Federal Appeal - Tim Durham, James Cochran, Rick Snow Federal Appeal - Part 1

Nos. 12-3819, 12-3833 and 12-3867

United States Court of Appeals for the Seventh Circuit

UNITED STATES OF AMERICA, Plaintiff-Appellee, v.

TIMOTHY S. DURHAM, JAMES S. COCHRAN, AND RICK D. SNOW, Defendants-Appellants.

On Appeal from United States District Court for the Southern District of Indiana

Case No. 11-CR-00042

CONSOLIDATED BRIEF AND SHORT APPENDIX OF DEFENDANTS-APPELLANTS TIMOTHY S. DURHAM,

JAMES S. COCHRAN, AND RICK D. SNOW

James H. Mutchnik, P.C. Leonid Feller KIRKLAND & ELLIS LLP 300 North LaSalle Street Chicago, Illinois 60654 Telephone: (312) 862-2000 Counsel for Defendant-Appellant Timothy S. Durham

Michelle L. Jacobs BISKUPIC & JACOBS, S.C. 1045 West Glen Oaks Lane Suite 106 Mequon, Wisconsin 53092 Telephone: (262) 241-0033 Counsel for Defendant-Appellant James. F. Cochran

Jeffrey A. Baldwin VOYLES ZAHN & PAUL 141 East Washington Street Suite 300 Indianapolis, Indiana 46204 Telephone: (317) 632-4463 Counsel for Defendant-Appellant Rick D. Snow

September 9, 2013

ORAL ARGUMENT REQUESTED

Case: 12-3819 Document: 34-1 Filed: 09/09/2013 Pages: 109

CIRCUIT RULE 26.1 DISCLOSURE STATEMENT

Appellate Court No:

Short Caption:

To enable the judges to determine whether recusal is necessary or appropriate, an attorney for a non-governmental party oramicus curiae, or a private attorney representing a government party, must furnish a disclosure statement providing thefollowing information in compliance with Circuit Rule 26.1 and Fed. R. App. P. 26.1.

The Court prefers that the disclosure statement be filed immediately following docketing; but, the disclosure statement mustbe filed within 21 days of docketing or upon the filing of a motion, response, petition, or answer in this court, whichever occursfirst. Attorneys are required to file an amended statement to reflect any material changes in the required information. The textof the statement must also be included in front of the table of contents of the party's main brief. Counsel is required tocomplete the entire statement and to use N/A for any information that is not applicable if this form is used.

[ ] PLEASE CHECK HERE IF ANY INFORMATION ON THIS FORM IS NEW OR REVISED AND INDICATE WHICH INFORMATION IS NEW OR REVISED.

(1) The full name of every party that the attorney represents in the case (if the party is a corporation, you must provide thecorporate disclosure information required by Fed. R. App. P 26.1 by completing item #3):

(2) The names of all law firms whose partners or associates have appeared for the party in the case (including proceedingsin the district court or before an administrative agency) or are expected to appear for the party in this court:

(3) If the party or amicus is a corporation:

i) Identify all its parent corporations, if any; and

ii) list any publicly held company that owns 10% or more of the party’s or amicus’ stock:

Attorney's Signature: Date:

Attorney's Printed Name:

Please indicate if you are Counsel of Record for the above listed parties pursuant to Circuit Rule 3(d). Yes No

Address:

Phone Number: Fax Number:

E-Mail Address:

rev. 01/08 AK

12-3819

United States of America v. Timothy S. Durham

✔

Timothy S. Durham

Kirkland & Ellis LLP (new counsel)

Brown Tompkins Lory & Mastrian; Hinshaw & Culbertson LLP; Black, Srebnick, Kornspan & Stumpf, P.A.

s/ James H. Mutchnik, P.C. February 22, 2013

James H. Mutchnik, P.C.

300 North LaSalle Street

Chicago IL 60654

(312)-862-2000 (312)-862-2200

[email protected]

Case: 12-3819 Document: 18 Filed: 02/22/2013 Pages: 1

i


CIRCUIT RULE 26.1 DISCLOSURE STATEMENT Appellate Court No: 12-3833

Short Caption: USA v. James F. Cochran

To enable the judges to determine whether recusal is necessary or appropriate, an attorney for a non-governmental party or

amicus curiae, or a private attorney representing a government party, must furnish a disclosure statement providing the following information in compliance with Circuit Rule 26.1 and Fed. R. App. P. 26.1.

The Court prefers that the disclosure statement be filed immediately following docketing; but, the disclosure statement must

be filed within 21 days of docketing or upon the filing of a motion, response, petition, or answer in this court, whichever occurs first. Attorneys are required to file an amended statement to reflect any material changes in the required information. The text of the statement must also be included in front of the table of contents of the party's main brief. Counsel is required to complete the entire statement and to use N/A for any information that is not applicable if this form is used.

[ ] PLEASE CHECK HERE IF ANY INFORMATION ON THIS FORM IS NEW OR REVISED

AND INDICATE WHICH INFORMATION IS NEW OR REVISED. (1) The full name of every party that the attorney represents in the case (if the party is a corporation, you must provide the

corporate disclosure information required by Fed. R. App. P 26.1 by completing item #3): James F. Cochran (2) The names of all law firms whose partners or associates have appeared for the party in the case (including proceedings

in the district court or before an administrative agency) or are expected to appear for the party in this court: On appeal: Biskupic & Jacobs, S.C., by Michelle L. Jacobs, 1045 W. Glen Oaks Lane, Suite 106, Mequon, WI 53092 In district court: Joseph Martin Cleary, Collignon and Dietrick, 310 N. Alabama, Suite 250, Indianapolis, IN 46204; William H. Dazey, Jr., Indiana Federal Community Defenders, 111 Monument Circle, Suite 752, Indianapolis, IN 46204; and Tyler D. Helmond and Jennifer Lukemeyer, Voyles Zahn Paul Hogan & Merriman, 141 East Washington Street, Suite 300, Indianapolis, IN 46204 (3) If the party or amicus is a corporation:


N/A


N/A

Attorney's Signature: /s Michelle L. Jacobs Date: March 27, 2013

Attorney's Printed Name: Michelle L. Jacobs

Please indicate if you are Counsel of Record for the above listed parties pursuant to Circuit Rule 3(d). Yes x No

Address: Biskupic & Jacobs, S.C., 1045 West Glen Oaks Lane, Suite 106, Mequon, WI 53092

Phone Number: 262-241-0033 Fax Number: 866-700-7640

E-Mail Address: [email protected]

rev. 01/08 AK ii


CIRCUIT RULE 26.1 DISCLOSURE STATEMENT

Appellate Court No:

Short Caption:

To enable the judges to determine whether recusal is necessary or appropriate, an attorney for a non-governmental party oramicus curiae, or a private attorney representing a government party, must furnish a disclosure statement providing thefollowing information in compliance with Circuit Rule 26.1 and Fed. R. App. P. 26.1.

The Court prefers that the disclosure statement be filed immediately following docketing; but, the disclosure statement mustbe filed within 21 days of docketing or upon the filing of a motion, response, petition, or answer in this court, whichever occursfirst. Attorneys are required to file an amended statement to reflect any material changes in the required information. The textof the statement must also be included in front of the table of contents of the party's main brief. Counsel is required tocomplete the entire statement and to use N/A for any information that is not applicable if this form is used.

[ ] PLEASE CHECK HERE IF ANY INFORMATION ON THIS FORM IS NEW OR REVISED AND INDICATE WHICH INFORMATION IS NEW OR REVISED.

(1) The full name of every party that the attorney represents in the case (if the party is a corporation, you must provide thecorporate disclosure information required by Fed. R. App. P 26.1 by completing item #3):

(2) The names of all law firms whose partners or associates have appeared for the party in the case (including proceedingsin the district court or before an administrative agency) or are expected to appear for the party in this court:

(3) If the party or amicus is a corporation:



Attorney's Signature: Date:

Attorney's Printed Name:

Please indicate if you are Counsel of Record for the above listed parties pursuant to Circuit Rule 3(d). Yes No

Address:

Phone Number: Fax Number:

E-Mail Address:

rev. 01/08 AK

12-3867

USA v. Rick D. Snow

Rick D. Snow

Baldwin & Maxwell, Indianapolis, IN; Voyles, Zahn & Paul, Indianapolis, IN; Frost Brown Todd, Indianapolis, IN

N/A

N/A

s/ Jeffrey A. Baldwin 1-8-13

Jeffrey A. Baldwin

141 E. Washington Street, Ste. 300

Indianapolis IN 46204

317-632-4463 317-631-1199

[email protected]

iii


iv

TABLE OF CONTENTS

TABLE OF AUTHORITIES ..................................................................... vii

JURISDICTIONAL STATEMENT ............................................................ 1 I. Timothy S. Durham ................................................................. 1 II. James F. Cochran ..................................................................... 1 III. Rick D. Snow ............................................................................ 2

ISSUES PRESENTED FOR REVIEW ...................................................... 3

STATEMENT OF THE CASE ................................................................... 4

STATEMENT OF FACTS .......................................................................... 7 I. Fair Finance Company ............................................................ 7 II. The government’s investigation ............................................ 11 III. Trial ........................................................................................ 13 IV. Sentencing .............................................................................. 16

SUMMARY OF THE ARGUMENT ......................................................... 18

ARGUMENT ............................................................................................. 22 I. The district court abused its discretion when it denied

the Defendants’ motion to suppress wiretap evidence for lack of necessity. ............................................................... 22 A. Standard of review ........................................................ 23 B. The wiretap application did not establish that

ordinary investigative techniques failed or were unlikely to succeed in this specific investigation. ....... 24

C. The district court erred by failing to suppress the wiretap evidence, and the Defendants’ convictions must be vacated because the wiretap evidence was central to the government’s case. ......................... 34

D. Evidence obtained from the search of Fair, Fair Holdings, and Obsidian also must be suppressed because wiretap evidence was essential to the government’s search warrant application. .................. 37

II. The district court should have ordered a mistrial when the prosecutor took unfair advantage of a plainly


v

inadvertent misstatement by defense counsel during closing arguments. ................................................................. 39 A. Factual background ...................................................... 39 B. Standard of review ........................................................ 41 C. The prosecutor’s comments were improper. ................ 42 D. The comments prejudiced all three Defendants. ......... 44

III. The government failed to introduce any evidence that the wires challenged in Counts Two and Five were “in furtherance” of any scheme to defraud. ................................ 48 A. Standard of review ........................................................ 49 B. There was no evidence that the wires charged in

Counts Two and Five were “in furtherance” of any scheme to defraud. ........................................................ 50

IV. The district court erred by rejecting the proposed securities fraud jury instruction. ........................................... 54 A. Standard of review. ....................................................... 57 B. The proposed instruction was an accurate

statement of law. ........................................................... 58 C. The proposed instruction was supported by the

evidence. ........................................................................ 60 D. Defendants’ theory was not already part of the

charge. ........................................................................... 63 E. The failure to include Defendants’ instruction

denied them a fair trial. ................................................ 64 V. The district court failed to follow proper sentencing

procedures. ............................................................................. 66 A. Standard of review ........................................................ 68 B. The district court’s loss calculation was clearly

erroneous. ...................................................................... 69 1. The district court erred when calculating

intended loss without considering Defendants’ subjective intent. ............................. 71

2. The district court erred even under the “placed at risk” standard because it failed to account for money returned to investors. ........... 75

3. The district court erred when calculating actual loss by failing to account for the effect of extrinsic factors. ..................................... 76


vi

C. The district court erred by failing to consider the need to avoid unwarranted sentencing disparities. ..................................................................... 81

D. None of the district court’s procedural errors was harmless. ....................................................................... 86

E. The district court abused its discretion when it ordered restitution of over $208 million. ..................... 87

CONCLUSION ......................................................................................... 88

REQUEST FOR ORAL ARGUMENT ...................................................... 89

CERTIFICATE OF SERVICE .................................................................. 92

APPENDIX TABLE OF CONTENTS ......................................................... i


vii

TABLE OF AUTHORITIES

Cases

Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977) ............................................................. 58, 59

Anthony v. United States, 935 A.2d 275 (D.C. 2007) ....................................................................... 44

Berger v. United States, 295 U.S. 78 (1935) .................................................................................. 39

Boyde v. California, 494 U.S. 370 (1990) ................................................................................ 87

Burks v. United States, 437 U.S. 1 (1978) .................................................................................... 53

Davis v. Zant, 36 F.3d 1538 (11th Cir. 1994) ................................................................ 43

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ................................................................................ 58

Gall v. United States, 552 U.S. 38 (2007) .................................................................................. 68

Gehring v. Case Corp., 43 F.3d 340 (7th Cir. 1995) .................................................................... 64

Griffin v. United States, 502 U.S. 46 (1991) .................................................................................. 64

Kann v. United States, 323 U.S. 88 (1944) .................................................................................. 50

Krim v. BancTexas Grp., Inc., 989 F.2d 1435 (5th Cir. 1993) ................................................................ 58

Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) .................................................................................. 58


viii

Otto v. Variable Annuity Life Ins. Co., 816 F. Supp. 458 (N.D. Ill. 1991) ..................................................... 58, 60

Parr v. United States, 363 U.S. 370 (1960) ................................................................................ 51

Ray v. U.S., 481 U.S. 736 (1987) ................................................................................ 57

Rothstein v. Seidman & Seidman, 410 F. Supp. 244 (S.D.N.Y. 1976) ......................................................... 59

Steffes v. Pollard, 663 F.3d 276 (7th Cir. 2011) .................................................................. 57

U.S. v. Sandoval, 347 F.3d 627 (7th Cir. 2003) .................................................................. 41

United States v. Adams, 625 F.3d 371 (7th Cir. 2010) .................................................................. 54

United States v. Allen, 529 F.3d 390 (7th Cir. 2008) ............................................................ 87, 88

United States v. Amerson, 185 F.3d 676 (7th Cir. 1999) .................................................................. 45

United States v. Arnaout, 431 F.3d 994 (7th Cir. 2005) .................................................................. 81

United States v. Badger, 983 F.2d 1443 (7th Cir. 1993) ................................................................ 42

United States v. Bartlett, 567 F.3d 901 (7th Cir. 2009) .................................................................. 84

United States v. Bell, 624 F.3d 803 (7th Cir. 2010) .................................................................. 41

United States v. Berheide, 421 F.3d 538 (7th Cir. 2005) .................................................................. 72


ix

United States v. Blackmon, 273 F.3d 1204 (9th Cir. 2001) .............................................. 24, 27, 28, 32

United States v. Booker, 543 U.S. 220 (2005) .............................................................................. 1, 2

United States v. Bowman, 353 F.3d 546 (7th Cir. 2003) .................................................................. 41

United States v. Bradley, 675 F.3d 1021 (7th Cir. 2012) .................................................... 81, 85, 86

United States v. Brandt, 546 F.3d 912 (7th Cir. 2008) .................................................................. 50

United States v. Brisk, 171 F.3d 514 (7th Cir. 1999) .................................................................. 46

United States v. Brownell, 495 F.3d 459 (7th Cir. 2007) .................................................................. 76

United States v. Campos, 541 F.3d 735 (7th Cir. 2008) ............................................................ 23, 30

United States v. Clark, 535 F.3d 571 (7th Cir. 2008) ............................................................ 42, 45

United States v. Cline, 349 F.3d 1276 (10th Cir. 2003) .............................................................. 35

United States v. Colon, 549 F.3d 565 (7th Cir. 2008) .................................................................. 54

United States v. Confredo, 528 F.3d 143 (2d Cir. 2008) ................................................................... 74

United States v. Davuluri, 239 F.3d 902 (7th Cir. 2001) .................................................................. 50

United States v. Delgado, 701 F.3d 1161 (7th Cir. 2012) ................................................................ 23


x

United States v. Diallo, 710 F.3d 147 (3d Cir. 2013) ................................................................... 73

United States v. Dokich, 614 F.3d 314 (7th Cir. 2010) .................................................................. 87

United States v. Dorr, 636 F.2d 117 (5th Cir. 1981) .................................................................. 43

United States v. Farmer, 543 F.3d 363 (7th Cir. 2008) .................................................................. 69

United States v. Fearman, 297 F.3d 660 (7th Cir. 2002) .................................................................. 72

United States v. Giordano, 416 U.S. 505 (1974) .................................................................... 23, 24, 35

United States v. Glosser, 623 F.3d 413 (7th Cir. 2010) .................................................................. 86

United States v. Gonzalez, Inc., 412 F.3d 1102 (9th Cir. 2005) .......................................................... 25, 26

United States v. Groves, 470 F.3d 311 (7th Cir. 2006) ...................................................... 49, 51, 53

United States v. Hach, 162 F.3d 937 (7th Cir. 1998) ...................................................... 54, 57, 66

United States v. Henry, 2 F.3d 792 (7th Cir. 1993) ...................................................................... 53

United States v. Higgins, 270 F.3d 1070 (7th Cir. 2001) ................................................................ 73

United States v. Hill, 645 F.3d 900 (7th Cir. 2011) .................................................................. 86

United States v. Holzer, 840 F.2d 1343 (7th Cir. 1988) ................................................................ 53


xi

United States v. Ippolito, 774 F.2d 1482 (9th Cir. 1985) ................................................................ 32

United States v. Irorere, 228 F.3d 816 (7th Cir. 2000) ............................................................ 54, 57

United States v. Jackson, 189 F.3d 502 (7th Cir. 1999) .................................................................. 37

United States v. Jewel, 947 F.2d 224 (7th Cir. 1991) ............................................................ 70, 71

United States v. Jones, 438 Fed. Appx. 515 (7th Cir. 2011) ....................................................... 82

United States v. Kahn, 415 U.S. 143 (1974) .................................................................... 22, 24, 34

United States v. Kimoto, 588 F.3d 464 (7th Cir. 2009) .................................................................. 81

United States v. Kwiat, 817 F.2d 440 (7th Cir. 1987) ............................................................ 51, 52

United States v. Lauer, 148 F.3d 766 (7th Cir. 1998) .................................................................. 72

United States v. Leiskunas, 656 F.3d 732 (7th Cir. 2011) ............................................................ 70, 71

United States v. Lilla, 699 F.2d 99 (2d Cir. 1983) ............................................................... 24, 34

United States v. Long, 639 F.3d 293 (7th Cir. 2011) .................................................................. 23

United States v. Lorefice, 192 F.3d 647 (7th Cir. 1999) .................................................................. 43

United States v. Manatau, 647 F.3d 1048 (10th Cir. 2011) ........................................................ 73, 74


xii

United States v. Martin, 692 F.3d 760 (7th Cir. 2012) .................................................................. 69

United States v. Maze, 414 U.S. 395 (1974) .......................................................................... 51, 52

United States v. McHale, 495 F.2d 15 (7th Cir. 1974) .................................................................... 37

United States v. McLee, 436 F.3d 751 (7th Cir. 2006) .................................................................. 23

United States v. Meeker, 558 F.2d 387 (7th Cir. 1977) .................................................................. 39

United States v. Meyer, 157 F.3d 1067 (7th Cir. 1998) .................................................... 60, 62, 65

United States v. Middlebrook, 553 F.3d 572 (7th Cir. 2009) ............................................................ 72, 87

United States v. Nacchio, 573 F.3d 1062 (10th Cir. 2009) .............................................................. 78

United States v. Newson, 351 F. App'x 986 (6th Cir. 2009) ........................................................... 73

United States v. O’Hagan, 521 U.S. 642 (1997) ................................................................................ 58

United States v. Olis, 429 F.3d 540 (5th Cir. 2005) .................................................................. 77

United States v. Owens, 697 F.3d 657 (7th Cir. 2012) .................................................................. 49

United States v. Panice, 598 F.3d 426 (7th Cir. 2010) ...................................................... 81, 85, 86

United States v. Patrick, 707 F.3d 815 (7th Cir. 2013) ...................................................... 68, 86, 87


xiii

United States v. Pisman, 443 F.3d 912 (7th Cir. 2006) .................................................................. 83

United States v. Quaye, 57 F.3d 447 (5th Cir. 1995) .................................................................... 73

United States v. Radziszewski, 474 F.3d 480 (7th Cir. 2007) .................................................................. 50

United States v. Reed, 539 F.3d 595 (7th Cir. 2008) .................................................................. 63

United States v. Requarth, 847 F.2d 1249 (7th Cir. 1988) ................................................................ 57

United States v. Reyes-Medina, 683 F.3d 837 (7th Cir. 2012) .................................................................. 83

United States v. Rice, 478 F.3d 704 (6th Cir. 2007) .................................................................. 35

United States v. Richards, 719 F.3d 746 (7th Cir. 2013) .................................................................. 48

United States v. Robinson, 698 F.2d 448 (D.C. Cir. 1983) ................................................................ 24

United States v. Rutkoske, 506 F.3d 170 (2d Cir. 2007) ................................................................... 77

United States v. Sanchez, 615 F.3d 836 (7th Cir. 2010) .................................................................. 50

United States v. Schroeder, 536 F.3d 746 (7th Cir. 2008) ................................................ 69, 75, 77, 81

United States v. Simpson, 479 F.3d 492 (7th Cir. 2007) .................................................................. 47

United States v. Spagnuolo, 549 F.2d 705 (9th Cir. 1977) ...................................................... 31, 37, 38


xiv

United States v. Starks, 309 F.3d 1017 (7th Cir. 2002) ................................................................ 50

United States v. Stephens, 421 F.3d 503 (7th Cir. 2005) .................................................................. 50

United States v. Stout, 882 F.2d 270 (7th Cir. 1989) .................................................................. 70

United States v. Swanquist, 161 F.3d 1064 (7th Cir. 1998) ................................................................ 54

United States v. Trujillo-Castillon, 692 F.3d 575 (7th Cir. 2012) .................................................................. 68

United States v. Van Allen, 524 F.3d 814 (7th Cir. 2008) .................................................................. 60

United States v. Vargas, 583 F.2d 380 (7th Cir. 1978) ............................................................ 44, 46

United States v. Vitek Supply Corp., 144 F.3d 476 (7th Cir. 1998) .................................................................. 37

United States v. Wasko, 473 F.2d 1282 (7th Cir. 1973) ................................................................ 42

United States v. Wells, 127 F.3d 739 (8th Cir. 1997) .................................................................. 73

United States v. Whiting, 471 F.3d 792 (7th Cir. 2006) ............................................................ 69, 76

United States v. Williams, 493 F.3d 763 (7th Cir. 2007) .................................................................. 36

United States v. Wingate, 128 F.3d 1157 (7th Cir. 1997) ................................................................ 50

United States v. Wurzinger, 467 F.3d 649 (7th Cir. 2006) ................................................ 68, 71, 86, 87


xv

United States v. Wysinger, 683 F.3d 784 (7th Cir. 2012) .................................................................. 35

United States v. Zambrana, 841 F.2d 1320 (7th Cir. 1988) ................................................................ 30

United States v. Zangari, 677 F.3d 86 (2d Cir. 2012) ............................................................... 69, 80

Statutes

15 U.S.C. § 78j(b) ................................................................................ 1, 2, 3

18 U.S.C. § 1343............................................................................ 1, 2, 3, 55

18 U.S.C. § 2 ....................................................................................... 1, 2, 3

18 U.S.C. § 2515............................................................................ 24, 25, 39

18 U.S.C. § 2518(1)(c) ......................................................................... 19, 23

18 U.S.C. § 3231.................................................................................. 1, 2, 3

18 U.S.C. § 3553(a) ............................................................................... 7, 92

18 U.S.C. § 3553(a)(6) ......................................................................... 18, 74

18 U.S.C. § 371.................................................................................... 1, 2, 3

18 U.S.C. § 3742(a) ............................................................................. 1, 2, 3

28 U.S.C. § 1291.................................................................................. 1, 2, 3

Other Authorities

Federal Rule of Appellate Procedure 4(b) ............................................. 1, 2

Federal Rule of Criminal Procedure 32(i)(3)(B) ...................................... 70

U.S.S.G. § 2B1.1, cmt. n. 3(B) ................................................................. 91

U.S.S.G. § 2B1.1, cmt. n. 3(A) .................................................................. 77

U.S.S.G. § 2B1.1, cmt. n. 3(A)(i) ............................................................... 87


xvi

U.S.S.G. § 2B1.1, cmt. n. 3(A)(ii) ............................................................. 80

U.S.S.G. § 2B1.1, cmt. n. 3(C) .................................................................. 78


1

JURISDICTIONAL STATEMENT

I. Timothy S. Durham

Timothy S. Durham appeals from a judgment of conviction in a

federal criminal case. He was convicted of securities fraud, wire fraud,

and conspiracy and sentenced to a total of 50 years’ imprisonment. The

district court had jurisdiction pursuant to 18 U.S.C. § 3231 and the un-

derlying criminal statutes, 18 U.S.C. §§ 371, 1343 and 2, and 15 U.S.C.

§ 78j(b).

Judgment was entered on December 10, 2012 and amended on

December 14, 2012. On December 14, 2012, Durham filed a timely no-

tice of appeal, which was amended on December 17, 2012. This Court

has jurisdiction pursuant to 28 U.S.C. § 1291, 18 U.S.C. § 3742(a) as

modified by United States v. Booker, 543 U.S. 220 (2005), and Rule 4(b)

of the Federal Rules of Appellate Procedure.

II. James F. Cochran

James F. Cochran appeals from a judgment of conviction in a fed-

eral criminal case. He was convicted of securities fraud, wire fraud, and

conspiracy and sentenced to a total of 25 years’ imprisonment. The dis-

trict court had jurisdiction pursuant to 18 U.S.C. § 3231 and the under-


2

lying criminal statutes, 18 U.S.C. §§ 371, 1343 and 2, and 15 U.S.C. §

78j(b).


December 14, 2012. On December 17, 2012, Cochran filed a timely no-

tice of appeal. This Court has jurisdiction pursuant to 28 U.S.C. § 1291,

18 U.S.C. § 3742(a) as modified by United States v. Booker, 543 U.S. 220

(2005), and Rule 4(b) of the Federal Rules of Appellate Procedure.

III. Rick D. Snow

Rick D. Snow appeals from a judgment of conviction in a federal

criminal case. He was convicted of securities fraud, wire fraud, and

conspiracy and sentenced to a total of 10 years’ imprisonment. The dis-

trict court had jurisdiction pursuant to 18 U.S.C. § 3231 and the under-

lying criminal statutes, 18 U.S.C. §§ 371, 1343 and 2, and 15 U.S.C. §

78j(b).


December 14, 2012. On December 19, 2012, Snow filed a timely notice

of appeal. This Court has jurisdiction pursuant to 28 U.S.C. § 1291, 18

U.S.C. § 3742(a) as modified by United States v. Booker, 543 U.S. 220

(2005), and Rule 4(b) of the Federal Rules of Appellate Procedure.


3

ISSUES PRESENTED FOR REVIEW

1. Did the district court err in denying Defendants’ motion to sup-

press wiretap evidence when the wiretap application’s statement

of necessity relied exclusively on generic allegations describing in-

herent limitations of ordinary investigative techniques rather

than limitations specific to this case?

2. Did the district court err by not ordering a mistrial as a result of

prosecutorial misconduct, when the government took unfair ad-

vantage of an obvious misstatement by defense counsel in closing

argument to claim, in rebuttal, that a Defendant had conceded the

existence of a scheme to defraud, the central issue in the case for

all three Defendants?

3. Did the district court err in denying Durham’s motion for acquittal

on wire fraud Counts Two and Five, when the government failed

to offer any proof connecting the wires to a scheme to defraud and

instead merely established that two wire transfers were executed?

4. Did the district court err in rejecting the Defendants’ proposed ju-

ry instruction related to the “in connection with the purchase or

sale of a security” element of securities fraud, which highlighted


4

the crucial distinction between transferring ownership of a securi-

ty and merely continuing to hold a security or delaying an interest

payment?

5. Did the district court err at sentencing when it: (i) calculated an

intended loss amount without determining Defendants’ subjective

intent and an actual loss amount without accounting for losses in-

curred independent of Defendants’ conduct; (ii) affirmatively re-

fused to consider sentences of similarly-situated defendants from

other districts when considering the need to avoid unwarranted

sentencing disparities; and (iii) ordered restitution based on a loss

amount not tied to the Defendants’ specific conduct?

STATEMENT OF THE CASE

On March 15, 2011, a grand jury in the Southern District of Indi-

ana returned a twelve-count indictment charging Durham, Cochran,

and Snow with securities fraud, wire fraud, and conspiracy. R. 1.1 A

superseding indictment was returned on February 14, 2012. R. 217.

1 In this brief, “R.” followed by a number refers to an entry on the district court’s docket,

“Tr.” followed by a number refers to a page of the trial transcript, “Sent. Tr.” followed by a number refers to a page of the sentencing hearing transcript, “Tr. Ex.” followed by a number refers to an exhibit admitted at trial, “App.” followed by a number refers to De-fendants’ Short Appendix, and “S.A.” followed by a number refers to Defendants’ Sepa-rate Appendix.


5

In pretrial motions, Durham moved to suppress wiretap record-

ings and derivative evidence for lack of necessity, R. 167, and Cochran

and Snow joined the motion, R. 166, 185, 186. The district court denied

the motion after oral argument. App. 226-233. The Defendants also

moved to suppress evidence obtained from searches of the Defendants’

offices, R. 152, 153, which the district court also denied, S.A. 1-15.

A seven-day trial began on June 11, 2012. R. 339. At the close of

the government’s case, the district court denied Defendants’ Rule 29

motions. App. 234:20-235:9, 247:22-248:11.

On June 20, 2012, the jury found Durham guilty of all twelve

counts. App. 213-225. The jury acquitted Cochran on Counts Two,

Three, Five and Seven, and found him guilty of conspiracy (Count One),

six counts of wire fraud (Counts Four, Six, and Eight through Eleven),

and one count of securities fraud (Count Twelve). Id. The jury acquit-

ted Snow of Counts Two, Three, Five, and Eight through Eleven, and

found him guilty of conspiracy (Count One), three counts of wire fraud

(Counts Four, Six and Seven), and securities fraud (Count Twelve). Id.

Beyond identifying the object of the conspiracy underlying Count

One, the verdicts contained no specific findings. Id. The court denied


6

the Defendants’ renewed Rule 29 motions, remanded all three Defend-

ants into custody, and ordered that Pre-Sentence Investigation Reports

(“PSR”) be prepared. R. 352; App. 243:24-44:3.

On October 31, 2012, Durham filed objections to his PSR, R. 413,

and on November 26, 2012, Durham, Cochran, and Snow all filed sen-

tencing memoranda. S.A. 195-217, 222-224; R. 432. Cochran adopted

Durham’s objections to the Sentencing Guidelines calculations, includ-

ing to the loss calculation, and adopted the bulk of Durham’s sentencing

arguments under 18 U.S.C. § 3553(a). R. 432 at 1; R. 421, Addendum at

2. Snow also objected to the Sentencing Guidelines calculations and

raised his own similar arguments regarding loss calculation. R. 424 at

29-35.

The district court conducted a sentencing hearing on November

30, 2012. R. 423. The court sentenced Durham to a total of 50 years’,

Cochran to a total of 25 years’, and Snow to a total of 10 years’ impris-

onment. All three were ordered to pay special assessments and restitu-

tion in the amount of $208,830,082.77, and to serve terms of supervised

release. R. 443-445, 448, 450, 452. Amended judgments for all three

were entered on the district court’s docket on December 14, 2012. App.


7

1-212. All three Defendants filed timely notices of appeal. R. 457, 469,

475. Defendants are currently incarcerated pending appeal.

STATEMENT OF FACTS

I. Fair Finance Company

At the heart of this case is Fair Finance Company (“Fair”). Fair

was fully-owned by Defendants Durham and Cochran, who acquired the

company in December 2001. Tr. 42:13-43:4. Defendant Snow served as

its Chief Financial Officer. Tr. 83:19-23.

Fair’s business evolved over time. When Fair was founded in

1934, it provided financing for dump trucks. Tr. 29:6-30:25. It later fi-

nanced used cars, made consumer loans, and then made second mort-

gages. Tr. 29:23-31:8, 33:15-19. By 2001, Fair was in the business of

buying and collecting on consumer contracts, also referred to as con-

sumer receivables. Tr. 34:13-21. Fair would purchase installment con-

tracts from businesses, like fitness clubs or buyer’s clubs, making a sin-

gle discounted payment and then collecting the stream of payments due

on the contract over time. Tr. 35:4-19, 66:10-67:12, 91:17-22. Fair con-

tinued in this profitable line of business throughout the time Durham

and Cochran owned and operated the company. Tr. 419:18-421:25.


8

Fair financed its business by selling subordinated debentures,

which it called investment certificates, to individuals. Tr. 31:15-32:7.

When an investor purchased an investment certificate, he or she was

entitled to interest payments for a set period of time. S.A. 35. At the

end of that period, the investor could redeem the certificates, at which

point the principal investment and any outstanding interest would be

repaid. Id. Alternatively, an investor could simply hold the certificate

and continue earning interest according to the original terms of the in-

vestment. Id. Investment certificate holders were unsecured creditors,

whose investments were not guaranteed in any manner. S.A. 31-32; Tr.

39:11-15. Fair, an Ohio company, sold these certificates to Ohio resi-

dents, and the sales were regulated by the Ohio Department of Securi-

ties (“ODS”). Tr. 32:8-13, 36:23-5. Fair sought authorization from ODS

to sell the certificates. Tr. 32:8-23.

After Durham and Cochran purchased the company in December

2001, in addition to continuing the consumer receivables business,

Durham and Cochran began investing in outside businesses by making

loans to various companies. Tr. 49:3-10; S.A. 31. Logistically, these

loans were made from Fair to its parent holding company, Fair Hold-


9

ings, Inc., then to the ultimate recipient of the loan. S.A. 31. These

loans were “directed at markets not serviced by Fair,” which created

“additional opportunities for growth” for Fair. Id.

Fair Holdings made loans both to unrelated third-party entities

and to business that were connected to Durham and Cochran. For ex-

ample, some of the companies that ultimately received loans were busi-

nesses owned by Obsidian Enterprises, a company partially owned by

Durham.2 Tr. 82:9-25, 92:8-10, 95:13-17, 145:15-17. Obsidian’s operat-

ing companies were involved in a diversified variety of businesses,

among them manufacturing enclosed cargo trailers, leasing luxury bus-

es, and reclaiming butyl rubber from old inner tubes. Tr. 89:9-24. Fair

also made loans to DC Investments, LLC, another company owned by

Durham and Cochran. Tr. 88:15-22; S.A. 31. In turn, DC Investments

2 Obsidian became a private company in 2005. Tr. 1445:16-19, 1449:1-21. As part of the

going-private transaction, an investment bank did a valuation of Obsidian and its oper-ating companies. Id. The investment bank determined that Obsidian and its operating companies had positive equity value—that is the value of the company in excess of its debt, including its debt to Fair—of $5.7 million if the company was sold during the nor-mal course of business, as distinguished from a forced liquidation. Tr. 1453:17-1454:1; Tr. Ex. 283 at 12-13.


10

made loans to both related and unrelated businesses and to Durham

and Cochran personally. Id.3

Fair’s loans were fully disclosed to investors. Tr. 49:3-10, 53:1-8,

411. In particular, Fair was required to submit an offering circular

with information about Fair’s financial condition to ODS when Fair

sought authorization to sell investment certificates. Tr. 223:6-17. The

offering circular explained both Fair’s consumer receivable business and

Fair’s loans to other businesses, including the loans to related business-

es, Fair Holdings, DC Investments, Obsidian, and Obsidian’s subsidiar-

ies. S.A. 30-32, 57-60; Tr. 49:3-10, 53:1-8, 411:18-24. It also made clear

that these certificates were subordinated to senior debt, that there was

no limit on the amount of senior debt Fair could incur, and that the fi-

nancial health of Fair Holdings, and its ability to repay the loans from

Fair, would impact Fair’s financial health. S.A. 32-35. Potential inves-

tors were provided a copy of the offering circular and had to sign a sub-

scription agreement indicating that they received and read the circular.

Tr. 404:25-405:10, 634:1-4.

3 Durham had other business interests in addition to Fair, Fair Holdings, DC Investments, and

Obsidian Enterprises, including serving as President and CEO of National Lampoon. Tr. 922:16-17; S.A. 105.


11

II. The government’s investigation

Like almost every other business in the country, Fair was vulner-

able to the financial crisis and resulting recession that struck in the fall

of 2008. Tr. 253:9-14. Investors began redeeming certificates at a high-

er rate than in prior years. Tr. 257:18-258:2. Fair undertook efforts to

manage its cash flow in light of this run, including monitoring cash flow

daily and no longer permitting investors to redeem certificates early.

Tr. 334:5-24, 408:3-20. None of the redemption policies Fair instituted

in the wake of the financial crisis violated Ohio regulations. Tr. 414:6-

8. The government offered no contrary evidence, nor any evidence that

these policies violated federal law. Further, these policies were con-

sistent with the terms of the investment set forth in Fair’s offering cir-

culars. See S.A. 29-30, 35-36; Tr. 59:1-4. Fair, however, also was una-

ble to make promptly some interest and redemption payments to inves-

tors. Tr. 262:2-20.

In February 2009, ODS initiated an examination of Fair based on

complaints it received from investors about delayed payments. Tr. Ex.

813; Tr. 346:5-348:13. As part of ODS’s examination, Durham attended

a meeting with ODS and gave accurate answers to ODS’s questions. Tr.


12

422:1-424:4. Prior to this meeting, Durham never had any conversa-

tions with any of the other attendees in an effort to conceal anything

from ODS. Tr. 422:1-424:4.

The redemption rate slowed, and thus Fair’s cash flow recovered,

around July 2009. Tr. 485:23-486:8. Fair was able to improve its pay-

ment processing and dispersal rate. Tr. 415:8-10. But the FBI began

investigating Fair at this time based on months-old rumors of alleged

criminal activity. R. 150, Ex. C ¶¶ 20, 22. The entirety of the govern-

ment’s ensuing four-month investigation consisted of: interviewing an

acquaintance of Durham’s, id. ¶ 22; installing a pen register on

Durham’s cell phone, id. ¶ 27; subpoenaing certain financial records, id.

¶¶ 30, 44; interviewing two “informants,” neither of whom actually

worked at Fair or its related companies, id. ¶¶ 4(a), 35-36; and once

calling and twice visiting Fair branches to interview low-level Fair em-

ployees (who confirmed the information outlined in Fair’s offering circu-

lar), id. ¶¶ 23-26.

Nevertheless, with the investigation still in an inchoate stage, on

November 6, 2009, the government applied for and secured a wiretap of

Durham’s cell phone. At the time, the government had not yet applied


13

for a search warrant because, in its own words, it lacked “probable

cause to search any specific location.” Id. at ¶ 46. Seventeen days later,

with the information gleaned from the wiretap, the government applied

for and received warrants to search the offices of Fair, Fair Holdings,

and Obsidian. See R. 154, Ex. AA; R. 188 at 2 n.2. The applications cit-

ed the wire intercepts as the basis for probable cause to search those lo-

cations. Id.

At the end of November 2009, the government executed the search

warrants and raided Fair’s offices. See Tr. 420:17-19. The government

seized Fair’s servers, hard drives, phone system, contracts, and dealer

files. S.A. 16:21-17:14. As a result, the infrastructure necessary to

maintain the company’s consumer receivables business—which had

continued generating cash flow through the recession and the legitima-

cy of which was never in question—was forced to shut down. S.A. 16:6-

17:25; Tr. 419:18-25.

III. Trial

The government’s case at trial focused heavily on wire-tapped dis-

cussions among the Defendants and statements made by the Defend-

ants to current Fair investors during the second half of 2009 regarding


14

efforts to explain delayed interest payments and convince investors to

retain rather than redeem their investment certificates. See Tr. at

13:22-14:5, 15:21-16:2, 256:24-58:2, 262:21-63:21, 284:17-25, 294:7-12,

511:11-14:18, 649:20-59:24, 657:18-59:24, 717:11-722:2, 1558:13-17.

The government played more than thirty-five communications captured

by the wiretap and highlighted the wiretap evidence both in its opening

statement and closing arguments. Tr. at 6:21-22; 1554:18-20; 1558:1-4;

1558:13-17; 1562:11-17; 759:1-785:15; 831:15-861:1; 1327:25-1353:13.

The government further sought to establish a scheme to defraud

through complex financial records about a byzantine business structure

and abstruse testimony about accounting principles. See Tr. at 181:19-

183:16; 204:20-205:08; 1091:1-1092:12; 1101:19-1104:11.

The Defendants countered with evidence that the government’s al-

leged indicia of fraud were disclosed to investors and to ODS in Fair’s

offering circulars. S.A. 27-78; Tr. 49:3-10, 53:1-8, 411:18-24, 635:5-16.

Defendants also offered evidence that the policies they instituted in re-

sponse to the financial crisis with respect to investor redemptions were

permissible. Tr. 414:6-8. Defendants established that they did not try

to influence the programs used to train employees on how to sell in-


15

vestment certificates or the preparation of the financial statements

used in the offering circular. Tr. 425:22-426:25, 429:13-432:24, 434:15-

435:13, 1101:4-15. They also offered evidence that they, and their fami-

lies, had put their own money into Fair, which was also lost when the

business collapsed. Tr. 446:2-13, 1036:18-37:1; Tr. Exs. 2056-2058.

At the close of evidence, the district court held a jury instruction

conference. Durham proposed a number of instructions, including one

reflecting the Defendants’ “theory of defense” to the charge of securities

fraud. That theory was that any statement, activity, or misrepresenta-

tion related to delaying interest payments to current investors or con-

vincing a current investor to continue to hold a certificate did not satisfy

the statute’s “in connection with a purchase or sale of a security” re-

quirement. S.A. 145. Though this instruction accurately stated the law

and found support in the evidence adduced at trial, the district court re-

jected it over Durham’s objection. App. 246:1-10.

Subsequently, the district court permitted the parties to present

closing arguments. During his closing argument, which immediately

followed Durham’s closing, counsel for Cochran—intending to argue

that there was no scheme to defraud but that, even if there was, his cli-


16

ent was not a participant, App. 240:5-14—misspoke and instead stated,

“I hope that your finding might be that there is a reasonable doubt as to

whether Mr. Durham participated in a scheme to defraud. . . . The an-

swer is, no, I think there was a scheme to defraud. The question is, was

there anybody else that was let in on that scheme?” S.A. 24:1-6 (em-

phasis added). The prosecutor, in the last piece of argument that the

jury heard before it began deliberating, then declared to the jurors that

Cochran’s lawyer had conceded there had been a scheme to defraud—

inviting the jury to infer guilt on the basis of this alleged concession ra-

ther than to determine its verdicts based on the evidence. S.A. 26:1-3

(“Now, you heard Mr. Cochran’s attorney tell you that there was a

scheme to defraud . . . .” ). The jury subsequently returned guilty ver-

dicts against each Defendant: Durham on twelve counts, Cochran on

eight counts, and Snow on five counts. App. 213-225.

IV. Sentencing

After the jury returned its verdict, the Probation Office prepared a

PSR for each Defendant, and the Court held a sentencing hearing. R.


17

423. Although all three Defendants made objections to their PSRs,4 and

all three Defendants submitted sentencing memoranda, R. 429, 430,

432, the district court failed to address several of the Defendants’ objec-

tions. See, e.g., R. 413 at 3, 12; R. 429 at 12-13; Sent. Tr. 10:1-17:3; R.

432 at 1-3.

At sentencing, the government offered no evidence of the Defend-

ants’ subjective intent to cause any investors’ loss, R. 434 at 3, and the

district court made no factual findings regarding the Defendants’ sub-

jective intent, if any. Sent. Tr. 105:20-107:7; 140:13-19, 168:24-169:11.

When determining the actual loss, the court never addressed Defend-

ants’ contentions that investors’ ability to recover their investment in

Fair was substantially impacted by extrinsic factors such as the general

decline in the broader economy, including the nationwide decline in

property values, the government’s raid on Fair’s offices, and the effect of

negative publicity from the government’s forfeiture lawsuit, which was

dismissed one day after it was filed. See R. 429 at 13.

4 Durham filed his objections with the district court. R. 413. Cochran and Snow submit-

ted objections to the probation officer to be incorporated in the final PSR pursuant to S.D. Ind. L.C. R. 13.1. See R. 421, Addendum at 2; R. 424 at 29-35.


18

When the time came for the district court to fulfill its statutory ob-

ligation to consider unwarranted sentencing disparities, 18 U.S.C.

§ 3553(a)(6), the district judge erroneously asserted, “I can’t look to cas-

es from other districts.” App. 278:3-8. Elsewhere the court elaborated

on its unwillingness to consider the Defendants’ evidence of sentencing

disparities: “I don’t know about what goes on in the Southern District of

New York. I visit there only rarely. This is the Heartland. This is

where we work hard . . . . We drive Chevies and Buicks and Fords, not

Bugattis.” App. 261:19-262:1.

The district court proceeded to sentence Durham, Cochran, and

Snow to 50, 25, and 10 year sentences, respectively. R. 456, 460, 462.

In doing so, the judge recognized that for Durham—and most likely for

Cochran as well—she had imposed effective life sentences. Sent. Tr.

133:9-13, 148:10-24, 155:1-5, 159:13-16.

SUMMARY OF THE ARGUMENT

There are five independent grounds that merit vacating the dis-

trict court’s judgments and sentences and remanding for a new trial or,

at a minimum, resentencing.


19

First, the district court erroneously admitted evidence gathered

from an improper wiretap. To strike an appropriate balance between

privacy, the potential for abuse, and legitimate law-enforcement needs,

Congress requires that the government demonstrate the wiretap’s “ne-

cessity” by providing “a full and complete statement as to whether or

not other investigative procedures have been tried and failed or why

they reasonably appear to be unlikely to succeed if tried or to be too

dangerous.” 18 U.S.C. § 2518(1)(c). Far from meeting this standard,

the government’s wiretap application in this case merely alleged generic

shortcomings of traditional investigative techniques which apply equal-

ly to every criminal investigation. Because the wiretap evidence was

obtained in violation of the necessity requirement, it must be sup-

pressed. And, because of the key role the wiretap evidence played at

trial, Defendants’ convictions must be vacated. Further, because the

wiretap evidence formed the basis of the government’s probable cause to

search Fair’s, Fair Holdings’, and Obsidian’s offices, evidence from those

searches should also be suppressed.

Second, the district court erred when it failed to grant a mistrial

in the face of prosecutorial misconduct. The prosecutor opportunistical-


20

ly turned an obvious misstatement by defense counsel into a critical

concession, stating that defense counsel admitted there was a scheme to

defraud—the key element of the government’s case against all three De-

fendants. This prosecutorial misconduct usurped the jury’s function,

distorted the burden of proof, and ultimately violated the Defendants’

due process.

Third, the government introduced no evidence to connect the wires

underlying two counts of fraud on which Durham was convicted to a

scheme to defraud. A conviction for wire fraud requires some proof in

the record—be it testimony, taped communications, written communi-

cations, or other documents—that the wire was transmitted “in further-

ance” of a scheme to defraud. Here, there is no such evidence. This er-

ror requires reversal, a judgment of acquittal on those two counts, and

that Durham’s sentence be vacated and his case remanded for resen-

tencing.

Fourth, the district court incorrectly rejected the Defendants’ the-

ory-of-defense jury instruction. The Defendants urged the district court

to instruct the jury on the critical distinction—the essence of the de-

fense theory with respect to the securities fraud charge—that a scheme


21

to delay is not a scheme to defraud. This Court has made clear that a

defendant is entitled to a jury instruction when the proposed instruc-

tion represents an accurate statement of law, is supported by the evi-

dence, is not already part of the charge, and its rejection would deny the

defendant a fair trial. The tendered instruction here accurately stated

the law and directly attacked evidence on which the government fo-

cused throughout the trial. The district court’s failure to give this in-

struction denied the Defendants a fair trial and requires that their con-

victions be vacated.

Finally, the district court failed to adhere to required sentencing

procedures. First, the court neglected to address the Defendants’

presentence objections. Second, it erred in calculating intended loss

without evidence or consideration of the Defendants’ subjective intent.

Third, it ignored the effect of extrinsic factors on investors’ losses when

calculating actual loss. Fourth, it failed to consider—indeed, erroneous-

ly professed that it was barred from considering—the need to avoid un-

warranted sentencing disparities. Finally, the district court’s erroneous

actual loss finding infected its restitution order. Together these errors


22

at sentencing require, at a minimum, that Defendants’ sentences be va-

cated and remanded for resentencing.

ARGUMENT

I. The district court abused its discretion when it denied the De-fendants’ motion to suppress wiretap evidence for lack of necessi-ty.

The government’s Title III affidavit failed to explain, as it must,

why ordinary investigative techniques were insufficient under the par-

ticularized, individual circumstances of this case. Instead, the affidavit

merely described generic limitations of those techniques. This is not

enough, as a matter of law.

To obtain authorization for a wiretap under Title III, the govern-

ment must provide “a full and complete statement as to whether or not

other investigative procedures have been tried and failed or why they

reasonably appear to be unlikely to succeed if tried or to be too danger-

ous.” 18 U.S.C. § 2518(1)(c). This so-called “necessity” requirement

“assure[s] that wiretapping is not resorted to in situations where tradi-

tional investigative techniques would suffice to expose the crime.”

United States v. Kahn, 415 U.S. 143, 153 n.12 (1974).

Not only did the government fail to explain why a wiretap was

necessary, but it also failed to explain why it ignored obvious and far


23

less intrusive avenues of investigation which appeared fruitful, safe,

and cost-effective. These failures rendered the wiretap application

statutorily deficient and the accompanying authorization erroneous.

Accordingly, the district court should have granted the Defendants’ mo-

tion to suppress all evidence derived from the wiretap. 18 U.S.C.

§ 2515; United States v. Giordano, 416 U.S. 505, 527 (1974). Given the

central role of this erroneously-admitted evidence to the government’s

case at trial, the Defendants’ convictions must be vacated and the case

remanded for a new trial. See United States v. Delgado, 701 F.3d 1161,

1165 (7th Cir. 2012).

A. Standard of review

This Court reviews a district court’s necessity finding for abuse of

discretion. United States v. Long, 639 F.3d 293, 301 (7th Cir. 2011). Ti-

tle III does not require absolute necessity or that the wiretap be used as

a last resort. United States v. Campos, 541 F.3d 735, 746 (7th Cir.

2008). Rather, the purpose of the requirement is to ensure that wire-

taps are not routinely used as the initial step in a criminal investiga-

tion, United States v. McLee, 436 F.3d 751, 763 (7th Cir. 2006), or

“where traditional investigative techniques would suffice to expose the


24

crime,” Kahn, 415 U.S. at 153 n.12. A wiretap application that fails to

meet the necessity requirement cannot support a valid wiretap authori-

zation, and any communications intercepted pursuant to that defective

authorization must be suppressed. 18 U.S.C. § 2515; Giordano, 416

U.S. at 527.

B. The wiretap application did not establish that ordinary in-vestigative techniques failed or were unlikely to succeed in this specific investigation.

To satisfy Title III, the government must demonstrate “why, in the

particular case at hand, [ordinary investigative techniques] will be in-

sufficient.” United States v. Blackmon, 273 F.3d 1204, 1210 (9th Cir.

2001) (emphasis added); see also United States v. Lilla, 699 F.2d 99, 104

(2d Cir. 1983) (suppressing wiretap evidence because “the affidavit does

not enlighten us as to why this narcotics case presented problems dif-

ferent from any other small-time narcotics case”); United States v. Rob-

inson, 698 F.2d 448, 453 (D.C. Cir. 1983) (per curiam) (superseded by

statute on other grounds) (“The affidavit must show with specificity

why in this particular investigation ordinary means of investigation will

fail.”) (emphasis in original).


25

The government’s Title III affidavit in this case itemizes six inves-

tigative techniques—(1) grand-jury subpoenas, (2) search warrants, (3)

pen registers, (4) confidential sources, (5) undercover agents, and (6)

physical surveillance—and asserts that, individually and in combina-

tion, these techniques were insufficient to further the government’s in-

vestigation absent a wiretap. But the affidavit’s discussion of each

technique failed to address with the requisite specificity why these

techniques failed or were unlikely to succeed under the particular cir-

cumstances of this investigation.

Grand Jury Subpoenas and Search Warrants. None of the affida-

vit’s allegations regarding the use of grand jury subpoenas or search

warrants described problems unique or particular to this investigation:

financial institution records are often complex and take time to obtain

and analyze; grand jury testimony is typically unlikely to uncover evi-

dence of mens rea; and grand jury investigations always run the risk of

alerting subjects to be more cautious or to flee. R. 150, Ex. C ¶¶44–45;

see United States v. Gonzalez, Inc., 412 F.3d 1102, 1114 (9th Cir. 2005)

(“The affidavit rejects these tools by claiming they would likely reveal

the investigation to its targets. Such statements do not reasonably ex-


26

plain why traditional investigative tools are unlikely to succeed in a

particular investigation.”).

Here, the government applied for the wiretap before basic records

responsive to the government’s subpoenas, such as Durham’s tax re-

turns, had even been returned. R. 150, Ex. C ¶ 43. In other words, the

government apparently concluded that the use of grand jury subpoenas

had failed before it had an opportunity to assess the utility of the evi-

dence that it already had subpoenaed.

Likewise, the notion that the use of search warrants might thwart

efforts to identify additional co-conspirators is common to every investi-

gation. See R. 150, Ex. C ¶¶ 45, 49. For this reason, search warrants

are typically used near the conclusion of an investigation. The govern-

ment’s assertion that it lacked information regarding the whereabouts

of records and could not establish probable cause to search any specific

location at the time the Title III affidavit was executed, id. ¶ 46, simply

suggests the investigation was at an inchoate stage—not that a wiretap

was necessary. See Gonzalez, 412 F.3d at 1114 (“[T]erse rejection of the

possible productive use of grand jury subpoenas or search warrants


27

does not establish that these investigative techniques were reasonably

unlikely to work.”).

Pen Registers. The affidavit alleged that pen registers had been

utilized, but were of limited evidentiary value because they “cannot con-

firm the identity of participants in the conversations or the subject mat-

ter of the discussions.” R. 150, Ex. C ¶ 51. This is not an explanation of

why pen registers were ineffective in this particular investigation, but

merely a generalized description of their functionality. As such, this al-

legation is irrelevant to the Title III necessity analysis. See Blackmon,

273 F.3d at 1210 (full and complete statement of necessity requires

more than allegation that pen registers “only provide evidence that the

telephone was used, without showing the identity of the callers or the

nature or purpose of those communications”).

The government also argued that it needed a wiretap in part be-

cause it could not identify all of the participants in the alleged conspira-

cy. Yet, it did not even attempt to make robust use of pen registers—

despite the government’s own allegation that “information gleaned from

these devices and records has been of some use in establishing contact


28

between telephones.” R. 150, Ex. C. ¶ 51. Again, this is more indicative

of investigative impatience than lack of utility.

Confidential Sources. After acknowledging that two confidential

sources had provided reliable information, the affidavit claimed those

sources “were never formally employed by Durham, and consequently

are unable to provide information on Durham’s current activities and

accomplish the investigative objectives.” R. 150, Ex. C ¶¶ 35–38. But

formal employment is not a prerequisite for providing current infor-

mation, particularly in light of the government’s own allegation that

one of the confidential informants “has worked with Durham . . . for at

least the last 12 months, and continues in that capacity to the present.”

Id. ¶4(a) (emphasis added). Further, there is no indication in the affi-

davit that the government made any effort to recruit additional—and

potentially more fruitful—confidential sources before resorting to a

wiretap. Regardless, the limitations of confidential informants cited in

the wiretap application are merely a “generic problem[] of police inves-

tigation.” Blackmon, 273 F.3d at 1211.

Undercover Agents. As with confidential sources, the govern-

ment’s allegations regarding undercover agents were both internally in-


29

consistent and wholly generic. The affidavit alleged that undercover

agents met with low-level Fair employees, but that further use of un-

dercover agents was unlikely to succeed because it was doubtful that

they would be able to approach the Defendants to attain information.

R. 150, Ex. C ¶ 40(a). According to the government, “[t]he only possible

success of an undercover operation would require that someone get

hired to work with Durham.” Id. Even if true, the government regular-

ly places undercover agents inside suspect organizations, and it is un-

clear why the FBI could not have attempted to do so here. More broad-

ly, the notion that an undercover operation could not be successful un-

less the agent was hired to work with Durham is belied by the affida-

vit’s earlier allegation that, when any individual desired to invest more

than $200,000, Fair’s “owners and/or Board of Directors would contact

the investor.” R. 150, Ex. C ¶ 26. Here, for example, there was nothing

preventing an undercover agent from posing as an investor desiring to

invest more than $200,000. In fact, at an evidentiary hearing, even

Special Agent Halliden conceded that this technique likely would have

succeeded.5 R. 270 at 76:21-77:7.

5 “Q: You then indicated you thought it was impossible to get somebody close enough to


30

Instead, the failure to do so apparently was premised on the gen-

eralized assertion that individuals involved in complex fraud schemes

“are suspicious of anyone who they have not known for a long period of

time.” R. 150, Ex. C ¶ 40(b). Yet again, this is nothing more than a

statement of the inherent limitations of undercover investigations. The

affidavit explicitly concedes that these allegations derive from general

past experience with fraud schemes—but not from the pending investi-

gation. Id.

Although this Court has sometimes overlooked such obvious in-

vestigative failures, it has done so only when the organization under in-

vestigation was specifically alleged to be particularly insular or danger-

ous. See, e.g., United States v. Campos, 541 F.3d 735, 747 (7th Cir.

2008) (involving “close,” “secretive,” “dangerous” drug-trafficking organ-

ization); United States v. Zambrana, 841 F.2d 1320, 1331-32 (7th Cir.

1988) (closely run family organization). However, here the district court

expressly found that the opposite was true: the organization was not in-

Durham to talk to him, correct? A: If I invested $200,000 I probably could have, but I didn’t have $200,000.” R. 270 at 76:24-77:2. Special Agent Halliden’s post hoc rational-ization—“I didn’t have $200,000”—is unpersuasive. As his own affidavit explained, the Defendants would contact any investor who expressed an interest in investing over $200,000, R. 150, Ex. C. ¶ 26, the undercover agent would not actually have needed to invest the $200,000.


31

sular, but rather “used the unknowing services of many” Fair employ-

ees. Sent. Tr. at 110. Lacking any case-specific allegations about the

nature of the organization, “an unsupported assertion that general po-

lice experience indicates that ordinary investigative techniques reason-

ably appear unlikely to succeed . . . will not suffice” to establish necessi-

ty. United States v. Spagnuolo, 549 F.2d 705, 710 (9th Cir. 1977).

Physical Surveillance. Finally, the government alleged that phys-

ical surveillance “would not permit law enforcement to determine

whether Durham conducted business in a legal or an illegal manner . . .

or the decisions made or actions taken from the meeting.” R. 150, Ex. C

¶ 52. But this is of course true for any fraud or financial-crime investi-

gation—indeed, it is true for most crimes that do not involve contraband

or violence.

* * *

In short, all of the affidavit’s allegations purporting to establish

necessity are generic: they stem from the intrinsic shortcomings of the-

se investigative techniques in fraud-based investigations, not from case-

specific circumstances. The government cannot side-step the necessity

requirement with generalities. To satisfy Title III’s necessity require-


32

ment, the government must do more than “describe inherent limitations

of normal investigative procedures.” Blackmon, 273 F.3d at 1210.

Beyond relying on inadequate generalizations, the government

cannot, consistent with the requirements of Title III, seek wiretap au-

thorization while ignoring obvious “avenues of investigation that appear

both fruitful and cost effective.” United States v. Ippolito, 774 F.2d

1482, 1486 (9th Cir. 1985). The government ignored several such ave-

nues here.

Most glaringly, the affidavit does not mention the FBI contacting

the Ohio Division of Securities (“ODS”), Fair’s principal regulator. ODS

had investigated Fair earlier in 2009—subpoenaing documents and in-

terviewing Fair’s management, including Durham. Tr. 345:13-348-7;

S.A. 18:1-22; R. 168, Ex. R. This obvious, cost-effective avenue of inves-

tigation—contacting ODS, speaking with the Division’s investigators,

reviewing its findings, and obtaining Fair’s documents—would have

aided the federal investigation in the very ways alleged in the wiretap

affidavit to be futile. For example, the affidavit claimed that search

warrants were unlikely to succeed because the government did not

know where Fair’s records were located, and grand jury subpoenas


33

would not be effective because the government had yet to identify which

individuals were integral to the alleged scheme. R. 150, Ex. C ¶¶ 45,

46. ODS already had much of this information,6 or could have been

used to gather such information with little risk of compromising the

federal investigation.

What is more, the government made no effort to contact any third

party—Fair’s accountants and lenders, or former Fair employees, for

example—all of whom undoubtedly had useful information about the

company’s operations, personnel, records, and recordkeeping practices

and procedures. The government failed to pursue these most basic in-

vestigative techniques, and instead rushed immediately to what is sup-

posed to be a technique of last—not first—resort. Cf. S. Rep. No. 90-

1097, reprinted in 1968 U.S.C.C.A.N. 2112, 2160 (Title III enacted to fa-

cilitate evidence gathering in circumstances where there are no “books

and records available for law enforcement inspection”).

The Defendants do not suggest that the government was required

to undertake all of these investigative techniques to meet Title III’s ne-

cessity requirement if the affidavit sufficiently alleged that ordinary 6 Indeed, Durham’s trial counsel submitted an online request to ODS for publicly availa-

ble materials relevant to Fair and received voluminous materials in response. R. 239.


34

techniques were unlikely to succeed or would be too dangerous. But

parroting those words, and making only half-hearted attempts at dis-

crediting ordinary investigative techniques through nonspecific general-

ization—endeavoring merely to check boxes in an effort to obtain an ex-

pedient wiretap rather than actually determining if traditional investi-

gative techniques would suffice—fall woefully short of what Title III re-

quires: “the most precise and discriminate circumstances, which fully

comply with the requirement of particularity.” S. Rep. No. 90-1097,

1968 U.S.C.C.A.N. at 2191; see Kahn, 415 U.S. at 153 n.12 (necessity

requirement was “designed to assure that wiretapping is not resorted to

in situations where traditional investigative techniques would suffice to

expose the crime”); Lilla, 699 F.2d at 104 (necessity requirement “un-

derscore[s] the desirability of using less intrusive procedures”). This

Court should not countenance the government’s effort to circumvent Ti-

tle III’s necessity requirement by allowing the government to recite ge-

neric allegations of the inherent limitations of traditional investigative

techniques, particularly when obvious avenues of investigation were

casually disregarded.

C. The district court erred by failing to suppress the wiretap ev-idence, and the Defendants’ convictions must be vacated be-


35

cause the wiretap evidence was central to the government’s case.

Title III requires suppression of evidence derived from wiretaps

when the application “fail[ed] to satisfy any of those statutory require-

ments that directly and substantially implement the congressional in-

tention to limit the use of intercept procedures to those situations clear-

ly calling for the employment of this extraordinary investigative de-

vice.” Giordano, 416 U.S. at 527; see also 18 U.S.C. § 2515 (no wiretap

evidence or “evidence derived therefrom may be received in evidence in

any trial . . . if the disclosure of that information would be in violation of

this chapter.”). Accordingly, wiretap evidence must be suppressed

where the wiretap application failed to satisfy the necessity require-

ment. United States v. Rice, 478 F.3d 704, 710 (6th Cir. 2007); United

States v. Cline, 349 F.3d 1276, 1280 (10th Cir. 2003). The district court

therefore erred by failing to do so.

Erroneous admission of evidence requires this Court to vacate the

Defendants’ convictions unless the error was harmless. See United

States v. Wysinger, 683 F.3d 784, 803-04 (7th Cir. 2012). The test for

harmless error is “whether it appears beyond a reasonable doubt that

the error complained of did not contribute to the verdict obtained.”


36

United States v. Williams, 493 F.3d 763, 766 (7th Cir. 2007) (internal

quotations omitted).

Here the erroneous admission of the wiretap evidence was far

from harmless. On the contrary, the wiretap evidence was the center-

piece of the government’s case. Indeed, in its opening statement, the

government acknowledged the central role of the wiretaps to its case:

So while in this case the Government is going to present witness testimony and quite a few documents, this case is a little bit different, because you, as members of the jury, are going to be able to hear the Defendants’ voices discussing committing a crime in real time when they didn’t know that anyone else was listening.

Tr. at 7:7-12. The government’s closing argument also concentrated on

the wiretap evidence:

And then October, November of 2009, go back and listen to those wiretap calls. See if you hear Rick Snow and Tim Durham working together on a plan on how to hide those bad debts. . . . Go back and listen to those calls.

Tr. at 1643:4-10 (emphasis added).

The wiretaps were, in effect, the government’s star witness.

There can be little doubt that, in the mind of the average juror, the

prosecution’s case would have been significantly less persuasive absent

the improperly admitted wiretap evidence. The Defendants’ convictions

must therefore be vacated and the case remanded for a new trial.


37

D. Evidence obtained from the search of Fair, Fair Holdings, and Obsidian also must be suppressed because wiretap evi-dence was essential to the government’s search warrant ap-plication.

Title III’s exclusionary provision reaches beyond intercepted

communications, encompassing all “evidence derived therefrom.” 18

U.S.C. § 2515. In particular, Title III requires suppression of evidence

tainted by illegally obtained wiretap evidence: if evidence derived from

an improper wiretap is necessary to a subsequent probable cause affi-

davit, that subsequent authorization must also be suppressed.

Spagnuolo, 549 F.2d at 712; accord United States v. McHale, 495 F.2d

15, 17 (7th Cir. 1974) (per curiam). Here, the wiretap evidence incura-

bly taints the warrants used to search the offices of Fair, Fair Holdings,

and Obsidian.7

In its wiretap application, the government expressly conceded that

it lacked probable cause to search any particular location. R. 150, Ex. C

¶ 46 (“The FBI does not know and does not have any current source of

7 The government submitted two search warrant applications: one in the Southern Dis-

trict of Indiana to search the offices of Fair Holdings and Obsidian and one in the Northern District of Ohio to search the offices of Fair Finance. The Defendants properly preserved their challenge to the Fair Holdings and Obsidian search warrant. S.A. 1. This Court therefore reviews the district court’s findings de novo. See United States v. Vitek Supply Corp., 144 F.3d 476, 480 (7th Cir. 1998). The Defendants’ challenge to the Fair Finance search warrant is reviewed for plain error. See S.A. 1 n.1; United States v. Jackson, 189 F.3d 502, 508 (7th Cir. 1999).


38

information that establishes probable cause to search any specific loca-

tion for records of Durham’s criminal activity.”) Yet, just seventeen

days later Special Agent Halliden submitted an affidavit in support of a

warrant to search the Defendants’ offices, specifically citing “the Title

III phone intercepts” as the basis of his knowledge that the Defendants

oversaw their business operations and prepared financial records from

their Indianapolis offices.8 R. 154, Ex. AA ¶ 49-50.

Even by its own assessment, the government could not have estab-

lished probable cause to search Fair, Fair Holdings, and Obsidian with-

out evidence derived from the illegal wiretap. Consequently, the search

warrant must fall with the wiretap, and all evidence derived from it

must be suppressed, further requiring that Defendants’ convictions be

vacated and the case remanded for a new trial. Spagnuolo, 549 F.2d at

712.

8 While the Ohio warrant application does not appear in the record, the government con-

ceded below that “the Indiana affidavit and the Ohio affidavit contain nearly identical factual allegations.” R. 188 at 2 n.2.


39

II. The district court should have ordered a mistrial when the prose-cutor took unfair advantage of a plainly inadvertent misstatement by defense counsel during closing arguments.

Prosecutors have a special obligation to remain well within the

bounds of propriety and fairness at all times. United States v. Meeker,

558 F.2d 387, 389 (7th Cir. 1977); see also Berger v. United States, 295

U.S. 78, 88 (1935) (“It is as much [the prosecutor’s] duty to refrain from

improper methods calculated to produce a wrongful conviction as it is to

use every legitimate means to bring about a just one.”). Here, the pros-

ecutor on rebuttal stepped outside those boundaries by taking ad-

vantage of an inadvertent misstatement by Cochran’s counsel during

closing argument. By doing so, the prosecutor usurped the jury’s func-

tion, distorted the burden of proof, and ultimately violated the Defend-

ants’ due process right to a fair trial. Accordingly, all three Defendants

are entitled to a new trial on all counts of conviction.

A. Factual background

During his closing argument, Cochran’s trial counsel (William

Dazey) made the following statement:

…[A]nd there may have been some reference today [by Durham’s counsel during closing] of Mr. Durham having a right hand and a left hand that performed various functions along the way. And I hope for Mr. Durham’s sake, and I hope for Mr. Cochran’s sake, that his counsel’s presentation is persuasive. And I hope that


40

your finding might be that there is a reasonable doubt as to whether Mr. Durham participated in a scheme to defraud. That is none of my business. The answer is, no, I think there was a scheme to defraud. The question is, was there anybody else that was let in on that scheme? Was there anybody that knew what the conspiracy was that was charged in this indictment? Was there anybody else that knew what the plan was?

S.A. 23:21-24:8 (emphasis added).

On rebuttal, the prosecutor asserted to the jury that Cochran’s

counsel had conceded the scheme to defraud:

Let’s talk about Mr. Cochran. Now, you heard Mr. Cochran’s at-torney tell you that there was a scheme to defraud but that Mr. Cochran didn’t have a role in it. Well, Mr. Cochran’s role was ab-solutely critical to making this thing happen.

S.A. 26:1-5 (emphasis added). Trial ended for the day after the govern-

ment’s rebuttal argument was concluded. Tr. 1644:12-14.

The next morning, Durham and Snow moved for a mistrial, argu-

ing that Dazey’s misstatement was improper as a statement of counsel’s

personal opinion of the evidence. App. 236:8-38:12. When asked about

Dazey’s comment, the prosecutor acknowledged that the “thrust” of

Dazey’s argument sounded in the alternative: “I think this isn’t the

first criminal trial there are multiple Defendants and one Defendant

has made the argument maybe there was a crime but I was not involved


41

in it . . .” App. 237:24-38:4. The district court, after replaying the audio

recording of Dazey’s closing argument, reached the same conclusion.

App. 238-240. Dazey confirmed that his intention was to argue in the

alternative. App. 240:5-14. The court denied the motion targeted at

Dazey’s comments. App. 239:23-40:4.

B. Standard of review

Because the Defendants’ aimed their objection at Dazey’s argu-

ment, rather than specifically at prosecutorial misconduct, a plain error

standard of review generally would apply.9 United States v. Bell, 624

F.3d 803, 811 (7th Cir. 2010) (quoting United States v. Bowman, 353

F.3d 546, 550 (7th Cir. 2003)). This Court employs a two-step test in

analyzing claims of prosecutorial misconduct. First, the Court deter-

mines whether the prosecutor’s statement, in isolation, was improper.

Second, if it was improper, the Court considers whether the impropriety

prejudiced the Defendants. United States v. Clark, 535 F.3d 571, 580

9 Durham’s counsel arguably preserved his objection to the prosecutor’s statement for this

appeal when, in making the motion for a mistrial, he noted that “[t]he Government picked up on it in their final close.” App. 236:16. In addition, the court said in ruling on the motion, “I also don’t know that -- it is prosecutorial misconduct that might result in a violation of the right to fair trial.” App. 240:16-18. Because the district court erred under even under a plain error standard of review, its failure to order a mistrial would be error under the abuse of discretion standard, which applies when the issue was properly preserved. U.S. v. Sandoval, 347 F.3d 627, 631 (7th Cir. 2003).


42

(7th Cir. 2008) (citations omitted); United States v. Badger, 983 F.2d

1443, 1450 (7th Cir. 1993).

C. The prosecutor’s comments were improper.

The prosecutor should never have referred to Dazey’s closing ar-

gument. First, regardless of its substance, defense counsel’s opinion

about the evidence is not itself evidence the jury may use in determin-

ing the existence of the scheme. See United States v. Wasko, 473 F.2d

1282, 1282 (7th Cir. 1973) (reversing a conviction where the prosecutor

stated an opinion in closing argument).

Second, even though he knew or should have known that Dazey

had made an argument in the alternative, App. 237-38, the prosecutor

unfairly mischaracterized Dazey’s argument as conceding a scheme to

defraud, and did so in rebuttal, leaving the improper remarks unchal-

lenged. Regardless of the prosecutor’s intent, his misrepresentation in-

vited the jury to reject the presumption of innocence as well as the bur-

den of proof, and to rely instead on counsel’s phantom concession. See

United States v. Clark, 535 F.3d 571, 580-81 (7th Cir 2008) (finding a

prosecutor’s characterization of a defendant’s anticipated closing argu-


43

ment “improper” because it deprived the defendant of the presumption

of innocence).

Courts have deemed similar mischaracterizations and misrepre-

sentations in closing argument improper. For example, in United States

v. Lorefice, the prosecutor argued in closing that a defense witness, who

was the defendant’s attorney for the transaction underlying the charg-

es, had “learned there was a scheme to defraud.” 192 F.3d 647, 651 (7th

Cir. 1999). This Court found the statement improper because it “in ef-

fect invited the jury to infer that [the witness, the defendant’s attorney,]

thought he was guilty.” Id. at 652 (finding the statement improper but

not sufficiently prejudicial to warrant a new trial in part because, un-

like here, the defendant’s attorney had an opportunity to address the

comment in closing). Similarly, in Davis v. Zant, the Eleventh Circuit

held improper the prosecutor’s misrepresentation of the defendant’s

theory of defense. 36 F.3d 1538, 1548 (11th Cir. 1994). Noting the

prosecutor’s special duty of integrity, the court held that “[l]ittle time

and no discussion is necessary to conclude that it is improper for a pros-

ecutor to use misstatements and falsehoods.” Id. Likewise, in United

States v. Dorr, the Fifth Circuit reversed where the prosecutor suggest-


44

ed that “defense counsel was contending that both judges were involved

in a conspiracy to convict the appellants”—even though “[n]o such ar-

gument by defense counsel was ever presented.” 636 F.2d 117, 120 (5th

Cir. 1981); see also Anthony v. United States, 935 A.2d 275, 283-84 (D.C.

2007) (reversing the defendant’s convictions on the charges tainted by

the prosecutorial misconduct where the prosecutor misstated the evi-

dence in rebuttal argument).

Here, the prosecutor’s statement unfairly mischaracterized de-

fense counsel’s argument. It invited the jury to rely on Dazey’s sup-

posed concession or opinion as to the existence of the scheme, thereby

distorting the jury’s function and lowering the government’s burden of

proof. United States v. Vargas, 583 F.2d 380, 386 (7th Cir. 1978) (not-

ing that prosecutors’ “statements that in effect distort the burden of

proof” can be grounds for reversal). Therefore, the statement was im-

proper.

D. The comments prejudiced all three Defendants.

In determining prejudice, this Court considers the following fac-

tors: (1) whether the prosecutor misstated the evidence; (2) whether the

remark implicated a specific right; (3) whether the defendant invited


45

the remark; (4) whether the district court provided a curative instruc-

tions, and the efficacy of that instruction; (5) whether the defendant had

an opportunity to rebut the remark; and (6) the weight of the evidence

against the defendant. Clark, 535 F.3d at 580-81; see also United States

v. Amerson, 185 F.3d 676, 686 (7th Cir. 1999).

Analysis of the six factors demonstrates that reversal is necessary.

First, the prosecutor misstated Cochran’s counsel’s argument and in do-

ing so misrepresented the lynchpin of all three Defendants’ theory of de-

fense, namely the absence of a scheme to defraud. Although the tran-

script of Dazey’s comments might, at first blush, appear to support

what the prosecutor said on rebuttal, it was immediately clear to the

district court upon review of the audio recording the following morning

that Cochran’s counsel had not conceded anything but instead made an

alternative argument. App. 238:13-41:4. Indeed, the government

seemed to agree. When asked about Dazey’s comment the following

morning, the prosecutor told the court that he could not “remember the

exact phrasing” but suggested that the “gist” of Dazey’s argument

sounded in the alternative. App. 237:24-38:4 (“I think this isn’t the first

criminal trial there are multiple Defendants and one Defendant has


46

made the argument maybe there was a crime but I was not involved in

it and that is not improper.”) (emphasis added). When considered in

context, the prosecutor could not reasonably have believed Dazey’s re-

mark meant what the prosecutor argued it meant—that is, that a de-

fendant had conceded that there was a scheme to defraud.

Second, the prosecutor’s remark implicates the fundamental pro-

tections of the presumption of innocence and burden of proof. The re-

mark invited the jury to infer a critical element of guilt as to all three

Defendants based on a comment or opinion from counsel, rather than on

the evidence. See Vargas, 583 F.2d at 386.

Third, the Defendants did not invite the error. Durham and Snow

had no involvement in the issue, and nor did Cochran, whose counsel

merely misspoke.

Fourth, the jury was not specifically instructed to disregard the

prosecutor’s remark.

Fifth, the Defendants had no ability to respond to or correct the

remark, as it was made on rebuttal. See United States v. Brisk, 171

F.3d 514, 524 (7th Cir. 1999).


47

Sixth, the evidence against the Defendants was not strong absent

the prosecutor’s improper statement. See United States v. Simpson, 479

F.3d 492, 504 (7th Cir. 2007), abrogated on other grounds by United

States v. Boone, 628 F.3d 927, 933 (7th Cir. 2007). In a complex case

like this, the prosecutor’s suggestion that Dazey had made a straight-

forward admission of a key element must have had immeasurable ap-

peal to the jury. Before this statement, the jury faced the task of de-

termining whether there was a scheme to defraud—the key issue on

which each claim against the Defendants hinged—after a multi-week

trial based on contested testimony and documents, including financial

statements related to a complex business structure, several loans be-

tween a variety of related and unrelated entities, and abstract account-

ing principles. To a jury starved for something it could understand, the

prosecutor’s endorsement of Dazey’s misstatement must have seemed a

comprehensible proposition with which it could too easily agree. It al-

lowed the jurors to take their focus off of the loans and the accountants

and the numbers—in other words, the actual evidence—and obscured

the government’s inability to prove the elements of the crime beyond a

reasonable doubt.


48

The prosecutor’s statement was highly prejudicial. The govern-

ment made it seem as though at least one of the Defendants had—at

the last moment, and only after being confronted with the trial evi-

dence—abandoned the Defendants’ cohesive, unified defense. It gave

the jury the mistaken impression that a Defendant—one of only three

people who really knew what had happened between Snow, Durham

and Cochran—had admitted the core element of the case for all three.

The prosecutor’s improper conduct so infected the trial with un-

fairness as to make the resulting conviction a denial of due process. See

United States v. Richards, 719 F.3d 746, 767 (7th Cir. 2013) (reversing

where the prosecutor’s misconduct in closing argument called into doubt

the fairness of the defendant’s trial). It affected Defendants’ convictions

on each count as the alleged scheme to defraud was the common thread

tying together each count. Therefore, in light of the prosecutorial mis-

conduct, the convictions of all three Defendants should be vacated on all

counts and the case remanded for a new trial.

III. The government failed to introduce any evidence that the wires challenged in Counts Two and Five were “in furtherance” of any scheme to defraud.


49

The jury convicted Durham of two counts of wire fraud based ex-

clusively on evidence that these two wires took place and in the absence

of any proof connecting the wires to a scheme to defraud. With no evi-

dence in the record to support this essential element of wire fraud,

Durham’s conviction on those counts cannot stand. United States v.

Groves, 470 F.3d 311, 327-28 (7th Cir. 2006). This Court, therefore,

should reverse Durham’s convictions on Counts Two and Five, order a

judgment of acquittal entered on these two counts, vacate his sentence

on the remaining counts, and remand the remaining counts for resen-

tencing.


“In considering a challenge to the sufficiency of the evidence to

sustain a conviction,” this Court reverses “only if no rational trier of

fact, viewing the evidence in the light most favorable to the Govern-

ment, could have found the defendant’s guilt beyond a reasonable

doubt.” United States v. Owens, 697 F.3d 657, 658 (7th Cir. 2012). This

standard of review applies where a defendant, like Durham, moved for

acquittal at the close of the government’s evidence and at the close of all

the evidence. App. 243:24-25, 247:22-248:6; see United States v. Brandt,


50

546 F.3d 912, 915 (7th Cir. 2008). Where, as here, “the record contains

no evidence, regardless of how it is weighed, upon which a rational trier

of fact could find guilt beyond a reasonable doubt,” the conviction must

be overturned. United States v. Sanchez, 615 F.3d 836, 842 (7th Cir.

2010) (quoting United States v. Starks, 309 F.3d 1017, 1021 (7th Cir.

2002)).

B. There was no evidence that the wires charged in Counts Two and Five were “in furtherance” of any scheme to defraud.

To sustain a conviction for wire fraud, there must be evidence of

“‘(1) the defendant’s participation in a scheme to defraud; (2) the de-

fendant’s intent to defraud; and (3) the defendant’s use of the . . . wires .

. . in furtherance of the fraudulent scheme.” United States v.

Radziszewski, 474 F.3d 480, 484-85 (7th Cir. 2007) (quoting United

States v. Davuluri, 239 F.3d 902, 906 (7th Cir. 2001)). Federal law

criminalizes “only those limited instances in which the use of the [wires]

is a part of the execution of the fraud.” Kann v. United States, 323 U.S.

88, 95 (1944); see also 18 U.S.C. § 1343 (wire fraud covers wire trans-

missions “for the purpose of executing such scheme or artifice”).10

10 “Cases construing the mail fraud statute are equally applicable to the wire fraud stat-

ute.” United States v. Stephens, 421 F.3d 503, 507 (7th Cir. 2005) (quoting United States v. Wingate, 128 F.3d 1157, 1162 n. 3 (7th Cir. 1997)).


51

Therefore, the wire must be “incident to an essential part of the

scheme.” United States v. Maze, 414 U.S. 395, 411 (1974) (quoting Parr

v. United States, 363 U.S. 370, 390 (1960)); see also R. 353 at 33 (“With

respect to wire fraud, the government must prove that an interstate

wire communication was used to carry out the scheme, or was inci-

dental to an essential part of the scheme.”). Put another way, the wire

must be “causally linked to the scheme’s success,” such that it “make[s]

the fraud possible or facilitate[s] it.” United States v. Kwiat, 817 F.2d

440, 443 (7th Cir. 1987).

Here, the government failed to offer any evidence connecting the

wires charged in Counts Two and Five to any alleged scheme to defraud

or any part of the alleged scheme to defraud. In fact, the government

failed to connect the wire transfers charged in these counts to any-

thing—criminal or otherwise. Where the record is “devoid of evi-

dence”—no testimony, no taped telephone conversations, no e-mail cor-

respondence, no document whatsoever—on an element of the offense, a

conviction can not stand. Groves, 470 F.3d at 324.

With respect to each count, the government sought admission of a

single exhibit—Exhibit 211 for Count Two and Exhibit 213 for Count


52

Five. S.A. 19:8-22:11, 141-142. Each exhibit originally consisted of

multiple pages, with the first page documenting a wire transfer be-

tween Fair and Fair Holdings, and the remainder presumably intended

to establish some connection to a scheme to defraud. But, the govern-

ment ultimately introduced only the first page of each exhibit—setting

forth nothing more than the fact of each wire—into evidence. S.A.

20:12-24, 21:8-17, 141-142. As a result, the only evidence in the record

with respect to Counts Two and Five was that on two particular occa-

sions, money was sent between two companies, Fair and Fair Holdings.

Id. During the remainder of trial, the government elicited no further

testimony about either wire and offered no evidence that these wire

transfers made “the fraud possible or facilitate[d] it” in anyway. Kwiat,

817 F.2d at 443.11 Accordingly, there is no basis for a juror to infer from

the simple movement of money between two companies that the trans-

fers were “incident to an essential part of [a fraudulent] scheme.” Maze,

414 U.S. at 411.

11 In contrast, with respect to Count Three, for example, the government introduced simi-

lar documentary evidence with respect to the fact of a wire transfer, S.A. 21:25-22:11, but then also offered testimony tracing the proceeds of the wire to alleged personal ex-penditures by the Defendants, Tr. 910:15-911:16. No similar evidence—or any evidence whatsoever for that matter—was offered with respect to Counts Two and Five.


53

Indeed, the only other mention of either count was in closing,

when the government argued that Durham made a “$250,000 wire of

investor money [Count Two] so he could rebuild his garage.” Tr.

1635:11-13. Of course, with no evidentiary support—indeed, no men-

tion whatsoever during the trial of Durham constructing a garage—the

argument was improper. See United States v. Henry, 2 F.3d 792, 795

(7th Cir. 1993) (“It is fundamental that counsel cannot rely or comment

on facts not in evidence during closing argument.”). But regardless,

closing argument is not proof and Durham’s convictions on Counts Two

and Five cannot stand without evidence in the record to support an es-

sential element of the charged crimes. See Groves, 470 F.3d at 327-28.

Durham’s convictions on Counts Two and Five should therefore be

reversed and a judgment of acquittal entered on both counts. Burks v.

United States, 437 U.S. 1, 18 (1978). In addition, Durham’s sentence

with respect to the remaining counts should be vacated, and “in accord-

ance with [the Court’s] usual practice,” his case remanded for resen-

tencing. United States v. Holzer, 840 F.2d 1343, 1352 (7th Cir. 1988)

(remanding for resentencing after acquittal on some but not all counts

because “the judge conceivably may have given him a longer sentence


54

because he erroneously believed that [he] had committed another

crime”); accord United States v. Adams, 625 F.3d 371, 386 (7th Cir.

2010); United States v. Colon, 549 F.3d 565, 572 (7th Cir. 2008).

IV. The district court erred by rejecting the proposed securities fraud jury instruction.

The district court’s erroneous rejection of the proposed theory-of-

defense jury instruction tainted Defendants’ securities fraud convictions

on Count Twelve. “[T]here are circumstances where a pattern instruc-

tion will be insufficient and where a criminal defendant is entitled to an

explicit jury instruction encapsulating his theory of defense.” United

States v. Irorere, 228 F.3d 816, 825 (7th Cir. 2000). A defendant is enti-

tled to a particular theory of defense instruction if: (1) the instruction

represents an accurate statement of the law; (2) the instruction is sup-

ported by the evidence; (3) the instruction is not already part of the

charge; and (4) failure to include the instruction would deny the de-

fendant a fair trial. United States v. Swanquist, 161 F.3d 1064, 1075

(7th Cir. 1998). “If the defendant can satisfy these four criteria, the tri-

al court’s decision to not give the theory of defense instruction provides

grounds for reversal.” United States v. Hach, 162 F.3d 937, 945 (7th

Cir. 1998).


55

The Defendants’ theory of defense to securities fraud was that “a

scheme to delay is not a scheme to defraud” and that many of the al-

leged misrepresentations on which the government built its case related

to, at most, delaying interest payments to investors, or encouraging in-

vestors to delay redemptions of investment certificates—not the pur-

chase or sale of a security by any investor. Tr. 1577:9-24, 1578:16-17;

S.A. 145. For the jurors to understand the legal import of this theory of

defense, it was critical that they understand the difference between, on

one hand, misrepresentations made in connection with a purchase or

sale of a security, and, on the other, misrepresentations made to delay

interest payments to investors or to cause investors to hold previously

purchased investment certificates. To highlight this vital distinction,

Defendants proposed the following jury instruction for the securities

fraud charge:

First, there must be a purchase or sale of a security. This means that the transfer of ownership of an asset is required for a purchase and sale. Simply continuing to holding [sic] a security does not qualify. Furthermore, delaying an interest payment or redemption of an Investment Certificate is not a purchase or sale of a security. Second, to satisfy the ‘in connection with’ requirement, the government must prove beyond a reasonable doubt that there was some nexus or relationship between the alleged


56

untrue statements of material fact and the purchase or sale of interests in Fair Finance. The misrepresentations must have some direct pertinence to a securities transaction. Evi-dence that defendants made untrue statements or omissions of material fact following the purchase of an Investment Cer-tificate is inadequate. Likewise, evidence that investors pur-chased or sold interests in spite of defendants’ alleged un-true statements of material fact is insufficient. Instead, the government must prove beyond a reasonable doubt that in-vestors actually purchased or sold some or all of their In-vestment Certificates in Fair in connection with the defend-ants’ alleged untrue statements of material fact.

S.A. 145.

The district court rejected the proposed jury instruction and in-

stead gave a set of instructions simply mirroring the statutory lan-

guage. The instructions as given told jurors only that the misrepresen-

tation must have been made “in connection with the purchase or sale of

a security”—without any mention of the legal distinction vital to a

proper understanding of that language in light of the testimony and ev-

idence at this trial. S.A. 182. This was error. It allowed the jurors to

consider mistakenly evidence of misrepresentations made to delay

payments—acts that do not rise to securities fraud—when deciding

whether to convict Defendants of securities fraud.12 Absent the pro-

12 The Defendants are entitled to appellate review of this error notwithstanding the fact

that the prison term to which each Defendant was sentenced based on their securities fraud convictions runs concurrent to other portions of their sentences. See App. 3; App.


57

posed instruction, it is impossible to know whether Defendants were

convicted based on evidence clearly insufficient to support a securities

fraud conviction. Given the importance of the proposed instruction to

Defendants’ theory of defense, their conviction for securities fraud must

be vacated. See Hach, 162 F.3d at 945.

A. Standard of review.

This Court reviews de novo a properly preserved objection to a dis-

trict court’s decision not to instruct the jury on a defendant’s theory of

defense. Irorere, 228 F.3d at 825. Here, Durham explicitly objected to

the district judge’s rejection of the proposed jury instruction. App.

246:1-10; see also United States v. Requarth, 847 F.2d 1249, 1253-54

(7th Cir. 1988). Thus, the district court’s refusal to give the instruction

is reviewed de novo.13

74; App. 144. At a minimum, Defendants were each assessed a monetary special as-sessment for each count, App. 6, 77, 147, 269, 283, 297; R. 426 ¶ 147; R. 421 ¶ 148; R. 424 ¶ 132, which renders the “concurrent sentences doctrine” inapplicable. Steffes v. Pollard, 663 F.3d 276, 280-81 (7th Cir. 2011) (citing Ray v. U.S., 481 U.S. 736, 737 (1987)).

13 Counsel for Cochran and Snow did not object to the court’s rejection of the proposed jury instruction. Thus, the appropriate standard for them may be plain error. See Irorere, 228 F.3d at 825.


58

B. The proposed instruction was an accurate statement of law.

In rejecting the proposed jury instruction, the district court erro-

neously refused an accurate statement of law and created a risk that

the jury convicted the Defendants of securities fraud on the basis of ir-

relevant evidence. Even when interpreted broadly, “in connection with”

requires the misrepresentation or omission to occur in conjunction with

a purchase or sale of a security. See United States v. O’Hagan, 521 U.S.

642, 651 (1997); Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit,

547 U.S. 71, 85 (2006).14

It is well established that fraudulently inducing an investor to re-

tain a security does not satisfy the “in connection with” requirement for

a securities fraud conviction, unless there has been a significant change

in the nature of the investment or additional funds are committed.

Abrahamson v. Fleschner, 568 F.2d 862, 868 (2d Cir. 1977); Krim v.

BancTexas Grp., Inc., 989 F.2d 1435, 1443 n. 7 (5th Cir. 1993); Otto v.

Variable Annuity Life Ins. Co., 816 F. Supp. 458, 461 (N.D. Ill. 1991).

Rather, continued performance of rights and obligations established up-

14 Courts look to civil, in addition to criminal, precedent when examining the elements of

criminal securities fraud. See O’Hagan, 521 U.S. at 651 (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 (1976)).


59

on prior purchase of a security is “nothing more than a continuation of

the status quo . . . and d[oes] not constitute purchases or sales.” Roth-

stein v. Seidman & Seidman, 410 F. Supp. 244, 247 (S.D.N.Y. 1976) (in-

ternal quotation omitted).

Here, Fair’s investors’ decision not to redeem their investment

certificates did not constitute a purchase or sale. When investors pur-

chased a Fair investment certificate, they were entitled to interest on

their investment for a set period of time. S.A. 35. At the end of that

period, they could decide to redeem their certificates, at which point

their principal and any outstanding interest would be repaid. Id. Al-

ternatively, an investor could simply continue to hold the certificate.

Id. When retained past maturity, the principal remained constant and

additional interest was paid according to the original terms. Id. Noth-

ing would change. The certificates did not automatically roll over into

new securities and no new cash expenditures were required. Id. Re-

taining a certificate past maturity was merely a continuation of the

status quo. Similarly, statements made with respect to the timing of

interest payments of an already purchased security are not “in connec-

tion with” the purchase or sale or a security. Abrahamson, 568 F.2d at


60

868; Otto, 816 F. Supp. at 461. Therefore, Defendants’ proposed jury

instruction was an accurate statement of law.

C. The proposed instruction was supported by the evidence.

Much of the government’s evidence of misrepresentations related

to delayed interest payments and redemptions. Accordingly, the evi-

dence at trial supported the proposed jury instruction.

A theory need only have “some foundation in the evidence, howev-

er tenuous,” to render a theory-of-defense instruction proper. United

States v. Van Allen, 524 F.3d 814, 823 (7th Cir. 2008). The relevant

evidence need not be so compelling that the jury could reach only one

conclusion—indeed, that conclusion need not even be more likely than

not. See United States v. Meyer, 157 F.3d 1067, 1075 (7th Cir. 1998)

(theory of defense supported “if there is evidence sufficient to create a

reasonable doubt of guilt in the mind of a reasonable juror” (internal

quotations omitted)). As long as a reasonable jury may have believed

the alleged misrepresentations were made to delay interest payments

or redemptions, it does not matter if there is also evidence to the con-

trary. See id. Instead, “[i]t may often be better to give the proposed ju-

ry instruction and let the jury sort it out.” Id. at 1076.


61

The government adduced considerable evidence at trial of misrep-

resentations made by Defendants simply to delay payments to inves-

tors and delay redemptions. For example, the government’s examina-

tions of former Fair employees Douglas DeRose and Matthew Ogden,

focused almost exclusively on establishing that the Defendants pur-

portedly lied to delay interest payments to and redemptions by inves-

tors. Tr. 13:22-14:5, 256:24-58:2, 262:21-63:21, 284:18-25, 294:7-12,

649:20-59:24, 657:18-59:24, 1558:13-17. The government’s direct ex-

amination of David Spector likewise detailed Defendants’ alleged ef-

forts to delay Spector’s redemption of his investment certificate. Tr.

15:21-16:2, 717:11-722:2. The government’s direct examination of

Donald Russell also focused on the Defendants’ attempts to delay pay-

ments. Tr. 511:11-14:18. Further, much of the wiretap evidence—

which the government called the “most important” evidence in the

case, Tr. at 6:21-22—involved alleged misrepresentations made only to

delay payments to current investors, not to solicit additional investors.

See Tr. Exs. 78A, 79A, 80A, 81A.

Tellingly, the government announced in its opening statement

that it would show the Defendants lied to “investors who were calling


62

and complaining about why their checks were arriving late”—not that

they lied to induce new sales. Tr. 7:2-5. And, it highlighted this evi-

dence again in its closing argument. Tr. 1554:18-20, 1558:1-4, 1558:13-

17, 1562:11-17. The government urged the jury to focus on evidence re-

lated to delayed payments and redemptions when rendering its securi-

ties fraud verdict.

All of this evidence supports Defendants’ theory of defense that

the government’s evidence at most established a “scheme to delay,” not

a “scheme to defraud.” See Tr. 1577:9-24, 1578:16-17. Had the jury

been properly instructed, there was substantial evidence for a reasona-

ble juror to believe that such misrepresentations were only made in an

effort to delay payments to investors. “Given the record as a whole,

had the jury been properly focused on the distinction” between a pur-

chase or sale and mere delay, the jury reasonably may have found the

government did not satisfy the “in connection with” requirement. Mey-

er, 157 F.3d at 1075. Consequently, the district court’s rejection of De-

fendants’ proposed jury instruction was error. Since there is a strong

possibility that the jury misinterpreted this evidence as supporting a

securities fraud conviction, the conviction should be vacated.


63

D. Defendants’ theory was not already part of the charge.

The district court should have accepted Defendants’ proposed in-

struction because it was not already part of the securities fraud charge.

A defendant is entitled to a specific jury instruction unless the jury was

adequately instructed on the defendant’s theory of defense, based on a

review of the instructions in their entirety. United States v. Reed, 539

F.3d 595, 599 (7th Cir. 2008). The district court’s instructions did not

adequately express Defendants’ theory of defense because the instruc-

tions as given did not explain what constitutes “a purchase or sale”

such that the jury could properly evaluate whether the alleged misrep-

resentations satisfied the “in connection with” requirement of securi-

ties fraud, or merely related to a delayed interest payment or redemp-

tion.

Instead, the district court’s instruction merely parroted the stat-

ute’s “in connection with a purchase or sale” language without drawing

the key distinction upon which the Defendants’ theory of defense re-

lied. S.A. 182. The instructions as given to a lay jury did not high-

light—or even suggest—that mere retention of a security was insuffi-

cient to satisfy the “in connection with” requirement. See Griffin v.


64

United States, 502 U.S. 46, 59 (1991) (“Jurors are not generally

equipped to determine whether a particular theory of conviction sub-

mitted to them is contrary to law. . . . [L]eft the option of relying upon a

legally inadequate theory, there is no reason to think that their own

intelligence and expertise will save them from that error.”); see also

Gehring v. Case Corp., 43 F.3d 340, 344 (7th Cir. 1995) (“Judges ought

not assume that jurors come armed with copies of H.L.A. Hart & Tony

Honoré, Causation and in the Law (2d ed. 1985), and the academic

background necessary to put its distinctions to use.”) Thus, the in-

structions as given did not fairly or adequately reflect Defendants’ the-

ory.

E. The failure to include Defendants’ instruction denied them a fair trial.

The district court’s rejection of Defendants’ proposed instruction

denied them a fair trial by creating a risk that jurors relied on evidence

showing alleged misrepresentations made to delay payment when they

convicted the Defendants of securities fraud. In determining whether

failure to include a proposed jury instruction denied the appellant a

fair trial, the key consideration is whether a reasonable jury may have


65

reached a different verdict had the proposed instruction been given.

See Meyer, 157 F.3d at 1075.

In Meyer, the Seventh Circuit held that the defendant in a drug

conspiracy case was denied a fair trial because the trial court’s rejec-

tion of his proposed jury instruction may have cost him a not-guilty

verdict. Id. at 1075. The trial court had rejected the defendant’s pro-

posed jury instruction that a mere buyer-seller relationship between a

defendant and members of an alleged conspiracy was insufficient for a

conspiracy conviction. Id. at 1074. The Seventh Circuit reversed the

conviction on the grounds that the jury may have rendered a not-guilty

verdict “had the jury been properly focused on the distinction between

a conspiracy and a mere buyer-seller relationship.” Id. at 1075.

That is similar to what happened here. The jury was not informed

of a key distinction that may have changed the verdict. The govern-

ment presented evidence of alleged misrepresentations made to delay

payments. Defendants’ theory of defense was heavily dependent on a

distinction that went to the core of the securities fraud charge: whether

inducing retention of a security by investors or delaying payments to

investors was considered “in connection with a purchase or sale.” Alt-


66

hough Defendants were allowed to present this theory of defense

throughout the trial, the defense could not be effective without proper

instruction of the jury. By refusing to properly instruct the jury on this

distinction, the district court created a risk of juror confusion that may

have robbed Defendants of a not-guilty verdict for securities fraud. A

conviction clouded by the district court’s erroneous rejection of Defend-

ants’ proposed jury instruction cannot stand. Defendants’ convictions

on Count Twelve should be vacated and the case remanded for resen-

tencing. See Hach, 162 F.3d at 945.

V. The district court failed to follow proper sentencing procedures.

The district court made three fundamental procedural errors

when sentencing the Defendants. Each requires Defendants’ sentences

be vacated and the cases remanded for resentencing. First, the district

court failed to calculate correctly the Sentencing Guidelines range when

it made erroneous findings as to the intended and actual losses caused

by the Defendants’ conduct, failing in the process to even address De-

fendants’ specific objections to the portions of their PSRs relating to the

loss calculations. This error had a substantial effect at sentencing, as


67

the loss increase was unequivocally the controlling factor in the Sen-

tencing Guidelines range calculation for each Defendant.

Second, the district court explicitly and affirmatively refused to

give meaningful consideration to the need to avoid unwarranted sen-

tencing disparities, as required by 18 U.S.C. § 3553(a)(6). Indeed, the

district court mistakenly believed that it was not permitted to consider

sentences imposed in other districts, several of which had been brought

to the district court’s attention in advance of and at sentencing. Yet,

this is precisely what section 3553(a)(6) requires.

Third, the district court applied its erroneous actual loss calcula-

tion when entering the restitution order. The district court’s failure to

account for extrinsic factors that contributed to the loss—a requirement

to determine properly the loss caused by a defendant’s conduct—

rendered the restitution order improper as a matter of law.

None of these errors was harmless. The district court’s failure to

follow proper sentencing procedures is especially problematic here be-

cause the district court acknowledged it was effectively sentencing Mr.

Durham and Mr. Cochran to life sentences given their ages at the time

of sentencing. App. 265:9-13; see also Sent. Tr. 148:10-149:3; App.


68

279:13-15. As this Court has repeatedly recognized, “‘death in prison is

not to be ordered lightly.’” United States v. Patrick, 707 F.3d 815, 820

(7th Cir. 2013) (quoting United States v. Wurzinger, 467 F.3d 649, 652

(7th Cir. 2006)). “‘[A] sentence of death in prison is notably harsher

than a sentence that stops even a short period before.’” Id. Sentencing

courts are thus admonished to give “pause” before sentencing a defend-

ant to life in prison. Id. Here, despite the need for serious considera-

tion before sentencing a defendant to life imprisonment, procedural er-

rors tainted Defendants’ sentences. Accordingly, their sentences cannot

stand.


“[W]hether a district court followed proper procedures in sentenc-

ing” is reviewed de novo. United States v. Trujillo-Castillon, 692 F.3d

575, 578 (7th Cir. 2012). “[F]ailing to calculate (or improperly calculat-

ing) the Guidelines range” and “failing to consider the § 3553(a) factors”

are procedural errors. Gall v. United States, 552 U.S. 38, 51 (2007).

When evaluating whether the district court calculated the Guidelines

range properly, findings of fact underlying the calculation are reviewed


69

for clear error. United States v. Whiting, 471 F.3d 792, 802 (7th Cir.

2006).

When a sentencing court commits procedural error, the sentence

must be vacated and the case remanded to the district court for resen-

tencing unless this Court has “‘reason to believe that the error in no

way affected the district court’s selection of a particular sentence.’”

United States v. Martin, 692 F.3d 760, 766 (7th Cir. 2012) (quoting

United States v. Farmer, 543 F.3d 363, 375 (7th Cir. 2008)).

B. The district court’s loss calculation was clearly erroneous.

The loss calculation should be based on the “greater of actual loss

or intended loss.” U.S.S.G. § 2B1.1, cmt. n. 3(A). Regardless of which

measure of loss the district court uses, it is the government’s burden to

“prove [the] amount of loss by a preponderance of the evidence.” United

States v. Schroeder, 536 F.3d 746, 753 (7th Cir. 2008). Even though cal-

culating the loss can be “difficult,” United States v. Zangari, 677 F.3d

86, 93 (2d Cir. 2012), the government must offer a “reasonable estimate

of the loss” based on proper criteria to meet its burden, U.S.S.G. §

2B1.1, cmt. n. 3(C). If the loss cannot be reasonably determined, “[t]he


70

court shall use the gain that resulted from the offense” as an alternative

measure of the loss. Id. at cmt. 3(B).

As a starting point, the district court erred as a matter of law by

failing to address Defendants’ objections to the district court’s loss cal-

culations. Here, Defendants “triggered the [Rule 32] protections” when

they “raise[ed] specific objections to the presentencing report.” United

States v. Jewel, 947 F.2d 224, 234 (7th Cir. 1991); see R. 413. at 3, 12; R.

429 at 12- 13; Sent. Tr. 10-17; R. 432 at 1-3; R. 421, Addendum at 2; R.

424 at 29-35. The district court must rule on “any disputed portion of

the presentence report or other controverted matter” or must “deter-

mine that a ruling is unnecessary either because the matter will not af-

fect sentencing, or because the court will not consider the matter in sen-

tencing.” Fed. R. Crim. P. 32(i)(3)(B).

The district court’s silence in the face of these objections was er-

ror. United States v. Leiskunas, 656 F.3d 732, 737-38 (7th Cir. 2011);

see also United States v. Stout, 882 F.2d 270, 272 (7th Cir. 1989) (Rule

32 is “mandatory, not discretionary, and our court has been reluctant to

characterize any violations of the rule as harmless.”) (internal citations


71

omitted).15 Such error requires a remand for resentencing because “the

lack of explanation” means this Court “cannot meaningfully review the

[district c]ourt’s decision.” Leiskunas, 656 F.3d at 737-38; Jewel, 947

F.2d at 232.

As to the district court’s loss calculations, the district court found

that each Defendant intended a $250 million loss or, in the alternative,

that the Defendants caused an actual loss of $202 million, resulting in a

28-level increase in the offense level. See App. 250:20-252:7, 272:13-19,

288:24-289:18. As set forth below, both calculations were infected with

error.16

1. The district court erred when calculating intended loss without considering Defendants’ subjective intent.

Intended loss is the “the pecuniary harm that was intended to re-

sult from the offense.” U.S.S.G. § 2B1.1, cmt. n. 3(A)(ii). In the Seventh 15 The district court also seemingly rejected, without meaningful consideration, Cochran’s

mitigation argument about life expectancy and the importance of considering a sentence that would not be an effective life sentence. S.A. 220:10-24. The court commented: “I don’t know about the life expectancy table, but I have crafted a sentence I think based on the counts for which you were charged . . . .” App. 279:13-15. The court continued: “[I]t may be in effect a life sentence. It is not certainly an effective life sentence.” App. 280:20-22. This too is failure to give meaningful consideration to a mitigation argu-ment, which warrants reversal. This error is particularly egregious given that “death in prison is not to be ordered lightly” and the chance that a defendant will not live out his sentence should “give pause to a sentencing court.” United States v. Wurzinger, 467 F.3d 649, 652 (7th Cir. 2006).

16 Defendants objected to both the intended and actual loss figures. R. 413 at 1-12; Sent. Tr. 10:6-14; R. 432 at 1-3; R. 421, Addendum at 2; R. 424 at 29-35.


72

Circuit, intended loss should be established through the subjective in-

tent of the defendant. United States v. Middlebrook, 553 F.3d 572, 578

(7th Cir. 2009). Here, the government presented no evidence whatsoev-

er of subjective intent, see R. 434 at 3, and the district court made no

factual findings on this point.17

Instead, the district court found that the Defendants intended in-

vestors to lose $250 million because that was “the amount that [De-

fendants] placed at risk.” App. 251:1-252:7, 272:13-19, 288:24-289:11

(citing United States v. Lauer, 148 F.3d 766, 768 (7th Cir. 1998)). Cas-

es, like Lauer, applying a “placed at risk” standard are contrary to the

weight of authority in this Circuit requiring proof of subjective intent to

establish intended loss. See Middlebrook, 553 F.3d at 578; United

States v. Berheide, 421 F.3d 538, 541 (7th Cir. 2005) (reversing the in-

tended loss finding, which must be based on a determination of “how

much loss, if any, [the defendant] intended [the victim] to suffer”); Unit-

ed States v. Fearman, 297 F.3d 660, 662 (7th Cir. 2002) (reversing the

17 Indeed, there is contrary evidence in the record, including evidence that Durham per-

sonally assumed loans Fair made to debtors who could no longer pay, Tr. 446:2-13, 1343:16-1346:25, and ultimately paid over $28 million into Fair, Tr. 1368:19-23. Almost $7 million of the $28 million in payments from Durham to Fair occurred after January 2008. Tr. 1388:8-11. Durham also pledged personal assets as collateral on other loans. Tr. 1036:18-20.


73

intended loss finding, which is “not an actual loss” or “a realistically ex-

pected loss,” but one that “must exist at least in the defendant's mind”);

United States v. Higgins, 270 F.3d 1070, 1075 (7th Cir. 2001) (reversing

the intended loss finding, which “as the name suggests, turns upon how

much loss the defendant actually intended to impose”).

The “placed at risk” standard is also contrary to near-uniform au-

thority in other circuits. See, e.g., United States v. Diallo, 710 F.3d 147

(3d Cir. 2013) (“[W]e look to the defendants subjective expectation, not

to the risk of loss to which he may have exposed his victims.”) (internal

citation omitted); United States v. Quaye, 57 F.3d 447, 448-49 (5th Cir.

1995) (vacating a sentence for failure to find that the defendant “did not

intend to repay the loans”); United States v. Newson, 351 F. App'x 986,

988 (6th Cir. 2009) (“[I]ntended loss [is] the loss the defendant subjec-

tively intended to inflict on the victim.”) (internal citation omitted);

United States v. Wells, 127 F.3d 739, 747-48 (8th Cir. 1997) (“The dis-

trict court did not commit clear error in determining that there was no

intention to cause the bank a loss . . . . The sentencing court’s determi-

nation that the intended loss was zero is not clearly erroneous.”); United

States v. Manatau, 647 F.3d 1048, 1050-54 (10th Cir. 2011) (intended


74

loss is “a loss the defendant purposely sought to inflict.”) (emphasis in

original); cf. United States v. Confredo, 528 F.3d 143, 152 (2d Cir. 2008)

(“[A] district court may presume that the defendant intended the vic-

tims to lose the entire face value of the [fraudulent] instrument, but the

defendant may rebut the presumption by producing evidence to demon-

strate that he actually intended to cause a lesser loss.”) (internal quota-

tions omitted).18

The Tenth Circuit recently set forth an exhaustive analysis of why

the Guidelines compel this conclusion: the meaning of “intent” is plain,

it fits within background legal norms, which the Sentencing Commis-

sion clearly understood, and a definition of intent is “implausible on its

face” if it “includes things [a defendant] never contemplated—except

perhaps in an Opposite Day game.” Manatau, 647 F.3d at 1050-53.

Because there was no offer of proof by the government and no

finding by the district court as to the amount Defendants subjectively

intended investors to lose, the district court erred in calculating De-

18 In Confredo, the court noted that although the 1991 Sentencing Guidelines referred to

the “probable or intended loss,” subsequent versions of the Guidelines eliminate the word “probable,” and courts have subsequently rejected equating “intended” loss with “the worst case scenario [of] potential loss.” 528 F.3d at 150-51 (emphasis in original) (internal citations omitted).


75

fendants’ Guidelines ranges based on intended loss. Defendants’ sen-

tences based on an improperly calculated Guidelines range cannot

stand. See Schroeder, 536 F.3d at 753.

2. The district court erred even under the “placed at risk” standard because it failed to account for money re-turned to investors.

The district court’s intended loss finding was premised on the

amount of investment certificates Fair was authorized to sell in July

2008 and the authorization Fair sought in late 2009, each of which

equaled $250 million. App. 250:23-252:7, 272:13-19, 288:24-289:18.

Neither, however, is the proper measure of intended loss even under the

district court’s erroneous “placed at risk” standard.

First, although Fair did sell substantially all its investment certif-

icates under the July 2008 authorization, Tr. 676:18-22, it is undisputed

that some of those investors were paid back, although the precise

amount was not adduced at trial or at sentencing.19 The money repaid

to investors before the fraud was detected must be deducted from the

intended loss figure under the “placed at risk” standard. United States 19 The $250 million July 2008 offering was nearly fully subscribed. Tr. 676. But in Fair’s

bankruptcy, investors claimed a total of $208 million in unpaid principal from all Fair offerings. R. 434 at 2-3. Therefore, at a minimum, $42 million of the July 2008 offering was necessarily repaid, although this amount is almost certainly greater since the $208 million total includes claims from all of Fair’s offerings, including pre-2008 offerings.


76

v. Brownell, 495 F.3d 459, 463 (7th Cir. 2007) (remanding for a deter-

mination of how much was returned before the detection of the fraud

because the Seventh Circuit, and several others, permit a credit against

intended loss for “money returned”). Having failed to do so, the district

court’s intended loss finding of $250 million was clearly erroneous.

Second, Defendants’ unsuccessful attempt to authorize Fair to is-

sue $250 million in additional investment certificates in late 2009 could

not and did not place investors’ money at risk. Because the authoriza-

tion was never granted, Fair was never able to sell certificates under it

and no funds were placed at risk.

3. The district court erred when calculating actual loss by failing to account for the effect of extrinsic factors.

The district court’s alternative basis for its loss enhancement—

actual loss—is also flawed. Actual loss is “the reasonably foreseeable

pecuniary harm that resulted from the offense.” U.S.S.G. § 2B1.1, cmt.

n. 3(A)(i). Harm is reasonably foreseeable if the defendant “knew or,

under the circumstances, reasonably should have known, [it] was a po-

tential result of the offense.” Id. at cmt. n. 3(A)(iv). Not only must the

harm be reasonably foreseeable, but there must be a causal connection

between the relevant conduct and the loss. See Whiting, 471 F.3d at


77

802 (reversing for failure to find the misrepresentations caused the

loss). As with intended loss, it is the government’s burden to prove the

actual loss by a preponderance of the evidence. Schroeder, 536 F.3d at

753.

Here, the district court’s actual loss calculation of $202 million

equaled the outstanding principal investors claimed they were owed at

the time of sentencing, after a credit for the $6 million of assets Fair’s

bankruptcy trustee recovered on their behalf. App. 251:11-252:7; R. 434

at 2-3. But the district court’s loss calculation failed to account, as it

must, for “extrinsic factors” that contributed to any decline in the value

of Fair’s assets.20 United States v. Olis, 429 F.3d 540, 548-49 (5th Cir.

2005); see also United States v. Rutkoske, 506 F.3d 170, 180 (2d Cir.

2007) (remanding for resentencing as a result of “[t]he District Court's

basic failure at least to approximate the amount of the loss caused by

the fraud without even considering other factors relevant to a decline”

in the at-issue security’s value); United States v. Nacchio, 573 F.3d

20 As unsecured creditors of Fair, the value of the investment certificates was based on the

value of Fair—measured either in terms of the value of Fair’s assets or Fair’s going con-cern value—less Fair’s liabilities to senior or secured creditors. Fair’s assets consisted mostly of its consumer receivables and outstanding loans, including the collateral or se-curity interests in assets underlying those loans. S.A. 103-122.


78

1062, 1078-79 (10th Cir. 2009) (applying the same principals to an in-

sider trading case).

Here, relevant extrinsic factors contributing to declines in the val-

ue of Fair’s assets were not accounted for by the district court. Most

significant, the district court failed to account for the effect of the gen-

eral decline in the broader recessionary economy on Fair’s balance

sheet, including but not limited to the nationwide decline in property

values. The record contained evidence of other factors influencing the

value of Fair’s assets. For example, one of the companies with an out-

standing loan from Fair had its ability to repay the loan hindered when

a significant customer canceled its contract. S.A. 197. Another compa-

ny with an outstanding loan from Fair saw its profitability decline when

its raw material costs increased by six percentage points between 2009

and 2011. S.A. 197, 204-209. The CEO of that company submitted an

affidavit indicating that the decline in the value of that company was “a

result of market and competitive factors and not a result of any actions

of the Defendants.” S.A. 212-213.

The district court also failed to account for the effect of the gov-

ernment’s raid on Fair’s office, which eliminated the infrastructure—


79

servers, hard drives, phone system, and documents—that Fair needed

to continue operating its then-profitable and indisputably legitimate

consumer receivables business, as well as the effect of negative publicity

from the government’s forfeiture lawsuit, which was dismissed one day

after it was filed. S.A. 16:21-18:14, 196-198. Neither the government

nor the district court made any effort to disaggregate the effect of these

various factors, rending the actual loss finding clearly erroneous.

Comparing the value of the assets reported on Fair’s financial

statements before Fair’s bankruptcy to the amount that Fair investors

were repaid by the bankruptcy trustee makes clear the absence of evi-

dence linking Defendant’s conduct to the $202 million actual loss that

the district court found. In the November 2009 offering circular Fair

submitted to ODS, Fair reported over $255 million in assets and only

$18 million in senior debt, leaving $237 million in assets available to

pay the $207 million in outstanding investment certificates. S.A. 103.

Even crediting the government’s allegation that the offering circular

overstated Fair’s assets, there is no record evidence that they were

overstated by anything approaching this magnitude. Thus, the gov-

ernment offered no evidence explaining how Defendants’ conduct was


80

exclusively responsible for shrinking the $237 million in reported assets

in November 2009 to the $6 million recovered by the bankruptcy trus-

tee—often through liquidation of assets rather than sales as going con-

cerns—at the time of sentencing. See App. 251:11-252:7; R. 434 at 2-3.

The court cannot simply assume that the difference must have been a

result of Defendants’ conduct, particularly given the presence of the ex-

trinsic factors discussed above. The district court’s failure to account

for those factors in calculating actual loss was error.

The fact that such a calculation may be “difficult” is immaterial.

Zangari, 677 F.3d at 93. The government must meet its burden of prov-

ing how Defendants’ conduct affected the asset values. Where this is

not possible, the Guidelines provide an alternative: “The court shall use

the gain that resulted from the offense as an alternative measure of the

loss.” U.S.S.G. § 2B1.1, cmt. n. 3(B). But the government provided no

evidence of this measure, and the district court did not conclude, nor

could it have, that the Defendants gained this amount. Therefore, the

district court erred in calculating Defendants’ Guidelines ranges based

on an actual loss that failed to account for the effect of extrinsic factors,


81

and therefore Defendants’ sentences cannot stand. See Schroeder, 536

F.3d at 753.21

C. The district court erred by failing to consider the need to avoid unwarranted sentencing disparities.

Proper sentencing procedure requires sentencing courts to “con-

sider what sentence is appropriate for the individual defendant in light

of the statutory sentencing factors, 18 U.S.C. § 3553(a).” United States

v. Panice, 598 F.3d 426, 441 (7th Cir. 2010) (internal citation deleted).

In doing so, the judge must “address any substantial arguments the de-

fendant made.” Id. at 443 (internal citation omitted). Section

3553(a)(6) requires a sentencing court to take into account “the need to

avoid unwarranted sentencing disparities among defendants with simi-

lar records who were found guilty of similar conduct.” United States v.

Bradley, 675 F.3d 1021, 1027 (7th Cir. 2012). The district court’s re-

21 The Defendants’ Guideline range was also increased based on the number of victims.

App. 252:15-21, 273:7-11, 289:19-21. This enhancement hinges on the actual loss find-ing. See United States v. Kimoto, 588 F.3d 464, 496 (7th Cir. 2009) (“[T]he estimation of the number of victims is limited to those who incurred part of the actual loss.”); United States v. Arnaout, 431 F.3d 994, 999 (7th Cir. 2005) (reversing for lack of evidence con-necting the number of victims to the loss amount). Because the district court’s errone-ous actual loss finding was based on the assumption that Defendants’ conduct caused all investors to lose their entire investment, the record remains devoid of any proof or find-ing as to the number of victims who suffered a loss if the loss were properly calculated. Thus, the district court’s actual loss calculation error renders the enhancement for the number of victims erroneous too.


82

fusal to properly consider sentencing disparities here, under the mis-

taken belief that it could not, was error.

At sentencing, Defendants identified and presented cases involv-

ing convictions, following trial, for fraud involving losses far in excess of

those the government claimed here, with sentences imposed far less

than the 50-year, and in some cases the 10- and 25-year, terms handed

down in this case:

• Ronald Ferguson was sentenced to 2 years’ imprison-ment for a $544 million fraud. S.A. 201; see also Unit-ed States v. Ferguson, 584 F. Supp. 2d 447, 456 (D. Conn. 2007).

• E. Kirk Shelton was sentenced to 10 years’ imprison-ment for a $3.2 billion fraud. S.A. 201; see also S.A. 228-229.

• Bernard Ebbers was sentenced to 25 years’ imprison-ment for a $1 billion fraud. S.A. 201; see also United States v. Ebbers, 458 F.3d 110, 128-129 (2d Cir. 2006).

Defendants pointed to other such examples. S.A. 199-203, 215-216,

217:19-218:5; R. 432 at 1.22

22 The district court seemed to suggest that Cochran did not preserve this argument be-

cause his “lawyers really haven’t made that argument.” Sent. Tr. at 158. But Cochran stated unequivocally in his sentencing memorandum that he had joined and adopted the disparity argument and analysis presented fully in Durham’s sentencing memorandum. R. 432 at 1. Moreover, the PSR included the disparity issue as a basis for potential de-parture. R. 421 at ¶ 156(f). Thus, Cochran properly raised the § 3553(a)(6) issue. See generally United States v. Jones, 438 Fed. App’x. 515 (7th Cir. 2011) (discussing preser-vation of arguments under § 3553).


83

The district court failed to address these arguments, wrongly be-

lieving: “I can’t look to cases from other districts.” App. 278:3-8. The

district court apparently felt it could (or should) simply ignore these

cases because “this case involves people in the Heartland of America.”

App. 278:8; see also App. 261:19-21 (“I don’t know about what goes on in

the Southern District of New York. I visit there only rarely. This is the

Heartland. This is where we work hard.”).

But the law requires exactly the opposite. Sentences for substan-

tially similar conduct in other cases, including cases in other districts,

are precisely the comparison group that the sentencing court is sup-

posed to consider. United States v. Pisman, 443 F.3d 912, 916 (7th Cir.

2006) (section 3553(a)(6) concerns “unjustified difference across judges

or districts”).

This Court has recently suggested that a sentencing judge need

not “say a word about § 3553(a)(6) . . . to satisfy the procedural re-

quirement that he give that factor ‘meaningful consideration,’” so long

as the judge “correctly calculated and carefully reviewed the guidelines

range.” United States v. Reyes-Medina, 683 F.3d 837, 841 (7th Cir.

2012) (quoting United States v. Bartlett, 567 F.3d 901, 908 (7th Cir.


84

2009)). In Reyes-Medina, however, that statement was mere dicta, as

this Court found that the judge did expressly consider section

3553(a)(6). Id. at 840. Further, that dicta was based on a line of cases

in the Seventh Circuit holding that judges adequately consider dispari-

ties among co-defendants by relying on properly calculated Guidelines

ranges. See Bartlett, 567 F.3d at 908. Here, in contrast, the Defend-

ants’ disparity argument concerned nationwide disparities with respect

to a category of offenses that regularly result in sentences substantially

below the Guidelines range. See R. 429 at 42-46; R. 432 at 1; R. 430 at

3-4. 23 Regardless, the district court here erred as a matter of law in its

23 It is unclear how the district court treated the sentences the government argued should

be considered with respect to unwarranted sentencing disparities. The district court may have also ignored the examples the government offered or, in even more egregious departure from sentencing procedures, the court may have considered the government’s examples and ignored only the Defendants’ examples. Further, the counter-examples the government offered to the district court are inapposite. In one—United States v. Bernard Madoff, 09-cr-213 (S.D.N.Y)—the 150 year sentence flowed from a $13 billion fraudulent scheme, an amount significantly above the loss the court found in this case. R. 435 at 15. In others, the specific conduct and criminal history of the defendant, ra-ther than the loss amount at issue, warranted a longer sentence. For example, Scott Rothstein was sentenced to 50 years for a $429 million fraud, but he fled to Morocco with $16 million in an attempt to escape prosecution. Id.; Defendant’s Sent. Memo at 12, United States v. Rothstein, No. 09-60331-CR-COHN, 2010 WL 3499085 (S.D. Fla. June 4, 2010). Robert Stinson was sentenced to 33 years for a $14 million fraud, but he was a repeat offender. R. 435 at 15; S.A. 230-231 (noting that the PSR utilized a crimi-nal history category of III). Edward Okun was sentenced to 100 years for a $126 million fraud, but there was evidence that he had been warned nine times by counsel that his behavior was illegal. R. 435 at 15; S.A. 225-227. And Richard Harkless was sentenced to 100 years for a $39 million fraud, but he fled to Mexico and diverted funds outside the United States in an attempt to escape prosecution. R. 435 at 15; S.A. 221-224. Thus, none of the government’s examples established a lack of unwarranted disparity between Defendants’ sentences and those from comparable cases.


85

mistaken belief that it was not even permitted to consider sentences in

comparable, out-of-district cases. S.A. 278:3-8.

Indeed, this Court has vacated and remanded substantially simi-

lar cases for resentencing where the district court failed to address a de-

fendant’s section 3553(a)(6) arguments. In Bradley, for example, this

Court vacated a sentence where the district court mentioned “one dis-

similar case without even referencing [the defendant’s] cited cases,” in-

cluding cases outside the trial court’s district. 675 F.3d at 1027. In

Panice, this Court vacated a sentence where the district court failed to

“give adequate consideration to the disparities between [the Defend-

ants’] sentence and those given to other white collar criminals.” 598

F.3d at 443. There, this Court noted that the failure to consider the

disparities noted by the defendant was of particular concern because

“[t]he amount of loss caused by [the others] is much, much greater than

that caused by [the defendant], yet their sentences are significantly

shorter than [the defendant’s].” Id.

In comparison, the district court here, in not mentioning any com-

parison cases at all, did even less than the sentencing judge in Panice.

By explicitly refusing to consider sentences from other districts, the dis-


86

trict court failed to consider that the effective life sentences Durham

and Cochran now face are vastly higher than other similarly-situated

defendants that happen to have been prosecuted elsewhere. And given

that a death sentence “‘is notably harsher than a sentence that stops

even a short period before,’” Patrick, 707 F.3d at 820 (quoting

Wurzinger, 467 F.3d at 652), the district court’s failure to consider un-

warranted sentencing disparities requires that the Defendants’ sen-

tences be vacated and the cases remanded for resentencing. Bradley,

675 F.3d at 1027; Panice, 598 F.3d at 443.

D. None of the district court’s procedural errors was harmless.

The district court’s procedural errors were not harmless because it

is “not certain that the sentencing judge would have imposed the same

sentence had it not committed a procedural error.” United States v.

Glosser, 623 F.3d 413, 419-20 (7th Cir. 2010). Far from the district

court “ma[king] it clear,” Glosser, 623 F.3d at 419-20, or “expressly

stat[ing]” that it would have handed down the same sentence regardless

of these errors, United States v. Hill, 645 F.3d 900, 912 (7th Cir. 2011),

to the contrary, the district court expressly stated that the erroneously

calculated loss amount was “the absolute accurate measure of the na-


87

ture, circumstances, and severity of this crime,” App. 266:22-23. And

given the notably harsh life sentences Durham and Cochran now face,

any ambiguity with respect to whether these errors were harmless

should militate in favor of remand. See Patrick, 707 F.3d at 820

(“‘[D]eath in prison is not to be ordered lightly.’”) (quoting Wurzinger,

467 F.3d at 652); cf. Boyde v. California, 494 U.S. 370, 395 (1990) (Mar-

shall, J. dissenting) (“We have long embraced a commitment to resolv-

ing doubts about the accuracy of a death verdict in favor of a capital de-

fendant.”).

E. The district court abused its discretion when it ordered resti-tution of over $208 million.

A challenge to the restitution amount is reviewed for an abuse of

discretion. Middlebrook, 553 F.3d at 579. “The proper amount of resti-

tution is the amount wrongfully taken by the defendant.” United States

v. Allen, 529 F.3d 390, 396 (7th Cir. 2008) (internal quotation omitted).

Like the actual loss calculation, it must be based on the loss caused by a

defendant’s conduct. Id. In fact, “the ‘amount of loss’ sustained by vic-

tims is synonymous with ‘actual loss,’” id. at 397, and “a restitution or-

der should never exceed the loss used to calculate a sentence.” United

States v. Dokich, 614 F.3d 314, 319-20 (7th Cir. 2010).


88

Here, the restitution amount was based on the same facts under-

lying the actual loss calculation: the amount of outstanding principle

payments Fair investors claimed in Fair’s bankruptcy, without account-

ing for extrinsic factors that contributed to the loss.24 Tr. 1415; R. 434

at 2. Thus, the restitution award suffers from the same defects as the

actual loss calculation. See R. 413 at 33; R. 432 at 1; R. 421, Addendum

at 2; R. 424 at 26. Because the district court erred in calculating the ac-

tual loss under the Sentencing Guidelines, the district court abused its

discretion in entering a restitution order in the same amount, and the

restitution order should be vacated. See Allen, 529 F.3d at 396.

CONCLUSION

For the foregoing reasons, the Defendants respectfully request

that the Court: (1) vacate their convictions on all counts, (2) direct the

district court to enter a judgment of acquittal for Durham on Counts

Two and Five, (3) remand the remaining the counts for a new trial. In

the alternative, the Court should vacate the Defendants sentences and

remand for new sentencing proceedings.

24 Although the restitution award is set at $208 million, Defendants receive credit for any

recovery made by the bankruptcy trustee, which at the time of the sentencing was ap-proximately $6 million, making the restitution award and actual loss calculation ($202 million) equal. See App. 4-5.


89

REQUEST FOR ORAL ARGUMENT

Pursuant to Federal Rule of Appellate Procedure 34(a) and Sev-

enth Circuit Rule 34(f), oral argument is requested, as Appellants be-

lieve it would assist the Court in resolution of this appeal.

September 9, 2013 Respectfully submitted, s/ James H. Mutchnik, P.C.

James H. Mutchnik, P.C. Leonid Feller Kirkland & Ellis LLP 300 North LaSalle Street Chicago, Illinois 60654 Telephone: (312) 862-2000 [email protected] [email protected] Counsel for Defendant-Appellant Timothy S. Durham

s/ Michelle L. Jacobs Michelle L. Jacobs, SBN 1021706

Biskupic & Jacobs, S.C. 1045 West Glen Oaks Lane Suite 106 Mequon, Wisconsin 53092 Telephone: (262) 241-0033 [email protected] Counsel for Defendant-Appellant James F. Cochran


90

s/ Jeffrey A. Baldwin

Jeffrey A. Baldwin Voyles Zahn & Paul 141 East Washington Street Suite 300 Indianapolis, Indiana 46204 Telephone: (317) 632-4463 [email protected] Counsel for Defendant-Appellant Rick D. Snow


91

CERTIFICATE OF COMPLIANCE WITH FEDERAL RULE OF APPELLATE PROCEDURE 32(a)(7)(C)

The undersigned, counsel of record for Defendant-Appellant Timo-

thy S. Durham, furnishes the following in compliance with Federal Rule

of Appellate Procedure 32(a)(7):

I hereby certify that this brief conforms to the rules contained in

Federal Rule of Appellate Procedure 32(a)(7) for a brief produced with a

proportionally spaced font, as modified by this Court’s May 6, 2013 Or-

der granting Defendants-Appellants leave to file a joint consolidated

opening brief containing up to 21,000 words. The length of this brief is

18,337 words.

Dated: September 9, 2013

s/ James H. Mutchnik, P.C.

James H. Mutchnik, P.C. Counsel for Defendant-Appellant Timothy S. Durham


92

CERTIFICATE OF SERVICE

I hereby certify that I electronically filed the foregoing with the

Clerk of Court for the United States Court of Appeals for the Seventh

Circuit on September 9, 2013 via the CM/ECF system, thereby serving

the following counsel of record:

Winfield D. Ong Nicholas E. Surmacz Office of the United States Attorney 10 West Market Street Suite 2100 Indianapolis, Indiana 46204 [email protected] [email protected] John-Alex Romano U.S. Department of Justice Criminal Division, Appellate Section 950 Pennsylvania Avenue, N.W. Room 1264 Washington, D.C. 20530 [email protected]

Dated: September 9, 2013

s/ James H. Mutchnik, P.C.

James H. Mutchnik, P.C. Counsel for Defendant-Appellant Timothy S. Durham


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Federal Appeal - Tim Durham, James Cochran, Rick Snow Federal Appeal - Part 1

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