UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 15-4097
UNITED STATES OF AMERICA,
Plaintiff - Appellee,
v.
JONATHAN D. DAVEY,
Defendant - Appellant.
Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte. Robert J. Conrad,
Jr., District Judge. (3:12-cr-00068-RJC-DSC-1)
Argued: May 12, 2016 Decided: September 8, 2016
Before TRAXLER and WYNN, Circuit Judges, and Norman K. MOON,
Senior United States District Judge for the Western District of
Virginia, sitting by designation.
Affirmed by unpublished opinion. Judge Wynn wrote the opinion,
in which Judge Traxler and Senior Judge Moon joined.
ARGUED: Gary Alvin Bryant, WILLCOX & SAVAGE, PC, Norfolk,
Virginia, for Appellant. Anthony Joseph Enright, OFFICE OF THE
UNITED STATES ATTORNEY, Charlotte, North Carolina, for Appellee.
ON BRIEF: Dianne K. Jones McVay, JONES MCVAY LAW FIRM, PLLC,
Dallas, Texas, for Appellant. Jill Westmoreland Rose, United
States Attorney, OFFICE OF THE UNITED STATES ATTORNEY,
Charlotte, North Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
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WYNN, Circuit Judge:
Jonathan Davey (“Defendant”) appeals his jury convictions
for conspiracy to commit wire fraud, conspiracy to commit money
laundering, and tax evasion, as well as a related award of
restitution. Defendant contends that the district court erred
in excluding certain evidence, that there was insufficient
evidence supporting his conviction for tax evasion, and that
restitution was improperly calculated. We reject these
arguments, and affirm.
I.
A.
Evidence produced at trial revealed the following. In
2007, Defendant created a hedge fund named “Divine Circulation
Services” (“DCS”). Over the following two years, he solicited
millions of dollars in funds from numerous entities and private
individuals, and through DCS, he invested that money in four
different business ventures, each of which either failed or
turned out to be fraudulent.
By February 2009, one of the only DCS investments that was
purportedly still profitable was with a supposed hedge fund
called “Black Diamond,” which was later revealed to be a Ponzi
scheme. That month, Black Diamond’s founder, Keith Simmons, met
with Defendant and other hedge fund managers with investments in
Black Diamond and told them that a “cash out” was imminent. J.A.
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146-48. In other words, said Simmons, Black Diamond soon would
be shut down, and all investor money would be returned. That
payout never happened. Indeed, soon after the meeting
announcing the supposed cash out, Black Diamond stopped honoring
withdrawal requests from its investors.
By the end of April 2009, Black Diamond was effectively
illiquid, the other DCS business ventures had collapsed, and
Defendant had stopped investing additional money in any
ventures, including Black Diamond. Nevertheless, Defendant
continued to solicit funds from new investors on the pretense
that their money actually would be invested. Along with other
hedge fund managers who had invested in Black Diamond, Defendant
set up a “cash” or “liquid” account in which to deposit these
new investor funds. J.A. 149. Instead of investing the money,
Defendant used it to fulfill withdrawal requests from old
investors, to pay himself a management fee, and to pay his own
personal expenses. In other words, Defendant set up his own
Ponzi scheme.
In addition to misrepresenting that DCS investors’ money
actually would be invested, Defendant made a number of other
false statements in order to obtain, or retain, investor funds.
For instance, Defendant told one large investor about a supposed
liquidity provider that did not exist, and he falsely suggested
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to another investor that his organization had developed and was
using a successful currency trading software.
After the February 2009 meeting during which Simmons
announced the Black Diamond “cash out,” Defendant also helped
facilitate a broader Ponzi scheme involving numerous other hedge
fund managers who, like Defendant, used new investor money to
fund withdrawal requests and pay personal expenses. In return
for a monthly management fee, Defendant—through an entity called
“Safe Harbor”—served as a hedge fund administrator, handling
fund transfers to and from hedge fund cash accounts. In doing
so, Defendant contributed to an effort to falsely reassure
investors that their investments were sound by maintaining a
website accessible to investors that showed false, positive
monthly returns. DCS investors were among those with access to
this website, and the investors made additional investments in
reliance on the false information it conveyed. Defendant also
permitted the hedge fund managers to report that they had been
vetted by an “independent” accounting firm, i.e., Safe Harbor,
when that was not the case. J.A. 175-76.
One of the most significant personal expenses Defendant
funded with DCS investor money was the construction of a $2
million, 10,000-square-foot personal home. To channel money
from DCS towards the construction of his home, Defendant created
two additional entities: “Sovereign Grace” and “Shiloh Estates.”
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Essentially, Defendant transferred funds, in the form of
purported “loans,” from DCS to Sovereign Grace, and then from
Sovereign Grace to Shiloh Estates, the legal owner of the home
and direct funder of its construction. J.A. 291-98, 513.
Those “loans” had no recognized interest rates, no payment
schedules, no associated liens, and no loan documentation. In
late 2008, Defendant informed Barry McFerren, his brother-in-law
and business associate, that he intended to default on the
loans, and Defendant did so in 2009. Defendant identified
$810,000 as a “loan” on his 2008 tax return, an amount
corresponding to purported loan payments to Shiloh Estates in
that year. J.A. 516-17.
Over time, without any truly profitable investments, the
money in DCS dried up. Near the end of August 2009, when DCS
had accumulated over $4 million in outstanding withdrawal
requests from investors, Defendant stopped accepting additional
investments. Through the fall of 2009, however, he continued to
use DCS money to pay personal expenses, and he continued to
accept fees from other hedge fund managers for publishing false
returns on Safe Harbor’s website. Outstanding withdrawal
requests from DCS investors grew to over $6 million by the end
of November 2009.
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B.
In February 2012, the government indicted Defendant and
three of the other hedge fund managers involved in the above
scheme on charges of conspiracy to commit securities fraud, 18
U.S.C. § 371, conspiracy to commit wire fraud, 18 U.S.C. § 1349,
and conspiracy to commit money laundering, 18 U.S.C. § 1956(h).
Additionally, Defendant was indicted for tax evasion, 26 U.S.C.
§ 7201. The other co-defendants pled guilty, but Defendant
elected to go to trial.
Over the course of a four-day trial, the government
presented testimony from over a dozen witnesses, including one
of the hedge fund managers who participated in the broader Ponzi
scheme, Defendant’s two principal employees, an IRS
investigator, and numerous individuals who invested money in
DCS. The defense presented testimony from five witnesses,
including Defendant and Simmons.
The jury returned a verdict of guilty on all four counts.
The district court sentenced Defendant to 252 months’
imprisonment. The court also found Defendant and his co-
conspirators jointly and severally liable for roughly $21.8
million in restitution. Defendant appealed, challenging the
restitution amount and all of his convictions except his
conviction for securities fraud.
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II.
Defendant first argues that the trial court committed
reversible error with regard to multiple evidentiary rulings.
In particular, Defendant contends that the district court should
not have excluded: (1) testimony from certain investors
Defendant turned away in the fall of 2009, (2) evidence
regarding certain non-fraudulent investments made by DCS, and
(3) evidence that Defendant eventually paid taxes on the amount
he designated as a “loan” on his 2008 tax return.
We review a district court’s evidentiary rulings for abuse
of discretion. United States v. Reevey, 364 F.3d 151, 156 (4th
Cir. 2004). Moreover, such rulings are subject to a harmless-
error standard, meaning that we will affirm notwithstanding an
error if it is “‘highly probable that the error did not affect
the judgment.’” United States v. Ibisevic, 675 F.3d 342, 349–50
(4th Cir. 2012) (quoting United States v. Madden, 38 F.3d 747,
753 (4th Cir. 1994)).
A.
Defendant contends that the district court erred when it
excluded the testimony of certain witnesses who would have
testified that Defendant refused to accept their money as an
investment in DCS after August 2009. He argues that such
testimony was relevant to his state of mind, in that it would
have suggested that Defendant took investor money not to
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facilitate a Ponzi scheme, but rather because, through much of
2009, he believed Black Diamond was legitimate and that a cash
out was imminent.
Assuming without deciding that the district court abused
its discretion in excluding this evidence, any such error was
harmless. The “‘single most important factor’” in a harmless-
error inquiry is the closeness of the case. United States v.
Ince, 21 F.3d 576, 584 (4th Cir. 1994) (quoting United States v.
Urbanik, 801 F.2d 692, 699 (4th Cir. 1986)).
Here, as outlined above, the government introduced at trial
overwhelming evidence that Defendant and his co-conspirators
solicited funds by intentionally misleading investors, in
multiple ways. Even though Black Diamond had stopped fulfilling
withdrawal requests and Defendant had stopped investing
additional money in Black Diamond by the end of April 2009,
Defendant continued to solicit investor money for several more
months, falsely representing that he would invest it. That is
not to mention other, more particularized false assertions
Defendant made to investors—for example, about a non-existent
liquidity provider.
Moreover, it was undisputed at trial that Defendant did
eventually stop accepting new investments. The accounting
records for DCS were introduced at trial, and Defendant
testified in detail regarding the investors he refused after
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August 2009. Indeed, defense counsel incorporated Defendant’s
turning away of investors into his closing argument. The
government also accepted that fact as true—before explaining why
it was not dispositive—during its closing.
In short, even if the trial court erred in excluding the
testimony of turned-away investors, it is “‘highly probable that
the error did not affect the judgment.’” Ibisevic, 675 F.3d at
350 (quoting Madden, 38 F.3d at 753).
B.
Defendant further argues that the district court abused its
discretion in excluding as cumulative or irrelevant certain
evidence related to investments made by DCS other than Black
Diamond. In particular, Defendant contends that the district
court should have admitted evidence that funds DCS invested in
“Amkel”—a separate venture that also turned out to be a fraud,
though not one perpetrated by Defendant—had been frozen in
connection with a government investigation, and ultimately
recovered. According to Defendant, this evidence would have
shown that DCS was a legitimate investment vehicle with real
value. Further, Defendant argues that the district court should
have permitted the principal of another failed DCS investment—a
movie production company called “Audience Alliance”—to play a
movie trailer and testify that he intended to repay the loan DCS
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issued to the company. This evidence, too, was offered to show
that DCS was not wholly fraudulent.
The district court did not abuse its discretion in
concluding that the potential probative value of the Amkel and
Audience Alliance evidence was “substantially outweighed by a
danger of . . . confusing the issues, misleading the jury, undue
delay, wasting time, or needlessly presenting cumulative
evidence.” Fed. R. Evid. 403.
First, we fail to see how evidence that DCS eventually
recovered frozen funds from a different fraudulent venture is
probative of Defendant’s lack of intent to defraud his
investors. And, as the district court reasonably concluded,
such evidence could very well confuse a jury.
Second, it may be that evidence showing DCS invested
partially in Audience Alliance—which, though unsuccessful, was
not fraudulent—is relevant regarding Defendant’s intent to
defraud. However, numerous witnesses, including Defendant,
testified as to the existence and nature of the Audience
Alliance investment. The district court was therefore within
its discretion to exclude further evidence of the Audience
Alliance investment’s legitimacy—including testimony from
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Audience Alliance’s principal that he intended to repay his
debts one day—as cumulative. *
C.
Defendant’s final argument contesting an evidentiary ruling
relates to his conviction for tax evasion. At trial, the
government sought to show that Defendant evaded taxes by falsely
characterizing $810,000 in payments from Sovereign Grace to
Shiloh Estates—the entity that funded the construction of his
home—as a “loan” on his 2008 tax return. Defendant contends the
district court erred by excluding his 2009 tax return, which
reported the defaulted “loan” as taxable income in 2009. He
argues that this evidence tends to disprove his intent to evade
taxes in 2008.
The government’s theory of the case, however, was that
Defendant mischaracterized the payment as a loan in 2008, and
that this mischaracterization was itself a willful attempt to
evade income taxes. Consequently, the relevant intent was
Defendant’s intent to repay—or not repay—the loan amount at the
time he received it. See United States v. Pomponio, 563 F.2d
659, 662–63 (4th Cir. 1977) (explaining that the “principal
*
To the extent that the district court excluded testimony
from the Audience Alliance principal regarding his intent to
repay his debt in the future on the grounds of relevance, we
likewise consider that ruling to have been a proper exercise of
the court’s discretion.
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question” relevant to a tax evasion prosecution based on
mischaracterized loan payments is whether those payments “were
not [actually] loans, that is, that no intent to repay them
existed, and that the defendants knew they were not loans”).
That one year later Defendant defaulted on the loan, recognized
it as income, and paid taxes on it tends to reinforce, rather
than undermine, the government’s argument that Defendant did not
intend to repay the “loan” when he received it.
In short, the district court did not abuse its discretion
in excluding the 2009 tax return for lack of relevance.
III.
In addition to challenging evidentiary rulings, Defendant
challenges his tax evasion conviction on grounds that it was not
supported by sufficient evidence, and that the district court
therefore erred in denying his motion for judgment of acquittal
for that count under Rule 29 of the Federal Rules of Criminal
Procedure. [See Appellant’s Br. at 35–39]
This Court will uphold a guilty verdict “if, viewing the
evidence in the light most favorable to the Government, it is
supported by ‘substantial evidence.’” United States v. Alerre,
430 F.3d 681, 693 (4th Cir. 2005) (quoting United States v.
Burgos, 94 F.3d 849, 862 (4th Cir. 1996) (en banc)).
“[S]ubstantial evidence is evidence that a reasonable finder of
fact could accept as adequate and sufficient to support a
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conclusion of a defendant’s guilt beyond a reasonable doubt.”
Burgos, 94 F.3d at 862. In other words, the relevant question
is 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).
The relevant criminal provision, 26 U.S.C. § 7201, makes it
a felony to “willfully attempt[] in any manner to evade or
defeat any tax imposed by [the Internal Revenue Code].” To
establish Section 7201 tax evasion, the government must show “1)
that the defendant acted willfully; 2) that the defendant
committed an affirmative act that constituted an attempted
evasion of tax payments; and 3) that a substantial tax
deficiency existed.” United States v. Wilson, 118 F.3d 228, 236
(4th Cir. 1997); see also Sansone v. United States, 380 U.S.
343, 351 (1965). “The jury may infer a ‘willful attempt’ from
‘any conduct having the likely effect of misleading or
concealing.’” Wilson, 118 F.3d at 236 (quoting United States v.
Goodyear, 649 F.2d 226, 228 (4th Cir. 1981)).
Here, as discussed above, the government theorized that
Defendant falsely characterized the $810,000 he transferred from
Sovereign Grace to Shiloh Estates as a loan on his 2008 tax
return in order to avoid paying taxes on that amount in that
year. It is settled law that what defines a true loan is “the
taxpayer’s own intention to repay” the loan amount. Pomponio,
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563 F.2d at 662; see also Comm’r of Internal Revenue v. Tufts,
461 U.S. 300, 307 (1983) (“When a taxpayer receives a loan, he
incurs an obligation to repay that loan at some future date.
Because of this obligation, the loan proceeds do not qualify as
income to the taxpayer.”); United States v. Beavers, 756 F.3d
1044, 1057 (7th Cir. 2014) (explaining that “loan proceeds are
not income because the taxpayer has incurred a genuine
obligation to repay the loan” and that “the recipient must
actually intend to repay” for a transaction to qualify as a
loan).
Defendant does not dispute that he characterized the
$810,000 transfer as a loan on his 2008 tax return or that there
was a resulting tax deficiency in that year. Consequently, the
relevant legal question is whether Defendant’s characterization
of the transfer as a loan on his tax return was accurate, i.e.,
“whether the evidence was sufficient for the jury to have found
beyond a reasonable doubt that the [transfer was] not [a]
loan[], that is, that no intent to repay [it] existed.”
Pomponio, 563 F.2d at 662–63.
In answering that question, both direct evidence of intent
and circumstantial evidence regarding the nature of the
transaction are relevant. See id. at 663 (finding sufficient
evidence that various advances were not loans where there was no
fixed repayment date, no notes evidencing the debt, no security
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backing it, and no interest charged or paid on the amount); see
also Merck & Co. v. United States, 652 F.3d 475, 481 (3d Cir.
2011) (“[D]etermining whether a transaction qualifies as a loan
requires analysis both of the objective characteristics of the
transaction and of the parties’ intentions.”).
The government introduced direct and circumstantial
evidence that Defendant did not intend to repay the $810,000
transfer when he received it, and therefore that the transaction
was taxable income, rather than a loan. Barry McFerren,
Defendant’s brother-in-law and employee, testified that in the
fall of 2008 Defendant said that he intended from the beginning
to default on the purported loan, i.e., not to repay it.
Defendant did in fact default on the purported loan in December
2009. Lynn Wymer, Defendant’s accountant, testified that, to
her knowledge, there was no interest rate governing the
purported loan, no loan document, no repayment schedule, no loan
payments made, and no lien securing it. Tyiesha Nixon, an IRS
investigator, similarly testified that, after examining
Defendant’s tax returns, accounting records, and other related
financial documents, she found no loan documents, nothing
indicating an interest rate on the purported loan, no schedule
of payments, and no lien securing it.
In short, there was sufficient evidence that Defendant
falsely characterized the $810,000 transfer as a loan on his
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2008 tax return. Because jurors “may infer a ‘willful attempt’
from ‘any conduct having the likely effect of misleading or
concealing,’” Wilson, 118 F.3d at 236 (quoting Goodyear, 649
F.2d at 228), there also was sufficient evidence that Defendant
attempted to evade the payment of taxes in 2008. We therefore
affirm the district court’s denial of Defendant’s motion for
acquittal on the tax evasion count.
IV.
Finally, Defendant challenges the district court’s
restitution order, primarily on the ground that his convictions
for conspiracy to commit wire fraud and money laundering are
invalid. Because we affirm those convictions, that argument
fails. Defendant also suggests that the district court
neglected to consider amounts already available to victims from
other sources, such as the funds recovered from the fraudulent
Amkel investment. The record, however, contradicts that
argument. In particular, the district court clarified that
“[t]o the extent that there are funds available to offset the
total amount of restitution, those will be applied in the
restitution process.” J.A. 997–98. Furthermore, the judgment
expressly limits “victims’ recovery . . . to the amount of their
loss,” so that Defendant’s “liability for restitution [will]
cease[] if and when the victim(s) receive full restitution.”
J.A. 1075.
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We therefore reject Defendant’s challenge to the
restitution order.
V.
For the reasons stated above, we affirm the challenged
convictions and the restitution order.
AFFIRMED
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