United States v. Polichemi, Joseph ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 96-3866, 96-3867, 96-3868, 96-3869, 96-3870
United States of America,
Plaintiff-Appellee,
v.
Joseph Polichemi, et al.,
Defendants-Appellants.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 94 CR 555--William T. Hart, Judge.
Argued January 4, 1999--Decided January 13, 2000/*
Before Flaum, Rovner, and Diane P. Wood, Circuit
Judges.
Diane P. Wood, Circuit Judge. Not everyone has a
perfect understanding of the complex workings of
modern financial markets, and unfortunately,
sometimes unscrupulous individuals manage to
exploit that fact for a period of time. This
case, at its outset, involved seven such
individuals, who allegedly engaged in a
breathtakingly ambitious phony investment scheme
through which they bilked nearly 30 investors out
of more than $15 million. Their largest patsy was
the Chicago Housing Authority, which lost more
than a third of its pension fund, some $13
million, in the scheme. The CHA’s former director
of employee benefits, John Lauer, landed in
prison for fraud and related offenses as a result
of these dealings. See United States v. Lauer,
148 F.3d 766 (7th Cir. 1998).
The present appeal comes to us from the
convictions after a jury trial of four of the
defendants, Joseph Polichemi, Lyle "Pete" Neal,
Oscar William Olson, and Charles Padilla, on
assorted counts of wire fraud, money laundering,
conspiracy, and perjury. A fifth, Larry
Oesterman, who pleaded guilty, argues that his
sentence is too harsh. Although taken together
the four who went to trial have raised nearly a
score of issues for our consideration, we
conclude that the trial court’s handling of the
defendants’ effort to strike a juror for cause
was an error that fundamentally tainted the
fairness of the trial. Under this circuit’s
decision in United States v. Underwood, 122 F.3d
389 (7th Cir. 1997), we have no choice but to
reverse and remand for a new trial. This error
was irrelevant to Oesterman, because of his
guilty plea. Finding no error in the district
court’s sentencing decision, we affirm
Oesterman’s sentence.
I
We need not delve into the details of the
scheme, given the fact that they are not
necessary for our analysis of the jury selection
problem. Briefly, however, they are as follows.
Polichemi, Neal, Olson, Padilla, and Oesterman,
along with others not relevant here, devised a
system under which they marketed so-called "prime
bank instruments" to investors (i.e. victims).
They described these "prime bank instruments" as
multi-million-dollar letters of credit issued by
the top 50 or 100 banks in the world. The
defendants told their victims that they could
purchase these instruments at a discount and then
resell them to other institutions at face value;
the difference in price represented the profits
that would go to the defendants and their
"investors." This was nothing more than a song
and dance: the trades were fictional; there was
no market for the trading of letters of credit;
and nothing capable of generating profits ever
occurred. Somehow, notwithstanding the
implausibility of the "prime bank instruments" to
one familiar with normal business practice for
letters of credit, they managed to persuade their
victims to give them money to finance the
purchase of the phantom discounted instruments.
While this did not earn a cent for any of the
investors, it definitely changed the defendants’
own lifestyles. Polichemi, for example, was
living in his sister’s 2-bedroom condominium in
Florida when things began, but he ended up in a
$6.2 million home. Olson’s and Neal’s stories
were similar.
Between 1991 and 1994, the defendants collected
more than $15 million in this way. As noted
above, their largest source was the CHA, which
turned over more than $13 million of its pension
funds to the defendants, thanks in large part to
the unfaithful Lauer. They passed the monies they
received through various bank accounts (often
Swiss), used some of the money to pay off prior
investors and old debts, and spent the rest on
themselves. Each person had his own role to play.
Polichemi was the president of "Copol," a company
that purportedly traded in the prime bank
instruments. He held himself out to be one of a
handful of people in the world with a license to
trade these "securities." Neal was president of
Konex Holding and Konex Marketing, companies that
marketed Copol’s product through a network of
salespeople. Olson was an attorney for both Copol
and Polichemi, in addition to being a participant
in many of the deals at issue. Padilla was
Copol’s "stateside banker." He served as a
reference for the other defendants and provided
reassurance of Copol’s soundness and success to
potential investors. Oesterman was one of Neal’s
salespeople and a director at Konex marketing.
These five were allegedly joined by Lauer, Edward
Russey (another salesperson for Neal who pleaded
guilty and testified pursuant to a plea
agreement), and John DeVincens, a Konex attorney
who was later acquitted on all charges by the
jury.
II
In the end, the final benefit the defendants
reaped from their scheme was an indictment from
the grand jury in the Northern District of
Illinois. Count 1 of the indictment charged the
entire group with a scheme to defraud in
violation of 18 U.S.C. sec.sec. 1343 and 2.
Counts 2 through 15 charged the individual
defendants with engaging in wire transmissions in
furtherance of the fraud. Count 16 accused
Polichemi, Neal, Olson, and DeVincens of
conspiring to launder money in violation of 18
U.S.C. sec. 371, and Counts 17-26 charged that
individual defendants had committed specific
money laundering offenses in violation of 18
U.S.C. sec.sec. 1956(a)(1)(A)(i),
1956(a)(2)(B)(i), 1957, and 2. Finally, Counts
27-33 involved perjury charges against Padilla
(27-29), DeVincens (30), and Neal (31-33), in
violation of 18 U.S.C. sec. 1621(1). As noted
above, DeVincens was acquitted; Russey pleaded
guilty and is not involved in this appeal;
Oesterman pleaded guilty and raises only
sentencing challenges on appeal; and Polichemi,
Neal, Olson, and Padilla (to whom we refer as the
Polichemi defendants for convenience) were each
convicted on some or all of the charges brought
against them and appeal both their convictions
and sentences.
III
At this court’s direction, the Polichemi
defendants filed one consolidated brief in which
they addressed issues common to all four, and
separate supplemental briefs on their individual
issues. Oesterman, of course, filed his own
brief. Because we find it dispositive of the
appeals of the Polichemi defendants, we address
first their complaint about the jury selection
process. It centers on the district court’s
handling of their request to strike potential
jurors Lorena Nape, John Buck, and David Maines
for cause. Under the system the trial court
adopted, the defendants were to have 10
peremptory challenges collectively, plus one
additional challenge for each two jurors selected
as alternatives. After sixteen potential jurors
had been qualified, the judge would call for
simultaneously submitted peremptory challenges
and then empanel those who were not struck.
Jury selection began on May 15, 1996. A number
of jurors were excused for cause during the
morning session. Among the prospective jurors
called after the lunch break were Nape, Buck, and
Maines. Both Buck and Maines stated, in response
to questions posed during the voir dire, that
they would tend to credit testimony from a law
enforcement officer more than testimony of a lay
witness. Maines noted that his wife’s side of the
family included several police officers, but he
indicated that he did not believe this would
affect his ability to be fair and impartial. On
the other hand, he said that he tended "to have
a less scrutinizing point of view when it comes
to government officials and police officers."
Buck said that he would start out believing the
testimony of a law enforcement agent more than
the testimony of a lay witness. Faced with these
damaging statements, the prosecutor elicited
statements from both men that they could, in the
final analysis, reach a verdict solely based on
the evidence they heard in the courtroom. On that
record, the court denied the defense motions to
excuse Maines and Buck for cause, and the
defendants used two of their remaining peremptory
challenges to strike them from the panel.
Nape’s situation was somewhat different. At the
time of the trial, Nape was a 15-year employee of
the U.S. Attorney’s Office for the Northern
District of Illinois, based in Chicago--precisely
the same office from which the prosecuting
attorneys came. At oral argument and in a letter
filed after argument, the AUSAs (in response to
questions posed by this court) indicated that the
official who signed the indictment did not have
supervisory authority over Nape, because she was
a secretary in the Civil Division. Nonetheless,
it also appears that the sharing of work from
division to division within the U.S. Attorney’s
Office led to varying levels of communication
between the employees of the Civil Division and
of the Criminal Division. See Tr. 176-77 (when
asked whether her work had involved any
assignments from the Criminal Division, Nape
responded "maybe in the asset forfeiture area, of
course, that seems to be slowing down or going
mostly criminal now."); Tr. 179 (Nape admitted to
recognizing the names of the prosecuting
attorneys in the case, and being aware that they
worked in her office.). See generally Attorney
General, Memorandum on Coordination of Parallel
Criminal, Civil, and Administrative Proceedings
(dated July 28, 1997), available at

(calling for information-sharing among divisions
during the investigation and prosecution of
cases, in order for the government to allocate
its resources efficiently and come to effective,
comprehensive settlements).
Based on her affiliation with the prosecutor’s
office, the defendants moved to strike Nape for
cause as well. Even though, in response to
questions, Nape stated that she could be fair and
impartial, the defendants took the position that
at a minimum she was excludable for cause on the
ground of implied bias. As before, the court
denied the motion, and the defendants had to use
a peremptory challenge to remove her from the
jury.
The Polichemi defendants argue that the district
court erred in all three of its rulings rejecting
their challenges for cause, with respect to
prospective jurors Buck, Maines, and Nape. These
errors forced them to use peremptory challenges
to eliminate the objectionable panel members,
which in turn, they argue, violated their Fifth
Amendment due process rights by impairing the
intelligent exercise of their peremptory
challenges. They rely on this court’s decision in
United States v. Underwood, 122 F.3d 389 (7th
Cir. 1997), cert. denied sub nom. United States
v. Messino, 118 S.Ct. 2341 (1988), to show that
this error is a structural one requiring
automatic reversal.
Our analysis of these claims will follow that
basic order. First, we consider whether the
district court erred in any of the three rulings
on the challenges for cause. If not, then we
would have no occasion to proceed further with
this ground of the appeals. Second, assuming at
least one of those decisions was in error (given
the fact that defendants here exhausted all their
peremptory challenges), we must decide whether
the automatic reversal rule of Underwood applies
in these circumstances, or if this was a lesser
error subject to harmless error analysis, as in
our more recent decision in United States v.
Osigbade, 195 F.3d 900 (7th Cir. 1999). If the
automatic reversal rule applies here, then there
is nothing left to do with the Polichemi
defendants but to reverse the convictions and
remand for further proceedings; if not, then we
would proceed to a harmless error analysis.
Before proceeding down this path, we acknowledge
that the circuits have been split on the question
whether the automatic reversal rule of Swain v.
Alabama, 380 U.S. 202, 218 (1965), still applies
to a situation in which trial court error with
respect to challenges for cause forces a
defendant to use up her peremptory challenges,
thus effectively reducing the number of such
challenges below that are permitted in Fed. R.
Crim. P. 24(b). Courts following the automatic
reversal rule include (in addition to our own, as
reflected in Underwood), the Fifth Circuit, in
United States v. Hall, 152 F.3d 381, 408 (5th
Cir. 1998), quoting United States v. Nell, 526
F.2d 1223, 1229 (5th Cir. 1976), the Ninth
Circuit, in United States v. Martinez-Salazar,
146 F.3d 653 (9th Cir. 1998), cert. granted, 119
S.Ct. 2365 (1999), the First Circuit, in United
States v. Cambara, 902 F.2d 144, 147 (1st Cir.
1990), the Third Circuit, in United States v.
Ruuska, 883 F.2d 262, 268 (3d Cir. 1989), the
Fourth Circuit, in United States v. Ricks, 776
F.2d 455, 461 (4th Cir. 1985), and the Sixth
Circuit, in United States v. Hill, 738 F.2d 152,
153-54 (6th Cir. 1984). The Eighth Circuit and
the Tenth Circuit take the opposite approach,
under which they regard errors in denying
challenges for cause as reversible only if the
eventual jury that sat was biased--in other
words, only if the error was not harmless. See
United States v. Sithithongtham, 192 F.3d 1119,
1123 (8th Cir. 1999); Getter v. Wal-Mart Stores,
66 F.3d 1119, 1122 (10th Cir. 1995); see also
Ross v. Oklahoma, 487 U.S. 81, 88 (1988). As we
explain in more detail below, this court has
taken a middle ground, under which some such
errors trigger the automatic reversal rule and
others do not. The Supreme Court will be speaking
soon on the subject, in Martinez-Salazar, but
unless or until we learn that we have erred, we
must follow our own circuit’s precedents.
We can dispose of the challenges to prospective
jurors Buck and Maines relatively easily. In both
those cases, the individuals made some remarks
during voir dire that indicated they would harbor
an actual bias in favor of witnesses from the law
enforcement community, but upon further
questioning, they both promised to evaluate the
evidence fairly and to decide the case based on
what was presented to them. We review a trial
court’s decision whether to dismiss a juror for
cause deferentially, recognizing that the judge
on the scene is in the best position to evaluate
the juror’s ability to serve. United States v.
Beasley, 48 F.3d 262, 266 (7th Cir. 1995); United
States v. Casey, 835 F.2d 148, 151-52 (7th Cir.
1987). We cannot say on this record that the
district court clearly erred when it concluded,
after full questioning, that the defendants had
failed to justify striking prospective jurors
Buck and Maines for cause. Thus, we need not
address the question whether the defendants’
choice to use peremptory challenges for them
infringed their due process rights. Peremptory
challenges are most often used to eliminate from
the jury those whom the defendant has no other
way to remove. Since the district court committed
no reversible error in these two rulings, no
further comment is necessary.
The situation with prospective juror Nape is
significantly different. As a long-time employee
of the same U.S. Attorney’s Office that was
handling the prosecution, Nape could not avoid a
public association with the lawyers for one side
of the case. While she assured the trial judge
that she believed she could be fair and
impartial, such assurances cannot be the last
word in these circumstances. Considering the
deferential standard of review, we do not quarrel
with the district court’s conclusion that Nape
did not consciously harbor ill will toward the
defendants, or good will toward the prosecution.
But the court erred in stopping its inquiries
there. In addition to the kind of overt, actual
bias that the court was looking for, a
prospective juror might be excludable for implied
bias.
While the term "implied bias" is not one that
is used often, the concept is nonetheless well
established in the law. Indeed, the risk of
implied bias lies behind many of the rules that
require excusing a juror for cause. A court must
excuse a juror for cause if the juror is related
to one of the parties in the case, or if the
juror has a financial interest in the case. See,
e.g., United States v. Annigoni, 96 F.3d 1132,
1138 (9th Cir. 1996); Getter, 61 F.3d at 1122. It
is possible, of course, that a particular juror
may be quite capable of maintaining her
objectivity, even if her nephew is a lawyer in
the case, but the relationship is so close that
the law errs on the side of caution. Indeed, much
the same rationale underlies the statute that
requires disqualification of judges when the risk
of at least the appearance of partiality or the
risk of an unconscious tendency to favor one side
is particularly great. See 28 U.S.C. sec. 455(b)
(requiring disqualification when, for example,
the judge or an immediate member of her family
has a financial interest in the case, or when a
close relative of the judge is a party or lawyer
in the case). In many, if not most, such cases,
the judge will in fact be unbiased and capable of
rendering a fair decision, but the need to
prevent even an appearance of partiality leads to
a type of implied bias rule.
In its decision in United States v. Haynes, 398
F.2d 980, 984 (2d Cir. 1968), the Second Circuit
traced the implied bias doctrine back to Chief
Justice John Marshall’s opinion in United States
v. Burr, 25 Fed. Cas. 49 (No. 14692g) (C.C. Va.
1807), one of a series of opinions in the famous
prosecution of Aaron Burr. In Burr the Chief
Justice addressed the ways in which the law
strives to assure an impartial jury:
Why is it that the most distant relative of a
party cannot serve upon his jury? Certainly the
single circumstance of relationship, taken in
itself, unconnected with its consequences, would
furnish no objection. The real reason of the rule
is, that the law suspects the relative of
partiality; suspects his mind to be under a bias,
which will prevent his fairly hearing and fairly
deciding on the testimony which may be offered to
him. The end to be obtained is an impartial jury;
to secure this end, a man is prohibited from
serving on it whose connexion with a party is
such as to induce a suspicion of partiality. The
relationship may be remote; the person may never
have seen the party; he may declare that he feels
no prejudice in the case; and yet the law
cautiously incapacitates him from serving on the
jury because it suspects prejudice, because in
general persons in a similar situation would feel
prejudice.
25 Fed. Cas. at 50. From that time to the
present, the federal courts have included among
the reasons supporting a challenge for cause the
kinds of presumptive sources of bias to which the
Chief Justice referred. In Haynes, the Second
Circuit wrote that
[a]t common law, jurors were challengeable on
principle for bias for partiality due to kinship,
interest, former jury service in the same cause,
or because the prospective juror was a master,
servant, counselor, steward, or of the same
society or corporation. . . . Not only have these
common law grounds for causal challenge retained
their vitality, . . . but to them have been added
others from which prejudice or bias may be
implied.
398 F.2d at 984 (internal citations omitted). See
also United States v. Torres, 128 F.3d 38, 43 (2d
Cir. 1997) (recognizing three possible grounds
for challenges for cause: those based on actual
bias, those based on implied bias, and those
based on "inferable" bias); United States v.
Nell, 526 F.2d at 1229 (5th Cir. 1976); United
States v. Dellinger, 472 F.2d 340, 367-69 (7th
Cir. 1972) (noting that prospective jurors may be
unacceptably biased for a variety of reasons,
and, because they themselves are often unaware of
these actual biases, it is essential to explore
their backgrounds and attitudes in order to
uncover them).
Here, prospective juror Nape was a "servant"--
that is, employee--of the particular office
representing the United States, that of the U.S.
Attorney for the Northern District of Illinois.
We offer no comment on the application of the
implied bias concept to links more remote than
the one she had, such as affiliation with a
different agency of the United States in Chicago,
or affiliation with a different part of the
Department of Justice. In this case,
unfortunately, the fit was perfect. Although the
government has argued that she should be
disqualified only if she was under the actual
supervision of the officer signing the
indictment, we think that fine-tunes matters too
far. The U.S. Attorney has authority over the
entire office and can manage its personnel as he
sees fit. The court therefore erred when it
denied defendants’ motion to dismiss Nape for
cause.
Given this error, what should be its
consequence under our decisions in Underwood and
Osigbade? In Underwood, the district court gave
a confusing explanation of the system it was
planning to use for jury selection. Under a
misapprehension about the actual system, the
defendants used their peremptory challenges on a
number of prospective jurors whom they would not
have chosen had they understood the court’s plan.
This court, noting that the specific right to
peremptory challenges is found in Fed. R. Crim.
P. 24(b), not the Constitution, held that "the
’right’ to peremptory challenges is denied or
impaired only if the defendant does not receive
that which [statutory] law provides." 122 F.3d at
392 (internal quotations and citations omitted).
Recognizing that not all restrictions on the
right to peremptory challenge constitutes the
denial or impairment of the right, the court held
that harmless error analysis was nonetheless
inappropriate when a fundamental denial or
impairment had occurred.
In Underwood, the fact that the entire process
for exercising peremptory challenges had been
misunderstood supported a finding of a denial or
impairment fundamental enough to justify
application of the Swain automatic reversal rule.
This was true even though there was no showing
that the jury that actually sat was biased or
could not be impartial. On the other hand, United
States v. Osigbade presented a case of a clerical
mistake that led to one juror’s being excused and
another being substituted in her place. 195 F.3d
at 901-02. Using the "struck jury" selection
system, both sides had questioned the entire
venire, completed their challenges for cause, and
then had submitted a list of peremptory
challenges to the court. The court reviewed the
peremptory challenges and then compiled the list
of jurors, including alternates, for trial. After
it entertained Batson challenges, it read off a
list of the jurors who had been selected. At that
point the parties alerted the court to the fact
that one juror on that list had already been
excused for cause. The court called the next name
on the list. While waiting for that individual to
return to the courtroom, the parties discovered
that one prospective juror, Rhoda Richardson, had
inadvertently been deleted from the list, because
the court erroneously thought the government had
struck her. Efforts to find her were
unsuccessful, and the court eventually replaced
her with one of the alternates.
These facts, we found, did not add up to such a
basic impairment of the right to use peremptory
challenges that the automatic reversal rule of
Swain and, by then, Underwood, should be applied.
As in Underwood, we recognized that some jury
mistakes justify automatic reversal and others do
not. Id. at 904. In Osigbade, automatic reversal
was not required for several reasons. First, the
defendant did not run out of peremptory
challenges. Second, there was no evidence that
the mistaken dismissal of the one juror resulted
in anyone’s being seated to whom the defendant
would have objected (even with a peremptory
challenge). Third, as the government argued in
Osigbade, the essence of the defendant’s
complaint was that Richardson herself did not sit
on the jury. Defendants have no legally
cognizable right to have any particular juror
participate in their case. See United States v.
Duff, 76 F.3d 122, 125 (7th Cir. 1996).
While we understand that the distinctions here
are fine, we have concluded that the district
court’s error in failing to excuse prospective
juror Nape for cause goes to the fundamental
integrity of the jury, and thus falls on the
Underwood side of the line. Osigbade did not
purport to overrule Underwood, nor could it have
done so under this circuit’s rules without
undergoing circulation to the full court under
the procedures established in Circuit Rule 40(e).
Instead, it sensibly distinguished fundamental
errors that undermine the integrity of the jury
selection system from mere clerical errors that
do not result in the seating of a single
individual to which the defendant would have
objected. (We know this to be the case, because
the court used one of the previously submitted
alternates in Osigbade after the problem became
clear.) Here, not only did the court fail to
consider Nape’s implied bias, but its error
resulted in the subversion of the defendants’
ability to exercise their peremptory challenges
effectively. See Osigbade, 195 F.3d at 904.
Unlike in Osigbade, the defendants ran out of
peremptory challenges; unlike in Osigbade, the
attorneys specifically told the court that the
error resulted in the seating of jurors to whom
they would have objected. These are important
differences. When, under these circumstances, the
court commits the legal error of failing to apply
the principle of implied bias in its
administration of challenges for cause, the
structure of the jury selection process itself is
compromised and the Underwood rule applies.
We therefore conclude that the convictions of
defendants Polichemi, Neal, Olson, and Padilla
must be reversed and the case must be remanded
for a new trial.
IV
The only remaining issue we need consider, in
light of our disposition of those four appeals,
is Oesterman’s challenge to his sentence.
Oesterman pleaded guilty to one count of wire
fraud, without any plea agreement. Although he
was personally responsible for only $450,000,
which he had obtained from victim investors, the
district court relied on the relevant conduct
provisions of the Sentencing Guidelines to hold
him accountable for the entire $10-20 million
loss. It found that he had joined the conspiracy
and increased his offense level by 15, following
U.S.S.G. sec. 2F1.1(b).
We review the district court’s assessment of
relevant conduct for clear error, including its
determination of the questions whether the
defendant participated in jointly undertaken
criminal activity and whether the actions of the
others were reasonably foreseeable to him. See
United States v. Edwards, 115 F.3d 1322, 1325
(7th Cir. 1997); see also U.S.S.G. sec. 1B1.3
(1)(B). The record showed that Oesterman was a
salesman of fraudulent securities for Konex. Neal
solicited the CHA investment, and that investment
was foreseeable to Oesterman according to
evidence showing that Oesterman and Lauer (the
CHA insider) were fellow participants in a Konex
Summit Meeting. Oesterman also used Lauer as a
reference (playing the role of a "satisfied
investor") to facilitate his sales. This evidence
justifies the district court’s finding that
Oesterman participated in the scheme as a whole
and that its activities were reasonably
foreseeable to him. In the absence of clear error
with respect to the relevant conduct calculation,
there is no reason to disturb Oesterman’s
sentence.
V
For the reasons stated, we therefore Reverse the
convictions of Joseph Polichemi, Lyle E. Neal,
Oscar W. Olson, and Charles Padilla and Remand for
further proceedings consistent with this opinion.
We Affirm the sentence imposed on Larry P.
Oesterman.
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