2010-05-27 Amrstrong's Reply in Support of 2255

8/3/2019 2010-05-27 Amrstrong's Reply in Support of 2255

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ARMSTRONGS REPLY IN SUPPORT OF 28 U.S.C. 2255 MOTION

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CONNIE C. ARMSTRONG, JR.

8309 Laughing Waters TrailMcKinney Texas, 75070Telephone: 469-212-2316

e-mail: [email protected]

Petitioner Pro Se

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

OAKLAND DIVISION


Petitioner

v.

UNITED STATES OF AMERICA

Respondent

No. CR 94 276 PJH

ARMSTRONGS REPLY IN SUPPORT OF28 U.S.C. 2255 MOTION

Armstrong submits this Reply in support of his pending motion under 28 U.S.C. 2255

and in traverse of the factual allegations and legal argument provided in the governments

response of July 24, 2009.
mailto:[email protected]:[email protected]:[email protected]


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ARMSTRONGS REPLY IN SUPPORT OF 28 U.S.C. 2255 MOTION Page i

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TABLE OF CONTENTS

Table of Contents ............................................................................................................................. i

Index of Authorities ........................................................................................................................ ii

Statement of Issues ..........................................................................................................................1

Statement of Facts ............................................................................................................................1

Argument .........................................................................................................................................2

A. Armstrongs claims are properly before the court. ................................................2

B. Improper suppression ofBrady material requires thatArmstrongs conviction be set aside. .......................................................................4

1. Summary ......................................................................................................4

2. Legal Standard .............................................................................................5

3. The Undisclosed Prior Investigation ............................................................6

4. The Undisclosed Political Pressure ..............................................................8

5. The Undisclosed Collusion with the Bankruptcy Trustee .........................10

C. Fraud on the court requires that Armstrongs conviction be set aside. ..................14

Conclusion .....................................................................................................................................15

Signature ................................................................................................................... Signature Page

Certificate of Service .............................................................................. Certificate of Service Page


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ARMSTRONGS REPLY IN SUPPORT OF 28 U.S.C. 2255 MOTION Page ii

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INDEX OF AUTHORITIES

Cases

Animal Legal Defense Fund v. Veneman, 490 F.3d 725 (9th Cir. 2007) ...................................... 13

Banks v. Dretke, 540 U.S. 668 (2004). ........................................................................................... 4

Bernstein v. Universal Pictures, Inc., 79 F.R.D. 59 (S.D. N.Y. 1978) ........................................... 7

Bousley v. United States, 523 U.S. 614 (1998) ............................................................................... 3

Carrington v. United States, 503 F.3d 888 (9th Cir. 2007). ........................................................... 4

Clay v. United States, 537 U.S. 522 (2003). ............................................................................... 2, 3

Dodd v. Hood River County, 59 F.3d 852 (9th Cir.1995). ............................................................ 11

Ferrell v. West Bend Mut. Ins. Co., 393 F.3d 786 (8th Cir. 2005); .............................................. 12

Gantt v. Roe, 389 F.3d 908 (9th Cir. 2004). ............................................................................... 4, 6

In re ABA Recovery Service, Inc., 110 B.R. 484, 488 (Bankr. S.D. Cal.1990). ........................... 13

In re Hamilton Taft, 53 F.3d 285 (9th Cir. 1995) ......................................................................... 10

In re Intermagnetics America, Inc., 926 F.2d 912 (9th Cir.1991) ................................................ 15

In re Levander, 180 F.3d 1114 (9th Cir. 1999) ....................................................................... 14, 15

In re U. S. Financial Securities Litigation, 75 F.R.D. 702 (S.D. Cal. 1977) .................................. 8

Jimenez v. Quarterman, 129 S.Ct. 681 (2009); .............................................................................. 2

Jones v. S.E.C., 115 F.3d 1173 (4th Cir. 1997); ........................................................................... 12

Kunzelman v. Thompson, 799 F.2d 1172 (7th Cir. 1986). ............................................................ 12

Kyles v. Whitley, 514 U.S. 419 (1995). ........................................................................................... 5

Memorex Corp. v. IBM Corp., 458 F. Supp. 423 (N.D. Cal. 1978) ................................................ 7

Missouri v. Jenkins, 495 U.S. 33 (1990) ......................................................................................... 3

Mitchell v. McCaughtry, 291 F. Supp.2d 823 (E.D. Wis. 2003) .................................................... 4


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ARMSTRONGS REPLY IN SUPPORT OF 28 U.S.C. 2255 MOTION Page iii

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Murray v. Carrier, 477 U.S. 478, 485 (1986). ..............................................................................3

Parklane Hosiery Co. v. Shore, 439 U.S. 322 (1979). ............................................................ 12, 13

Reid v. Simmons, 163 F. Supp.2d 81 (D. N.H. 2001). .................................................................... 7

Schlup v. Delo, 513 U.S. 298 (1995). ........................................................................................... 13

Stanford University Hosp. v. Federal Ins. Co., 1995, WL 912346 (N.D. Cal. 1995) .................. 12

U.S. Bancorp Mortgage Co. v. Bonner Mall Pship, 513 U.S. 18 (1994) .................................... 13

U.S. v. Bagley, 473 U.S. 667 (1985). .............................................................................................. 5

U.S. v. Blanco, 392 F.3d 382 (9th Cir. 2004) ........................................................................... 6, 10

U.S. v. Boulware, 558 F.3d 971 (9th Cir. 2009............................................................................... 7

U.S. v. Brasswell, 501 F.3d 1147 (9th Cir. 2007) ........................................................................... 4

U.S. v. Fernandez, 559 F.3d 303 (5th Cir. 2009). ........................................................................... 7

U.S. v. Golb, 69 F.3d 1417, 1430 (9th Cir. 1995) ........................................................................... 5

U.S. v. Jernigan, 492 F.3d 1050 (9th Cir. 2007)............................................................................. 4

U.S. v. Lopez, 577 F.3d 1053 (9th Cir. 2009) ............................................................................ 4, 5

Perez v. United States, 502 F. Supp. 2d 301 (N.D.N.Y 2006).........................................................3

U.S. v. Schimmels, 127 F.3d 875 (9th Cir. 1997). ......................................................................... 12

U.S. v. Shaffer, 789 F.2d 682 (9th Cir. 1986) ................................................................................. 5

Weldon v. U.S., 225 F.3d 647 (2nd Cir. 2000) .............................................................................. 15

Younan v. Caruso, 51 Cal. App. 4th 401 (1996)........................................................................... 12

Rules

Supreme Court Rule 13.1 ................................................................................................................ 3

Supreme Court Rule 13.3 ................................................................................................................ 3


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STATEMENT OF ISSUES

Armstrong replies to the opposition tendered by the government which argues that a) his

section 2255 motion was not timely, b) claims related to the late production of evidence were

procedurally defaulted, and c) his complaints regarding suppression of evidence concerning

political pressure are conclusory. The government has since withdrawn its argument concerning

timeliness. In reply, Armstrong addresses the Courts recent and erroneous sua sponte

conclusion that certain claims are procedurally barred. Further, Armstrong explains that the

issue concerning the late-produced evidence is not,per se, aBrady complaint; rather, the issue is

that the lead prosecutor and the lead FBI agent lied under oath about the character of the

evidence in an apparent effort to block a defense request for a continuance. Finally, Armstrong

shows that his suppression complaints are not conclusory but compel and support the

conclusions reached.

In its opposition, the government did not address the non-politicalBrady complaints

alleged in Armstrongs 2255 motion and the amendment thereto. Armstrong provides a

summary of these complaints in response to this Courts reasonable observation that his amended

motion was not entirely comprehensible. [Docket Entry 548, Order to Show Cause].

STATEMENT OF FACTS

Armstrong is currently serving a sentence imposed by the Honorable Charles Legge. On

February 26, 1997, Armstrong was convicted by a jury on each count of a twenty-one count

indictment. Armstrong appealed to the Ninth Circuit, which on April 19, 2000, affirmed in part

and reversed in part his conviction. On August 15, 2000, Judge Legge resentenced Armstrong to

108 months in prison on counts for which his conviction had been affirmed. Armstrong

appealed, and April 15, 2002, the Ninth Circuit affirmed. Armstrong filed a petition for


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rehearing in the Ninth Circuit, which was denied on January 31, 2003 with a mandate issued on

February 10, 2003. On April 22, 2008, upon a finding that Armstrong did not receive notice of

the January 31, 2003 order, the Ninth Circuit recalled its mandate, withdrew its January 31, 2003

order, and re-issued that order as of April 22, 2008.

On April 22, 2009, Armstrong filed a motion to vacate, set aside, or correct his

sentence under 28 U.S.C. 2255. On May 11, 2009, Armstrong filed an amendment to that

motion under Rule 15(c) of the Federal Rules of Civil Procedure. Armstrongs complaints center

onBrady and concern the suppression of a) evidence of a prior exculpatory investigation, b)

evidence that the prosecution was spurred by pressure from political leaders connected to

Armstrongs opponent in ongoing civil litigation, and c) evidence that the prosecution team and

the bankruptcy trustee in a collateral proceeding worked in concert, such that collateral estoppel

bound the prosecution to final judgments in the bankruptcy court. Finally, Armstrong complains

of gross prosecutorial misconduct arising from false testimony and affidavits tendered to the trial

judge by officers of the court. On July 24, 2009, the government filed an opposition to the 2255

motion.

ARGUMENT

A. Armstrongs claims are properly before the court.

The government argued in its opposition that Armstrongs complaints regarding the late

production of evidence were procedurally defaulted. Shortly after an ex parte discussion with

the governments counsel [Docket 592], this court issued an order denying certain discover

requests made by Armstrong. [Docket 594]. In its order, the Court declined to reach the merits

of Armstrongs discovery request, asserting that the claims were not cognizable because of a

procedural default. The Court conducted is procedural default analysis sua sponte.


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While the Court correct stated the rule for procedural default, the Court wholly failed to

utilize that rule in its analysis. At page three of its order, the Court writes,

The general rule is that claims not raised on direct appeal may not be raised on

collateral review unless the petitioner shows cause and prejudice.Massaro v.United States, 538 U.S. 500, 504 (2003). Thus, a section 2255 movant raising aclaim for the first time in post-conviction proceedings is in procedural default,and is precluded from asserting the claim.

Order, Docket 594, at p. 3. Any claim not raised on direct appealfor whatever reasonis

procedurally defaulted. See Perez v. United States, 502 F. Supp. 2d 301, 307 (N.D.N.Y 2006)

(Any claims not raised on direct appeal are, in general, procedurally defaulted.) citingMurray

v. Carrier, 477 U.S. 478, 485 (1986). As noted by this Court in the above-quoted rule, once a

claim is procedurally defaulted, the determination of whether that claim is subject to habeas

review requires a cause and prejudice analysis. Whether a procedurally defaulted claim is

barred from habeas review turns on the cause and prejudice analysis. See Bousley v. United

States, 523 U.S. 614 (1998).

Regrettably, this Court failed to conduct a cause and prejudice analysis prior to

determining that Armstrongs claims were not subject to collateral review and, therefore,

discovery was not available.1

The Ninth Circuit has held that the cause and prejudice test for excusing the failure to

raise a claim on direct appeal will apply, for example, where the claim rests upon a new legal or

factual basis that was unavailable at the time of direct appeal, or where interference by officials

may have prevented the claim from being brought earlier. United States v. Braswell, 501 F.3d

1147, 1150 (9th Cir. 2007), quoting Murray v. Carrier, 477 U.S. 478, 488 (1986).

In an effort to prevent to propagation of error from the discovery

motion to the 2255 motion itself, Armstrong provides a brief cause and prejudice analysis.

1 Armstrong does not complain in this Reply about the Courts decision on his discoverymotion and is deferring that compliant to another time and forum.


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Each claim raised by Armstrong in his 2255 motion meets the cause standard articulated

inBraswell, as the existence of each claim was only made known years after trial when probative

FOIA documents were delivered to Armstrong. These documents revealed for the first time that,

among other facts,

the government had conducted a prior, exculpatory investigation of Armstrongscompany,

Nancy Pelosi spurred the investigation of Armstrongs company after the FBI foundno evidence of wrongdoing,

the Deputy Director of the FBI was providing reports on the status of Armstrongsprosecution to Howard Baker, Nancy Pelosi, and Barbara Boxer, and

the trustee managing the bankruptcy of Armstrongs company was working in concert

with the prosecution team to develop the prosecution strategy.

To underscore the issue, claims whose existence was made known years after the last appeal was

filed were clearly unavailable at the time of direct appeal. United States v. Braswell, 501 F.3d at

1150.

As to the prejudice component, the Ninth Circuit has noted that the analysis of prejudice

for a procedurally defaulted claim is analogous to a materiality analysis underBrady. See

United States v. Lopez, 577 F.3d 1053 (9th Cir. 2009). Accordingly, and in the interest of

brevity, Armstrong incorporates the materiality discussion set forth in Section B below.

B. Improper suppression ofBrady material requires that Armstrongs conviction be set

aside.

1. Summary

Armstrong complains of a pattern ofBrady violations so profound that his conviction

must be set aside. In determining whether there has been aBrady violation, this Court must

consider whether the evidence was: (1) favorable to Armstrong, (2) suppressed by the

government and (3) material to the guilt or innocence of Armstrong. See U.S. v. Jernigan, 492

F.3d 1050, 1053 (9th Cir. 2007)(en banc). Evidence is favorable if it is exculpatory or


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impeaches a prosecution witness, and suppression occurs when favorable evidence known to the

prosecution is not disclosed, either willfully or inadvertently. See Banks v. Dretke, 540 U.S. 668,

691 (2004). Evidence is exculpatory if it is merely favorable to the accused, a rather low

standard. See Gantt v. Roe, 389 F.3d 908, 912 (9th Cir. 2004). Evidence is material when

there is a reasonable probability that, had the evidence been disclosed to the defense, the result

of the proceeding would have been different. U.S. v. Bagley, 473 U.S. 667, 682 (1985). A

reasonable probability of a different result [exists] when the governments evidentiary

suppression undermines confidence in the outcome of the trial. Id. at 678. If the petitioner

establishes all three elements, the challenged conviction or sentence must be set aside. U.S. v.

Lopez, 577 F.3d 1053, 1059 (9th Cir. 2009). As Armstrong does not anticipate any serious

debate that the subject evidence was favorable to the accused and was suppressed, his

argument in this Reply centers on the materiality of the evidence.

2. Legal Standard

The governments constitutional duty is triggered by the potential impact of favorable but

undisclosed evidence, and a showing of materiality does not require demonstration by a

preponderance that disclosure of the suppressed evidence would have resulted ultimately in

Armstrongs acquittal. See U.S. v. Bagley, 473 U.S. at 682. This specifically includes acquittal

because the jury accepted an explanation for the events that did not inculpate Armstrong. See id.

Bagleys touchstone of materiality is a reasonable probability of a different result, and the

adjective is important. The question is not whether the defendant would more likely than not

have received a different verdict with the evidence, but whether in its absence he received a fair

trial, understood as a trial resulting in a verdict worthy of confidence. Kyles v. Whitley, 514

U.S. 419, 434 (1995). The second aspect ofBagley materiality bearing emphasis here is that it


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is not a sufficiency of evidence test. A defendant need not demonstrate that after discounting the

inculpatory evidence in light of the undisclosed evidence, there would not have been enough left

to convict. Id., at 435; see also U.S. v. Golb, 69 F.3d 1417, 1430 (9th Cir. 1995) (Holding that

the ultimate question is whether there is a reasonable probability that, had the evidence been

disclosed, the result of the proceeding would have been different such that confidence in

outcome is undermined). The final aspect ofBagley materiality to be stressed here is its

definition in terms of suppressed evidence considered collectively, not item by item. Id., at 436.

This Court is to evaluate the cumulative effect of the suppressed evidence. See U.S. v. Blanco,

392 F.3d 382 (9th Cir. 2004). Brady applies even if the government fails to grasp the

significance of the suppressed evidence. Gantt v. Roe, 389 F.3d 908, 912 (9th Cir. 2004).

3. The Undisclosed Prior Investigation

The most significantBrady violation in this case arises from the governments failure to

disclose the existence of a recent, prior investigation of Hamilton Taft by AUSA Yamaguchi that

closed upon a lack of evidence of a federal crime. [Exhibits, p. 6, letter dated 9/23/1988 noting

prior investigation of Hamilton Taft by AUSA Yamaguchi who declined prosecution; Exhibits,

p. 8, letter dated 2/8/1991 referencing and reviewing prior investigation.] Neither the fact of

Yamaguchis investigation nor its exculpatory conclusion was disclosed to Armstrong before or

during trial. Indeed they were never disclosed but merely transmitted to him under FOIA several

years after his conviction. Fortunately, the failure to disclose a prior favorable investigation is an

oddity, but the Fifth Circuit nonetheless had a recent opportunity to consider the matter in U.S. v.

Fernandez, 559 F.3d 303 (5th Cir. 2009). There, a unanimous panel analyzed an undisclosed

investigation under the three familiar factors ofBrady. The panel found that the fact of the

investigation was actually well-known during trial with only the results of the investigation


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remaining undisclosed. The panel further found that the district judge conducted an in camera

review of the results and found no exculpatory material. Based upon these findings, the panel

held that noBrady violation occurred.

Here, of course, the prior Hamilton Taft investigation was clearly exculpatory yet was

never disclosed to Armstrong. Further, the Hamilton Taft situation is more troubling from a

policy perspective because, unlike the Fernandez investigation that looked for conduct which

violated a known law, the Hamilton Taft inquiry turned on whether known conduct could be

interpreted as violating a yet-unknown law. Indeed, a Baker & McKenzie opinion letter relied

upon by the government found that [t]here does not appear to be any case law, regulation, or

statute dealing with an independent agent who actually pays over the taxes to the government.

[Exhibits, p. 8, FBI letter dated 2/8/1991 referencing Baker & McKenzie opinion; Exhibits, p.

14, Baker & McKenzie opinion letter dated 10/29/1981.] A prior investigation that reaches a

contrary result is highly material in a case such as this, where the government in breaking new

legal ground in creating an offense.

This suppression of material exculpatory evidence harmed Armstrong and benefitted the

government. The suppression of a recent, exculpatory investigation of Armstrongs company

obviously implicatesBrady. SeeU.S. v. Fernandez, 559 F.3d 303 (5th Cir. 2009);Reid v.

Simmons, 163 F. Supp.2d 81 (D. N.H. 2001). But the benefit to the government is also obvious

and casts doubt upon the fundamental fairness of Armstrongs trial. See U.S. v. Boulware, 558

F.3d 971, 974 (9th Cir. 2009)(Due process requires that criminal prosecutions comport with

prevailing notions of fundamental fairness and that criminal defendants be afforded a meaningful

opportunity to present a complete defense.)


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Here, the prosecution of Armstrong involved the presentation and explanation of complex

financial transactions to lay jurors who are, generally, ill-equipped to evaluate such evidence.

See U.S. v. Hinojosa, 958 F.2d 624 (5th Cir. 1992)(HoldingBatson not implicated when the

structuring of financial transaction was at issue and all jurors without a high-school education

were struck);Memorex Corp. v. IBM Corp., 458 F. Supp. 423 (N.D. Cal. 1978) (approving court

fact-finding after jury disagreement in complex case);Bernstein v. Universal Pictures, Inc., 79

F.R.D. 59 (S.D. N.Y. 1978) (jury disallowed in complex case); In re U. S. Financial Securities

Litigation, 75 F.R.D. 702 (S.D. Cal. 1977) (same). Indeed, one of the key financial concepts at

issue in this case was actually decided in a collateral bankruptcy proceeding and was not decided

until after Armstrongs indictment. Yet the suppression of the prior investigation completely

relieved the government of the heavy burden of explaining the conflict between the two

investigations. [Exhibits, pp. 8-12, Letter from FBI to U.S. Attorney McGivern and AUSA

Yamaguchi describing prior investigation; Exhibits pp. 81-83, Redacted FBI 302 revealing that

Hamilton Tafts operations at the time of the prior investigation showed the same characteristics

as those for which Armstrong was prosecuted].

As noted above, the suppression of a prior, exculpatory investigation is not a frequent

scenario. Nevertheless, it happened here and warrants a reversal of Armstrongs conviction.

4. The Undisclosed Political Pressure

Had the government disclosed its prior investigation, the jury in this trial would have

faced the additional question of which investigation to believethe September 1988 version or

the February 1991 version. One element that would have aided the jurys determination,

however, was suppressed by the government; namely, the high level of political involvement at

the onset of the 1991 inquiry. [Exhibits, p. 19, Redacted FBI Memo of March 8, 1991]. This


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memo describes the interplay between a disgruntled former Hamilton Taft employee,2 the IRS,

the staffs of Sen. Boxer and Rep. Pelosi, the Wall Street Journal, and the FBI. On the last page

of this interesting memo, the writer discloses a conversation with AUSA Yamaguchi, who noted

the need for additional probable cause before seeking a search warrant for the Hamilton Taft

offices. About this same time, Hamilton Taft became engaged in a contractual dispute with one

of its clients, Federal Express. [Exhibits, p. 34, Original Complaint filed by Federal Express3

In short, the investigation of Armstrongs company began with the polite rebuffing of a

disgruntled former employee by an FBI agent on March 8 and quickly escalated to the Deputy

].

One week later, the Wall Street Journal publishes a negative article about Hamilton Taft, citing

the disgruntled employee. [Exhibits, p. 41]. FBI memoranda reveal that the employee was

directed to the Wall Street Journal by Nancy Pelosi. [Exhibits, p. 19]. The article was published

on Friday, March 15, 1991. On Sunday, March 17, two days after the articles publication and

nine days after Yamaguchis statement that he lacked probable cause to pursue a warrant, the

DOJ published a press release detailing its investigation of Hamilton Taft. On April 3, 1991, two

weeks after the Federal Express filing, FBI Deputy Director Larry Potts sends a status report to

Howard Baker, then a director of Federal Express, and copies the report to individuals associated

with the staffs of Pelosi and Boxer. [Exhibits, p. 43]. This memo is the only communiqu

produced which reveals contact between Mssrs. Baker and Potts. All documents initiating the

involvement of Mr. Potts are missing, as are the follow-up reports promised in the memo.

2Years after trial, FOIA material delivered to Armstrong contained financial reports fromthe Hamilton Taft bankruptcy trustee. The financial reports included a listing of creditorsclaims and revealed that the disgruntled employee, during the time he was aiding government,was submitting a whistleblower claim of $110 million. [Exhibits, pp. 23-33 at page 33]. Theimpeachment value of this information is clear.

3The Federal Express complaint is also interesting in that it describes Federal Express as

trustee of the monies held by Hamilton Taft. This is in direct contrast to the position thecompany took at trial and the theory upon which Armstrong was convicted.


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Director of the FBI sending a status report to a politically-influential director of Federal Express

(but not to any of its corporate officers) and to staff members of Pelosi and Boxer on April 3. It

must have been an exciting 26 days in the San Francisco field office. In its opposition, the

government criticizes Armstrongs section 2255 motion as conclusory on this subject. To the

contrary, an argument is not conclusory simply because it reaches a proper conclusion. Here, the

only conclusion supported by these facts is that a dispute between Hamilton Taft and Federal

Express received attention from the highest levels of Congress and the DOJ, and that this

attention was rained down upon USAO and FBI employees in San Francisco.

As noted above, aBrady materiality analysis must consider the cumulative effect of the

suppressed evidence. See U.S. v. Blanco, 392 F.3d 382 (9th Cir. 2004). Under this standard, the

political influence both underscores and explains the governments reversal on the question of

criminal culpability, which found no violation of federal law in 1988 but commenced a public

prosecution 30 months later. This suppression undermines confidence in the outcome of the

trial, and compels the reversal of Armstrongs conviction. U.S. v. Bagley, 473 U.S. 667, 682

(1985).

5. The Undisclosed Collusion with the Bankruptcy Trustee

During trial and upon direct appeal, one of the most contested issues was Armstrongs

request for a law of the case instruction based upon the holding of the collateral bankruptcy

proceeding,In re Hamilton Taft, 53 F.3d 285 (9th Cir. 1995)(vacated as moot by reason of

settlement). TheIn re Hamilton Taftopinion reversed both the bankruptcy judge and the district

court judge (who was also the judge conducting Armstrongs criminal trial) and held that the

deposits transmitted to Hamilton Taft were owned by Hamilton Taft. See id., at 290. This is in

contrast to the views of the lower court and of the prosecution team, both of which considered


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the deposits as owned by the Hamilton Taft clients, with Hamilton Taft operating as a trustee

and constrained by all the statutory, judicial, and common-law obligations associated with that

designation.

This significance of this issue is obvious in a prosecution that put forth as its central trial

theme the tale of a high profile executive who financed his lifestyle with other peoples

money. That theme was gutted when the Ninth Circuit held that the funds in question were

actually owned by Hamilton Taft. [Exhibits pp. 69-80 at pp. 78-79; Brief of AUSA Yamaguchi

acknowledging six adverse prosecutorial ramifications of a law of the case instruction and

asserting that such an instruction would amount to a gutting of the governments case.]

Armstrong respectfully suggests that Mr. Yamaguchi analyzed the situation correctly and further

suggests that due process requires such an outcome when the prosecutions theory proves

erroneous.

Turning now to the issue addressable under section 2255, Mr. Yamaguchi argued to the

trial court thatIn re Hamilton Taftwas inapplicable to the instant trial because the government

was not a party to the bankruptcy proceeding and, regardless,In re Hamilton Tafthad been

vacated. [Exhibits pp. 69-80 at pp. 71-72]. To the contrary, documents delivered to Armstrong

after trial show a close alignment between the prosecution team and the bankruptcy team, such

that the two are in privity for purposes of collateral estoppel. [Exhibits p. 89, FBI memo

describing a meeting between the lead prosecutor (Yamaguchi), the lead FBI agent (Hatcher),

and counsel for the bankruptcy trustee to discuss prosecution strategy; p. 87, redacted partial

FBI 302 wherein the unnamed witness stated the trustee was doing the work of the FBI.]

Under collateral estoppel, once a court has decided an issue of fact or law necessary to

its judgment, that decision may preclude relitigation of the issue in a suit on a different cause of


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action involving a party to the first case. Dodd v. Hood River County, 59 F.3d 852, 863 (9th

Cir.1995). Under both California and federal law, collateral estoppel applies where it is

established that

(1) the issue necessarily decided at the previous proceeding is identical to the onewhich is sought to be relitigated; (2) the first proceeding ended with a finaljudgment on the merits; and (3) the party against whom collateral estoppel isasserted was a party or in privity with a party at the first proceeding.

Younan v. Caruso, 51 Cal. App. 4th 401, 406-07 (1996). Here, elements one and two are

established. Thus, the remaining inquiry turns on whether the suppressed evidence is probative

of the privity issue, such that the defense was deprived of the opportunity to argue collateral

estoppel.4

Privity is a legal conclusion designating a person so identified in interest with a party to

former litigation that he represents precisely the same right in respect to the subject matter

involved. U.S. v. Schimmels, 127 F.3d 875, 881(9th Cir. 1997). Parties are in privity when they

are aligned such that the have the same legal interest. See Ferrell v. West Bend Mut. Ins. Co.,

393 F.3d 786 (8th Cir. 2005);Jones v. S.E.C., 115 F.3d 1173 (4th Cir. 1997); Kunzelman v.

Thompson, 799 F.2d 1172 (7th Cir. 1986).

Defensive use occurs when a defendant seeks to prevent a plaintiff from asserting a

claim the plaintiff has previously litigated and lost against another defendant. Parklane Hosiery

Co. v. Shore, 439 U.S. 322, 326 (1979).

Here, suppression of FBI documents revealing collusion and cooperation between the

prosecution and the bankruptcy trustee deprived Armstrong of the opportunity to demonstrate

privity and invoke the mandatory strictures of collateral estoppel. The alignment in interests is

and wasobvious: Armstrongs conviction would allow the bankruptcy trustee to benefit from

4While the term law of the case was a convenient moniker for the proposed instruction,

that doctrine was never fully on point given that the appellate ruling arose in a different cause ofaction and was discretionary. By contrast, a collateral estoppel finding would have been binding.


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more than $50 million in insurance proceeds triggered by criminal conduct. See Stanford

University Hosp. v. Federal Ins. Co., 1995, WL 912346, *1 (N.D. Cal. 1995)(not designated for

publication)(Hamilton Taft did carry such a bond with Lloyds, with primary coverage of $20

million and umbrella coverage of $30 million.). The trustee's responsibility is to preserve and

maximize the value of the estate for the benefit of the parties in interest, and not to safeguard the

interest of the debtors principals. In re ABA Recovery Service, Inc., 110 B.R. 484, 488 (Bankr.

S.D. Cal.1990).

But while the alignment in interests supports a collateral estoppel theory, the suppressed

evidence compels the invocation of that doctrine. Due process requires that, prior to utilization

of collateral estoppel, the party or its privy to be estopped had an opportunity to be heard in the

prior proceeding. See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 327 n. 7 (1979). The

alignment in interests shows that the government and the trustee were in privity as to the

bankruptcy proceeding. However, the suppressed evidence takes this a step further and shows

that the government and the trustee coordinated their respective litigations such that the

government was bound by the judgment in the bankruptcy proceeding. For this reason, the

suppression of this evidence materially harmed Armstrong and his conviction must be set aside.

Finally, Armstrong briefly addresses the arguments in the trial court and upon direct

appeal that vacatur of theIn re Hamilton Taftopinion ends the inquiry. Armstrong bases his

address on a plea to the equitable power of this Court to do justice in a habeas proceeding. See

Schlup v. Delo, 513 U.S. 298 (1995). Contrary to the arguments of the government and to the

overruled cases relied upon in support of those arguments, the Ninth Circuit lacked the power to

vacate its opinion. See U.S. Bancorp Mortgage Co. v. Bonner Mall Pship, 513 U.S. 18, 29

(1994) (holding that mootness by reason of settlement does not justify vacatur of a judgment


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under review.); compare Animal Legal Defense Fund v. Veneman, 490 F.3d 725 (9th Cir.

2007)(Distinguishing U.S. Bancorp in situations where en banc review had already been granted.

That is not the situation here, where petitions for review were filed but not ruled upon at the time

of settlement.)

C. Fraud on the court requires that Armstrongs conviction be set aside.

In opposing Armstrongs complaints surrounding the 70 hours of late-disclosed audio

tapes, the government asserts that he has procedurally defaulted his claim. The government

misapprehends the issue. The issue is not whether, on the record before it, the trial court abused

its discretion in denying a continuance to allow review of the tapes. Instead, the issue is that the

record before the trial court included a) the oral assurance of Special Prosecutor Smetana and b)

the sworn affidavit of FBI SA Hatcher, both stating that the audio recordings were made by the

Dallas FBI office in connection with an unrelated investigation. [Exhibits, pp. 44-55 at p. 55 as

to Smetana; and pp. 56-59 at pp. 56-57 as to Hatcher.]. Both of these statements were lies. Not

misrepresentations or statements made with less than full knowledge, but direct and

unambiguous lies delivered with the intent that they influence a decision by this Court.

Documents recently delivered to Armstrong pursuant to a FOIA request reveal that both

the oral statement of Smetana and the affidavit of Hatcher were false and the tapes were actually

prepared by the Dallas FBI office at the express request of AUSA Yamaguchi in support of his

prosecution of the instant case. [Exhibits, p. 60].

The Ninth Circuit has explained fraud on the court as follows:

Fraud upon the court should, we believe, embrace only that species of fraudwhich does or attempts to, defile the court itself, or is a fraud perpetrated byofficers of the court so that the judicial machinery can not perform in the usualmanner its impartial task of adjudging cases that are presented for adjudication.


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In re Levander, 180 F.3d 1114, 1120 (9th Cir. 1999)(Recognizing the inherent power of a court

to set aside a judgment when a party deceives the court through perjury, and the perjury was not

discovered until after trial.) See also Weldon v. U.S., 225 F.3d 647 (2nd Cir. 2000)(Sotomayor,

J.)(Explaining that the submission of a false document is one form of fraud on the court.)

Of course, the late disclosure of the subject tapes implicatesBrady. See U.S. v. Shaffer,

789 F.2d 682, 690 (9th Cir. 1986)(If the arguably exculpatory statements of witnesses ... were

in the prosecutor's file and not produced, failure to disclose indicates the tip of an iceberg of

evidence that should have been revealed underBrady.) But the issue for the Special Prosecutor

and the FBI agent was not the content of the tapes; rather, the issue was opposition to a trial

continuance proposed by the defense. [Exhibits, pp. 61-68, trial transcript of hearing discussing

the volume of material and the time needed to review.]

To oppose that continuance, these men lied to the court. Armstrong cannot explain why

they lied, but lie they did. As noted above, this Court has the inherent power to set aside a

judgment obtained through fraud on the court. SeeIn re Levander, 180 F.3d at 1120;In re

Intermagnetics America, Inc., 926 F.2d 912, 916 (9th Cir.1991)(finding fraud on the court

provided an appropriate remedy where an officer of the court made a false declaration.) The

actions of Smetana and Hatcher were inexcusable and harmed the integrity of this Courts

judicial process. For this reason, the judgment obtained pursuant to that process must be set

aside.

CONCLUSION

For the foregoing reasons, Armstrong requests that this Court grant his petition under

section 2255 and set aside his conviction.


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ARMSTRONGS REPLY IN SUPPORT OF 28 U.S.C. 2255 MOTION Signature Page

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DATED: May ____, 2010

Respectfully submitted,

______________________________Connie C. Armstrong, Jr.


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ARMSTRONGS REPLY IN SUPPORT OF 28 U.S.C. 2255 MOTION Certificate of Service Page

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CERTIFICATE OF SERVICE

I certify that I served a copy of

1. Armstrongs Reply in Support of 28 U.S.C. 2255 Motion;

2. Exhibits to Armstrongs Reply in Support of 28 U.S.C. 2255 Motion;

3. Declaration of Connie C. Armstrong, Jr. in support ofArmstrongs Reply in Support of 28 U.S.C. 2255 Motion;

4. Transmittal letter dated May ____, 2010

via FedEx to the following counsel of record:Doug SpragueUnited States Attorneys Office450 Golden Gate Avenue, 11th Floor

San Francisco, CA 94102

Dated: May ____, 2010



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8309 Laughing Waters TrailMcKinney Texas, 75070Telephone: 469-212-2316

e-mail: [email protected]

Petitioner Pro Se

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

OAKLAND DIVISION


Petitioner

v.

UNITED STATES OF AMERICA

Respondent

No. CR 94 276 PJH

EXHIBITS TOARMSTRONGS REPLY IN SUPPORT OF

28 U.S.C. 2255 MOTION

Armstrong submits these Exhibits to his Reply in support of his pending motion under 28

U.S.C. 2255 and in traverse of the factual allegations and legal argument provided in the

governments response of July 24, 2009.

EXHIBITS TO REPLY IN SUPPORT OF 2255 MOTION PAGE 1
mailto:[email protected]:[email protected]:[email protected]


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TABLE OF CONTENTS

FBI Letter referencing prior investigation, September 23, 1988 .....................................................6

FBI Letter referencing prior investigation, February 8, 1988 ..........................................................8

Baker & McKenzie opinion letter, October 29, 1981 ....................................................................14

FBI memo disclosing political influence and lack of probable cause, March 8, 1991 ..................19

Financial report showing creditors claims, including $100 million whistleblower claim............23

Federal Express Original Complaint ..............................................................................................34

Wall Street Journal article induced by Pelosi and Boxer ...............................................................41

Status memo from FBI deputy Director Potts to Howard Baker, Pelosi, and Boxer .....................48

Hearing transcript of January 13, 1997 discussing late-produced audio tapes ..............................49

Affidavit of FBI Special Agent Hatcher disclaiming prior knowledge of audio tapes ..................56

FBI memo showing prior authorization for tapes given to Hatcher by AUSA Yamaguchi ..........60

Hearing transcript of January 27, 1997 discussing late-produced audio tapes ..............................61

Government brief authored by Yamaguchi in opposition to law of the case instruction ..............69

Partial FBI 302 disclosing Hamilton Taft problems prior to Armstrongs acquisition .................81

FBI 302 re. between FBI and counsel for bankruptcy trustee .......................................................84

FBI 302 wherein witness stated bankruptcy trustee was doing the work of the FBI.....................87

FBI memo regarding meeting between prosecution team and trustee to plan prosecution ...........89



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DATED: May ____, 2010

Respectfully submitted,




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CERTIFICATE OF SERVICE

I certify that I served a copy of

1. Armstrongs Reply in Support of 28 U.S.C. 2255 Motion;

2. Exhibits to Armstrongs Reply in Support of 28 U.S.C. 2255 Motion;

3. Declaration of Connie C. Armstrong, Jr. in support of

Armstrongs Reply in Support of 28 U.S.C. 2255 Motion;

4. Transmittal letter dated May ____, 2010

via FedEx to the following counsel of record:

Doug Sprague

United States Attorneys Office

450 Golden Gate Avenue, 11th Floor

San Francisco, CA 94102

Dated: May ____, 2010

______________________________

Connie C. Armstrong, Jr.



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Case 3:94-cr-0027f JH Document 531

UNITED STATES OF AMERICA,Plaintiff-Appellee,

v.CONNIE ARMSTRONG, JR.,

Defendant-Appellant.

Filed 04/25, )8 Page 1 of 1

No . 00-10399

FILEDAPR 22 2008

MOLLY C. DWYER, CLERKu.s. COURT OF APPEALS

DC# CR-94-276-CALNorthern California(San Francisco)

ORDER

Before: BROWNING, KLEINFELD and GOULD, Circuit Judges

Armstrong's letter is a construed as a motion to recall the mandate, and soconstrued, the motion is granted. We recall the mandate issued on February 10,

2003.The order issued on January 31 , 2003 is withdrawn.The panel has voted to deny the petition for panel rehearing .The full court has been advised of the petition for rehearing en bane and no

judge has requested a yote on whether to rehear the matter en bane. See Fed. R.App. P. 35.

The petition for panel rehearing and the petition for rehearing en bane aredenied. The mandate shall issue forthwith.KBiResearch



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u.s. Departmen. ~ Justice

In Reply I Ploa-se Refer 1;0Ftle No

Federal Bureau of InveStlgatlOn

450 Golden Gate AvenueSan Franc isco , Cal i forn ia 94102September 23, 1988

Mr. Joseph P. Russoniel lounited s ta tes AttorneyNorthern Distr ict of california450 Golden Gate AvenueBox 36055San Francisco, California 94102Attent ion: Mr. Flay DawsonAssis tant u. S. Attorney

Re: I ~ ~ ~ ............ _PRESIDENT, dbaHAMILTON TAFT AND COMPANY,SAN FRANCISCO, CALIFORNIA;UNKNOWN SUBJECTS I dbaMAX FHARMA, INCORPORATED,200 CRESCENT COURT, SUITE 1375,DALI.AS TEXAS;POSSIBLE WIRE FRAUD

Dear Mr. Russoniel lo: b -: i:Referenced conference between Assistant U.s. Attorney(AUSA) Michae l Y a m a g u c h ~ and Spec ia l Agent (SA) I Ion September 14, 1988.This le t te r i s to confino. the above referencedconference in which SA I Idelineated the de ta i l s of theallegation and the results or his investigation to date regardingcaptioned matter. AUSA Mike Yamaguchi indicated based on whatwas presented to him as well as h is examination of documentationpert inent to the captioned matte r, t he re was insufficient

1 - Addressee/1 - San FranClSCO ((196A-2868)RES/bfa(2 )



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Mr. Joseph P. Russoniello

evidence to support a violation of federal law a t th is time andhe would therefore decl ine prosecution. AUSA Yamaguchi added i ffurther information could be obtained regarding the a ll egat ionspresented, he would reconsider his opinion.Based on AUSA Yamaguchi's declination, our office wi l lclose i t s i nvest iga tion in to the captioned matter.

Very t ru ly yours,RICHARD W. HELDSpecial Agent in Charge

../ ---

2*

By: I fS u p e r v ~ s o r y Speclal Agent

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u.s. Department of JusticeFederal Bureau of Investigation

In Reply, Please ReIer t.oFIle No

Mr. william T. Mc Givernunited s ta tes AttorneyNorthern Dis t r i c t of California450 Golden Gate AvenueP.O. Box 36055San Francisco, California 94102

450 Golden Gate AvenueSan Francisco, CA 94102February B, 1991yt J i $ - ~ r t L ! ,( ''''''! liI. '6enhtJ/I I nYlDIIIYt{J 1 / ~ 1 f I '1 th11/1'!uM/ ')7l'N/UVi,,1 /til II/If} flo,) '1 htloJ tJ ~ ~ " " i l l t 1 t .

Attn: Mr. Michael YamaguchiAssistant u.s. AttorneyRe: Chip Armstrong, dbaHamilton Taf t andcompany#1 Market ~ ' P l a z a ,Spear s ~ e t TowerSan F r ~ c i s c o , Ca 94105

P o s s i ~ e Fraud by WirerTax raud00 : San Francisco

Dear Mr. Me Givern:Our off ice i s SUbmitting th e following information toyou fo r a prosecutive opinion as to 'whether a vio la t ion of

Federa l Law has taken place .

\\D~ 9(;ff- d 1 5/q / .L1 - r J ' : : - q '?:J c-< -:- I

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Enclosures

The San Franc is co D iv is ion f i r s t became co gn iza nt o fthe existence of Hamilton Taft and Company in August of 1988 whenI ~ a in terviewed a t our off ice . I I wasthe co-founder of Hamilton Taft and the o ther founder was one, -I I who founded the company in ,1979. For yourinformation r Hamilton Taf t is a service company which prov ides . atax paying service on beha l f of t he i r c l i en t s . Hamilton Taf t andCompany col lec t s money from t he i r ~ u c l i en t s and in turnpays th e ir c lie n ts various f e d e r ~ , s t a t e ~ and l o ca l income1 - Addressee ' n n ,O '""\ I fJt, - ~ I ~ 11 - 196A-2868 I \ , 1 / 'VPKM/sgc(2 )

7C



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taxes . Unemployment taxes and other various tax l i ab i l i t i e s a realso paid by Hamilton Taft . When a company becomes a c l i en t ofHamilton Taft , it not i f ies Hamilton of the companies payrol ldates, pert inent payrol l information, the s ta te in which thecompany i s required to pay taxes and the type of taxes which needto be paid and on what dates . Hamilton co l l ec t s monies fromthese va r ious c l i en t s and in turn pays the c l i en t s tax obl igat ionwhether they be local , county, s ta te and/or federal income taxes,unemployment taxes and/or other tax l i ab i l i t i e s .b7C I I advised tha t when a c l ien t company enrol lswith Hamilton Taft, the company not i f ies Hamilton of i t s payrol lda tes , per t inent payrol l information the s ta te in which thecompany i s required to pay t axes and the type of taxes which needto be paid. The company then remits to Hamilton Taft on a timelybas is i t s payrol l tax l i ab i l i t y . The c l i en t company wi l l a lsoremi t funds to Hamilton Taft which would be used to pay theaforernent ionedtax l i ab i l i t i e s . His tor i ca l ly the funds weree i t h e r wired to a Hamilton Ta f t Impound Account each t ime apayrol l i s paid by the company or Hamilton Taf t gains access tothe companies account by a deposi tory t r ans fe r check.

Hamilton Taf t was also respons ible for f i l ing a l lapplicable federa l , state , county and local tax f i l inginformation on beha l f of its c l i en t and pay the i r var ious t axesas they become due fo r the service Hamilton Taf t charges i t sc l i en t s a fee based on the number of t imes a c l ien t renders apayrol l and the number of areas taxing agencies which have to beu l t imate ly pa id . Hamilton Ta f t also receives the in te re s t inwhich it can generate on the funds i t s cl ients deposi t with i t .All t h i s information i s revealed to the c l i en t p r i o r to acon t r ac t being en tered in to by the c l i e n t and Hamil ton Taf t .This is also done orally by Hamilton Taft ' s sa lesrepresenta t ives .As Hamilton Taft grew, the company became concernedwith what i t s l i ab i l i ty may be with the funds they wereco l l ec t ing on beha lf o f t he i r c l i en t s . Because of th i s in te rna lconcern in 1981, the firm contacted Baker and McKenzie Attorney 'sat Law, 555 California s t ree t , San Francisco, Cal i forn ia , 94104and reques ted tha t t h i s firm p rov ide Hamilton with an opinion ofthe characterization of the funds it was holding on behalf of i t sc l i en t s for tax payments.On October 29, 1981, Baker and McKenzie i ssued anopinion tha t basical ly s ta ted tha t a t the time a payrol l isrendered, tha t i s paid by th e employer, the funds representingthe withheld taxes belong to the federal government. Theemployer becomes a t rus tee for those funds and as such the dutiesand respons ib i l i t i es of a t rus tee are mandated under common law.

2

t axes . Unemployment taxes and other various tax l i ab i l i t i e s a realso paid by Hamilton Taft . When a company becomes a c l i en t ofHamilton Taf t , it not i f ies Hamilton of the companies payrol ldates , pert inent payroll information, the s ta te in which thecompany i s required to pay taxes and the type of taxes which needto be paid and on what dates . Hamilton co l l ec t s monies fromthese va r ious c l i en t s and in turn pays the c l i en t s tax obl iga t ionwhether they be local , county, s ta te and/or federal income taxes ,unemployment t axes and/or other tax l i a b i l i t i e s .b7C I advised tha t when a c l i e n t company enrol lswith Hamilton Taft , the company no t i f i e s Hamilton of i t s payrol lda tes , per t inent payrol l information the s ta te in which thecompany i s required to pay taxes and the type of taxes which needto be paid. The company then remits to Hamilton Taf t on a t imelybas is i t s payrol l tax l i a b i l i t y . The c l i en t company w i l l a lsoremit funds to Hamilton Taft which would be used to pay theaforernent ionedtax l i a b i l i t i e s . His tor i ca l ly the funds weree i t h e r wired to a Hamilton T a f t Impound Account each t ime apayrol l i s paid by the company or Hamilton Taf t gains access tothe companies account by a deposi tory t ransfer check.

Hamilton Taf t was also responsible fo r f i l ing a l lapplicable federal, state , county and local tax f i l inginformation on beha l f of its c l i e n t and pay t he i r various t axesas they become due fo r the service Hamilton Taf t charges i t scl ients a fee based on the number of t imes a c l i en t renders apayrol l and the number of areas tax ing agencies which have to beu l t imate ly p a i d . Hamilton T a f t also receives the in te re s t inwhich it can generate on the funds i t s c l i en t s deposi t with i t .All t h i s information i s revealed to the c l i en t p r i o r to aco n t r ac t being entered in to by the c l i e n t and Hamil ton Taf t .This i s also done orally by Hamilton Taft ' s sa lesrepresenta t ives .As Hamilton Taft grew, the company became concernedwith what i t s l i ab i l i ty may be with the funds they werecol lect ing on behal f of t he i r c l i en t s . Because of th i s in te rna lconcern in 1981, the firm contacted Baker and McKenzie Attorney 'sa t Law, 555 California s t ree t , San Francisco, Cal i forn ia , 94104and reques ted tha t t h i s firm p ro v id e Hamilton with an opinion ofthe charac ter iza t ion of the funds it was holding on behalf of i t sc l i en t s for tax payments.On October 29, 1981, Baker and McKenzie issued anopinion tha t bas ica l ly s ta ted tha t a t the t ime a payroll i srendered, tha t i s paid by th e employer, the funds represent ingthe withheld t axes belong to the federa l government. Theemployer becomes a t rus tee for those funds and as such the dutiesand respons ib i l i t ie s of a t rustee are mandated under common law.

2



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with such a sh o rt y ie ld per iod , I Iwould no t respond toMayl s quest ion and j u s t to ld him to do i t . c::::::J to ld! I tha tth e $5,000,000 was e x c l u s i v e ~ s t o m e r funds which were pu t ondepos i t with Hamil ton Taf t . ~ t o l d ' ~ t h a t a t th e t ime th et r an s f e r was made, Hamilto n Taf t d id not have any funds o f i t sown.

In orde r to a s s i s t you in preven t ing your opin ion from 7a h i s t o r i c a l poin t o f v i e w ~ Yle are enc los ing a copy o f th e actual r ~ FD-302 not ing interview Of, Iwith appropriate copies of -J / documents prov ided byl to our agen t . --/-

__I noted t h a t the form 8-K repor t which,. was f i led in -'-'.th e Secur i t i es Exchange Commission (SEC) by Maxphrama fo r thepurchase o f Hamil ton Ta f t , Maxphrama s t a t e s it has used a$5,000,000 Treasury Bill to secure a promissory note which fundswere used to conclude the ~ u r c h a s e of Hamilton Taft from CignaCorpora t ion . According t a l I to ld him t h a t t h e s e fundshad been t ransferred to t h ~ s brokerage firm from cus tomer fundsin th e custody of Hamilton Taft . According toL ' . alsoadv ised tha t l J ; - Ihad d i r ec t ed him to wire t r a n s f e r $50,000in an unre la ted t ransac ti on .

C

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I was also interviewed in December of1988. I ~ - - : = = = ~ I h ~ a ~ d ~ b ~ e ~ e ~ n ~ h i i r e d by Hamilton Taft as Treasurer -Manager o f th e f i rm. I I i s a Cer t i f i ed Pub l i c Accountant(CPA) having become a CPA in th e s t a t e of t a ~ ; f : r n i a :': t986.I Ibasical ly s ta ted tha t shor t ly af te r becameP re sid en t o f Hamilton Taf t , she t o l d him t a s ew a l l e makingth e day to day inves tment dec i s i ons regarding th e funds o fHamil ton Taft . She instructed him not to make any investmen tunle s s she okayed them. He explained to he r t h a t any moniesco l l e c t ed from th e c l i en t s only had a two o r t h r ee day "window"during which they could be invested prior to having to be paid tot ax ing en t i t i e s . Therea f t e r , a l l inves tments he made, o the r thaninto commercial paper, were done a t the direct ion LI I In connection with his responsibi l i t iesC: ~ w o u l da s s i s t in th e prepara t ion of th e monthly f inancia l s ta tements fo rHamil ton Taf t . Each month a meet ing would be he ld to d iscuss aj u s t completed financial s ta tement for th e previous month. Atth e c lo se o f such a meet ing in Apr i l , 1988, a f t e r th e c lo se o fth e Apr i l f i n anc i a l statements , l l s t a t ed t h a t he had aconversa t ion with in he r off ice . During th i sconversa t ion was bragging on th e f in a nc ia l s tr en g th ofMaxphrama an ow axphrama was in th e process of purchasing C &H Nationwide Incorporated, a spec ia l i zed trucking company.Apparently, in order to s U b s t a n t i ~ t e herr s t a t emen t s and th es t r eng th o f Maxphrama, she showedL _ th e Hamil ton f i n anc i a ls t a t ement which l i s t e d Hamilton Ta f t ' s a s se t s in excess of30,000,000. r If inancial picture was qui te di f fe ren t thanth e f in an cia l s t a t emen t s which he had prepared fo r Hamilton fromth e month of Apr i l , 1988. J 3 i { ) ) ~ . x ~ ~ ' l J J ~ ~ l ~ . ~ ' ~ ~ ~ ~ ' ~ ; } -, : ~ ~ ~ ' J ~ t : : 1 J D L ~ ~ ~ ~ / ~ : . ~ ~ ,

~ r : : ' ~ : , : ~ ~ ~ i,"'" t"'"'' ''''U' k'" '. ' I



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p p a r e n t t o l in looking a t the f inanc ia lstatement showed h im t h a t someone had taken the Apri l ,1988 f i n a n c ~ a statements of Hamilton and re-did them. Thef inanc ia l s ta tement prepared fo r Hamilton Taf t showed itsre ta )U:d earnt'ngs a t approximately $200,000. , Is tated hetoldL _ . during th is conversation t ha t he thought thef i n a n c ~ a l s ta tements which she had showed him fo r Hamilton Taf twere a fabr icat ion and not r l : p r e s e : t a ~ i v e of Hamilton Taft ' sactual f inancia l condit ion. _ J re plie d t ha t the people inDallas were taking care of these f ~ n a n c i a l s t a t ement s .

~ ~ ~ _ r n o t e d tha t the above incident concerni ng what heconsidered fa lse and misleading f inancial statements was a majorfactor in h is ult imate decision to sever h is employment withHamilton Taft . A copy of the interview form FD-302 the interviewoil I i s incorporated as pa r t o f t h i s communicat ion.It should a l so be noted t h a t onel Iwasin terviewed in september of 1988 regarding h is former employment

wi th Hamilton Taft . At the time of t h i s in terview,c : : J s ta tedtha t he was self -employed as a consultant s p e c i a l i z ~ n g inemployment taxes . He s t a t ed tha t pr ior to being self-employed,he was employed for f ive years with Hamil ton Taf t in SanFrancisco as the i r Chief Operations Officer and Executive VicePresident. A copy of the interview conducted wi t h c : : J i sa t tached he r e to .This matter was informal ly presented to the uniteds t a t e s Atto rney ' s of f i c e which concluded t h a t t h e re was a lack of (.evidence to suppor t the viola t ion of any f edera l law a t t h a tt ime. Our case was subsequently closed. I IttI j J. ' j (J ;: ' ". /$~ / D d t l ~ / w ( J ~ r J . . . , . . , , ~ . f J _ ~ On December 24, 1990 7 -the. o ~ f i q e receiy..etf complaint S/,.; : . . ~ j : Ica l l from one I ~ . C o n t . r ~ ~ l e r "and CPA. I I( s t a t ed t h a t he was th e cur ren t Controller o f Hamilton Taf t andtha t he was cal l ing th e FBI because he f e l t t ha t h is employer was).che atin g t he In te rna l Revenue Service - (IRS) by not paying t a ~ e s ( - - / 1 ' l i ' ~ Iowing to not only th e I ~ but o th er ta xin g en t i t i e s w h ~ n t h ~ Y J ; ~ wer,e due. I - ~ a d v l s e d t h a t a t l e a s t $20,000,000 J.n c l ~ e n t rJIJ ' ! - - funds have been t ransferred to accounts controlled by Chip ~ B .Armstrong, the new CEO of Hamilton Taft . I I s t a t ed t h a t

Itbe:e f"rdS were used to purchase one or more companies in Texi?-s.stated tha t Hamilton Taft had approximatel: 100 .emp oyees in San Francisco in July of 1990.I t advisedArmstrong i s bas i c a l ly opera t ing a Ponzi scheme, u t ~ l i z i n g th etens of mill ions of dollars which are sent to Hamilton Taf t fo rth e u ltima te payment of tax l iab i l i t ies sustained by HamiltonTa f t I s c l i en t s . I has documentation, to support h is claims r ~ t;and i s scheduled to present same to t ~ rBI on Jar:uary 13" ~ 9 9 1 7 " ~ t : " S a t 10: 00 am. I I furth7r stated t ha t th7re ~ an o n g o ~ n g , i.; ~ :procedure fo r p r o v 1 d ~ n g lul11ng l e t t e r s to c11ents who ac tua l ly ~ ~ ~

\ comPlain to Hamilton Taft when they, the c l ien t , receive a la te t ~ ~"" ;= ' ~ ~ s.5 ~ ~ ~ ~ ' . \ . ) ~ ~ , ' " " "1 . ~ ..t"-, . t;,.i~ ~ ~ ~ ~ ~ .'-:



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b7eno t i ce from th e IRS. , s t a t e s t h a t a l e t t e r on HamiltonTa f t s ta t ione ry i s genera ted to th e IRS bera t ing th e IRS fo rhaving made an e r ro r in showing a t l e a s t th e f ron t copy o f acheck drawn on Hamilton Taf t / s checking account a l l eged lydemonst ra t ing t ha t payment was ac tua l ly made on a pa r t i c u l a r datefor a par t icular tax l iabil i ty_ These checks were never sent tothe IRS but a copy of the l e t t e r was sent to the cl ient , therebys ta l l ing the c l i en t s fur ther i nqu i r i e s .

Please con tact us a t your ear l ies t convenience so tha twe might discuss th is matte r in grea te r de ta i l .

Sincerely yours,RICHARD W. HELDSpecial Agent in Charge

6*

By: b7C



36/112

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Octc=er 19, 1981

Mr. :iarc Paiva~ a m i l t o n Taf t & COffi?any1255 Pos t S t r ee tSan Franci sco , CA 94109

Re: Charac :e r iza t ion of Funds ~ i c h h e l d by Employer'E'or Tax PaymentsDear Marc:

Per your reques t , t h i s l e t t e r Q1SCUSSes the cha r ac t e r i za t ion of funds withheld by employers from emplo ye e p aychecks in s a t i s f a c t i on o f f ede ra l and s t a ~ e income t axes ,Soc i a l Secur i ty t axes , and s t a t e ~ n e m p l o y m e n t insurance '.t axes . This l e t t e r i s l imi ted to a d iscuss ion o f the In t e rna l Revenue Code ( " I .R .C . " ) , t ~ Cal i fo rn ia Revenue andTaxat ion Code ("Cal . Rev. & Tax. Code") , ;:he Cal i fo rn iaUnemployment Insurance Code ("Cal . U. Com. Code") , and thegenera l r e spons i b i l i t i e s and du t i e s o f a t ru s t ee as r e f l e c t edin the C a li f or nia C iv il Code ("Cal . C iv . C ode").

An employer i s r equ i red to w ith ho ld from the wages ofemployees amounts in r e spec t of f ed e r a l income t axes ( I .R .C . 3402] , So c ia l S e cu ri ty taxes [ I .R .C . 3102] , s t a t e incomet axes [Cal . U. Corn. Code 13020] , and s t a t e unemploymentinsurance "taxes [Cal . U. Com. Code 986 ] . The employer i sl i ab l e fo r th e d ed uctio n and wit r.h old in g o f t axes . I .R .C . 53403: Cal . U. Corn. Code 13021.

Charac te r iza t ion o f Withheld FundsFunds t h a t are withhe ld or co l l ec t ed as income tax orSocia l Secu r i t y Tax are to be he ld by the employer as " aspec ia l f:..1nd in t r u s t fo r th e Uni ted S t a t e s . " LR.C . 750 l .

u.s ..... Hi l l , 368 F.2d 617 , 6 6 - 2 : : .S .T .C. ~ [ 9 7 3 6 a t 87382 (5 th



37/112

:-: :' . :.: 3 r c ? ..= ': j. .J, 'C ::.:)0-2 r :::?, ;?-".:ls:e :' ... 0

2 i . ~ . , 1 9 6 6 ~ . = " . . . ! ~ d s Lha t are .....' l . - : : : ~ e l d c r :::: __ ~ c r : e d as s ~ a t ei n c o ~ e c ~ 3re ~ be held by ~ ~ employer aE "3 spec i a l fundin tr 'Jsc for the S't'ate ot Cal i=ornia ll rCc l . -,:. Com .. Cocie 13070] ; '..."hile : ~ n d s withheld 2. 5 u n e m c l ~ v m e n ~ : 'nsurance tax.:i ret 0 be \.; i t h he 1d " i n t r L1 s t . II Cal . - U - Ca . ::0 d e 9 8 6 Theduty to keep Withheld taxes as a t r u s t a r i se s as the taxesa re w ith held from wages regard less of the o r ~ s c r i b e d dace fo r~ a y m e n t to the government and does no t t e r m i ~ a t e un t i l thetaxes are paid ove r . ' ; s t l e f o r c 'I. U.S . , 75-1 U.S .T.C. I! 9464(D. ~ i nn. 1975) .

During the ?er iod the funds are held i t r u s t , the personholding the f ~ n d s a s s u m e s , with a few e x c e p t ~ o n s discussed~ e l o w , the dut ies and re sDons ib i l i t i e s of a ~ r u s t e e as suchdut ies and r e s p o n s i b i l i t i ~ s are mandated under common law.~ a r s h v. Home F ed er al S av in as & Loan Assn, 66 Cal . App. 3d674, 136 Cal . Rptr . 180 (4th D.C.A. 1977) . In genera l , at r u s t ee i s a f iduc ia ry and is bound to ac t in the h ighes tgood f a i th toward h is bene f i c i a ry , must make f u l l disc losureof mate r i a l fac t s , must not acqui re any adverse i n t e r e s t , andmust not use h is pos i t ion to gain any advantage over thebenef ic ia ry or to make any spec ia l ~ r o f i t . Cal . Civ. Code 2228-2233. A t rus t ee normally should not ~ i n g l e t r u s tproperty with his own, bu t i f he do.es wi l l fu l l y mingle thet r u s t funds with proper ty of h is own, he is abso lu te ly l i ab lefor t he i r safe ty and fo r the value of t h e i ~ use . Cal . Civ.Code 2236.

A t rus tee has a genera l duty to inves t funds for thebenef i t of the bene f i c i a r i e s , but he must account over to thebene f i c i a r i e s any i n t e r e s t earned. Cal . e iv . Code 2262.In inves t ing , r e i nves t i ng , or othe rwise managing t r u s t proper ty ,a t rus tee must exerc i se the judgment and ca re which people ofprudence, d i s c r e t i on , and i n t e l l i gence exe rc i se in the managementof the i r own a f f a i r s . Cal . eiv. Code 2261. Cal i fo rn ia lawprovides a - f a i r l y l i b e r a l desc r i p t i on of the type o f in vestm en ta prudent person would make, inc luding every kind of proper ty ,rea l , personal , or mixed, and every kind of investment whicha p ru de nt p er so n might en te r in to . Id .N o t w i t h s t a n d i n ~ the fo rego ing, the pa r t i e s to the t r u s tmay a l t e r or waive any o f the s tandard p r o ~ i s i o n s and dut i e s .Rest . 2d, Trus ts 216. I t i s poss ib le fo r the pa r t i e s to at r u s t arrangement to au thor ize commingling of funds, to au thor izethe t r u s t ee to r e ta in any income rrom the t r u s t asse t s , and



38/112

.' : r . ~ arc r' 2 V i..J>: tobe r .2 9 , : 9 S 1?age Three:0 consent ~ var ious k i ~ d s of i n v e s t m e n ~ s . The ~ a s e G[:;acsh Va HOi7le Federa l Savir .qs &. Loan Assn. I 66 C: : . ' ;?p . .,)06 7 4 , 1 36 Cal. . R t: r--:. 1 8 0 (4 t h D. C .. rl.. 1 9'77 ) , i spa =- t i c u 1 a t 1Yi n s t r u c t i v e . At i s sue in Marsh was the p r o p r i e ~ ~ and: ega l i t y o r ' :he lIimpoundll or l l reserve" accounts :::.lstomar-ilyrequired by savings and loan 2 s s o c i a ~ i o n s and b a ~ K s inconnec t ion with r e s i d en t i a l ~ o r t g a g e s to in su re ~ a y m e n t of~ a x e s and insurance. . The s u i t was a c l a s s ac t i on seekinggenera l and pun i t ive damages and seeking an a c c o ~ n t i n g o fi n t e r e s t on the impound accounts , which were cus tomar i ly held~ i t h o u t i n t e r e s t .

The Cour t f i r s t determined t ha t the impound accounts~ o n s t i t u t e d t r u s t s , not escrOws. I t then cons ide red inde t a i l the natu re of a t r u s t and the du t i e s o f a t r u s t e e ,observ ing t h a t the bene f i c i a ry of ' the t r u s t may ~ a i v e ther igh t to any income and may au thor i ze th e commingling ofEunds. Thus , the Cour t noted t h a t the deed o f t r u s t au tho r i z i ngth e impound account s ta te d s pe ci f ic a l ly th at th e payments bythe p l a i n t i f f would be held by Home Federa l " in i t s gene r a lfund withou t i n t e r e s t , " and concluded t h a t the pa r t i e s hadagreed t ha t the t r u s t e e s could commingle and use th e t r u s tfunds, bu t d id not have to account fo r any i n t e r e s t ea rned .

9 .

The s t a t u t e and cases i nd i ca t e t h a t the t r u s t fundscrea ted by I .R .C . 7501, Cal . U. Com. Code 986, and Cal .U. Com. Code 13070 a re s ub j e c t to some mod if ic at io n o f thegenera l r u l e . Thus , a l though normal ly a t r u s t e e must segrega teth e as se t s o f a t r u s t and no t commingle the as secs with h ispersonal funds , see C al. e iv . Code 2236, it i s not genera l lyrequ i red t h a t th e- Iu nd s w ith he ld fo r t axes be held s epa ra t e lyfrom the gene r a l accoun ts o f the corpora t ion or cha t they bedepos i t ed in a separa te bank account , Slodov v. ~ . S . , 436U.S. 238, 78-1 U.S.T.C. ,[ 9447 a t 84,206 (1978); Newsome v.U.S. , 431 F.2d 742, 70-2 U.S.T.e . 9504 a t 8 4 , 1 ~ 9 (5th Ci r .1970) . The Treasury or the Franch ise Tax Board, as th e casemay be, may spe c i a l l y r equ i r e t h a t wi thhe ld t axes be pu t in tosepara t e accoun ts , however , in th e even t the employer hasf a i l ed p re vio us ly to make app rop r i a t e depos i t s , payments , orr e tu rns fo r such t axes , I .R .C . 7512; Cal . Rev .. & Tax. Code5 18492.

Fur thermore , there i s noth ing in the s t a t u t e o r anyr eg ula tio n o r case w ith which we a re acqua in ted to imply t h a tthe government i s en t i t l ed to any add i t i ona l i n t e r e s t on thet r u s t funds doring th e per iod such funds a re held in t r u s t .Thus, it would fol low t h a t i f an employer decided to foregoi n t e r e s t on th e t r u s t funds , he, too , could do so .



39/112

:1 r . :1.3 r c ? a \. i 3-Oc tobe r :2 9 , 1981?age fou r

~ o l e o f C o 1 1 e c ~ i n g A g e r . ~The fo rego ing d i scu s s i on has c on sid ere d th e s i t u a t i o n o fan emclover . There does noe appear to be any case law, r egu l a -t i on , or s t a t u t e dea l ing w i t ~ an : ~ d e p e n d e n t agen t who ac t u a l l ypays over th e t axes to th e sove rnmen t . The funds presumablya re still t r u s t funds , and che ho lde r o f those funds stillbea r s the r e s p o n s i b i l i t i e s o f a t r u s t e e . Presumably , however ,

th e co l l ec t i ng agen t may use th e f ~ n d s in th e same manner a sth e employer ~ i g h t have , ana i s noe r equ i r ed , i n so f a r as th eI n t e r n a l Revenue Se rv i c e or th e F r anch i s e Tax Board a reconcerned , to segrega te th e =unds from th e ge ne r a l fund o fthe co l l ec t i ng agen t .

Pena l t i e sThe normal pena l t y fo r a breach o f f i duc i a ry du ty by at r u s t e e i s th e amount o f th e l o s s to th e bene f i c i a r y . A s i m i -l a r pena l t y i s imposed by I .R .C . 6672 or C a l . Rev. & Tax.Code 18815: any pe rson r equ i r ed to co l l e c t , account f o r ,and pay ove r wi thho ld ing t axes who w i l l f u l l y f a i l s to c o l l e c t ,

account fo r , o r pay over such t a x , i s l i a b le fo r a pena l t yequa l to th e t o t a l amount o f th e tax evaded , no t co l l e c t ed ,not accounted fo r , o r p a id ove r .

The t e s t i s "wi l l f u l l n e s s . " Bas i ca l l v , "w i l l f u l l n e s s "does no t r equ i r e an in t en t to dep r ive th e government o f itst a xe s , Newsome v. U.S . , s uo r a , 70-2 U.S.T .C. a t 84 ,151 , bu tcan be ev idenced mere ly by use o f th e w ith he ld funds fo r anyo the r co rpo ra t e purpose , r eg a r d l e s s o f any expec t a t i on t h a tadequa te funds would be av a i l a b l e a t th e due da t e fo r th et axes . WavchofE v. U.S . , 79-2 U.S.T .C 9602 a t 88 ,195(S.D. Tex. 1979) . Any per son who vo lun t a r i l y and consc ious lyr i s k s the wi thhe ld tax e s in the oper a t i on o f a co rpo r a t i on i ss ub j e c t to l i a b i l i t y under I .R .C . 6672 (Ca l . Rev. & Tax.Code 18815) i f subsequen t l y th e c or po ra tio n i s unab le torem it th e wi thhe ld t axes . ~ e w s o m e v . U .S ., sup ra .

In add i t ion to th e c i v i l p e n a l t i e s , however, th e re a rea l so c imina l pena l t i e s . I . ~ . C . 7202 prov ides t h a t anyperson r equ i r ed to c o l l e c t , accoun t f o r , and pay ove r any taxwho wi l l fU l l y f a i l s to co l l e c t , accoun t fo r , o r pay over suchtax s h a l l be gu i l t y of a f e lony and, upon conv i c t i on t h e reo f ,s h a l l be f ined no t more than S10,000 , or impr i soned no t more



40/112

:lr. :larc Pa'.'.:..3October 29, :981?age Five

than f ive yea r s . o both, together with th e cos t s of prosecu-t ion . Cal . Kev. & Tax. Code 19408 imposes a f ine of na tmOre th an $2,00 0 or imprisonment [no s taeed maximuml, or bothfo r the s imi l a r offense . Although the pena l t i e s under thesesec t ions have been imposed only ra re ly and only in pa r t i cu l a r l yegregious s i t u a t i on s , there is cons ide rab le need to be con-cerned about the po t en t i a l c r imina l pena l t i e s as wel l .I f you have any ques t ions or comments .concerning theforegoing, please do not hes i t a t e to con tac t us .t;;jY,

~ i L. KimpertDLK/aw

..



41/112

Memorandum

To . SAN FRANCISCO (196A-SF-93255) (P) Date 3/8/91From sAJ _ (SQ' 5) b7CSubject CHIP ARMSTRONG, J r . , dbaHamilton Taft and Company1 Market PlazaSpear s t r e e t TowerSan Francisco, CaliforniaFBW; MFi Tax Fraud;00: SAN FRANCISCO

The purpose o f t h i s memo i s tO 'document even t s t h a t~ ~ ; ; ; : " " : ~ ~ I o 6 . . J I I ' o I I I e l . . . , e since 6bruary 13 I 199 whi,?h is the date t h a t~ ~ ~ ~ ~ w a s l a s t interviewed by the wri te r . On t ha t__________~ p r o v i d e d a numbs ocuments to i t e r whichhave been disse ~ n e y he wri te r to ~ or the IRSC ~ h e r e in San F ranc is co , te le phone number 556-6850. I t should:a l so be noted. t h a t a copy o f these documents a long with a s u m m ~ r yof the wri te r ' s review of San Francisco f i l e 196A-2868 ha s beenprepa red and d i s semina ted to AUSA MICHAEL YAMAGUCHI a t 556-1328.A copy o f t h i s summary i s a matter of record under a separa tecommunication which i s a par t of th i s f i l e .

Due to th e f a c t t h a t AUSA YAMAGUCHI was on annual l e aveand did not re turn to h is office unt i l March 4, and/or 5, 1991 noovert investigation was undertaken. This matter was referred toMr. Y GUCHI because of h is r ev ious r e f e r r a l w' he handledr e a rd i n Haml on Taft in which he subse en t l f r- ~ lJlck 0] prosecution.. T his matter was inves t iga ted by S -I _it was handled under--SF 196A-2868 and was c losedAugust , 1988.w ith re ga rd to information suppl ied byl I wr i t e rwas re luc tan t to i n i t i a t e any ove r t i nves t i g a t i on fo r f ea r that

t h e r e w o u l d ~ Eotent ia l l iab i l i ty attached wherein theg o v e r n m ~ n t .QB1dJ2e accused.Qf i n i t i a t i pg the down f a l l ,ofcap t i oned company bvl'the mere fac t t h a t it was making ove r tinquir ies . [ . ' ,has provided detai led i n fo rma t i on which,of t h i s date , has ' been unab le to be thoroughly co r r obo r a t ed .P rogress i s being made to e f f e c t such cor roDora t2on . .

I. expressed apprehension in h is mind r ega rd ingth e " ex te ns iv e n t im e - i t was t ak ing for th e government to decideWhether o r no t to i n i t i a t e an i nves t i g a t i on and to e f f e c t somec r imina l process . He was to ld t h a t th e government ha_g._:t.Q .........@ ~ vic t im be fore any process would be for thcoming. He was f u r the r

C

Memorandum

To

From

Subject

SAN FRANCISCO (196A-SF-93255) (P)sAJ ....___ ----1 (SQ' 5) b7CCHIP ARMSTRONG, J r . , dbaHamilton Taft and Company1 Market Pl azaSpear St ree t TowerSan Francisco, CaliforniaFBW; MFi Tax Fraud;00: SAN FRANCISCO

Date 3/8/91

The purpose of this_memo i s to 'document events t h a t" ; ' : : ' : : ~ ; ; " " " ' ; ~ ~ I " - I : . G . i i I I o l ~ e since ~ b r u a : ; y 13 I which is the date t ha t~ ~ ~ ~ ________~ w a s l a s t interviewed by the wri ter . On t ha t___________prov ided a numbe ocuments to i t e r whichhave been dis se ~ n a e y he wri te r to qA o r the IRSC ~ e r e in San Franc isco , te lephone number 556-6850 . It should:a l so be noted. t h a t a copy o f t hese documents a long with a summqryof the wri ter ' s review of San Francisco f i l e 196A-2868 has beenprepared and disseminated to AUSA MICHAEL YAMAGUCHI a t 556-1328.A copy o f t h i s summary i s a matter o f record under a separa tecommunication which i s a par t of th is f i l e .

Due to the f a c t t ha t AUSA YAMAGUCHI was on annual l e aveand did not r e t u rn to his office unt i l March 4, and/or 5, 1991 noovert investigation was undertaken. This matter was referred toMr. YAMAGUCHI because of h is previous re fer ra l which he handled~ g . . a r d i n g HamHton Taf t -in which he subsequently QIilCl j.n:p f o rl

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