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United States District Court, Southern District of New York

July 7, 2003


The opinion of the court was delivered by: John Martin, United States District Judge


In this action the Defendants made a number of motions, most of which were decided at oral argument. The Court reserved decision on motions by various Defendants for a severance and the motion of the Defendant Freedman to dismiss two of the counts.

The Motions to Sever

While each Defendant has filed a motion for a severance, they make a variety of different arguments. Some argue that certain counts in which they are named should be severed from other counts naming them, while others argue that counts in which they are named should be severed from other counts naming only their co-defendants.

The forty-nine counts in the indictment relate to three separate conspiracies: 1) a conspiracy to defraud the United States and certain creditors of two of the Defendants, Monty D. Hundley and Stanley S. Tollman, by covering up the true financial condition of those two individuals and inducing their creditors to sell their debt for less than fair value to entities they controlled and then failing to report the gain from these transactions to the Internal Revenue Service; 2) a conspiracy to defraud the Internal Revenue Service by failing properly to report to the IRS the compensation of various employees of entities controlled by Hundley and Tollman; and 3) a conspiracy involving Stanley Tollman, his wife and his son, Brett G. Tollman, to evade taxes by having various fees paid to certain channel island entities and by not reporting the existence of these accounts or the income to the IRS.

Rule 8(a), which permits joinder of unrelated offenses of a similar character against a single defendant, provides:

The indictment or information may charge a defendant in separate counts with 2 or more offenses if the offenses charged — whether felonies or misdemeanors or both — are of the same or similar character, or are connected with or constitute parts of a common scheme or plan.
Rule 8(b), which addresses joinder of multiple defendants, provides:

The indictment or information may charge 2 or more defendants if they are alleged to have participated in the same act or transaction, or in the same series of acts or transactions, constituting an offense or offenses.
As Judge Schwartz of this Court observed in United States v. Reinhold, 994 F. Supp. 194, 197-98 (1998):

Where, as here, joinder involves both multiple offenses and multiple defendants, the standards of Rule 8(b) must be applied. United States v. Attanasio, 870 F.2d 809, 814 (2d Cir. 1989). Accordingly, joinder of defendants and counts is proper where the criminal acts of two or more persons (1) arise out of a common plan or scheme or (2) are unified by some substantial identity of facts or participants. United States v. Lech, 161 F.R.D. 255, 256 (S.D.N.Y. 1995).
Where as here a defendant joined with others challenges only the joinder of claims in which he alone is named, there has been some debate as to whether that severance claim is governed by the standards of Rule 8(a) or 8(b).

It suffices to say here that I am in complete accord with the well-reasoned and thorough decision of Judge Motley in United States v. Biaggi, 705 F. Supp. 852 (1988), aff'd 909 F.2d 662 (2d Cir. 1990), in which she concluded that, when a defendant moves to sever claims in which he alone is named from counts charging him and others, Rule 8(a) provides the governing standard. Using that standard, the motions of those defendants seeking to sever counts in which they alone are named must be denied.

The more difficult question is whether the three separate conspiracies alleged and the substantive counts relating to those conspiracies can fairly be said to arise from "the same series of acts or transactions constituting an offense or offenses." While a strict literal reading of that language might suggest that the answer is no, the Second Circuit has given the language of Rule 8(b) a broader reading:

We read this to mean that the acts must be "unified by some substantial identity of facts or participants," or "arise out of a common plan or scheme," United States v. Porter, 821 F.2d 968, 972 (4th Cir. 1987), cert. denied, 485 U.S. 934, 108 S.Ct. 1108, 99 L.Ed.2d 269 (1988); see also United States v. Green, 561 F.2d 423, 426 (2d Cir. 1977), cert. denied, 434 U.S. 1018, 98 S.Ct. 739, 54 L.Ed.2d 764 (1978).
United States v. Attanasio, 870 F.2d 809, 815 (1989)

The answer to the joinder issue depends on how narrowly or broadly one construes the common scheme or schemes in which these Defendants were engaged. The Defendants argue that each of the conspiracies was a separate scheme and therefore separate trials are required with respect to the offenses arising from each of the schemes, i.e, the creditor fraud scheme, the compensation scheme and the channel island scheme. However, the indictment can also be read as alleging that these defendants were engaged in a broad scheme to enrich themselves and their associates by any fraudulent means required, which included defrauding the Hundley-Tollman creditors and the IRS through the creditor fraud, the compensation fraud and the channel island fraud.

Even though there are three separate conspiracies alleged, those conspiracies involve "substantial identity of facts [and] participants." All of the Defendants are named as conspirators in the bank fraud conspiracy and all but one of them are named conspirators in the compensation conspiracy.

The creditor fraud and the compensation fraud involve basically the same group of people defrauding the same IRS during the same period of time. There are clearly "sufficient overlapping facts [and] issues" to support the joinder of these offenses and defendants. United States v. Turoff, 853 F.2d 1037, 1044 (2d Cir. 1987).

While only Brett Tollman is named in the channel island conspiracy, the facts relating to that conspiracy will be admissible in the trial of the bank fraud conspiracy because the channel island accounts were among the assets that were hidden from the Hundley-Tollman creditors. Here, as in Turoff, "the proof of one scheme is indispensable for a full understanding of the other." Id.

Freedman's Motion to Dismiss Counts 22 and 34.

Count 22 charges that Freedman participated in a conspiracy to defraud the IRS by failing to report compensation paid to various employees of certain entities controlled by two of his Co-Defendants Monty D. Hundley and Stanley Tollman. He argues that the indictment does not sufficiently allege that he acted with knowledge of the alleged illegal nature of the conspiracy or that his particular acts made him part of the illegal venture. His argument is without merit. As the Second Circuit noted in United States v. Walsh, 194 F.3d 37, 44 (2d Cir. 1999):

we have consistently upheld indictments that "do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime." United States v. Tramunti, 513 F.2d 1087, 1113 (2d Cir.), cert. denied, 423 U.S. 832, 96 S.Ct. 54, 46 L.Ed.2d 50 (1975).
Here the indictment provides ample notice to Freedman of the charge against him. It details the nature of the conspiracy to provide compensation to the employees of certain entities without reporting that income to the IRS on W-2 forms. Paragraph 152 of the Indictment specifically alleges that Freedman was one of the people for whom the appropriate form was not issued and that the compensation was not accurately reflected in the corporate records or reported to the outside accountant. Freedman's filing of his personal income tax returns is alleged as an overt act in furtherance of that conspiracy. No greater detail is required.

Count 34 alleges that during 1995 Freedman was the vice-president, treasurer and a director of Chelsea Acquisitions, Inc. and "by reason of such fact, he was required by law" to file income tax returns on behalf of the corporation and that he failed to file returns for the corporation. Freedman argues that this count must be dismissed because the by-laws of the corporation place the responsibility for filing the corporate tax returns on the secretary of the corporation. If Freedman's argument were correct, then anyone in control of a corporation could avoid liability for the corporation's failure to file tax returns by adopting a by-law that would place the responsibility for filing the corporation's returns on someone who was incompetent. That is not the law.

In a closely analogous case, United States v. Saucedo, No. 86 Cr. 177, 1986 WL 9749, *1 (N.D.Ill. Aug. 18, 1986), Judge Williams of the United States District Court for the Northern District of Illinois rejected a similar argument stating:

The information charges defendant with offenses under 26 U.S.C. § 7203, which provides in pertinent part that:
Any person required under this title to make a return . . . who willfully fails to make such return . . . shall be guilty of a misdemeanor. Defendant's contention seems to be that he is not a "person" as defined in the statute. Further, defendant argues that Section 7203 places criminal responsibility for making corporate returns only on officers of a corporation. Since he is not an officer, the argument goes, he cannot be held criminally liable. Further, he says, the government cannot circumvent the requirement that the liable person be an officer of the corporation by creating a category of persons who are "officers in fact." Defendant's argument is without merit.
A "person" is defined at 26 U.S.C. § 7343:

The term "person" as used in this chapter includes an officer [or] employee of a corporation . . . who as such officer or employee . . . is under duty to perform the act in respect of which the violation occurs. Determination of whether an individual is a responsible person within the meaning of Section 7343 is a factual inquiry. United States v. Fago, 162 F. Supp. 125 (W.D.N.Y. 1956). Courts look to a number of factors such as the individual's authority to draw checks on the corporate bank account, and the authority to make decisions about financial matters in the ordinary course of business. Linda Scott v. United States, 354 F.2d 292, 296 (Ct.Cl. 1965). Thus, the question of whether a given defendant fits within Section 7343's definition of responsible person is a question of fact to be decided by the trier of fact.
Contrary to defendant's assertions, there is no authority for, and the cases he cites do not support, the proposition that only officers of a corporation can be persons as defined in Section 7343. This is not surprising since the statute explicitly states that the term "person" "includes an officer or employee of a corporation." 26 U.S.C. § 7343. Interpretation of the statute in such a way as to limit responsible persons to corporate officers would therefore ignore the statute's express terms. Thus, what matters is not whether defendant was a de facto officer, de jure officer, or non-officer. The statute imposes liability on one whose duty it is to make and file the return. Whether defendant had such a duty as defined in the statute is a factual question whose answer must be left for trial.
This Court completely agrees with Judge Williams' thoughtful analysis and her conclusion that "[w]hether defendant had such a duty as defined in the statute is a factual question whose answer must be left for trial." Id. See also Lumetta v. United States, 362 F.2d 644, 645 (8th Cir. 1966).*fn1


For the foregoing reasons, all of the motions to sever and Freedman's motion to dismiss Counts 22 and 34 are denied.


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