United States v. Veksler

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit

8-9-1995

United States v Veksler
Precedential or Non-Precedential:

Docket 94-1982

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 UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

__________________

No. 94-1982
__________________

UNITED STATES OF AMERICA

v.

IGOR VEKSLER,
Appellant

__________________

No. 94-2079
__________________

UNITED STATES OF AMERICA

v.

RICHARD MCNAUGHTON,
Appellant
__________________

On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Criminal Nos. 93-cr-00147-8, 93-cr-00147-10)
__________________

Submitted Pursuant to Third Circuit LAR 34.1(a)
July 21, 1995

Before: SLOVITER, Chief Judge,
SCIRICA and McKEE, Circuit Judges

(Filed: August 9, 1995)

Joel I. Fishbein
Law Office of Jack Meyerson, Esq.
Philadelphia, PA 19103

Attorney for Appellant Igor Veksler

Robert E. Welsh, Jr.
Philadelphia, PA 19103

1
 Attorney for Appellant Richard McNaughton

Loretta C. Argrett
Assistant Attorney General
Robert E. Lindsay
Alan Hechtkopf
Gregory V. Davis
United States Department of Justice
Tax Division
Washington, DC 20044
Robert E. Courtney, III
Mary E. Crawley

Of Counsel:
Michael R. Stiles
United States Attorney
Office of United States Attorney
Philadelphia, PA 19106
Attorneys for Appellee

___________________

OPINION OF THE COURT
___________________

SLOVITER, Chief Judge.

Richard McNaughton and Igor Veksler appeal from the

judgments of conviction and sentences entered against them by the

district court. For the reasons set forth below, we will affirm

the district court's orders.

I.

Facts and Procedural History
During 1991 and 1992, McNaughton and Veksler were

involved in a scheme to evade federal and state taxes on sales of

number two oil, a product that can be used as either home heating

oil or diesel fuel. During this period, no taxes were imposed by

the federal government or either New Jersey or Pennsylvania on

the sale of number two oil for use as home heating oil. In

2
contrast, the United States, New Jersey and Pennsylvania did tax

the sale of number two oil when it was to be used as diesel fuel,

and imposed that tax on the producer or importer who first sold

the oil to a purchaser that did not hold a Registration for Tax-

Free Transactions (IRS Form 637).

The tax evasion scheme in which McNaughton and Veksler

participated involved the use of "daisy chains," a series of

paper transactions through numerous companies, some of which were

largely fictitious. In each "daisy chain," the change in

characterization of number two oil from tax-free home heating oil

to taxable diesel fuel was effected through the use of a "burn

company," which would purchase number two oil as tax-free home

heating oil and then sell it to another company as diesel fuel.

The burn company, which typically held an IRS Form 637, would

produce invoices to its purchaser reflecting that the diesel fuel

taxes had been paid and that the taxes were included in the

price. Although the burn company was liable for the payment of

taxes on the oil, it paid no taxes and typically existed for a

brief time and then disappeared. The participants in the scheme

took commissions on the sales at the step in which each

participated.

On September 19, 1993, the United States filed a

superseding indictment charging eighteen different defendants

with various offenses related to the "daisy chain" operation.

Both McNaughton and Veksler were charged with one count of

conspiracy. McNaughton was also charged with twenty-three counts

of wire fraud, three counts of attempted tax evasion, and RICO

3
conspiracy.1 In addition to the conspiracy count, Veksler was

charged with six counts of wire fraud and one count of attempted

tax evasion.

On May 23, 1994, after a twenty-day trial, the jury

convicted McNaughton on all counts. Veksler was convicted of the

conspiracy and wire fraud counts and acquitted on the tax evasion

counts. McNaughton was sentenced to a prison term of forty

months, five years of supervised release, and a special

assessment of $1,400.00. Veksler was sentenced to a prison term

of twenty-six months, followed by three years of supervised

release. These appeals followed.

II.

Discussion

A. Appeal No. 94-2079--McNaughton

McNaughton was the president of BELL/ASCO, a

Pennsylvania corporation that was in the business of making

purchases and sales of number two oil. Prior to April 1, 1992,

BELL/ASCO allegedly played a dual role in the "daisy chain"

scheme by both supplying number two oil to the chain and buying

oil at the end of the chain. After April 1, 1992, BELL/ASCO

served only as a supplier and a new company, ASCA/NOVA, purchased

oil at the end of the chain. ASCA/NOVA, however, operated from

the same office as BELL/ASCO.
1. Did the district court err in refusing to
suppress McNaughton's statement to Perry on
December 1, 1992?

1
A RICO forfeiture count under 18 U.S.C. § 1963(m) was also
brought against McNaughton.

4
 On November 24, 1992, the government executed a search

warrant at Atlantic Heating and Oil, BELL/ASCO's parent

corporation. During the course of the search, McNaughton was

interviewed in his office by an FBI Agent and a Pennsylvania

Revenue Enforcement Officer. Sometime during the interview,

McNaughton left his office to speak with Mr. Thomas Smida, an

attorney who had arrived to represent Atlantic in connection with

the execution of the search warrant. After conferring with

Smida, McNaughton informed the agents that Smida did not want him

to make any more statements. Later, Smida was present when an

agent elicited background information from McNaughton. Smida,

however, halted the interview when an agent asked McNaughton

about his tax returns. Smida was also present when McNaughton's

briefcase was searched.

On November 30, 1992, FBI Agent Sid Perry called

McNaughton and invited him to the FBI office in Philadelphia to

review the evidence against him. On December 1, 1992, McNaughton

went to the FBI office, where he was interviewed by Agent Perry.

During the course of the interview, McNaughton admitted (1) that

he was involved in "daisy chain" deals, (2) that the price of oil

purchased through the "daisy chains" was too low for taxes to

have been paid, (3) that ASCA/NOVA was established in order to

avoid BELL/ASCO's appearance at both ends of the chains, and (4)

that he had received commission payments for his participation in

the "daisy chain" scheme. At no time during the interview did

McNaughton state that he was represented by Mr. Smida or any

other counsel.

5
 McNaughton contends that because he was represented by

Smida at the time of Agent Perry's questioning, the district

court erred by refusing to suppress his statement. McNaughton

argues that Perry violated Rule 4.2 of the Pennsylvania Rules of

Professional Conduct by questioning him,2 and that suppression is

the appropriate sanction.

Rule 4.2 of the Pennsylvania Rules of Professional

Conduct provides, in relevant part, that:
In representing a client, a lawyer shall not
communicate about the subject of the representation
with a party the lawyer knows to be represented by
another lawyer in the matter, unless the lawyer has the
consent of the other lawyer or is authorized by law to
do so.

Pa.R.P.C. 4.2. As the district court concluded, in order for

McNaughton to prevail on his motion to suppress the court would

have to find (1) that the Rule applied to Agent Perry, although

he is not an attorney, (2) that McNaughton was represented by

counsel when Perry interviewed him on December 1, 1992, or that

McNaughton is otherwise entitled to protection under the Rule,

and (3) that suppression of the statement is an appropriate

remedy for a violation of the Rule.

The district court concluded that McNaughton was not

represented by counsel at the time of the interview. There is

adequate support in the record for this conclusion. During the

execution of the search warrant at Atlantic, Smida represented
2
The Pennsylvania Rules of Professional Conduct are applicable to
all actions before the United States District Court for the
Eastern District of Pennsylvania. See Rule 14.IV(B) of the Local
Rules of Civil Procedure for the United States District Court for
the Eastern District of Pennsylvania.

6
himself as the "company" attorney, and never suggested that he

represented McNaughton. App. at 722. McNaughton also referred

to Smida as his employer's attorney, and never suggested that

Smida represented him in a personal capacity. App. at 723. In

addition, on November 25 or 26, 1992, Atlantic informed

McNaughton that it would not represent him in connection with

this matter and that he should retain personal counsel. App. at

722. Indeed, at the conclusion of the December 1, 1992,

interview, McNaughton suggested to Perry that he might retain an

attorney and asked for Perry's opinion of two possible

candidates. App. at 725. Finally, and most significantly,

McNaughton testified at the suppression hearing that Smida was

not representing him personally at the time of the December 1,

1992 interview. App. at 2869-70. In light of these facts, we

cannot characterize the district court's conclusion that

McNaughton was not represented at the time of the interview as

clearly erroneous. Thus, McNaughton may not invoke the

protections of Rule 4.2.

Nor does McNaughton have standing to invoke Rule 4.2 on

Atlantic's behalf. See, e.g., Rakas v. Illinois, 439 U.S. 128,

133-34 (1978); United States v. Fortna, 796 F.2d 724, 732-34 (5th

Cir.) (defendant lacks standing to assert violation of a third-

party's attorney-client privilege), cert. denied, 479 U.S. 950

(1986). Although Rule 4.2 applies to communication with persons

having managerial responsibility on behalf of a represented

organization, see Pa. R.P.C. 4.2 (Comment), we need not decide
whether Perry's questioning of McNaughton violated Rule 4.2 as it

7
applies to Atlantic, because McNaughton could not invoke any such

violation as a basis for his suppression motion.

It follows that the district court did not err in

denying McNaughton's motion to suppress his statements to Perry

on December 1, 1992.3

2. Did the district court err in denying
McNaughton's motion to suppress the wiretap
information?

McNaughton contends that the district court erred by

refusing to suppress the wiretap information in this case because

the warrant for those wiretaps was granted on the basis of

information obtained through the use of a pen register. While

McNaughton acknowledges that the United States Supreme Court

upheld the use of pen registers without a warrant in Smith v.

Maryland, 442 U.S. 735 (1979), he contends that the Smith

decision was based upon the fact that pen registers were

incapable of intercepting conversations. McNaughton argues that

modern technological advances, which have permitted the

development of pen registers that can be turned into listening

devices with the mere turn of a switch, merit reconsideration of

the Supreme Court's position. At a minimum, he reasons, he

should be permitted to conduct discovery regarding the use of the

pen register and the government policies regarding such use.

3
Because we find that McNaughton was neither represented at the
time of the interview nor otherwise entitled to the protections
of Rule 4.2, we need not address whether suppression is the
appropriate remedy for a violation of Rule 4.2.

8
 We would not be so presumptuous as to limit Smith, a

Supreme Court decision, in the manner suggested by McNaughton. In

any event, McNaughton concedes that he has no evidence that the

pen register was used to record any information other than

telephone numbers. The mere suggestion that pen register

equipment is now capable of misuse does not give us a basis to

depart from the controlling precedent of the Smith case. The

district court therefore did not err in failing to suppress the

wiretap and in concluding that McNaughton is not entitled to

additional discovery on that issue.

3. Did the district court err in declining to
order the government to disclose information
regarding Hurchalla's status as a subject of
a grand jury investigation?

McNaughton filed a post-trial motion for information on

the status of a grand jury investigation in connection with

Charles Hurchalla, one of the government's trial witnesses, at

the time that Hurchalla began to cooperate with the government.

McNaughton suggests that by failing to disclose this information,

the government may have violated its obligations under Brady v.

Maryland, 373 U.S. 83, 87 (1963), and Giglio v. United States,

405 U.S. 150, 153-55 (1972). The district court denied

McNaughton's request, holding that the outcome of the trial would

not have been different if the government had disclosed the

requested information. App. at 263-64.

McNaughton asserts that the grand jury investigation

conducted by the Office of the Inspector General of the

9
Department of Transportation concerned possible fraud and false

statements in connection with minority set-aside programs. The

only possible relevance of this information, sought at this late

date, would be in support of a motion for a new trial. In order

to establish a Brady violation, a defendant must first

demonstrate that the prosecution failed to disclose pro-defense

evidence "actually or constructively in its possession or

accessible to it." United States v. Perdomo, 929 F.2d 967, 970

(3d Cir. 1991).

McNaughton does not suggest that the prosecution had

actual knowledge or cause to know of the ongoing nature of the

investigation of Hurchalla. All criminal history checks of

Hurchalla were negative and Hurchalla himself told the

prosecution that the investigation had occurred in the 1980s.

Constructive knowledge can only be found where the defense has

made a specific request for the information. See United States

v. Joseph, 996 F.2d 36, 40-41 (3d Cir.), cert. denied, 114 S.Ct.

357 (1993). The defense made no such request prior to trial,

even though it had information regarding the existence of the

investigation. Under these circumstances, we cannot conclude

that the prosecution committed a Brady violation. Id. at 41.

Moreover, not every failure to disclose evidence

favorable to the defense requires a reversal of a conviction. See

United States v. Thornton, 1 F.3d 149, 158 (3d Cir.), cert.

denied, 114 S.Ct. 483 (1993). Rather, the undisclosed evidence

must also be material. Id. "'[E]vidence is material only if

there is a reasonable probability that, had the evidence been

10
disclosed to the defense, the result of the proceeding would have

been different. A 'reasonable probability' is a probability

sufficient to undermine confidence in the outcome.'" Pennsylvania

v. Ritchie, 480 U.S. 39, 57 (1987) (quoting United States v.

Bagley, 473 U.S. 667, 682 (1985) (Opinion of Blackmun, J.)).

McNaughton contends that the undisclosed evidence could

have led the jury to conclude that Hurchalla's testimony was

designed to further his own interests in connection with the

ongoing grand jury investigation. As the government notes,

inasmuch as Hurchalla was unaware of the ongoing nature of the

investigation and Hurchalla never asked the government to

intercede on his behalf in connection with any such

investigation, it is unlikely that the jury would have rejected

Hurchalla's testimony on the basis of evidence regarding the

ongoing grand jury investigation.

We note also, as the district court concluded, that the

extensive evidence regarding BELL/ASCO's involvement in the

"daisy chain" scheme provided ample evidence of McNaughton's

guilt. App. at 1616-22, 1634. There was testimony by Nadezhda

Shnayderman that McNaughton received commissions for his

participation in the scheme. App. at 1204-05.

We therefore conclude that the district court did not

err in refusing to allow McNaughton to conduct further discovery

into the status of the grand jury investigation.
4. Did the district court err in imposing
McNaughton's sentence?

11
 McNaughton raises various challenges to the district

court's application of the sentencing guidelines. We exercise

plenary review over legal questions about the meaning of the

sentencing guidelines, but apply the deferential clearly

erroneous standard to factual determinations underlying their

application. See United States v. Collado, 975 F.2d 985, 990 (3d

Cir. 1992).

First, we find no error in the district court's

imposition of a two-level upward adjustment under U.S.S.G.

§2T1.1(b)(2) for McNaughton's use of "sophisticated means" to

impede discovery of the tax offense. Application note 4 to

section 2T1.1 states that "'sophisticated means' . . . includes

conduct that is more complex or demonstrates greater intricacy or

planning than a routine tax evasion case." U.S.S.G. § 2T1.1,

comment. (n.4). The commentary continues by stating that "[a]n

enhancement would be applied, for example, where the defendant

used . . . transactions through corporate shells or fictitious

entities." Id. The "daisy chain" scheme employed by McNaughton

in this case is plainly covered by this language.4

Nor did the district court abuse its discretion in

declining to grant a two-level reduction under U.S.S.G. § 3E1.1

for McNaughton's acceptance of responsibility. Although

4
McNaughton contends that the use of a "sophisticated means"
enhancement is duplicative and improper where the state and
federal tax losses were combined to calculate the offense level
under the Tax Table at U.S.S.G. § 2T4.1. The imposition of a
"sophisticated means" enhancement under § 2T1.1(b) is unrelated
to the calculation of the base offense level from the tax loss
under § 2T1.1(a).

12
McNaughton made significant admissions to investigating officers

during the execution of the search warrant and to Agent Perry

during the December 1, 1992 interview, the record does not

support the conclusion that he admitted that he personally had

committed the crimes charged in the indictment. Moreover, as

application note 2 of section 3E1.1 suggests, in most cases,

"[t]his adjustment is not intended to apply to a defendant who

puts the government to its burden of proof at trial by denying

the essential factual elements of guilt . . . ." U.S.S.G.

§3E1.1, comment. (n.2).

At sentencing McNaughton sought a downward departure

under U.S.S.G. § 5H1.4 due to his medical condition, in that his

lung function was seriously decreased. From our review of the

record, we conclude that the district court's refusal to depart

was based not on a belief regarding its authority to depart, as

McNaughton argues, but on McNaughton's failure to present

evidence sufficient to warrant an exercise of the court's

discretion under section 5H1.4. The district court's refusal to

exercise its discretion to grant a downward departure pursuant to

section 5H1.4 is therefore not subject to review by this court.

See United States v. Gaskill, 991 F.2d 82, 84 (3d Cir. 1993).

B. Appeal No. 94-1982--Veksler

Veksler was the operator of one of the "daisy chain"

participants, I.V. Enterprises, a Wisconsin corporation that held

an IRS Form 637, a Pennsylvania oil company franchise tax

exemption certificate and a New Jersey Special B license. Between

July 1991 and December 1991, I.V. purchased approximately

13
3,486,000 gallons of number two oil from Self Oil and sold it, on

paper, to Keroscene, Inc., which served as a burn company in the

same "daisy chain." I.V. never received payment for the oil from

Keroscene, however. Instead, IV received wire transfers from

companies to which Keroscene sold the oil.
1. Was there sufficient evidence to support the
jury's guilty verdict on Counts 1-7?

Veksler argues that the government failed to present

evidence sufficient to support his wire fraud and conspiracy

convictions. In particular, Veksler contends that the government

failed to present evidence to support the conclusion that Veksler

had the requisite level of intent to support his convictions

under 18 U.S.C. § 1343 (wire fraud) and 18 U.S.C. § 371

(conspiracy).

A "claim of insufficiency of the evidence places a very

heavy burden on an appellant." United States v. Gonzalez, 918

F.2d 1129, 1132 (3d Cir. 1990) (quotation and citation omitted),

cert. denied, 498 U.S. 1107 (1991), cert. denied, 499 U.S. 968
(1991), cert. denied, 499 U.S. 982 (1991). In evaluating the

sufficiency of the evidence to sustain a conviction, the evidence

at trial is considered in the light most favorable to the

government. The "'evidence does not need to be inconsistent with

every conclusion save that of guilt if it does establish a case

from which the jury can find the defendant guilty beyond a

reasonable doubt'." United States v. Sandini, 888 F.2d 300, 311

(3d Cir. 1989) (quoting United States v. Cooper, 567 F.2d 252,
254 (3d Cir. 1977)), cert. denied, 494 U.S. 1089 (1990). Instead,

14
this Court reviews the evidence to determine whether "any

rational trier of fact could have found the essential elements of

the crime beyond a reasonable doubt." Jackson v. Virginia, 443

U.S. 307, 319 (1979).

In order to convict a defendant of wire fraud under 18

U.S.C. § 1343, the government must prove, inter alia, that the

defendant participated in the scheme with the specific intent to

defraud. In Re Phillips Petroleum Sec. Litig., 881 F.2d 1236,

1249 (3d Cir. 1989). In order to convict a defendant of

conspiracy to defraud the United States under 18 U.S.C. § 371,

the government must prove, inter alia, that the defendant

intended to defraud the United States. While the parties appear

to disagree on whether section 371 requires a showing of

"willfulness" on the part of the defendant, they do agree that in

order to demonstrate the requisite intent to support Veksler's

convictions, the government must demonstrate both (1) that

Veksler knew of the obligation to pay taxes on the oil sold as

diesel fuel and (2) that he knew that the purpose and effect of

his actions was to avoid the payment of such taxes. See

Appellant's Brief at 15; Appellee's Brief at 38-39.

A review of the record in this case demonstrates that

the government satisfied its burden of presenting sufficient

evidence upon which a jury could have based its conviction.

Dimitry Belokopytov, Veksler's associate at I.V. Enterprises,

testified that he instructed Veksler to send form letters

regarding meetings that never occurred to other participants in

the daisy chain scheme. App. at 839-41. Belokopytov also

15
instructed Veksler to send invoices to Keroscene. The payments

to I.V., however, were all made by Romans Penn. These facts are

sufficient to permit the jury to infer that Veksler was aware

that his company was not engaged in legitimate business

activities. Moreover, Belokopytov also explained to Veksler that

it was "very important" that I.V.'s papers demonstrate that it

bought only heating oil and not diesel fuel because heating oil

was not taxed, while diesel fuel was taxed. App. at 828-29. This

testimony was sufficient to permit the jury to infer that Veksler

knew about both the tax obligations regarding the sale of diesel

fuel and the tax evasion goals of the scheme in which he

participated.5 We thus reject Veksler's contention that there

was insufficient evidence of his specific intent.6
2. Did the court err in refusing to depart
from the sentencing guidelines due to
Veksler's degree of culpability?

Veksler also argues that the district court erred in

refusing to depart from the base offense level applicable to him

under the Sentencing Guidelines. Under U.S.S.G. § 2T1.1, the

base offense level for offenses involving taxation is determined

by the amount of the tax loss. In this case, the district court

based its calculation of Veksler's offense level on the
5
This case is therefore distinguishable from United States v
Pearlstein, 576 F.2d 531, 543 (3d Cir. 1978), where the
government presented no substantial evidence from which the jury
could infer that the defendants were, or should have been, aware
of the fraudulent nature of the scheme.
6
Because we conclude that the government presented adequate
evidence to support Vecksler's convictions, we need not address
the issue of whether district court's reliance upon Vecksler's
testimony as an alternative basis for supporting the convictions
was proper.

16
approximately $1.4 million in tax losses that could be attributed

to transactions in which Veksler participated. See U.S.S.G.

§§2T1.1(a), 2T4.1.

At sentencing, Veksler requested the district court to

depart from this base offense level because it overstated his

culpability and because the amount of taxes lost was not

foreseeable by Veksler under the evidence adduced at trial. The

district court rejected Veksler's request, and Veksler reads the

court's statement as holding that it lacked the authority under

the Guidelines to grant the requested departure. We need not

decide whether the district court had authority to grant the

requested departure because the court found as a fact that the

tax loss was foreseeable to Veksler who "participated in a very

integral part of this entire daisy chain." App. at 338.

Moreover, nothing in section 2T1.1 and its accompanying

application notes suggests that a court has the discretion to

depart from the base offense level established through

calculation of the tax loss. This case differs significantly

from those cited by Veksler. In United States v. Monaco, 23 F.3d

793 (3d Cir. 1994), the commentary to the guideline at issue

expressly permitted a downward departure in certain limited

circumstances. Id. at 798-99. As Veksler points out, in United

States v. Stuart, 22 F.3d 76 (3d Cir. 1994), we suggested that in

certain instances, a court may have the authority to depart even

in the absence of explicit authorization, but that decision was

limited to instances where "'a particular guideline

linguistically applies but . . . the conduct [of a defendant]

17
significantly differs from the norm.'" Id. at 82-83 (quoting

United States Sentencing Commission Guidelines Manual 5-6

(1992)).

Veksler has presented no arguable basis for applying

the exception identified by this court in Stuart. Section 2T1.1

patently applies to Veksler, and the facts of this case lack any

extraordinary circumstances that the Sentencing Commission would

not have considered in formulating the guideline. See Stuart, 22

F.3d at 82. Thus, we find no error in the district court's

refusal to grant the departure requested by Veksler.

III.

Conclusion

For the foregoing reasons, we will affirm the judgments

of conviction and the sentences imposed by the district court.

18