United States v. Schussel , 291 F. App'x 336 ( 2008 )

Not for Publication in West's Federal Reporter
United States Court of Appeals
For the First Circuit
No. 07-2095
UNITED STATES OF AMERICA,
Appellee,
v.
GEORGE SCHUSSEL,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Reginald C. Lindsay, U.S. District Judge]
Before
Lipez, Merritt,* and Howard,
Circuit Judges.
Scott A. Srebnick with whom Martin G. Weinberg and Francis
DiMento were on brief for appellant.
Michael J. Sullivan with whom Jack W. Pirozzolo and Carmen M.
Ortiz were on brief for appellee.
August 29, 2008
*
Of the Sixth Circuit, sitting by designation.
MERRITT, Senior Circuit Judge. Defendant George Schussel was
convicted after a thirteen-day jury trial of one count of
conspiracy to defraud the United States in violation of 18 U.S.C.
§ 371 and two counts of tax evasion in violation of 26 U.S.C. §
7201. He was sentenced to 60 months’ imprisonment on each count,
to run concurrently. He now appeals his conviction, raising three
issues: (1) whether documents turned over to the government from
his attorney’s files violate the attorney-client privilege; (2)
whether the refusal of the trial court to give certain requested
jury instructions violated Schussel’s right to a fair trial; and
(3) whether sufficient evidence supports Schussel’s conviction for
conspiracy. Schussel does not appeal his sentence. For the
following reasons, we affirm the judgment of the district court.
I. Facts
Defendant George Schussel is the founder of and was, at all
times relevant to the charges herein, the principal shareholder of
Digital Consulting, Inc. (“DCI”), a Massachusetts corporation
engaged in the business of planning and conducting trade shows and
conferences for businesses in the computer industry. DCI’s primary
source of revenue came from participants at DCI-organized events
and from vendors at those events that bought booth space to display
software or other products. Schussel was first the president and
then the CEO of DCI and he owned 95% of the stock. Ronald Gomes,
who owned the other 5% of DCI stock, succeeded Schussel as
- 2 -
president of DCI. Diane Reed was hired in 1985 as DCI’s accountant
and she later became controller. She reported primarily to
Schussel.
Schussel also was the owner and President of Digital
Consulting International Limited (“DCIL”), a company established in
1988 and operating in Hamilton, Bermuda, ostensibly to help DCI
expand its international business. DCIL, however, was a shell
company that existed in name only; it did not exist as an actual
company with employees or a building. According to testimony of
Diane Reed, DCI’s controller, from the late 1980s through 1995,
Schussel directed her to divert money generated by DCI into a
Bermuda bank account held in the name of DCIL in order to avoid
paying taxes on DCI income. Schussel, Schussel’s wife, and
Schussel’s daughter, Stacy Griffin, were the authorized signatories
of the Bermuda account. The types of checks deposited into the
Bermuda account varied. Sometimes customer checks were deposited
directly into the Bermuda account, but, over time, Reed began
sending funds to the Bermuda account from various operating
accounts of DCI known as “user group” accounts. DCI used these
accounts to handle incoming and outgoing funds associated with
particular events run by DCI. The separate accounts allowed DCI to
keep client and vendor funds separated from DCI funds.
Between 1988 and 1995, Schussel diverted over $12 million of
DCI’s income to the Bermuda account, much of it from the “user
- 3 -
group” accounts. This was taxable income to DCI that was not
reported to the IRS. After being deposited in the DCIL Bermuda
account, most of the money was transferred by wire to accounts in
the United States at Fidelity Investments that were maintained and
controlled by Schussel. The rest of the money deposited in the
Bermuda account, about 5%, was transferred to Schussel’s business
partner, Gomes. By depositing money in the Bermuda account and
then transferring it to the Fidelity account, Schussel also avoided
paying personal income tax. Reed kept track of the funds diverted
to the Bermuda account by noting the amount of each deposit made
and the subsequent distribution to Schussel and Gomes.
In late 1991 and early 1992, the IRS conducted an audit of DCI
covering tax years 1986 to 1990. When the IRS agent in charge of
the audit asked about two payments from DCI to DCIL, he was told
that the payments were commissions DCI owed to DCIL for foreign
events. The agent was also given fabricated documents signed by
Schussel and Gomes that referenced each payment as being made for
services DCIL purportedly performed for DCI.
Although tax adjustments were made for DCI for the years 1986
to 1990, the agent took no further action. In 1995, the IRS again
audited DCI, this time for tax year 1993. A different agent
handled the audit, and the existence of the Bermuda account was not
raised by the agent or anyone at DCI.
- 4 -
In the mid-1990s, discussions arose about selling DCI. A
concern arose that DCI would not be able to show its true value and
profitability to potential buyers because income actually earned by
DCI was being diverted to the DCIL Bermuda account. Two sets of
numbers existed in DCI’s books – one set reflected DCI’s true
income and the other set reflected the income reported by DCI to
the Internal Revenue Service. In early 1996, it was decided that
money would no longer be diverted to the Bermuda account so that
the company could be sold for its “true” value. Tax year 1995,
therefore, was the last year that the corporate return omitted
income DCI had diverted to Bermuda. The Bermuda account was not
closed until 1997, but Schussel reported on his 1996 personal
return that he did not control any foreign bank accounts.
In early 1997, Gomes and Schussel met with attorney Kenneth
Glusman regarding the sale of DCI. At an evidentiary hearing to
consider admission into evidence of various attorney-client
communications, attorney Glusman testified that at his first
meeting with Schussel and Gomes, the men told him about the shell
company DCIL and the Bermuda account to which money had been
diverted, including the fact that DCI had not been reporting all of
its taxable income to the IRS for a number of years. Glusman, who
did not have experience with criminal tax matters, testified that
his main concern at that point was not Schussel’s and Gomes’
liability for not paying taxes, but the fact that anyone who
- 5 -
purchased DCI would be buying a company with a potentially large
liability for unpaid taxes.
Also occurring in 1997 was the decision among Schussel, Gomes,
Diane Reed (the controller of DCI), Schussel’s daughter, Stacey
Griffin, and her husband, Michael, both DCI employees, to destroy
certain DCI records. Specifically, Michael Griffin recommended a
plan to delete and alter DCI’s computerized accounting records so
that if an audit were to occur, revenue information in the computer
would match the revenue information in the 1995 corporate tax
return. The discussion stemmed from concern that potential buyers
might discover the discrepancies in DCI’s records due to the
deposits of money into the Bermuda account. Records in DCI’s
computer database showed that DCI’s income receipts did not match
DCI’s corporate bank account due to the monies that had been
transferred to the Bermuda account. Gomes testified that the
record destruction plan was referred to as “Project Phoenix” and
the project’s goal was to alter DCI’s electronic database to ensure
that the information in the database matched income reported in
DCI’s corporate tax returns.1 In July 1997, at Gomes’ direction,
Reed prepared a list of documents to “Keep or Lose” in case of an
IRS audit or a sale. An “All Staff Memo” dated July 29, 1997, from
the “Archiving Committee” directed the destruction of records as
1
Information and records relating to the Bermuda account of
DCIL were not maintained in the DCI database and were not
destroyed.
- 6 -
part of a “routine” clean up. Reed questioned Gomes about this
memo and he told her he wanted to make sure all the documents were
“purged.”
DCI learned in September 1997 that it would undergo an IRS
audit of its 1995 tax return. On October 27, 1997, Reed, Schussel
and Paul Law, DCI’s accountant, met with Kelly McGovern, an IRS
agent.2 Prior to the October meeting, Reed had collected all of
the documentation requested by McGovern, other than documents
pertaining to DCIL and the Bermuda account. The over $4 million
diverted to the Bermuda account in 1995 was therefore not disclosed
to the IRS agent. Concern arose at DCI, however, when, during the
investigation, McGovern found a refund check issued to a vendor
written from a “user group” account, the separate accounts DCI used
to handle the funds for certain specific events. The refund check
had come from the general DCI account because that particular “user
group” account had been closed. This led McGovern to inquire about
the separate accounts of “user groups.” DCI became concerned that
if a thorough examination of each “user group” account was
conducted, it would be discovered that money from these accounts
had been transferred to the Bermuda account.
McGovern’s discovery of the “user group” accounts led to
another meeting in November 1998 with Schussel, Schussel’s wife,
2
IRS Agent McGovern is referred to in various places in the
record and briefs as Kelly Jordan, her married name.
- 7 -
Gomes and his wife, Stacey and Michael Griffin, Reed and Glusman,
the attorney. Reed testified that Glusman was told at that meeting
that monies from the user group accounts had been transferred to
the Bermuda account. Glusman then left the meeting and further
discussion took place regarding whether information in the DCI
database could be destroyed or at least made confusing and
difficult for the IRS to understand.
Upon learning about the audit, attorney Glusman recommended to
Schussel that he hire an attorney with experience in criminal tax
matters. On Glusman’s recommendation, Schussel hired Edward
DeFranceschi to represent both Schussel and DCI in the 1997 audit.
Gomes and Schussel first met with DeFranceschi in November 1997 and
told him that income had been diverted from DCI to the Bermuda
account and had not been reported to the IRS. Glusman was also
present at the meeting. Reed met with DeFranceschi and showed him
the user group documentation and checks that had been sent to the
Bermuda account. She also showed him documentation that showed
money being sent from DCI user groups to the Bermuda account and
back to Schussel’s Fidelity account in the United States.
DeFranceschi took over communicating with IRS agent McGovern and
recommended that no one from DCI communicate directly with the IRS.
DeFranceschi relied mainly on Schussel for information disclosed to
the IRS. Reed was instructed by Schussel to provide information to
DeFranceschi and Schussel as needed by DeFranceschi.
- 8 -
In February 1998, McGovern discovered more “user group” checks
and inquired about the relationship between DCI, DCIL and Schussel.
DeFranceschi provided her with a copy of a contract between DCI and
DCIL dated September 1993, given to him by Schussel. The contract
was signed by “J. Cardullo” on behalf of DCIL and provided that DCI
would compensate DCIL for “services rendered.” DeFranceschi
represented to McGovern that the contract had been in effect in
various forms since 1988. Gomes and Reed testified that they did
not see the contract at the time it was executed in 1993. Gomes
said he first saw the contract in 1997 during the IRS audit. Reed,
who was responsible for maintaining all of DCI’s contracts in her
position as controller, testified that she did not see the contract
until 2003, when it was shown to her by the government. John
Cardullo, who was hired by DCI in 1988 to be Director of
International Operations, testified that he never signed the
contract, nor did he authorize anyone else to sign on his behalf.
He also testified that he had never conducted any business with
DCIL or any other company in Bermuda while at DCI. In addition,
Cardullo left DCI before September 1993, the date he purportedly
signed the contract.
After receiving the contract between DCIL and DCI, IRS agent
McGovern requested certain documents from DeFranceschi concerning
DCIL, Schussel’s relationship with DCIL and the relationship
between DCI and DCIL. On March 4, 1998, Schussel faxed responses
- 9 -
to some of the questions to DeFranceschi and provided a description
of what had occurred concerning DCIL in the earlier audit in 1991
and 1995. Schussel asserted that he “had provided [the IRS] with
the complete file which I had in my possession at that time” and
indicated that on both occasions the IRS had not found a problem
with the DCI-DCIL connection. Schussel also supplied two
“exhibits” to DeFranceschi that purported to document international
events for which DCI compensated DCIL.
DeFranceschi, using the information supplied to him by
Schussel, drafted a response to the IRS document request. He sent
the draft response to Schussel, who made notations on the draft
that indicate that he discussed the response with DeFranceschi. On
March 12, 1998, DeFranceschi sent the letter to IRS agent McGovern.
Based on the representations in this letter, IRS agent McGovern
concluded that DCI and DCIL were not related entities, that
Schussel had no control over DCIL, and that the business conducted
by DCIL was outside the scope of her audit of DCI. Glusman and
Reed testified that McGovern never asked to see the actual records
of DCIL. Pursuant to a letter dated May 6, 1998, the audit was
concluded with the IRS making certain adjustments to DCI’s
corporate return for 1995. None of these adjustments reflected the
DCI income that Schussel had diverted to the Bermuda account.
After the 1997 audit concluded, Gomes and Schussel discussed
amending their personal tax returns for 1995 to reflect income that
- 10 -
had not been disclosed at the time. At Schussel’s request,
controller Reed provided to attorney DeFranceschi documentation
regarding the Bermuda account, as well as documentation concerning
Schussel’s Fidelity account, so that DeFranceschi could prepare an
amended return for Schussel. Although an amended return was
prepared by DeFranceschi, it was never filed based on advice from
DeFranceschi.
In October 2001, Darlene Flint, who had worked as Gomes’
secretary for 18 years, walked into the IRS office in Stoneham,
Massachusetts, with a box of DCI records that included the Bermuda
account records. This disclosure triggered a criminal
investigation of DCI and its employees. Reed and Gomes cooperated
in the investigation and provided information implicating Schussel
in both the diversion of taxable income and obstruction of IRS
audits. In addition to the DCI employees, attorney DeFranceschi’s
conduct was also questioned by the federal prosecutor. Upon
learning that he was a subject and potential target of the
investigation, DeFranceschi hired his own attorney, Elliot Lobel,
who contacted the federal prosecutor and offered to provide
evidence that DeFranceschi did not knowingly provide false
information to the IRS or obstruct the 1998 audit. Lobel
determined that the Massachusetts Rules of Professional Conduct
allowed DeFranceschi to reveal attorney-client privileged
information to the extent necessary to defend himself from criminal
- 11 -
charges. Lobel allowed DeFranceschi to make a statement pursuant
to a proffer letter with the government. In the proffer,
DeFranceschi stated that Schussel had provided him with all the
information and material provided to the IRS. The prosecutor told
Lobel that the government would require documentary evidence to
prove that DeFranceschi had not knowingly participated in
Schussel’s illegal scheme. Lobel produced a limited number of
documents deemed necessary to prove DeFranceschi’s innocence, along
with an affidavit by DeFranceschi. DeFranceschi did not turn over
his entire Schussel file to the government. The government decided
not to indict DeFranceschi.
On February 26, 2004, a federal grand jury returned a three-
count indictment against Schussel, charging him with conspiring
with unnamed others, known and unknown, to defraud the United
States in the collection of income taxes in violation of 18 U.S.C.
§ 371 (Count I), and two counts of tax evasion in violation of 26
U.S.C. § 7201. Specifically, the tax evasion counts allege that
Schussel made false statements to a revenue agent of the Internal
Revenue Service and filed a false and fraudulent corporate income
tax return (Count II) and individual tax return (Count III). The
indictment charged that the offense conduct in the conspiracy in
Count I began in or about January 1988 and extended through May
1998. The offense conduct in Counts II and III occurred in March
- 12 -
1998 during an audit of Schussel’s individual and corporate tax
returns for 1995.
The indictment charged that Schussel and others “intentionally
and willfully caused the filing of false and fraudulent Corporate
U.S. Income Tax Returns to be filed with the IRS for the purpose of
evading and defeating income tax due and owing for several years.”
Indictment at ¶ 32. The indictment also specifically stated that
Schussel and others had failed to disclose DCI income which had
been diverted to DCIL’s bank account in Bermuda in the amount of
$8.5 million from 1993 through 1995. The indictment also charged
that Schussel and others “for purposes of preventing discovery of
DCI’s unreported income, endeavored to impede and obstruct an audit
conducted by the IRS of DCI’s 1995 Corporate U.S. Income Tax
Return.” Indictment at ¶ 34. The overt acts charged in
furtherance of the conspiracy included Schussel’s hiring of a tax
attorney in 1997 to represent him during the audit and his use of
the attorney “to impede and obstruct the audit.” Indictment at ¶
40 (ee). At issue on appeal are the following overt acts charged
in the indictment:
gg. On or about March 11, 1998, Schussel caused the tax
attorney who was acting on his behalf, to send a letter
to the revenue agent, which letter falsely stated, among
other things, that Schussel was not an officer of DCIL
and falsely represented that payments made by DCI to DCIL
were pursuant to the contract purportedly executed
between DCI and DCIL in September 1993.
hh. On or about May 6, 1998, Schussel signed IRS Form
CG-4549, acknowledging and agreeing to income tax
- 13 -
examination changes that the revenue agent had made to
DCI’s 1995 Corporate U.S. Income tax Return which showed
that $18,859.00 was additional income tax due for DCI’s
1995 calendar year. As Schussel well knew, this amount
was, in fact, substantially less than the true amount due
to the IRS because Schussel had concealed DCI’s true
income from 1995 from the revenue agent during the course
of the audit.
Indictment at ¶ 40 (gg, hh).
Count II of the indictment charged that on March 11, 1998,
Schussel did “willfully attempt to evade and defeat” part of the
federal income tax owed by DCI by “making and causing to be made”
false statements to an IRS agent in order to mislead and impede an
audit examination of DCI’s 1995 corporate income tax return, and by
“filing and causing to be filed” with the IRS a false and
fraudulent income tax return underreporting DCI’s taxable income
for 1995. Indictment at ¶ 91. Count III charged that on or about
March 11, 1998, Schussel willfully attempted to evade and defeat
part of the personal income tax owed by him by “making and causing
to be made false statements” to the revenue agent in order to
mislead and impede the audit of DCI’s 1995 corporate income tax
return, and by “filing and causing to be filed” with the IRS a
false and fraudulent individual income tax return by underreporting
his taxable income for 1995. Indictment at ¶ 93.
Before trial, Schussel moved to suppress documents on the
basis of various privileges, including the attorney-client
privilege, the corporate attorney-client privilege and the joint
defense/common interest privilege. An evidentiary hearing was
- 14 -
held in May 2005 before Magistrate Judge Alexander. Reed, Gomes,
Schussel’s attorneys Glusman and DeFranceschi and others testified.
The magistrate judge found that of the thirteen documents at issue
three were privileged and the government was prevented from using
them at trial. The other ten were either not privileged or the
privilege was vitiated under an exception, such as the crime-fraud
exception or third-party disclosure rule. Of the six documents at
issue in this appeal, the Magistrate Judge held that two (Exs. 65
and 73) were not privileged under the third-party disclosure rule
and one (Ex. 67) was not privileged because it was not a
confidential communication. Three documents (Exs. 66, 68 and 71)
lost their privilege under the crime-fraud exception. See Findings
and Recommendation on Motion to Suppress Government’s Use and
Acquisition of Privileged Materials and for Other Appropriate
Relief, August 25, 2005. Over Schussel’s objection, the district
court adopted the Magistrate Judge’s Findings and Recommendation.
II. Analysis
Schussel raises three main issues on appeal: (1) the
attorney-client relationship was violated when documents sent
between Schussel and his lawyer were introduced into evidence at
trial; (2) the district court erred in refusing to give certain
jury instructions requested by Schussel pertaining to the tax
evasion counts; and (3) the evidence was insufficient to support
the conspiracy conviction.
- 15 -
A. Attorney-Client Privilege
The purpose of the attorney-client privilege is “to encourage
full and frank communication between attorneys and their clients .
. . .” Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). The
privilege is not absolute, however, and does not extend to all
communications between an attorney and client. The privilege
protects “only those communications that are confidential and are
made for the purpose of seeking or receiving legal advice.” In re
Keeper of Records (Grand Jury Subpoena Addressed to XYZ Corp.), 348
F.3d 16, 22 (1st Cir. 2003). The First Circuit has adopted the
following definition of the attorney client privilege:
(1) Where legal advice of any kind is sought (2) from a
professional legal adviser in his capacity as such, (3)
the communications relating to that purpose, (4) made in
confidence (5) by the client, (6) are at his instance
permanently protected (7) from disclosure by himself or
by the legal adviser, (8) except the protection be
waived.
United States v. Mass. Inst. of Tech.. 129 F.3d 681, 684 (1st Cir.
1997) (quoting 8 J. Wigmore, Evidence § 2292, at 554 (McNaughton
rev. 1961)). The burden of proving an applicable privilege lies
with the party claiming the privilege. The party must demonstrate
by a preponderance of the evidence not only that the privilege
applies, but that it has not been waived or that exceptions do not
apply. FDIC v. Ogden Corp., 202 F.3d 454, 460 (1st Cir. 2000).
Following his indictment, Schussel filed a motion to suppress
thirteen documents supplied by his tax attorney, Edward
- 16 -
DeFranceschi, to the government, claiming they were privileged and
confidential pursuant to attorney-client privilege.3 Of the
thirteen documents, the district court found three to be protected
by the attorney-client privilege. Of the remaining ten documents
at issue, the district court found most of them not to be protected
under the attorney-client privilege either because they were not
confidential due to their content or due to the fact that they were
intended to be disclosed to a third-party. Three documents that
were found to be confidential had the attorney-client privilege
vitiated due to the “crime-fraud exception,” which exempts
privileged documents from protection if the client seeks advice
from a lawyer that will serve him in the commission of a crime or
fraud. Only six of the documents are at issue on appeal; all six
documents came from the files of Ed DeFranceschi, Schussel’s
attorney at the time of an IRS audit in 1998.
The six documents at issue on appeal are:
Exhibit 65: A fax dated 2/16/98 from Schussel to DeFranceschi
telling DeFranceschi that the information in a 2/13/98 letter sent
to the IRS by DeFranceschi is incorrect and should be corrected to
say: “I am advised that the transactions for 1988 through 1991
were reviewed in 1993 as part of the IRS audit for the years 1987-
1991.” As the district court ruled, this document was properly
3
Schussel also moved to suppress documents provided to the
government by Gomes and Flint. The court’s rulings on those
documents are not at issue in this appeal.
- 17 -
admitted under the third-party disclosure rule because Schussel
intended, and indeed directed, that DeFranceschi disclose the
information to a third-party – the IRS.
Exhibit 66: A fax dated 3/4/98 from Schussel to DeFranceschi with
draft responses to questions 1-3 of a document request from the
IRS. This document was admitted under the “crime-fraud exception”
to the attorney-client privilege.
Exhibit 67: A fax dated 3/6/98 from Schussel to DeFranceschi
requesting that DeFranceschi ask the IRS agent when Schussel can
“take down” the data room at Schussel’s offices that was set up for
the IRS examination. The district court found this document not to
be a confidential communication and therefore not privileged.
Exhibit 68: Draft of letter dated 3/11/98 to be sent to IRS agent
concerning Document request #4. This document was admitted under
the “crime-fraud exception” to the attorney-client privilege.
Exhibit 71: Fax from Schussel to DeFranceschi dated 3/12/98
reminding DeFranceschi that the auditor who performed the 1993
audit had some questions about a cash transaction involving one of
DCI’s user groups and the questions were answered to the agent’s
satisfaction at that time. This document was admitted under the
“crime-fraud exception” to the attorney-client privilege.
Exhibit 73: Fax from Schussel to DeFranceschi dated 4/24/98
alerting DeFranceschi to a package of tax forms, schedules and
other material DeFranceschi will be receiving from Schussel under
- 18 -
separate cover. This document was admitted under the third-party
disclosure rule because Schussel intended that DeFranceschi
disclose the information to a third-party – the IRS.
1. Waiver
The government first argues that Schussel waived the privilege
as to all six documents because in the trial court Schussel made
selective use of the documents as part of an advice-of-counsel
defense – sometimes wanting to use them in his defense and other
times wanting to withhold them on the ground of attorney-client
privilege. The government argues that once Schussel put any
communications with DeFranceschi in evidence pursuant to an advice-
of-counsel defense, he waived the attorney-client privilege as to
all communications with DeFranceschi. However, the district court
did not admit the documents on the basis of waiver and, because a
determination of waiver often requires a detailed factual analysis,
we decline to make such a finding in this appeal.
2. Contents Not Privileged
Exhibit 67 is a fax dated March 6, 1998, from Schussel to
DeFranceschi requesting that DeFranceschi ask the IRS agent when
Schussel can dismantle a data and records room at Schussel’s offices
that was set up for the IRS examination. Because the communication
did not seek or give legal advice, the district court found this
document not to be a confidential communication and therefore not
privileged. This finding was not clearly erroneous.
- 19 -
3. The Crime-Fraud Exception to the Attorney-Client Privilege
Under the “crime-fraud exception,” the attorney-client
privilege does not apply when a client seeks advice from a lawyer
that will serve him in the commission of a crime or fraud. Clark
v. United States, 289 U.S. 1, 15 (1933); accord In re Grand Jury
Proceedings, 417 F.3d 18,22 (1st Cir. 2005); United States v.
Reeder, 170 F.3d 93, 106 (1st Cir. 1999). The exception applies
where there is a “reasonable basis to believe that the lawyer’s
services were used by the client to foster a crime or fraud.” In
re Grand Jury Proceedings, 417 F.3d at 23. The exception applies
based on the client’s intent, not the lawyer’s. In re Grand Jury
Proceedings (Violette), 183 F.3d 71, 79 (1st Cir. 1999). The
exception applies, therefore, regardless of whether the attorney was
an innocent or willing accomplice. To “successfully invoke the
crime-fraud exception, the government must make a prima facie
showing that the attorney’s assistance was sought in furtherance of
a crime or fraud.” Reeder, 170 F.3d at 106. The government must
show: (1) that the client was engaged in (or was planning) criminal
or fraudulent activity when the attorney-client communications took
place; and (2) that the communications were intended by the client
to facilitate or conceal the criminal or fraudulent activity. In
re Grand Jury Proceeding, 183 F.3d at 75. The district co urt
found that the exception applied to Exhibits 66, 68 and 71, all
three of which were faxes or drafts sent to DeFranceschi by Schussel
- 20 -
in March 1998 when DeFranceschi was trying to gather information
from Schussel and DCI to respond to IRS inquiries or document
requests. The district court correctly applied the exception
because in each of the three documents Schussel was providing
incorrect information to DeFranceschi to be used in responses to
document requests and other exchanges with the IRS in an effort to
deceive the IRS about the true nature of Schussel’s relationship
with DCIL.
Schussel’s attempts to characterize these communications as
simply soliciting legal advice from DeFranceschi belies their
content and Schussel’s intent in relaying the information to
DeFranceschi. The three documents were clearly sent to DeFranceschi
by Schussel so that Schussel and DCI could continue to evade the
taxes they owed. In Exhibit 66, the March 4, 1998, fax from
Schussel to DeFranceschi, Schussel provided false information to
DeFranceschi about the business relationship between DCI and DCIL
by stating that DCIL had performed services for DCI and received
compensation. In Exhibit 68, the March 12, 1998, draft letter to
the IRS from DeFranceschi on behalf of Schussel and DCI, Schussel
provided false information about the contract between DCI and DCIL.
As to Exhibit 71, the March 12, 1998, fax to DeFranceschi from
Schussel, Schussel reported to DeFranceschi that in the earlier 1995
audit, the IRS had questioned a cash payment to a user group
account. Schussel intended for DeFranceschi to use this information
- 21 -
to mislead the IRS into believing that the user group accounts had
already been examined by the IRS during an earlier audit.
Schussel argues that the exception cannot apply because he had
not yet been found guilty of any wrongdoing. The crime-fraud
exception may apply, however, even if the client is ultimately found
not to be guilty. By necessity, the assessment of documents during
a legal proceeding is generally preliminary and does not reflect a
finding that a client acted wrongfully. The required level of proof
to pierce the privilege under the crime-fraud exception is limited
to the issue of whether reasonable cause adequate to pierce the
privilege exists. In re Grand Jury Proceedings, 417 F.3d at 22.
Both the district court and the magistrate judge held hearings where
findings were made that a sufficient factual predicate existed to
pierce the privilege as to these documents. The district court’s
admission of Exhibits 66, 68 and 71 under the crime-fraud exception
was not clearly erroneous.
Schussel also argues that even if the crime-fraud exception
applied, the documents should be suppressed and his conviction
reversed as a sanction against the government for violating his due
process rights when it “induced” DeFranceschi to turn over certain
documents without notifying Schussel first. This argument is also
without merit. Attorneys may disclose confidential client
information to the extent the attorney reasonably believes such
disclosure is necessary to defend himself against a charge of
- 22 -
criminal wrongdoing. See Mass. Rules of Prof’l Conduct 1.6(b)(2)
(a lawyer may reveal confidential information “to the extent the
lawyer reasonably believes necessary . . . to establish a defense
to a criminal charge . . . against the lawyer based on conduct in
which the client was involved”). Moreover, an attorney need not
wait to be indicted before making such disclosures. Id. cmt. 18
(“Paragraph (b)(2) does not require the lawyer to await commencement
of an action or proceeding that charges such complicity [with the
client], so that the defense may be established by responding
directly to a third party who has made such an assertion.”); United
States v. Weger, 709 F.2d 1151, 1156-57 (7th Cir. 1983) (permitting
a law firm to disclose privileged information before formal charges
filed to avoid stigma of indictment).
Under the Massachusetts Rules of Professional Conduct,
therefore, and general legal principles aimed at preserving client
confidentiality to the fullest extent possible, DeFranceschi was
permitted to make a limited disclosure of information to the
government to defend himself from indictment. Once the United
States notified DeFranceschi’s attorney that DeFranceschi was a
potential target of the investigation into DCI and Schussel,
DeFranceschi became entitled immediately to disclose information
showing that he should not be charged.
Citing to United States v. Zolin, 491 U.S. 554 (1989), Schussel
claims he had a due process right to be notified by either the
- 23 -
government or DeFranceschi before DeFranceschi made the disclosure
to the government. Schussel’s reliance on Zolin is misplaced.
Zolin held only that a court may receive contested documents for in
camera inspection to assess whether the crime-fraud exception
applies. It makes no requirement that an attorney give advance
notice to the client about his intention to disclose client
documents to a third party in order to defend himself from criminal
charges. While we are mindful of Schussel’s argument that notice
is required due to the potential manipulation of an attorney by an
overzealous or unethical prosecutor accusing the attorney of
criminal wrongdoing in order to get access to documents that might
be helpful in building a case against the client, Schussel has cited
no evidence that such was the case here.
Finally, to the extent there was any error in admitting the
three documents under the crime-fraud exception, the error was
harmless. Other evidence at trial, including non-privileged
documents and testimony by witnesses, including employees of DCI,
was sufficient to show Schussel’s guilt. Such evidence included the
false contract given by Schussel to DeFranceschi, knowing it would
be turned over to the IRS. Evidence was also introduced showing
that after each of the audits, Schussel had signed off on the
adjustments to his and DCI’s taxes recommended by the IRS knowing
that the income diverted to the Bermuda account was not included in
the adjustments. This evidence and the testimony by numerous
- 24 -
witnesses was sufficient for the jury to conclude that Schussel had
the necessary intent to mislead and deceive the IRS to support the
conspiracy and tax evasion counts.
4. Third-Party Disclosure
The third-party disclosure exception supports the principle
that the attorney-client privilege does not attach to communications
between attorney and client when they have been disclosed to a third
party or were created with the intention of being disclosed to a
third party. “When information is transmitted to an attorney with
the intent that the information will be transmitted to a third-party
. . ., such information is not confidential.” United States v.
Lawless, 709 F.2d 485, 487 (7th Cir. 1983) (finding waiver of
attorney-client privilege where information used to prepare tax
return would be disclosed on the tax return itself).
Both Exhibits 65 and 73 contained information that Schussel
sent to DeFranceschi with the intent that the information be turned
over to the IRS. Therefore, the documents are not privileged and
no attorney-client confidentiality attaches to them. Exhibit 65 is
a fax sent by Schussel to DeFranceschi in which Schussel provides
information for DeFranceschi to give to IRS agent McGovern. Exhibit
73 consists of drafts of amended tax returns for Schussel and Gomes.
As the information provided in both these documents was intended to
be disclosed to the IRS, it is not confidential. Schussel argues
that Exhibit 73 is a working draft between attorney and client that
- 25 -
is therefore privileged. If a client transmits information “so that
it might be used on a tax return, such transmission destroys any
expectation of confidentiality that might have otherwise existed.”
Lawless, 709 F.2d at 487. The court below correctly ruled that
the documents are not privileged.
B. Jury Instructions
Schussel claims error as to several of the jury instructions.
Schussel filed requests for specific jury instructions concerning
willfulness and the attorney-client relationship that were rejected
by the district court as incorrect statements of the law. Another
requested instruction sought to “supplement” the conspiracy
instruction to specifically inform the jury that DeFranceschi,
Schussel’s tax attorney, was not part of the conspiracy.
1. Willfulness
Schussel claims it was error for the district court to reject
a request he made to instruct the jury on additions to the standard
willfulness instructions applicable to tax evasion charges under
Cheek v. United States, 498 U.S. 192 (1991).4 The district court’s
4
Schussel requested several instructions on willfulness that
were rejected by the district court. Although we do not recite
each of Schussel’s requested willfulness instructions herein, we
reproduce several examples to demonstrate the nature of the
requested instructions:
Instruction No. 3
Willfulness
Defendant Schussel acted wilfully if the law imposed a
duty on him, he knew of that duty, and he voluntarily and
- 26 -
instruction explicitly focused the jury on the requirement that
Schussel have “the specific intent to disobey or disregard the law,”
which satisfies the Cheek willfulness requirement. Schussel’s
requested instruction changed the standard tax evasion instruction
to instruct the jury that it could not find guilt unless it
concluded that Schussel knew he had a legal duty to reject his
attorney’s advice, which was based on the misinformation that
Schussel had supplied to him. Specifically, the requested
intentionally violated that duty. Thus, if defendant
Schussel acted in good faith, he cannot be guilty of
filing a false and fraudulent tax return, as charged in
Counts Two and three. This is a subjective standard; the
question is what defendant Schussel actually believed,
not what a reasonable person would have believed.
negligence, even gross negligence, is not enough to meet
the wilfulness [sic] requirement. . . .
Instruction 3(A)
Thus, you cannot convict defendant Schussel of the
offenses charged in Counts Two or Three unless the
government proves beyond a reasonable doubt that he knew
that he had the duty to instruct his attorney Edward
DeFranceschi to make changes in the letter to the IRS
prepared by DeFranceschi dated march 11, 1998.
. . .
Instruction 3(D)
. . .
You may not convict defendant Schussel of the offenses
charged in Counts Two or Three based upon the signing of
the May 6, 1998, letter unless you find beyond a
reasonable doubt that he knew he had a duty to reject his
attorney’s advice that he sing the may 6, 1998,
adjustment letter.
- 27 -
instruction would have required Schussel to know he had a legal duty
to tell DeFranceschi to change the March 11, 1998, letter sent to
the IRS and to reject DeFranceschi’s advice to sign the May 6, 1998,
tax adjustment letter because they were based on false or misleading
information. The requested instruction indicated, erroneously, that
once a client hires an attorney and makes certain disclosures to
that lawyer, the client cannot have acted “willfully” if the lawyer
passes on false information to the IRS. This is an improper reading
of the meaning of “willfulness” under the tax evasion statutes and
the district court properly rejected this proposed instruction.
In addition, Schussel’s requested “willfulness” instructions
focus too much on the lawyer’s duty to the client under ethical and
professional responsibility rules instead of on the taxpayer’s
conduct. The tax evasion statute, and its standard “willfulness”
instruction, focuses solely on the taxpayer’s duty to pay the tax
imposed and to not mislead the IRS about that amount. They do not
look to the attorney’s conduct in representing the client.
Requested instructions are appropriate only if they correctly
state the law. United States v. Buttrick, 432 F.3d 373, 376 (1st
Cir. 2005). Schussel’s requested instruction concerning the
attorney-client relationship as it applies to the willfulness
requirement to prove a tax evasion charge was simply incorrect. The
tax evasion statute at issue, 26 U.S.C. § 7201, prohibits willfully
attempting in any manner to evade or defeat any tax imposed or
- 28 -
payment thereof. The relevant legal duty requires that the taxpayer
pay the required income tax and not mislead the IRS. Schussel’s
requested instruction sought to add on a multitude of concepts from
the advice-of-counsel defense and attorney ethical rules.
2. Literal Truth Instruction
Schussel also claims error concerning the rejection by the
district court of Schussel’s proposed instruction telling the jury
it could not consider as “false” any statement Schussel made
responding to the IRS if that statement were “literally” true – even
if the statement was found by the jury to be incomplete or
misleading. The court below found that this instruction only
applied to perjury cases and not to actions taken with the “intent
to mislead or conceal” as stated in the tax evasion statutes.
- 29 -
Schussel’s requested instruction5 informed the jury that
DeFranceschi had told the IRS the “literal truth” in answering its
inquiries, such as informing the IRS that Schussel “is” not an
officer or employee of DCIL and that payments made to DCIL by DCI
were pursuant to a “contract,” even though DeFranceschi knew that
DCIL was a shell company to which Schussel had diverted funds.
Specifically, Schussel argues that DeFranceschi knew that the
answers in the March 11, 1998, letter to the IRS were misleading,
but they were in keeping with the general practice whereby attorneys
recommend that their clients narrowly answer questions without
volunteering information.
Schussel’s request that the jury be told specifically that they
must consider whether the answers given to the IRS in the March 11,
1998, letter were “literally true” does not reflect a correct
5
The requested instruction reads in relevant part:
Instruction No. 10
False Statments
Counts Two and Three charge defendant Schussel with
wilfully attempting to evade and defeat a part of the
income tax due and owing by DCI and by himself personally
by making false statements to an IRS revenue officer or
by causing false statements to be made to an IRS revenue
officer. In determining whether defendant Schussel is
guilty of the offense charged in Counts Two and Three,
you may not consider as false statements any statements
which were made in response to questions asked by Revenue
Agent Kelly McGovern Jordan and which were literally
true, even if those statements are determined by you to
have been incomplete or even misleading.
- 30 -
statement of the law. A “literal truth” instruction does not take
into account the language of 26 U.S.C. § 7201, the tax evasion
statute, which prohibits “any conduct, the likely effect of which
would be to mislead or conceal.” (Emphasis added.) As the statute
prohibits conduct that misleads or conceals, the “literal truth” may
still violate the tax statute. The plain language of the statute
covers a broader range of conduct than Schussel’s proposed
instruction would reflect. The cases that Schussel relies on for
the correctness of his “literal truth” instruction all concern
perjury, false statements and obstruction of justice charges, not
the broader conduct prohibited by the tax evasion statute.
In addition, the instruction the district court gave to the
jury about the March 11 letter asked the jury to consider whether
Schussel had made or caused to be made “false statements to the
revenue agent.” There is nothing in that instruction that prohibits
the jury from considering the “literal truth” of Schussel’s answers
and Schussel did in fact make that argument to the jury.
In sum, what Schussel was trying to accomplish by his requested
instructions was to inform the jury, incorrectly, that when a
taxpayer hires professionals to perform legal services for him, the
taxpayer may rely on those services to such an extent that the
taxpayer does not act “willfully” under the tax evasion statute if
he retains counsel for an audit. The district court was correct to
- 31 -
reject the changes to the tax evasion instructions requested by
Schussel.
3. Supplemental Instruction on DeFranceschi’s Role
The indictment in this case, which came down on February 26,
2004, alleged that the conspiracy involved “others known and unknown
to the Grand Jury.” This language permitted the jury to convict
Schussel based on a conspiracy with persons not named in the
indictment and, in fact, the coconspirators are all unnamed. When
describing the overt acts in furtherance of the conspiracy, the
indictment refers to DCI controller Diane Reed as “D.R.” and
minority shareholder Ronald Gomes as R.G. Stacey and Michael
Griffin, Schussel’s daughter and son-in-law, are also unindicted
coconspirators. Attorney Edward DeFranceschi is not mentioned in
the conspiracy count in any way.
The statute of limitations for the conspiracy is six years, so
the government was required to prove an ongoing conspiracy among
Schussel and his coconspirators as of February 26, 1998, during the
time frame when DeFranceschi was representing Schussel in connection
with the 1997-98 audit concerning the 1995 tax year. Schussel
claims on appeal that the government wanted the jury to believe that
DeFranceschi was part of the conspiracy because it was easier for
the government to prove the existence of a conspiracy as of February
26, 1998, between Schussel and DeFranceschi than trying to prove
that Reed, Gomes and others were still part of the conspiracy as of
- 32 -
that date. Schussel’s interaction with DeFranceschi during this
time period was very clear and Schussel maintains that the others
in the conspiracy, such as Gomes and Reed, had withdrawn from the
conspiracy, as argued by Schussel in his challenge to the
sufficiency of the evidence for the conspiracy count, which is
addressed infra.
In an effort to counter what Schussel calls a “change in
course” by the government to have the jury believe that DeFranceschi
was part of the conspiracy, Schussel requested a specific
instruction that “the government does not allege that DeFranceschi
was a coconspirator.” The district court refused to give the jury
the supplemental language and gave a standard instruction concerning
the conspiracy:
You are not being asked whether any other person is
guilty or not guilty of those offenses or should have
been charged with a crime. Your verdict should be based
solely upon the evidence or lack of evidence as to Dr.
Schussel in accordance with my instructions.
The instruction is not confusing, as argued by Schussel. It
told the jury not to take into consideration the question of whether
some other person should or should not have been charged. The
instruction does not suggest, as Schussel argues, that DeFranceschi
should have been charged as a coconspirator. Moreover, the United
States did not imply or suggest during the trial that DeFranceschi
was or should have been charged as a coconspirator. Indeed, the
United States told the jury that the evidence did not support the
- 33 -
inference that Schussel had acted in good faith with DeFranceschi
and instead suggested that Schussel used him as a “scapegoat.” The
government stated that the evidence showed that DeFranceschi
believed that the contract between DCI and DCIL was a true and valid
contract when he turned it over to the IRS. Therefore, contrary to
Schussel’s allegations that the government tried to portray
DeFranceschi as a coconspirator, the United States made clear to the
jury that Schussel “use[d] the lawyer as a conduit to give false
information to the IRS.”
C. Sufficiency of the Evidence
The evidence showed that Schussel and unindicted coconspirators
Reed, Gomes, and Stacey and Michael Griffin, engaged in a conspiracy
to evade taxes and that the conspiracy lasted until at least May
1998. Schussel claims that, if a conspiracy existed at all, his
coconspirators withdrew prior to February 26, 1998, the date on
which the conspiracy must have existed to be within the six-year
statute of limitations. The documents submitted to DeFranceschi and
the IRS after February 26, 1998, demonstrate that the conspiracy was
still active until at least the signing of the adjustment letter
with the IRS by Schussel in May 1998. Numerous exhibits and
documents show the ongoing nature of the conspiracy after February
26, 1998.
Withdrawal from a conspiracy as a defense requires affirmative
evidence of an effort to defeat, disavow or confess the conspiracy.
- 34 -
United States v. Potter, 463 F.3d 9, 20 (1st Cir. 2006). The
defense requires either a full confession to authorities or a
communication to coconspirators that the individual has abandoned
the enterprise and its goals. United States v. Pizarro-Berrios, 448
F.3d 1, 10 (1st Cir. 2006). Mere cessation of activity in
furtherance of a conspiracy does not constitute withdrawal. Id.Contrary to Schussel’s argument, none of the unindicted
coconspirators met the demanding standard for withdrawal.
Although Diane Reed, DCI’s controller, did not interact
directly with IRS agent McGovern after Schussel hired attorney
DeFranceschi in late 1997, she continued to play an active role in
the conspiracy as a conduit of information between Schussel and
DeFranceschi. Reed provided DeFranceschi with information after
February 26, 1998, that was subsequently provided to the IRS, such
as information included in the March 11, 1998, letter from
DeFranceschi to agent McGovern.
Schussel’s contention that Gomes withdrew from the conspiracy
also fails. Schussel contends that Gomes’ “state of mind” after
January 1996, when DCI ceased sending money to the Bermuda account,
demonstrates that he had withdrawn from the conspiracy. However,
Gomes’ “state of mind” is not evidence of an affirmative withdrawal
from the conspiracy. Schussel points to no affirmative act by
Gomes indicating that he left or intended to leave the conspiracy.
- 35 -
He continued to be a minority shareholder and business partner of
Schussel in DCI.
CONCLUSION
For the foregoing reasons, we affirm the judgment of the
district court.
- 36 -