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United States v. Proudfoot

United States District Court, D. Oregon

November 28, 2018

UNITED STATES OF AMERICA,
v.
HARRY DEAN PROUDFOOT III, Defendant.

          Billy J. Williams, United States Attorney, and Scott E. Bradford and John C. Brassell, Assistant United States Attorneys, United States Attorney's Office for the District of Oregon, Of Attorneys for the United States of America.

          Robert B. Hamilton and Bryan Francesconi, Assistant Federal Public Defenders, Office of the Federal Public Defender, Of Attorneys for Defendant Harry Dean Proudfoot III.

          OPINION AND ORDER ON PRETRIAL MOTIONS

          Michael H. Simon United States District Judge.

         Defendant Harry Dean Proudfoot III (“Defendant” or “Proudfoot”) is charged in a 15-count indictment (ECF 1-1) with one count of conspiracy to commit wire fraud in violation of 18 U.S.C. § 1349, five counts of wire fraud in violation of 18 U.S.C. § 1343, one count of conspiracy to commit money laundering in violation of 18 U.S.C. § 1956(h), and eight counts of money laundering in violation of 18 U.S.C. § 1957.[1] A ten-day jury trial is scheduled to begin on December 3, 2018.[2] On November 26, 2018, the Court held a pretrial conference to address the parties' respective motions in limine and other pretrial matters. This Opinion and Order addresses the Government's motion in limine (ECF 78), Defendant's motions in limine (ECF 131), [3] and Defendant's motion for reconsideration (ECF 126).

         BACKGROUND

         The Government alleges that in 2008, Defendant created 3 Eagles Research and Development, LLC (“Three Eagles”) and that from 2008 through 2012 Defendant and others (including several of Defendant's adult children) used Three Eagles to solicit investments in a purported gold mining operation in Ohio. According to the Government, Defendant and his co-conspirators and co-schemers obtained approximately $3.2 million from approximately 140 investors based on materially false promises and other false or misleading representations and omissions. Among other things, Defendant and his alleged co-conspirators and co-schemers allegedly made false promises that they would use the investors' money to purchase mining equipment and conduct mining operations at two gravel pits in Ohio, falsely promised high rates of return (typically 10 percent of gross revenues payable after the mine became operational), falsely claimed that Defendant had secured two properties in Ohio totaling 300 acres from which Three Eagles would extract gold (when, in fact, Defendant had only obtained a lease for one property consisting of 204 acres), falsely claimed that Three Eagles already had obtained all necessary contracts to conduct the described gold mining operation in Ohio, and falsely stated that Three Eagles had hired an “expert geological miner” (when, in fact, that person was only an amateur prospector).

         In addition, Defendant and his co-conspirators and co-schemers allegedly encouraged investors to invest as much money as they could in the Ohio gold mining project and sent periodic updates to the investors containing allegedly false statements representing that the mining operation was progressing. According to the Government, however, the Ohio gold mining project had never progressed beyond merely acquiring soil samples from the proposed mining site. Further, rather than use the investors' money as Defendant and his alleged co-conspirators and co-schemers had promised, Defendant and several of his adult children allegedly used the investors' money to pay their personal expenses.

         The Government also alleges that Defendant intentionally failed to disclose to investors the following allegedly material facts:

(a) In 1991, the State of Alaska served a Cease and Desist Order on Defendant for selling unregistered securities through material misrepresentations;
(b) In 1993, the State of Oregon served a Cease and Desist Order on Defendant for selling unregistered securities through material misrepresentations;
(c) In 2003, the State of Oregon served a Cease and Desist Order on Defendant for selling unregistered securities through material misrepresentations;
(d) In August 2010, alleged co-conspirator Matthew Proudfoot filed for personal bankruptcy; and
(e) In 2013, the State of Oregon served a Cease and Desist Order on Defendant for selling unregistered securities from 2004-2007 for a gold mining operation in Canada.

         DISCUSSION

         A. Government's Motion in Limine (ECF 78)

         The Government moves in limine to exclude evidence or argument related to Defendant's intent or ability to repay the victims of the alleged fraud, including any expert testimony or argument about the viability of the purported gold mining scheme. ECF 78. The Ninth Circuit has held that a defendant's intent or ability to repay the victims of fraud is not a defense to charges of criminal fraud. See United States v. Treadwell, 593 F.3d 990, 997 (9th Cir. 2010) (“The intent to induce one's victim to give up his or her property on the basis of an intentional misrepresentation causes ‘harm' by depriving the victim of the opportunity to weigh the true benefits and risks of the transaction, regardless of whether or not the victim will suffer the permanent loss of money or property.”); United States v. Oren, 893 F.2d 1057, 1062 (9th Cir. 1990) (“[O]ne defrauds another when he causes him to be ‘deprive[d] . . . of property by means of false . . . representations.'”) (quoting Carpenter v. United States, 484 U.S. 19, 27 (1987) (alteration in original)); United States v. Benny, 786 F.2d 1410, 1417 (9th Cir. 1986) (“While an honest, good-faith belief in the truth of the misrepresentations may negate intent to defraud, a good-faith belief that the victim will be repaid and will sustain no loss is no defense at all.”). Similarly, in United States v. Molinaro, 11 F.3d 853 (9th Cir. 1993), the Ninth Circuit approved the following jury instruction in a criminal case alleging bank fraud:

You may determine whether a defendant had an honest, good faith belief in the truth of the specific misrepresentations alleged in the indictment in determining whether or not the defendant acted with intent to defraud. However, a defendant's belief that the victims of the fraud will be paid in the future or will sustain no economic loss is no defense to the crime.

Molinaro, 11 F.3d at 863. In Defendant's Response, Defendant did not oppose the Government's motion in limine. ECF 91. Accordingly, the Government's motion in limine (ECF 78) is granted.

         B. Defendant's Motions in Limine (ECF 131)

         Defendant moves in limine to exclude evidence or argument on twelve matters. Each is addressed in turn.

         1. Defendant's SEC deposition testimony on March 28, 2018

         At some point before October 2011, the U.S. Securities and Exchange Commission (“SEC”) began an investigation of Three Eagles, Defendant, and others relating to whether they were selling securities in violation of federal securities laws. On October 18, 2011, the SEC sent Defendant a letter and deposition subpoena as part of its civil investigation and attached the SEC's “Form 1662.” This form advises deposition witnesses of their Fifth Amendment rights and that any information they provide in a deposition may be used against them in a criminal proceeding. See ECF 90-1 (SEC Form 1662).

         On March 13, 2012, Defendant appeared with his counsel for the subpoenaed deposition, which was taken by an attorney from the SEC. Before providing any testimony, Defendant acknowledged that he had reviewed the SEC's Form 1662 and had no questions about the content of that form. Defendant was represented by counsel at that deposition. At the end of the deposition, the SEC attorney explained there likely would be another required deposition of Defendant, and the SEC attorney provided Defendant and his attorney with an opportunity to ask questions or clarify any issues. Neither Defendant nor his counsel asked any questions about Form 1662, the use of Defendant's deposition, or whether there was a parallel criminal investigation.

         On July 17, 2012, the SEC filed a complaint in the U.S. District Court in Portland, Oregon, alleging that Three Eagles, Defendant, Defendant's son Matthew Proudfoot, Defendant's daughter Laurie Vrvilo, and another person sold securities in violation of federal securities laws. Securities and Exchange Commission v. 3 Eagles Research & Development, LLC, et al., Case No. 12-cv-01289-ST (D. Or.) (the “SEC Case”). On March 28, 2013, the SEC deposed Defendant a second time. Defendant appeared for this deposition without counsel. The attorneys for the SEC did not send another copy of Form 1662 to Defendant in advance of the second deposition and did not discuss that form with Defendant at the second deposition.

         Defendant moves in limine to exclude the statements that he made during his second deposition, taken on March 28, 2013. Defendant argues that the use of these statements from his second deposition would violate his Fifth Amendment privilege against self-incrimination and his due process rights. Defendant asserts that a second copy of the SEC's Form 1662 was not provided to him, or even referenced, before or during his March 28, 2013 deposition, which was taken after the SEC Case had been filed and more than a year after the SEC took Defendant's first deposition in March 2012. Defendant also states that he was not represented by counsel during his second deposition, taken on March 28, 2013. Further, Defendant represents that the SEC did not warn him at the beginning of his deposition on March 28, 2013, as they did the year before, that any statements he may make could be used against him in a criminal proceeding. Thus, according to Defendant, at his second deposition he did not knowingly and intelligently waive his Fifth Amendment privilege against self-incrimination, and his March 2013 deposition testimony should be excluded from any criminal trial against him.

         Both sides refer the Court to the Ninth Circuit's decision in United States v. Stringer, 535 F.3d 929 (9th Cir. 2008). In that case, the Ninth Circuit noted that “[t]he Supreme Court has held that the government may conduct parallel civil and criminal investigations without violating the due process clause, so long as it does not act in bad faith.” Id. at 936. Proudfoot, however, offers no evidence of any bad faith by the Government.

         Further, as explained by the Ninth Circuit in Stringer:

The privilege against self-incrimination protects an individual from being forced to provide information that might establish a direct link in a chain of evidence leading to his conviction. Hoffman v. United States, 341 U.S. 479, 486 (1951). It may be waived if it is not affirmatively invoked. In Minnesota v. Murphy, the Supreme Court stressed that the privilege is lost if not affirmatively invoked, even if the defendant did not make a knowing and intelligent waiver. 465 U.S. 420, 428 (1984). We have similarly stated that a “defendant's failure to invoke the privilege against self-incrimination waives a later claim of privilege.” Unruh, 855 F.2d at 1374 (holding that a defendant waived the privilege when, after being advised of his right not to answer questions, he proceeded to testify in a civil deposition).

Id. at 938. In Stringer, the district court dismissed the Government's indictment and held that the defendants' waivers of their Fifth Amendment privilege against self-incrimination were ineffective because the defendants were not told of the U.S. Attorney's active involvement in a parallel SEC investigation. In reversing the district court, the Ninth Circuit explained:

The SEC Form 1662 used in this case alerts SEC investigative witnesses that the information can be used in a criminal proceeding. Defendants were on sufficient notice, and so were their attorneys. As one federal court has explained, all that was required was “sufficient notice . . . that any information could be used against [them] in a subsequent criminal proceeding.” United States v. Teyibo, 877 F.Supp. 846, 855 (S.D.N.Y.1995). That court emphasized that “SEC Form 1662 stated in no uncertain terms that the [g]overnment's request for information could be refused pursuant to the Fifth Amendment's protection against compelled self-incrimination.” Id. We agree.
The SEC here went even further, warning each defendant at the beginning of each deposition that “the facts developed in this investigation might constitute violations of . . . criminal laws.” Nonetheless, defendants proceeded to testify and failed to invoke their privilege against self-incrimination. Defendants have forfeited any claims that the use of their testimony against them in the criminal proceedings violates the privilege against self-incrimination.

Id.

         In the pending case, Defendant asserts that he did not have the benefit of counsel at his second deposition, that a second Form 1662 was not sent to him by the SEC before his second deposition, and that the SEC attorney at the second deposition did not begin that deposition by asking whether Defendant had again reviewed the Form 1662 or repeating the warning that Defendant's statements at this civil deposition could be used against him in a criminal proceeding. The Court accepts these factual assertions as true. Nevertheless, all of this information was given to Defendant at or before his first deposition taken by the SEC approximately one year earlier, and the SEC stated at the first deposition that another deposition likely would be required from Defendant. Nothing in Stringer requires the exclusion in this criminal trial of Defendant's statements made during his civil deposition taken by the SEC on March 28, 2013. Further, the parties have not presented to the Court any case law that requires such exclusion. The Court finds that Defendant's statements were made knowingly and voluntarily. Accordingly, Defendant's motion in limine to exclude his civil deposition testimony given to the SEC on March 28, 2013, is denied.

         2. Conrad Lysiak's SEC deposition testimony on March 25, 2013

         On March 25, 2013, in the SEC case, the SEC took the deposition of attorney Conrad Lysiak, who passed away in 2017. Mr. Lysiak previously served as securities counsel for Three Eagles, and he did not assert the attorney-client privilege during his deposition. Also, Defendant, who was pro se at the time, was not present at the SEC's deposition of Mr. Lysiak, although Defendant had the opportunity to attend that deposition.

         Defendant moves to exclude the deposition testimony of Mr. Lysiak, relying on both the Confrontation Clause of the Sixth Amendment and Rule 804(b)(1)(B) of the Federal Rules of Evidence. Regarding that hearsay exception for former testimony, Defendant argues that he did not have a “similar motive” to develop through cross-examination Mr. Lysiak's testimony in the SEC Case that Defendant now has in this criminal prosecution. In response, the Government states that it “does not currently plan to exhibit any of Mr. Lysiak's deposition testimony at the upcoming trial, although that may change if defendant asserts a reliance [on counsel] defense.” ECF 90 at 5. Accordingly, there is no need for the Court to rule on this issue at this time.[4]

         3. Purported hearsay statements in correspondence by Conrad Lysiak

         Defendant objects to certain written correspondence between Defendant and the attorney for Three Eagles, Mr. Lysiak. The Government argues that Defendant's statements are statements of a party opponent and thus admissible under Rule 801(d)(2) of the Federal Rules of Evidence and that Attorney Lysiak's statements are admissible for the limited purpose of providing context for Defendant's statements. Defendant argues that the Government is merely attempting to introduce Attorney Lysiak's statements to show the jury the attorney's legal advice that was given to Three Eagles. The Court reserves ruling on this issue until after the Government has had an opportunity to show the relevance and context of the disputed statements.

         4. Victim impact evidence

         Defendant objects to what it calls “victim impact” evidence. The Government may not elicit testimony or otherwise present evidence about the effect on the alleged victims caused by Defendant's alleged actions, other than the specific amounts of investment loss actually suffered.

         5. Religious beliefs

         Defendant moves to exclude all evidence regarding Defendant's religious beliefs as irrelevant. The Government states that it will not introduce any evidence that Defendant's professed religious beliefs are insincere or not genuinely held. The Government, however, seeks to introduce evidence that Defendant intentionally discussed his religious beliefs with prospective investors who held similar religious beliefs to make these prospective investors more likely to trust Defendant and give him their money. Such evidence is permissible. See United States v. Turner, 400 F.3d 491, 494-95 (9th Cir. 2005) (“Nevertheless, [the defendant] worked hard in creating an image of legitimacy. For example, he created a database of the investors to facilitate communication between the investors (more properly, victims) and himself. Later, he set up a recorded message hotline to keep investors up to date on the status of Omega. The status of Omega was always the same; pay-out was just around the bend. Other written communications stated the same, often times including religious references and biblical quotations.”); United States v. Dazey, 403 F.3d 1147, 1157-58 (10th Cir. 2005) (“[The defendant's] sales pitch routinely exploited investors' religious convictions. Dr. Craft was portrayed as a devout Christian and humanitarian, while Mr. Dazey and Mr. Mathew were said to be active ministers. Some investors entrusted funds to Wealth-Mart based on its principals' religious bona fides and were attracted to the program in part because they were told their money would be used to advance charitable causes.”).

         The Court also has considered Defendant's objection under Rule 403 and has concluded that the probative value of the Government's evidence is not substantially outweighed by the danger of unfair prejudice. The Court, however, will instruct the jurors that they may not consider a defendant's religious beliefs in deciding whether the Government has met its burden of proving all of the essential elements of any charge beyond a reasonable doubt and that all persons are equal before the law.

         6. Details of personal expenditures

         Defendant moves to exclude evidence of how Defendant and his adult children spent the money they obtained from the investors in Three Eagles. The Government alleges that much of the investors' money was used for the personal expenses of Defendant and his adult children, the alleged co-conspirators and co-schemers. This is relevant to show, among other things, whether the money taken out of Three Eagles by Defendant and his alleged co-conspirators was treated as a “loan.” The Government will be allowed to present this evidence. See United States v. Cohen, 539 Fed.Appx. 743, 745 (9th Cir. 2013) (“The district court did not abuse its discretion by admitting evidence about [the defendant's] lavish lifestyle because a description of his lifestyle was probative of the manner in which [the defendant] conducted his scheme and relevant to whether the money he received was an investment, a loan, or funds he spent rather than funds he intended to repay.) The Court, however, is mindful that the line between probative evidence and unfair prejudice in this context may be thin. See United States v. Unruh, 855 F.2d 1363, 1376-77 (9th Cir. 1987). The Court reserves ruling on any specific items of evidence relating to personal expenditures and will rule on any objections that are timely made at trial.

         7. Absence of Defendant's tax records (Ruling Reserved)

         Defendant moves to exclude evidence showing the absence of tax filings for Defendant and Three Eagles for the years 2009 through 2012. At various times, Defendant characterized the money that he took from Three Eagles as “loans” and at other times he characterized that money as “income.” According to the Government, Defendant made these inconsistent statements to the SEC during his depositions and to the FBI during his interviews. The Government explains that Defendant's failure to file tax returns is relevant to show that Defendant acted with fraudulent intent and knowledge of illegal activity. See United States v. Lloyd, 807 F.3d 1128, 1159 (9th Cir. 2015) (“evidence of fraudulent tax returns [was] admitted to show knowledge of illegal activity”); see also United States v. Fuchs, 218 F.3d 957, 965 (9th Cir. 2000). The Government also notes that this evidence is needed for the Government to present a coherent and comprehensible story regarding the commission of the alleged crimes. The Court agrees. The Court also has considered Defendant's objection under Rule 403 and has concluded that the probative value of the Government's evidence is not substantially outweighed by the danger of unfair prejudice. If this evidence is received, however, the jury will be instructed that Defendant is on trial only for the specific crimes charged.

         At the pretrial conference, Defendant also argued that the Government's proposed proof by affidavit of the absence of Defendant's tax filings would violate Defendant's rights under the confrontation clause, as interpreted by the Supreme Court in Crawford v. Washington, 541 U.S. 36 (2004). Both sides have asked for additional time to ...


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