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UNITED STATES v. COLE

April 14, 1971

UNITED STATES of America, Plaintiff,
v.
Marvin R. COLE, Arthur A. Fischer and Cole Fischer Rogow, Inc., Defendants


Pollack, District Judge.


The opinion of the court was delivered by: POLLACK

POLLACK, District Judge.

The defendants seek to void a prosecution against them for criminal tax evasion on the ground that the government's proceedings and proof were tainted by illegal electronic surveillance.

 I.

 In 1961-62, the Department of Justice was conducting a grand jury investigation of Joseph "Doc" Stacher under an organized crime drive (OCD). The investigation was directed primarily to whether Stacher owned certain interests in gambling casinos in Las Vegas.

 On or about May 5, 1961 until August 29, 1962, an electronic transmitting device was illegally planted and used by agents of the Federal Bureau of Investigation to overhear conversations in the private business office of the defendant Cole, located in Beverly Hills, California. In November, 1962, until about April 28, 1963, a similar device was illegally planted and utilized by the FBI in the Fremont Hotel in Las Vegas, Nevada, a hotel in which the defendant Cole then had a proprietary interest.

 It was believed that the defendant Cole was a deputy for an unreported, undisclosed interest held by Stacher in gambling at the Sands Hotel in Las Vegas. Cole's advertising agency, the defendant Cole, Fischer & Rogow, Inc., with offices in New York City and Beverly Hills, represented the Sands Hotel. Cole and defendant Fischer were each 50% stockholders of the advertising agency.

 Cole was called before the grand jury investigating Stacher, in April, 1962 and questioned in relation to any association he had with Stacher. In substance he denied even knowing Stacher, except only superficially. On June 21, 1962, one Joel Benton, a former employee of the corporate defendant, sought out representatives of the FBI through his brother. He sent his brother to meet the agents and made known his desire to come in to give a statement to the government concerning Cole and his connection with the gambling interests. Benton then met with Benjamin Farber, an assistant in the office of the United States Attorney, and gave him a voluntary statement indicating among other things, Cole's connections with Stacher; the skimming off of gambling money which was not declared as income on the books of the Sands Hotel; the use of Cole's office to receive such moneys in cash for distribution and a financial interest of Cole in the Sands Hotel as well as in the Fremont Hotel.

 In the summer of 1962 a second grand jury was convened following Farber's talk with Benton; it inquired into whether Cole had committed perjury before the Stacher grand jury. In the late summer of 1962 or early fall, Farber talked to one, Louis Scalzo, a Department of Justice lawyer concerning the opening of an Internal Revenue Service (IRS hereafter) investigation of Cole. Farber's request was based in large part on the information from Benton that Cole was acting as the representative of Stacher's hidden interest and also that Cole himself held a hidden interest in gambling tables and the unreported proceeds therefrom.

 In October 1962, Cole was indicted on a charge of obstructing justice in regard to the Stacher investigation and in the Cole investigation. That indictment grew out of alleged coercion exerted by Cole to keep Benton from testifying before the grand jury. Cole was tried and found guilty by a jury and the conviction was affirmed on appeal. Cole v. United States, 329 F.2d 437 (9th Cir. 1964), cert. denied, 377 U.S. 954, 84 S. Ct. 1630, 12 L. Ed. 2d 497 (1964).

 In the fall of 1962, Farber told Francis S. Sullivan, an IRS agent assigned to investigate Cole's income tax matters that nothing should be done on the tax case for the time being because of the pending obstruction of justice charge against Cole. Farber did not want any collateral type investigation to impede that prosecution. Sullivan was preoccupied at the time with the Stacher case and at any event, was not able to work on the Cole assignment.

 Neither Farber nor Sullivan had any knowledge of the illegal surveillance of Cole's office which had been conducted by the FBI.

 Stacher was indicted in 1964.

 Sullivan turned his attention to the FBI reports on Cole in October, November and December, 1963 but the investigation of Cole's tax matters was held in abeyance until May or June of 1964 by which time the obstruction of justice case had been completed as far as he was concerned.

 The FBI reports indicated to Sullivan that Cole was charging personal expenses to the defendant corporation. Sullivan also had information concerning Cole's net worth in November, 1963 which was secured from an FBI report including financial statements submitted by Cole to bankers. As a result of Sullivan's analysis of the information at hand and the FBI reports, he informed his superior that he did not believe there was an intelligence case on the facts contained in the reports; and at best it would be marginal, he thought. Sullivan wanted to know if the Department of Justice still wanted the case investigated. After an interval, the local office was told to go forward and conduct an investigation of the so-called saturation type, to leave no stone unturned in determining the correct tax liability of the taxpayer, if any.

 Accordingly, Sullivan prepared a work plan of the Cole investigation, listing the areas of inquiry he felt were necessary under the procedures of an Organized Crime Drive case. In October, 1964 Sullivan communicated with Cole and told him he was making an investigation of his income tax affairs for the taxable years 1959 through 1962 and that he desired Cole's records and the Cole, Fischer & Rogow income tax returns and records. He told Cole that there was an unaccounted for increase in his net worth and an allegation of personal expenses charged by him to the corporation. Cole's lawyers were told about the same thing by Sullivan.

 An effort was made by IRS to begin the examination of the corporate books and a subpoena was served to obtain the records. However, resistance was encountered from the taxpayers. Legal proceedings in respect of the production of the records occasioned a considerable delay. When the government's right to the production of the records was finally cleared, the IRS was, for the first time, informed that all corporate records prior to 1963 had been destroyed.

 With the mandate from the Department of Justice, the IRS went forward with an investigation in respect of Cole's tax matters which began on June 8, 1965 in New York City. Agent Robert E. Zagorin had received an assignment to cooperate with Agent Sullivan. The latter continued on the case briefly. He was asked to remain alert to see if the government could develop a charge of conspiracy to obstruct justice by the destruction of the books and records of the corporate defendant. The investigation was taken over by Zagorin who truly conducted a saturation type investigation in every sense of the word, from June 8 through August 27, 1965. Zagorin was not assigned to audit the tax liability of the corporation; there was another agent who did that at a later time. Zagorin never read any of the FBI reports on Joseph Stacher or any of the files of the Intelligence Division containing any notes from any FBI reports. He never knew of any illegal surveillance of Cole. Zagorin's inquiry in 1965 was supplemented over the following years 1966, 1967 and 1968.

 After the fall of 1965, with the information developed by Zagorin, a formal income tax investigation was opened pertaining to the defendant Fischer and the defendant corporation, Cole, Fischer & Rogow, Inc. This was handled by three other agents. None of the agents had ever read the surveillance logs of the "bugging" of Cole's office or knew thereof.

 The indictment herein was filed on November 24, 1969 and charged the defendants with conspiracy to evade the corporation's and Cole's income taxes. In addition, the substantive offenses charged were tax evasion by Cole of income taxes for 1963 and 1964; tax evasion by the corporate defendant of income taxes for 1963 and ...


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