Individual Appeals Klein Conspiracy Charge, Sentence

UNITED STATES OF AMERICA,
Appellee,
v.
SCOTT PHILLIP FLYNN,
Appellant.

UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

APPEAL FROM THE JUDGMENT OF THE
U.S. DISTRICT COURT FOR THE DISTRICT OF MINNESOTA

BRIEF FOR APPELLANT

FOX ROTHSCHILD LLP
Ian M. Comisky (#19-0093)
Patrick J. Egan (#19-0092)
2000 Market Street, 20^th Floor
Philadelphia, PA 19103
Telephone: (215) 299-2000

Attorneys for Appellant

SUMMARY OF THE CASE AND REQUEST FOR ORAL ARGUMENT

A grand jury indicted Scott Phillip Flynn for engaging in a conspiracy to defraud the United States, tax evasion, and filing false tax returns. The charges stem from a series of reverse merger transactions for which Mr. Flynn and his father (who passed away before charges were brought) performed advisory services and allegedly received compensation by way of shares in the merged companies. Mr. Flynn pleaded guilty to Counts 1 and 3 charging the conspiracy to defraud and filing a false tax return. Mr. Flynn moved to withdraw the plea before sentencing based on Rule 11 violations and the contention that the 18 U.S.C. § 371 (“Klein”) conspiracy charge failed to state an offense and was constitutionally overbroad after Marinello v. United States, 584 U.S. __, 138 S.Ct. 1101 (2018). The District Court denied the motion to withdraw the plea despite the “liberal” standard afforded to motions filed presentencing and rejected the applicability of Marinello to the Klein conspiracy charge. The District Court sentenced Mr. Flynn principally to 87 months imprisonment. After rejecting a jury trial request, the District Court accepted the government's theory that the loss for restitution may be based upon a “proxy” of the actual tax loss, and ordered Mr. Flynn to pay restitution in the amount of $5,392,442.87.

Appellant respectfully requests 30 minutes for oral argument (15 minutes per side) in this complex case involving multiple issues on appeal.

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TABLE OF CONTENTS

SUMMARY OF THE CASE AND REQUEST FOR ORAL ARGUMENT

TABLE OF CONTENTS

JURISDICTIONAL STATEMENT

STATEMENT OF ISSUES

STATEMENT OF THE CASE AND STATEMENT OF FACTS

SUMMARY OF THE ARGUMENT

ARGUMENT

CONCLUSION

TABLE OF AUTHORITIES

Cases

Apprendi v. New Jersey, 530 U.S. 466 (2000)

Boykin v. Alabama, 395 U.S. 238 (1969)

Brookens v. Acosta, 297 F. Supp. 3d 40 (D.D.C. 2018), aff'd sub nom. Brookens v. Dep't of Labor, 2018 WL 5118489 (D.C. Cir. Sept. 19, 2018)

Cheek v. United States, 498 U.S. 192 (1991)

Class v. United States, __ U.S. __, 138 S.Ct. 798 (2018)

Cleveland v. United States, 531 U.S. 12 (2000)

Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)

Dowling v. United States, 473 U.S. 207 (1985)

Haas v. Henkel, 216 U.S. 462 (1910)

Hammerschmidt v. United States, 265 U.S. 182 (1924)

Harvey v. United States, 850 F.2d 388 (8th Cir. 1988)

Hester v. United States, __ U.S. __, 139 S. Ct. 509 (2019)

James v United States, 366 U.S. 213 (1961)

Kolender v. Lawson, 461 U.S. 352 (1983)

Mack v. United States, 635 F.2d 20 (1st Cir. 1980)

Marinello v. United States, 584 U.S. __, 138 S.Ct. 1101 (2018)

McCarthy v. United States, 394 U.S. 459 (1969)

McNally v. United States, 483 U.S. 350 (1987)

Minchem Int'l, Inc. v. Commissioner, TCM 2015-56 (2015)

Nash v. Israel, 707 F.2d 298 (7th Cir. 1983)

North Carolina v. Alford, 400 U.S. 25 (1970)

Phillips v. United States, 519 F.2d 483 (6th Cir. 1975)

Rewis v. United States, 401 U.S. 808 (1971)

Rutkin v. United States, 343 U.S. 130 (1952)

Santobello v. New York, 404 U.S. 257 (1971)

Skilling v. United States, 561 U.S. 358 (2010)

Sorich v. United States, 555 U.S. 1204 (2009)

Southern Union v. United States, 567 U.S. 343 (2012)

United States v. Adetiloye, 716 F.3d 1030 (8th Cir. 2013)

United States v. Aguilar, 515 U.S. 593 (1995)

United States v. Alvarado, 615 F.3d 916 (8th Cir. 2010)

United States v. Anderson, 747 F.3d 51 (2d Cir. 2014)

United States v. Andrews, 600 F.3d 1167 (9th Cir. 2010)

United States v. Armstrong, 974 F. Supp. 528 (E.D. Va. 1997)

United States v. Bagley, 907 F.3d 1096 (8th Cir. 2018)

United States v. Baker, 672 F.Supp.2d 771 (E.D. Tex. 2009)

United States v. Ballistrea, 101 F.3d 827 (2d Cir. 1996)

United States v. Batson, 608 F.3d 630 (9th Cir. 2010)

United States v. Beckham, 917 F.3d 1059 (8th Cir. 2019)

United States v. Boatright, 588 F.2d 471 (5th Cir. 1979)

United States v. Bonadonna, 775 F.2d 949 (8th Cir. 1985)

United States v. Booker, 639 F.3d 1115 (8th Cir. 2011)

United States v. Broce, 488 U.S. 563 (1989)

United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993), overruled on other grounds by Neder v. United States, 527 U.S. 1 (1999)

United States v. Carruth, 418 F.3d 900 (8th Cir. 2005)

United States v. Chalupnik, 514 F.3d 748 (8th Cir. 2008)

United States v. Clemmons, 461 F.3d 1057 (8th Cir. 2006)

United States v. Cody, 438 F.2d 287 (8th Cir. 1971)

United States v. Collyard, 2013 WL 2318141 (D. Minn. 2013)

United States v. Coplan, 703 F.3d 46 (2d Cir. 2012), cert. denied, 571 U.S. 819 (2013)

United States v. DeRosier, 501 F.3d 888 (8th Cir. 2007)

United States v. Duckworth, 945 F.2d 1052 (8th Cir. 1991)

United States v. Ervasti, 201 F.3d 1029 (8th Cir. 2000)

United States v. Fletcher, 322 F.3d 508 (8th Cir. 2003)

United States v. Fontenot, 628 F.2d 921 (5th Cir. 1980)

United States v. Furkin, 119 F.3d 1276 (7th Cir. 1997)

United States v. Garcia, 785 F.2d 214 (8th Cir.), cert. denied, 475 U.S. 1143 (1986)

United States v. Gering, 716 F.2d 615 (8th Cir. 1983)

United States v. Goldberg, 105 F.3d 770 (1st Cir. 1997)

United States v. Gray, 152 F.3d 816 (8th Cir. 1998)

United States v. Green, 722 F.3d 1146 (9th Cir. 2013)

United States v. Hall, No. 15-cr-55-LLR, 2016 WL 1175207 (N.D. Iowa. 2016)

United States v. Heid, 651 F.3d 850 (8th Cir. 2011)

United States v. Hudson, 7 Cranch 32 (1812)

United States v. Jenkins, 884 F.2d 433 (9th Cir. 1989)

United States v. Johnson, 715 F.3d 1094 (8th Cir. 2013)

United States v. Jones, 479 F.3d 975 (8th Cir. 2007)

United States v. Kent, 821 F.3d 362 (2d Cir. 2016)

United States v. Khalife, 106 F.3d 1300 (6th Cir. 1997)

United States v. Klein, 247 F.2d 908 (2d Cir. 1957)

United States v. Lanier, 520 U.S. 259 (1997)

United States v. Leahy, 438 F.3d 328 (3d Cir. 2006)

United States v. Lezine, 166 F.3d 895 (7th Cir. 1999)

United States v. Litwok, 678 F.3d 208 (2d Cir. 2012)

United States v. Mazurie, 419 U.S. 544 (1975)

United States v. Miller, 545 F.2d 1204 (9th Cir. 1976)

United States v. Moran, 452 F.3d 1167 (10th Cir. 2006)

Unites States v. Mosley, 505 F.3d 804 (8th Cir. 2007)

United States v. Navedo, 516 F.2d 293 (2d. Cir. 1975)

United States v. O'Hagan, 139 F.3d 641 (8th Cir. 1998)

United States v. Parlato, No. 15-CR-149-FPG, 2019 WL 988450 (W.D.N.Y. Mar. 1, 2019)

United States v. Perry, 714 F.3d 570 (8th Cir. 2013)

United States v. Prior, 107 F.3d 654 (8th Cir. 1997)

United States v. Ramirez-Hernandez, 449 F.3d 824 (8th Cir. 2006)

United States v. Rendon, 752 F.3d 1130 (8th Cir. 2014)

United States v. Rosenblatt, 554 F.2d 36-39 (2d Cir. 1977)

United States v. Rosnow, 9 F.3d 728 (8th Cir. 1993)

United States v. Rush–Richardson, 574 F.3d 906 (8th Cir. 2009)

United States v. Shannon, 56 F.3d 69 (8th Cir. 1995)

United States v. Shoup, 608 F.2d 950 (3d Cir. 1979)

United States v. Syal, 963 F.2d 900 (6th Cir. 1992)

United States v. Tucker, 217 F.3d 960 (8th Cir. 2000)

United States v. Tuohey, 867 F.2d 534 (9th Cir. 1989)

United States v. Vallery, 108 F.3d 155 (8th Cir. 1997)

United States v.Van Buren, 804 F.2d 888 (6th Cir. 1986)

United States v. Van Doren, 800 F.3d 998 (8th Cir. 2015)

United States v. Ventura-Cruel, 356 F.3d 55 (1st Cir. 2003)

United States v. Villarreal, 707 F.3d 942 (8th Cir. 2013)

United States v. Vogt, 910 F.2d 1184 (4th Cir. 1990)

United States v. Weisman, 858 F.2d 389 (8th Cir. 1988)

United States v. Wetterlin, 583 F.2d 346 (7th Cir. 1978)

United States v. White, 241 F.3d 1015 (8th Cir. 2001)

United States v. Wroblewski, 816 F.3d 1021 (8th Cir. 2016)

United States v. Yah, 500 F.3d 698 (8th Cir. 2007)

Statutes

18 U.S.C. § 371

18 U.S.C. § 1346

18 U.S.C. § 3231

18 U.S.C. § 3664

26 U.S.C. § 1221

26 U.S.C. § 1222

26 U.S.C. § 7201

26 U.S.C. § 7206(1)

26 U.S.C. § 7212

26 U.S.C. § 7214

28 U.S.C. § 1291

USSG § 2X1.1

USSG § 3B1.1(a)

Other Authorities

Abraham S. Goldstein, Conspiracy to Defraud the U.S., 68 YALE L.J. 405, 436 (1959)

Comisky and Lee, IRS in the Offing

DEPARTMENT OF JUSTICE CRIMINAL TAX MANUAL, § 23.03

Fed. R. Crim. P. 11

Federal Tax Crimes

Jack Townsend, What Are the Implications for Marinello on the Defraud/Klein Conspiracy?

Marinello Limits Tax Obstruction Prosecutions, 129 Journal of Taxation, No. 4, 24 (Oct. 2018)

Stephen Cook, Justin Weddle and Daniel Day, Prosecutors Should Be Wary Of Overreach After Marinello

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JURISDICTIONAL STATEMENT

By way of a Second Superseding Indictment filed in United States District Court for the District of Minnesota, Appellant Scott Phillip Flynn was charged with offenses against the laws of the United States. On January 24, 2019, the District Court entered judgment. Mr. Flynn filed a timely Notice of Appeal on February 5, 2019 in Case No. 0:16-cr-347-ADM-KMM-1 [DCD 142].

This Court has jurisdiction pursuant to 28 U.S.C. § 1291, because the District Court had jurisdiction over the underlying matter under 18 U.S.C. § 3231, and this appeal is timely taken from final judgment under Rule 4 of the Federal Rules of Appellate Procedure.

STATEMENT OF ISSUES

1. Whether the District Court erred and/or committed an abuse of discretion by denying Mr. Flynn's motion to withdraw his guilty plea.

2. Whether Count 1 of the Second Superseding Indictment is insufficient because the Klein conspiracy charged in Count 1 is void for vagueness in its application of 18 U.S.C. § 371 and/or must be limited as a result of Marinello v. United States.

3. Whether the District Court erred by ordering restitution without a jury trial and in an amount that did not reflect the actual tax loss.

4. Whether the District Court erred at sentencing by applying the four point-increase for being an organizer or leader without making any findings on the record.

STATEMENT OF THE CASE AND STATEMENT OF FACTS

I. PROCEDURAL HISTORY

Appellant Scott Phillip Flynn was indicted on December 21, 2016 on tax and related conspiracy charges. [Case No. 0:16-cr-0374-ADM-KMM, DCD 1.] After a Superseding Indictment was returned on August 15, 2017 [DCD 64], a Second Superseding Indictment (“SSI”) was filed on May 7, 2018 [DCD 83]. The SSI charged Mr. Flynn with one count of conspiracy to defraud the United States in violation of 18 U.S.C. § 371 (Count 1) (“Klein Conspiracy Charge”) (with the sole object being evasion of the assessment of income taxes), one count of tax evasion in violation of 26 U.S.C. § 7201 (Count 2), and five counts for filing false tax returns in violation of 26 U.S.C. § 7206(1) (Counts 3-7).

On June 4, 2018, Mr. Flynn signed a plea agreement and entered a guilty plea to Counts 1 and 3 of the SSI. [DCD 89, 90]. On December 11, 2018, after changing counsel, Mr. Flynn filed a presentence motion seeking to withdraw his guilty plea. [DCD 115-117]. The District Court denied Mr. Flynn's motion to withdraw. (Addendum (“Add.”) 1). Mr. Flynn then moved to continue and/or bifurcate his sentencing so that he could adequately prepare to contest, among other things, the government's request for restitution. [DCD 133]. The District Court denied Mr. Flynn's motion (Add. 17) and, after denying Mr. Flynn's request for a jury trial on restitution, entered its sentencing judgment on January 24, 2019.¹ The District Court sentenced Mr. Flynn principally to 60 months on Count 1 and 27 months on Count 3, to be served consecutively, and ordered restitution in the amount of $5,392,442.87. (Add. 19).

II. FACTUAL ALLEGATIONS

The SSI involves reverse merger transactions that took place in 2006 and 2008. (Appendix (“App.”) 12). The SSI alleged that Mr. Flynn controlled shares resulting from the two reverse merger transactions occurring in those years. (App. 12-13). The funds were received by a series of entities controlled by Mr. Flynn's now-deceased father. (App. 14-15). The SSI further alleged that Mr. Flynn caused certain nominees to sell the stock and that he received income on those sales, even though the shares were distributed and funds were provided to others. The SSI alleged that these sales “generated capital gains income, which the defendant purposely failed to report” to the Internal Revenue Service. (App. 13, 24). Count 1 of the SSI alleged that as a result of this conduct, Mr. Flynn agreed to defraud the U.S. “by impeding, impairing, obstructing, and defeating the lawful governmental functions of the Internal Revenue Service, an agency of the U.S., and the Treasury Department. . . .” (App. 17). Count 3 of the SSI alleged that Mr. Flynn filed a false tax return for 2007 in violation of 26 U.S.C. § 7206(1). (App 32-33). The government initiated its investigation of Mr. Flynn (and his now deceased father) by way of search warrants executed on February 23, 2012. [DCD 1.]

III. THE PLEA AGREEMENT AND GUILTY PLEA COLLOQUY

On June 4, 2018, Mr. Flynn signed a plea agreement and entered a guilty plea to Counts 1 and 3 of the SSI. (App. 63, 70). The plea agreement provided a sparse recitation of the underlying alleged facts. It provided, inter alia, that Mr. Flynn assisted two companies, one in 2006 and one in 2008, in becoming publicly traded, and that shares of the stock were transferred to companies called Integritas, Inc. and Diversified Equities Partners.² Although the plea agreement contained the conclusory statement that Mr. Flynn exercised “control” over the shares and funds generated through their sale, the agreement further provided that the money was “transferred to the Australian nominees' U.S. Dollar accounts in Australia from the sale of stock.” (App. 64-65). The plea agreement stated that the defendant caused stock to be sold for approximately $15 million and transferred that amount to accounts of the nominees at National Australia Bank. It further stated that in 2007, the defendant received $2.7 million of the $15 million to buy a home. (App. 65). The agreement did not discuss the whereabouts of the remainder of the funds. (App. 64-65).

Mr. Flynn agreed to plead guilty to Count 1 (the Klein Conspiracy Charge) and Count 3 (violation of 26 U.S.C. § 7206(1)) in exchange for dismissal of the remaining counts, and a two (not three) point reduction for acceptance of responsibility due to the lateness of the plea. There was a further agreement to adjustments for sophisticated means (two levels) and organizer or leader (four levels). The plea agreement provided that the advisory guideline range reflected a loss of between $3.5 and $9.5 million. (App. 66-68). The plea agreement further provided for an advisory guideline range of 28 with a Criminal History II category, and that the government would recommend an 87-month sentence of imprisonment. (App. 68).

A. Elements of the KLEIN Conspiracy Offense

The change of plea hearing occurred on June 4, 2018. The entire transcript was 26 pages. (App. 71-97). Despite the factual and legal complexity of the crimes, the only discussion relating to the elements of the purported Klein conspiracy was the recitation of the introductory paragraph of Count 1 during arraignment. (App. 80-81). Mr. Flynn was never notified of the elements of the offense. He was not asked if he understood the nature of the offense, nor did the District Court ask if Mr. Flynn's attorneys has explained the elements to him thoroughly.³ The District Court began to ask Mr. Flynn if he had “gone over it with [his] attorneys,” but never gave Mr. Flynn an opportunity to respond as to whether he had ever discussed the charges with his attorneys. (App. 81).

B. The “Factual Basis” for the Plea.

The purported factual basis for the plea to the Klein Conspiracy Charge consisted of only three pages. (App. 91-94). After confirming background facts regarding the reverse mergers and companies at issue, Mr. Flynn disputed the government's suggested facts or merely responded “yes” to the government's recitation regarding the alleged crimes, phrased in question form. (App. 94). For example, Mr. Flynn agreed that the unindicted coconspirator recruited individuals to hold shares and that Mr. Flynn was “working with [him].” (App. 94-95).

When asked about his interaction with the alleged unindicted coconspirator form Australia, Mr. Flynn, however, testified:

(App. 94). Likewise, when asked about his role in the recruitment and use of purported nominees in Australia, Mr. Flynn disclaimed involvement:

(App. 92-93). Further, while Mr. Flynn agreed with the prosecutor's premise that the “evidence in [the government's] case suggests” that he and Mr. Miotti had control of the Australian accounts and caused the Australian nominees to sell stock and deposit proceeds in Australian bank accounts, Mr. Flynn never actually testified that he had such control. (App. 93). The colloquy discussed and Mr. Flynn answered “yes” that the use of the nominees impaired the IRS but went no further (App. 94).⁴ That was the end of the colloquy with respect to Count 1.

The colloquy then continued with Count 3. Here, the purported evidence consisted of sales by Australians, and $2.7 million routed to Minnesota and used to buy a home in which Mr. Flynn resides:

(App. 94). The identity of the owner of the home was omitted from the colloquy and remains in dispute. Three boilerplate questions with respect to 26 U.S.C. § 7206(1) followed. (App. 95). The colloquy contained no further discussion as to the disposition of the funds for which Mr. Flynn was being held accountable.⁵

Factual disputes arose rapidly after the entry of the plea. Prior counsel wrote to the Probation Officer disavowing even the limited facts contained in the plea agreement and discussed during the colloquy. (App. 122, 247). Counsel contested the critical issue of whether Mr. Flynn had “dominion and control” over the funds sufficient to create a requirement to report income from the sales and whether the advisory guideline calculation as to loss was correct. This contention resulted in an email from the government stating that:

Now, in your letters to the probation officer, Flynn seems to be saying that these contrivances were real and, in fact, that the Klein conspiracy was not really a Klein Conspiracy. Now, Flynn claims for example, that a “downward variance should be available to Mr. Flynn in light of the fact that the sale of these shares [by the Australians] are technically taxable to their respective owner.”

(App. 247). Despite these critical factual disputes, prior counsel never sought to withdraw the plea.

The Presentence Investigation Report (“PSI”) was issued on October 16, 2018. (App. 99). The PSI presented a two-and-one half pages of facts and outlined income resulting both from the issuance of the shares and their eventual sale. (App. 102-04).⁶ In the Addendum to the PSI, the Probation Office reported:

The defendant objects to the inference that he had exclusive dominion and control over the public investors or their shares of stock, as his control was, at best, partial. He contends he did not have majority control, which is essential for decision-making power over all the shares. The defendant further notes that, in reverse merger transactions, the publicly-traded company can only acquire restricted shares. He believes no publicly-traded shares have ever been transferred to him from Integritas or Diversified Equities Partners.

(App. 122). The Probation Officer further reported that prior counsel was now contesting the tax loss and suggested a tax loss of $704,550. (App. 123).

IV. THE DISTRICT COURT'S DENIAL OF MR. FLYNN'S MOTION TO WITHDRAW HIS PLEA

On December 11, 2018, after changing counsel and prior to sentencing, Mr. Flynn filed a motion seeking to withdraw his guilty plea. [DCD 115-117]. In the motion, Mr. Flynn contended that there were fair and just reasons to withdraw his guilty plea, including Rule 11 violations, the failure to discuss the charges, and the factual basis for the charges. Mr. Flynn also contended that the Klein Conspiracy Charge was invalid in light of Marinello v. United States. Mr. Flynn asserted his innocence, and argued that the delay before filing the motion due to the change of counsel was in line with cases where pleas have been allowed to be withdrawn. Mr. Flynn also asserted that there was no prejudice to the government in permitting the withdrawal. [DCD 116].

The District Court denied Mr. Flynn's motion to withdraw his guilty plea on January 8, 2019. (Add. 16). The District Court concluded that the record adequately demonstrated that Mr. Flynn understood the nature of the charges against him. Despite Rule 11's command that “the court must inform the defendant of . . . nature of each charge,” the District Court stated that “Rule 11 does not require that the elements of each charge be reviewed with the defendant.” (Add. 5). The District Court held that because it recited a paragraph from the SSI while arraigning Mr. Flynn, and because Mr. Flynn had experienced counsel, was involved in sophisticated transactions, and had a prior conviction for a federal crime, he must have understood the technical nature of the charges against him. (Add. 7). No authority was cited for these conclusions. (Add. 5-7).

The District Court further found that there was an adequate factual basis for the plea. The District Court discussed the factual discrepancies between the plea agreement and the testimony at the hearing and declared that Mr. Flynn misstated the record. (Add. 9-10). The District Court determined that the statements in the plea agreement and at the hearing were sufficient to establish the factual basis for Mr. Flynn's plea. (Add. 10-11). There was no discussion about counsel's submission to the Probation Office, the PSI Addendum, or the change in position after the change of plea hearing.

The District Court also declined to extend the holding from Marinello to the Klein Conspiracy Charge. The District Court reasoned that Marinello was a narrow holding based on the limited meaning of “due administration” of the Code in 26 U.S.C. § 7212(a), and that the broad Klein conspiracy doctrine was unaffected by the Marinello decision. (Add. 13-14).

The District Court did not consider the assertion of innocence and suggested that there was undue delay in the filing of the motion. (Add. 14). Finally, the District Court concluded that withdrawing Mr. Flynn's guilty plea would be prejudicial to the government, concluding that having to prepare for trial would constitute prejudice. (Add. 15).

V. SENTENCING

The District Court scheduled Mr. Flynn's sentencing for January 23, 2019, just two weeks after denying his motion to withdraw. On January 15, 2019, Mr. Flynn moved to continue and/or bifurcate sentencing and the restitution hearing. [DCD 133]. The District Court denied the motion, reserving the right to bifurcate and continue the restitution hearing if the evidence became “more complicated than anticipated.” (Add. 17-18). Mr. Flynn further sought a jury trial on restitution, which was denied. (Add. 17).

After the District Court denied Mr. Flynn's motion, the government provided its loss calculations and approximately 30,000 documents to Mr. Flynn's counsel, less than a week before the sentencing hearing. (App. 260, 283). In both his motion to continue and/or bifurcate sentencing and at the sentencing hearing, Mr. Flynn stated his desire to engage an expert. See DCD 133; App. 260. Mr. Flynn's counsel also noted that it was unfair to have only three days to review 30,000 documents in preparation for the restitution hearing, and renewed his request to bifurcate. (App. 260). The District Court pressed forward with the restitution portion of the hearing on the afternoon of January 23. (App. 261).

At sentencing, the government abandoned the plea agreement's sentencing recommendations and withdrew its support for the acceptance-of-responsibility reduction. (App. 253). Counsel for Mr. Flynn argued that the agreement had been breached and renewed his request to permit withdrawal of the plea. The District Court rejected this request. (App. 254).

During the restitution portion of the hearing, the government presented three different calculations of the tax loss. One calculation (Exhibit 2), recognizing the corporate entities, had a loss of $1,292,651 attributable to Mr. Flynn. (App. 402-4). A second calculation ignoring the corporate entities (Exhibit 3), had a loss of $12,151,454, outside of the agreed upon advisory guideline range. (App. 405-7). The third calculation (Exhibit 4), on which the government relied at sentencing, concededly was not based upon a calculation of the actual loss.⁷ (App. 408-12). Instead, the government's restitution calculation was based on:

[A] proxy number that we used kind of as a compromise between the largest tax loss that it could be and what Mr. Flynn probably wanted. So the 15 million was a compromise number that stood instead of the actual income.

(App. 296). In fact, the government admitted, “We're not contending that this [$15 million] is a completely accurate number.” (App. 307).

Indeed, the government stated that its “proxy” figure included “maybe 6 million” left in Australia that was never returned to the United States. (App. 295). The government conceded that it only knew what happened to “some of the funds” it imputed as income to Mr. Flynn. (App. 295).⁸ The government also acknowledged that it only sought to impose restitution for proceeds derived from the sale of stock, and that such income is ordinarily taxed at the lower capital gains rate. (App. 295-96). However, when the government calculated its restitution figure by way of “proxy,” it calculated that figure at ordinary income rates. (App. 296). Using the higher ordinary income rate, the government contended that the tax loss for purposes of restitution was $5,392,442.87. (App. 304).

The District Court adopted the government's tax loss calculation as “fair” and entered an order of restitution on both counts with immediate payment required in the amount of $5,392,442.87 (App. 375, 392). The District Court, in imposing restitution, acknowledged that the figure did not represent the actual loss:

And I won't pretend that I think it is mathematically precise in any way to reflect the amount that should actually be paid back, but it certainly satisfies in my mind the preponderance of the evidence standard and, more importantly, I think it is fair under the circumstances.

(App. 375).

The plea agreement provided for a four-point increase in the offense level under USSG § 3B1.1(a). The District Court made no findings regarding whether the criminal activity was “otherwise extensive.” Despite the lack of an evidentiary basis for the four-point increase, the District Court imposed sentence including that adjustment. The District Court imposed a sentence of 60 months on Count 1 and 27 months on Count 3, to be served consecutively. (App. 392).

SUMMARY OF THE ARGUMENT

This is the unusual case where Rule 11 and other errors so affected the change of plea that Mr. Flynn should have been permitted to withdraw his guilty plea pre-sentencing. Despite the facts that Mr. Flynn filed the motion before sentencing, asserted his innocence, and demonstrated there was no prejudice to the government, the District Court denied the motion. Mr. Flynn was not provided adequate notice of the elements of the charges against him and there was no adequate factual basis for Mr. Flynn's plea, especially as to Count 1. Disputes as to essential elements of Count 1 were raised with the government, were contained in the PSI, and remained unresolved. The government's plea agreement breach at the sentencing by refusing to move for acceptance further mandates that the withdrawal of the plea should have been permitted.

Mr. Flynn's conviction on Count 1 should also be vacated because the Klein Conspiracy Charge in Count 1 of the SSI is void for vagueness. The Supreme Court has never adopted the judicially-created common law crime of Klein conspiracy. Even if the Klein Conspiracy Charge is not to be considered void, under Marinello, proof was required that the charged conduct had a nexus to a pending or reasonably foreseeable proceeding or investigation. The language of the SSI in this case with respect to the Klein conspiracy tracks the language of 26 U.S.C. § 7212(a) at issue in Marinello, and there is nothing in the record to support any nexus to an investigation.

The District Court abused its discretion by refusing to bifurcate the sentencing and restitution hearing to permit Mr. Flynn adequate time to prepare his defense. The District Court refused to permit a jury trial as to restitution and committed clear error by basing its restitution order on a “proxy” number instead of proof of the actual loss. The District Court further erred in ordering immediate restitution for Count 3.

Finally, the organizer/leader adjustment should not have been imposed, and Mr. Flynn may contest imposition of that adjustment based upon the government's renunciation of the plea agreement at sentencing.

The case should be remanded with instructions to permit the withdrawal of the guilty plea and to require the government to prove its case against Mr. Flynn at a trial. Alternatively, the conviction as to Count 1 should be vacated and the matter remanded for resentencing. Separately, the restitution order should be vacated.

ARGUMENT

I. THE DISTRICT COURT ABUSED ITS DISCRETION AND ERRED BY NOT PERMITTING MR. FLYNN TO WITHDRAW HIS GUILTY PLEA

A. Applicable Legal Standard

“Whether a plea is knowing and voluntary is a mixed question of fact and law that we review de novo.” United States v. Gray, 152 F.3d 816, 819 (8th Cir. 1998). Whether a defendant raised fair and just reasons to withdraw a guilty plea prior to sentencing is reviewed for an abuse of discretion. Gray, 152 F.3d at 819; United States v. Alvarado, 615 F.3d 916, 920 (8th Cir. 2010).

Under Fed. R. Crim. P. 11(d), a defendant may withdraw a plea of guilty before the court imposes a sentence if “the defendant can show a fair and just reason for requesting the withdrawal.” Fed. R. Crim. P. 11(d)(2)(B). The standard is to be construed liberally, but is not automatic: “'[w]hile the standard is liberal, the defendant has no automatic right to withdraw a plea.'” United States v. Heid, 651 F.3d 850, 853 (8th Cir. 2011) (quoting United States v. Ramirez-Hernandez, 449 F.3d 824, 826 (8th Cir. 2006)).

B. Mr. Flynn Was Not Fully Informed of the Nature of the Charges, Which Renders His Plea Not “Knowing and Voluntary”

Before a court accepts a plea of guilty or nolo contendere, the defendant may be placed under oath, and the court must address the defendant personally in open court. Fed. R. Crim. P. 11(b)(1). During this address, “the court must inform the defendant of, and determine that the defendant understands . . . the nature of each charge to which the defendant is pleading.” Fed. R. Crim. P. 11(b)(1)(G) (emphasis added).

A guilty plea “is more than a confession which admits that the accused did various acts.” Boykin v. Alabama, 395 U.S. 238, 242 (1969). It is an “admission that he committed the crime charged against him.” North Carolina v. Alford, 400 U.S. 25, 32 (1970). The Supreme Court has observed that, by entering a plea of guilty:

[T]he accused is not simply stating that he did the discrete acts described in the indictment; he is admitting guilt of a substantive crime. That is why the defendant must be instructed in open court on “the nature of the charge to which the plea is offered,” Fed. Rule Crim. Proc. 11(c)(1), and why the plea “cannot be truly voluntary unless the defendant possesses an understanding of the law in relation to the facts.”

United States v. Broce, 488 U.S. 563, 570 (1989) (quoting McCarthy v. United States, 394 U.S. 459, 466 (1969)).

The District Court's ruling contradicted this binding Supreme Court authority and the text of Rule 11 itself by concluding, based upon a citation to United States v. Johnson, 715 F.3d 1094 (8th Cir. 2013), that “Rule 11 does not require that the elements of each charge be reviewed with the defendant.” (Add. 5). Johnson, however, is inapposite. After a child pornography plea by a defendant acting pro se, this Court held that there was a factual basis for the plea. There was no contest in that case that the elements of the offense were not recited properly as required by Rule 11.

This Court outlined the proper standard in Harvey v. United States, 850 F.2d 388 (8th Cir. 1988), even though the case arose on collateral attack rather than direct review. “While a verbatim reading of the indictment may not be required under Rule 11, we believe a more thorough probing of the charges is required.” Harvey, 850 F.2d at 395 n.5 (citations omitted).A true understanding requires knowledge of “the law in relation to the facts” of the case. Id. at 396 (citing Nash v. Israel, 707 F.2d 298, 302 (7th Cir. 1983); McCarthy, 394 U.S. at 466). The court should “engage in [as] extensive an interchange as necessary to assure itself and any subsequent reader of the transcript that the defendant does indeed fully understand the charges. . . .” Mack v. United States, 635 F.2d 20, 26 (1st Cir. 1980) (citation omitted). The court should not rely on yes or no answers. Id.; see also United States v. Wetterlin, 583 F.2d 346, 350 n.6 (7th Cir. 1978) (finding error for failure to explain charge of conspiracy; merely “reading the indictment clearly does nothing to establish on the record that the court personally determined that the defendant understood the nature of the charges”).

Under Rule 11(b)(1)(G), the District Court was required to explain the charges against Mr. Flynn, in the context of the facts of this case. That did not occur here. The only reference whatsoever to any of the elements of a Klein conspiracy in the plea colloquy was the District Court's reading of the introductory paragraph of Count 1 during arraignment. (App. 80-81). There was certainly no “thorough probing of the charges,” or any probing of the charges, as is required by Harvey. (Add. 5-7).

The omission of the elements of the charges was especially critical here, where the law is vague and complex as related to a Klein conspiracy and Mr. Flynn disputed elements of the offense in the colloquy.⁹ Because it is a common law crime, a body of inconsistent law has developed regarding even the elements necessary to prove a Klein conspiracy. See United States v. Fletcher, 322 F.3d 508, 513 (8th Cir. 2003) (describing Klein conspiracy as a two-element crime, but citing United States v. Furkin, 119 F.3d 1276, 1279 (7th Cir. 1997); United States v. Shoup, 608 F.2d 950, 956 (3d Cir. 1979) and United States v. Vogt, 910 F.2d 1184, 1202 (4th Cir. 1990), which all identify a third element); United States v. Coplan, 703 F.3d 46, 61 (2d Cir. 2012), cert. denied, 571 U.S. 819 (2013) (describing four necessary elements to offense).¹⁰

Moreover, while the government need not prove the substantive offense, the government must establish all the elements of the substantive crime when a specific crime is alleged as the object of the conspiracy. Coplan, 703 F.3d at 66 (“'Although the government need not prove commission of the substantive offense' to secure a conspiracy conviction, 'it must prove that the intended future conduct [the conspirators] agreed upon includes all the elements of the substantive crime'”). The government, having alleged tax evasion as the object, was required to establish a substantial tax due, willfulness and an affirmative act performed with an intent to evade or defeat the assessment of tax. Id. (quoting United States v. Litwok, 678 F.3d 208, 215 (2d Cir. 2012)). There was no discussion in the colloquy on any of these points.

The District Court further erred by failing to ensure that Mr. Flynn understood that the exercise of “dominion and control” over the funds in question was a material element for both Counts 1 and 3. The Supreme Court has stated that income is taxable only when the taxpayer has complete dominion and control over the funds. James v United States, 366 U.S. 213, 219 (1961) (citing Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955)); Rutkin v. United States, 343 U.S. 130, 137 (1952) (taxpayer has income when he has such control that as a practical matter “he derives readily realizable economic value from it”) (citation omitted); see also Minchem Int'l, Inc. v. Commissioner, TCM 2015-56 (2015) (“true owner” of income is the person who controls rather than person who receives the income; holding that recipient did not retain sufficient dominion and control to create taxable income for the company; holding that entity was conduit for the funds).

Thus, a material requirement for both Count 1 and Count 3 is that Mr. Flynn exercised such dominion and control over the funds sufficient to make him responsible for reporting. Simply using the word “control” in this context during the colloquy was disputed and was insufficient to establish Mr. Flynn's knowledge that he was responsible for the alleged taxes not being reported. See, e.g., United States v. Boatright, 588 F.2d 471, 475-76 (5th Cir. 1979) (finding insufficient factual basis for plea where conclusory language was not supported by underlying factual information). Even if the District Court believed that counsel had advised Mr. Flynn regarding the nature of the charges, advice by counsel is not enough to satisfy Rule 11. Wetterlin, 583 F.2d at 350 n.7 (citing Phillips v. United States, 519 F.2d 483, 485 (6th Cir. 1975); United States v. Cody, 438 F.2d 287 (8th Cir. 1971)).

The record in entirely devoid of any advice, colloquy, or other discussion regarding any of these elements as part of Mr. Flynn's plea. And, this is especially important here after Mr. Flynn stated that he had no contact with the individuals allegedly holding funds, denied even the amount of the stock sales, and where the government was unable to establish that Mr. Flynn received any benefit other than the home (whose ownership was disputed) in which he resided. The failure to discuss these issues led to disputes by Mr. Flynn's prior counsel after the guilty plea regarding whether he ever had dominion or control over the funds. See, e.g., App. 122; App. 247.¹¹

An out-of-circuit decision, United States v. Syal, 963 F.2d 900, 905 (6th Cir. 1992), is instructive here. In that case, the defendant sought to withdraw a guilty plea entered on wire fraud charges. The Sixth Circuit noted, “[w]hen a defendant pleads guilty, that defendant is admitting all the elements of a formal criminal charge, and so must have knowledge of all those elements.” Id. at 904 (citing United States v. Van Buren, 804 F.2d 888, 892 (6th Cir. 1986)).The Sixth Circuit rejected the approach taken by the District Court here, and found that while in a simple case a mere recitation of the indictment might suffice, “[w]hen the case is more complex, further explanation may be required. In any case, the district court must be satisfied, after discussion with the defendant in open court, that the defendant understands the elements of the offense.” Id. at 905. In Syal, the district court did not engage in any detailed discussion of the nature of the charges during the plea colloquy. In reversing, the Sixth Circuit stated:

While a defendant in Syal's circumstance may not need as much explanation as an unrepresented defendant, the District Court must meet the minimum requirements of Rule 11. Some rehearsal of the elements of the offense is necessary for any defendant. Failure to identify the elements of the offense is error and cannot be said to be harmless, even for an educated, well-represented defendant.

Id. (citations omitted; emphasis added).¹² This case is indistinguishable from Syal. The fact that none of the elements were discussed in the plea colloquy is not mere harmless error; it affected Mr. Flynn's substantial rights with respect to the plea to Count 1 and were omitted from Count 3 as well. See, e.g., Syal, 963 F.2d at 905.

C. There Is No Adequate Factual Basis for the Plea to Count 1

Whether this Court applies pre- or post-Marinello standards, there was no adequate factual basis for Mr. Flynn's plea to the Klein Conspiracy Charge in Count 1. See, e.g., United States v. Wroblewski, 816 F.3d 1021, 1025 (8th Cir. 2016); United States v. Van Doren, 800 F.3d 998, 1001 (8th Cir. 2015). While the District Court relied on the stock acquisition, the use of nominees, a password allegedly used to control certain accounts, and the sale and transfer to accounts offshore (Add. 8-9), critical facts were either insufficient, omitted, or contradicted during the colloquy or before the motion to withdraw was filed.

First, Mr. Flynn first stated that he could not quantify the $15 million but, upon questioning by the government, said only that he did not dispute it. (App. 94). This should have caused additional questioning concerning the essential element of the amount involved in the alleged conspiracy. The District Court's statement that Mr. Flynn misstated the record on this point is incorrect because of his plea stipulation as to this amount is insufficient to establish this critical fact when Mr. Flynn changed his position on this point during the plea colloquy. See United States v. Navedo, 516 F.2d 293, 297-98 (2d. Cir. 1975) (affirming rejection of guilty plea where defendant disclaimed elements of offense during colloquy).

Second Mr. Flynn did not admit he had control over the Australian nominees and the facts reflect that he did not. (App. 122). Here, the District Court relied upon the colloquy which stated that “our case suggests that collectively, you and Mr. Miotti had control over those Australian people . . .,” to which Mr. Flynn responded in the affirmative. Once Mr. Flynn stated he never spoke to his alleged nominees, more was required. Boatright, 588 F.2d at 475-76; Rutkin, 343 U.S. at 137. And, at sentencing, the government announced that, other than the home, the rest of the funds were either untraced or remained offshore a decade or more after that operative events occurred. (App. 295, 325).

Third, while the District Court can examine facts in the PSI to determine whether a factual basis exists, here Mr. Flynn and the government had an ongoing dispute over whether Mr. Flynn had dominion or control over the funds up through sentencing. See App. 122; App. 247 (government stating that Mr. Flynn had disavowed that a Klein conspiracy violation had occurred); App. 128 (arguing Mr. Flynn “has frivolously minimized his offense conduct” and “den[ied] key aspects of the Klein Conspiracy”). And a dispute arose based on documents provided by the government post-plea over the basic agreement as to the advisory guideline range. (App. 122). The District Court was required to consider those ongoing disputes in relation to the withdrawal of the plea. See, e.g., United States v. Moran, 452 F.3d 1167, 1171 (10th Cir. 2006) (factual basis for plea must continue to exist through entry of judgment); United States v. Ventura-Cruel, 356 F.3d 55, 60-61 (1st Cir. 2003) (affirming vacated plea at time of sentencing when the district court discovered that the defendant disavowed an element of the crime).

Fourth, the factual basis to support Mr. Flynn's role as a coconspirator was insufficient. At most, the factual record provides that Mr. Flynn was “working with Mr. Miotti,” but there is no factual support to conclude that the efforts were intended to defraud the IRS. Mr. Miotti and the other Australian nominees were citizens of a different country. The government presented no evidence that any of them had U.S. filing or tax obligations, and it later presented evidence that most of the funds allegedly involved remained offshore. (App. 295, 325).¹³ The colloquy was insufficient and the District Court erred in refusing to permit the plea withdrawal.

Finally, because nexus is required post-Marinello, the plea fails for this reason as well. See infra p. 42. There is no discussion in the plea agreement or colloquy regarding any facts suggesting that Mr. Flynn's conduct had any nexus to any investigation or proceeding about which he had knowledge. The earliest indication in the record of any proceeding or investigation was in February 2012, with the execution of search warrants.

D. There Is No Adequate Factual Basis for the Plea to Count 3

Mr. Flynn also entered a guilty plea to Count 3, alleging that he filed a false tax return for tax year 2007. To establish such a violation, the government must prove both falsity as to a material matter in the tax return and knowledge of such falsity by the accused at the time the return was signed. United States v. Fontenot, 628 F.2d 921, 923 (5th Cir. 1980); United States v. Miller, 545 F.2d 1204, 1212 (9th Cir. 1976).

Here, the only factual basis in the record supporting the government's claim that there was false information in the 2007 tax return is that money from the sales of stock was routed offshore and then back onshore to buy the house in which Mr. Flynn resided. The fact that the funds were used to purchase a home he lived in — as opposed to owned — does not establish income to Mr. Flynn and is intertwined with the issue of dominion and control. This claim was also belied by the government's own position in the SSI and SAR, which acknowledged that the money flowed to Watertown Properties, which does in fact own the property, and the SAR, which did not seek to tax the income from the home to Mr. Flynn. (App. 25, 153, 172-73). There was no factual basis for the plea to Count 3, as nothing supports the plea beyond conclusory statements.

E. Mr. Flynn Properly Asserted His Actual Innocence and there Is No Prejudice to the Government

Mr. Flynn asserted his innocence. At the plea colloquy and subsequent to it, Mr. Flynn repeatedly asserted that the factual basis for material elements of the Klein conspiracy were lacking. In fact, the government chastised Mr. Flynn for continuing to assert his innocence after the plea. (App. 247). And, it was determined from the SAR that the government had changed its theory of the case and dramatically increased the tax loss by claiming that Mr. Flynn was part of a conspiracy with his deceased father and the unindicted coconspirator. See United States v. Hall, No. 15-cr-55-LLR, 2016 WL 1175207, at *6 (N.D. Iowa. 2016) (always an inconsistency between guilty plea and motion to withdraw).

Without citation to any authority, the District Court found that permitting the withdrawal of the guilty plea would be prejudicial to the government because it would have to prepare for trial anew. The Court failed to distinguish, or even acknowledge, case law holding directly to the contrary. See Hall, 2016 WL 1175207, at *7; United States v. Collyard, 2013 WL 2318141, *12 (D. Minn. 2013) (merely having to prepare for trial upon the withdrawal of a plea is not prejudicial). There is no prejudice to the government by forcing it to prove its case.

Without making a specific finding on the issue, the District Court implied Mr. Flynn's delay in bringing his motion to withdraw his plea factored into its decision to deny his motion. (Add. 14).¹⁴ First, filing delays alone are not a reason to deny a motion to withdraw a guilty plea, but can merely “provide[ ] additional reasons for denying the motions, in concert with consideration of other factors.” Hall, 2016 WL 1175207, at *7 (citing United States v. Jones, 479 F.3d 975, 978 (8th Cir. 2007); United States v. Prior, 107 F.3d 654, 658 (8th Cir. 1997); United States v. Vallery, 108 F.3d 155, 158 (8th Cir. 1997)). Moreover, a delay of several months is justified where, as here, a change of counsel preceded the withdrawal of the plea. Id. Third, the District Court was aware from the PSI and government's filings that core factual disputes remained between the parties.

F. The District Court Should Have Permitted the Withdrawal of the Guilty Plea Based upon the Government's Breach

At the sentencing hearing, the government breached the plea agreement by withdrawing its support for the acceptance-of-responsibility reduction. (App. 253). Where the government breaches the plea agreement by making a different sentencing recommendation than it agreed to, Mr. Flynn should have been permitted to withdraw his plea. See, e.g., United States v. Mosley, 505 F.3d 804, 808-11 (8th Cir. 2007) (remand based upon breach for failure to recommend acceptance reduction); United States v. Yah, 500 F.3d 698, 704-05 (8th Cir. 2007) (where government breaches sentencing recommendation provision of plea agreement, “the defendant is entitled to specific performance and resentencing by a different judge or the opportunity to withdraw his plea”) (citing Santobello v. New York, 404 U.S. 257, 262-263 (1971)).¹⁵ When Mr. Flynn renewed his motion to withdraw his guilty plea at the sentencing (App. 376), the District Court should have granted it based upon the government's breach alone.

The District Court stated at the hearing, “I have always been reluctant to have anyone be going to [sic] and sentencing anyone based on a guilty plea if they aren't truly guilty of that and if they think they have a defense.” (App. 438-39). Despite this statement, the District Court refused to permit the withdrawal and this was error.

II. THE COURT SHOULD VACATE MR. FLYNN'S CONVICTION UNDER COUNT 1 BECAUSE THE KLEIN CONSPIRACY IS VOID FOR VAGUENESS

Mr. Flynn's plea is invalid for the additional reason that Count 1 fails to state an offense. The SSI charged Mr. Flynn with Klein Conspiracy in violation of 18 U.S.C. § 371. The government employed the “defraud clause” of § 371, alleging that he, his deceased father, and an unindicted coconspirator agreed “to defraud the U.S. by deceitful and dishonest means by impeding, impairing, obstructing, and defeating the lawful governmental functions of the Internal Revenue Service. . . .” (App. 17). As such, the SSI “alleged a conspiracy to defraud the IRS in the function of assessing and collecting taxes, commonly known as a Klein Conspiracy.” Fletcher, 322 F.3d at 513.

In the District Court, Mr. Flynn challenged the validity of the indictment on two bases: (1) the application of 18 U.S.C. § 371 as a Klein conspiracy is void for vagueness and; (2) the Klein conspiracy must be limited in the same fashion as the Internal Revenue Code's Omnibus Clause (26 U.S.C. § 7212(a)) was limited in Marinello. This Court “review[s] a challenge to the sufficiency of an indictment de novo.”United States v. White, 241 F.3d 1015, 1020 (8th Cir. 2001) (citing United States v. O'Hagan, 139 F.3d 641, 651 (8th Cir. 1998)).

Mr. Flynn raised these Klein conspiracy issues in his motion to withdraw his guilty plea. [DCD 116]. Because the Klein conspiracy is invalid and because the charging document lacks the necessary nexus post-Marinello to state an offense, Mr. Flynn may challenge the validity of the charge after entering the plea and by way of this appeal. See Class v. United States, __ U.S. __, 138 S.Ct. 798, 807 (2018) (defendant does not waive constitutional claims that statute is invalid after guilty plea); United States v. Rosnow, 9 F.3d 728, 730 (8th Cir. 1993) (the claim that the indictment fails to state an offense may be raised at any time); United States v. Villarreal, 707 F.3d 942, 957 (8th Cir. 2013) (same).

A. History of the KLEIN Conspiracy Offense

18 U.S.C. § 371 contains two provisions:

If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.

18 U.S.C. § 371. The first clause is known as the “offense” clause because it requires the conspiracy to violate an offense under another statutory provision. Here, the government could have charged an offense to violate specific tax provisions contained in the SSI.

The second clause, the “defraud” clause, was first applied with respect to the IRS in United States v. Klein, 247 F.2d 908 (2d Cir. 1957). There, the defendants were charged with tax evasion and a “defraud conspiracy” in connection with their whiskey-selling business and the Second Circuit found sufficient evidence to support the 18 U.S.C. § 371 conspiracy conviction based on twenty “acts of concealment of income,” including false statements on tax returns and in interrogatory responses. Id. at 915-16.

The Supreme Court has never held that the criminal charge created by the interpretation of 18 U.S.C. § 371 in Klein is valid, and the use of 18 U.S.C. § 371 has been subject to challenges for its vagueness. Klein, 247 F.2d at 910 (“Defendants have continuously attacked this count for a variety of reasons, generally centering on the point that it is too vague and general to afford a proper basis for a felony trial and conviction”).¹⁶ Mr. Flynn recognizes this Court's existing precedent, Derezinski, 945 F.2d at 1010. But in that case, this Court noted that its analysis was limited “to the facts of the case at hand.” Id. (quoting United States v. Mazurie, 419 U.S. 544, 550 (1975)). Mr. Flynn asserts that intervening Supreme Court case law and years of inconsistent interpretations of the Klein doctrine, as described below, warrant revisiting the issue. Controlling precedent may be “effectively overruled” where a later Supreme Court decision effectively overrules its reasoning. Brookens v. Acosta, 297 F. Supp. 3d 40, 47 (D.D.C. 2018), aff'd sub nom. Brookens v. Dep't of Labor, No. 18-5129, 2018 WL 5118489 (D.C. Cir. Sept. 19, 2018) (citations omitted). That is exactly what has happened as a result of Skilling and Marinello, as described below.

B. Because It Is a Judicially-Created Doctrine, the KLEIN Conspiracy Offense Fails to Provide Adequate Notice of Prohibited Conduct and Invites Arbitrary and Discriminatory Enforcement

The fact that the Klein conspiracy doctrine was created by courts, and not by Congress, alone makes it unjustifiable. Federal courts have long held that there are no federal common law crimes. United States v. Hudson, 7 Cranch 32 (1812); United States v. Lanier, 520 U.S. 259, 267 n. 6 (1997) (“Federal crimes are defined by Congress, not the courts . . .”); Sorich v. United States, 555 U.S. 1204, 129 S.Ct. 1308, 1310 (2009) (Scalia, J., dissenting from denial of certiorari) (“[T]he notion of a common-law crime is utterly anathema today, and for good reason”). Hammerschmidt v. United States, 265 U.S. 182 (1924), relied upon by Klein, went beyond the common law interpretation of defraud, which is limited to depriving another of property through deceptive means. See McNally v. United States, 483 U.S. 350 (1987). Instead of applying the common law definition of fraud, Hammerschmidt and Klein expanded the concept to include any act “to interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest.” Klein, 247 F.2d at 916. Such an expansive reading does not comport with the principle that “ambiguity concerning the ambit of criminal statutes should be resolved in favor of lenity.” Skilling v. United States, 561 U.S. 358, 410-411 (2010) (quoting Cleveland v. United States, 531 U.S. 12, 25, (2000); Rewis v. United States, 401 U.S. 808, 812 (1971)). Instead, the Klein doctrine developed in direct contradiction to the maxim that federal courts should “exercise restraint in assessing the reach of a federal criminal statute.” United States v. Aguilar, 515 U.S. 593, 600 (1995) (citing Dowling v. United States, 473 U.S. 207 (1985)).

The Second Circuit — out of which the Klein conspiracy originated — has concluded, “the Klein conspiracy is a common law crime, created by the courts rather than by Congress. That fact alone warrants considerable judicial skepticism.” Coplan, 703 F.3d at 61. Several other circuit courts have agreed. Rosenblatt, 554 F.2d at 40 (prosecutions under 18 U.S.C. § 371 must be “scrutinized carefully”); Shoup, 608 F.2d 950, 956 (3d Cir. 1979) (same); United States v. Caldwell, 989 F.2d 1056, 1061 (9th Cir. 1993) (18 U.S.C. § 371 must not be interpreted “to forbid all things that obstruct the government, or require citizens to do all those things that could make the government's job easier”), overruled on other grounds by Neder v. United States, 527 U.S. 1 (1999).

Because it is a criminal charge borne of judicial doctrine, the law surrounding Klein conspiracies is in disarray. First, the basic elements of a Klein conspiracy differ among the Circuits. This Court has defined a Klein conspiracy as consisting of two elements: “To convict a defendant of a Klein conspiracy, the government must show the existence of an agreement to defraud the IRS and an overt act by one of the conspirators in furtherance of the agreement's objectives.” Fletcher, 322 F.3d at 513. This Court cited cases from the Third and Fourth Circuit in Fletcher which added a third element necessary to establish a Klein conspiracy, omitted by this Court. Shoup, 608 F.2d at 956 (“To establish a conspiracy under 18 U.S.C. § 371, the prosecution must prove three elements: (1) the existence of an agreement, (2) an overt act by one of the conspirators in furtherance of the objectives, and (3) an intent on the part of the conspirators to agree, as well as to defraud the U.S.”); Vogt, 910 F.2d at 1202 (same). The Department of Justice Criminal Tax Manual also adds a third element necessary for a Klein conspiracy charge, but states the elements differently. DEPARTMENT OF JUSTICE CRIMINAL TAX MANUAL, § 23.03. The Second Circuit recognizes four elements for a Klein conspiracy. Coplan, 703 F.3d at 61 (quoting United States v. Ballistrea, 101 F.3d 827, 832 (2d Cir. 1996)).

Second, like the elements of a Klein conspiracy, there is no consensus on the mental state required to be proven to establish a Klein conspiracy. Typically, tax crimes require an intentional violation of a known legal duty, or willfulness. See, e.g., Cheek v. United States, 498 U.S. 192, 200-201 (1991).The better-reasoned authority is that a Klein Conspiracy requires proof that a defendant knew his or her conduct was illegal based upon the substantive offense that was the object of the conspiracy. See Coplan, 703 F.3d at 66 (holding that to secure a conviction, the government must prove that the intended conduct agreed upon includes all the elements of the substantive offense); compare United States v. Khalife, 106 F.3d 1300, 1302–03 (6th Cir. 1997) (collecting authority on knowledge requirement).¹⁷

Where a statute lacks “sufficient definiteness that ordinary people can understand what conduct is prohibited,” or where it “encourages arbitrary and discriminatory enforcement,” a criminal statute is overly vague. Derezinski, 945 F.2d at 1010 (quoting Kolender v. Lawson, 461 U.S. 352, 357 (1983)). Even in light of half a century of case law, it remains unclear exactly what conduct might constitute a Klein conspiracy.

The Second Circuit reviewed a challenge to 18 U.S.C. § 371 on constitutional grounds in 2012. In Coplan, the defendant attacked § 371 in a case arising in the wake of Skilling, in which the Supreme Court limited the applicability of the honest services statute, 18 U.S.C. § 1346. Similar to the Klein conspiracy doctrine under 18 U.S.C. § 371, the honest services statute had been used to criminalize a broad array of conduct, and was subject to constant criticism for its breadth. Skilling, 561 U.S. at 405. In response to defendant's void-for-vagueness challenge to § 1346, the Supreme Court required that the statute be “pare[d] . . . down to its core.” Id. at 404.¹⁸

Relying on Skilling, the defendants in Coplan argued that the vagueness of the Klein conspiracy required the court to “pare down” the statute to its core. 703 F.3d at 61-62. In Coplan, the Second Circuit questioned the government's reliance on Hammerschmidt and Haas v. Henkel, 216 U.S. 462 (1910). It stated, “[t]here is nothing in the Government's brief recognizable as statutory interpretation — no discussion of plain meaning, legislative history, or interpretative cannons . . . The Government thus appears implicitly to concede that the Klein conspiracy is a common law crime, created by the courts rather than Congress. That fact alone warrants considerable judicial skepticism.” Id. at 61 (citations omitted). The Court continued: “[t]o justify an expansive reading of § 371, courts have occasionally implied that a conspiracy to defraud the Government is to be read more broadly than a conspiracy to defraud a private person . . . But this conclusion appears to rest on a policy judgment — that, in the nature of things, government interests justify broader protection than the interests of private parties — rather than on any principle of statutory interpretation.” Id. While it found the defendants' arguments to “pare down” the use of § 371 in Klein conspiracies persuasive, the Second Circuit ultimately declined to upset its precedent from Klein, stating it was for the Supreme Court to shift the law in this area. Id. at 62.

The government had the ability here to charge that Mr. Flynn conspired to violate 26 U.S.C. § 7201 under the offense clause of § 371 and did charge tax evasion and filing false returns as substantive offenses. The Klein Conspiracy Count sweeps too broadly, and this is confirmed by the Supreme Court's treatment of 26 U.S.C. § 7212(a) in Marinello.

C. If the KLEIN Conspiracy is to be Maintained, a Nexus Requirement is Necessary

The Supreme Court in Marinello held that prosecutors must establish a nexus between a particular administrative proceeding and a taxpayer's conduct in order to obtain a conviction under 26 U.S.C. § 7212(a) of the Internal Revenue Code. Marinello, 138 S.Ct. at 1109. Section 7212(a)'s omnibus clause forbids “corruptly or by force or threats of force . . . obstruct[ing] or imped[ing], or endeavor[ing] to obstruct or impede, the due administration of [the Internal Revenue Code].” 26 U.S.C. § 7212(a). The language of 18 U.S.C. § 371 employed in the SSI is identical in scope to that at issue in Marinello. Compare 26 U.S.C. § 7212(a) corruptly or by force or threats of force . . . obstruct[ing] or imped[ing], or endeavor[ing] to obstruct or impede, the due administration of [the Internal Revenue Code]” with the SSI alleging Mr. Flynn “imped[ed], impair[ed], obstruct[ed], and defeat[ed] the lawful government functions of the Internal Revenue Service . . .” (App. 17). The same limitation imposed in Marinello based upon the charging language employed here is thus required.

The Supreme Court reviewed the scope of the language “obstruct or impede” and noted its enormous breadth. The Court further noted that the phrase the “due administration of this title” could read literally to refer to every “'[a]ct or process of administering' including every act of 'managing' or 'conduct[ing]' any 'office', or 'performing the executive duties' of any 'institution business or the like.'” 138 S.Ct. at 1106 (quotations and citations omitted). The Supreme Court found that the reading sought by the government that any obstructive conduct came within the scope of the statute “'would risk the lack of fair warning and related kinds of unfairness that led this court in Aguilar to 'exercise' interpretative 'restraint.'” Id. at 1108 (citation omitted).¹⁹ The Court continued that, if Congress had intended such a result, “it would have spoken with more clarity than it did.” Id.

The Supreme Court concluded that the proof of a nexus between the conduct and the proceeding must be accompanied by proof “that the proceeding was pending at the time the defendant engaged in the obstructive conduct or, at the least, was then reasonably foreseeable by the defendant.” Id. at 1110. The Supreme Court held that the obstructive conduct must have a nexus to a particular investigation or proceeding, requiring a “relationship in time, causation or logic with the [administrative] proceeding.” Id. at 1109.

Historically, Klein conspiracies under 18 U.S.C. § 371 have been aligned with the Omnibus Clause of 26 U.S.C. § 7212(a). See, e.g., United States v. Armstrong, 974 F. Supp. 528, 540 (E.D. Va. 1997) (“Section 7212(a) is analogous to the general conspiracy statute, 18 U.S.C. § 371”; the district court's actual 26 U.S.C. § 7212(a) holding was overruled by Marinello). The Department of Justice itself recognized the relationship between the two statutes in its Criminal Tax Manual — Tax Division Directive No. 77, which provides, “In general, the use of the 'omnibus' provision of Section 7212(a) should be reserved for conduct . . . designed to impede or obstruct an audit or criminal tax investigation, when 18 U.S.C. § 371 charges are unavailable due to insufficient evidence of a conspiracy.”²⁰

Whatever theoretical differences the government may seek to portray between 26 U.S.C. § 7212(a) and the Klein Conspiracy Charge, the language employed in the SSI demands the same construction as the Supreme Court reached in Marinello. The “due administration” and “lawful government functions” require the same interpretative analysis and the conclusion that the Klein Conspiracy Count requires two participants but otherwise was identical to the 26 U.S.C. § 7212(a) charge limited in Marinello.²¹

The District Court rejected Mr. Flynn's Marinello claims because “Marinello does not address § 371, and the Court does not construe it as silently overturning the well-settled law governing conspiracies to defraud the United States.” (Add. 14). However, such a constrained view of Marinello is inconsistent with the Supreme Court's opinion. The Court in Marinello did not limit itself to 26 U.S.C. § 7212, and did not treat that statute as an anomaly. 138 S.Ct. at 1109

The District Court further noted that, despite it being less than one year since its issuance, there is not yet a line of authority applying Marinello to Klein conspiracies. (Add. 29). While this is true, cases are only now beginning to appear seeking this application. See United States v. Parlato, No. 15-CR-149-FPG, 2019 WL 988450 (W.D.N.Y. Mar. 1, 2019).²² Because the SSI and the record are completely devoid of any nexus between the alleged conduct and a pending investigation or proceeding about which Mr. Flynn had knowledge, this Court should vacate his conviction under Count 1. See United States v. Beckham, 917 F.3d 1059, 1064 (8th Cir. 2019) (holding that Marinello requires both (1) a nexus and (2) knowledge of a currently-pending or reasonably foreseeable proceeding).

III. THE DISTRICT COURT COMMITTED CLEAR ERROR AND ABUSED ITS DISCRETION WITH REGARD TO THE IMPOSITION OF RESTITUTION

A. The District Court Abused Its Discretion by Refusing to Bifurcate Sentencing and Restitution and Continue the Restitution Hearing

The District Court abused its discretion by refusing to permit Mr. Flynn ample time to defend the restitution hearing. A court's refusal to grant a continuance in the sentencing phase is reviewed for abuse of discretion. See, e.g., United States v. Shannon, 56 F.3d 69 (8th Cir. 1995) (citing United States v. Weisman, 858 F.2d 389, 391 (8th Cir. 1988)).

18 U.S.C. § 3664(d)(5) provides that a restitution hearing may take place up to 90 days after the sentencing. The bifurcation of the penalty phase of sentencing and restitution is warranted where there is a dispute over the proper amount of restitution. See, e.g., United States v. Andrews, 600 F.3d 1167, 1170 (9th Cir. 2010) (noting that district court bifurcated sentencing and restitution at defendant's request because defendant sought to dispute amount of loss); United States v. Baker, 672 F.Supp.2d 771, 772 (E.D. Tex. 2009) (bifurcated sentencing hearing).

The plea agreement did not specify any restitution amount. Here, where Mr. Flynn sought to contest the amount of the actual loss, sought to offer an expert, and where the government provided its restitution calculations just days before the hearing date, Mr. Flynn was denied his due process right to defend the hearing. (App. 260).²³ As a result, the District Court abused its discretion by refusing to continue the restitution hearing.

B. The Restitution Order Was Clearly Erroneous Because It Was Not Based on Proof of Actual Loss

The District Court committed clear error by awarding restitution of $5,392,442.87.²⁴ With regard to restitution, “the government must prove 'the amount of the loss sustained by [the] victim as a result of the offense' by a preponderance of the evidence.” United States v. Chalupnik, 514 F.3d 748, 754 (8th Cir. 2008) (quoting 18 U.S.C. § 3664(e)).

There were both procedural and substantive errors. Mr. Flynn requested a jury trial on the issue of restitution.²⁵ While Mr. Flynn is aware of this Court's decision in United States v. Carruth, 418 F.3d 900 (8th Cir. 2005), this decision was before the Supreme Court's decision in Southern Union v. United States, 567 U.S. 343 (2012), which applied Apprendi v. New Jersey, 530 U.S. 466 (2000) to fines. In his January 7, 2019, dissent from the failure to grant certiorari in Hester v. United States, __ U.S. __, 139 S.Ct. 509 (2019), Justice Gorsuch stated that “the Sixth Amendment's jury trial right expressly applies '[i]n all criminal prosecutions,' and the government concedes that 'restitution is imposed as part of a defendant's criminal conviction.'” Id. (citations omitted). Justice Gorsuch cited the dissenting opinion of Judge Bye in Carruth, 418 F.3d at 905-906, along with other Circuit Courts that have cast doubt on allowing judges, rather than juries, to decide restitution. See United States v. Green, 722 F.3d 1146, 1151 (9th Cir. 2013); United States v. Leahy, 438 F.3d 328, 343-344 (3d Cir. 2006) (en banc) (McKee, J., concurring in part and dissenting in part). Alternatively, Justice Gorusch argued that the Seventh Amendment right to a jury trial would apply. Id. at 511. Mr. Flynn submits that the Constitution guarantees him a right to a jury trial on the issue of restitution.

Substantively, the government did not even attempt to meet its “burden at sentencing to prove fact-intensive issues such as tax loss by a preponderance of the evidence.” United States v. Tucker, 217 F.3d 960, 961 (8th Cir. 2000). Instead, it offered what it called a “proxy” figure for the income imputed to Mr. Flynn. (App. 296).

The District Court, in imposing the restitution, acknowledged that the figure did not “in any way reflect the amount that should actually be paid back.” (App. 375). The District Court committed clear error because the award of restitution was not based on certain proof of the actual loss. United States v. Bagley, 907 F.3d 1096, 1098 (8th Cir. 2018) (vacating restitution order based on an estimate, not the actual loss caused by the injury); United States v. Jenkins, 884 F.2d 433, 440 (9th Cir. 1989) (holding that on remand district court must judicially establish actual loss “with certainty”).

Even if the District Court could have accepted the “proxy” figure offered by the government, the calculation of restitution would have been in error. The USSG § 2X1.1 advisory guideline resulted in the application of the USSG § 2T 1.1 advisory guideline. For restitution purposes, the amount must be based upon actual and not intended loss. Chalupnick, 514 F.3d at 754. The government's estimate included amounts that could not be traced and funds that remained in Australia. By including funds that the government cannot actually confirm as income to anyone subject to U.S. taxation, let alone Mr. Flynn, the restitution is not based on actual loss.²⁶ The only “benefit” the government asserted was the home in which Mr. Flynn resided and the value of this home, even if subject to taxation, would be dramatically less than that sought by the government and allowed by the District Court. Mr. Flynn has noted the dispute as to “dominion and control” and even presented testimony at the restitution hearing contradicting the government's dominion and control evidence.²⁷

Moreover, the government conceded that the entire $15 million was based on proceeds from the sale of shares. The government had alleged in the SSI that Mr. Flynn failed to pay tax at capital gains rates. (App. 23-24, 294). At sentencing, the government's Exhibit 4 altered this position and taxed Mr. Flynn at ordinary income rates. (App. 408-12).²⁸ The District Court's adoption of a restitution figure based on ordinary income rates, therefore, does not properly represent the actual loss. For any asset held over a year, a taxpayer should be subject to capital gains and not ordinary income rates. Stock is a capital asset under 26 U.S.C. § 1221. Stock held for more than a year is subject to long term capital gains. 26 U.S.C. § 1222. The capital gains rates for the years at issue was 15% or 20%, not the ordinary income rates employed by the government. This is an independent reason that the restitution amount was in error.

Finally, the restitution provisions of the VWPA and the MVRA only apply to offenses under Title 18, and do not apply to Title 26 offenses. United States v. Perry, 714 F.3d 570, 577 (8th Cir. 2013). Convictions under Title 26 may only result in restitution as a condition of supervised release. Id. Here, the District Court awarded restitution on both counts, which it cannot do except as a condition of supervised release on Count 3. Moreover, restitution can only relate to the offense conduct, so any restitution awarded for Count 3 can only relate to tax year 2007. See, e.g., United States v. Batson, 608 F.3d 630, 636 (9th Cir. 2010). The government proffered no testimony related to the purported loss for just 2007, and thus failed to prove any basis for restitution on Count 3.

IV. THE DISTRICT COURT COMMITTED PLAIN ERROR BY APPLYING THE FOUR-POINT ORGANIZER/LEADER ENHANCEMENT

The District Court's application of the four-point enhancement for Mr. Flynn's purported role as an organizer or leader pursuant to § 3B1.1 of the Sentencing Guidelines is subject to review for plain error. See United States v. Booker, 639 F.3d 1115, 1119 (8th Cir. 2011) (citing United States v. Rush–Richardson, 574 F.3d 906, 910 (8th Cir. 2009)) (sentencing enhancements not challenged below are subject to plain error review). It was plain error for the District Court to apply the increase. Mr. Flynn notes again that the government abandoned the sentencing agreements when it withdrew its recommendation for the two-point acceptance of responsibility reduction and breached the agreement. (App. 253).

At sentencing, the government, consistent with the SSI, provided evidence of less than five participants in the criminal activity that it viewed as criminally responsible. (App. 16-17, 265). Mr. Flynn at the change of plea hearing specifically stated that he never spoke to the unindicted coconspirator and there was no questioning as to the interaction with his father. (App. 92-93). Mr. Flynn further presented evidence that his father acted independently from him. (App. 339).

If all this was not enough, the District Court made no findings regarding the criminal activity to be “otherwise extensive,” or that Mr. Flynn directed anyone criminally responsible as part of the scheme. See, e.g., United States v. Kent, 821 F.3d 362, 370 (2d Cir. 2016) (requiring court to make finding supporting conclusion of “otherwise extensive” activity); United States v. Adetiloye, 716 F.3d 1030, 1037 (8th Cir. 2013) (requiring government to prove defendant directed someone as part of scheme). The evidence from the plea and presented at the sentencing hearing was that much of the money stayed offshore and there was no testimony that Mr. Flynn directed anyone. Because the District Court made no such finding, it was plain error to apply the four-point increase under § 3B1.1.

CONCLUSION

For the foregoing reasons, Mr. Flynn respectfully requests that this Court reverse the District Court and dismiss Count 1 of the Second Superseding Indictment, order the withdrawal of his guilty plea and remand this matter to the District Court for trial or, in the alternative, reverse the District Court's order on restitution and remand the matter for a rehearing on restitution.

Respectfully submitted,

FOX ROTHSCHILD LLP

By: Ian M. Comisky (#19-0093)
Patrick J. Egan (#19-0092)
2000 Market Street, 20^th Floor
Philadelphia, PA 19103
(215) 299-2000
icomisky@foxrothschild.com
pegan@foxrothschild.com

Attorneys for Appellant

Dated: April 12, 2019