Unpublished Disposition, 865 F.2d 266 (9th Cir. 1987)Annotate this Case
UNITED STATES of America, Plaintiff-Appellee,v.Josef SEHNAL, Defendant-Appellant.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted Oct. 4, 1988.Decided Dec. 22, 1988.
Before TANG, DAVID R. THOMPSON and O'SCANNLAIN, Circuit Judges.
Josef Sehnal appeals the district court's order denying his motion to dismiss the indictment because of prosecutorial misconduct. Sehnal, charged with four counts of making and subscribing false federal income tax returns, contends a government witness presented false and misleading testimony before the grand jury.
Sehnal was the founder, owner and president of Scorpio Steel, Inc. (Scorpio), a steel-fabrication company located in Phoenix, Arizona. On April 8, 1987, a grand jury in the District of Arizona returned a four-count indictment against Sehnal. Each count charged Sehnal with making and subscribing a false federal income tax return in violation of 26 U.S.C. § 7206(a). Counts One and Two charged Sehnal with falsely reporting the amount of income which he received from Scorpio on his 1980 and 1981 personal income tax returns. Counts Three and Four charged him with falsely reporting the amount of gross receipts which Scorpio received from its steel-fabrication business on the company's corporate tax returns for the fiscal years ending February 28, 1981 and February 28, 1982. The grand jury returned the indictment after hearing testimony from two witnesses, Sharon Smith on March 25, 1987, and Internal Revenue Service (IRS) Special Agent Sandra Schwartz on April 8, 1987.
On September 4, 1987, Sehnal filed a motion to dismiss the indictment on the grounds of governmental misconduct before the grand jury. Sehnal cited three specific portions of IRS Special Agent Schwartz's grand jury testimony which he claimed constituted false and misleading testimony prejudicing his right to an unbiased grand jury. On November 16, 1987, following a hearing, the district court found no misconduct by Agent Schwartz and denied Sehnal's motion. In so ruling, the court stated in pertinent part:
Assuming the facts in the light most favorable to the defendant, the Court finds the matters raised by the defendant simply do not rise to the level of prosecutorial misconduct. The grand jury is charged with determination of probable cause. The argument presented in the motion are essentially those that would appear to be a viable defense to the charges but not of the type that would rise to the dismissal of the charges.
Sehnal filed a timely notice of appeal.
JURISDICTION AND STANDARD OF REVIEW
The denial of a motion to dismiss an indictment based on alleged prosecutorial misconduct before the grand jury is properly appealed as an interlocutory order under 28 U.S.C. § 1292 and the collateral order doctrine. United States v. Dederich, 825 F.2d 1317, 1319-20 (9th Cir. 1987).
This court reviews de novo a district court's determination of whether a prosecutor's alleged misconduct before a grand jury warrants dismissal of the indictment. United States v. De Rosa, 783 F.2d 1401, 1404 (9th Cir.), cert. denied, 477 U.S. 903 (1986). However the Attorney General's use of the grand jury process also implicates separation of power concerns. Id.; see also, United States v. Sears, Roebuck & Co., Inc., 719 F.2d 1386, 1391 (9th Cir. 1983) cert. denied, 465 U.S. 1079 (1984). Thus, juridical intervention into the grand jury process is justified where the Attorney General's prosecutorial discretion "is abused to such an extent as to be arbitrary and capricious and violative of due process." De Rosa, 783 F.2d at 1404 (quoting United States v. Samango, 607 F.2d 877, 881 (9th Cir. 1979). Only in a "flagrant case" of prosecutorial misconduct, "and perhaps only where knowing perjury, relating to a material matter, has been presented to the grand jury should the trial judge dismiss an otherwise valid indictment returned by an apparently unbiased grand jury." United States v. Kennedy, 564 F.2d 1329, 1338 (9th Cir. 1977), cert. denied, 435 U.S. 944 (1978); cf., United States v. Flake, 746 F.2d 535, 538-39 (9th Cir. 1984), cert. denied, 469 U.S. 1225 (1985).
Dismissal of an indictment where such dismissal is sought for nonconstitutional error is appropriate only " 'if it is established that the violation substantially influenced the grand jury's decision to indict, 'or if there is 'grave doubt' that the decision to indict was free from the substantial influence of such violation." Bank of Nova Scotia v. United States, --- U.S. ----, 108 S. Ct. 2369, 2374 (1988), quoting United States v. Mechanik, 475 U.S. 66, 78 (1986) (O'Connor, J. concurring).
Sehnal bases his claim of governmental misconduct upon the following five instances of allegedly false and misleading testimony given by Agent Schwartz or presented by the government: (1) Schwartz testified falsely that Scorpio Steel was a cash basis taxpayer and that all four tax returns were prepared using the cash basis accounting method; (2) Schwartz testified falsely that Hy Spivack prepared both Scorpio corporate tax returns; (3) Schwartz testified falsely that Sehnal refused to provide his personal records to the IRS; (4) Schwartz testified misleadingly that corporate receipts had been diverted throughout the history of the corporation; and (5) the government inaccurately presented certain exculpatory evidence. None of these allegations of misconduct rises to a level to justify dismissal of the indictment.
First, Sehnal claims that Schwartz testified falsely that Scorpio Steel was a "cash basis" taxpayer required to report income as received and to deduct expenses as paid. He asserts Schwartz failed to advise the grand jury that Scorpio's 1982 tax return was filed during the course of a civil audit on a "completed contract" accounting basis at the request of IRS. The record does not support Sehnal's claim.
Schwartz testified that Scorpio's accountant, Hy Spivack, had maintained the company's books on a cash basis of accounting, that Spivack informed Sehnal of that fact, and that Spivack had prepared Scorpio's corporate tax returns with this method. These statements were true, responsive to the prosecutor's questions and were supported by Sehnal's own briefs. Nonetheless, the record also indicates that IRS Agent Samson had requested that Scorpio change its method of reporting income and expenses to the IRS from the cash basis method to the completed-contract method.1 However, Sehnal fails to note that IRS Agent Reese, who succeeded Samson on the case, determined that the completed-contract accounting method was inappropriate because the majority of Scorpio's jobs were completed within the tax year when commenced, and accordingly reversed Samson's initial determination and recomputed the 1982 corporate return using the cash basis accounting method.
Assuming Schwartz "falsely misled" the grand jury by not advising it about the change in accounting methods used in preparing the corporate returns, Sehnal has failed to demonstrate how the alleged omission was relevant or material to the grand jury's determination of probable cause. Regardless of the accounting method Scorpio employed to report gross receipts, the $59,706 understatement charged in the indictment (representing the customer checks allegedly diverted to Sehnal's personal and trust accounts) would not have been reported to the IRS on the two corporate tax returns. Thus, even if the grand jury had been advised, there was still a sufficient basis for the charge of wilfully filing two false corporate tax returns. The "misconduct," if any, cannot be described as so flagrant as to warrant dismissal of the indictment.
Second, Sehnal claims that Schwartz testified falsely that Spivack prepared both Scorpio corporate tax returns. The government concedes that Agent Schwartz "misstated the evidence." Although Spivack prepared three returns--the two personal tax returns described in Counts I and II, and the Scorpio corporate tax return for the fiscal year ending February 1981, described in Count IV--Jonathan Grice prepared the Scorpio tax return for the fiscal year ending February 1982 (Count III).
Again, however, the court's inquiry must focus on the materiality of the misstatement and its impact on the grand jury's impartiality. See Sears, 719 F.2d at 1391-92. Sehnal charges the misstatement "eliminated the possibility that the grand jury would discover the circumstances surrounding the filing of the 1982 corporate return." This claim misperceives the nature of the grand jury's function and scope of the appellate court's review. The identity of the particular tax preparer was not an issue for the grand jury. Nor was the prosecutor required to present the facts surrounding Agent Samson's audit and the requested change in accounting methods as evidence which would "tend to negate guilt." Sears, 719 F.2d at 1394 (quoting United States v. Lasky, 600 F.2d 765, 768 (9th Cir.), cert. denied, 444 U.S. 979 (1979)). The grand jury's determination of probable cause is only a preliminary one; to the extent Sehnal challenges the sufficiency of the indictment as to his intent, "legal uncertainty" over the appropriate accounting method, or actual understatements in gross receipts, these are questions more appropriately raised in proceedings before the district court.
Sehnal also claims that Agent Schwartz testified falsely that Sehnal "refused to turn over all his personal records to us." Sehnal asserts he in fact provided all records which Revenue Agent Samson requested, and alternatively, that even if Schwartz's statement was not false (i.e., if he did not produce all his records), that it then was an impermissible comment on his assertion of his fifth amendment privilege against self-incrimination. These contentions lack merit.
First, the record indicates Sehnal was somewhat less than fully cooperative with Agent Samson, particularly regarding his personal bank account records at Valley National Bank. However, even if Sehnal had been fully cooperative and provided all his personal records, there has been no showing as to how this isolated remark stripped the grand jury of its impartiality. Further, Schwartz's statement even if false or misleading, is considerably less damaging than that excused by this court in Sears, 719 F.2d at 1392, and De Rosa, 783 F.2d at 1405. Finally, the statement did not violate Sehnal's fifth amendment privilege because there has been no showing that the privilege was ever invoked, let alone that Schwartz's statement improperly commented on that invocation in a way requiring dismissal of the indictment. See Doyle v. Ohio, 426 U.S. 610, 617-18 (1976); United States v. McLaughlin, 663 F.2d 949, 951 (9th Cir. 1981).
Sehnal also asserts that Schwartz testified misleadingly that corporate receipts had been diverted "from the very first day" Scorpio opened for business , when in fact, the only evidence of any diversion related to the two years at issue in the indictment. Sehnal's argument is unsupported by the record. Schwartz's testimony makes clear her comments regarding the time period of any diversion referred only to 1980 and 1981.
Finally, Sehnal seeks dismissal of the indictment on the basis of what he asserts to be Schwartz's prejudicial testimony concerning Sehnal's "ex-girlfriend" Sharon Smith and Schwartz's allegedly misleading characterization of potentially exculpatory evidence. These claims are meritless. As indicated above, the government was under no obligation to present Sehnal's "exculpatory" evidence, Sears, 719 F.2d at 1394, and there was nothing improper in Schwartz's comment on Smith's marital status or relationship with Sehnal, facts volunteered by Smith herself.
Sehnal has failed to establish that the misconduct alleged subverted the requirement that an indictment be returned by an informed and independent grand jury.
The alleged misconduct was not sufficient to pervert the grand jury process. The unfairness required for a reversal is not apparent. Accordingly, the district court's order denying dismissal of the indictment is
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3.1 Under the "completed-contract" method, a company would report income and deduct costs properly allocatable to a particular contract in the tax year in which the contract was completed. This method is generally used by companies which have long-term contracts which are not completed within twelve months. [Red Brief at 7, citing U.S. Master Tax Guide, Commerce Clearing House, Inc. p 1551, p. 398-400 (71st Ed.1988) ]