United States v. Keith Simmons

PUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 12-4469

UNITED STATES OF AMERICA,

Plaintiff - Appellee,

v.

KEITH FRANKLIN SIMMONS,

Defendant - Appellant.

Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte. Robert J. Conrad,
Jr., Chief District Judge. (3:10-cr-00023-RJC-DCK-1)

Argued: October 29, 2013 Decided: December 11, 2013

Before NIEMEYER and MOTZ, Circuit Judges, and John A. GIBNEY,
Jr., United States District Judge for the Eastern District of
Virginia, sitting by designation.

Affirmed in part, reversed in part, vacated in part, and
remanded by published opinion. Judge Motz wrote the opinion, in
which Judge Gibney joined. Judge Niemeyer wrote a dissenting
opinion.

ARGUED: Joshua B. Carpenter, FEDERAL DEFENDERS OF WESTERN NORTH
CAROLINA, INC., Asheville, North Carolina, for Appellant.
William Michael Miller, OFFICE OF THE UNITED STATES ATTORNEY,
Charlotte, North Carolina, for Appellee. ON BRIEF: Henderson
Hill, Executive Director, Ann L. Hester, FEDERAL DEFENDERS OF
WESTERN NORTH CAROLINA, INC., Charlotte, North Carolina, for
Appellant. Anne M. Tompkins, United States Attorney, Amy
Elizabeth Ray, Assistant United States Attorney, OFFICE OF THE
UNITED STATES ATTORNEY, Asheville, North Carolina, for Appellee.

2
DIANA GRIBBON MOTZ, Circuit Judge:

Keith Simmons appeals his convictions on one count of

securities fraud, one count of wire fraud, and two counts of

money laundering, as well as his sentence of fifty years’

imprisonment. We affirm his fraud convictions but reverse his

money-laundering convictions because the transactions prosecuted

as money laundering constituted essential expenses of his

underlying fraudulent scheme. Accordingly, we affirm in part,

reverse in part, vacate his sentence, and remand for further

proceedings consistent with this opinion.

I.

A.

From April 2007 to December 2009, Simmons operated a $35

million Ponzi scheme called Black Diamond Capital Solutions.

With help from a network of self-styled hedge fund managers,

Simmons recruited more than 400 investors by promising to invest

their money in a lucrative and exclusive foreign currency

exchange, or “Forex” fund. Simmons told investors that only ten

or twenty percent of their investment would be at risk at any

given time. He sent them monthly earnings statements reporting

sizeable profits. And he promised them that, after an initial

ninety-day period, they could withdraw their money at will.

3
 Numerous investors tested Simmons’s promise and withdrew a

portion of their money after ninety days had passed. Upon the

receipt of these returns, which seemed to evidence Black

Diamond’s legitimacy and profitability, many investors sent even

more money to Simmons. Some recruited their friends to invest

with Simmons as well.

In fact, no Forex fund existed and Simmons never invested a

cent of his victims’ funds. Simmons fabricated the earnings

reports, and he paid the purported returns to early investors

from deposits made by later ones. 1 Rather than investing his

victims’ funds as promised, Simmons treated their investments as

his personal piggy bank. He purchased $4.6 million in real

estate, invested $1.2 million in an extreme fighting venture,

funneled $2.2 million to his other businesses, and bought lavish

gifts and trips for his employees and girlfriends.

Greed provoked the Ponzi scheme, and greed doomed it. As

more investors sought to withdraw their funds, Simmons told a

series of escalating lies to “string out” investors and delay

withdrawals. First, he claimed that withdrawals were

interfering with the fund, and that he would henceforth limit

withdrawals in order to reduce the fund’s volatility. Later, he

1
Simmons paid out a total of $19 million, but only $9
million made its way to actual investors. Corrupt hedge fund
managers, who served as middle-men between Simmons and some of
his investors, siphoned off the rest.

4
asserted that he was negotiating with a German named Klaus

Bruner, who allegedly planned to cash out investors and take

over the account. And Simmons told some investors that the FBI

itself was impeding some withdrawals.

Simmons was lying. In 2009, when investors’ earning

statements reflected a total of more than $292 million, the

Black Diamond bank account had in fact dwindled to $523.60.

Still, Simmons told investors that their money was safe.

By July 2009, Simmons permitted no further withdrawals by

investors. After that date, Simmons managed to attract only one

new investor. Moreover, existing investors began demanding

their money back. And as victim-investors became more alarmed,

Simmons’s dissembling became more desperate. Finally, in

December 2009, the FBI raided his offices. During a long

conversation with an FBI agent, Simmons confessed to the fraud.

Ultimately, Simmons’s Ponzi scheme cost his victims more

than $35 million. Many lost their life savings. Some lost

their families. Many became depressed, even suicidal, after

learning that their money was gone.

B.

The Government indicted Simmons on one count of securities

fraud, one count of wire fraud, and two counts of money

laundering. The fraud counts arose from Simmons’s role in the

Ponzi scheme itself, which, according to the superseding

5
indictment, took place from April 2007 to December 2009. The

indictment did not predicate Simmons’s two fraud charges on

discrete instances of fraud; rather, it charged Simmons with a

two-and-one-half year “scheme to defraud,” specifically claiming

that Simmons executed “what is commonly known as a ponzi

scheme.” Simmons’s money-laundering counts, by contrast, arose

from two discrete payments to investors made in 2008. The

Government alleged that these payments also involved the

“diver[sion of] investor money back to other investors in ponzi-

fashion . . . to induce further investments by investors and

their friends and family members.”

Simmons proceeded to trial in December 2010. Nine of his

victims testified against him, as did certain hedge fund

managers, an IRS agent, and the FBI agent to whom Simmons

confessed. Simmons did not testify. His counsel argued that he

was a neophyte financier who never intended to defraud his

investors. The jury, however, convicted him on all counts.

After Simmons’s conviction, a probation officer drafted a

presentence report calculating Simmons’s recommended term of

imprisonment. The probation officer recommended an offense

level of 43 -- the maximum level permitted under the Guidelines

-- and a criminal history category of I. This offense level and

criminal history category produced a Guidelines-recommended

sentence of 960 months’ imprisonment.
6
 The district court varied downward from the probation

officer’s recommendation and sentenced Simmons to 600 months’

imprisonment. Specifically, the court sentenced Simmons to 240

months on the securities-fraud count, a consecutive term of 240

months on the wire-fraud count, and 240-month terms on each of

the two money-laundering counts -- 120 months of which was to be

served consecutively to the fraud counts, and 360 months of

which was to be served concurrently. The court acknowledged

that this was an “enormous” sentence, but explained that it

could not “remember another case that involved such devastating,

life wrecking” greed. The court concluded that a fifty-year

sentence was sufficient, but not greater than necessary, to

accomplish justice.

II.

On appeal, Simmons primarily challenges his money-

laundering convictions. 2 He claims that the trial court erred by

2
Simmons also challenges all of his convictions on the
general ground that the district court violated due process by
admitting three pieces of assertedly irrelevant victim-impact
testimony. Even if the court erred in admitting this evidence,
any error was harmless. Overwhelming evidence supported the
jury verdict. Nine testifying victims traced the fraud directly
to Simmons. He confessed his role in the Ponzi scheme to an FBI
agent, who also testified. And the fraud left a paper trail
that pointed straight to Simmons. Thus, given the wealth of
evidence against Simmons, even if the admission of brief victim-
impact testimony was error, the guilty verdict “was surely
(Continued)
7
declining to grant his motion for judgment of acquittal on those

counts. We review the denial of a motion for judgment of

acquittal de novo. United States v. Mehta, 594 F.3d 277, 279

(4th Cir. 2010).

A.

The federal promotional money-laundering statute makes it a

crime to engage in a “financial transaction” involving “the

proceeds of specified unlawful activity” with the intent to

“promote the carrying on” of that activity. 18 U.S.C.

§ 1956(a)(1)(A)(i) (2006). The statute defines “specified

unlawful activity” to encompass more than 250 predicate crimes,

including securities fraud and wire fraud. Id. at

§ 1956(c)(7)(A).

Both of Simmons’s money-laundering convictions arose from

payments that he made to investors during the course of his

Ponzi scheme. The first conviction was based on a wire transfer

of $150,000 to James Bazluki on March 14, 2008. Bazluki had

invested $250,000 in Black Diamond prior to receiving this

return; after receiving it, Bazluki invested another $70,000.

The second money-laundering conviction was based on a wire

transfer of $16,000 to Till Lux on October 22, 2008. Lux had

unattributable to the error.” Sullivan v. Louisiana, 508 U.S.
275, 279 (1993).

8
invested $40,000 in Black Diamond. He testified that after

recovering the $16,000, he subsequently convinced many of his

friends to invest in Black Diamond. Lux also continued to

withdraw money from Black Diamond, and ultimately turned a small

profit on his investment. Simmons contends that these payments

did not involve “proceeds” of unlawful activity as required to

constitute money laundering.

His argument relies on United States v. Santos, a 4-1-4

decision in which the Supreme Court reversed the money-

laundering convictions of a defendant convicted of both running

an illegal gambling business and money laundering. 553 U.S. 507

(2008). Santos’s gambling counts arose from his operation of an

illegal lottery through a network of local bars and restaurants.

The money-laundering counts were based on payments by Santos to

the “runners” and “collectors” who helped operate the lottery,

and to the lottery winners themselves. The lower court

concluded that these payments involved the “proceeds” of

operating an illegal lottery, and could therefore constitute

grounds for money-laundering convictions.

Five members of the Supreme Court disagreed. A four-

Justice plurality concluded that the term “proceeds” in the

money-laundering statute was ambiguous -- it could mean either

“receipts” or “profits” -- and invoked the rule of lenity to

resolve the ambiguity in favor of the defendant. Id. at 514

9
(plurality opinion). The plurality thus concluded that the

money-laundering statute only covers transactions involving

“profits” of criminal activity. Id. at 524.

In rejecting the statute’s broader interpretation, the

plurality found that construing “proceeds” to mean “receipts”

would create a “merger problem.” Id. at 515. The plurality

explained that those who run illegal gambling businesses must

necessarily pay their accomplices and the lottery’s winners. If

a defendant could commit money laundering merely by “paying the

expenses of his illegal activity,” all illegal gambling

businesses would involve money laundering, and the Government

could punish a defendant twice for an offense that Congress

intended to punish only once. Id. at 517.

This merger problem, the plurality noted, is not limited to

illegal gambling. Writing for the plurality, Justice Scalia

explained:

Few crimes are entirely free of cost, and costs are
not always paid in advance. Anyone who pays for the
costs of a crime with its proceeds -- for example, the
felon who uses the stolen money to pay for the rented
getaway car -- would violate the money-laundering
statute. And any wealth-acquiring crime with multiple
participants would become money laundering when the
initial recipient of the wealth gives his confederates
their shares. Generally speaking, any specified
unlawful activity, an episode of which includes
transactions which are not elements of the offense and
in which a participant passes receipts on to someone
else, would merge with money laundering.

10
Id. at 516. The plurality concluded that interpreting

“proceeds” to mean “profits” would resolve the merger problem by

ensuring that defendants cannot be convicted of money laundering

merely for paying the essential “crime-related expenses” of the

predicate crime. Id. at 515.

Justice Scalia devoted much of the plurality opinion to

challenging the dissent’s prediction that applying the “profits”

interpretation would undermine the viability of “the very cases

that money laundering statutes principally target, that is,

cases involving large-scale criminal operations that continue

over a substantial period of time.” Santos, 553 U.S. at 538-39

(Alito, J., dissenting). The dissent warned that, following the

plurality’s approach, the money-laundering statute could not

reach long-term criminal enterprises in which the distinction

between payments of “essential expenses” and payments dispensing

criminal profits may often be unclear. But the plurality

dismissed the dissent’s concerns as baseless. According to the

plurality, determining the lifespan of a long-term criminal

enterprise, for purposes of evaluating whether the enterprise

produced profits, would raise no difficulties because an

enterprise lasts “as long as the Government chooses to charge.”

Id. at 520 n.7 (plurality opinion). Because the Government

selects the lifespan of the predicate crime, it must prove that

payments charged as money laundering during that lifespan

11
involved profits, rather than essential expenses, of the

predicate crime. Id.

Justice Stevens provided the crucial fifth vote to reverse

Santos’s money-laundering convictions, but did not endorse the

plurality’s view that “proceeds” always means “profits.”

Rather, Justice Stevens concluded that courts should resolve the

scope of the term “proceeds” on a case-by-case basis by

reference to congressional intent. Id. at 525 (Stevens, J.,

concurring). Justice Stevens grounded his conclusion on the

merger problem identified by the plurality. He concluded that

using funds earned through an illegal lottery business to pay

the “essential expenses” of that business cannot constitute

money laundering. Id. at 528. And he agreed with the plurality

that there was “no explanation for why Congress would have

wanted a transaction that is a normal part of a crime it had

duly considered and appropriately punished elsewhere in the

Criminal Code, to radically increase the sentence for that

crime.” Id. Justice Stevens concluded that Congress could not

have intended such a perverse result. Id.

B.

Congress amended the money-laundering statute in May 2009;

that amendment effectively overruled Santos, defining proceeds

to include “gross receipts.” Fraud Enforcement and Recovery Act

of 2009, Pub. L. No. 111–21, § 2(f)(1), 123 Stat. 1617, 1618

12
(2009) (codified at 18 U.S.C. § 1956(c)(9)). However, because

the amendment was not enacted at the time of the conduct giving

rise to Simmons’s money-laundering convictions, this expanded

definition of “proceeds” does not apply in this case. We are

therefore called on to wade into the murky Santos waters, as we

have in three previous published opinions.

In United States v. Halstead, we considered the reach of

Santos in the context of a defendant convicted of healthcare

fraud and money laundering. 634 F.3d 270 (4th Cir. 2011).

Halstead’s fraud convictions arose from his scheme to capitalize

on his patients’ healthcare benefits by making phony medical

diagnoses. His money-laundering conviction, by contrast, arose

from his transfer of the illicit gains into his personal bank

account. He claimed that Santos prohibited his money-laundering

conviction because transferring his ill-gotten gains into his

own coffers constituted an “essential expense[] of operating”

his healthcare fraud. Santos, 553 U.S. at 528 (Stevens, J.,

concurring).

To resolve Halstead’s argument we first examined what,

exactly, Santos held -- a task complicated by the fractured

disposition. Relying on Marks v. United States, 430 U.S. 188

(1977), we interpreted Santos narrowly to bind lower courts only

in cases where illegal gambling constituted the predicate for

the defendant’s money-laundering conviction. Halstead, 634 F.3d

13
at 279. But, because the merger problem provided the “driving

force” behind both the plurality’s and Justice Stevens’s

opinions, we recognized that Santos compelled us to construe the

money-laundering statute so as to avoid punishing a defendant

twice for the same offense. Id. at 278-79. We concluded that a

defendant cannot be convicted of money laundering merely “for

paying the essential expenses of operating the underlying

crime.” Id. at 278 (quotation marks omitted). But if “the

financial transactions of the predicate offense are different

from the transactions prosecuted as money laundering” no merger

problem arises. Id. at 279-80.

Applying this rule to Halstead, we held that no merger

problem tainted his money-laundering conviction. His healthcare

fraud was “complete” as soon as he received the ill-gotten

healthcare reimbursements. Transferring these reimbursements

into his own account thereafter constituted an altogether

“separate” offense that the Government properly prosecuted as

money laundering. Id. at 280.

After Halstead, we twice returned to Santos and its elusive

merger problem. In United States v. Cloud, we considered a

defendant convicted of mortgage fraud -- for fraudulently luring

home-buyers into making bad real-estate investments -- and money

laundering -- for paying kickbacks to the accomplices who helped

him locate his victims. 680 F.3d 396 (4th Cir. 2012). We

14
reversed Cloud’s money-laundering convictions, concluding that

the kickbacks constituted “essential expenses” of the mortgage-

fraud scheme because “Cloud’s mortgage fraud depended on the

help of others, and their help, in turn, depended upon payments

from Cloud.” Id. at 406. Because Cloud’s scheme “could not

have succeeded” without the kickbacks, we held that convicting

him separately for these transactions would present the very

same merger problem identified in Santos. Id. at 407.

A few months ago, in United States v. Abdulwahab, we again

relied on Santos to reverse a defendant’s money-laundering

convictions. 715 F.3d 521 (4th Cir. 2013). Abdulwahab had

committed an elaborate investment fraud, and the jury convicted

him of money laundering based on payments he made to his co-

conspirators to carry out that fraud. Id. at 506-07. As in

Cloud, we found that these payments “were for services that

played a critical role in the underlying fraud scheme” because

they persuaded confederates to participate in the crime. Id. at

531. Abdulwahab resembled the paradigmatic felon, recognized by

the Santos plurality, who uses “stolen money to pay for the

rented getaway car.” Id. We therefore concluded that the same

merger problem presented in Santos barred his money-laundering

convictions. Id.

15
 III.

Simmons argues that Santos, Halstead, Cloud, and Abdulwahab

require that we reverse his money-laundering convictions. He

claims that his payments to investors did not involve “proceeds”

of criminal activity but rather “essential expenses” of

maintaining his Ponzi scheme. And he maintains that convicting

him separately of money laundering for payments that were

essential to accomplishing his fraud would raise the same fatal

merger problem identified in Santos. The Government, by

contrast, argues that Simmons’s fraud did not depend on payments

to investors and that these payments were not essential to the

fraud. The Government therefore maintains that Simmons’s money-

laundering convictions should be affirmed.

A.

After considering the record in this case, the parties’

arguments, and controlling law, we conclude that Simmons’s

money-laundering convictions cannot stand. The evidence

admitted at Simmons’s trial irrefutably established that the

ongoing success of his Ponzi scheme depended on payments to

earlier investors, including those payments charged in the

money-laundering counts.

The evidence against Simmons confirmed the commonsense

notion that people generally do not send money into unproven

investment schemes without some evidence that they will see

16
their money again. Early payments from Simmons provided his

victims with just such evidence. Thus, the $9 million dollars

that Simmons paid to early investors was essential to

perpetuating the fraud scheme that ultimately earned him more

than $35 million. Indeed, James Bazluki -- the victim whose

payment formed the basis of Simmons’s first money-laundering

count -- testified that the fact that he “was able to request

money out of the account” convinced him “that this was a good

place to have [his] money” and prompted him to make further

investments. And Till Lux -- whose payment formed the basis of

Simmons’s other money-laundering count -- testified that the

fact that he was able to withdraw from his account made him “100

percent confident” in his investment, convinced him that his

gains were “not just on paper,” and made him encourage his

friends to invest. In sum, the very victims who received the

payments that formed the basis for Simmons’s money-laundering

charges unequivocally testified to the critical importance of

those payments in fostering the (misplaced) confidence necessary

to perpetuate the fraud.

That Simmons’s fraud continued for five months after the

payments to existing investors stopped does not alter this fact.

When payments ceased in July 2009, Simmons managed to attract

only one new investor. And, as soon as the payments ceased,

existing investors started demanding the answers that led to the

17
scheme’s prompt unraveling. That Simmons managed, through lies

and dissembling, to extend a fraud that had endured for more

than two years for an additional five months without paying any

new returns to investors does not prove that those payments were

unnecessary to the scheme. If anything, the rapid unraveling of

the Ponzi scheme when the payments ceased suggests just the

opposite.

Furthermore, we note that throughout its prosecution of

this case, the Government itself treated the payments to

investors as essential to Simmons’s fraud. The superseding

indictment characterized the wire fraud offense as including

transfers to “wire ponzi payment to investors and to their

intermediaries in other States” -- the very transactions that

the Government later prosecuted as money laundering. And in its

closing argument, the Government contended that payments to

investors were necessary to the fraud because they “g[a]ve the

investors confidence” that their investment was sound and

“induce[d] them to put even more money back into the scheme.”

The Government explained that the payments were “one of the ways

the defendant kept the scheme going.”

In addition to the evidence proving that this particular

Ponzi scheme relied on payments to early investors, such

payments are understood to constitute essential features of

Ponzi schemes. In fact, we have defined a Ponzi scheme as one

18
“in which early investors are paid off with money received from

later investors in order to prevent discovery and to encourage

additional and larger investments.” United States v. Loayza,

107 F.3d 257, 259 n.1 (4th Cir. 1997). The Oxford English

Dictionary similarly defines a Ponzi scheme as a “form of fraud

in which belief in the success of a non-existent enterprise is

fostered by payment of quick returns to first investors using

money invested by others.” Ponzi Scheme, Oxford English

Dictionary (2013).

Given these definitions, it is hardly surprising that the

only other appellate court to decide a case involving a Ponzi-

scheme operator convicted of both fraud and money laundering has

reached the same conclusion as we do. In United States v. Van

Alstyne, the Ninth Circuit reversed the defendant’s money-

laundering convictions on the ground that the payments of

purported returns to early investors were “inherent” to the

defendant’s underlying scheme to defraud. 584 F.3d 803, 815

(9th Cir. 2009). The court concluded that the money-laundering

convictions suffered from a merger problem because the very

nature of a Ponzi scheme “require[s] some payments to investors

for it to be at all successful.” Id. at 815.

Finally, we note that when Congress amended the money-

laundering statute in 2009 to include “gross receipts” within

the law’s definition of “proceeds,” the Senate Report

19
acknowledged that Ponzi scheme payments could not be prosecuted

as money laundering under the existing statute. The Report

bluntly stated that, given the Santos Court’s interpretation of

the existing statute, the “proceeds of ‘Ponzi schemes’ like the

Bernard Madoff case, which by their very nature do not include

any profit, would be out of the reach of the money laundering

statutes.” S. Rep. No. 111-10, at 4 (2009). Of course, the

Senate’s interpretation of Supreme Court case law does not bind

us. It does, however, accord with our conclusion that payments

of purported returns to early investors are understood to

constitute “essential expenses” of Ponzi schemes rather than

transactions dispensing a Ponzi scheme’s profits.

B.

The Government concedes that this case involves a

“difficult line-drawing” issue, Gov’t Br. at 57, but nonetheless

contends that we must affirm. The Government raises three

principal arguments as to why Simmons’s money-laundering

convictions present no merger problem.

First, the Government contends that Simmons’s returns to

investors constitute “the reinvestment of profit to finance

future fraud” rather than “essential expenses” of an ongoing

fraud. Gov’t Br. at 56. Although the line between using

criminal profits to finance a future fraud and using gross

receipts to pay the expenses of an ongoing fraud is less than

20
self-evident, see Santos, 553 U.S. at 544 (Alito, J.,

dissenting), Santos both requires us to draw this line and

offers useful guidance as to where the line falls in this case.

Santos’s gambling scheme and Simmons’s Ponzi scheme

resemble each other in virtually all material respects. Both

constituted ongoing schemes rather than discrete criminal

transactions. The indictments in both cases charged underlying

conduct that spanned a number of years rather than a single

illegal act. And both schemes required occasional payments to

third parties to sustain the crime during its lifespan.

Santos paid his lottery winners, presumably hoping that

reliable paydays would induce winners, losers, and new players

alike to test their luck during the next round of play. Of

course, Santos could have declined to pay his winners and

instead pocketed the cash. Had he done so, however, his

gambling scheme would have been short-lived; it could not have

lasted the six years charged in the indictment. A majority of

the Supreme Court therefore agreed that Santos’s payments to

winners did not amount to the reinvestment of profit to finance

new, discrete gambling crimes. Rather, these payments

constituted expenses necessary to further a crime that, by its

very nature, required periodic payments to survive.

The same is true in this case. Like a bookie who pays his

winners in the hopes of attracting new and repeat gamblers

21
during the course of an ongoing lottery, Simmons paid early

investors in the hopes of attracting new and repeat investors

during the course of an ongoing fraud. Although Simmons could

have absconded with the early investors’ money before paying any

returns, had he done so, his scheme certainly could not have

lasted for the nearly three-year period charged in the

indictment. See Santos, 553 U.S. at 520 n.7 (plurality opinion)

(a criminal enterprise’s profitability must be proved for “as

long as the Government chooses to charge”).

Given this case’s similarity to Santos, we must decline the

Government’s invitation to divide Simmons’s Ponzi scheme into a

successive series of past, present, and future frauds. Rather,

Santos requires that we hold that Simmons’s Ponzi scheme, like

the lottery scheme in Santos, represented a single, ongoing

enterprise that the defendant could sustain only by making

limited payouts.

The Government next argues that payments to innocent third

parties -- rather than to coconspirators -- cannot constitute

essential expenses of a criminal scheme. The Government notes

that in both Cloud and Abdulwahab, the payments we deemed to be

essential were made to the defendant’s criminal accomplices

rather than to innocent outsiders like Simmons’s Ponzi victims.

According to the Government, while paying one’s accomplices is a

typical expense of criminal activity akin to paying for a rented

22
getaway car, paying investors in order to maintain a Ponzi

scheme is a different matter entirely.

This argument ignores the very facts of Santos itself. In

Santos, payments to runners, collectors, and lottery winners

formed the basis of the defendant’s money-laundering

convictions. 553 U.S. at 509. Although the runners and

collectors were accomplices to Santos’s crime, the lottery

winners were not. 3 Manifestly, the Supreme Court therefore did

not believe that the merger problem arises only when the

defendant pays his co-conspirators or accomplices. See Santos,

553 U.S. at 515-16 (plurality opinion) (“Since few lotteries, if

any, will not pay their winners, the statute criminalizing

illegal lotteries would ‘merge’ with the money-laundering

statute.”). For our part, we have repeatedly explained in

interpreting Santos that the essential nature of the payment --

rather than the identity of the payment’s recipient -- dictates

whether a given transaction raises a merger problem. See Cloud,

680 F.3d at 407; Halstead, 634 F.3d at 279.

3
That these winners participated in an illegal lottery, and
were therefore not strictly “innocent,” did not make them
accomplices to Santos’s crime. The illegal gambling statute
criminalizes “conduct[ing], financ[ing], manag[ing],
supervis[ing], direct[ing], or own[ing]” a gambling operation
that violates state law. 18 U.S.C. § 1955 (2006). The statute
thus criminalizes the management of -- rather than the mere
participation in -- an illegal gambling venture. Just like
Simmons’s victims, the lottery winners were therefore not
participants or co-conspirators in Santos’s crime.

23
 Finally, perhaps recognizing the similarity between the

payments in this case and those in Santos, the Government

stretches to distinguish them by pointing to the assertedly

unscheduled, discretionary nature of the Ponzi payments. The

Government maintains that although regular payments to lottery

winners -- as in Santos -- can constitute essential expenses of

a criminal scheme, “payments in discretionary amounts made on no

schedule in particular” -- assertedly as in this case -- cannot.

Gov’t Br. at 57.

It is not at all clear that the payments in Santos were

more “scheduled” or less “discretionary” than those here. 4 But

even assuming that Santos made payments according to a strict

schedule, and that Simmons made them at whim, the Government

raises a distinction without a difference. If a criminal scheme

requires certain payments to succeed, it makes no difference

whether these payments arrive regularly or sporadically. A

payment need not be predictable to be essential. Because

Simmons’s Ponzi scheme depended on periodic payments to

4
The payments here were governed by a contract permitting
investors to withdraw funds on the first business day of each
month. To be sure, Simmons failed to honor this contract. But
his ultimate failure to honor his contractual obligations does
not necessarily render the payments that he did make
unscheduled. For its part, the Santos Court never specified
whether Santos paid his winners on a particular schedule. In
any event, in neither case can the payments be characterized as
“discretionary” given that both schemes depended on the payments
to survive.

24
investors, these payments constituted essential expenses of his

criminal enterprise regardless of whether they accrued on a

specified timetable.

IV.

Simmons’s fraudulent scheme, like any typical Ponzi scheme,

depended on attracting new investments through occasional

payouts to existing investors. Without these payouts, there

would have been no new investments and, consequently, no Ponzi

scheme. The Government conceded -- indeed, trumpeted -- this

fact throughout the trial proceedings -- both in its charging

documents and its arguments to the jury. And Congress itself

recognized as much when it amended the money-laundering statute

in 2009 to ensure that Ponzi disbursements like the ones at

issue here could henceforth be punishable as money laundering.

Simmons’s payments to investors, like Santos’s payments to

lottery winners, constitute essential expenses of his underlying

fraud. Punishing Simmons separately for these payments

therefore raises the same merger problem identified in Santos.

For these reasons, while we affirm Simmons’s two fraud

convictions, we must reverse his two money-laundering

25
convictions, vacate his sentence, and remand for further

proceedings consistent with this opinion. 5

AFFIRMED IN PART, REVERSED IN PART,
VACATED IN PART, AND REMANDED

5
We need not address Simmons’s contention that his fifty-
year sentence was procedurally and substantively unreasonable.
And, given that Simmons’s procedural challenge to his sentence
rests on an asserted misapplication of a money-laundering
sentence enhancement, this challenge should be moot on remand in
light of our reversal of the money-laundering convictions on
which it is based.

26
NIEMEYER, Circuit Judge, dissenting:

During the course of this Ponzi scheme, Simmons obtained

money through wire fraud and securities fraud from investing

customers and used a portion of the money so obtained -- the

proceeds of the fraud -- to return $150,000 to James Bazluki and

$16,000 to Till Lux in an effort to conceal the fraud he had

committed on them. By so investing the proceeds of the fraud,

Simmons was able to engage in additional fraud from which he

obtained additional proceeds, because the payments to Bazluki

and Lux deflected potential suspicion that otherwise might arise

with respect to his initial fraudulent transactions.

Under these facts, when Simmons returned money to Bazluki

and Lux, he engaged in “transactions” that constituted money

laundering, in violation of 18 U.S.C. § 1956(a)(1)(A)(i)

(prohibiting financial transactions involving the “proceeds of

specific unlawful activity” (i.e., in this case, wire fraud and

securities fraud)). And the fraud committed by Simmons in

obtaining investors’ money was a distinct, antecedent crime,

completed when Simmons received the money. In these

circumstances, I submit, the two crimes (money laundering and

wire or securities fraud) did not merge so that Simmons was

subjected to punishment twice for the same conduct. See United

States v. Santos, 553 U.S. 507, 517 (2008) (observing that a

“merger problem” would allow prosecutors, in their discretion,

27
to seek the higher penalty for the two merged crimes or both

penalties); United States v. Halstead, 634 F.3d 270, 278-79 (4th

Cir. 2011) (same).

Disagreeing with the majority’s analysis, I would conclude

that the payments to Bazluki and Lux were not the “essential

expenses” of Simmons’ wire fraud. See Santos, 553 U.S. at 528.

The wire fraud did indeed have expenses in marketing and selling

the scheme and paying employees to work the office. But once

the fraudulent statements were made to customers and the

customers sent money to Simmons based on the statements, the

fraud was complete, and Simmons would then be punishable for

violating the wire fraud statute, 18 U.S.C. § 1343. The

subsequent payments back to the investors, who had earlier been

defrauded, were not expenses of the fraudulent act -- they were

not necessary as a matter of fact or law. Rather, they were

acts of money-laundering that indeed would have the effect of

covering up the fraud and thus promoting future frauds.

Our decision in United States v. Cloud, 680 F.3d 396 (4th

Cir. 2012), makes clear the distinction between an expense of

the fraud and a payment to conceal the fraud and promote future

frauds. In Cloud, the proceeds of the fraud were paid to

employed recruiters, as coconspirators of the defendant, who

helped perpetuate the fraud. Id. at 408. We noted that the

payments to these recruited coconspirators were the “essential

28
expenses of Cloud’s underlying fraud, thus presenting a merger

problem.” Id. at 407. We thus found it essential that the

payments be made to conspiring employees, distinguishing those

payments from payments made to investors for cover-up and future

frauds. As we stated:

In utilizing monies from previous properties to
finance future purchases, Cloud was not paying the
“essential expenses” of the underlying crime.

Cloud, 680 F.3d at 408; see also United States v. Abdulwahab,

715 F.3d 521, 531 (4th Cir. 2013) (likewise holding that

payments made to the defendant’s agents for “services that

played a critical role in the underlying fraud scheme” were

essential expenses of the fraud and recognizing the distinction

made in Cloud that payments to nonparticipating persons to

promote future frauds were not “essential expenses”).

In this case, Bazluki and Lux were not recruiters,

confederates, or coconspirators in the fraudulent scheme. To

the contrary, they were innocent victims of Simmons’ wire or

securities fraud, and the payments made to them were to cover up

Simmons’ past fraud and promote future fraud. Simmons’ ability

to obtain investments based on fraudulent statements subjected

him to punishment under 18 U.S.C. § 1343, as well as 15 U.S.C.

§ 78j(b), and his payments of the fraudulently obtained monies

to victims of the fraud were separate “transactions” that

subjected him to punishment for money laundering under 18 U.S.C.

29
§ 1956(a)(1)(A)(i). In this circumstance, there is no risk of

penalizing Simmons twice for the same conduct.

The majority could only make its analysis work if Simmons

were convicted of some single crime prohibiting a Ponzi scheme

because under a Ponzi scheme, the proceeds from earlier

fraudulent transactions are used to engage in future

transactions. But Simmons was not charged with a crime

prohibiting a Ponzi scheme; he was charged with committing

distinct crimes of wire fraud, securities fraud, and money

laundering, and his payment of monies to investors who had

already been defrauded was not an expense of the fraud; it was a

transaction of money laundering.

Accordingly, I would not find that a merger problem exists

in this case and would affirm on all counts.

30