Case: 4:11-cr-00168-LRR Doc.

#: 179

Filed: 03/25/12 Page: 1 of 12 PageID #: 2959

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MISSOURI EASTERN DIVISION UNITED STATES OF AMERICA, Plaintiff, v. MARTIN T. SIGILLITO, et al., Defendants. ) ) ) ) ) No. 4:11CR168 LRR ) ) ) )

Governments Motion to Exclude Cross-Examination, Evidence and Argument On Legally Irrelevant Issues Comes now the United States of America, by and through its undersigned counsel and moves to exclude cross-examination, evidence and argument as follows: I. Introduction: The indictment charges mail and wire fraud, conspiracy to commit mail and wire fraud and using the proceeds of the mail and wire fraud to engage in financial transactions. Thus, this is a case about fraudulent sales. The elements of mail and wire fraud were set forth in the jointly submitted jury instructions. Doc. 139 at 5659. The indictment charges several specific categories of misrepresentations and deceit which occurred in connection with the marketing of the BLP. Defendants theories of the case were unknown1 to the Government prior to opening statement and the cross-examination of the Government witnesses presented in the first week of trial. Thus, there is good cause for the filing of this motion in the midst of trial.
In fact, defendant has still not revealed the nature of his proposed expert witness testimony. 1
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During opening statement, defendants counsel stated (and wrote on an easel pad) that the evidence would prove that the BLP was an economically viable program, that defendant relied on information given to him by others and therefore did not intend to defraud anyone, and that defendant did not cause the BLP to collapse. Defendant also made clear his intention to prove that the FBI acted hastily on the uncorroborated information of Ms. Stajduhar in seeking a search warrant and that the FBI contributed to the failure of the BLP by not pursuing other investigative tactics. During cross-examination of Elizabeth Stajduhar, defendant posited a theory that defendant had a viable plan to fix the BLP and that Ms. Stajduhars caused the collapse of the BLP by going to the FBI. It was further suggested that lenders did not lose money until Ms. Stajduhar and the FBI prevented the BLP from continuing. The parties were directed to file trial briefs prior to trial. The Government did so, addressing the legal issues anticipated to arise in the trial. The defendant did not do so. As this Court is aware, the Government has been seeking discovery regarding defense experts for some time without success. It was unclear, from the inadequate production efforts by the defendant, the nature of any defense expert evidence or theories of defense. Additional discovery is now required from the defendant by Monday, March 26, 2012, one week into the trial. Based on the opening statement and the cross-examination during the first week of trial, the Government now suspects that defendant intends to present expert testimony on the economic feasibility of the BLP, assuming certain facts, and the viability of an alleged plan to fix the BLP, again assuming certain facts. The estimate of the length of trial was originally 5-6 weeks for all evidence. The Court, however, set aside 4 weeks for the trial. Within that time frame, there
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is now a day off and a shortened trial day on Fridays. With the exception of completing the testimony of Mr. Brown and presenting the testimony of Mr. Smith, most of the Governments remaining witnesses can be relatively brief if the testimony can be limited to the issues raised by the charges. The Government is entitled to an opportunity to present the evidence that it reasonably needs to prove the elements of the offenses charged. The offenses here span 10 years, 150 victims and multiple continents. The Governments evidence will present only a handful of the victims to whom defendant marketed the BLP, 3 participants in the BLP, a legal expert who will establish that the representations about UK collection law were false, and summary witnesses who will account for the scope of the BLP lender activity and the receipt and use of BLP funds contrary to the marketing representations. The Governments summary charts present the total amount obtained from lenders through fraud and traces any returns to them, which were all lulling payments, to arrive at a net loss for restitution purposes. This is because the law does not normally recognize lost opportunity and consequential damages in criminal restitution. If defendant is permitted to expand the trial to irrelevant issues of causation, Government conduct issues concluded by the pretrial motions, and economic feasibility issues, the original estimates of the length of the trial are flawed. In addition, the Government has not been given an opportunity to obtain a rebuttal expert on the issue of economic feasibility, if that issue is determined to be relevant. To permit the receipt of evidence, cross-examination and argument on issues which are legally irrelevant will confuse the issues that the jury needs to determine and will also unnecessarily prolong the length of the trial. II. Economic Feasibility/Plan to Save/Plan to Fix the BLP
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Defendant should be precluded from offering evidence, cross-examining witnesses on the subjects of the economic feasibility of the BLP and any plan to fix the BLP such that no lender would suffer an eventual net principal loss due to Smiths defaults. The proximate cause of the lenders ultimate economic losses is similarly irrelevant. In addition, defendant should be precluded from arguing to the jury that said issues are relevant to the elements of the offenses, particularly defendants intent to defraud. Defendants efforts to prevent said evidence stem from a fundamental legal flaw in his understanding of the offenses charged. Defendant has maintained from the start of this investigation that the BLP was not a fraudulent Ponzi scheme, because there were real assets in the UK which could eventually pour off value for lenders such that they would not suffer a net loan loss (or more than a haircut loss) from Smiths defaults. Defendants counsel seems to have adopted these theories. However, these concepts are legally irrelevant and this Court should preclude the evidence in question, because it will confuse the issues before the jury. The elements of wire fraud are simple and are set forth in the parties joint submission of jury instructions, as follows:
One, the defendant voluntarily and intentionally devised or made up a scheme to defraud other persons out of money, property or property rights by means of material false representations or promises, which scheme is described as follows: the defendant devised a scheme to defraud or to obtain money from persons who were induced to lend in the socalled British Lending Program; Two, the defendant did so with the intent to defraud; Three, interstate wire facilities were used in furtherance of some essential step in the scheme.

Doc. 139 at 56. The elements of mail fraud are not materially different. Directly relevant to the Governments motion was the discussion at pages 11-12 of the Government trial brief, as follows:
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Ultimate Success Does Not Negate Intent To Defraud The United States expects that Sigillito will attempt to present evidence to prove that he honestly believed that the BLP might someday be successful and that he did not specifically intend that the lenders would ultimately lose money. Even if such a belief could be established, such evidence is insufficient to negate the element of fraudulent intent under the mail and wire fraud statutes. As the Eighth Circuit recognized in United States v. Cheatham, 899 F.2d 747 (8th Cir. 1990), it is well-established that actions indicating a belief in the ultimate success of a business do not absolve defendants from liability for making misrepresentations in order to promote that business. Id. at 752; see also Parties Joint Proposed & Agreed Jury Instructions (Doc. #139) at 70 ([A]n honest belief on the part of the defendant that a particular business venture was sound and would ultimately succeed would not, in and of itself, constitute good faith as used in these instructions if, in carrying out that venture, the defendant knowingly made false or fraudulent representations to others with the specific intent to deceive them. (following 8th Cir. Model Inst. 9.08 note 2(c))). As such, even if Sigillito incorrectly believed that the BLP was a viable business venture, that belief would not excuse his misrepresenting the truth to potential lenders in order to induce them to part with their money.

Doc. 147 at 11-12. Defendant did not and has not submitted any contrary legal authority supporting the proposition that evidence of ultimate success is relevant in a fraud prosecution. The Government suspects that defendants belief that said evidence is relevant stems from another flawed belief, namely that defendant lacks the requisite intent to defraud if did not intend that lenders ultimately obtain no net return on their loan. In other words, defendants theory appears to be that he cannot intend to defraud unless he intends that lenders ultimately lose the value of their investment - that they suffer loss. Embedded within his argument is the equally fallacious notion that any eventual net loss to lenders is the property which is the subject of the fraudulent intent. Neither of these is correct or even relevant under the law of federal criminal fraud. Just as ultimate success evidence is not relevant, it is not a defense to a charge that an investment scheme was intentionally marketed deceptively based on affirmative misrepresentations. Intent to defraud does not require proof that
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defendant intended to lenders to lose the entire value of their investment before or after the maturity of their loans. As the commentary to the Eighth Circuit instructions make clear, relying on United States v. Ponec, 163 F.3d 486, 488 (8th Cir. 1998), actual ultimate loss to a victim, gain to the defendant or evidence that the lender was actually defrauded is not required. The offense occurred at the time the funds or property were obtained from the victim under false pretenses and not at some later time.2 Defendant may have had the best of secret intentions and beliefs in the ultimate success of the BLP, but if he used deceptions to get the lenders to part with their funds and send them to defendant or Browns bank accounts, the crime was then complete and no amount of good intentions is relevant. This is made abundantly clear in the jury instructions from the Eighth Circuit which were submitted in the joint proposed jury instructions, as follows: [A]n honest belief on the part of the defendant that a particular business venture was sound and would ultimately succeed would not, in and of itself, constitute good faith as used in these instructions if, in carrying out that venture, the defendant knowingly made false or fraudulent representations to others with the specific intent to deceive them. (Doc. 139) at 70 (following 8th Cir. Model Inst 9.08 note 2(c)). Nothing in the instructions or the law of fraud supports the notion that loss is an element of the offenses. Thus, the Government is not required to prove that defendant was the proximate cause of any ultimate losses and evidence of who or what was the
Under defendant view, if funds are obtained from a victim through fraud to invest in a project that defendant honestly believes will provide sufficient funds to return to the lender is not guilty of fraud unless the fraudster intended the victim to lose the value of his/her investment and no obtaining of property occurs until it becomes clear that the fraudster is unable to return the funds to the lender. Such a theory is ludicrous. The offense occurs at the moment the fraudster takes control of and obtains the funds to use in any manner. 6
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proximate cause of ultimate loss expands the issues for trial into the irrelevant and immaterial. It would confuse the jury and be a waste of time to permit evidence on that issue. Loss causation could be a subject for sentencing or a civil trial, but not a guilt/innocence criminal trial. The issues before the jury will be confused if they are allowed to even hear evidence that defendant did not intend that the lenders suffer a net ultimate loss or that defendant had a plan to fix the BLP which Ms. Stajduhar or the Government prevented from materializing. If such evidence is permitted and if defendant is permitted to argue the legal relevance of said evidence to the jury, they will be thoroughly confused by instructions which do not make it so. III. Advice of Counsel Defendant previously represented to the Government and this Court that he would not rely on an advice of counsel defense. On this basis, the Government did not pursue discovery of the documentation of any such defense. No such evidence has been produced by the defendant and the Government is unaware, from talking with several of the attorneys with whom defendant dealt, of any circumstance under which full disclosure of relevant facts was made by defendant for the purpose of seeking advice on the legality of his conduct or that legal advice was thereafter provided which confirmed that his conduct conformed to the requirements of the law. During opening statement, however, defendant declared his intention to present evidence that no less than four, and perhaps more, attorneys looked at the BLP and said nothing or words to that effect.3 This is an improper bootstrap method of relying on an advice of counsel defense which

The Government does not have a transcript of defendants opening statement. 7

Case: 4:11-cr-00168-LRR Doc. #: 179

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does not conform to the requirements for such a defense. Based on the opening statement, it now appears that defendant intends to offer quasi-advice-of-counsel defense. The Government is entitled to discovery of any documents which purport to contain the evidence of attorneys look[ing] at the BLP and offering no alert of any problem to defendant. Defendant should have provided said discovery to the Government under Rule 16 months ago. He should be required to produce any such discovery forthwith or be precluded from presenting it at trial in either the Governments or the defendants case-in-chief. After the Government is given an opportunity to discover the evidence, the Government may then be in a position to raise issues of relevance and sufficiency to rely on the defense. IV. Loss The issue of loss is also being misrepresented by defendant in his crossexamination of victims and others. The summaries prepared by the Government track the amount of each victims initial loan and the value of that loan, with accrued interest, at the time of the search of defendants office in May, 2010. The summaries also track interest and redemption payments to lenders over the years to arrive at a net figure of restitution loss. For relevant offense purposes, however, the loss was the amount of the initial investment, that being the amount of funds obtained through fraud. Restitution loss, as this Court is no doubt aware, does not recognize the accrued interest at the rates which were part of the fraud scheme or lost opportunity costs as recoverable by victims. For restitution purposes, the law treats all payments as return of principal, but said payments may be relevant to the scheme if they are intended to lull lenders into a false sense of security, entice them to roll over loans and thereby keep them from discovering the true
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circumstances or prevent them from discovering the original marketing fraud. Defendant should be precluded from referring to the net restitution loss figure as a lenders loss. The time of a lenders loss is likewise being misrepresented to the jury. Defendant cross-examination suggests that the loss had not yet occurred until the BLP stopped functioning or until it was realized that Smith did not have sufficient current assets to cover his liabilities. For fraud purposes, the loss of property occurred at the time the property or funds were obtained through deception, not at some later time when it was discovered that the loan was not payable. V. Limit Defendant to Three Character Witnesses: Defendant indicated in his opening statement that defense witnesses would testify that defendant is a good person. Much of the first half of his opening was directed at defendants church activities and future plans. While the Government does not seek to prevent defendant from presenting some measure of his personal side, much of said evidence is irrelevant. The number of witnesses on defendants exhibit list suggests that defendant is intending to offer a large number of character witnesses. This issue was also addressed in the Governments trial brief and there has been no reply from the defendant, (Doc. 147) at 32-34. It is well-accepted that a trial court has discretion to limit the number of character witnesses and that the scope of their testimony must be limited to character traits in issue. In United States v. Koessel, 706 F.2d 271 (8th Cir. 1983), the Court upheld a limit of three character witnesses in a trial from this district. Until defendant testifies, his character trait for credibility is not in issue, but his character trait for honesty may be relevant given the nature of the charges regardless of whether he testifies. Prior
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to putting on character witnesses, the Government requests that this Court make inquiry of defendant to ascertain whether he realizes the wide scope of crossexamination that is permitted in the case of character witnesses and the risk that such wide scope make present to his defense. VI. Defendants Marriage Circumstances Again during opening statement, defendant suggested to the jury that the evidence would show that the Government was to blame for the break-up of defendants marriage. Evidence concerning the reasons for the apparent separation of defendant from his wife is irrelevant. What does it have to do with defendants guilt or innocence of the charges, other than to create sympathy for the defendant? Before presenting said evidence, defendant should be required to articulate a theory of relevance to prevent confusion of the issues and the injection of irrelevant facts and questions into the trial. The Government notes that defendant listed his wife as a potential trial witnesses. WHEREFORE, the Government seeks a ruling in limine from the Court regarding the evidentiary issues raised above.

Respectfully submitted, ERIC H. HOLDER, JR. United States Attorney General DAVE KETCHMARK Interim United States Attorney WESTERN DISTRICT OF MISSOURI s/ Jess E. Michaelsen JESS E. MICHAELSEN, #52253 Special Attorney to the United States Attorney General Charles Evans Whittaker Courthouse 400 East Ninth Street, Fifth Floor Kansas City, Missouri 64106 10

Case: 4:11-cr-00168-LRR Doc. #: 179

Filed: 03/25/12 Page: 11 of 12 PageID #: 2969

s/ Steven E. Holtshouser STEVEN E. HOLTSHOUSER, #24277 Special Attorney to the United States Attorney General 111 South 10th Street, Room 20.333 St. Louis, Missouri 63102 s/ Richard E. Finneran RICHARD E. FINNERAN, #60768 Special Attorney to the United States Attorney General 111 South 10th Street, Room 20.333 St. Louis, Missouri 63102

CERTIFICATE OF SERVICE I hereby certify that on March 25, 2012, the foregoing was filed electronically with the Clerk of Court to be served by operation of the Courts electronic filing system upon the following and, in addition, a copy was directly e-mailed to the following:

Douglas P. Roller dprcrimlaw@aol.com

s/ Jess E. Michaelsen JESS E. MICHAELSEN, #52253 Special Attorney to the United States Attorney General Charles Evans Whittaker Courthouse 400 East Ninth Street, Fifth Floor Kansas City, Missouri 64106 s/ Steven E. Holtshouser STEVEN E. HOLTSHOUSER, #24277 Special Attorney to the United States Attorney General 111 South 10th Street, Room 20.333 St. Louis, Missouri 63102 s/ Richard E. Finneran RICHARD E. FINNERAN, #60768 11

Case: 4:11-cr-00168-LRR Doc. #: 179

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Special Attorney to the United States Attorney General 111 South 10th Street, Room 20.333 St. Louis, Missouri 63102

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