IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
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No. 94-10321
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UNITED STATES OF AMERICA,
Plaintiff-Appellee,
versus
DONALD R. PEPPER,
Defendant-Appellant.
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Appeal from United States District Court
for the Northern District of Texas
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(April 20, 1995)
Before HIGGINBOTHAM, SMITH and STEWART, Circuit Judges.
CARL E. STEWART, Circuit Judge:
Donald R. Pepper appeals both his convictions and sentence on
fifteen counts of aiding and abetting in the commission of mail
fraud in violation of 18 U.S.C. §§ 2, 1341, three counts of aiding
and abetting in the commission of wire fraud in violation of 18
U.S.C. §§ 2, 1343, and two counts of aiding and abetting in the
commission of money laundering in violation of 18 U.S.C. §§ 2,
1956(a)(1)(A)(i). For the following reasons, one conviction for
mail fraud is reversed, and the remaining convictions and sentence
are affirmed.
BACKGROUND
In 1989, Pepper started a scheme to defraud people of their
money by holding himself out as a wealthy businessman who was
1
interested in attracting investors into a business venture to buy
and sell water purifiers. Pepper flashed large amounts of cash in
front of potential investors and made grandiose representations
about his personal wealth and the capacity of the business venture
to reward investors with equal largess.
Investors were told that they would receive a sixty percent
return on their money. Commitments to Pepper by the investors were
made in $5,000 units and paid to him in person, by mail, or by
wiring it to him. Pepper would use the money to buy water
purifiers from a company called National Safety Administration
("NSA") and then sell the water purifiers through telemarketing.
According to the evidence submitted at trial, only a few water
purifiers were ever bought from NSA. Pepper was not a millionaire:
in fact, his personal checking account balance at a credit union
for the entire year of 1990 totalled $10.17. Pepper simply kept
most of the money he solicited from investors, using it to finance
an extravagant lifestyle in which he rented Lear jets, bought
lavish dinners, and generally maintained his profile as a wealthy
businessman. As a result of his scheme, Pepper swindled investors
out of approximately $171,000.
In January of 1991, Pepper filed a petition for bankruptcy.
On November 6, 1991, he was granted a discharge. Among the
dischargeable debts were at least thirteen of the loans that
investors had made to him.
Pepper was indicted on fifteen counts of aiding and abetting
mail fraud, three counts of aiding and abetting wire fraud, two
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counts of aiding and abetting money laundering and one count of
conspiracy to commit money laundering. The conspiracy to commit
money laundering count was dropped before trial. After a jury
trial, he was convicted on all of the remaining counts. On the
mail fraud and wire fraud indictments, Pepper was sentenced to
sixty months of imprisonment per count. On each of the money
laundering counts, he was sentenced to seventy-eight months of
imprisonment. All sentences were to run concurrently. He was also
sentenced to three years of supervised release after he had served
his jail term and ordered to pay a $50 special assessment per
count. He was also ordered to pay $155,560 in restitution to the
victims of his crimes. Pepper appeals his sentence and
convictions.
DISCUSSION
ADMISSION OF HEARSAY
Pepper contends that the district court erred in allowing the
government to ask a question that incorporated hearsay.1 He argues
that the hearsay question violated his Sixth Amendment right to
confront witnesses, because the hearsay statements were made by
people who never testified. The disputed testimony is as follows:
1
Under Fed. R. Evid. 801(c), hearsay is a:
[S]tatement, other that one made by the declarant
while testifying at the trial or hearing, offered
in evidence to prove the matter asserted.
3
Q. Would you be surprised if William Chenail [an NSA
employee] told us the receipt that you purportedly have
from him for $10,000 is phony?
MR. WHITE [Pepper's attorney]: Objection, Your Honor, if
there is no independent evidence of that, then that is
improper cross-examination because it is based upon
hearsay.
MS. HOWARD [Government's Attorney]: Your Honor I have a
good faith basis.
THE COURT: You may proceed.
A. Madam Prosecutor, I will tell you that I wrote Bill
Chenail's name on the bottom of this and gave it to my
accountant, or bookkeeper, so that she would know who to
credit it to, in addition, Mr. Steven Worth and Joe James
[Investors in the scheme].
BY MS. HOWARD:
Q. My question is: would you be surprised if Bill Chenail
told [a federal agent] that the receipt you got is phony?
A. Yes, I would be surprised.
The government argues that the prosecutor's question was not
hearsay because it did not seek to assert a fact as true, only that
an assertion was made. Assuming that the government's question
incorporates hearsay, its admission at trial was harmless. In
determining whether the admission of hearsay evidence was harmless,
we must consider the other evidence in the case, and then decide if
the inadmissible evidence actually contributed to the jury's
verdict. United States v. El-Zoubi, 993 F.2d 442, 446 (5th Cir.
1993). We will find such testimony harmful and reverse a
conviction only if it had a "substantial impact" on the jury's
verdict. Id. The question posed by the prosecutor was addressed
to whether Pepper was running a legitimate business. With this
question, the government sought to show that Pepper had lied about
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his involvement in the scheme. The government introduced other
evidence at trial showing the falsity of Pepper's claims about the
scheme. This evidence included, but was not limited to, an NSA
independent distributor application, which showed that Chenail did
not become involved with NSA until long after the date of the
receipt. Other evidence included inconsistencies in a purported
ledger of the investments, Pepper's inability to name any of his
employees, and bankruptcy documents in which Pepper alleged that he
had no business records. Viewing the evidence as a whole, we
conclude that the statement was cumulative and had little, if any,
impact on the jury. See El-Zoubi, 993 F.2d at 446.
DIRECT ARGUMENT
Pepper contends that his convictions on four counts of the
mail fraud were improper because the victims testified that Pepper
made no direct misrepresentations to them. We find this contention
to be without merit. In order to convict under the mail fraud
statute, 18 U.S.C. § 1341, the government has to prove the
existence of a scheme or artifice:
[T]o defraud, or for obtaining money or
property by means of false or fraudulent
pretenses, representations, or promises, or to
sell, dispose of, loan, exchange, alter, give
away, distribute, supply, or furnish or
procure for unlawful use any counterfeit or
spurious coin, obligation, security, or other
article, or anything represented to be or
intimated or held out to be such counterfeit
or spurious article, for the purpose of
executing such scheme or artifice or
attempting so to do, . . . .
There is no statutory requirement that direct misrepresentations
must be made to the victims of the scheme. The defendant has cited
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no authority to this effect and we have found none. See Kreuter v.
United States, 218 F.2d 532,535 (5th Cir. 1955)(stating that it is
not necessary to prove communication of the alleged false
representations to the victims). This contention has no merit.
UNNAMED VICTIMS
Pepper contends that the district court allowed evidence
concerning victims who were not named in the indictment. He argues
that he was prejudiced because the district court submitted a jury
question with respect to these investors. He states that the
variance between the indictment and the jury instruction prevented
him from adequately preparing for trial. Our review of the record
reveals that although victims not charged in the indictment
testified at trial to show the overall scheme, no instruction
concerning these witnesses was submitted to the jury. Thus,
Pepper's claim of prejudice caused by a jury charge is meritless.
Pepper also argues that the district court erred in ordering
restitution for victims of the scheme not named in the indictment.
A district court can order restitution under the Victim and Witness
Protection Act, 18 U.S.C. § 3663 (VWPA). In Hughey v. United
States, 495 U.S. 411, 110 S.Ct. 1979, 109 L.Ed.2d 408 (1990), the
Supreme Court held that, under the VWPA, restitution for victims
can only be awarded for the loss caused by the specific offense
that is the basis of the offense of conviction. Id. at 413; 110
S.Ct. at 1981. To convict Pepper of mail and wire fraud, the
government had to prove a scheme to defraud, rather than specific
incidents of fraud limited to individual investors. See 18 U.S.C.
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§§ 341, 343. Because a fraudulent scheme is an element of his
offenses of mail and wire fraud, actions pursuant to that scheme
are conduct underlying the offense of conviction. United States v.
Stouffer, 986 F.2d 916, 928 (5th Cir.), cert. denied, ___ U.S. ___,
114 S.Ct. 115, 126 L.Ed.2d 80 (1993)
In United States v. Stouffer, 986 F.2d 916 (5th Cir. 1993),
two codefendants had been convicted of wire fraud and mail fraud
and the court had ordered restitution of the amount allegedly lost
because of the scheme. The defendant contended that under Hughey,
they could not be ordered to pay back all of the losses. We
disagreed. We found that "because the scheme to defraud was
specifically defined in the indictment--i.e., the indictment
described in detail the duration of [the defendants'] scheme and
the methods used" the district court's inclusion of all losses
caused by the scheme to defraud satisfied Hughey's requirement that
sentencing courts focus only on the specific conduct underlying the
offense of conviction. Id. at 929-30.
Similarly, in this case, the indictment also described the
duration of the scheme, i.e., from February 19, 1990 until
September 1990, and the methods used i.e., convincing people to
invest money in a telemarketing operation and then converting the
money to personal use, the indictment is also specific enough to
satisfy Hughey. Thus, the district court could order restitution
to the victims not named in the indictment.
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BANKRUPTCY DISCHARGE
Pepper contends that the district court could not order
restitution as part of his sentence because the debts of some of
the people that were to be compensated had been discharged in
bankruptcy. We disagree. Generally, a bankruptcy proceeding and
a criminal prosecution are fundamentally different proceedings,
both in purpose and procedure, and the causes of action resolved by
each are totally different. United States v. Tatum, 943 F.2d 370,
381 (4th Cir. 1991). The pursuit of one proceeding will seldom
resolve the other. Id. at 381-82. As such, we do not believe that
a bankruptcy discharge has any effect on the district court's power
to order restitution in a criminal case. See Kelly v. Robinson,
479 U.S. 36, 50 (1986)(holding that under the established law that
bankruptcy courts could not discharge criminal judgments)
In United States v. Carson, 669 F.2d 216 (5th Cir. 1982), the
district court had ordered restitution as a condition of parole.
The defendant had already obtained a discharge for the debt of
those people who were to be compensated. The defendant argued that
the discharge restricted the district court from ordering
restitution. The Court rejected the arguments for two reasons.
Primarily, the Court reasoned that making restitution was
consistent with the spirit of probation as offering a offender the
chance to rehabilitate himself. Id. at 217-18.
Secondly, the Court held that although a bankruptcy discharge
extinguishes a defendant's liability, it does not extinguish the
losses that the victim suffered. Id. at 217. The Court determined
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that restitution seeks to compensate for this loss. Id. It stated
that the defendant does not "offer any reason to restrict the
losses for which restitution is authorized to those for which the
aggrieved party retains a right of action." Id.
Similarly, in this case, Pepper's bankruptcy discharge does
nothing to relieve the loss suffered by the victims of his scheme.
Therefore, like in Carson, we hold that a bankruptcy discharge does
not limit a district court's power to order restitution in a
criminal case. Pepper's contention to the contrary is rejected.
OBSTRUCTION OF JUSTICE
Pepper contends that the district court erred in giving him a
two point increase in his offense level for obstruction of justice
under § 3C1.1 of the United States Sentencing Guidelines. Under
U.S.S.G § 3C1.1:
If the defendant willfully obstructed or impeded,
or attempted to obstruct or impede, the
administration of justice during the investigation,
prosecution, or sentencing of the instant offense,
increase the offense level by 2 levels.
Included in the examples of conduct to which this enhancement
applies is committing perjury and producing a "false, altered, or
counterfeit document" during a judicial proceeding. U.S.S.G §
3C1.1, application notes 3(b) & (c). The court's finding on the
issue of obstruction of justice is a factual determination which
may be reviewed only for clear error. United States v. Velgar-
Vivero, 8 F.3d 236, 242 (5th Cir. 1993).
In this case, the district court increased the offense level
because it found that Pepper had created false documents in the
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form of receipts and a ledger that were submitted at trial. At
trial, the government demonstrated that the entries were made in
the ledger for payments received before checks were even written.
The government also introduced Pepper's bankruptcy documents in
which Pepper denied the existence of any business records covering
the period named in the indictment. This evidence corroborated the
district court's conclusion that Pepper submitted false documents
during a judicial proceeding.2 We find this contention to be
without merit.
JURISDICTION
Pepper contends that the district court had no jurisdiction
because his scheme only incidently involved the mails and therefore
should have been prosecuted under state laws. In order to convict
a defendant for mail fraud, the government must prove, inter alia,
that the mails were used in furtherance of a scheme to defraud;
this element is the basis of federal jurisdiction. United States
v. Vontstein, 872 F.2d 626, 628 (5th Cir. 1989). The use of the
mail must be an integral part of the scheme. United States v.
Kent, 608 F.2d 542, 546 (5th Cir. 1979), cert. denied, 446 U.S.
936, 100 S.Ct. 2153, 54 L.Ed.2d 788 (1980).
In Periera v. United States, 347 U.S. 1, 74 S.Ct. 358, 98
L.Ed. 435 (1954), two men convinced a woman to invest $35,000 in a
2
Moreover, there is also sufficient evidence in the record to
conclude that Pepper perjured himself when he testified at trial
that he had not told people he was wealthy. This would also
support a two level increase for obstruction of justice. See
U.S.S.G. § 3C1.1, application note 3(b)(citing perjury as an
example of obstruction of justice).
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phony oil deal. The victim of the scheme sent a $35,000 check
through the mail to the two men. In a prosecution for mail fraud,
the Supreme Court found that the use of the mail service was an
essential part of the scheme because it was the way that the men
were to received the funds from the victims. Id. at 9; 74 S.Ct. at
363. Similarly, in this case, where Pepper was receiving the
investors' money by mail, it was also an essential part of the
scheme. Thus, the district court had jurisdiction.
In a letter to this court and at oral argument, the government
has conceded that there was insufficient evidence to convict Pepper
of count fourteen of the indictment. After examining the record,
we agree and will reverse Pepper's conviction on this count.
However, this reversal does not affect his sentence, his jail term,
or the amount of restitution ordered as part of his sentence.3
CONCLUSION
For the foregoing reasons, Pepper's convictions and sentence,
except for count fourteen of the indictment, are AFFIRMED.
Pepper's conviction on count fourteen is REVERSED. The total
amount of Pepper's special assessments is reduced by $50.
3
The amount of restitution was supported by a preponderance of
the evidence. See United States v. Reese, 998 F.2d 1275, 1282
(5th Cir. 1993)(holding that the factual underpinnings of a
restitution order must be proved by a preponderance of the
evidence).
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