Argued February 9, 2015
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Appeals from judgments of the United States District Court for the Eastern District of New York convicting defendants of conspiring to commit mail and wire fraud in the sale of coins, in violation of 18 U.S.C. § 1349, and money laundering conspiracy in violation of 18 U.S.C. § § 1956(a)(1)(A)(i) and 1956(h); sentencing defendant Romano principally to 240 months' imprisonment and defendant Kearney principally to 156 months' imprisonment; and ordering defendants to pay $9,139,727.10 in restitution and to forfeit $32,220,617. Defendants contend principally that the court erred in admitting expert testimony as to the grading and valuation of coins. See 859 F.Supp.2d 445 (2012). Defendants also contend that their sentences are unreasonable and that the court erred in failing to review de novo the magistrate judge's recommendations for restitution and forfeiture. The government concedes that there should be a remand with respect to restitution and forfeiture.
Remanded for de novo review of the recommendations for restitution and forfeiture; in other respects, the judgments are affirmed.
LARA TREINIS GATZ, Assistant United States Attorney, Brooklyn, New York (Loretta E. Lynch, United States Attorney for the Eastern District of New York, Susan Corkery, Emily Berger, and Diane Beckmann, Assistant United States Attorneys, Brooklyn, New York, on the brief), for Appellee.
RICHARD LEVITT, Levitt & Kaizer, New York, New York (Yvonne Shivers, Emily Golub, on the brief), for Defendant-Appellant Romano.
MATTHEW W. BRISSENDEN, Garden City, New York, for Defendant-Appellant Kearney.
Before: KEARSE, LIVINGSTON, and CARNEY, Circuit Judges.
KEARSE, Circuit Judge:
Defendants Michael Romano and William Kearney appeal from judgments of the United States District Court for the Eastern District of New York entered by Sterling Johnson, Jr., Judge, following a jury trial before Joseph F. Bianco, Judge, convicting defendants of conspiracy to commit mail and wire fraud in connection with the sale of coins, in violation of 18 U.S.C. § 1349, and conspiracy to engage in money laundering, in violation of 18 U.S.C. § § 1956(a)(1)(A)(i) and 1956(h). Romano was sentenced principally to 240 months' imprisonment, to be followed by a five-year term of supervised release; Kearney was sentenced principally to 156 months' imprisonment, to be followed by a three-year term of supervised release; defendants were ordered, jointly and severally, to pay restitution in the amount of $9,139,727.10 and to forfeit $32,220,617. On appeal, defendants challenge their convictions principally on the grounds that the court failed to perform the necessary gatekeeping function before admitting the testimony of expert witnesses as to the grading and valuation of coins and that admission of one of the government's exhibits violated their rights under the Confrontation Clause. Kearney also argues that the evidence was insufficient to show that he knowingly and willingly participated in a conspiracy. Defendants challenge their sentences as procedurally and substantively unreasonable and contend that the district court erred in failing to conduct de novo review of the magistrate judge's recommendations for restitution and forfeiture. The government concedes that there should be a remand for consideration of defendants' objections to the magistrate judge's recommendations and the extent to which a certain property is forfeitable.
For the reasons that follow, we remand for de novo review of the magistrate judge's recommendations for restitution and forfeiture, including forfeitability of the property in question; in all other respects we affirm.
The present prosecution focused on the operations of a succession of three companies
owned by Romano: Wall Street Rare Coins (or " WSRC" ), which operated from approximately December 1990 until October 2004, Atlantic Coin Galleries (" ACG" ), which operated from approximately October 2004 until August 2008, and Northeast Gold and Silver (" NEGS" ), which operated from approximately September 2008 until November 2008 (collectively, " the Romano Companies" ). Kearney was a salesman and sales manager at all three companies and was also a 50-percent owner of NEGS. Romano and Kearney were alleged principally to have engaged, through the Romano Companies, in a fraudulent scheme for sales of coins by telephone, making and causing the making of false representations to customers as to the grade and value of the coins they sold, the general profitability of coin sets, and the assistance the Romano Companies would provide to customers who later wished to sell coins bought from the Romano Companies.
A. The Government's Evidence at Trial
The government's evidence at trial consisted principally of testimony from several of the Romano Companies' former salesmen (" salesmen" ), former suppliers (" suppliers" ), and customers; government investigators; and three expert witnesses who testified about the grading and valuation of coins.
1. General Industry Practice and Procedures
The government's first expert witness, Scott Schechter, whose testimony is not challenged on these appeals, provided general information with respect to the rare coin market. Schechter was a vice president of Numismatic Guarantee Corporation (" NGC" ), an independent (or third-party) coin grading service, i.e., an entity not in the business of buying or selling coins. He testified that NGC and its competitor Professional Coin Grading Service (" PCGS" ) each have about 45 to 47 percent of the coin-grading market. (See Trial Transcript (" Tr." ) 1038.) He described general industry practices, and NGC's procedures, in the grading and certification of rare coins as follows.
Coins are generally graded on a 70-point scale, 1-70 (though not all numbers are used), called the Sheldon scale. The Sheldon scale has been in fairly common use since the middle of the 20th century. At NGC, each coin is graded seriatim by three experts who ultimately arrive at a consensus on the coin's grade. In evaluating some coins, two graders can reasonably differ in their opinions as to grade; at NGC a third grader examines all coins. The graders consider four attributes: the coin's luster, i.e., the sheen or vibrancy of its surface; its strike quality, i.e., how well the coin has been struck between the two dies that give the coin its details; the existence and number of contact marks, i.e., surface wear; and its eye appeal, i.e., how attractive the coin is. Eye appeal is the most subjective of these factors.
At the high end of the Sheldon scale are " mint state" (" MS" ) coins that can be assigned a number from 60 through 70; they are considered " uncirculated" because they show no evidence of metal loss from having been circulated. The next lower range is for coins near uncirculated condition; they are called " about uncirculated" (" AU" ) coins and can be graded 50, 53, 55, or 58. In addition, a " " can be added to a coin's grade to indicate that the coin is in the top 15 percent of the pieces within that grade. Small differences in a coin's grade can result in substantial differences in the coin's market value.
Some collectors accumulate complete sets of coins that are of interest to them; that is the most common way to collect
coins. However, a set has no greater monetary value than the total values of its individual coins.
" Certified" coins are coins that have been graded by a third-party grading service such as NGC or PCGS. After grading a coin, the grading service normally places it in a protective capsule, or " slab," that is then sealed and difficult to open without a tool. An " unslabbed," or " raw," coin is one that is not certified by a grading service. NGC gives a guarantee for any coin it has certified (for so long as the coin remains in its slab), meaning that if a coin fails to trade in the marketplace for as much as the price associated with the grade given it by NGC, NGC either will buy the coin from the owner at the price associated with the certified grade or will regrade the coin, return it to the owner, and pay the owner the difference in value. NGC's grading is relied on in transactions between and among dealers and collectors; indeed, some buyers purchase coins sight unseen based solely on the grades given by NGC. PCGS gives similar guarantees.
2. Testimony by Romano Companies Suppliers or Salesmen
Suppliers to the Romano Companies testified that before purchasing coins from them, Romano examined the coins only briefly, if at all. (See Tr. 1583-86, 1878, 2392-93.) For example, one supplier, who over the years sold some $2,000,000 of coins to Romano, testified that Romano typically, without gloves or magnifier or other aid, would look at and purchase some 300-400 coins in 20-30 minutes. (See id. at 1583-86.) Romano would sometimes remove certified coins from their slabs and hand the coins to his secretary. When Romano had asked the supplier for rolls of coins, the supplier brought rolls and Romano bought them without looking at the coins; the grades of the coins were not discussed. (See, e.g., id. at 1584-86.)
Romano periodically created a coin inventory for the use of his salesmen, and during that process he assigned grades to the coins he had purchased. Former employees testified that when Romano took inventory he would call a particular salesman, usually Robert Lepolszki, to learn the current prices for a given coin at different grades. Lepolszki testified that once a week or twice a month, Romano would call, tell him to grab his coin-pricing book and turn to a particular page, and would ask, e.g., " what is the 1948 mint state 64 grade condition, what is a 65 grade condition. I would give him the prices" (Tr. 2291). Lepolszki would then hear Romano telling the secretary to " put it down mint state 64, $10,000, or whatever the amount [was]" (id. at 2291-92), but it was always at " [t]he high end" (id. at 2293). When Romano had all the prices, an inventory sheet would be printed and distributed to all the salesmen. All of the coins Romano and Lepolszki discussed would be on the inventory sheet; and they had been graded at the higher end of the prices Lepolszki had relayed. (See id. at 2294; see also id. at 1742-43 (Romano told one of the salesmen he " marked up the coins to the max" ).)
A former secretary testified that in five years of working for Romano, she never saw him examine coins, either while he was taking inventory or at any other time. (See id. at 486.) Romano's salesmen used to joke " about Mike's grading practice" (Tr. 1157; see, e.g., id. at 1148; id. at 851 (it was " a running joke" )), and " even joke about customers, how gullible they [we]re" (id. at 1157).
Romano tended to assign particular grades for certain types of coins; these included Benjamin Franklin half dollars, of which the Romano Companies sold many
rolls. All or nearly all of the rolls of Franklin half dollars sold by the Romano Companies were graded by Romano as MS 64. However, suppliers testified that they never sold entire rolls of Franklin half dollars to Romano at grade 64 or above, because such rolls are simply not available in the marketplace. (See, e.g., id. at 1503-04 (" You won't buy a complete 64. The problem is it doesn't exist." ); id. at 1587 (" They just don't come that way." ); id. at 2393-94 (" Generally on most of the dates they don't exist on those grades." ).) Suppliers testified that the Franklin half dollars they sold Romano in rolls were typically graded lower, i.e., MS 62 to 64 (see id. at 1469), or MS 60 to MS 64 (see Tr. 1553, 1586-87), or MS 62 to 63 (see id. at 2390-91), or MS 60 to 62 (see id. at 1877-81). Schechter testified that the proper grade for a roll of coins is the grade of the lowest included coin. (See Tr. 1031.)
In addition, one supplier testified that Romano evinced a preference for $20 gold pieces in the AU 58 to MS 61 grade range. The supplier testified that " AU-58[ coins] are called sliders because they could be graded as MS-61 or 60 or 58, because to one untrained eye those coins may look uncirculated . . . ." (Tr. 1551.) Generally, the market prices for $20 gold pieces graded MS 62 or MS 63 were much higher than the prices for those in the AU 58 to MS 61 range. Customers submitted for analysis in this case $20 gold pieces they had bought from the Romano Companies; each of the 17 for which the Romano Companies' grading could be determined was sold as MS 63 grade or higher.
Romano and Kearney closely supervised the companies' sales force, and Kearney, using an alias--as did all of the salesmen--also made sales calls himself. Both men worked mostly from desks on the small sales floor (see Tr. 519, 839-40, 1642); one salesman testified that Kearney was on the sales floor " [p]robably 90 percent of the time" (id. at 1109). Kearney, as the sales manager, trained the salesmen and provided them with sales pitches. (See, e.g., id. at 838-39, 2182.) He also directed salesmen to submit their own handwritten pitches for his approval; he returned typed versions of the pitches he approved and gave feedback on those he did not. According to deposition testimony from Romano that was read into the trial record, " everything" the salesmen said " ha[d] to be sanctioned" by management, and " [w]e monitor[ed] them" to ensure compliance. (Id. at 815-17.) Salesmen also testified that Romano and Kearney regularly listened in to sales calls and critiqued them, sometimes feeding them lines during calls or even taking over calls and pitching to customers directly.
The company-approved sales pitches contained numerous false representations, with salesmen stating that they were offering bargains, i.e., coins priced below the normal retail price for coins of the same type and grade, when in fact the quality of the offered coins was simply lower than represented. The salesmen represented that they could offer such bargains because the company was operating as a wholesaler, which it was not (see id. at 550-51, 1146); or because they were liquidating another dealer's inventory, which they were not (see id. at 845); or because they had just returned from a coin show, though the salesmen never actually attended coin shows (see id. at 1146, 2210). Salesmen were also instructed by Kearney to tell customers that by collecting a complete set of certain coins, they could reap a " set premium," i.e., that " [t]he set is worth more than the sum of its parts" (id. at 856)--anywhere from five to 50 percent above the total value of the coins individually (see id. at 854-55). Salesmen testified
that they used to joke about this pitch and knew it was false because the Romano Companies had in inventory entire sets listed at prices below the aggregate prices of the individual coins in the set. (See, e.g., id. at 856.) Nonetheless, the salesmen, and Kearney himself, used the " set premium" pitch to persuade customers to buy coins toward completion of sets; and multiple customers testified that they heard and relied on it.
Salesmen also used to joke about the fact that as far as the Romano Companies were concerned, " [t]here really was no complete set" (Tr. 1126). They were instructed by Romano and Kearney to keep changing the parameters for what would constitute a set: " It depend[ed] on what the[ customer] bought originally, but it would always change. . . . [Y]ou could make up whatever you wanted as a set. And you would never let them complete the set," so the customer would always have to buy more. (Id.; see id. at 1129.) The salesmen would sing a little ditty that went, " This is the set that never ends, yes, it goes on and on my friends," and Romano and Kearney would laugh or join in. (See id. at 1130-31.)
Kearney also instructed salesmen to tell customers that the Romano Companies employed three in-house graders (see Tr. 853, 1120); that the coins were graded in accordance with the highest standards of the American Numismatic Association (" ANA" ) (see id. at 853, 2265); and that their grading process was similar to those used by NGC and PCGS (see id. at 853). Kearney himself, and all of the salesmen, made such representations in sales calls. (See, e.g., id. at 866, 1518.) Customers testified that they relied on these representations about the grading process. But in fact the only " grader" was Romano, and he did not examine the coins.
Several salesmen testified that they not only knew that their descriptions of the companies' grading process were false, but also knew that the grades themselves were inflated. One testified that he repeatedly overheard Romano ordering uncirculated Franklin half dollars with no specification as to their grade; nonetheless, the Romano companies represented nearly all of the Franklin half dollars they sold to be MS 64. That salesman also sold Morgan silver dollars that the Romano Companies graded MS 64; he did not believe that grading was accurate, given the high volume and large profit margins on these coins, as well as the " constant customer complaints about quality." (Tr. 851-52.) On one occasion when he failed to sell a coin that Romano had graded MS 62, because the customer wanted a coin graded MS 63, Romano instructed him to call back and sell that coin by simply telling the customer he had an MS 63. (See Tr. 876.)
In addition, although Romano and Kearney required their salesmen to sign a form promising that they would not hype the coins as an " investment," and did not allow them to use that specific word (see, e.g., Tr. 874-75, 1152, 1703), the salesmen viewed the form as " a big joke" (id. at 1157) that had no real effect on their sales pitches, even when Romano and Kearney were listening in (see id. at 1642, 2301-02; see also id. at 875, 1152). Indeed, sales pitches distributed by Kearney instructed salesmen to tell customers that buying Franklin half dollars from the Romano Companies was " a can't miss situation" (id. at 2247-48) and to say, " 'If these coins do half as well as they've done in the past, believe me, you're going to wish you have 10,000 of them'" (id. at 2238-39). Thus, despite knowing that the Romano Companies falsely inflated the coins' value, Kearney and the other salesmen regularly told customers that owning the coins would be profitable.
Kearney and the salesmen also told customers that if the customers decided to sell the coins in the future, the Romano Companies would buy the coins back or help customers with resale; several customers testified they relied on this representation. (See Tr. 552-53, 1518-19, 1838.) However, Kearney trained the salesmen on how to " push[ customers] off until a later time" when they wanted to sell, and one salesman testified that he overheard Kearney telling customers who made such requests that " it wasn't a good time right now" and " we should wait." (Id. at 869.) Thus, one customer testified that when she contacted a salesman about selling some coins, the salesman became " evasive," told her " [i]t was not a good time to sell," and said he would get back to her, which he never did. (Id. at 1326.) And when another customer tried to contact ACG " to try to get them to buy the coins back," he discovered that ACG " had closed shop and disappeared." (Id. at 1906.)
Salesmen and secretaries testified that they forwarded customer complaints to Romano and Kearney, including complaints that coins were overgraded and not worth what the customers had paid. (See, e.g., Tr. 384, 388-89, 472-73, 876-77, 1673, 2280-81.) One customer, Ms. Williams, testified that she complained to Kearney that he had misrepresented the value of the coins he had sold her, and that Kearney responded by saying that grading companies were not necessarily reliable and reiterating that the Romano Companies had three in-house graders. Williams testified that Kearney (who used the alias " Ed Thompson" ) had sold her a 1936 Walking Liberty half dollar proof coin as an MS 67; but when she had it appraised by NGC, NGC graded it " a proof 64. So instead of being worth almost $10,000, it was worth $2,000." (Id. at 1359.) Williams also testified that Kearney consistently steered her away from buying certified coins when she requested them.
Romano and Kearney made extensive efforts to conceal their business practices from potential law enforcement agents and from customers. One salesman testified that Kearney repeatedly worried aloud about the possibility of undercover police officers infiltrating the sales staff (see Tr. 872), as did Romano, and that in fact " there was a general concern in the office about that" (id. at 873). Romano twice renamed his company and relocated it within the same geographic area, for no apparent reason other than to conceal its business practices. The entity, its personnel, and its practices remained the same. Romano and Kearney instructed salesmen and secretaries to shred invoices or letterheads bearing the name of the prior company and to deny any affiliation with it--unless they thought the affiliation would help make a sale. (See, e.g., Tr. 405, 879-81, 1174-75.)
In addition, one supplier testified that Romano asked him to change items listed on some invoices to reflect coins different from the ones Romano had actually purchased. (See Tr. 1595-96.) And Kearney instructed the secretaries not to put any coin grades on invoices for particularly expensive orders (see id. at 383-84); he argued to Romano that the company should not put grades on invoices (see id. at 1171), and came up with the idea to stamp some orders as nonreturnable " special orders" (id. at 540-42), which the companies used for customers " who were considered problematic or [who] had returned [coins] in the past" (id. at 871).
William Hessle, who as a postal inspector had participated in the investigation into the Romano Companies, testified that bank records showed that, between 2000 and 2008, the companies sold coins to approximately 1,450 customers and generated
revenue of some $32 million. Of that sum, Romano personally received approximately $6.7 million, and Kearney personally ...