts in
their proper context. The district court rejected this request and
ignored defendants’ objections as to scope and use of the charts.
The defense was thus unable to counter the tactical advantage
improperly obtained by the prosecution. (J.A. 1550-53).
Failure to Charge Cheek
Defendants requested that the district court give the follow-
ing charge based on this Court’s opinion in Cheek v. United
States, 111 S. Ct. 604 (1991):
If you find that the defendant you are considering
believed that the repo interest expense arising from
the transactions at issue in this case was deductible
under the Internal Revenue laws, he cannot be guilty
of the charges in the indictment, regardless of whether
his belief was reasonable.
£
(Appendix E-15) (Specific Criminal Intent). The district court
rejected defendants’ proposed charge, even though the prosecu-
tion consented to include the above-italicized language. (Ap-
pendix E-3).
The prosecution’s summations took full advantage of the
district court’s refusal to give defendants’ proposed instructions
by arguing that defendants’ beliefs were not reasonable, know-
ing the district court would not give a corrective charge. It thus
completed an end run around this Court’s decision in Cheek.
During summations, the prosecution repeatedly urged the jury
to hold defendants to an improper reasonable man standard,
improperly asking them to measure defendants’ good faith belief
that the repo interest expense was deductible against what a
reasonable businessman would have believed under the cir-
cumstances. (“You [the jury] constantly have to ask yourself
against these facts, do real business men and women operate
this way?” (Appendix E-5). “Is this the way real businessmen
act, million dollar transactions, billion dollar transactions, no
one knowing what is going on . . . .” (Appendix E-9).
In summation the government also suggested that the jury
should reject the defendants’ subjective belief as unreasonable
by stating: “It only happens in the Manko world, in the land
of Edelman. That is the only place it happens.” (Appendix E-4).
The government argued, in a fashion directly contrary to Cheek,
that the jury should ask: “Where in the real world does that
happen?” (Appendix E-4). Finally, the government ended its
summation with an analogy everyone knows and which left no
question that it was arguing that the defendants’ subjective good
faith belief should be rejected as unreasonable. The government
charged: “Mr. Manko, Mr. Edelman, the emperor has no clothes.”
(Appendix E-7).
The prosecution suggested that the jury use its own experience
to determine if defendants’ good faith belief was reasonable.
See Appendix E-3-4; J.A. 1491-95. On rebuttal summation, the
prosecution suggested that in deliberations the jury divide itself
into two groups and reenact its version of the facts. (Appendix
E10). It prefaced this suggestion with the statement: “If it’s legal
10
to do what the defendants did, you, ladies and gentlemen, can
eliminate the tax liability of our entire country, and you can
do it like that.” (J.A. 1601). The defense alerted the trial court
at the charging conference to the prosecutor’s improper
arguments to the jury suggesting that the jury apply an objective
reasonable man test in deciding whether the petitioners’ defense
of good faith was well founded. (J.A. 331-334). The court refused
to remedy the problem by instructing the rule of Cheek.
In Cheek this Court flatly held that it was improper for a
jury in a criminal tax case to be instructed that the good faith
defense be measured by an objective reasonable man standard
because in the complex world of taxes, a subjective standard is
appropriate. In this case, the district court did not distinguish
between the objective and subjective standards. The Court of
Appeals’ affirmance endorsed the government’s end run around
Cheek by sustaining the convictions here despite the prosecutor’s
summation urging the jury to apply an objeciive standard while
the district court remained silent on the issue and refused to issue
a corrective instruction.
The Erroneous Interest Deduction Standard
Two weeks before the trial of this case, the Second Circuit
decided Jacobson v. Commissioner which held that the only re-
quired elements for an interest expense deduction are actual debt
and the payment or accrual of interest. 915 F.2d 832 (2d Cir.
1990). Since the issue was critically important and would deter-
mine trial strategy, the district court ruled just before opening
arguments that it would follow Jacobson. (J.A. 488-89). See
J.A. 1256-58. After the parties rested, the district court reversed
this pretrial ruling.* It ruled that to find lawful interest
* It is difficult to imagine a more certain basis for prejudice than the district
court’s “last minute 180-degree turn” in its announced treatment of a central
issue in the case. United States v. Mendel, 746 F.2d 155, 161 (2d Cir. 1984),
cert. denied, 469 U.S. 1213 (1985). Defendants went to trial and rested in
reasonable reliance on the false understanding that the two-pronged economic
substance test would not determine the outcome; “[i]t is not too much to say
that | defense] counsel [were] seduced by the court’s first ruling into forgoing
submission of evidence” of profit potential and market risk. /d.
ee
1]
deductions the jury not only would have to find genuine debt
and the payment or accrual of interest, but was also required
to find that the transaction had “economic substance” which
the court ambiguously defined two ways: (1) as requiring “a
reasonable possibility of profit apart from tax deductions” or
“market risk”, and (2) “business purpose” or “market risk”. (J.A.
413-14). See generally T. 1165-71; J.A. 454-63.
In affirming, the Second Circuit set out a rule which con-
flicts with the Fourth, Sixth, and Tenth Circuits.
REASONS FOR GRANTING THE WRIT
I
THE COURT OF APPEALS DECISION CREATES A
CONFLICT IN THE CIRCUITS ON AN ISSUE
WHICH HAS AN IMPORTANT IMPACT ON THE
RIGHT TO ASSISTANCE OF COUNSEL AND
WHICH SHOULD BE ADDRESSED BY THIS
COURT WITHOUT DELAY
The Court of Appeals improperly applied a harmless error
analysis in holding that the ex parte meeting between the judge
and the prosecutor did not constitute reversible error. In doing
so it sanctioned reprehensible conduct and created a conflict
between the Second and Sixth Circuits on the circumstances in
which ex parte conferences between the court and the govern-
ment can be conducted with impunity in criminal cases. Should
the Second Circuit rule announced in this case be allowed to
stand, the government in a criminal case will be able to im-
munize ex parte conferences by determining with the court that
they are “merely” tactical or administrative despite the fact that
the defense is handicapped.
Although acknowledging that “the prosecution initiated
this ex parte proceeding in a blatant attempt to win a tactical
12
advantage, to get a ‘leg up’ ”, in its rebuttal summation, the
Court of Appeals held that “this highly improper ex parte
conference does not constitute reversible error.” (Appendix
A-19-20). This application of the harmless error doctrine is a
radical departure from the standards governing constitutional
error established by this Court. It establishes a safe harbor
rule which will allow prosecutors and judges to collaborate on
the use of tactics to maximize the chances of conviction. This
rule will surely erode confidence in the impartiality of our
judicial system.
This Court “has uniformly found constitutional error without
any showing of prejudice when counsel was either totally ab-
sent, or prevented from assisting the accused during a critical
stage of the proceeding.” United States v. Cronic, 466 U.S. 648,
659 n.25 (1984) (collecting cases). There can be no doubt that
the tactical advantage gained by the prosecutor's ex parte con-
ference occurred at a critical stage of the trial because, as the
Second Circuit found, it gave the prosecutor a tactical advan-
tage in his rebuttal summation. United States v. Swanson, 943
F.2d 1070, 1074 (9th Cir. 1991) (summation is a “critical stage”
of a criminal proceeding). This alone establishes prejudice. This
Court, recognizing the importance of summation to a criminal
defendant, has stated:
The very premise of our adversary system of criminal
justice is that partisan advocacy on both sides of a case
will best promote the ultimate objective that the guilty
be convicted and the innocent go free. In a criminal
trial, which is in the end basically a factfinding pro-
cess, no aspect of such advocacy could be more im-
portant than the opportunity finally to marshal the
evidence for each side before submission of the case
to judgment.
Herring v. New York, 422 U.S. 853, 862 (1975). The impact of
argument on juror’s minds is exaggerated where it is made in
13
a prosecutor's final summation.’ United States v. Solivan, 937
F.2d 1146 (6th Cir. 1991).
The Second Circuit correctly observed that “the propriety of
using the chart cannot be the measure of whether the ex parte
proceeding constituted reversible error. Otherwise, the fact of
an ex parte proceeding would be irrelevant so long as the court
ultimately made the right ruling.” (Appendix A-20). But it went
on anyway to say that the first of two “facts” convincing it that
reversal was not required was that it did not believe “the district
court would [as opposed to could] have ruled differently ab-
sent the ex parte conference.” (Appendix A-20) (emphasis added).
Quite clearly, with the benefit of defense counsels’ advocacy,
the district court could have correctly ruled differently in any
one of several favorable ways as follows:
1. The quotes and paraphrases used in the prosecution’s
charts would have to be put in proper context by the prosecu-
tion (i.e., a fair context rule);
2. The prosecution could use charts in rebuttal summation,
but the defense would be entitled to surrebutal to put the quotes
and paraphrases in their proper context;
3. No charts could be used by the prosecution in rebuttal
unless first used in its closing — so defendants could use their
closing to put the quotes in proper context;
4. The charts could not be as large as those used by the
prosecution;
’ The devastating impact of charts used in summation is attested to by the
many trial manuals and treatises advocating their use. See, e.g.. F. Lee Bailey
& Henry B. Rothblatt, Successful Techniques for Criminal Trials § 24:1] at
544-45 (2d ed. 1985); 5 Melvin M. Belli, Sr., Modern Trials 69-120, 439-43
(2d ed. 1982); Jacob A. Stein, Closing Argument §§ 206-07 (1985); Albert H.
Parnell, “The Effective Use of Demonstrative Aids in Closing Argument”, For
the Defense 15-20 (Dec. 1983). This is particularly the case with jurors who
had listened to hundreds of hours of testimony on complex financial transac-
tions during four months of trial. It is difficult to fathom how the jury could
not be swayed by highlighted, charged testimony in last-word rebuttal where
the context could not be clearly, if at all, remembered.
14
5. No charts could be used by either side; or
6. Both the prosecution and the defense would be permitted
to use charts.
The Second Circuit applied harmless error analysis to the ex
parte conference despite the fact that it gave the prosecution
a “tactical advantage” at a critical stage of this criminal trial.
(Appendix A-19). That holding violated this Court’s ruling in
Cronic that such deprivation of the right to assistance of counsel
is per se reversible error without any showing of prejudice.
A more appropriate solution to the problem of ex parte con-
ferences was presented recently in United States v. Minsky, 963
F.2d 870 (6th Cir. 1992), where, in conflict with the Second
Circuit’s affirmance in this case, the court held that such an ex
parte conference at a critical stage was sufficient ground for
reversal standing alone, and indicated that it would reverse the
judgment below before it decided whether the ex parte ruling
was substantively correct. The Minsky analysis is correct because
its decision to reverse based on the ex parte conference was made
prior to a consideration of the propriety of the ex parte ruling
itself. Otherwise a prosecutor need only secure a non-erroneous
ex parte ruling (though one of many possible non-erroneous rul-
ings) to safely gain a tactical advantage. The decision of the Sixth
Circuit was based on the principle that a court should “refuse
to condone conduct that ‘undermines confidence in the impar-
tiality of the court”. Jd. at 874 (citation omitted). The Second
Circuit condoned just such conduct in this case.
The panel’s opinion will encourage rather than discourage
the use of ex parte conferences by effectively establishing a safe
harbor rule that may be stated most narrowly as follows:
SAFE HARBOR RULE: It is not reversible error for
the prosecutor and trial judge to have a secret, ex parte
conference so the prosecutor can secure a tactical ad-
vantage or a “leg-up”. EXPLANATION: Although it
is improper to engage in such conduct, it is not re-
versible error unless the defendant can overcome the
15
harmless error rule. EXAMPLE: It is not reversible
error if the tactical advantage allows the prosecutor
to highlight damaging testimony or paraphrases of
testimony in its last-word rebuttal semmation because
successfully highlighting damaging testimony on the
ultimate factual issue of a case cannot, as a matter
of law, have even a minimal effect on the jury.
See Appendix A-19. This safe harbor rule sends a dangerous
message to prosecutors and is in conflict with this Court’s rul-
ing in Cronic as well as with the Sixth Circuit’s decision in
Minsky. If the Second Circuit’s tolerance of ex parte conferences
is not forcefully rejected, the integrity of our judicial system will
be damaged.
Il
THE DECISION OF THE COURT BELOW CON.
FLICTS WITH THIS COURT'S HOLDING IN
CHEEK THAT A DEFENDANT'S GOOD FAITH
DEFENSE IS TO BE MEASURED BY A SUBJECTIVE
TEST
Petitioner was convicted of criminal tax violations of 26 U.S.C.
§ 7206(1) that require a finding of specific intent. United States
v. Gurary, 860 F.2d 521, 523 (2d Cir. 1988), cert. denied, 490
U.S. 1035 (1989). To be guilty of violating a known legal duty,
by making and subscribing false tax returns in violation of 26
U.S.C. § 7206(1), and of “willfully” aiding and assisting in the
preparation of a false tax return in violation of 26 U.S.C.
§ 7206(2), a person must intentionally violate a known legal
duty. United States v. Pomponio, 429 U.S. 10, 11 (1976); United
States v. Golitschek, 808 F.2d 195, 202-03 (2d Cir. 1986). Yet,
petitioner’s conviction was upheld on appeal despite the fact
that the trial court failed to properly instruct that the jury must
determine the validity of a defense of good faith based on what
petitioner honestly believed.
A. Cheek Established A Rule Of Subjective Good Faith.
This Court has held that in criminal cases involving viola-
tions of federal tax law, a jury’s determination of whether a
16
proper defense of good faith has been established is to be deter-
mined by reference to the subjective belief of the accused. Cheek,
111 S. Ct. at 604. In Cheek, this Court specifically announced
that a defendant’s belief need not be objectively reasonable in
order to support a defense of good faith. Jd. at 611.
As this Court explained in Cheei::
In the end, the issue is whether, based on all the
evidence, the Government has pr«ved that the defen-
dant was aware of the duty at issue, which cannot be
true if the jury credits a good faith misunderstanding
and belief submission, whether or not the claimed
belief or misunderstanding is objectively reasonable.
Id. (emphasis added). The Cheek rule emerged out of a recogni-
tion that “[t]he proliferation of statutes and regulations has
sometimes made it difficult . . . to know and comprehend .. .
the tax laws.” Id. at 609. This Court recognized in Cheek that
Congress intended to exclude honest mistakes by making specific
intent an element of federal tax crimes:
“{I]n our complex tax system, uncertainty often arises
even among taxpayers who earnestly wish to follow
the law” and “.. . it is not the purpose of the law to
penalize frank difference of opinion or innocent er-
rors made despite the exercise of reasonable care.”
Id. at 612 (quoting United States v. Bishop, 412 U.S. 346, 360-361
(1973)). More than statutory construction, this is a matter of
constitutional importance because, “forbidding the jury to con-
sider evidence that might negate willfulness would raise a serious
question under the Sixth Amendment's jury trial provision.” Jd.
at 611 (citations omitted).
Under Cheek, the jury is precluded from substituting its own
determination of objective reasonableness for what the defend-
ant subjectively believed. See, e.g., United States v. Powell, 955
F.2d 1206, 1211-12 (9th Cir. 1992). Even if the evidence against
a defendant is strong, an erroneous instruction suggesting that
an objective standard applies is plain error. United States v.
Aitken, 755 F.2d 188, 193-94 (Ist Cir. 1985).
17
The trial court below denied petitioner’s requested charge
regarding its defense of good faith and refused to inform the
jury that it is the defendants’ subjective belief that controls. See
J.A. 375. Specifically, the trial court refused to charge the jury
that a good faith belief in the legality of tax deductions negates
the specific intent necessary to support a criminal conviction
regardless of whether that belief was reasonable. (Appendix
E-13-15).
The charge given by the trial court included the following
general language: “A person who believes that his tax return
truthfully reports the taxable income and allowable deductions
under the tax law acts in good faith and cannot be found guilty
of wilfully filing a false return.” (Appendix E-13). The instruc-
tion omitted the pivotal concept announced in Cheek that a good
faith defense is not negated by a finding that the defendants’
belief may have been objectively unreasonable. (Appendix E-13).
The vague instruction given was insufficient after the prosecu-
tion had repeatedly argued to the jury that it should convict
based on a finding that the defendants’ belief in the legality of
the transactions was unreasonable.
B. The Prosecutors’ Arguments In Summation Allowed
The Government To Circumvent The Rule Announced
In Cheek Mandating A Subjective Test.
1. Prosecution May Not Argue Incorrect Statements
Of The Law
This Court has held that a prosecutor may not make improper
suggestions, insinuations or assertions to a jury, calculated to
mislead. Berger v. United States, 295 U.S. 78 (1935); United
States v. Young, 470 U.S. 1, 7 (1984) (“Nearly half a century ago
this Court counselled prosecutors ‘to refrain from improper
methods calculated to produce a wrongful conviction . . _ ’
(quoting Berger, 295 U.S. at 88)); United States v. Corona, 551
F.2d 1386 (Sth Cir. 1977). Nor may the prosecution argue in-
correct or inapplicable theories of law to the jury. United States
v. Wheeler, 800 F.2d 100, 106-07 (7th Cir. 1987) (prosecution’s
arguments which effectively shifted its legal burden of proof
18
were improper); Mahorney v. Wallman, 917 F.2d 469, 470-74
(10th Cir. 1990) (prosecution’s arguments incorrectly describ-
ing the presumption of innocence found to be reversible error).
See United States v. Hammond, 642 F.2d 248, 249-50 (2d Cir.
1981); Graham v. United States, 257 F.2d 724 (6th Cir. 1958).
These rules are required because jurors should be confident
that the prosecuting attorney will not use improper methods
calculated to produce a wrongful conviction. Berger, 295 U.S.
at 88. Consequently, improper suggestions, insinuations and
assertions made by the prosecution are apt to carry much weight
against the accused when they should properly carry none. Id.
Thus, a prosecutor’s argument to the jury carries with it the
imprimatur of the government and may induce the jury to trust
the government’s judgment rather than its own. Young, 470 US.
at 18; Tarpley v. Dugger, 841 F.2d 359 (11th Cir.), cert. denied,
488 U.S. 837 (1988); Hall v. United States, 419 F.2d 582 (5th
Cir. 1969). When prosecutors abuse this mantle of authority,
it unfairly plays upon the jury’s susceptibility to credit the
prosecutor’s viewpoint. Brooks v. Kemp, 762 F.2d 1383, 1399,
1410 (llth Cir. 1985), cert. granted, judgment vacated on other
grounds, 478 U.S. 1016 (1986), on remand, judgment reinstated,
809 F.2d 700 (11th Cir.), cert. denied, 483 U.S. 1010 (1987).
The district court had an obligation to correct the false
impression left by the prosecution but failed to do so. See Young,
470 U.S. at 9-10; United States v. Pabisz, 936 F.2d 80, 83 (2d
Cir. 1991); GAF, 928 F.2d at 1263 n.4.
2. The Prosecutions Arguments To The Jury
Circumvented The Rule Of Cheek
The jury was misled as to the test to apply in determining
the validity of petitioner’s good faith defense by the prosecu-
tion’s arguments. As a result, the prosecution’s burden of
establishing the petitioner’s specific criminal intent to violate
a known legal duty beyond a reasonable doubt was effectively
removed.
19
During summation, the prosecutor invited the jury to use an
objective test when he stated: “Would any businessman or
businesswoman act the way these guys did?” (Appendix E-5).. .
“It only happens in the Manko world, in the land of Edelman.
That is the only place it happens.” (Appendix E-4). And later,
the prosecutor asked: “Is this the way real businessmen act,
million dollar transactions, billion dollar transactions, no one
knowing what is going on, supposedly at risk, having $33 in
cash?” (Appendix E-9). The government thus asked the jury to
measure the defendants’ conduct by what it argued objective
“real businessmen” would believe or do under the circumstances.
Moreover, after describing the defendants as selling tax losses
and inviting the jury to simulate the activities of the petitioners
during the jury’s deliberation, the government concluded:
Ladies and gentlemen, if you really think you can do
that, then acquit the defendants. You should acquit
the defendants if you think you can do that. But if
you think what I just suggested is absolutely
ridiculous, and the defendants know that, then it’s
your duty to convict them.
(Appendix E-10) (emphasis supplied). The government's clear
invitation to the jury to substitute its own beliefs about the trans-
actions at issue for that of the defendants eviscerated the defense
of good faith. This erroneous suggestion cried out for correc-
tion by the trial court. Yet, the court permitted this misleading
argument over the defense’s objection. (Appendix E-10). The
court’s refusal to correct the prosecutor’s misstatements when
requested to do so gave the prosecution’s arguments the ap-
pearance of judicial approval. See Mahorney, 917 F.2d at 473 n.4.
When viewed through the distorting lens of the prosecution’s
misleading arguments, the charge did not make clear to the jury
that the defendants must demonstrate only that a subjective good
faith belief in the legality of the acts was held and not that
the belief must be found to be objectively reasonable.* The
* There was ample evidence adduced at trial of the petitioners’ good faith belief
in the legality of the transactions (J.A. 1329-34, 1343, 1348, 1350-55) and the
reasons for their belief (J.A. 1108, 1116, 1143, 1266-71).
20
government should not be permitted to so circumvent the holding
of this Court in Cheek.
Ill
THE DECISIONS BELOW ARE IN CONFLICT
WITH THE LAW IN OTHER CIRCUITS CON-
CERNING THE REQUIREMENTS FOR AN IN-
TEREST DEDUCTION
The critical legal issue in the trial of this case concerned the
requirements for an interest deduction under Section 163(a) of
the Internal Revenue Code (the “Code”). The rules for interest
deductibility are important and need to be clearly spelled out.
Deductibility of interest on indebtedness affects the cost of bor-
rowing and, therefore, the pace and scope of commercial activity
in our debt markets which are vast in volume and value. The
imposition of criminal sanctions in an interest deduction case
when the law is confused and the circuits are in conflict requires
that this Court articulate a clear rule. If this confusion and con-
flict are not resolved by this Court, it will result in inconsistent
treatment of taxpayers, both civilly and criminally, with respect
to an important and recurring issue.
The imposition of criminal liability based on the complicated
transactions at issue in this case is inappropriate. As the Second
Circuit has noted:
[O]Jne of the most esoteric areas of the law is that of
federal taxation. It is replete with ‘full grown in-
tricacies’, and it is rare that a ‘sirnple, direct statement
of the law can be made without caveat’.
United States v. Regan, 937 F.2d 823, 827 (2d Cir. 1991) (quoting
1 Mertens Law of Federal Income Tax § 1.01), cert. denied sub
nom., 112 S. Ct. 2273 (1992).
The defendants in this interest deduction case have been held
criminally accountable, not to the clear rule of the Tax Code,
but to one of several competing interpretations of Section 163.
21
Criminal liability is unduly and impermissibly harsh “when the
law [is] uncertain or cast in doubt by prior court decisions.”
United States v. Heller, 830 F.2d 150, 155 (1lth Cir. 1987). See
United States v. Garber, 607 F.2d 92 (5th Cir. 1979); United
States v. Critzer, 498 F.2d 1160 (4th Cir. 1974).
The tax issue boils down to whether the statutory requirements
for an interest deduction as stated in the Code (genuine debt
and accrual of interest) are sufficient for an interest deduction,
which is the rule in the Fourth, Sixth, and Tenth Circuits, or
whether the statutory requirements are necessary but a subjective
non-tax purpose such as a profit motive is also required for an
interest deduction under the contrary rule in the Second Circuit.
The interpretation of any statute “must begin with the
language of the statute itself.” Touche Ross & Co. v. Redington,
442 U.S. 560, 568 (1979). This Court has also cautioned that
the literal terms of a tax statute should be ignored “only under
rare and exceptional circumstances.” Crooks v. Harrelson, 282
U.S. 55, 60 (1930). Section 163 provides as a general rule that
“all interest paid or accrued within the taxable year on in-
debtedness” is deductible, subject to certain statutory exceptions
that are not relevant here. IRC § 163(a) (emphasis added). The
requirements for deductibility under Section 163(a) are plain
and unambiguous: (1) payment or accrual of interest; and (2)
actual indebtedness. See Stanton v. Commissioner, 34 T.C. 1,
7 (1960) (“Congress has included no requirement in the Code
that the borrowed money be used in connection with a trans-
action entered into for profit . .. Congress has repeatedly con-
sidered and ultimately rejected limitations somewhat com-
parable to the [requirement] now urged by the Commissioner’).
The Fourth, Sixth, and Tenth Circuits follow the plain mean-
ing and clear rule of the statute. In Rice’s Toyota World, Inc.
v. Commissioner, 752 F.2d 89 (4th Cir. 1985), a case involving
the sale and leaseback of computers, the Tax Court had denied
a deduction for interest paid on recourse debt that had been
used to finance the sale-leaseback because the underlying trans-
action was motivated by no business purpose other than obtain-
ing tax benefits and had no reasonable prospect of providing
22
a profit and was, therefore, a sham. The Fourth Circuit reversed
on the interest deduction issue despite “the sham nature of the
underlying purchase transaction” because the debt was real and
interest was paid. Id. at 96.
The Fourth Circuit rule as set forth in Rice’s Toyota finds suf-
ficient economic substance for an interest deduction in the
satisfaction of the statutory requirements of genuine debt and
the payment or accrual of interest. In James v. Commissioner,
899 F.2d 905 (10th Cir. 1990), the Tenth Circuit followed Rice's
Toyota and approved an interest deduction on genuine debt
despite the fact that the underlying transaction was a sham and,
therefore, could not be respected for tax purposes. In so holding,
the James court said, “[ w]e agree [with Rice’s Toyota] that within
the framework of a sham transaction a taxpayer may incur bona
fide obligations which should be recognized for tax purposes.”
Id. at 910. In Smith v. Commissioner, the Sixth Circuit relied
on the Rice’s Toyota rule to conclude that the taxpayer’s pay-
ment of interest on a “genuine obligation” gave rise to a valid
tax deduction “even in the face of the sham nature of the underly-
ing agreement.” 937 F.2d 1089, 1099 (6th Cir. 1991). The Tax
Court has also adopted the Fourth Circuit’s reasoning:
[ W Je believe that the distinction made by the [Fourth
Circuit] Court of Appeals is valid to the extent that
the petitioners actually incurred a debt . . . that was
certain to be paid . . . [I]n other words, the require-
ment of a profit objective is not one of the limitations
in section 163 on the deduction of interest actually
paid.
Rose v. Commissioner, 88 T.C. 386, 423 (1987) (emphasis added),
affd on other grounds, 868 F.2d 851 (6th Cir. 1989).
In this criminal case, the Court of Appeals has embraced a
standard for interest deductions which is not supported by the
statute and is stricter than the standard which the Fourth, Sixth,
and Tenth Circuits have applied in civil cases. The Second
Circuit now requires that a borrowing must have additional
ll
23
economic substance in the form of a non-tax purpose (i.e., a
business purpose other than tax savings) or market risk (i.e., an
objective potential for economic gain apart from tax savings).
In Goldstein v. Commissioner, 364 F.2d 734 (2d Cir. 1966),
cert. denied, 385 U.S. 1005 (1967) the Second Circuit first grafted
onto the clear statutory language of Section 163 the additional
requirement of “purposive activity” in order to claim an interest
deduction. The Goldstein court acknowledged that “there is no
[statutory] requirement that deductible interest serve a business
purpose, that it be ordinary and necessary, or even that it be
reasonable.” Id. at 741 (citation omitted). Nevertheless, the
Goldstein court opined that:
Congress could not have intended to permit a taxpayer
to reduce his taxes by means of an interest deduction
that arose from a transaction that had no substance,
utility or purpose beyond the tax deduction.
Id. at 742.°
The Second Circuit appeared to back away from Goldstein
in Jacobson, in favor of the plain meaning of Section 163: “even
if the motive for a transaction is to avoid taxes, interest incurred
therein may still be deductible if it relates to economically
substantive indebtedness.” 915 F.2d at 840. The Jacobson court
relied on Tax Code Sections 183(b)(1) and 163(a) to conclude
that interest expense deductions are not dependent on a finding
of a non-tax purpose and that an interest deduction is “allowable
. .. without regard to whether or not such activity is engaged
in for profit.” IRC § 183(b)(1) (1988); Jacobson, 915 F.2d at 840.
In this case, by adding the element of a non-tax purpose, the
Second Circuit has rejected Jacobson where it had followed the
clean contours of the statute.
* The Goldstein rule has been criticized by tax commentators because of its
departure from the clear language of Section 163 and basic principles of statu-
tory construction. Joseph Isenbergh, Musings on Form and Substance in Tax-
ation, 49 U. Chi. L. Rev. 859, 875-76 (1982); John H. Young, The Role of Motive
in Evaluating Tax Sheltered Investments, 22 Tax Law. 275, 279-81 (1969).
24
This case is an appropriate vehicle for the resolution of the
conflict among the circuits because the trial court’s confusion
on the economic substance requirement infected the jury’s
understanding of the requirement of an actual debt. The jury
was charged that it could not find that the repo loans represented
genuine debt unless it found that the loans possessed “substance
or business purpose”, and that they would be fraudulent for “tax
purposes” if they lacked “economic substance”. (Appendix E-12).
The trial judge also charged that the repo transactions possess-
ed economic substance if they had business purpose or market
risk. (J.A. 1635). These errors would have affected the jury’s
response to the special interrogatory. A finding that the trans-
actions were “fictitious” could have been based on the erroneous
instruction that a transaction without “economic substance’ is
“fraudulent”. (J.A. 481).
Consistency among the circuits and certainty in the ad-
ministration of the tax laws are essential, particularly when the
law can form the basis of a criminal indictment.
25
CONCLUSION
For the foregoing reasons, petitioner Bernhard F. Manko
respectfully requests this Court to grant this Petition for a Writ
of Certiorari to the United States Court of Appeals for the Second
Circuit, and to reverse the conviction of petitioner Bernhard F.
Manko.
Dated: New York, New York
March 4, 1993
Respectfully submitted,
Haven C. RooseveE t, Esq.
Counsel of Record
CADWALADER, WICKERSHAM & TAFT
100 Maiden Lane
New York, New York 10038
(212) 504-6000
Attorneys for Petitioner
Bernhard F. Manko
Of Counsel:
Eart H. NEMSER
Gary J. MENNITT
BurTON SPIVAK
Curtis L. Sykes
i
APPENDIX
A-|
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
>
Nos. 1600, 1601—August Term 1991
(Argued July 13, 1992 Decided October 9, 1992 )
Docket Nos. 91-1732, -1733
aed
UNITED STATES OF AMERICA,
Appellee,
—_—vV—
BERNHARD FRED MANKO, also known as Fred;
and JON EDELMAN,
Defendants-Appellants.
ie
Before:
ALTIMARI, MAHONEY, and WALKER,
Circuit Judges.
a
Appeal from judgment of conviction entered in the United
States District Court for the Southern District of New York
(Mary J. Lowe, Judge) on ground that district court’s bias
denied defendants a fair trial.
Affirmed.
A-2
EARL H. NEMSER (Kathryn L. Hoenig, Gary J.
Mennit, Burton Spivak, Cadwalader,
Wickersham & Taft, New York, NY, of
counsel) for Defendant-Appellant Manko.
MARION BACHRACH (Carro, Spanbock, Kaster &
Cuiffo, New York, NY, of counsel) for
Defendant-Appellant Edelman.
ROBERT J. CLEARY, Ass’t U.S. Atty, Southern
District of New York (Otto G. Obermaier,
U.S. Atty, Miguel A. Estrada, Daniel C.
Richman, Ass’t U.S. Atty’s, Southern Dis-
trict of New York, of counsel) for Appellee.
—
WALKER, Circuit Judge:
On February 4, 1991, following a four-month jury mal in
the Southern District of New York before Judge Lowe,
Bernhard Fred Manko and Jon Edelman were convicted of
making and subscribing false tax returns in violation of 26
U.S.C. § 7206(1), aiding and abetting in the preparation of
false returns in violation of 26 U.S.C. § 7206(2), and consrir-
ing to violate the tax laws and to defraud the United States in
violation of 18 U.S.C. § 371. On November 25, 1991, the
district court sentenced each defendant to five years
imprisonment and fined each $450,000. On appeal, Manko
and Edelman raise a host of objections to the district court's
conduct of the trial. In addition, Manko and Edelman assert
that the government failed to produce sufficient evidence to
Sustain their convictions and that prosecutorial misconduct
denied them a fair trial.
A-3
BACKGROUND
Manko and Edelman were professionals in the once thriv-
ing field of tax shelters. In the late 1970s and early 1980s, the
two sold interests in partnerships that engaged in complex
commodities straddles. These straddles had the effect of
creating losses in one tax year and a corresponding gain in the
subsequent year, thereby deferring income. See Gardner v.
Commissioner, 954 F.2d 836 (2d Cir.) (per curiam), cert.
denied sub nom. Falk v. Commissioner, 112 S.Ct. 1940
(1992).
The straddle business evaporated when Congress passed
the Economic Recovery Tax Act of 1981 (“ERTA”), Pub. L.
97-34 (1981). ERTA eliminated the tax benefits of straddles
by requiring the taxpayer to recognize both the gain and the
loss generated by the straddle in the same tax year. Manko
and Edelman began to look for new tax deferral techniques.
Eventually, Manko and Edelman devised a way around
ERTA. They determined that by engaging in repurchase
transactions (“repos”) in United States Treasury Bills
(“T-Bills”), they could create interest deductions in the first
tax year and corresponding gains in the second year, with lit-
tle or no risk. A T-Bill is an obligation of the United States
Government to pay a fixed amount (the face value) at a cer-
tain date in the future (maturity). T-Bills are purchased at a
discount from face value. The interest is determined by the
difference between the face value and the purchase price. A
repurchase agreement,is an agreement to sell a T-Bill and
then repurchase the bill at a later date for a predetermined
amount. In effect, a repurchase agreement is a loan in the
amount of the proceeds of the original sale, collateralized by
the T-Bill, with interest equal to the difference between the
sale and repurchase prices. A repurchase agreement may ex-
pose the parties to market risk, since the agreed-upon repur-
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chase price may be greater or less than the market price of the
T-Bill at the agreed-upon date. A repo to maturity exists when
the repurchase date specified in the agreement is the maturity
date of the T-Bill. In a repo to maturity, there are no
economic variables, since the market value of the T-Bill at
maturity is always equal to the face value of the T-Bill.
Repos created tax advantages because, until the tax laws
changed in 1984, a securities dealer could deduct the interest
payments on the loan as they accrued, but only had to report
the corresponding gain from the appreciation of the T-Bill at
matunity. If the T-Bill matured in the tax year after the repur-
chase agreement was made, the taxpayer would be able to de-
fer income equal to the amount of interest accrued in the first
year.
One problem with using repos to create tax deductions is
that the deduction created in the first year is relatively small
compared with the face value of the T-Bill. A repo on a ten
million dollar T-Bill would only create a few hundred thou-
sand dollars of interest deductions. Since Manko and Edel-
man had raised over $25 million from investors with a
promise of generating four times that amount in tax deduc-
tions, they realized they would have to do huge quantities of
repos to maturity.
At trial, the government asserted that Manko and Edelman
hatched a fraudulent scheme in order to achieve such vol-
umes. The government alleged that Manko and Edelman ap-
propriated a dormant shell company, TSM Holding Company
(“TSMH”), and unilaterally wrote documents to reflect bil-
lions of dollars of repos to maturity between TSMH and two
clearing brokers controlled by Manko and Edelman—
Government Clearing Company and Government Securities
Trading Corporation (collectively “GCC’’). In turn, Manko
and Edelman created documents to reflect mirror transactions
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between GCC and several investment partnerships, thereby
passing on the ersatz tax breaks to numerous unwitting
investors. Manko and Edelman represented to their lawyers
and accountants that TSMH was an independent entity and
that all their transactions with TSMH actually occurred and
carried market risk.
The documents introduced at trial described the trades as
follows. First, TSMH would sell a T-Bill through GCC to the
partnerships. Since TSMH was only a shell company without
assets, TSMH would sell the bill short. In a short sale, a party
sells a security that it does not own and must therefore find a
way to deliver the security to the buyer, such as borrowing it
from a third party. Since TSMH sold as much as a billion
dollars worth of T-Bills at a time, the partnerships lacked the
funds to pay for the T-Bills. Accordingly, the partnerships
would borrow the funds from GCC by entering into a repo to
maturity with GCC secured by the T-Bill received from
TSMH in the short sale. GCC, of course, did not have a spare
billion dollars lying around to lend to the partnerships. In-
stead, GCC would borrow the funds from TSMH with a repo
to maturity secured by the same T-Bill that TSMH had sold
short to the partnerships and that the partnerships had loaned
to GCC.
The return of the T-Bill to TSMH as collateral cancelled
TSMH’s obligation to deliver the T-Bill promised in the short
sale. Therefore, at the end of the day, GCC would owe TSMH
the proceeds of the loan plus interest and TSMH would owe
GCC a T-Bill. Both obligations would come due at maturity.
GCC would have mirror obligations with the partnerships.
The terms of the repurchase agreements between GCC and
TSMH exactly mirrored the terms of the agreements between
GCC and the partnerships. At the end of the first tax year,
GCC would “roll up” the outstanding interest payments on
the loan by unilaterally adding them to the principal amount
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of the loan. The mirror transactions between GCC and the
partnerships would proceed with a similar interest roll up,
thus allowing the partnerships to take the tax deductions.
GCC set the interest rates on both loans so that the loan
proceeds plus interest would exceed the face value of the
T-Bill by a set amount—$50 per million at the outset. This
money, in effect TSMH’s fee for providing GCC with a tax
deduction to pass on to the partnerships, was the only thing
actually to change hands in the transactions.
The government presented a substantial amount of evi-
dence that the transactions described above never took
place—that GCC engaged in typing, not trading. First, from
July of 1982 to September of 1982, there was no one at
TSMH with whom Manko and Edelman could negotiate the
deals. Vincent Tese and James Sinclair (former partners of
Manko) set up TSMH in June of 1982. Neither, however, ever
injected any capital into TSMH or used the company in any
way. Both denied any kno'vledge of the transactions between
TSMH and GCC. During this period in which nobody
controlled TSMH, Manko and Edelman had their trading
room staff write up trade tickets that made it appear that
TSMH had sold $500 million in T-Bills to GCC and loaned
GCC the money to purchase them. GCC prepared but did not
send confirmations reflecting the terms of these trades.
Edelman admitted that GCC determined the size of the trans-
actions and set the interest rate on the repo without negotiat-
ing with TSMH.
In October of 1982, perhaps in an effort to provide more
substantial documentation of the “trades,” defendant Manko
hired Richard Bandel, a former employee of GCC, to work at
TSMH. At Manko’s instruction, Bandel picked up the con-
firmations that GCC had printed and logged into accounting
ledgers all the trades that had been written up to that point.
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With Bandel in place at TSMH, GCC began sending trading
confirmations to TSMH, and Bandel logged these transactions
into TSMH’s books. The defendants admitted that even with
Bandel in place, GCC did not negotiate the terms of the
transactions with TSMH.
At about the same time that Manko placed Bandel at
TSMH, Tese and Sinclair transferred TSMH, free of charge,
to Robert Maurus and Charles Genovese. Maurus testified
that he did not even learn that Bandel worked at TSMH until
March of 1983. Genovese testified that Manko informed him
that TSMH needed Bandel in order to make TSMH “look like
a real company.”
After the transfer, Maurus and Genovese remained largely
unaware of the details of the alleged transactions. On redirect
examination, Maurus conceded that he understood nothing
about the transactions except that GCC wrote up the paper
and TSMH received a fee. It was not until the Spring of 1983
that TSMH began to send reciprocal confirmation slips to
GCC. By the time these confirmation slips were sent, most of
the underlying T-Bills had already matured and the parties’
obligations had already been settled. Genovese testified that
these confirmation slips were sent for “cosmetic” reasons.
The pace of the transactions’ accelerated in November of
1982. Faced with the need to create almost $100 million in
deductions by the end of the year, Edelman ordered John
Mann, the chief trader for GCC, to write up $500 million and
$1 billion transactions with TSMH. Edelman instructed Mann
to set the price without contacting TSMH. Mann refused, with
the explanation that he did not participate in transactions in
which he did not speak to the other party. Eventually, Mann
agreed to limited participation in the transactions, informing
other trading room employees of the market price for T-Bills
so that the correct amounts could be written on the trade
tickets.
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One GCC trading room employee testified:
Right after the first billion dollars was decided on, it was
just quiet right after, and then Joe Bryant [a trading room
employee] said “this is the one that’s going to get them.”
And John Mann and [another employee] and myself all
agreed to that, and a few minutes later John Mann said,
“it’s gone too far now. The boys have gone too far.”
At other times, trading room employees referred to the bil-
lion-dollar trades as “the straw that’s going to break the
camel’s back.” Employees also discussed the financial reward
for turning Manko and Edelman in to the IRS.
After the first three days of the billion dollar trades, Mann
informed Edelman that he “had legal reservations about these
trades and didn’t want to do them anymore.” Mann testified
that Edelman replied that the trades were “none of [Mann’s]
concern” and “that it was not [Mann’s] job to be policeman
for the world.”
In fifteen days in November of 1982, GCC wrote $25
billion worth of T-Bill repurchase transactions with TSMH.
After that, the pace of the scheme slackened, but GCC con-
tinued to write repurchase transactions until the tax laws
changed in 1984. At the time of the billion dollar trades in
November of 1982, TSMH had $33 in cash, $50 in office ex-
penses, and no telephone bills. TSMH did not even have a
bank account until the end of that month.
Eventually, Barbara Kanter, Edelman’s personal assistant,
opened an account for TSMH. Kanter then transferred mil-
lions of dollars into and out of TSMH’s account. The defense
alleged at trial that this money reflected interest payments
from GCC to TSMH. However, Edelman acknowledged on
cross-examination that he could not correlate any particular
payment to interest owed on any loan. When Maurus and
Genovese learned in the spring of 1983 that Kanter had been
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transferring money into and out of their account, they made
no efforts to stop her. Genovese explained at trial that he felt
the money did not belong to TSMH.
Faced with this powerful evidence that the purported
transactions were shams that never took place, the defense
contended at trial that TSMH had granted GCC discretion to
make trades on TSMH’s behalf, and thus that there was no
need for GCC to seek TSMH’s approval of the terms of the
repo transactions. The defense never presented any direct
evidence of such an agreement apart from Edelman’s testi-
mony that Manko told him that TSMH had granted GCC dis-
cretion to make trades.
The defense further argued that there was nothing strange
about a corporation with no assets making billions of dollars
of loans because it was common in the government securities
markets for undercapitalized entities to engage in highly lev-
eraged, low-risk transactions.
The trial also proceeded on a second front. The government
argued that even if the jury were to determine that the
transactions actually occurred, the transactions were devoid of
nsk and thus lacked economic substance. Accordingly, the
government contended that the transactions could not form
the proper basis for tax deductions. The defense countered
that so long as the repurchase loan represented a real debt,
interest paid on that debt could be deducted even if the
transactions as a whole lacked economic substance. The court
sided with the government and charged the jury that it could
convict if it found either that the transactions did not occur or
that they lacked economic substance.
The trial in this extremely complex matter took four
months. At the close of trial, the jury convicted Manko and
Edelman on all counts. After the jury returned the verdict, the
district court gave the jury a supplemental interrogatory that
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asked the jury to indicate whether it concluded that the
transactions never took place or that the transactions lacked
economic substance. After deliberating briefly, the jury an-
nounced that it had determined that the transactions never
took place. This appeal followed.
DISCUSSION
On appeal, Manko and Edelman principally challenge the
district court’s handling of the trial. They contend that the
court questioned witnesses in a way that suggested disbelief
of the defendants’ position, improperly held an ex parte con-
ference with the prosecutor near the end of the mal, permitted
the prosecutor to make improper comments in summation,
and issued confusing instructions to the jury. Defendants
Suggest that the combined force of these asserted infirmities
denied them a fair trial.
A. The Trial Court’s Conduct
The district judge took an active role in the trial of this
case, asking numerous and probing questions of witnesses.
Such conduct is unquestionably proper—indeed, often re-
quired—in extremely complex cases. United States v. Gurary,
860 F.2d 521, 527 (2d Cir. 1988), cert. denied, 490 U.S. 1035
(1989): United States v. DiTommaso, 817 F.2d 201, 221 (2d
Cir. 1987); United States v. Pisani, 773 F.2d 397, 403 (2d Cir.
1985). However, such questioning carries with it the risk that
the judge will appear partial to one side or the other. In order
to avoid the appearance of partiality, a trial judge should limit
questioning to inquiries necessary to clarify ambiguities,
correct misstatements, or obtain information necessary to
make rulings. United States v. Mazzilli, 848 F.2d 384, 388 (2d
Cir. 1988).
The fact that a judge asks a question the purpose of which
is not so limited will not always require reversal. Judges are
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human, and it is inevitable that in the course of long, com-
Plex, and hotly contested trials, 2 udge may on occasion react
intemperately. A defendant is not entitled to a perfect trial,
only a fair one. United States v. Robinson, 635 F.2d 981, 984
(2d Cir. 1980), cert. denied, 451 U.S. 992 (1981). Our ability
to discern from a cold record whether particular statements of
a trial judge rendered the trial unfair is quite limited. “[I]t is
difficult to glean tone of voice, whether sarcastic or neutral,
facial expression, whether reflecting disbelief or sober
thoughtfulness, or physical demeanor, whether self-contained
or expressing opinion and emotion. Therefore, it is only after
an examination of the entire record that we can come to a
conclusion about the conduct of the district court.” Mazzilli,
848 F.2d at 389 (2d Cir. 1988).
The defendants point to several incidents in the trial that we
quite frankly find disturbing. Nonetheless, after a careful
review of the entire record, we conclude that the district
court’s conduct did not deny defendants a fair trial.
1. The District Court’ s Questioning of Jon Edelman
A district court must show particular restraint in question-
ing a Criminal defendant during the defendant’s direct tes-
timony. At this critical phase of the trial, the court must scru-
pulously insure that its questions do not indicate that the court
doubts that the witness is telling the truth. Mazzilli, 848 F.2d
at 388-89; United States v. Victoria, 837 F.2d 50, 55 (2d Cir.
1988). Impeaching the defendant is the job of the prosecution,
not the court.
Here, the district court vigorously interceded in Edelman’s
tesumony. Most of the court’s questioning took the form of
inquiry into precise details of the transaction. The court re-
peatedly sought to clarify whether GCC had made certain
payments to TSMH in cash or by book entry. While the rele-
vance of this distinction to whether the transactions took
ee
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place or had economic substance is not entirely clear, our
view upon reading the record is that the court’s questions
were aimed at pinning down this factual issue, not at casting
doubt on defendant Edelman’s credibility. Accordingly, we
think this portion of the court’s questioning of Edelman was
proper.
We are more troubled by the court’s questioning of
Edelman with regard to financing arrangements between
GCC and the investor partnerships. At one point, Edelman
compared GCC’s willingness to enter into a repurchase
agreement with an investor partnership to allowing a cus-
tomer to purchase securities on margin. The court asked a
series of questions that undermined the analogy:
[Edelman]: Yes, there is financing here and the best
analogy I could make simply is to a financing on a
margin account where you might have 100 shares of
IBM you paid for, no money in your account, but fully
paid for and you want to buy another 100 shares. You
can do that.
The Court: Yes, you can, but if it’s called you are ex-
pected to pay.
Edelman: If there is a margin call.
The Court: Yes.
[Edelman]: And the same thing is here, if my equity
declines —
The Court: At any time in these whole 2 years we are
talking about, did GCC or TSM ever call upon any of
these partnerships to put money on any of these financ-
ing transactions?
[Edelman]: Can I answer that generically first?
The Court: Any way you want to.
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[Edelman]: When an account at GCC has deficit
equity, that is, that its value is less than the amount that it
has borrowed, it has deficit equity, then GCC would be
in a position to ask for more money. It may ask for more
money, it may not.
The Court: That isn’t my question. This is 1990. We
are seven years down the road of the last transaction. In
any of those two years, ’82 or ’83, did GCC or TSM ever
ask any of these partnerships to put up money such as
you were talking about a margin call in a stockbroker’s
account?
[Edelman]: With respect to the financing repo to
maturity transactions, no other transactions?
The Court: Yes.
[Edelman]: I don’t think so. GCC would be the per-
son who would ask for money and I don’t recall any situ-
ation where that was required.
[The Court]: That is the question I was asking.
By forcing Edelman to concede that GCC never made a
margin call, the court discredited Edelman’s analogy to ordi-
nary brokerage accounts. By undermining Edelman’s testim-
ony in this fashion, the court may have cast some doubt on
Edelman’s credibility. We note, however, that the court’s
questioning related to a collateral issue and that Edelman’s
lawyer, upon resuming questioning, elicited testimony ex-
plaining that GCC would never need to make a margin call
because the securities held as collateral for the repos, the
T-Bills, were by their very nature always increasing in value
as maturity approached. Thus, any doubts raised by the
court’s questions were quickly dispelled. While the court
should not have challenged Edelman’s analogy, since the
challenge reflected as much on credibility as it did on factual
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clarification, we do not think this incident undermined the
fairness of the trial.
2. The Bandel Cross-examination
We are also disturbed by the district court’s conduct during
the cross-examination of Richard Bandel, who testified for
the government. The government’s theory was that Bandel
had been placed in TSMH by Manko to record the paper
transactions in TSMH’s books and that Bandel had no sub-
stantive role in determining the dimensions of the transac-
tions.
The defense sought to discredit the government’s view of
Bandel’s role in several ways. First, the defense asked Bandel
to explain his testimony that Manko had hired him at TSMH
in light of Bandel’s prior statement in an affidavit that some-
one other than Manko had hired him to work at TSMH. Ban-
del, with some prodding from the district court, indicated that
he stood by his testimony in court and that his present recol-
lection was more accurate than that found in his prior affi-
davit. The defense also asked Bandel about his view of the
transactions, perhaps in an effort to show that Bandel had
some role in negotiating the deals:
Q. [The Prosecutor] asked you about the large trades
that occurred in November of 1982.
A. Yes, he did.
Q. And it’s your testimony that you viewed those
trades no differently than any others?
A. Just that I was told—
The Court: By whom?
The Witness: By Joe Bryant, usually the day before I
would get the ticket, that there were large tax trades
going through.
—————
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Q. And it’s fair to say the word “tax trade” was used
openly?
A. Yes.
Q. And that based on your experience on Wall Street
that many trades had a tax component?
Mr. Robinson: Objection.
The Court: This man was a scrivener, he wasn't a
policy maker.
While prosecutor Robinson's objection was well taken, in that
Bandel had not been qualified as an expert, the court’s
observation that Bandel “was a scrivener” was unnecessary
and prejudicial. The government’s theory was that Bandel
was a scrivener, and evidence in the record supports this
view. The district court, however, should not have endorsed
the government’s position.
The court repeated the error moments later:
Q. Did you ever tell Mr. Maurus or Mr. Genovese
that you had any problems with these trades?
The Court: He has told us that when he found there
might be errors, he spoke to Mr.—who did you speak to
about the errors in calculating the fees?
The Witness: The financing, Joe Bryant.
The Court: And Mr. Bryant and you got together and
corrected whatever errors?
The Witness: Yes.
| Q. My question was, did you ever tell Mr. Maurus or
Mr. Genovese, when they took control of TSM Hold-
ings, that you had any problems or concerns about these
trades?
The Court: What kind of problems are you talking
about? The man was a scrivener. That’s the third time I
repeated it. He knew nothing about the underlying
transaction, and you’re not going to ask questions to give
the inference that he did when he has told you repeatedly
he did not know.
The court thus explicitly and repeatedly endorsed the gov-
ernment’s view of Bandel’s role. Such a breach of impartial-
ity is a matter of grave concer.
We cannot, however, conclude that the court’s conduct
denied Manko and Edelman a fair trial. First, defendants did
not argue to the jury that Bandel negotiated the transactions.
In closing argument defendants all but adopted the court’s
characterization, impeaching the accuracy of Bandel’s tes-
timony by stressing that after leaving Wall Street, Bandel
went to work as a part-time starter at a golf course. Thus, de-
fendants do not really dispute the accuracy of the scrivener
label.
Second, the court properly instructed the jury that the jury’s
view of the evidence controlled, regardless of what the court
Said:
With respect to factual matters, it is your recollection
that controls. Nothing that counsel for either the
government or the defendant may have said with respect
to matters of evidence, either in their openings or in their
summations, is evidence in this case; nor are any
remarks that I may make during the course of this
charge, or have made during the course of the trial—hat
is not evidence.
* * 5
I remind you again that nothing I may have said, even
my questions to witnesses during the trial when they
were on the stand, those questions should be given no
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undue weight for their sole purpose was to clarify and
aid you in understanding what the content of the
testimony was to be. So you are to place no undue
weight, one way or another, on the fact that I may have
asked questions of witnesses.
In light of this extensive instruction and the fact that the
court’s statement concerned what proved to be an uncontested
issue, we do not think that the court’s error denied Manko and
Edelman a fair trial.
In sum, our review of the transcript confirms that on a few
occasions the court crossed the line in questioning witnesses.
In the context of a four month trial, we think the court’s con-
duct did not indicate to the jury that the court believed that the
prosecution should win. Accordingly, we reject defendants’
contention that the trial court’s conduct denied them a fair
trial.
B. The Ex Parte Conference
Towards the end of the government’s summation, one
prosecutor initiated a conference with the district court, with-
out the defense team. The conference was transcribed, but the
district court sealed the record of the conference and refused
to unseal the transcript until after the government’s rebuttal
summation. In this ex parte conference, the prosecutor ad-
vised the district court of his plan to use a chart in the rebuttal
summation:
The Court: What is it you have handed me, Mr.
Cleary?
Mr. Cleary: Judge, I just handed you a document I
typed up headed “Excerpts of testimony.” It lists
witness’s names and either quotations or paraphrases of
their testimony. It’s what I propose to use. It’s a mockup
of a chart I propose to use in my rebuttal summation.
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I bring this to you ex parte because I didn’t want to let
the defense know at this time before they sum up exactly
what I am proposing to do in my rebuttal and I did want
to apprise the court that I am planning on doing this so
that your Honor could allot whatever time is necessary
between the end of the last defense summation and the
beginning of the rebuttal summation should there be
objection to this. Because at that time I propose to give
the defense a copy of this mockup which contains
references to the page of the transcript.
I should add, Judge, if you think it’s more appropriate
to disclose this information to them now, although I
prefer not to I, of course, would go along with that.
The Court: No, I don’t think you should disclose it.
What I will do is I will check the places that you expect
to use quotations or summations of testimony with the
record so I will be in a position to rule if there are ob-
jections to your use.
Mr. Cleary: Thank you, Judge.
The Court: All right.
At the close of the defense summation, the government in-
formed the defense of its intent to use the chart on rebuttal,
and the court allowed the defense forty-five minutes to review
the twenty-eight quotations and paraphrases in the chart for
accuracy. Defendants objected to the use of the chart and
requested surrebuttal, but did not point to any specific inac-
Curacies in the chart. The court overruled defendants’ objec-
tion and denied the request for surrebuttal. On appeal, the de-
fendants assert that the ex parte conference denied them due
process.
We note at the outset our inability to fathom why the
prosecutor would jeopardize a four month tnal with a wholly
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unnecessary ex parte conference. Such conferences “should
not be conducted except in extraordinary circumstances.”
United States v. Walsh, 700 F.2d 846, 858 (2d Cir.), cert.
denied, 464 U.S. 825 (1983). No such extraordinary circum-
stances are present here.
The government lamely contends that the conference was
for a proper purpose—to advise the district court of the gov-
ernment’s plan to use a chart so that the court could allot
proper time for argument between the defense summations
and the government’s rebuttal summation. But if that were all
that the government wished to accomplish in the meeting,
then there would have been no need to show the court the
chart the government planned to introduce. The government
could have indicated, with defense counsel present, that it
likely would have a chart in rebuttal which would require
prior review. The only purpose for showing the court the
precise quotes the government wished to use was to enable
the court to review the chart for accuracy before the defense
had an opportunity to present any arguments to the court. In
short, the prosecution initiated this ex parte proceeding in a
blatant attempt to win a tactical advantage, to get a “leg up.”
Unhappily, the district court went along with the prosecution.
That this ex parte conference was improper and unneces-
sary does not, of course, establish reversible error. United
States v. Persico, 349 F.2d 6, 13 (2d Cir. 1965). Rather, “[t]he
fact that such a meeting occurs . . . does not require reversal if
it does not affect the fairness of the trial.” Walsh, 700 F.2d at
858: see also United States v. Moten, 564 F.2d 620, 630 (2d
Cir.), cert. denied, 434 U.S. 959 (1977).
Defendants do not point to any inaccuracies in the chart.
Nor do defendants identify any way in which the chart went
beyond the scope of proper rebuttal. Cf. United States v.
Giovanelli, 945 F.2d 479, 493-96 (2d Cir. 1991) (Newman, J.,
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concurring). Defendants’ contention that a chart prepared
before the defense summation is necessarily beyond the scope
of rebuttal is unpersuasive. The quotations reflected on the
charts were all central to the case. The government could
easily predict that defense summation would tread the same
ground as the quotations. Thus, we are convinced that the
district court acted properly in allowing the government to
use the chart.
Of course, the propriety of using the chart cannot be the
measure of whether the ex parte proceeding constituted re-
versible error. Otherwise, the fact of an ex parte proceeding
would be irrelevant so long as the court ultimately made the
right ruling. Such a rule would not properly reflect our deep
distrust for one-sided proceedings. Here, however, two facts
convince us that reversal is not required. First, because the
chart was clearly accurate and within the scope of rebutial,
there is no reason to believe that the district court would have
ruled differently absent the ex parte conference. Moreover,
even if the conference did influence the judge’s decision to
allow the chart, in the context of this four month trial, we
doubt that this chart highlighting damaging testimony played
even a minimal role in influencing the jury verdict. The
prosecution presented substantial evidence that the transac-
tions with TSMH never occurred. The chart at issue did not
present any new information or any information that could
not have been conveyed easily to the jury without the chart.
Accordingly, we conclude that this highly improper ex parte
conference does not constitute reversible error.
C. The Jury Instructions
Defendants raise a series of objections to the court’s in-
structions to the jury. Principally, defendants argue that the
court should have given all of the proposed charges submitted
to the court by the defense on the afternoon of the charging
A-21
conference. Most of the proposed charges concerned tan-
gential legal issues that the government never disputed. In this
lengthy trial, the court properly avoided burdening the jury
with this extraneous information. Accordingly, we find most
of defendants’ contentions meritless. Defendants do raise
three objections to the charge that warrant discussion.
1. Ratification
The defense argued at trial that the transactions between
TSMH and GCC were real and binding even if TSMH did not
grant discretion to GCC to perform trades, because TSMH
subsequently ratified GCC’s trading. The district court, as
part of a general charge on defense contentions, instructed the
jury that “the defendants contend that TSM Holding ratified
all transactions by subsequent conduct.” The defense
requested an additional instruction defining ratification. The
court refused to give the proposed instruction. Defendants
assert this refusal constitutes reversible error. We disagree.
A court may properly refuse to give a charge that fails to
accurately state the law. United States v. Paccione, 949 F.2d
1183, 1200 (2d Cir. 1991), cert. denied, 112 S.Ct. 3029
(1992). Here, defendants’ requested charge stated that TSMH
could ratify the acts of GCC “either by sending back confir-
mations to GCC, by failing to object to the transactions after
TSMH received confirmations from GCC, or by any other
conduct, such as recording the transactions as if they were
done, indicating an intention to be bound by the transactions.”
The problem with this proposed charge is that under New
York law, “[{a]n agent’s acts that are not valid unless
performed pursuant to writing can only be ratified in writing.”
Weston Associates, Inc. v. Niagara Properties, Inc., 130
A.D.2d 964, 965, 516 N.Y.S.2d 381, 382 (4th Dept. 1987).
Here, the acts of the purported agent, GCC, contracting for
the purchase of securities, would not be valid absent “some -
A-22
writing signed by the party against whom enforcement ‘is
sought.” N.Y.U.C.C. § 8-319(a). Accordingly, TSMH could
ratify GCC’s authority only through a writing. The defen-
dants’ proposed instruction suggesting that TSMH could rat-
ify through any conduct indicating an intent to be bound by
the transactions failed to state New York law accurately. The
district court correctly refused to give the proposed instruc-
tion.
2. Economic Substance
Defendants claim that they were prejudiced by a reversal
by the trial court during the course of the trial on the issue of
the proper definition of economic substance. On the eve of
trial, the court ruled that if the transactions were not
“economically substantive indebtedness,” the interest would
not be deductible. Defendants claim that the trial court, at this
time, rejected a two-part test for economic substance ad-
vanced by the government, instead adopting an open defini-
tion of economically substantive indebtedness, but then re-
versed itself in its charge to the jury by adopting the two-part
test previously rejected. The two-part test with which the
court charged the jury stated, in accordance with our decision
in United States v. Atkins, 869 F.2d 135, 139-40 (2d Cir.),
cert. denied, 493 U.S. 818 (1989), that a transaction lacks
economic substance if it lacks a reasonable possibility of
profit and lacks market risk. Defendants contend that the
ambiguous term “economically substantive indebtedness”
adopted on the eve of trial would encompass purely formal
indebtedness, and that they relied on this notion in presenting
their case. The defendants claim that this reversal constitutes
a- violation of the law of the case doctrine and they were
prejudiced by it, since they relied on the earlier ruling in
formulating their trial strategy.
| ii
A-23
While a trial court’s reversal of its own ruling during the
course of a trial may raise serious issues of prejudice, see
United States v. Uccio, 940 F.2d 753, 758 (2d Cir. 1991), we
doubt whether such concerns are raised here. Our review of
the trial record suggests that, at the outset of the trial, the
judge’s ruling was limited to acknowledging that the question
of economic substance was an issue in the case after first
saying off the record that it would not be an issue. The judge
did not provide the parties with a precise definition of
economic substance until her instructions to the jury, when
she employed the two-prong test of Atkins. On the eve of trial,
the judge simply noted that the defense objected to the
government discussing profit motive and market risk, but
stated to the parties that in establishing whether or not there
was economically substantive indebtedness, the parties may
present “whatever factors you believe are relevant in order to
reach that legal conclusion... .” In light of this, the eventual
jury charge defining economic substance as profit potential or
market risk does not appear to us to constitute a reversal of a
prior decision.
In any event, we need not decide whether there was a
prejudicial reversal of a prior ruling of law by the trial court.
In the special interrogatory, the jury found that the transac-
tions “were fictitious and did not take place.” That finding
rendered the jury’s understanding of the term “economic
substance”’ irrelevant to the outcome.
3. Prearranged Transactions
Defendants contend that the court’s charge implied that
prearranged transactions are necessarily fictitious. Defendants
argue that since all repurchase transactions are in some sense
prearranged—in that the borrower sells the security to the
lender and agrees in advance to repurchase the security at a
A-24
later date for a set price—the court’s charge effectively forced
the jury to conclude that the transactions were fictitious.
Defendants focus particularly on the court’s instructions
with respect to the knowledge element of the filing false re-
turns charge. The court advised the jury that the government
did not have to prove actual knowledge. Instead, the court
stated:
you may find that a defendant knew that the transactions
were a@ Sham or without economic substance if you find,
1, that the defendant you are considering was aware of a
high probability that the transactions did not take place
or were prearranged and, 2, that the defendant acted
with deliberate disregard for how or whether those
transactions were carried out with a conscious purpose to
avoid learning the truth on this subject. (emphasis added)
The defendants argue that this charge equated transactions
that “did not take place” with transactions that “were prear-
ranged.”
However, we think the more natural reading of the above
passage is that it equates transactions that “did not take place”
with transactions that “were a sham” and equates transactions
that “were prearranged” with transactions “without economic
substance.” Viewed in this light, we doubt the court’s
instructions prejudiced defendants. Elsewhere in the instruc-
tions the court advised the jury that “transactions may be
arranged in an attempt to minimize taxes” and expressly
stated that in order to lack economic substance, a transaction
must “lack[ ] a reasonable possibility of profit apart from tax
deductions, and... lack[ ] market risk.”
More importantly, even if the charge confused the jury on
this point, we are unable to see how this confusion prejudiced
defendants, for the same reason that we find that defendants
could not have been prejudiced by the trial court’s alleged
aaa a a
A-25
reversal on her instructions on economic substance. As noted
above, the jury expressly found that the transactions “were
fictitious and did not take place.” This response to the special
interrogatory removed the economic substance issue from the
case. Any lingering confusion about whether prearrangement
was synonymous with a lack of economic substance was ir-
relevant to the verdict. Accordingly, we reject defendants’
challenges to the jury instructions.
Finally, defendants assert that the government failed to
produce sufficient evidence to support the conviction and that
prosecutorial misconduct in summation denied them a fair
trial. We have considered these and the remainder of defen-
dants’ arguments and find them to be without merit.
CONCLUSION
The trial in this case challenged the resources of the district
court. Through the months of testimony and the thousands of
documents, the district court grappled with vigorous and
experienced defense counsel and diligently struggled to
ensure that the jury could follow the evidence and render a
fair verdict. Not unexpectedly in a long trial, the court made
some mistakes, and defendants did not receive a perfect trial.
However, our thorough review of the entire record convinces
us that the defendants did receive a fair one.
Affirmed.
ha
B-1
UNITED STATES COURT OF APPEALS
FOR THE
SECOND CIRCUIT
UNITED STATES COURT OF APPEALS
FILED
DEC 4 1992
ELAINE B. GOLDSMITH, CLERK
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 4th day of December one thousand
nine hundred and ninety-two.
UNITED STATES OF AMERICA,
Appellee, DOCKET 91-1732
:* NUMBER: 91-1733
BERNHARD FRED MANKO, also
known as FRED; and JON EDELMAN,
Defendants-Appellants.
A petition for rehearing containing a sugggestion that the ac-
tion be reheard in banc having been filed herein by Appellant
Bernhard Fred Manko
Upon consideration by the panel that decided the appeal, it is
Ordered that said petition for rehearing is DENIED.
It is further noted that the suggestion for rehearing in banc
has been transmitted to the judges of the court in regular ac-
tive service and to any other judge that heard the appeal and
that no such judge has requested that a vote be taken thereon.
s/
ELAINE B. GOLDSMITH,
Clerk
by: s/
Chief Deputy Clerk
C-1
United States District Court for
SOUTHERN DISTRICT OF NEW YORK
DOCKET NO. S89CR91-01 (MJL)
United States of America vs.
DEFENDANT BERNHARD F. MANKO
JUDGMENT AND PROBATION/COMMITMENT ORDER
In the presence of the attorney for the
government the defendant appeared in per- [MonTH DAY YEAR
son on this date ROBERT CLEARY ll 25 91
COUNSEL — WITHOUT COUNSEL
However the court advised defendant of right
to counsel and asked whether defendant desired
to have counsel appointed by the court and the
defendant thereupon waived assistance of
counsel.
X_ WITH COUNSEL
GERALD R. LEFCOURT
(Name of Counsel)
PLEA GUILTY, and the court being satisfied
that there is a factual basis for the plea,
__. NOLO CONTENDERE,
> ___. NOT _ GUILTY
FINDING & There being a finding/verdict of
JUDGMENT NOT GUILTY. Defendant is discharged
_X_ GUILTY. Defendant has been convicted
as charged of the offense(s) of
TITLE 21, SECTION 371
TITLE 26, SECTION 7206 (2)
TITLE 26, SECTION 7206 (2)
TITLE 26, SECTION 7206 (1)
DOCKETED AS
A JUDGMENT #91, 2604
ON 12/5/91
_
SENTENCE
OR
PROBATION
ORDER
SPECIAL
CONDITIONS
OF
PROBATION
ADDITIONAL
CONDITIONS
OF
PROBATION
C-2
The court asked whether defendant had
anything to say why judgment should not be
pronounced. Because no sufficient cause to the
contrary was shown, or appeared to the court,
the court adjudged the defendant guilty as
charged and convicted and ordered that the
defendant is hereby committed to the custody
of the Attorney General or his authorized
representative for imprisonment for a period of
COUNT I THREE YEARS IMPRISONMENT.
A FINE OF $250,000.00 $50.00 SPEC. ASS.
FEE
COUNT EIGHT THROUGH TWENTY-
EIGHT ONE YEAR IMPRISONMENT AND
A $50.00 SPEC. ASS. FEE ON EACH COUNT,
SENTENCES OF IMPRISONMENT ARE
CONCURRENT WITH EACH OTHER AND
CONCURRENT WITH COUNT I.
COUNT THIRTY-ONE ONE YEAR IMPRIS-
ONMENT A FINE OF $100,000.00 $50.00
SPEC. ASS. FEE. TO RUN CONSECUTIVE
TO SENTENCE ON COUNTS ONE AND
EIGHT THROUGH TWENTY-EIGHT.
COUNT THIRTY-TWO ONE YEAR IMPRIS-
ONMENT A FINE OF $100,000.00 $50.00
SPEC. ASS. FEE TO RUN CONSECUTIVE
TO SENTENCE ON COUNTS ONE, EIGHT
THROUGH TWENTY-EIGHT, AND
THIRTY-ONE.
In addition to the special conditions of probation
imposed above, it is hereby ordered that the
general conditions of probation set out on the
reverse side of this judgment be imposed. The
Court may change the conditions of probation,
reduce or extend the period of probation, and at
any time during the probation period or within
aii
C-3
a maximum probation period of five years per-
mitted by law, may issue a warrant and revoke
probation for a violation occurring during the
probation period.
The court orders commitment to the custody
of the Attorney General and recommends,
COMMITMENT
RECOMMEN.- It is ordered that the Clerk
DATION submit a certified copy of the
judgment and commitment
to the U.S. Marshal or other
| qualified officer
MICROFILM
DEC 03 1991 9:00 AM
SIGNED BY
_x__ US. District Judge
U.S. Magistrate
» HON. MARY JOHNSON LOWE
Date _11-26-91
US. DISTRICT COURT
FILED
DEC 2 1994
D-1
ORIGINAL PAGE 1
United States Court of Appeals
FOR THE SECOND CIRCUIT
Each motion must be
accompanied by a
UNITED STATES OF AMERICA, supporting affidavit.
APPELLEE, 91-1732, 1733
Vv. Docket Number
BERNHARD FRED MANKO and JON Pai oe
EDELMAN, :
state type of motion
for Stay of the
Issuance of the
Mandate
Use short title
DEFENDANTS-APPELLANTS.
MOTION BY: (Name, address and tel. no. 4 law firm and of
attorney in charge of case)
Earl Nemser, Esq.
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Has consent of opposing counsel:
A. been sought? &) Yes O) No
B. been obtained? C) Yes x No
Has service been effected? &) Yes O) No
Is oral argument desired? UO Yes OU No
(Substantive motions only)
Requested return date:
(See Second Circuit Rule 27(b))
Has argument date of appeal been set:
A. by scheduling order? O Yes O) No
B. by firm date of argument notice? C) Yes O) No
C. If Yes, enter date: not applicable
Judge or agency whose order is being appealed:
D-2
UNITED STATES COURT OF APPEALS
FILED
DEC 10 1992
ELAINE B. GOLDSMITH, CLERK
SECOND CIRCUIT
OPPOSING COUNSEL: (Name, address and tel. no. of law firm
and of attorney in charge of case)
ROBERT CLEARY, AUSA
Office of the United States Attorney
One St. Andrew’s Plaza
New York, New York 10007
(212) 791-1967
EMERGENCY MOTIONS, MOTIONS FOR STAYS & INJUNC-
TIONS PENDING APPEAL
Has request for relief been made below? JL) Yes LC) No
(See F.R.A.P. Rule 8)
Would expedited appeal eliminate
need for this motion? LJ Yes LJ No
If No, explain why not:
Will the parties agree to maintain
the status quo until the
motion is heard? CL Yes LO No
Brief statement of the relief requested:
Defendants-Appellants seek a 90-day stay of issuance of the
Mandate pending application for a writ of certiorari.
Complete Page 2 of this Form
By: (Signature of attorney)
/s/ Earl Nemser
Signed name must be printed beneath (by CLS)
Earl Nemser
Appearing for: (Name of Party)
Appellant or Petitioner:
CJ Plaintiff &) Defendant
D-3
Appellee or Respondent:
C) Plaintiff O Defendant
Bernhard Manko
Date
10/12/92
ORDER
Kindly leave this space blank
IT IS HEREBY ORDERED that the motion be and it
hereby is granted dented
UNITED STATES COURT OF APPEALS
FILED
DEC 22 1992
ELAINE B. GOLDSMITH, CLERK
SECOND CIRCUIT
/s/
/s/
/s/
12/22/92
T. 1613
A. I said, “Don’t even show me those tickets, I don’t want
to be hauled out of here in handcuffs.”
Q. Did Mr. Bryant reply?
A. Hesaid, “I’m just an employee, and I’m showing you these
tickets.” and I said, “Well, I don’t like seeing tickets anyway.”
Q. I want to move onto another subject now.
Had you received any tax benefit from the TSM tax
transactions?
A. Had I received any?
Q. Right.
A. I was a participant in some limited partnerships.
Q. Which ones — let’s focus on 1982 and ’83?
A. In 1982, I was in a limited partnership called AIP, and
in a limited partnership called HTA, Hedge Trading Associates,
and in one called AHF, Arbitrage Hedge Fund, and joined one
in 1982 called Midopco.
Q. Were these all Manko-Edelman partnerships?
A. They were.
Q. Did you receive any tax deductions from your involve-
ment with these partnerships in 1982 and 1983?
A. I did.
Q. In what amounts?
A. My accountant said that I received a hundred thousand
tax deduction in ’82, and 83, a little more than
T. 1866
A. Yes, I recall that.
Q. Are you able to say what year that happened in?
A. What I’m able to say, I could tell you what I’m able to
say, but in the negative sense, I am not able to say anything but
they were a batch of very large tickets that Joe Bryant held up
that had some cancelled and corrects associated with them. I
can't say when he held those up.
Q. Even the year?
A. If there was another batch of large tickets in another year,
I could have confused it.
Q. Are you able to tell us, or do you know, whether those
tickets had anything at all to do with the trades that are the
subject of this lawsuit?
A. I cannot.
Q. Was the comment made by you intended to communicate
a serious message when you saw those trades?
A. It was to rattle Joe Bryant’s cage.
Q. You were getting at him, I think?
A. He held up those tickets, I don’t like to see tickets, he’s show-
ing me tickets, and he had a line from time to time, “I’m only
an employee, I’m only an employee,” so I said the words, “Don’t
show me your tickets,” or “those tickets,” they’re not going to
haul me out of here in handcuffs.”
Q. With the intention to rattle his cage?
E-3
T. 6374
reiterate, we think the charge the court gave is perfect under
Cheeks, but the defense would like the following language added
and we do not object. The bottom of page 62, the last sentence
begins “a person who acts” and we will be adding something
at the eid. I will read the whole sentence, “a person who acts
on a belief or an opinion honestly held is not punishable under
the statute merely because that honest belief turns out to be in-
correct or,” substitution now, “even if you determine that his
belief was unreasonable.”
MR. NEMSER: On ccasent.
THE COURT: Put a pin in that for a minute.
Let’s talk about what this court was doing in Cheeks.
The court first said that the government must prove beyond
a reasonable doubt that the defendant knew of the duty, in our
case, to deduct interest only on genuine indebtedness. Paraphras-
ing the Cheeks court, it went on to say that if the government
proves actual knowledge of this duty beyond a reasonable doubt
it has satisfied the knowledge component of wilfulness. However,
the government must negate the defendant's claim of either ig-
norance of the law or because of a misunderstanding of the law
he has a good faith belief that he was not violating the law.
Now, as I interpret that distillation, that the
* * *
T. 6428-29
Where is this discretion? Oh, Mr. Manko told me that there was
discretion. The partners in crime, the partners in this fraud —
Mr. Edelman sits there and tells you that Fred Manko told him
he had discretion. But then we put the witnesses on the stand
who could have given discretion. Mr. Sinclair, did you give
E-4
discretion? No. Mr. Tese, did you give discretion? No. Mr.
Maurus, vou must have given discretion. No. Oh, then it must
have been" you, Mr. Genovese, you gave the discretion. No.
Who gave this discretion? Is any authorization form filled out
by TSM Holding, by anyone at TSM Holding over this period?
No. You know they had them. They have the authorization forms
from other clients. Why don’t they have one for TSM Holding
showing this discretion to do whatever we want to do? It didn’t
exist. Do they have an authorization form? No. Do they have
a discretion form? No. Do they have a contract? That is what
they have. They have a contract between TSM Holding and
Government Clearing Company saying this is what we can do.
We, GCC, at our own discretion, give billions of dollars from
you, TSM, and we will set the interest rates.
Where in the real world does that happen? Try on your leisure
time and go to the bank and say, ladies and gentlemen, Mr.
Citibank, Mr. Chemical Bank, Ms. Bank of America, I am going
to borrow money from you. I am going to tell you how much
I am borrowing from you and — and here is the trick — I am
going to set the interest rate. Who would ever do that? Does
that happen in the real world?
It only happens in the Manko world, in the land of Edelman.
That is the only place it happens. They do it without a written
contract. They do it without powers of attorney. They do it
without discretion forms. Are these understandings written down
anywhere? No. Mr. Edelman tells you the understandings are
in Fred Manko’s head. That is where it is.
Mr. Edelman says, but you didn’t know this happened because
there was this account opening document. TSM filed an account
opening document. First of all, even if they did, so what? Does
that account opening document have discretionary language in
it? No. It says we opened an account. But then he tells you TSM
has this account opening document. Mr. Edelman, where is the
document? Oops, we lost it. Our biggest customer, we sold 27
billion dollars in securities for them, we borrowed 13 billion
dollars, the only document we have, we lost it.
Would any businessman or businesswoman act the way these
guys did? Would any businessman or woman act the way Maurus
or Genovese did? Of course not. What if a disagreement arose
between TSM and GCC? How do you solve it? What do you
do? You put on Mr. Manko and Mr. Manko
T. 6516
that, he doesn’t even say I assumed, he says Mr. Bandel was being
supervised by Ed Cohen. He knows it doesn’t make any sense
that they don’t talk to this guy.
Remember redirect, I got up and said, wait a minute, did you
tell Mr. Bandel he was being supervised by Ed Cohen? No. Did
Ed Cohen tell you he was supervising Mr. Bandel? No. Did
Bandel tell you that Ed Cohen was supervising him? No. Did
you ever see the two of them talking? No. Why do you say that?
He finally backs up, and says, yes, I guess I have no reason to
say that. Why did he say that? Bandel told you that. He said
Cohen was not his supervisor. He said Manko was.
Cohen told I you he didn’t supervise Dick Bandel. How is any
of this real? You constantly have to ask yourself against these
facts, do real business men and women operate this way? What
entities out there lend 13 billion dollars in this fashion?
I keep saying that number because I think one gets numb to
the numbers involved here. That would have made TSM Holding
one of the largest loan institutions in this country. 13 billion
dollars in less than six months. That's a tremendous operation.
Who are these guys? They don’t keep records.
The one guy they got keeping records, he doesn’t know what
he’s doing. He tried to explain this to you. He
T. 6579 SEALED
want to apprise the court that I am planning on doing this so
that your Honor could allot whatever time is necessary between
the end of the last defense summation and the beginning of the
rebuttal summation should there be objections to this. Because
at that time I propose to give the defense a copy of this mockup
which contains references to the page of the transcript.
I should add, Judge, if you think it’s more appropriate to
disclose this information to them now, although I prefer not to
I, of course, would go along with that.
THE COURT: No, I don’t think you should disclose it. What
I will do is I will check the places that you expect to use quota-
tions or summations of testimony with the record so I will be
in a position to rule if there are objections to your use.
MR. CLEARY: Thank you, Judge.
THE COURT: All right.
(Continued on next page)
T. 6612
are holding money for them. What are these guys talking about?
He files a tax return. He has $33 in cash, 5 billion dollars in
assets. Talk about being liquid cash poor. This is ridiculous. What
company is like that? No company is like that.
The evidence of this fraud is overwhelming. GCC and TSM
_are both controlled by Manko and Edelman. They are the
emperors, ladies and gentlemen, but we are in the Federal Court
today and all of us are equals here. :
E-7
You need to look at Manko and Edelman with clear eyes. They
are not the emperors here. Look at Manko and Edelman and
you tell them that this was a fraud. You know it was a fraud
and they knew it was a fraud.
The emperor has no clothes. Mr. Manko, Mr. Edelman, the
emperor has no clothes.
Thank you.
THE COURT: Jurors, we will take a recess and then we will
begin the summation of Ms. Chepiga.
(Recess)
T. 6824
I won't have time, because I am sure my secretary will not be
happy if I tell her to do this page over tonight. But if you will
just make that change on yours.
MS. HOENIG: The first sentence of that paragraph, yester-
day we discussed the change to be made there. Just to be clear,
was the change made or not made?
THE COURT: Yes. If I can get upstairs in time you might
have a clean sheet for tomorrow. I will try, but I can’t promise it.
See you tomorrow.
Fa
MR. RITHOLZ: Your Honor, I just was shown the transcript
for January 29, yesterday, which starts out pages 6578 and 6579
sealed.
MR. CLEARY: That was my conference with your Honor.
I don’t mind having that unsealed as soon as Mr. Ritholz
completes his summation.
E-8
THE COURT: All right. Everything I do is on the record one
way or another. You will see it as soon as you are finished.
MR. RITHOLZ: You don’t think I should know it now before
I finish summing up?
THE COURT: No.
MR. RITHOLZ: I won't suffer a prejudice.
THE COURT: The prejudice you will suffer will not be caused
by what is sealed, all right?
* * .
T. 6960-61
MR. CLEARY: From the record, the facts the evidence, the
testimony under oath of the witnesses.
Mr. Ritholz told us during his summation that the fee was
negotiated — the fee was negotiated.
What facts, what evidence, what testimony did he rely on
to reach that conclusion? Well, the fee changed, he said — the
fee changed. It went from 50 to 5 to 10. Does that mean it was
negotiated? Different size trades were done. They weren't
negotiated. The facts, the evidence, the testimony shows the fee
was never negotiated.
How do we know that? All of the decisions would be made
at the Manko/Edelman entities. When we talk about the fee
a little bit later we are going to see the fee computed by the
difference between the interest income on the bill and the in-
terest expense on the repo. Information that you saw during the
course of this trial was typed into the confirmations and someone
at the Manko/Edelman offices determined what figures to put
on those confirmations, not ‘TSM, not negotiated.
E-9
Is this the way real businessmen act, million dollar transac-
tions, billion dollar transactions, no one knowing what is going
on, supposedly at risk, having $33 in cash? We have heard a lot
about big bucks in this case and I think we all tend to get a
little blinded about the type of money we are talking about here.
During the course of the last 3 and a half months did you ever
stop to think what a billion dollars is, a billion dollars? If I were
to hand you a dollar bill every second of every minute of every
hour of every day in the entire year, and I never stopped doing
that, do you know how long it would take me to give you 1 billion
dollars? Any idea?
A JUROR: About 30.
MR. CLEARY: Close, 32 years.
We have in this case, we know, 5] billion dollars in transac-
tions. Mr. Krause told us that. Adding up ’82 and ’83, do the
multiplication, it would take me 1600 years to pass that money
over and that is what these defendants did by banging some keys
on a typewriter — Maurus and Genovese not even caring what
is written with that typewriter and in many instances not even
knowing about billion dollar transactions.
There was some discussion by Mr. Ritholz today about an emo-
tional disability that Mr. Maurus had. Mr. Maurus is not emo-
tionally disabled. Mr. Genovese is not emotionally disabled. They
are not dumb. They are not stupid. They are co-conspirators
with the defendants. They are people that got in bed with the
_ defendants and were willing to do anything the defendants
wantec as long as Maurus and Genovese made their money, and
they didn’t care what was written on the paper. They never
reviewed it as
T. 7040
how much am I going to pay. That is a fee.
E-10
Now, they try to dress it up and say, oh, it’s a markup just
like Mr. McConnon was testifying about, two different things.
This fee is a purchase price. It’s the amount the defendants deter-
mined they would pay in order to get the amount of deductions
they determined they wanted, buying tax losses, just like you
would buy a loaf of bread at the store. The only difference here
is the defendants determined the size of the loaf and how much
they are going to pay for it.
How do we know they determined how mvch they were go-
ing to pay? We looked at this earlier. They made all the deci-
sions for both sides.
What do they want you to believe? That it’s legal to buy tax
losses? If it’s legal to buy and sell tax deductions, there would
be a “Losses Are Us” franchise on every street corner in this city
and no one would pay a dime in taxes. If it’s legal to pay a
predetermined fee for a four-to-one write-off, why don’t they
reveal anywhere that that is what they are doing? If it’s legal
to do what the defendants did, you, ladies and gentlemen, can
eliminate the tax liability of our entire country, and you can
do it like that. You go back to deliberate, divide yourselves into
2 groups, jurors in the back row, jurors in the front row.
Jurors in the back row, short, short sale, you
* * *
T. 7042
Ladies and gentlemen, if you really think you can do that,
then acquit the defendants. You should acquit the defendants
if you think you can do that. But if you think what I just sug-
gested is absolutely ridiculous, and the defendants know that,
then it’s your duty to convict them.
MS. CHEPIGA: Objection.
THE COURT: Overruled.
MR. CLEARY: Their scheme is even more absurd than the
one I just suggested to you. The only difference between what
they did and what I suggested to you is the cosmetics. They had
more paper. They had more ways to hide things. They lied.
One final point about the fee. The way to hide the fee was
to rig the transactions so that GCC’s interest expense was always
a little higher than the income it got on the bill. Remember,
they controlled everything so they can put everything down there.
But the very nature of rigging this transaction this way to get
the fee — interest expense versus the interest income — shows
you that is a phony transaction. I will tell you why.
Remember how Sawyer, Carlock, Mann and even James
McConnon, the expert, described real trades, real repurchase
agreements. You are on the horn. You are calling around. You
finally get a price one place. You try two or three others, you
get the best price, call around for financing on
T. 7126
winks or nods at me.” The defense pointed out that Mr. Mann
said that everything was aboveboard. There is no question about
that. He said it. It’s in the record. It’s just not believable.
Mr. Mann was not being honest with himself nor with you
when he talked about his knowledge of the fraud. He fell prey
to one of the most common of human reactions, protect thyself,
or as we used to say in the old neighborhood, CYA. He wasn’t
willing to admit what he knew. Think about it though. Mann
was the one who told you how his trading room employees used
to refer to these as paper transactions, not having another
substance, cosmetics. When Joe Bryant held up the trading
documents John Mann expressed concern about being hauled
off in handcuffs. “Don’t even show me those tickets, I don’t want
to be hauled out of here in handcuffs.”
E-12
And he tried to justify that by saying, well, I was just trying
to rattle Joe Bryant’s cage. It was a joke. If it was a joke, why
would it rattle Joe Bryant’s cage who was worried about this,
the Joe Bryant that we hear replied to Mr. Mann by saying, I
am just an employee. I am doing my job. In essence, don’t bother
me with anything going on here. I am not responsible for this.
I am just an employee.
By the way, Mr. Ritholz had pointed out that
* . .
T. 7169 CHARGE
To find a defendant guilty of the crimes charged, in addition
to all of the other elements that I wi# instruct you about, you
need only find either, one, that the transactions were a sham,
that is, that they never occurred, or the alternative, two, that
the transactions lacked economic substance. In other words,
either one of these alternatives standing alone, in addition to
the elements of the particular crime charged, is sufficient to
prove that the transactions were fraudulent for tax purposes and
did not give rise to valid tax deductions.
If vou find beyond a reasonable doubt that TSM Holding Cor-
poration did not sell the securities to the defendant companies,
or did not lend the money to the defendant’s companies for the
purchase of these securities, I instruct you that you may find
that the transactions were a sham or paper tax shelters with form
but no substance or business purpose, and therefore did not
represent genuine indebtedness.
Now, let’s look at the alternative of the government’s
contentions.
In the alternative, if you find beyond a reasonable doubt that
the transactions were without economic substance, that is, that
they lacked a reasonable possibility of profit apart from tax
deductions, and they lacked market risk, then they would not
support interest
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T. 7211-12 CHARGE
is not sufficient to constitute wilfulness.
You should look at all of the circumstances concerning the
transactions involved. Look at the manner in which the trans-
actions were carried out or not carried out and each defendant's
knowledge of and role in carrying out those transactions or not
carrying them out.
The good faith of the defendant is a complete defense to the
tax charges of the indictment because good faith is simply in-
consistent with wilfully filing a fraudulent tax return.
While the term “good faith” has no precise definition, it
means, among other things, an honest belief and the intent to
perform all lawful obligations. A person who acts on a belief
or an opinion honestly held is not punishable under this statute
merely because that honest belief turns out to be incorrect or
wrong. The tax laws subject to criminal punishment only those
people who wilfully file a fraudulent tax return.
A person who believes that his tax return truthfully reports
tne taxable income and allowable deductions under the tax law
acts in good faith and cannot be found guilty of wilfully filing
a false return. Therefore, the government must prove beyond
a reasonable doubt that the defendant you are considering knew
that the tax law permitted only the deduction of interest paid
on genuine indebtedness and that the defendant did not have
a good faith belief that the transactions involved herein con-
stituted genuine indebtedness.
In determining whether or not the government has proven
that the defendant wilfully filed a fraudulent tax return, the
jury must consider all of the evidence received in the case bear-
ing on the defendant’s state of mind.
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You are further instructed that motive is irrelevant in
determining whether a taxpayer wilfully acted under either
Section 7206 subdivision 1 or subdivision 2 of the Internal
Revenue Code.
I further instruct you that it is a valid defense to a charge
of filing a false return if a person provides full information
regarding his taxable income and expenses+o an accountant
qualified to prepare federal income tax returns and the defend-
ant adopts and files the return as prepared by the accountant
without having reason to believe that it is incorrect.
On the other hand, a defendant cannot shift his responsibility
to an accountant or another if the defendant has withheld vital
information, failed to disclose secret agreements, made false en-
tries in his books, or created false documents or engaged in any
conduct the likely effect of which would be to mislead the ac-
countant or to conceal the actual state of his affairs.
DEFENDANTS’ REVISED PROPOSED JURY INSTRUCTION
NO. 23
(Specific Criminal Iptent)
Under our system of laws individuals are not punished
criminally for mere mistakes, negligence, carelessness or errors
of judgment, nor are they punished for misunderstanding the
law. They are punished only for knowing and intentional
wrongdoing.
The defendants here are not on trial for errors of judgment,
mistakes, carelessness or for misunderstanding the tax law. They
are on trial for criminal offenses, and an essential element of
such offenses is the specific criminal intent to violate a known
legal duty. To convict either defendant of the charges in the in-
dictment, the prosecution must prove beyond a reasonable doubt
that each defendant intentionally viclated a known legal duty,
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that is that the defendant actually knew of this legal duty and
deliberately, consciously, voluntarily and willfully violated that
duty.
The government must prove beyond a reasonable doubt that
the defendant you are considering actually knew that the tax
law prohibited deducting the repo interest expense arising from
the transactions between GCC/GSTC and the investment part-
nerships, and that he voluntarily and intentionally violated the
tax law.
In the case of their own returns or the returns of the invest-
ment partnerships, a defendant cannot be convicted merely for
listing in a tax return an amount of interest expense or loss which
is later demonstrated to be wrong. You must find that the
defendant you are considering knew of the falsity at the time
that he signed and filed the return, and that he did not act mere-
ly by accident or through negligence, inadvertence or careless
disregard for the truth.
If you find that the defendant you are considering believed
that the repo interest expense arising from the transactions at
issue in this case was deductible under the Internal Revenue laws,
he cannot be guilty of the charges in the indictment, regardless
of whether his belief was reasonable.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.