United States v. James Brooks , 681 F.3d 678 ( 2012 )

Case: 09-20871 Document: 00511861304 Page: 1 Date Filed: 05/18/2012
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 18, 2012
No. 09-20871 Lyle W. Cayce
Clerk
UNITED STATES OF AMERICA,
Plaintiff- Appellee
v.
JAMES BROOKS, WESLEY C. WALTON, JAMES PATRICK PHILLIPS,
Defendants - Appellants
Appeals from the United States District Court
for the Southern District of Texas
Before KING, BENAVIDES, and DENNIS, Circuit Judges
BENAVIDES, Circuit Judge:
Defendants-Appellants James Patrick Phillips, Wesley C. Walton, and
James Brooks (collectively, the “Defendants-Appellants”) appeal their conviction
of and sentencing for false reporting of natural gas trades in violation of the
Commodities Exchange Act and the federal wire fraud statute. We AFFIRM.
FACTUAL AND PROCEDURAL BACKGROUND
The Defendants-Appellants are former employees of El Paso Merchant
Energy Corporation (“EPME”), a subsidiary of the El Paso Corporation (“El
Paso”). The government alleges that the Defendants-Appellants violated the
Commodities Exchange Act (“CEA”) and the wire fraud statute by sending false
information about natural gas prices to trade magazines that report natural gas
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prices in indexes, in an effort to affect and manipulate those indexes, which, in
turn, would affect the market for natural gas futures and benefit the company’s
financial positions.
Some background on the natural gas industry is necessary for
understanding this case. Natural gas is transported throughout North America
via a network of pipelines. The gas transportation network is centered around
“hubs,” which are geographical locations where major pipeline systems interlink.
These hubs act as separate markets, at which supply and demand dictate prices
that may differ between the hubs.
Gas trades are divided into different types. Most basically, physical gas
is traded, whereby one company agrees to purchase a quantity of gas to be
physically delivered to a particular location. In addition to the sale of physical
gas, financial trades are made based on gas prices. One particular financial
trade, a gas contract for future delivery, is traded on the New York Mercantile
Exchange (“NYMEX”). NYMEX contracts are based on the price of gas trading
at Henry Hub, Louisiana. Other financial trades, termed “swaps,” are
transactions where two traders agree to buy a volume of gas from each other at
the same time, but at different prices. In one common format, called a “basis”
trade, one party agrees to pay a first-of-the-month index price and the
counterparty agrees to pay based on the last day NYMEX settle. Another
common financial transaction is an exchange for physical futures (“EFP”), which
is a swap with one end priced off the NYMEX futures market and the other
prices off an index plus or minus a differential.1 Financial trades generally do
not result in the transfer of physical gas, but are resolved financially.
1
In these various futures transactions, the parties discuss financial traders holding
“short” or “long” positions. In a “short” position, a trader benefits from a lower index price,
and in a “long” position, the trader benefits from a higher index price.
2
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The market index prices for physical gas are most prominently published
in two privately owned newsletters: Inside FERC Gas Market Report (“Inside
FERC”) and Natural Gas Intelligence (“NGI”). Both of these publications publish
the natural gas price marketing indicators at the major pipeline hubs and
market centers in the United States, and it is undisputed that both publications
are highly influential to market price for physical gas. The indexes also are used
to determine royalties and public gas contracts, among other things. The
publications gather pricing information about the various markets and pipeline
hubs by requesting data about physical gas transactions from natural gas
traders. After receiving data from the gas traders, and taking a variety of other
factors into account, the publications release indexes that purport to represent
the price of natural gas at different delivery points. In requesting data, Inside
FERC and NGI requested that traders report fixed-price, baseload deals
negotiated during bidweek, and it also instructed that basis or EFP trades not
be reported.2
The Defendants-Appellants were all employees at EPME. EPME traded
in both physical and financial transactions of the sort previously mentioned. In
2000, Defendant-Appellant Brooks was EPME’s Senior Vice President for Risk
Management, and he was responsible for overseeing physical traders. In 2001,
Brooks became the Managing Director for Natural Gas, and he oversaw both
physical and basis traders. At the time, EPME was divided into various trading
“desks,” which were then split between physical gas trading and finance trading.
The desks were based on pipeline network regions. During the time in question,
Defendant-Appellant Phillips was a senior physical trader and was manager of
the Texas Desk at EPME. Defendant-Appellant Walton was a basis trader on
the financial side for both the Texas Desk and the Gulf Coast Region of the
2
As will be explained, the parties dispute the extent to which these terms have
accepted meanings in the natural gas industry.
3
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Northeast Desk. As a market participant, Inside FERC and NGI would request
physical trade information from EPME. EPME would report the information to
the trade publications via spreadsheets sent by the physical traders responsible
for each of EPME’s desks.
From summer 2002 to fall 2002, El Paso received inquires from various
federal agencies and a United States Attorney’s Office grand jury subpoena
seeking information on the reports EPME sent to the trade publications.3
Around that time, El Paso hired Haynes & Boone, a law firm, to conduct an
internal investigation into allegations that El Paso employees had submitted
false trades to trade publications. Defendants-Appellants Brooks, Walton, and
Phillips were interviewed as part of that investigation, and each employee was
subsequently terminated. Nonetheless, at least at the beginning of this
investigation, El Paso paid the legal fees for both Walton and Brooks.
Starting in March 2003, an Assistant U.S. Attorney began a course of
correspondence with El Paso’s legal counsel about El Paso’s payment of legal fees
for former employees. El Paso informed the Assistant U.S. Attorney about the
company by-laws, according to which EPME was required to indemnify any
employee for legal fees if the employee was found not to have engaged in wrong-
doing, but EPME was left with discretion about whether to advance payment of
legal fees prior to such determination.4 El Paso stated that, based in part on
3
Prior to the United States Attorney’s investigation, in 2000, the California Public
Utilities Commission started an investigation of El Paso, during which Southern California
Edison also requested documents related to EPME’s reporting. Moreover, at about the time
of the United States Attorney subpoena, El Paso received similar requests for information
from the Commodities Futures Trading Commission and the Federal Energy Regulatory
Commission.
4
El Paso and EPME had slightly different policies. El Paso’s by-laws required it to
both indemnify and to advance legal fees for any of its employees. El Paso would then have
the right to seek a refund of payments if the employee was found to have engaged in wrong-
doing. EPME was only required to indemnify its employees, however, and the defendants here
were all EPME employees.
4
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“the limited results of the Haynes & Boone interviews,” it had decided not to
advance legal fees for Brooks, but that it was inclined to advance Walton’s legal
fees. El Paso stressed, however, that it would consider the employee’s
cooperation with the federal investigation in deciding whether to continue
advancing legal fees. After additional correspondence regarding Delaware law
and its application to El Paso’s indemnification policy, the government, in
response to El Paso’s request for the identities of any individual who was not
cooperating, identified Walton, as well as four other employees, who are not
defendants here, as non-cooperating employees. Sometime thereafter, El Paso
terminated Walton’s legal fees, but it did not inform the government.
Defendant-Appellant Phillips, who had not been discussed in the
correspondence, subsequently requested indemnification. On August 12, 2004,
El Paso declined Phillips’s request, noting that indemnification was made only
after an ultimate determination of the legal proceedings, and that it would not
advance his legal fees. El Paso also noted that it was not obliged to advance fees,
and that EPME was cooperating with the government and so it would not
advance legal fees to “potential subjects or targets of their investigations.”5
On September 25, 2006, the government filed a second superseding
indictment, charging the Defendants-Appellants with forty-nine counts:
specifically, twenty-four counts of false reporting in violation of the CEA, 7
U.S.C. § 13(a)(2), twenty-four counts of wire fraud in violation of 18 U.S.C.
§ 1343, and one count of conspiracy to commit false reporting and wire fraud in
violation of 18 U.S.C. § 371. The government alleged that the Defendants-
Appellants were involved in a conspiracy, lasting from about April 2000 through
5
Phillips subsequently filed a civil suit to force EPME to advance his legal fees, in
which he sought discovery. See Phillips v. El Paso Corp., no. 2005-00645 (Texas Dist. Ct. Jan.
5, 2005). The government filed a successful motion to stay that civil suit, pending the criminal
investigation.
5
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May 2002, whereby the Defendants-Appellants reported false information
related to natural gas prices to Inside FERC and NGI to manipulate the index
prices reported in those magazines. Specifically, the government alleged that
Defendant-Appellant Brooks would direct the physical gas traders at EPME to
report false data to the publications, such as trades that did not occur, false
prices, or false gas volumes, in a manner that would benefit EPME’s financial
positions. Defendant-Appellant Walton, a basis trader on the Texas and
Northeast Desks, would allegedly tell the physical traders his financial positions
for the upcoming month, such as whether he wanted the index price of gas to
increase or decrease in certain areas, so the physical traders could report data
manipulating the published indexes in his favor. The second superseding
indictment also alleged that Defendant-Appellant Phillips and the other physical
gas traders sent fictitious information and reports to Inside FERC and NGI. The
government alleged that twenty-four misleading reports were transmitted to
these publications, either personally by the Defendants-Appellants or based on
their instructions.6
The trial lasted from December 4, 2007 to February 7, 2008. During the
trial, the government submitted over 1,000 exhibits, including the bidweek
surveys sent to Inside FERC and NGI, internal worksheet versions of those
surveys, internal EPME emails, EPME trade tickets recording physical and
basis deals, summaries of basis positions, and hundreds of taped telephone calls.
During trial, the jury heard testimony from fourteen government witnesses,
including Matthew O’Loughlin, an expert, and five defense witnesses, including
Defendant-Appellant Brooks.
The government’s two primary witnesses were physical traders Dallas
Dean and Sharon O’Toole. Dean was a physical trader on the Northeast Desk
6
A number of other members of the alleged conspiracy have already pled guilty to
charges of false reporting, wire fraud, or conspiracy.
6
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and O’Toole was a physical trader on the Texas Desk. Both testified about the
conspiracy and stated that Defendant-Appellant Brooks instructed them to
submit false data to Inside FERC based on information given to them by
Defendant-Appellant Walton. O’Toole also testified about Defendant-Appellant
Phillips’s involvement in the conspiracy. The government also admitted a large
number of incriminating emails between the various traders—often between
Phillips and other physical traders—about the content of the reports sent to
Inside FERC and NGI or requesting information from basis traders about their
financial positions. Similarly, the government played recordings of telephone
calls, many recorded on Walton’s line. In some of these conversations, Walton
discussed price targets for certain trading regions, the submission of reports that
would or had affected published indexes, and whether certain reported trades
were too low to be credible. He also thanked the physical traders when the
published index prices were favorable to his financial positions.
In one particularly important email chain, various EPME employees,
including Brooks, Phillips, and Walton, discussed the reports sent to the
publications. Starting this chain, Brooks emailed the physical and financial
traders on October 23, 2000, writing:
There has [sic] been several discussions on how IF [Inside FERC]
price should be reported in the month of November. Most of you are
aware that we reported only verifiable fixed price transactions to IF
for October. It is the opinion of some, that the reason for doing so
made no difference, and only eliminated us as an active price setting
participant. In an effort to get everyone’s opinion on this, reply as
to the following: 1. Report according to our book bias (as in the
past). 2. Report verifiable fixed price trades only.
In response, various traders, including Walton and Phillips, chose the first
option. Several other traders discussed the options, emailing with Brooks and
discussing how Inside FERC had a standardized format for reporting data, but
that the “integrity of the data . . . is not verified.” Another trader replied that
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they should “avoid discussing this is on e-mail” due to ongoing investigations,
and O’Toole replied, “GOOD point!”
Also testifying for the government was Ronald Clay Sanders, an employee
at EPME, who worked as the manager of the risk operations group during the
time of the alleged conspiracy. Sanders testified whether the trades reported to
Inside FERC or NGI by the physical traders were real and whether they
matched any trades in the EPME electronic database. Overall, Sanders testified
that only 3.6% of the 6,213 trades reported to Inside FERC and NGI during the
course of the conspiracy matched actual trades, and that if the trades reported
by the West Desk are excluded—which allegedly stopped participating in the
conspiracy in fall 2002—only 1.9% of the 5,687 trades match actual trades.
Finally, the government presented O’Loughlin, an expert who testified about the
effect of EPME’s false reports on the published indexes at Inside FERC and NGI.
The primary defense witness was Defendant-Appellant Brooks. In part,
Brooks testified about the incriminating October 2000 email chain where the
traders discuss reporting based on “book bias.” Brooks testified that “book bias”
did not mean that the physical traders would submit numbers favoring the basis
traders’ positions; rather, Brooks stated that the term meant that EPME would
report data to the publications based on their perception of where gas was
actually trading.
A potential defense witness, Don Guilbault, invoked his Fifth Amendment
privilege against self-incrimination on the day he was scheduled to testify.
Guilbault was a physical trader at EPME and he had admitted to submitting
false reports to Inside FERC and NGI. According to the Defendants-Appellants,
however, Guilbault would have testified that Walton did not provide him with
basis positions to shape his reports. Although Guilbault pled guilty prior to the
Defendant-Appellants’ trial, he was still awaiting sentencing at the time of the
current trial to ensure cooperation. The Defendants-Appellants moved to compel
8
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testimony; after a hearing, the district court denied the motion, finding no
government misconduct and a valid purpose for the invocation of privilege.
After closing arguments, the jury deliberated for three days. The jury sent
several notes during deliberations, one of which asked a question about the
phrase “ignorance of the law is no excuse.” Ultimately, the jury found: all
Defendants-Appellants guilty of the conspiracy count; Phillips guilty of false
reporting and wire fraud on counts 5, 9–10, 14, 19–21, 23–25, 29, 33–34, 38,
43–45, 47–49, and not guilty on all other charged counts; Walton guilty of false
reporting and wire fraud on counts 3–5, 9–10, 19–24, 27–29, 33–34, 43–48, and
not guilty on all other charged counts; and Brooks guilty on counts 2–5, 8–29,
32–49, and not guilty on all other charged counts.
On December 17, 2009, the district court sentenced the Defendants-
Appellants. The district court calculated, for Phillips and Walton, that the
proper offense level was thirty-three (with criminal history category 1), with a
recommended sentencing range of 135 to 168 months. For Brooks, the district
court calculated that the offense level was thirty-five (with a criminal history
category 1), with a recommended sentencing range of 168 to 210 months. The
district court sentenced Phillips and Walton to 135 months of imprisonment and
sentenced Brooks to 168 months of imprisonment.
The Defendants-Appellants filed a timely notice of appeal, and they now
assert ten separate grounds for error. They argue that the indictment must be
dismissed, and that their convictions and sentences must also be reversed.
ANALYSIS
A. Government Interference with Payment of Legal Fees
The Defendants-Appellants first argue that the government pressured
EPME to cut off its payment of legal fees for their attorneys, violating their Fifth
and Sixth Amendment rights, and consequently, requiring dismissal of the
indictment against them, relying on 2003 correspondence between the Assistant
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U.S. Attorney and El Paso’s legal counsel. The district court found no such
pressure by the government, and the Defendants-Appellants do not show clear
error in that determination.
We review a district court’s denial of a motion to dismiss an indictment de
novo. United States v. McNealy, 625 F.3d 858, 868 (5th Cir. 2010). We review
the district court’s underlying factual findings for clear error. Id. “Under the
clear error standard, we defer to the findings of the district court unless we are
left with a definite and firm conviction that a mistake has been committed.”
United States v. Avants, 367 F.3d 433, 441 (5th Cir. 2004) (citation and internal
quotation omitted).
The record creates no “firm conviction” that the district court erred in
finding the government did not coerce El Paso into deciding not to advance the
Defendants-Appellants’ legal fees. While the correspondence shows El Paso
possessed an intense desire to be seen as cooperative by the government, the
government never demanded or suggested to El Paso that it cease paying the
legal fees of the Defendants-Appellants. Indeed, rather than create a “firm
conviction” that El Paso was coerced into not paying the Defendants-Appellants’
attorney fees, the correspondence shows El Paso, through EPME, exercised its
own discretion whether to pay the Defendants-Appellants’ legal fees. The
correspondence shows that EPME had the discretion, under its by-laws, not to
advance legal fees to its employees. Further, as to Brooks, the correspondence
shows El Paso had exercised that discretion prior to the government’s
correspondence due to the company’s conclusion that he was involved in wrong-
doing.
Nor do Defendants-Appellants fair better in relying on the 2003 Justice
Department Memorandum, “Principles of Federal Prosecution of Business
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Organizations,” also known as the “Thompson Memorandum.”7 That
memorandum provided guidance on how the government should decide whether
a corporate entity is cooperating with an investigation, and it suggested that
investigators consider whether a corporation was advancing legal fees to
culpable agents. Admittedly, that memorandum has been subject to criticism,
and the Department of Justice has subsequently revised its policies.
Nevertheless, the mere existence of the memorandum could not have compelled
El Paso.
This case is distinguishable from the facts that the Second Circuit
confronted in United States v. Stein, 541 F.3d 130 (2d Cir. 2008). There, the
district court found that the government had “forced” KPMG to cease paying
legal fees on behalf of the defendants, the payment of which had been KPMG’s
long-standing policy, based on threats from the government and the
government’s involvement in crafting internal KPMG memos dissuading
employees from obtaining counsel. Id. at 147–50. The district court’s factual
findings bound the Second Circuit, and on such findings, the Second Circuit held
KPMG’s actions were state actions that violated the defendants’ right to counsel
of their choice. Id.Here, as noted above, no such factual findings were made, and reasonably
so. Whereas in Stein, where the government specifically threatened to take into
account KPMG’s payment of legal fees, referring to the Thompson Memorandum,
the correspondence here does not refer to that memorandum and it includes no
threat to indict El Paso if it continued to pay fees. Moreover, the government did
not meddle in El Paso’s internal discussion with employees in an attempt to
dissuade the retention of counsel. Lastly, whereas KPMG’s long-standing policy
7
Mem. from Larry D. Thompson, Deputy Att’y Gen., U.S. Dep’t of Justice, Principles
of Federal Prosecution of Business Organizations (Jan. 20, 2003), available at
http://www.justice.gov/dag/cftf/corporate_guidelines.htm.
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of paying legal fees demonstrated that the fees would have been paid but for the
government’s actions, EPME’s policy was discretionary, and had been
independently exercised to not advance legal fees to Brooks.
Accordingly, the Defendants-Appellants fail to show clear error in the
district court’s factual findings, and under those facts, we find that denial of the
motion to dismiss the indictment was proper.
B. Applicability and Constitutionality of CEA
The Defendants-Appellants raise a number of challenges to the
applicability and constitutionality of the CEA. First, they argue that 7 U.S.C.
§ 13(a)(2)’s reference to “false . . . reports” does not cover the false reports they
sent to industry newsletters. Second, they argue that trades of physical natural
gas are exempted from the CEA and/or do not meet the Act’s definition of
“commodity.” Third, the Defendants-Appellants argue that various terms in
§ 13(a)(2) are vague, and thus the CEA is unconstitutionally vague as applied to
them. Fourth, they argue that the CEA is overbroad. While the Defendant-
Appellants’ arguments are sweeping, they are, ultimately, unavailing.
1. “Report”
The Defendants-Appellants first argue that their communications with
Inside FERC and NGI do not qualify as “reports” under §13(a)(2). They state
that other portions of the CEA, as well as the CFTC’s regulations promulgated
thereunder, distinguish between “statements” and “reports,” and generally use
“report” to refer to “a formal record or document the Commission requires
regulated futures professionals or traders to file, maintain or provide to the
Commission or costumers.”
The CEA states that it shall be unlawful for:
[a]ny person . . . knowingly to deliver or cause to be delivered for
transmission through the mails or interstate commerce by
telegraph, telephone, wireless, or other means of communication
false or misleading or knowingly inaccurate reports concerning . . .
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market information or conditions that affect or tend to affect the
price of any commodity of interstate commerce . . . .
7 U.S.C. § 13(a)(2). The term “reports” is not defined in the CEA or CFTC
regulations. See 7 U.S.C. § 1a; 17 C.F.R. § 1.3. Neither the Supreme Court nor
any circuit court has considered the definition.8 Consequently, the applicability
of the term “reports” appears to be an issue of first impression.
“In construing the United States Code our task must begin with the words
provided by Congress and the plain meaning of those words.” United States v.
Valencia, 394 F.3d 352, 355 (5th Cir. 2004). Thus, we begin with the plain
meaning of “report[],” which the dictionary defines as any statement of fact, or
at least a detailed statement of fact. See Merriam-Webster, report, available at
http://www.merriam-webster.com/dictionary/report (defining report as “a usually
detailed account or statement); Oxford English Dictionary, report, available at
http://www.oed.com/search?searchType=dictionary&q=report (defining report as
“[i]nformation provided or conveyed, and related senses,” “[a]n account of a
situation, event, etc., brought by one person to another . . . , a notification of
something observed,” “[a] descriptive account or statement”); see also CBC, Inc.
v. Bd. of Governors of Federal Reserve Sys., 855 F.2d 688, 690–91 (10th Cir.
1988) (applying dictionary definition of “report” to interpret word in Bank
Holding Act).9 The Defendants-Appellants’ statements to Inside FERC and NGI
would satisfy such a definition. They were not expressions of opinion, or casual
communications, but were lengthy documents outlining detailed information
8
A district court has considered the definition of “report” and found it covers electronic
communications such as the Defendants-Appellants’. See CFTC v. Atha, 420 F. Supp. 2d 1373,
1380–81 (N.D. Ga. 2006) (finding § 13(a)(2) false reporting provision applies to false trade
reports sent electronically to Inside FERC).
9
The Defendants-Appellants provide the court with no reason to believe “report,” first
included in the Grain Futures Act of 1922, had a meaning other than that used today. See
Grain Futures Act, 42 State 998, 1003 (1922).
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about natural gas trades, sent to established industry publications with the
intent to inform those publications about the state of the natural gas markets.
The Defendants-Appellants argue that “reports,” when used in the CEA,
refers only to formal reports required under the statute to be submitted by
traders to the CFTC or to customers, and that other portions of the CEA
differentiate between “reports” and mere “statements.” While it is true that
various parts of the CEA specify reports that are to be kept and submitted, such
fact cuts against the Defendants-Appellants. Where the CEA discusses reports
to be sent to the CFTC or to customers, the CEA specifies the kind of report. See
7 U.S.C. § 6g (providing “[e]very person registered hereunder . . . shall make
such reports as are required by the Commission . . .” (emphasis added)); 7 U.S.C.
§ 6i(2) (providing certain trades unlawful “unless such person files . . . with . . .
the Commission such reports regarding any transaction . . . as the Commission
may by rule . . . require” (emphasis added)); 17 C.F.R. § 16.00 (providing “[e]ach
reporting market shall submit to the commission . . . a report . . . showing”
specified information); 17 C.F.R. § 17.00 (providing “[e]ach futures commission
merchant . . . shall submit a report to the Commission . . .”; requiring report to
provide specified information). Such specifics would be unnecessary if every use
of “report” implied the same type of report. The fact that the CEA specifies the
kind of report when discussing reports to be made to the CFTC or to customers
implies that when the CEA uses “report,” without such limits, it does so in a
more general fashion.
Indeed, reading § 13(a)(2) in the manner suggested by Defendants-
Appellants would render other sections of the CEA superfluous. The next two
subsections of the CEA make it unlawful for “[a]ny person knowingly to make
. . . any statement in any application, report, or document required to be filed
under this chapter . . . which statement was false or misleading with respect to
a material fact,” and for “[a]ny person willfully to falsify . . . a material fact,
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make any false . . . statements or representations . . . to a registered entity,
board of trade, of futures associations . . . .” 7 U.S.C. §§ 13(a)(3), (4) (emphasis
added). Similarly, 7 U.S.C. § 6b(a)(2) renders it unlawful for “any person, in or
in connection with any order to make . . . any contract of sale of any commodity
for future delivery . . . , (B) willfully to make or cause to be made to the other
person any false report or statement or willfully to enter or cause to be entered
for the other person any false record.” If § 13(a)(2) was intended to cover only
false reports sent to the CFTC or to customers, these other sections would be
superfluous.
Moreover, if § 13(a)(2) concerned only false reports submitted to the CFTC,
or false reports submitted from traders to customers, there would be no need to
limit the provision to communications “in interstate commerce,” and that “affect
or tend to affect the price of any commodity.” See 7 U.S.C. § 13(a)(2). These
jurisdictional “hooks” would not be needed for Congress to regulate false
communications to a government agency, or false communications by federally
registered traders. See M’Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 417 (1819). The
fact is apparent when one looks at the CEA’s provisions that specifically deal
with false reports to the CEA or customers. Those sections are not limited to
communications in interstate commerce or to those that affect commodity prices.
Instead, they render all false statements to the CFTC or customers by registered
traders unlawful. See 7 U.S.C. §§ 6b(a)(2)(B), 13(a)(3)–(4).
Further, the language in § 13(a)(2) indicates that covered “reports” include
more than formal communications to the CFTC or customers. As the Northern
District of Georgia pointed out, § 13(a)(2) covers reports communicated “through
the mails or interstate commere by telegraph, telephone, wireless or other means
of communication.” See CFTC v. Atha, 420 F. Supp. 2d 1373, 1380–81 (N.D. Ga.
2006). As the section clearly contemplates reports sent by telephone, it is
unlikely it is intended to cover only the official reports.
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Finally, the CFTC has consistently interpreted § 13(a)(2) to apply to trade
reports sent to Insider FERC and/or NGI, like those sent by the Defendants-
Appellants. Although not promulgated in notice-and-comment rulemaking, the
CFTC has sued various defendants for behavior identical or similar to that at
issue here. See CFTC v. Dizona, 594 F.3d 408, 411–13 (5th Cir. 2010) (alleging
defendants sent false reports to Inside FERC and NGI; affirming district court’s
refusal to overturn jury verdict on false reporting because no evidence that
reports were false); CFTC v. Reed, 481 F. Supp. 2d 1190, 1193 (D. Colo. 2007)
(alleging defendants sent false trade reports to “industry reporting firm”); Atha,
420 F. Supp. 2d at 1377–78 (alleging defendants sent false reports to Insider
FERC, NGI, and Gas Daily). The CFTC’s consistent interpretation is afforded
at least some deference. See generally Skidmore v. Swift & Co., 323 U.S. 134(1944).
Accordingly, we find that the Defendant-Appellants’ communications with
Inside FERC and NGI qualified as “reports” under 7 U.S.C. § 13(a)(2).
2. Covered Commodities
The Defendants-Appellants next argue that the CEA does not apply to
their conduct, making two arguments. First, they argue that natural gas is an
exempt commodity under the CEA, and thus, the types of contracts they
allegedly falsely reported—natural gas contracts—are exempt. Second, they
argue that because the CEA only regulates natural gas futures contracts, which
are traded on NYMEX, any false reporting related to index prices at hubs other
than Henry Hub are not covered by the CEA. These arguments will be
considered in turn.
a. Exemptions
In 1993, the CFTC issued a final rule which “exempt[ed] from all
provisions of the [CEA], [except certain provisions to the extent they prohibit
manipulation] . . . [c]ontracts for the purchase and sale of . . . natural gas, [and]
16
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No. 09-20871
natural gas liquids.” See 58 Fed. Reg. 21,286, 21,294 (1993). Thereafter, 7
U.S.C. § 2(g)–(h) was amended in 2000, as part of the Commodity Futures
Modernization Act, to exclude all trades between individual qualified
participants that are not “executed or traded on” or “entered into on” a “trading
facility,” which, defendants argue, covers the physical natural gas trades. The
Defendants-Appellants contend that because natural gas is exempted under both
the 1993 CFTC rule and the 2000 amendment to the CEA, their false reporting
practices are also exempted from the CEA’s coverage.
The Defendants-Appellants’ argument, however, has been uniformly
rejected by the courts that have considered it—this Court included. In United
States v. Futch, an unpublished decision, this Court found that the various
exemptions only cover actual contracts for natural gas, and do not cover false
reports about non-existent contracts. See 278 F. App’x 387, 392 (5th Cir. 2008).
In reaching this holding, this Court stated that “§ 13(a)(2)’s false reporting
offense . . . extends to ‘any commodity in interstate commerce’ and is not limited
to futures contracts regulated by the CFTC . . . [;] ‘false reporting of market
information concerning natural gas and attempted manipulation of natural gas
price indices does not implicate an agreement, contract or transaction’ and thus
does not come under the exceptions in 7 U.S.C. § 2(g)–(h).” See id. (citations and
quotations omitted). As in Futch, the charges against the Defendants-
Appellants do not arise from their execution of contracts for purchase of natural
gas, or contracts entered into outside of a trading facility, but rather, for filing
false reports about contracts that they claimed to have executed.
This reading has been uniformly adopted by courts, and the Defendants-
Appellants do not cite any contrary case law to support their argument. See,
e.g., Reed, 481 F. Supp.2d at 1197–98 (holding that false reporting not
exempted); Atha, 420 F. Supp.2d at 1379–80 (same); CFTC v. Bradley, 408 F.
Supp. 2d 1214, 1218–19 (N.D. Okla. 2005) (same); United States v. Valencia, No.
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Civ. A. H-03-024, 2003 WL 23174749, at *10 (S.D. Tex. Aug. 25, 2003) (same),
rev’d on other grounds, 394 F.3d 352 (5th Cir. 2004); see also CFTC v. Johnson,
408 F. Supp. 2d 259, 266–67 (S.D. Tex. 2005) (not expressly addressing issue but
finding that CEA covers nearly identical false reporting practices).10 Moreover,
other decisions by this Court have implicitly found that the CEA covers false
reports about natural gas markets, even if it would not cover the falsely reported
contracts (if they existed). See Dizona, 594 F.3d at 418 (dismissing false
reporting count for lack of evidence, but assuming CEA covered similar false
reporting of natural gas); Valencia, 394 F.3d at 353–57 (assuming but not
expressly deciding that the CEA covers false reporting of natural gas); see also
58 Fed. Reg. at 21,291 (approving exemption of natural gas; noting conduct
“otherwise subject to the Act would not be exempt for such activity, even if it
were connected to their exempted . . . (Energy Contract) activity”). In sum,
given that we agree with the previously cited decisions that squarely rejected the
Defendants-Appellants’ argument, we hold that the exemptions in the CEA and
the CFTC do not cover their reporting activities.
b. “Commodity”
The Defendants-Appellants next contend that the false reports they
submitted did not concern a “commodity” subject to the CEA. They argue that
only natural gas traded at Henry Hub is a commodity under the CEA because
only natural gas traded at Henry Hub underlies the natural gas futures
contracts traded on NYMEX. Consequently, because the government proved
only that their false reports affected or could have affected the price of natural
10
Cf. United States v. Radley, 632 F.3d 177, 182–83 (5th Cir. 2011) (holding § 2(g)’s
“contract, agreement, or transaction” not limited to legally enforceable agreements, but also
covers “conducting business,” thus including, and exempting from CEA, defendants’ allegedly
manipulative actions; distinguishing Futch, stating falsely reporting trades is not “conducting
business”).
18
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gas generally, and not at Henry Hub, the Defendants-Appellants argue their
convictions must be vacated. We do not agree.
The CEA defines “commodity” as “wheat, cotton, rice, corn, oats, barley,
rye . . . , and all other goods and articles, except onions . . . , and all services,
rights, and interests . . . in which contracts for future delivery are presently or
in the future dealt with.” See 7 U.S.C. § 1a(4). Natural gas is plainly a “good”
or “article.” The questions thus turns on whether it is a good “in which contracts
for future delivery are presently or in the future dealt with.”
As mentioned above, futures contracts for natural gas are traded on
NYMEX, and those futures are derivative of natural gas traded at Henry Hub.
Nonetheless, the record shows that natural gas may be moved from any location
to Henry Hub through the national pipeline system. Thus, it would be peculiar
that natural gas at another hub is not a commodity, but suddenly becomes a
commodity solely on the basis that it passes through Henry Hub, and ceases to
be a commodity once it moves onto some other locale. While the price of that
commodity may fluctuate with its location, and the forces of supply and demand
at that location, the actual nature of the “good” does not change.11
Although, as discussed above, the Defendants-Appellants conduct did not
fall within the regulatory exemption, the existence of that exemption bolsters
our reading of the definition of “commodity.” The CFTC exempted from the
CEA’s coverage “[c]ontracts for the purchase or sale of . . . natural gas.” See 58
11
Indeed, it is at least open to question whether the CEA requires a commodity to be
the subject of a currently existing futures market, or merely that it be such a good for which
a futures market could come into being. The CEA defines, as a commodity, all “goods . . . in
which contracts for future delivery are presently or in the future dealt with.” See § 1a(4).
Assuming only natural gas at Henry Hub was a covered commodity, the Defendants-
Appellants present no reason why gas at other hubs could never serve as the basis for other
futures markets. See United States v. Reliant Energy Servs., Inc., 420 F. Supp. 2d 1043, 1062
(N.D. Cal. 2006) (holding “criminal manipulation provision of § [13(a)(2)] is not limited to
futures contracts”; “[r]ather, according to the plain meaning of the text, the criminal
manipulation provision also applies to ‘any commodity in interstate commerce’”).
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Fed. Reg. at 21,294. Such an exemption would be unnecessary if natural gas
was not a commodity under the act.12
Case law supports such a reading. Although no court has squarely
confronted the question presented by the Defendants-Appellants, neither has
any court suggested that natural gas at hubs other than Henry Hub is outside
the purview of the CEA. See Futch, 278 F. App’x at 390 (stating “natural gas is
a commodity under the Commodity Exchange Act”); Valencia, 394 F.3d at353
(considering allegations defendant manipulated natural gas market, by
reporting false trades, in violation of § 13(a)(2)); United States v. Radley, 659 F.
Supp. 2d 803, 806 (S.D. Tex. 2009) (stating “natural gas” was “the commodity at
issue in the case”); Reed, 481 F. Supp.2d at 1196 (finding allegations “Defendant
attempted to manipulate the price of natural gas, a commodity that travels in
interstate commerce” covered by CEA); Atha, 420 F. Supp.2d at 1377–78 (stating
“[n]atural gas is a commodity”); Bradley, 408 F. Supp.2d at 1220 (“It is
undisputed that natural gas constitutes a ‘commodity’ under the CEA.”);
Johnson, 408 F. Supp.2d at 264–65 (finding allegations defendants falsely
reported natural gas trades stated a claim under § 13(a)(2)).
Hershey v. Energy Tranfers Partners, L.P., 610 F.3d 239 (5th Cir. 2010),
does not contradict this reading. In that case, the Court considered whether
private plaintiffs had a cause of action based on allegations that the defendants
were manipulating the price of natural gas at hubs other than Henry Hub. Id.at 243–49. The private plaintiffs’ standing to sue was premised on their holding
NYMEX futures contracts. Id. at 240. The CEA, however, provides a right of
action for holders of a futures contract for manipulation of that contract or “the
price of the commodity underlying such contract.” See 7 U.S.C. § 25(a)(1)(D).
Consequently, as the plaintiffs had not alleged manipulation of the Henry Hub
12
The CFTC gave no indication that it believed the exemption covered only natural gas
at Henry Hub.
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natural gas price, which price underlay their security, they had no cause of
action against manipulation of the price of natural gas which had no affect on
their security. See Hershey, 610 F.3d at 241, 247 (stating “[t]he modifier
‘underlying’ has an important effect on ‘commodity’—the ‘underlying commodity’
of a futures contract is a specific good, governed by the terms of the futures
contract”; holding “the underlying commodity of a NYMEX natural gas futures
contract is not natural gas wherever bought and sold, but the specific natural
gas delivered at Henry Hub”). Hershey, however, never questioned whether
natural gas was a commodity subject to § 13(a)(2).
Accordingly, we find that natural gas, whether at Henry Hub or at some
other location, is a “commodity” within the meaning of the CEA.
3. Vagueness
The Defendants-Appellants next argue § 13(a)(2) is unconstitutionally
vague because it fails to give fair notice that the CEA, an act whose primary
purpose is to regulate futures and options, covers false reporting of physical
trades. In particular, they argue that terms “report,” “false or misleading,”
“market information,” “conditions that tend to affect the price of any commodity
in interstate commerce,” and “price” are all vague.
“It is a basic principal of due process that an enactment is void for
vagueness if its prohibitions are not clearly defined.” Grayned v. City of
Rockford, 408 U.S. 104, 108 (1972). “[T]he void-for-vagueness doctrine requires
that a penal statute define the criminal offense with sufficient definiteness that
ordinary people can understand what conduct is prohibited and in a manner that
does not encourage arbitrary and discriminatory enforcement.” Kolender v.
Lawson, 461 U.S. 352, 357 (1983). Nonetheless, it is also “well established that
vagueness challenges to statutes which do not involve First Amendment
freedoms must be examined in light of the facts of the case at hand.” United
States v. Mazurie, 419 U.S. 544, 550 (1975).
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Here, the Defendants-Appellants do not argue that their speech is
protected by the First Amendment. Indeed, this Circuit has held that
“intentional or reckless falsehood, even political falsehood, enjoys no First
Amendment protection[.]” Colson v. Grohman, 174 F.3d 498, 507 (5th Cir. 1999)
(finding first amendment did not protect defamation and libel made with
knowledge of or reckless disregard to falsity).13
Consequently, the Defendants-Appellants’ vagueness challenge must be
evaluated in light of the proven conduct. As discussed below, the evidence shows
the Defendants-Appellants reported knowingly false trades to Inside FERC and
NGI, that they did so with the intent that it affect those publications’ reported
indexes, and with the intent that it would affect EPME’s financial positions, to
their personal benefit. Simply put, it is incredulous to believe that a person of
average intelligence could not understand the CEA as potentially applying to
that type of conduct. See Futch, 278 F. App’x at 393–95 (holding CEA was not
vague in application to false trade reports submitted to Inside FERC).
In particular, “report,” as discussed above, clearly covers the Defendants-
Appellants’ emails and faxes to the publications. Similarly, “false and
misleading” has a clear and well defined meaning. “[M]arket information”
clearly covers reports of quantity and price of trades. See id. at 393 (holding the
term “‘market information’ is not vague because [defendant’s] false statements
about time, place, price, and volume of . . . natural gas trades clearly qualified
as ‘market information’ under almost any definition of the term”). Similarly, the
term “price” is also clear. See Merriam-Webster, price, available at
13
Moreover, as discussed below, the jury found each violation of the CEA was
accompanied by an act of wire fraud, and fraud has long been recognized to be outside the
protection of the First Amendment. See United States v. Stevens, 130 S.Ct. 1577, 1584 (2010)
(finding “[f]rom 1791 to the present . . . , the First Amendment has permitted restrictions upon
the content of speech,” including “fraud” (quotation and citations omitted)). Here, as discussed
below, sufficient evidence was introduced that the Defendants-Appellants possessed a
fraudulent intent.
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http://www.merriam-webster.com/dictionary/price (defining “price” as “the
amount of money given or set as consideration for the sale of a specified thing”).
Even if the Defendants-Appellants are correct that there are a number of prices
in natural gas trading, each one of the referenced prices is a “price,” and thus
manipulation of it would create a violation of § 13(a)(2). Finally, the term “affect
or tend to affect” clearly covers a situation, such as the Defendants-Appellants’,
where the false reports served as the basis for the industry publication’s price
reports. See Futch, F. App’x at 394 (noting “even if the phrase ‘tends to affect’
were found to be vague in some factual contexts, it is sufficiently clear to have
put [defendant] on notice that providing false sales data to Inside FERC’s
monthly reporting index survey violated the law”).
Accordingly, the CEA is not unconstitutionally vague as applied to the
Defendants-Appellants’ conduct.
4. Overbreadth
The Defendants-Appellants also challenge the CEA as being
unconstitutionally overbroad. The Defendants-Appellants argue that the CEA,
while directed at constitutionally unprotected speech, nevertheless covers
constitutionally protected speech because it requires no mens rea proof with
regard to the element that the speech “affect or tend to affect” commodity prices.
A statute is overbroad if in “banning unprotected speech,” a “substantial
amount of protected speech is prohibited or chilled in the process.” Ashcroft v.
Free Speech Coalition, 535 U.S. 234, 237 (2002). Nevertheless, by its express
language, the CEA only covers “knowingly . . . false or misleading or knowingly
inaccurate” speech. Such speech is not constitutionally protected. See Colson
v. Grohman, 174 F.3d 498, 507 (5th Cir. 1999). Accordingly, the CEA covers no
constitutionally protected speech.
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C. Jury Instructions
The Defendants-Appellants next argue that the district court’s jury
instructions were erroneous on several grounds. We review “preserved error in
jury instructions under an abuse of discretion standard and ask whether the
court’s charge, as a whole, is a correct statement of the law and whether it
clearly instructs jurors as to the principles of the law applicable to the factual
issues confronting them.” United States v. Kay, 513 F.3d 432, 446 (5th Cir. 2007)
(quotation and footnote omitted). Under this standard, district courts “enjoy
substantial latitude in formulating a jury charge.” United States v. Davis, 609
F.3d 663, 689 (5th Cir. 2010); see also United States v. Williams, 610 F.3d 271,
285 (5th Cir. 2010). Similarly, the district court is afforded “great discretion in
responding to jury questions.” United States v. Wilcox, 631 F.3d 740, 752 (5th
Cir. 2011) (quotation marks omitted). However, when a jury instruction “hinges
on a question of statutory construction, [our] review is de novo.” United States
v. Wright, 634 F.3d 770, 774 (5th Cir. 2011).
1. Conspiracy Instructions
First, the Defendants-Appellants argue that the district court incorrectly
instructed the jury on the mens rea of conspiracy and conspiracy to commit wire
fraud in a response to a jury note. In its jury instructions, based on the Fifth
Circuit Pattern Criminal Instructions, the district court instructed that to
convict for conspiracy under 18 U.S.C. § 371, the jury must find:14
First: That two or more persons made an agreement to commit the
crime of false reporting or wire fraud as charged in the indictment;
14
18 U.S.C. § 371 provides:
If two or more persons conspire either to commit any offense against the United
States, or to defraud the United States, or any agency thereof in any manner or
for any purpose, and one or more of such persons do any act to effect the object
of the conspiracy, each shall be fined under this title or imprisoned not more
than five years, or both.
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Second: That the defendant knew the unlawful purpose of the
agreement and joined in it willfully, that is, with the intent to
further the unlawful purpose; and
Third: That one of the conspirators during the existence of the
conspiracy knowingly committed at least one of the overt acts
described in the indictment, in order to accomplish some object or
purpose of the conspiracy.
The district court also explained that under the first element the jurors need to
“agree that the government proved beyond a reasonable doubt that the
defendants conspired to commit false reporting; or, all of you must agree that the
government proved beyond a reasonable doubt that the defendants conspired to
commit wire fraud.” The district court instructed that to convict someone of wire
fraud under 18 U.S.C. § 1343,15 the jury must find:
First: That the defendant knowingly created a scheme or artifice to
defraud or to obtain money, property or other things of value by
means of material false or fraudulent pretenses, representations or
promises as set out in the indictment;
Second: That the defendant acted with a specific intent to defraud;
Third: That the defendant used interstate wire communications
facilities or caused another person to use interstate wire
communications facilities for the purpose of carrying out the
scheme; and
Fourth: That the scheme to defraud employed false material
representations.
The district court explained that “‘specific intent to defraud’ means an intent to
specifically deceive or cheat someone.”
During its deliberations, the jury sent the district court a note asking:
15
18 U.S.C. § 1343 provides:
Whoever, having devised or intending to devise any scheme or artifice to
defraud, or for obtaining money or property by means of false or fraudulent
pretenses, representations, or promises, transmits or causes to be transmitted
by means of wire, radio, or television communication in interstate or foreign
commerce, any writings, signs, signals, pictures, or sounds for the purpose of
executing such scheme or artifice, shall be fined under this title or imprisoned
not more than 20 years, or both.
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In the second part of Count 1 it states, “that the Defendant knew
the unlawful purpose.” Doesn’t this contradict the idea that
“ignorance of the law is no excuse.”
After a conference with the parties, the district court replied to the note, writing:
There is no contradiction. The government is not required to prove
that a defendant knew the purpose of the agreement was in fact
unlawful, that is, in violation of a statute, but the government must
prove the defendant knew the purpose of the agreement, and the
government must prove that the purpose was in fact unlawful.
The Defendants-Appellants argue that this answer misstates the mens rea
required to prove conspiracy and conspiracy to commit wire fraud.
A conviction for conspiracy under Section 371 requires that the
government prove: “(1) an agreement between two or more persons to pursue an
unlawful objective; (2) the defendant’s knowledge of the unlawful objective and
voluntary agreement to join the conspiracy; and (3) an overt act by one or more
of the members of the conspiracy in furtherance of the objective of the
conspiracy.” United States v. Coleman, 609 F.3d 699, 704 (5th Cir. 2010); see
also United States v. Curtis, 635 F.3d 704, 719 n.53 (5th Cir. 2011). Conspiracy
actually has two intent elements—intent to further the unlawful purpose and
the level of intent required for proving the underlying substantive offense. See
2 Wayne R. LaFave & Austin W. Scott, Jr., Substantive Criminal Law §
12.2(c)(1) (2003); United States v. Alvarez, 610 F.2d 1250, 1255 (5th Cir. 1980)
(“Conspiracy is, however, more complex because it involves two elements of
intent that shade into each other: each party must have intended to enter into
the agreement and the schemers must have had a common intent to commit an
unlawful act.”).16
16
Although the two intents are separate, they often functionally collapse into a single
intent. United States v. Chagra, 807 F.2d 398, 401 (5th Cir. 1986). Thus, oftentimes, it is only
necessary for the government to prove the level of intent required for proving the underlying
substantive offense. United States v. Feola, 420 U.S. 671, 686 (1975); United States v. Dadi,
235 F.3d 945, 950 (5th Cir. 2000).
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The Defendants-Appellants first seem to argue that proving conspiracy
always requires proof the defendant knew his conduct was unlawful, regardless
of the mens rea of the underlying substantive offense. This argument is
inconsistent, however, with the Supreme Court’s opinion in Ingram v. United
States, 360 U.S. 672 (1959). In that decision, the Supreme Court stated that to
convict for conspiracy, “[t]here need not, of course, be proof that the conspirators
were aware of the criminality of their objective,” but rather, there must only be
proof of knowledge of the unlawful conduct. Id. at 678. This holding was
reaffirmed in United States v. Feola. 420 U.S. 671 (1975). In Feola, the
Supreme Court again stated that the government need not prove anything more
than the degree of criminal intent necessary for the substantive offense in order
to convict a defendant of conspiracy. Id. at 686–87. Thus, to the extent that the
Defendants-Appellants argue that conspiracy always requires proof that the
defendant knew his conduct was unlawful, we reject their argument. See United
States v. Blair, 54 F.3d 639, 642–43 (10th Cir. 1995) (rejecting same argument
and stating that since “‘one can violate a criminal statute simply by engaging in
the forbidden conduct, a conspiracy to commit that offense is nothing more than
an agreement to engage in the prohibited conduct’” (quoting Feola, 420 U.S. at
687)).17
More specific to the wire fraud offense, the Defendants-Appellants argue
that the answer to the jury’s question was erroneous because it improperly
lowered the intent required to prove conspiracy to commit wire fraud. They
argue that the response improperly led the jury to believe that the Defendants-
17
See also United States v. Ramiscal, 99 F.3d 1148 (9th Cir. Oct. 18, 1996)
(unpublished) (rejecting argument that proof of conspiracy always requires proof of knowledge
of illegality of conduct); United States v. Jo, 99 F.3d 1147 (9th Cir. Oct. 18, 1996) (unpublished)
(same);United States v. Sclamo, 578 F.2d 888, 891 (1st Cir. 1978) (rejecting similar argument
and stating, “[t]he underlying substantive statute does not require a showing of specific Mens
rea; the conspiracy count requires no greater degree of scienter than the substantive count”).
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Appellants could be convicted even if they lacked specific intent to defraud. This
is closer, but again, we do not find the Defendants-Appellants’ argument
persuasive.
To prove wire fraud, the government must prove: (1) a scheme or artifice
to defraud; (2) material falsehoods; and (3) the use of interstate wires in
furtherance of the scheme. See Curtis, 635 F.3d at 718 n.49; United States v.
McMillan, 600 F.3d 434, 447 n.24 (5th Cir. 2010). Violation of the wire-fraud
statute requires the specific intent to defraud, i.e., a “conscious knowing intent
to defraud.” United States v. Reyes, 239 F.3d 722, 736 (5th Cir. 2001). Thus,
proving conspiracy to commit wire fraud requires proof that the Defendants-
Appellants joined the conspiracy with the specific intent to defraud. See Curtis,
635 F.3d at 719 n.53. The district court’s response to the jury’s note accurately
describes this intent requirement.
The jury note states that as to the conspiracy statute itself, ignorance of
the law is no excuse, because “[t]he government is not required to prove that a
defendant knew the purpose of the agreement was in fact unlawful, that is, in
violation of a statute, but the government must prove the defendant knew the
purpose of the agreement.” See Ingram, 360 U.S. at 678. The note also
accurately states that the government must prove that the purpose was in fact
unlawful, which requires proof that the Defendants-Appellants acted with the
requisite mens rea to commit wire fraud. Coleman, 609 F.3d at 704–06
(analyzing whether elements of target offense also met when determining if
conspiracy to commit that offense proven); United States v. Bedford, 536 F.3d
1148, 1155 (10th Cir. 2008) (stating government must prove degree of criminal
intent necessary to prove underlying crime). Although the district court’s
response possibly could have spelled out the relationship between conspiracy and
the underlying substantive offenses more clearly, it is not an incorrect statement
of the law, particularly in light of the rest of the jury charge. See United States
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No. 09-20871
v. Chavis, 772 F.2d 100, 108 (5th Cir. 1985) (“The jury charge must . . . be
considered as a whole, in the full context of the trial.”).18
Therefore, we conclude that the district court’s instructions and the note
to the jury were an accurate statement of the mens rea required to convict for
conspiracy to commit wire fraud.
2. Deliberate Ignorance Instruction
Next, the Defendants-Appellants argue that the district court’s jury
instruction on deliberate ignorance impermissibly lowered the mens rea of both
offenses. The district used the Pattern Fifth Circuit instruction, and instructed:
You may find that a defendant had knowledge of a fact if you find
that the defendant deliberately closed his eyes to what would
otherwise have been obvious to him. While knowledge on the part
of the defendant cannot be established merely by demonstrating
that the defendant was negligent, careless, or foolish, knowledge can
be inferred if the defendant deliberately blinded himself to the
existence of a fact.
Fifth Circuit Pattern Criminal Jury Instructions, § 1.37. The Defendants-
Appellants argue that these instructions were incorrect on two grounds: first,
18
The Defendants-Appellants also argue that the note gave the jury the impression
that the maxim “ignorance of the law is no excuse” was officially a jury instruction. Whether
or not it was proper for the district court to implicitly adopt this statement, the note accurately
stated that this case did not fall within the narrow exception to the traditional rule that
“ignorance of the law is no excuse,” as laid out by the Supreme Court. The Supreme Court
stated that “the traditional rule that ignorance of the law is no excuse” does not apply only in
cases involving highly technical statutes that criminalize otherwise “innocent conduct.”
Bryan v. United States, 524 U.S. 184, 194–96 (1998); see also Ratzlaf v. United States, 510 U.S.
135, 149 (1994); Cheek v. United States, 498 U.S. 192, 199–200 (1991). Although wire fraud
is a specific intent crime, it would not fall into this narrow exception to the general rule. See
Kay, 513 F.3d at 447–51 (describing narrow exception to traditional rule that ignorance of the
law is no excuse). Further, to the extent that the Defendants-Appellants argue that this
instruction gave the jury the impression that it could not acquit, even if it found that the
Defendants-Appellants believed they were giving accurate answers to the publications, the
instruction on specific intent to defraud made clear to the jury that it could not convict unless
it found a “conscious knowing intent to defraud.” See United States v. Cavin, 39 F.3d 1299,
1310 (5th Cir. 1994) (a finding of intent to defraud and good faith are mutually exclusive).
Taken in context with the rest of the instructions, and the remainder of the note, we do not
think that the statement regarding “ignorance of the law” was in error.
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No. 09-20871
that the evidence did not support the instruction; and second, that the
instruction was legally incorrect.
On the first argument, a deliberate ignorance instruction is warranted
“when a defendant claims a lack of guilty knowledge and the proof at trial
supports an inference of deliberate indifference.” United States v. Moreno, 185
F.3d 465, 476 (5th Cir. 1999) (quotation omitted). “The evidence at trial must
raise two inferences: (1) the defendant was subjectively aware of a high
probability of the existence of the illegal conduct; and (2) the defendant
purposely contrived to avoid learning of the illegal conduct.” United States v.
Lara–Velasquez, 919 F.2d 946, 951 (5th Cir. 1990). In assessing whether
evidence sufficiently supports the instruction, we “view the evidence and all
reasonable inferences that may be drawn from the evidence in the light most
favorable to the [g]overnment.” United States v. Mendoza-Medina, 346 F.3d 121,
132 (5th Cir. 2003) (quotation omitted); United States v. Gray, 105 F.3d 956, 967
(5th Cir. 1997).
The first requirement for using the instruction—the defendant claims a
lack of guilty knowledge—is not disputed by the parties. The second
requirement—the defendant purposely contrived to avoid learning of the illegal
conduct—is satisfied if the evidence at trial raises an inference that: (1) the
defendant was subjectively aware of a high probability of the existence of the
illegal conduct; and (2) the defendant purposely contrived to avoid learning of
the illegal conduct. Lara-Velasquez, 919 F.2d at 951. Here, taking all
reasonable inference in the government’s favor, there is more than sufficient
evidence to find that the Defendants-Appellants were subjectively aware of a
high probably of the existence of illegal conduct and that they purposely
contrived to avoid learning of the illegal conduct.
On this first prong, a review of the record shows that there was a great
deal of evidence admitted at trial showing that the Defendants-Appellants
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believed that their conduct was illegal, or were aware of a high probability that
it was illegal. For example, testimony at trial revealed that Brooks told co-
workers that they would “be toast” if the government looked into their index
reporting practices, and later, Brooks ordered traders to delete all copies of the
reports that had been sent to the trade publications. Similarly, all of the
Defendants-Appellants were involved in the email communication where the
traders decided to continue reporting based on “book bias.” In that email
exchange, the traders discussed how they should not discuss this topic over
email—an obvious inference from these comments is that the traders were aware
their “book bias” method of reporting was likely illegal. Finally, taking a step
back, it is simply unbelievable to think that sophisticated gas traders, such as
the Defendants-Appellants, did not realize that falsely reporting data to steal
money from basis trading partners was, in all likelihood, criminalized under
some statute.
On the second prong, the Defendants-Appellants argue that there is no
evidence that they “purposefully contrived to avoid learning of illegal conduct.”
Specifically, the Defendants-Appellants claim that they did not know the actual
instructions sent by the publications, and that they thought they were sending
the correct information. There is evidence in the record, however, showing that
the Defendants-Appellants purposely avoided learning of the illegal nature of
the conduct. For example, both Brooks and Phillips repeatedly ignored the
reporting instructions, and they both also had conversations with Kelley Doolan,
an editor at Inside FERC, about the reporting requirements. Similarly, other
evidence indicated that Walton had been forwarded a spreadsheet with fake
trades, and that he was included in the “book bias” email, in which the traders
made statements indicating that their reporting practices were not in line with
Inside FERC’s instructions. Based on this evidence, we hold that it was not an
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abuse of discretion for the district court to instruct the jury on deliberate
ignorance.
Second, the Defendants-Appellants argue that the instruction on
deliberate ignorance was an improper statement of the law in light of the
Supreme Court’s recent decision in Global-Tech Appliances, Inc. v. SEB S.A., 131
S. Ct. 2060 (2011). In Global-Tech, the Supreme Court considered willful
blindness in the civil context, stating that willful blindness requires proof that:
“(1) the defendant [ ] subjectively believe[d] that there [was] a high probability
that a fact exists and (2) the defendant [took] deliberate actions to avoid learning
of that fact.” Id. at 2070. The Court continued, stating that willful blindness
“surpasses recklessness and negligence,” and that “a willfully blind defendant
is one who takes deliberate actions to avoid confirming a high probability of
wrongdoing and who can almost be said to have actually known the critical
facts.” Id. at 2070–71.
The Fifth Circuit Pattern Instruction meets the standard set forth by the
Supreme Court in Global-Tech.19 The instructions do not have the same failings
as the Federal Circuit standard reversed in Global Tech, which allowed for a
finding of willful blindness where there is only a “known risk,” and where the
defendant did not make an active effort to avoid knowledge. Global-Tech, 131
S. Ct. at 2071. As to Global Tech’s first prong—the defendant “must subjectively
believe that there is a high probability that a fact exists”—the jury instruction
provided that the defendant needed to have “deliberately closed his eyes” to a
fact that “would otherwise have been obvious to him.” As to the second
prong—the defendant “must take deliberate actions to avoid learning of that
19
Although Global-Tech was a civil case, the standard seems to apply equally to
criminal deliberate ignorance cases. See United States v. Ferguson, --- F.3d ----, 2011 WL
6351862, at *10 n.16 (2d Cir. Dec. 19, 2011) (applying standard in criminal case and noting
slight differences in terminology); United States v. Butler, 646 F.3d 1038, 1041 (8th Cir. 2011)
(same).
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fact”—the instruction provided that the defendant needed to have “deliberately
closed his eyes,” and “deliberately blinded himself to the existence of a fact.” The
instruction also stated that merely finding the defendants were “negligent,
careless, or foolish” was insufficient. Thus, although this instruction obviously
does not use the same language as Global-Tech, the same meaning is conveyed.
Accordingly, not only was the deliberate ignorance instruction justified, the
instruction itself was legally correct.
3. False Reporting Instruction
The Defendants-Appellants also argue that the jury instructions were in
error because the district court incorrectly stated the elements of false reporting
under the CEA, 7 U.S.C. § 13(a)(2).
In relevant part, the CEA provides that “[i]t shall be a felony . . . for . . .
[a]ny person . . . knowingly to deliver or cause to be delivered for transmission
through the mails or interstate commerce by telegraph, telephone, wireless, or
other means of communication false or misleading or knowingly inaccurate
reports concerning crop or market information or conditions that affect or tend
to affect the price of any commodity in interstate commerce . . . .” 7 U.S.C.
§ 13(a)(2). The district court instructed the jury that to convict it must find that
the Defendants-Appellants: (1) “knowingly delivered, or caused to be delivered,
for transmission through interstate commerce by telephone or other means of
communication a material false or misleading or inaccurate report”; (2) “knew
the report was false or misleading or inaccurate; and (3) “[t]hat the report
concerned market information or conditions that affected or tended to affected
the price of a commodity in interstate commerce.” The Defendants-Appellants
argue that the mens rea of false reporting—knowingly—requires that a
defendant must “know” his reports would “affect or tend to affect the price of any
commodity in interstate commerce.”
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In Valencia, the Court found that “knowingly” in this section of the CEA
applies both to the transmission and falsity of the report (elements one and two),
but that decision did not reach whether it applied to the final element of the
offense. 394 F.3d at 354–56.20 It is not clear whether “knowingly” applies to all
of the elements of the offense. As a matter of natural reading and grammar,
there is not an interpretation of the language that clearly makes the most sense.
See generally Flores-Figueroa v. United States, 556 U.S. 646 (2009) (applying
“ordinary English grammar” to construe statute’s knowledge requirement); see
also United States v. Betancourt, 586 F.3d 303, 308–09 (5th Cir. 2009)
(determining whether mens rea applies to elements of an offense after Flores-
Figueroa). The Defendants-Appellants argue that the mens rea should be
applied to the final element of the offense based on the Supreme Court’s decision
in United States v. X-Citement Video, Inc., 513 U.S. 64 (1994). In X-Citement
Video, the Supreme Court read the term “knowingly” as applying to each
element of a child pornography offense, even though the “most natural
grammatical reading” of the statute did not suggest this result. See id. at 68.
In reaching this conclusion, the Supreme Court set forth a general rule that a
“scienter requirement should apply to each of the statutory elements that
criminalize otherwise innocent conduct.” See id. at 72 (citing Staples v. United
States, 511 U.S. 600, 619 (1994)); see also Carter v. United States, 530 U.S. 255,
269 (2000) (reaffirming X-Citement Video rule); Valencia, 394 F.3d at 354–56
(applying the X-Citement Video rule to the CEA). Here though, the first two
elements of the offense already require that a defendant knowingly transmit a
knowingly false statement, largely taking the criminalized conduct out of the
20
Although obviously not dispositive, our decision in Valencia has been interpreted by
other courts as only requiring knowledge as to the first two elements of the offense. See, e.g.,
Atha, 420 F. Supp. 2d at 1380; CFTC v. Johnson, 408 F. Supp. 2d at 267. This Court also
adopted that interpretation in Futch, 278 F. App’x at 391, although that is an unpublished and
non-precedential decision.
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realm of innocent activity. See United States v. Butler, 637 F.3d 519, 524 (5th
Cir. 2011) (stating that Staples and X-Citement Video presumption does not
apply where statute “does not entail the risk of subjecting ordinary citizens to
criminal prosecution for otherwise innocent conduct”).21
Overall, it is not clear whether knowledge applies to the requirement that
the false report affect or tend to affect the price of a commodity. However, even
assuming that the Defendants-Appellants are correct in their interpretation of
the statute, we need not reverse their convictions. Where a trial court misstates
or omits an element of an offense, the conviction is reviewed for harmless error.
See Neder v. United States, 527 U.S. 1, 9–10 (1999); Pope v. Illinois, 481 U.S.
497, 501–04 (1987); United States v. Bohuchot, 625 F.3d 892, 903 (5th Cir. 2010);
United States v. Delgado, 256 F.3d 264, 280–81 (5th Cir. 2001). Under this plain
error standard, the conviction should be affirmed if it is “clear beyond a
reasonable doubt that a rational jury would have found the defendant guilty
absent the error.” Neder, 527 U.S. at 18; accord United States v. Skilling, 638
F.3d 480, 481–82 (5th Cir. 2011).
Here, there was a great deal of evidence admitted at trial showing that the
Defendants-Appellants knew their price reports would or had affected natural
gas indexes. For example, according to Dean, Brooks told him that they “gamed
the system” and that Dean needed to report trades that would favorably affect
the index prices. Additionally, in the October 2000 “book bias” email, Brooks
wrote to the other traders that “we reported only verifiable fixed price
21
See also United States v. Velte, 331 F.3d 673, 680 (9th Cir. 2003) (holding mens rea
did not apply to “without authority” language in statute because setting a fire in a national
park not generally considered an innocent act); United States v. Quarrell, 310 F.3d 664, 672
(10th Cir. 2002) (statute prohibiting excavating for artifacts on federal lands did not require
knowledge that one was on federal land because “[o]ne would anticipate that excavating for
archaeological resources on another person’s land, whether private or public, would not be
viewed as an innocent act”); United States v. Sablan, 92 F.3d 865, 868 (9th Cir. 1996) (federal
statute barring unauthorized computer access did not require knowledge access would cause
damage because unauthorized access not an innocent act).
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transactions to IF for October” and “[it] only eliminated us as an active price
setting participant.” O’Toole and Dean both also testified that they were
instructed by Phillips or Brooks to coordinate their reports with Walton, and
that Walton would give them target prices for the indexes. Additionally, there
were numerous recorded conversations and emails entered into evidence, during
which Walton and Phillips discussed the manner certain reports would or had
affected index prices. Moreover, the jury convicted the Defendants-Appellants
for wire fraud on every count that it convicted them for false reporting. In doing
so, the jury found that the Defendants-Appellants had specific intent to defraud
when submitting these false reports, which indicates that the jury also believed
that the Defendants-Appellants had knowledge that their reporting would affect
index prices.
Given this evidence, it is “clear beyond a reasonable doubt that a rational
jury” would have found that the Defendants-Appellants had knowledge that
their reports affected or tended to affect the price of natural gas. Accordingly,
we decline to decide whether the mens rea applies to the final element of false
reporting, because even assuming that it does, the error would be harmless.
4. Cumulative Error
Finally, the Defendants-Appellants argue that the cumulative error of the
jury instructions errors requires reversal. “[T]he cumulative error doctrine . . .
provides that an aggregation of non-reversible errors (i.e., plain errors failing to
necessitate reversal and harmless errors) can yield a denial of the constitutional
right to a fair trial, which calls for reversal.” United States v. Munoz, 150 F.3d
401, 418 (5th Cir. 1998). Beyond the issue of whether the mens rea applied to
the final element of the false reporting offense—which we are confident was
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harmless if it was erroneous—we found no errors in the jury instructions.
Therefore, we hold that the cumulative error doctrine does not require reversal.22
D. Fundamental and Arguable Ambiguity
The Defendants-Appellants also argue that the questions on the Inside
FERC and NGI surveys were fundamentally ambiguous—requiring a judgment
of acquittal—or that the district court should have given the jury an arguable
ambiguity instruction.
First, the Defendants-Appellants argue that the district court erred by
denying their motion for acquittal because they were convicted for answering
fundamentally ambiguous questions. Specifically, they argue that there are not
universally accepted definitions for the terms “trading location,” “bidweek,”
“baseload,” or “fixed price.” This court reviews the district court’s denial of a
motion for acquittal de novo. United States v. Bennett, 664 F.3d 997, 1011–12
(5th Cir. 2011).
22
The Defendants-Appellants also briefly challenge the district court’s denial of a good
faith instruction and an instruction that failure to follow Inside FERC’s instructions, standing
alone, is not a crime. As to the good faith instruction, the district court did not abuse its
discretion in denying it. “The district court will not abuse its discretion when it denies a
proffered instruction unless this instruction (1) was a correct statement of the law, (2) was not
substantially covered in the charge as a whole, and (3) concerned an important point in the
trial such that the failure to instruct the jury on the issue seriously impaired the defendant’s
ability to present a given defense.” United States v. Jobe, 101 F.3d 1046, 1059 (5th Cir. 1996)
(citation and quotation marks omitted). A district court may “refuse to submit an instruction
regarding a good faith defense if the defense is substantially covered by the charge given and
the defendant has had the opportunity to argue good faith to the jury.” United States v. Upton,
91 F.3d 677, 683 (5th Cir. 1996) (quotation omitted). Here, the Defendants-Appellants were
permitted to argue that they acted in good faith and had no intent to defraud, and the jury
instructions accurately conveyed the specific intent required to both commit fraud and
conspiracy. See United States v. Storm, 36 F.3d 1289, 1294–95 (5th Cir. 1994) (refusing to find
error where “defense of good faith was substantially covered by charge to the jury” on the
terms “‘knowingly’ and ‘willfully’”).
Second, the Defendants-Appellants proposed instruction that a failure to follow Inside
FERC’s instructions, by itself, is not evidence of a crime, is confusing and the instruction likely
would have misled the jury. Further, the instruction seems to be inaccurate, given that a
failure to follow Inside FERC’s instructions alone, with the proper intent, could constitute
false reporting or wire fraud. Thus, denying this instruction was also not an abuse of
discretion. See Jobe, 101 F.3d at 1059.
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To be fundamentally ambiguous, a “question must lack ‘a meaning about
which men of ordinary intellect could agree, nor one which could be used with
mutual understanding by a questioner and answerer unless it were defined at
the time it were sought and offered as testimony.’” United States v. Strohm, 671
F.3d 1173, 1179 (10th Cir. 2011) (quoting United States v. Farmer, 137 F.3d
1265, 1269 (10th Cir. 1998)); accord United States v. Culliton, 328 F.3d 1074,
1078 (9th Cir. 2003). The question must be so vague that it is impossible to have
intended to answer it untruthfully. United States v. Richardson, 421 F.3d 17,
33 (1st Cir. 2005). Where a question is found to be fundamentally ambiguous,
a defendant’s answer to it is insufficient as a matter of law to sustain a
conviction. Richardson, 421 F.3d at 33. A question is fundamentally ambiguous,
however, in only very “narrow circumstances.” Strohm, 671 F.3d at 1179; United
States v. Damrah, 412 F.3d 618, 627 (6th Cir. 2005) (stating that doctrine
applies only in “exceptional” cases). If a witness “knowingly made a false
statement, based on his or her understanding of the question,” the doctrine does
not apply, Strohm, 671 F.3d at 1180, and a witness cannot “twist the meaning
of a question in his own mind into some totally unrecognizable shape and then
hide behind it by alleging its fundamental ambiguity,” Richardson, 421 F.3d at
35 (quotation omitted).
Given the context in which the fundamental ambiguity defense has been
applied previously, we hold that it does not apply under the facts of this case.
It is completely implausible to think that the Defendants-Appellants reported
fabricated trades based on a misinterpretation of the instructions. The
fundamental ambiguity defense does not apply where a defendant “twist[s] the
meaning of a question in his own mind into some totally unrecognizable shape
and then hide[s] behind it by alleging its fundamental ambiguity.” Richardson,
421 F.3d at 35 (quotation omitted); see also Farmer, 137 F.3d at 1269 (stating
that a question cannot be isolated from context to engineer ambiguity); United
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States v. Carey, 152 F. Supp. 2d 415, 427 (S.D.N.Y. 2001) (defense does not apply
where an “answer to an ambiguous question is false under any reasonable
interpretation”). There is no reasonable interpretation of the instructions that
would allow reporting invented and fabricated trades. Indeed, the Defendants-
Appellants are unable to cite any actual trade that was mistakenly reported due
to specific ambiguities in the survey instructions.23
Additionally, as to the only Defendant-Appellant who testified, Brooks
stated at trial that he either (1) did not ever read Inside FERC’s instructions, or
(2) consciously disregarded the instructions and submitted invented data as a
means of reporting “fair market value” (or “book bias”) to make the indexes more
accurate, even though he knew the publications only wanted actual trades. In
either case, Brooks admits that the instructions did not cause the type of false
reporting that occurred. See United States v. Mubayyid, 658 F.3d 35, 63 (1st Cir.
2011) (holding that, if the defendant gave a false response based on how he
understood the question, his conviction would not be invalidated due to
ambiguity in question); Culliton, 328 F.2d at 1079 (“[The defendant] points to no
case, and indeed we have found none, that justifies an applicant’s unilateral
reinterpretation of questions . . . to comport with his own particular goals.”);
United States v. Bollin, 264 F.3d 391, 411 (4th Cir. 2001) (holding defense not
available where defendant testified in a manner that he knew was false, even if
question open to multiple interpretations). Accordingly, we hold that the district
court did not err in denying the motion for acquittal based on the ambiguity of
the terminology in the reporting instructions.
23
At oral argument and in their briefing, the Defendants-Appellants state that Inside
FERC survey question, given the ambiguous terms, functionally was: “What undefined type
of trades that may or may not call for delivery of gas for an unspecified time did you conduct
during some time frame and that occurred in an area without geographic boundaries.”
However, even based on the Defendants-Appellants’ characterization of the instructions, they
gave false responses because the question only requests trades that were actually conducted.
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Second, the Defendants-Appellants argue that even if Inside FERC’s
instructions were not fundamentally ambiguous, the district court abused its
discretion by denying a jury instruction on arguable ambiguity. As we noted
earlier, “[d]istrict courts enjoy substantial latitude in formulating a jury charge,
and hence we review all challenges to, and refusals to give, jury instructions for
abuse of discretion.” United States v. Carrillo, 660 F.3d 914, 925–26 (5th Cir.
2011) (quotation omitted). “We consider whether the instruction, taken as a
whole, ‘is a correct statement of the law and whether it clearly instructs jurors
as to the principles of law applicable to the factual issues confronting them.’”
United States v. Freeman, 434 F.3d 369, 377 (5th Cir. 2005) (quoting United
States v. Daniels, 281 F.3d 168, 183 (5th Cir. 2002)). It is “reversible error to
refuse a charge on a defense theory for which there is an evidentiary foundation
and which, if believed by the jury, would be legally sufficient to support a verdict
of not guilty.” United States v. Barnett, 197 F.3d 138, 142 (5th Cir. 1999)
(quotation omitted). An instruction on a defense theory, however, only need be
given where “there exists evidence sufficient for a reasonable jury to find in [the
defendant’s] favor.” United States v. Mata, 491 F.3d 237, 241 (5th Cir. 2007).
During the jury charge conference, the Defendants-Appellants requested
that the following jury instruction be given, which was adapted from the Fifth
Circuit Pattern Jury Instruction Section 2.69, on perjury:
If you should find that a particular question was ambiguous and
that the defendant truthfully answered one reasonable
interpretation of the question under the circumstances presented,
then such answer would not be false. Similarly, if you should find
that the question was clear, but the answer was ambiguous, and one
reasonable interpretation of such answer would be truthful, then
such answer would not be false.
Fifth Circuit Pattern Criminal Jury Instructions § 2.69. The district court
denied this instruction. The Defendants-Appellants argue that their defense
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revolved around showing that the instructions from Inside FERC were
ambiguous and that not allowing the instruction prevented them from
presenting their theory to the jury.
A determination of whether a question or statement is arguably
ambiguous is generally left to the jury. See, e.g., United States v. Posada
Carilles, 541 F.3d 344, 362–63 (5th Cir. 2008) (stating that jury resolves
ambiguities where they are not fundamental); United States v. Bell, 623 F.2d
1132, 1136 (5th Cir. 1980) (same). It is not clear whether an arguable ambiguity
instruction is appropriate in cases charging false reporting and wire fraud.24 In
support of their argument, the Defendants-Appellants rely upon a Tenth Circuit
case, United States v. Migliaccio, 34 F.3d 1517 (10th Cir. 1994), in which the
doctrine was applied to a charge of fraud under facts somewhat similar to the
current suit. In that case, the Tenth Circuit held that not allowing an arguable
ambiguity instruction was reversible error where the defendants were charged
with fraudulent billing of medical procedures. Id. at 1520–25. The defendants
argued that the terminology was ambiguous and that their answers were
truthful under their interpretation of the terms. Id.Here, in making their argument, the Defendants-Appellants ignore the
fact that such an ambiguity instruction is only appropriate in cases where the
defendant’s claimed interpretation of the ambiguous terms is reasonable and is
supported by the record. Migliaccio, 34 F.3d at 1525. In United States v.
Lawrence, the Tenth Circuit discussed Migliaccio and affirmed a district court’s
denial of an ambiguity instruction in a wire fraud case. 405 F.3d 888, 896–900
(10th Cir. 2005). In doing so, the court stated that an ambiguity instruction “is
only necessary where there is evidence supporting the defendant’s interpretation
as reasonable.” Id. at 898. Indeed, it is accepted law that a defendant is only
24
See United States v. Munoz, 233 F.3d 1117, 1130–32 (9th Cir. 2000) (stating that
ambiguity instruction not appropriate in fraud case due to broad nature of statute).
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entitled to an instruction on a defense theory where there is sufficient evidence
such that a reasonable jury could find in his favor on that theory. See United
States v. Branch, 91 F.3d 699, 712–13 (5th Cir. 1996).
As explained previously, there is no reasonable interpretation of the
instructions that allows the reporting of completely fabricated data. This
interpretation is divorced from the language of the instructions, and it has no
relationship to the allegedly ambiguous terminology. The district court,
therefore, appropriately denied the ambiguity instruction.25 See Lawrence, 405
F.3d at 898; Migliaccio, 34 F.3d at 1525.26
E. Evidentiary Rulings
The Defendants-Appellants also appeal several of the district court’s
evidentiary rulings. Specifically, the Defendants-Appellants challenge: (1) the
district court’s exclusion of their industry practice evidence; (2) the district
court’s admission of the testimony of Matthew O’Loughlin, the government’s
25
Because the arguable ambiguity instruction is not supported by the record, we
decline to decide whether such an instruction is ever appropriate in cases charging fraud or
false reporting.
26
Additionally, it is not an abuse of discretion for a district court to deny a proposed
jury instruction where the defense theory was adequately presented to the jury. See United
States v. Gray, 751 F.2d 733, 736–37 (5th Cir. 1985). For example, in the case of a proposed
good faith defense, we have held that denial of a specific instruction is not an abuse of
discretion where the content of the defense is raised during argument and the jury is
accurately instructed on specific intent to defraud. See United States v. Bilotto, 245 F. App’x
410, 413–14 (5th Cir. 2007) (per curiam); United States v. Manges, 110 F.3d 1162, 1177 (5th
Cir. 1997); Daniel, 957 F.2d at 170; United States v. St. Gelais, 952 F.2d 90, 94 (5th Cir. 1992);
Gray, 751 F.2d at 736–37. Here, even though the district court denied the specific instruction
on ambiguity, the Defendants-Appellants were permitted to present this argument to the jury,
and in fact, Phillips’s lawyer discussed how the ambiguous terms negated the intent elements
of the charged offenses during closing arguments at length. Further, the district court
accurately instructed the jury on how both offenses require knowledge of the falsity of the
statement, which prevented the jury from convicting if it found that the Defendants-
Appellants actually believed that they were complying with the instructions. Thus, the district
court’s charge “enabled the jury to recognize and understand the defense theory, [to] test it
against the evidence presented at trial, and then [to] make a definitive decision whether,
based on that evidence and in light of the defense theory, the defendant was guilty or not
guilty.” Gray, 751 F.2d at 736–37 (quotation omitted).
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expert witness; and (3) the district court’s decision not to immunize Don
Guilbault, a potential defense witness. We will consider these rulings in turn.
First, the Defendants-Appellants argue that the district court erred by
excluding evidence related to industry practice. Specifically, the Defendants-
Appellants argue that they were prevented from proving their good faith defense
because they were barred from presenting evidence showing that other energy
companies were also submitting similarly false data to Inside FERC and NGI.
We review evidentiary rulings for abuse of discretion, subject to harmless
error analysis. United States v. Isiwele, 635 F.3d 196, 199 (5th Cir. 2011);
United States v. Cantu, 167 F.3d 198, 203 (5th Cir. 1999). This Court has
previously held that it was not an abuse of discretion to exclude evidence offered
on a very similar theory. See United States v. Arledge, 553 F.3d 881, 894 (5th
Cir. 2008) (excluding evidence in fraud case showing that similarly situated
third parties committed similar acts because it had little or no bearing on
whether defendant acted with fraudulent intent). The industry practice
evidence offered here has little or no bearing on whether the Defendants-
Appellants acted with fraudulent intent. See United States v. Kahn, 711 F.
Supp. 2d 9, 12 (D.D.C. 2010) (testimony about beliefs of third parties on validity
of tax code irrelevant to determination of whether defendant acted in good faith).
Indeed, this unrelated information posed a threat of confusing the jury and
detracting from relevant information about the conduct of the actual parties.
See Fed. R. Evid. 403 (stating “relevant evidence” may be excluded “if its
probative value is substantially outweighed by a danger of . . . unfair prejudice,
confusing the issues, [or] misleading the jury . . .”). Thus, we hold that it was not
an abuse of discretion to exclude this testimony.
Second, the Defendants-Appellants challenge the district court’s admission
of the government’s expert, Matthew O’Loughlin. The admission of expert
evidence is also reviewed “for abuse of discretion; however, evidentiary rulings
43
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No. 09-20871
are subjected to heightened scrutiny in criminal cases.” United States v. John,
597 F.3d 263, 274 (5th Cir. 2010). “Federal Rule of Evidence 702 provides that
testimony by a qualified expert is admissible if (1) it will assist the trier of fact;
(2) it is based upon sufficient facts or data; (3) the testimony is a product of
reliable methods; and (4) the witness has applied those principles reliably to the
facts.” Id.The Fifth Circuit has already upheld the admission of O’Loughlin’s expert
testimony in nearly identical circumstances. See Valencia, 600 F.3d at 401,
420–29. The Defendants-Appellants’ attempts to distinguish Valencia are
unavailing. The Defendants-Appellants argue that here, unlike in Valencia,
O’Loughlin expressly “rejected” the publishers’ testimony about their editorial
process. Valencia, however, upheld O’Loughlin’s testimony because it was not
simply an attack on the credibility of the publishers; his testimony also provided
a conclusion grounded in analysis. See 600 F.3d at 427. The Defendants-
Appellants do not argue O’Loughlin’s testimony was not so grounded here, and
his disagreement with the publishers did not render his testimony inadmissable.
Cf. United States v. Whitted, 11 F.3d 782, 786–87 (8th Cir. 1993) (holding experts
could not testify about credibility of fact witnesses). Accordingly, the
Defendants-Appellants fail to show the district court abused its discretion when
it admitted the testimony of O’Loughlin.27
Third, Defendant-Appellant Walton argues that the district court erred by
failing to order the government to immunize Don Guilbault, a physical gas
trader on the same desk as Dean. In particular, Walton argues, first, that the
27
The Defendants-Appellants’ half-hearted attack on O’Loughlin’s qualification is also
unavailing. The Defendants-Appellants, along with failing to raise this objection to the district
court, cite no authority to show that work in the relevant field is a necessary qualification for
expert testimony. Presumably, their failure stems from the fact that any such authority would
contradict the terms of Rule 702, which allows an expert to be qualified by “knowledge, skill
experience, training or education.” See Fed. R. Evid. 702 (emphasis added).
44
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No. 09-20871
district court should have denied Guilbault’s invocation of his Fifth Amendment
right because he had already plead guilty to the relevant crimes and the statute
of limitations had expired on any others, and, second, that the district court
should have either granted Guilbault immunity or compelled the government to
do so. As Walton shows error on neither ground, his argument fails.
Guilbault worked on El Paso during the relevant times, and, on October
5, 2004, he plead guilty to violating the CEA by submitting false reports to
Inside FERC and NGI. At the time of the Defendants-Appellants’ trial,
Guilbault had not been sentenced because the government had sought to delay
sentencing to ensure Guilbault’s continued corporation in its prosecutions. On
June 2, 2005, Guilbault was interviewed by government agents. According to a
summary of the interview, Guilbault stated that, while Brooks told Guilbault to
“get with” Walton, Walton told Guilbault that he did not need to show Walton
his trades, and that Walton did not otherwise tell Guilbault what to report.
Walton subpoenaed Guilbault to appear at trial, and informed the
government of the subpoena the day before Guilbault was to appear. That night,
one of the members of the prosecution called Guibault’s attorney to ask if
Guilbault would indeed testify. The next morning at trial, Guilbault’s attorney
informed the court that Guilbault would invoke his Fifth Amendment right
against self-incrimination. Guilbault’s attorney told the court that the decision
has been Guilbault’s alone to make. Guilbault’s attorney further explained that,
while Guilbault had been on a list of possible government witnesses, no decision
had been made previously about whether he would be called. Prosecutors then
informed the court that they did not intend to call Guilbault because they had
concerns about Guilbault’s truthfulness, and pointed to inconsistences between
Guilbault’s 2005 interview and previous statements, as well as other instances
that cast doubt on his credibility. Walton thereafter moved to compel Guilbault
45
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No. 09-20871
to testify, to compel the government to grant Guilbault immunity, or to admit a
summary of the 2005 interview. The district court denied each request.
“A district court’s decision to exclude a witnesses’s testimony based on an
invocation of the witnesses’s Fifth Amendment privilege is reviewed for an abuse
of discretion.” United States v. Mares, 402 F.3d 511, 514 (5th Cir. 2005).
“Although the trial court’s discretion is not unlimited, it must enjoy wide
discretion in resolving a self-incrimination claim.” United States v. Van Deveer,
577 F.2d 1016, 1017 (5th Cir. 1978) (per curiam). “Generally, an abuse of
discretion only occurs where no reasonable person could take the view adopted
by the trial court.” Whitehead v. Food Max of Miss., Inc., 332 F.3d 796, 803 (5th
Cir. 2003) (quotation omitted & emphasis in original).
Here, although Guilbault had plead guilty to violating the CEA, he had not
yet been sentenced, and Walton’s questions sought information related to those
crimes. The Fifth Amendment right against self-incrimination only extinguishes
once “the sentence has been fixed and the judgment of conviction has become
final.” Mitchell v. United States, 526 U.S. 314, 326 (1999) (“Where the sentence
has not yet been imposed a defendant may have a legitimate fear of adverse
consequences from further testimony.”). Accordingly, the district court did not
err in finding Guilbault had a legitimate fear of self-incrimination, and could be
excused from testifying.
With regard to immunity, this Court has held that “[d]istrict [c]ourts have
no inherent power to grant immunity.” United States v. Follin, 979 F.2d 369,
374 (5th Cir. 1992). “A district court may not grant immunity simply because
a witness has essential exculpatory evidence unavailable from other sources.”
Id. (citing United States v. Thevis, 665 F.2d 616, 638–41 (5th Cir. 1982)). At
most, this Court has left open the possibility that immunity may be necessary
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to stem government abuse. See Thevis, 665 F.2d at 641.28 Here, however, the
district court found no abuse, and Walton has failed to show error in that
determination.
Walton’s sole evidence showing an abuse by the government is the
government’s continuances of Guilbault’s sentencing, a single call by a
prosecutor to Guilbault after Walton subpoenaed him to testify, and the
purported inconsistency in the government’s maintaining Guilbault as a possible
witness and its statements on January 24, 2008 that it had concerns about
Guilbault’s truthfulness. Guilbault’s attorney, however, informed the court that
Guilbault’s decision to invoke the Fifth Amendment was his own. Further, the
prosecutor’s call the night before was explained as an inquiry to determine
whether the government would need to prepare to cross-examine Guilbault, a
task that would be need to be completed that night as Walton only informed the
government about the subpoena that day. And the government’s proffer
demonstrated a reasonable basis for it to doubt Guilbault’s veracity. In light of
such facts, Walton fails to show the district court erred in accepting the
prosecution’s, and Guilbault’s attorney’s, view of the facts.29
28
Walton’s citation to out-of-circuit precedent to argue that government misconduct is
not a necessary prerequisite is unavailing in light of Thevis. See Thevis, 665 F.2d at 639–41
(declining to follow Gov’t of Virgin Islands v. Smith, 615 F.2d 964, 974 (3d Cir. 1980)).
Moreover, even if this Court could consider such authority, Walton fails to show immunity was
justified under it. Walton fails to show that Guilbault’s exclusion skewed the evidence in the
government’s favor. Although Guilbault could have testified that Walton never asked him to
send false trades, such testimony hardly contradicts O’Toole’s and Dean’s testimony that
Walton provided them with his positions. See United States v. Straub, 538 F.3d 1147, 1156–57
(9th Cir. 2008) (finding exculpatory evidence must “directly contradict[]” admitted evidence
to warrant immunity). Further, in cross-examination of O’Toole, Walton introduced his theory
that he did not always provide the traders with his positions, and that he did not ask to review
their submissions to the publications. See United States v. Ebbers, 458 F.3d 110, 119 (2d Cir.
2006) (finding exculpatory evidence must not be “cumulative”). Guilbault’s testimony would
not have been materially more exculpatory.
29
Waltons’ argument, made only in passing and citing no support, that the interview
memorandum should have been introduced as evidence is also unavailing. The memorandum
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No. 09-20871
F. Sentencing
Lastly, the Defendants-Appellants raise a number of challenges to the
calculation of their Sentencing Guidelines’ sentences. In particular, the
Defendants-Appellants challenge the burden of proof born by the government
and the calculation of their Guidelines range.
We review the district court’s legal interpretation of the Sentencing
Guidelines de novo and factual findings for clear error. See United States v.
Murray, 648 F.3d 251, 254 (5th Cir. 2011). A factual finding is clearly erroneous
only if, based on the entirety of the evidence, the reviewing court is left with the
definite and firm conviction that a mistake has been made. United States v.
Valdez, 453 F.3d 252, 262 (5th Cir. 2006). A factual finding is not clearly
erroneous if it is plausible in light of the entire record. Id. Because the Court
finds Defendants-Appellants’ arguments unavailing, we affirm the sentence.
1. Burden of Proof
The Defendants-Appellants first argue that the government should have
been required to prove the loss caused by their fraud with clear and convincing
evidence. The Presentence Report (“PSR”) provided for increases of eighteen and
twenty-levels for the Defendants-Appellants due to the calculated loss, which
was the largest contributing factor to the Defendants-Appellants’ offense levels.30
is hearsay. See United States v. Moore, 651 F.3d 30, 83 (D.C. Cir. 2011) (finding witness’s
prior confessions hearsay under Federal Rule of Evidence 804(b)(3)). Guilbault’s invocation
of the Fifth Amendment rendered him unavailable. See id. However, none of the exceptions
to hearsay apply. The portion of the statement Walton sought to introduce was not against
Guilbault’s interest because it was exculpatory. See Fed. R. Evid. 804(b)(3). And the fact that
it was contradicted by an earlier statement by Guilbault tends to show it does not “ha[ve]
equivalent circumstantial guarantees of trustworthiness.” See Fed. R. Evid. 807; Moore, 651
F.3d at 83 (finding witness’s prior contradictions rendered hearsay statements untrustworthy).
Accordingly, Walton showed no error in the district court’s decision to exclude the interview
summary.
30
The calculated loss resulted in a twenty-level increase for Brooks, increasing his
offense level from fifteen to thirty-five, and resulted in an eighteen-level increase for Walton
and Phillips, increasing their offense levels from fifteen to thirty-three.
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They argue that, because of the significant effect of the loss, due process requires
that the government prove the loss by more than a mere preponderance.
“[A]s a general matter, the burden of proof at sentencing is by a
preponderance of the evidence.” United States v. Mergerson, 4 F.3d 337, 343 (5th
Cir. 1993). The Fifth Circuit has stated in dicta, however, that “there may be
certain cases where a sentencing fact is a ‘tail that wags the dog of the
substantive offense,’ and might arguably require a finding beyond a reasonable
doubt.” Id. at 344 (quoting McMillan v. Pennsylvania, 477 U.S. 79, 88 (1986)
(rejecting petitioner’s argument that visible possession of firearm enhancement
was element of crime required to be proved beyond a reasonable doubt)).
Nevertheless the Fifth Circuit has never required such a heightened burden.
See id. at 344–45 (finding a preponderance standard was sufficient where life
sentence was within range both prior to and after enhancement); United States
v. Coleman, 290 F. App’x 684, 685 (5th Cir. 2008) (per curiam) (finding
sentencing judge did not commit plain error where judge applied preponderance
standard to sentencing). Indeed, nearly all of our fellow circuits have rejected
the need to apply a heightened standard in light of the advisory nature of the
Guidelines.31
31
See United States v. Villareal-Amarillas, 562 F.3d 892, 894–98 & n.3 (8th Cir. 2009)
(holding sentencing factors may be proven by preponderance; finding dicta in United States
v. Archuleta, 412 F.3d 1003, 1007 (8th Cir. 2005), expressing otherwise was erroneous);
United States v. Fisher, 502 F.3d 293, 308 (3d Cir. 2007) (holding preponderance sole standard
of proof in sentencing; stating “because the Guidelines are now advisory and district judges
are empowered to discharge their duties fully in the first instance, it is a logical impossibility
for the ‘tail to wag the dog,’ as could occur when the Guidelines were mandatory”); United
States v. Brika, 487 F.3d 450, 460–62 (6th Cir. 2007) (holding preponderance standard applies,
even where judge sentenced defendant for conduct underlying charge on which jury hung);
United States v. Reuter, 463 F.3d 792, 793 (7th Cir. 2006) (finding tail-wagging-dog concern
rendered “academic” after Booker); but see United States v. Staten, 466 F.3d 708, 717–20 (9th
Cir. 2008) (finding due process required proof by clear and convincing evidence where
enhancement increased offense level fifteen levels and effectively doubled defendant’s
sentence; holding United States v. Booker, 543 U.S. 220 (2005), which rendered Sentencing
Guidelines advisory, did not require departure from earlier precedent).
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We need not decide at this time that a heightened burden is never
required. While the Defendants-Appellants’ enhancements are significant,
accounting for more than fifty percent of their offense levels, and increasing
their recommended sentence range from 18-to-24 months to 135-to-168 or 168-
to-210 months, this Court has held a similar enhancement did not require a
heightened burden of proof. See United States v. Carreon, 11 F.3d 1225, 1240
(5th Cir. 1994) (holding enhancement in recommended sentence from six years
to twenty years did not require proof beyond a preponderance).32 Accordingly,
we find that a heightened burden or proof, even if required by due process in
certain situations, is not appropriate here, and the district court did not err in
refusing to apply one.
2. Calculation of Guidelines Range
The Defendants-Appellants assert a number of errors in the calculation of
their Sentencing Guidelines. In particular, the Defendants-Appellants challenge
the district court’s calculation of loss, its calculation of the number of victims of
that loss, and its finding that the Defendant-Appellants obstructed justice.
Turning first to the calculation of loss, “[w]e review de novo the district
court’s method for determining loss, while clear error applies to the background
factual findings that determine whether or not a particular method is
appropriate.” Isiwele, 635 F.3d at 202. “[A] district court need only make a
reasonable estimate of loss, and, ‘because the sentencing judge is in a unique
position to assess the evidence and estimate the loss . . . the court’s loss
determination is entitled to appropriate deference.’” Murray, 648 F.3d at 254(ellipsis in original) (quoting United States v. Goss, 549 F.3d 1013 (5th Cir.
2008)).
32
See also United States v. Vittek, 228 F. App’x 469, 475–76 & n. 23 (5th Cir. 2007) (per
curiam) (finding increase in recommend sentencing range from 51-to-63 months to sentence
of 168 months did not require heightened standard of proof).
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The Defendants-Appellants fail to show that the district court’s method for
determining loss was erroneous. The district court, adopting the method used
in the PSRs, relied on O’Loughlin’s calculations about the effect of the false
reports on the published index prices, and El Paso’s own calculations, in its
“Basis Summaries,” about its “exposure” to changes in those index prices. The
various losses were then attributed to each Defendant-Appellant based on his
responsibility for the various reports. The method provided a “reasonable
estimate,” and, indeed, a conservative estimate, of the loss caused by the
Defendants-Appellants’ fraudulent scheme.33 Although the editors of the
industry publications used some editorial discretion to determine what index
price to publish, and did not rotely publish the volume-weighted average of the
reported trades, O’Loughlin demonstrated that the published price and the
volume-weighted average of the reported trades was identical eighty percent of
the time, and a strong correlation between the two was observable for the
remainder of the trades.34 Admittedly, as Hume observed over 250 years ago,
one can never know with certainty that one event is caused by another.35
Unfortunately for the Defendants-Appellants, the law does not require such
absolute certainty.36
33
The estimate did not include any loss caused to counterparties who purchased
natural gas from El Paso at index price, or those parties who did not contract with El Paso,
but nevertheless payed an inflated price for natural gas due to Defendants-Appellants actions.
34
Indeed, the PSRs excluded gains where the published index prices was different than
the volume weighted average would have dictated.
35
See David Hume, An Enquiry Concerning Human Understanding (1748).
36
Moreover, loss may be measured not only by the actual loss caused by a defendants’
actions, but by the loss the defendants intended to cause. See U.S. Sentencing Guidelines
Manual § 2B1.1 cmt. n.2(A) (2001). Loss is the “greater of the actual loss or intended loss.”
See id. Thus, even if the Court were to conclude O’Loughlin’s testimony was insufficient to
demonstrate the actual influence the VWA had on the published indexes, such difference was
a fair approximation of the change the Defendants-Appellants intended to have on the
published indexes.
51
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Nor does the Defendants-Appellants’ challenge to the use of the use of El
Paso’s Basis Summaries fare better. As the record shows, the summaries were
created so that El Paso could determine its exposure to changes in the various
index prices. El Paso entered into a trade to buy or sell natural gas at some
price at a certain hub. That contract had value so long as there was some
difference between the specified price and the market price for natural gas at the
hub at the time of the contract’s execution. For example, a contract to buy a unit
of natural gas at $5 next month would gain value if the price of natural gas at
the hub increased to $6: the contract would allow the holder to net a $1 profit by
buying the gas at $5 and selling it at $6.37 Conversely, the contract would
negatively impact the company if the price of natural gas fell to $4, as the
company would be required to spend $5 on the natural gas and then could only
sell it at a $1 loss.38 El Paso’s basis summary charts aggregated these various
risks, and thus reflected the inflation or deflation in value of El Paso’s futures
contracts.
While the Defendants-Appellants are correct that these charts did not
necessarily reflect the flow of cash,39 they identify no legal authority suggesting
that the Sentencing Guidelines are incapable of taking into account the losses
and gains described above. The Sentencing Guidelines state that “fair market
value of the property unlawfully taken” shall be used to determine the value of
loss. See U.S. Sentencing Guidelines Manual § 2B1.1 cmt. n. 2(C)(i) (2001).
Here, the Defendants-Appellants’ scheme drove up the market price of their
37
As discussed above, these transactions rarely resulted in the actual transfer of
physical gas, but were instead resolved financially.
38
This also explains why trades that specified the price to be paid as the published
index price did not create this type of risk: any variations in the market price would be
reflected in the price at which El Paso would have to buy or sell.
39
Although it is difficult to believe that the value of these contracts were not converted
to cash, or some other asset, at any point during the Defendants-Appellants’ two-year scheme.
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contracts, which necessarily drove down the market price of their counterparties’
contracts.40 Thus, the basis summaries’ calculation of the increase in the value
of El Paso’s futures contracts provides a reasonable basis from which to infer the
counterparties’ loss in market value to their contracts.
Moreover, in contrast to the Defendants-Appellants’ protests, the method
employed by the district court provided a “realistic, economic approach” to
determining the loss caused by their fraud. See United States v. Olis, 429 F.3d
540, 546 (5th Cir. 2005) (quotation omitted). Unlike the typical valuation of
damages in a securities fraud scheme, where the effect of the fraud must be
inferred from the changes in the market price of the security and where,
consequently, external forces on that price must be accounted, see, e.g., id. at
546–48, the method employed by the district court directly measured the loss.
As described above, the district court relied on the government’s expert’s
conclusion that the false trades move the various index prices by definite
amounts, and the company’s calculations about the effect of such moves on the
value of its assets. With such a method, there is no need to account for external
factors that may have also increased or decreased the value of the futures
contracts.
Next, the Defendants-Appellants challenge the calculation used to
determine the number of victims of their fraud. Each of the Defendants-
Appellants received a four-point enhancement to their offense level due to the
district court’s finding that their scheme involved fifty or more victims. See U.S.
Sentencing Guideline § 2B1.1(b)(2)(B). In light of the entire record, the district
40
This can be seen from the example above. If El Paso has a contract to buy gas at $5,
then the counterparty has a contract to sell gas at $5. If the Defendants-Appellants could
fraudulent raise the market price to $6, their contract would be worth $1, while the
counterparty’s contract would have a negative value of $1. In essence, the Defendants-
Appellants would have stolen $1 from their counterparty by fraudulently shifting the market
value of the trade. Further, if the counterparty was hedged, it would merely shift the loss to
yet another third party.
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court’s finding is not clearly erroneous. The record includes backup for the Basis
Summaries reports that list the details of the various financial trades that went
into those calculations. Just one of those backup spreadsheets, showing the
trades for a single hub in a single month, shows in excess of fifty counterparties
to El Paso’s futures trades—the counterparties who would have seen the value
of their contracts artificially lowered by the Defendants-Appellants’ false
statements. Accordingly, Defendants-Appellants fail to show error in the district
court’s finding that their scheme, which occurred over at least two years and
covered multiple hubs, involved more than fifty victims.
Lastly, the Defendants-Appellants challenge the two-point enhancement
they received as a result of the district court’s finding that they obstructed
justice. In particular, the Defendants-Appellants argue that the district court
improperly found that they provided materially false information to the
investigating government officials because they mislead the individuals involved
in El Paso’s internal investigation. The Defendants-Appellants argue they
cannot be found to have obstructed the investigation because, (1) their
statements occurred before any government investigation started, (2) their false
statements were not made directly to government agents, and (3) their false
statements did not actually impede the investigation.
The relevant Sentencing Guidelines allow for an enhancement where:
(A) the defendant willfully obstructed or impeded, or attempted to
obstruct or impede, the administration of justice during the course
of an investigation, prosecution, or sentencing of the instant offense
of conviction, and (B) the obstructive conduct related to (i) the
defendant’s offense of conviction and any relevant conduct; or (ii) a
closely related offense . . . .
See U.S. Sentencing Guideline § 3C1.1 (2001).41
41
The Guidelines provide a non-exhaustive list of examples of such conduct, including
“destroying or concealing or directing or procuring another to destroy or conceal evidence that
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First, with regard to Brooks, the district court found, in addition to his
false statements, that in or about May of 2002 he destroyed or ordered another
person to destroy material evidence when he ordered an El Paso employee to
shred records related to reports to an industry newsletter. As noted in the PSR,
and unchallenged by the Defendants-Appellants,42 such conduct occurred during
the course of a state investigation into false reporting at El Paso of which Brooks
had knowledge.43 Brooks’ sole challenge to the district court’s finding of
obstruction for his destruction of documents was his conduct was innocent.
Looking to the record as a whole, the district court’s finding to the contrary was
not implausible. Accordingly, Brooks fails to show such a finding is clearly
is material to an official investigation or judicial proceeding,” and “providing a materially false
statement to a law enforcement officer that significantly obstructed or impeded the official
investigation or prosecution of the instant offense.” See id. at cmt. n.4 (d), (g). The Guidelines
further provide examples of non-covered conduct, such as “making false statements, not under
oath, to law enforcement officers, unless Application Note 3(g) above applies,” and “providing
incomplete or misleading information, not amounting to a material falsehood in respect to a
presentence investigation.” See id. at cmt. n. 5(b), (c). A 2006 amendment to the Guidelines
allows consideration of pre-investigation conduct. See United States v. Alexander, 602 F.3d
639, 642 n.3 (5th Cir. 2010).
42
The district court adopted the factual findings of the PSR. “[I]f no relevant affidavits
or other evidence is submitted to rebut the information contained in the [presentence report],
the court is free to adopt its findings without further inquiry or explanation.” United States
v. Vital, 68 F.3d 114, 121 (5th Cir. 1995).
43
While the pre-2007 Guidelines required conduct to occur during the course of an
investigation into the conduct at issue, they did not require the investigation to be led by the
federal government, or to be a criminal investigation, so long as it was led by government
officials. See United States v. Fiore, 381 F.3d 89, 94 (2d Cir. 2004) (finding SEC civil
investigation into conduct giving rise to later criminal charge sufficient to render obstructive
conduct relevant for sentencing enhancement); United States v. McGovern, 329 F.3d 247, 252
(1st Cir. 2003) (finding Medicaid & Medicare civil investigation sufficient to allow for
obstruction enhancement); see also United States v. Upchurch, 88 F. App’x 794, 795–96 (5th
Cir. 2004) (per curiam) (finding state investigation into conduct at issue sufficient to trigger
obstruction enhancement). While the Defendants-Appellants assert the earlier investigation
was into wash trading, the record indicates the investigation also covered false reporting, and,
accordingly, the district court’s conclusion was not implausible.
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erroneous, and, in light of such a finding, the district court did not err in
providing a two-point enhancement.
With regard to Phillips and Walton, the PSRs found obstruction based on
their statements to El Paso’s legal counsel and independent investigators during
the company’s investigation arising from inquiries by the CFTC, the Federal
Energy Regulatory Commission, and the U.S. Attorney’s Office.44 The
Defendants-Appellants show no error in the district court’s finding that they
made their false statements during the course of the investigations. Similarly,
they show no error in the district court’s finding the Phillips’s and Walton’s
statements were not made in ignorance of the investigations and were not “the
result of a spur of the moment decision.” See United States v. Greer, 158 F.3d
228, 235 (5th Cir. 1998) (finding obstruction limited to “egregiously wrongful
behavior whose execution requires a significant amount of planning and
presents an inherently high risk that justice will in fact be obstructed”).
Further, although the statements were not made directly to government officials,
the district court’s finding that they were made with intent to be communicated
to government officials, and thus to impede the investigation into their wrong-
doing, was not implausible. See U.S. Sentencing Guidelines Manual §3C1.1 cmt.
n.9 (providing obstruction may be “induced, procured, or willfully caused”); see
also United States v. Aguilar, 515 US 593, 601 (1995) (holding, to secure
conviction for obstruction of justice charge, government must show defendant
“knew that his false statement would be provided to the grand jury”).
Finally, the Defendants-Appellants fail to show error in the district court’s
adoption of the PSRs’ finding that their false statements significantly impeded
44
The PSR also found Brooks obstructed the investigation based on his statements to
El Paso’s legal counsel and internal investigation. Nonetheless, because the district court’s
finding of obstruction was supported by Brooks’s destruction of evidence, the Court does not
address Brooks’s false statements.
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No. 09-20871
the investigation. False statements which significantly delay an investigation
and prosecution, even if not successful in preventing it, may provide a sufficient
basis for an obstruction enhancement. See United States v. Phipps, 319 F.3d
177, 191–92 (5th Cir. 2003) (holding defendant’s false identification of
accomplice, delaying investigation, constituted obstruction). While Defendants-
Appellants objected to the PSRs’ finding, they presented no evidence to rebut
that finding. See Vital, 68 F.3d at 121. Consequently, the district court could
rely on the PSRs, see id., and the Defendants-Appellants fail to show that the
district court’s finding was implausible based on the record. Thus, they fail to
show error in the obstruction enhancement.
Accordingly, the Defendants-Appellants fail to show any error in their
sentences.45
CONCLUSION
For the reasons stated above, Defendants-Appellants’ convictions and
sentences are AFFIRMED.
45
The Defendants-Appellants’ additional purported error, that the district court
erroneously treated the guidelines as presumptively reasonable, see Gall v. United States, 552
U.S. 38, 50 (2007), is without any support in the record. Indeed, the district court’s statement
of reasons indicates that it made “an individualized assessment based on the facts presented.”
See id.57