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United States v. Schlegel

March 16, 2009

UNITED STATES OF AMERICA,
v.
DAWN SCHLEGEL, SANDRA HATFIELD, AND DAVID H. BROOKS, DEFENDANTS.



The opinion of the court was delivered by: Seybert, District Judge

MEMORANDUM AND ORDER

Pending before the Court is Defendant Sandra Hatfield's ("Hatfield") motion to sever her trial from co-defendant David H. Brooks ("Brooks") under Federal Rule of Criminal Procedure 14(a), Defendant Brooks' motion to sever his trial from Hatfield's, and both Defendants' motion to sever the tax counts from the non-tax counts in the Superseding Indictment.*fn1

BACKGROUND

On August 16, 2006, the government indicted Hatfield, the former Chief Operating Officer of D.H.B Industries, Inc. ("DHB") for conspiracy to commit securities fraud, substantive securities fraud, and insider trading. On October 24, 2007, the government filed a Superseding Indictment (hereinafter, the "Indictment") against Hatfield and added Brooks, the founder and former Chief Executive Officer of DHB, as a co-defendant. Both Defendants were charged with conspiracy to commit and substantive securities fraud, conspiracy to commit mail and wire fraud, mail fraud, wire fraud, conspiracy to obstruct justice, obstruction of justice, and conspiracy to impair, impede, obstruct, and defeat the Internal Revenue Service ("IRS"). The Indictment separately charges Hatfield with three counts of insider trading and one count of tax evasion, and charges Brooks with six counts of insider trading, one count of making material misstatements to auditors, and two counts of filing false tax returns.

On November 13, 2007, Defendant Hatfield filed a motion to sever her trial from co-defendant Brooks, which this Court denied on January 8, 2008. On May 27, 2008, Hatfield renewed her motion to sever, arguing primarily that her right to a speedy trial would be violated if her trial is not severed from Brooks' trial. On November 3, 2008, Brooks filed a motion to sever his trial from Hatfield on the grounds that a joint trial would involve antagonistic defenses and would deprive Brooks of vital exculpatory evidence. Brooks' motion additionally seeks to sever the tax charges against him from the non-tax charges. On November 21, 2008, Hatfield joined Brooks' motion to sever the tax counts. For the reasons stated below, the Court GRANTS Defendants' motion to sever the tax counts from the non-tax counts, DENIES Hatfield's motion to sever based upon her speedy trial rights, and reserves decision on Defendants' motions to sever to avoid substantial prejudice until after oral argument.

DISCUSSION

I. Motion to Sever the Tax Charges

A. Legal Standard

Federal Rule of Criminal Procedure 8(a) permits joinder of offenses in an indictment "if the offenses charged -- whether felonies or misdemeanors or both -- are of the same or similar character, or are based on the same act or transaction, or are connected with or constitute parts of a common scheme or plan." Rule 8(b) allows joinder of defendants if the defendants "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." Fed. R. Crim. Proc. 8(a). "[W]hen a defendant in a multiple-defendant case challenges joinder of offenses, his motion is made under 8(b) rather than 8(a)." United States v. Turoff, 853 F.2d 1037, 1043 (2d Cir. 1988) (internal quotations omitted). The Second Circuit has not yet clarified "whether Rule 8(a) or Rule 8(b) applies when a defendant in a multi-defendant, multi-count prosecution . . . challenges the joinder of a count in which he is the only defendant charged." United States v. Shellef, 507 F.3d 82, 97 (2d Cir. 2007). However, the Court's resolution of the motion to sever the tax counts is the same regardless of which subdivision of Rule 8 applies.

"[T]ax counts can properly be joined with non-tax counts where it is shown that the tax offenses arose directly from the other offenses charged." United States v. Turoff, 853 F.2d 1037, 1043 (2d Cir. 1988) (internal quotations omitted). The Second Circuit has guided that "[t]he most direct link possible between non-tax crimes and tax fraud is that funds derived from non-tax violations either are or produce the unreported income." Id. However, if the character of the funds derived do not convince [the Court] of the benefit of joining these two schemes in one indictment, other overlapping facts or issues may." Id.

B. The Tax Charges

1. Count Eighteen Against Brooks and Hatfield

Count Eighteen of the Indictment (the "Conspiracy Tax Count") charges Brooks and Hatfield with knowingly and willfully conspiring "to defraud the United States by impeding, impairing, obstructing and defeating the lawful government functions of the Internal Revenue Service . . . in the ascertainment, computation, assessment and collection of . . . federal income taxes." The Government alleges that Defendants approved and distributed bonus payments to employees of DHB for the years 2003, 2004 and 2005, and informed the employees that they did not have to report the payments as income or pay taxes on the bonus ...


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