United States v. Simmons, No. 12-4469 (4th Cir. 2013)
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Defendant appealed his sentences and convictions for one count of securities fraud, one count of wire fraud, and two counts of money laundering. Defendant's convictions stemmed from his operation of a $35 million Ponzi scheme called Black Diamond Capital Solutions. The court affirmed defendant's two fraud convictions but reversed his two money-laundering convictions because the transactions prosecuted as money laundering constituted essential expenses of his underlying fraudulent scheme. Accordingly, the court affirmed in part, reversed in part, and remanded for further proceedings.
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PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 12-4469 UNITED STATES OF AMERICA, Plaintiff - Appellee, v. KEITH FRANKLIN SIMMONS, Defendant - Appellant. Appeal from the United States District Court for the Western District of North Carolina, at Charlotte. Robert J. Conrad, Jr., Chief District Judge. (3:10-cr-00023-RJC-DCK-1) Argued: October 29, 2013 Decided: December 11, 2013 Before NIEMEYER and MOTZ, Circuit Judges, and John A. GIBNEY, Jr., United States District Judge for the Eastern District of Virginia, sitting by designation. Affirmed in part, reversed in part, vacated in part, and remanded by published opinion. Judge Motz wrote the opinion, in which Judge Gibney joined. Judge Niemeyer wrote a dissenting opinion. ARGUED: Joshua B. Carpenter, FEDERAL DEFENDERS OF WESTERN NORTH CAROLINA, INC., Asheville, North Carolina, for Appellant. William Michael Miller, OFFICE OF THE UNITED STATES ATTORNEY, Charlotte, North Carolina, for Appellee. ON BRIEF: Henderson Hill, Executive Director, Ann L. Hester, FEDERAL DEFENDERS OF WESTERN NORTH CAROLINA, INC., Charlotte, North Carolina, for Appellant. Anne M. Tompkins, United States Attorney, Amy Elizabeth Ray, Assistant United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Asheville, North Carolina, for Appellee. 2 DIANA GRIBBON MOTZ, Circuit Judge: Keith Simmons appeals his convictions on one count of securities fraud, one count of wire fraud, and two counts of money laundering, imprisonment. as well as his sentence of fifty years We affirm his fraud convictions but reverse his money-laundering convictions because the transactions prosecuted as money laundering constituted underlying fraudulent scheme. essential expenses of his Accordingly, we affirm in part, reverse in part, vacate his sentence, and remand for further proceedings consistent with this opinion. I. A. From April 2007 to December 2009, Simmons operated a $35 million Ponzi scheme called Black Diamond Capital Solutions. With help from a network of self-styled hedge fund managers, Simmons recruited more than 400 investors by promising to invest their money in a lucrative exchange, or Forex fund. and exclusive foreign currency Simmons told investors that only ten or twenty percent of their investment would be at risk at any given time. He sent them monthly earnings statements reporting sizeable profits. And he promised them that, after an initial ninety-day period, they could withdraw their money at will. 3 Numerous investors tested Simmons s promise and withdrew a portion of their money after ninety days had passed. receipt of these returns, which seemed to Upon the evidence Black Diamond s legitimacy and profitability, many investors sent even more money to Simmons. Some recruited their friends to invest with Simmons as well. In fact, no Forex fund existed and Simmons never invested a cent of his victims funds. Simmons fabricated the earnings reports, and he paid the purported returns to early investors from deposits made by later ones. 1 Rather than investing his victims funds as promised, Simmons treated their investments as his personal piggy bank. He purchased $4.6 million in real estate, invested $1.2 million in an extreme fighting venture, funneled $2.2 million to his other businesses, and bought lavish gifts and trips for his employees and girlfriends. Greed provoked the Ponzi scheme, and greed doomed it. As more investors sought to withdraw their funds, Simmons told a series of escalating lies to string out investors and delay withdrawals. First, he claimed that withdrawals were interfering with the fund, and that he would henceforth limit withdrawals in order to reduce the fund s volatility. 1 Later, he Simmons paid out a total of $19 million, but only $9 million made its way to actual investors. Corrupt hedge fund managers, who served as middle-men between Simmons and some of his investors, siphoned off the rest. 4 asserted that he was negotiating with a German named Klaus Bruner, who allegedly planned to cash out investors and take over the account. And Simmons told some investors that the FBI itself was impeding some withdrawals. Simmons statements Black was lying. reflected Diamond bank a In total account 2009, of had when more in investors than fact $292 earning million, dwindled to the $523.60. Still, Simmons told investors that their money was safe. By July 2009, Simmons permitted no further withdrawals by investors. new After that date, Simmons managed to attract only one investor. Moreover, their money back. Simmons s December investors began demanding And as victim-investors became more alarmed, dissembling 2009, existing the became FBI more raided his desperate. offices. Finally, During a in long conversation with an FBI agent, Simmons confessed to the fraud. Ultimately, Simmons s Ponzi scheme cost his victims more than $35 million. their families. Many lost their life savings. Some lost Many became depressed, even suicidal, after learning that their money was gone. B. The Government indicted Simmons on one count of securities fraud, one count laundering. Ponzi scheme of wire fraud, and two counts of money The fraud counts arose from Simmons s role in the itself, which, according 5 to the superseding indictment, took place from April 2007 to December 2009. indictment did not predicate Simmons s two fraud The charges on discrete instances of fraud; rather, it charged Simmons with a two-and-one-half year scheme to defraud, specifically claiming that Simmons executed what is commonly known as a ponzi scheme. Simmons s money-laundering counts, by contrast, arose from discrete two Government payments alleged that to investors these made payments in The involved also 2008. the diver[sion of] investor money back to other investors in ponzifashion . . . to induce further investments by investors and their friends and family members. Simmons proceeded to trial in December 2010. victims testified managers, an confessed. was a IRS against agent, him, and as the FBI Simmons did not testify. neophyte investors. financier who did Nine of his certain agent to hedge whom fund Simmons His counsel argued that he never intended to defraud his The jury, however, convicted him on all counts. After Simmons s conviction, a probation officer drafted a presentence report imprisonment. calculating The probation Simmons s officer recommended recommended an term of offense level of 43 -- the maximum level permitted under the Guidelines -- and a criminal history category of I. This offense level and criminal Guidelines-recommended history category produced sentence of 960 months imprisonment. 6 a The district court varied downward from the probation officer s recommendation and sentenced Simmons to 600 months imprisonment. Specifically, the court sentenced Simmons to 240 months on the securities-fraud count, a consecutive term of 240 months on the wire-fraud count, and 240-month terms on each of the two money-laundering counts -- 120 months of which was to be served consecutively to the fraud counts, and 360 months of which was to be served concurrently. The court acknowledged that but this was an enormous sentence, explained that it could not remember another case that involved such devastating, life wrecking greed. sentence was The court concluded that a fifty-year sufficient, but not greater than necessary, to accomplish justice. II. On appeal, Simmons laundering convictions. 2 primarily challenges his money- He claims that the trial court erred by 2 Simmons also challenges all of his convictions on the general ground that the district court violated due process by admitting three pieces of assertedly irrelevant victim-impact testimony. Even if the court erred in admitting this evidence, any error was harmless. Overwhelming evidence supported the jury verdict. Nine testifying victims traced the fraud directly to Simmons. He confessed his role in the Ponzi scheme to an FBI agent, who also testified. And the fraud left a paper trail that pointed straight to Simmons. Thus, given the wealth of evidence against Simmons, even if the admission of brief victimimpact testimony was error, the guilty verdict was surely (Continued) 7 declining to grant his motion for judgment of acquittal on those counts. We review acquittal de novo. the denial of a motion for judgment of United States v. Mehta, 594 F.3d 277, 279 (4th Cir. 2010). A. The federal promotional money-laundering statute makes it a crime to engage proceeds of promote the in a specified carrying § 1956(a)(1)(A)(i) financial unlawful on (2006). transaction activity of that The involving with the activity. statute the intent 18 defines to U.S.C. specified unlawful activity to encompass more than 250 predicate crimes, including securities fraud and wire fraud. Id. at § 1956(c)(7)(A). Both of Simmons s money-laundering convictions arose from payments that he made to investors during the course of his Ponzi scheme. The first conviction was based on a wire transfer of $150,000 to James Bazluki on March 14, 2008. invested $250,000 in Black Diamond prior to Bazluki had receiving this return; after receiving it, Bazluki invested another $70,000. The second money-laundering conviction was based on transfer of $16,000 to Till Lux on October 22, 2008. unattributable to the error. 275, 279 (1993). a wire Lux had Sullivan v. Louisiana, 508 U.S. 8 invested $40,000 in Black Diamond. He testified that after recovering the $16,000, he subsequently convinced many of his friends to invest in Black Diamond. Lux also continued to withdraw money from Black Diamond, and ultimately turned a small profit on his investment. Simmons contends that these payments did not involve proceeds of unlawful activity as required to constitute money laundering. His argument relies on United States v. Santos, a 4-1-4 decision in which the Supreme Court reversed the money- laundering convictions of a defendant convicted of both running an illegal gambling business and money laundering. (2008). 553 U.S. 507 Santos s gambling counts arose from his operation of an illegal lottery through a network of local bars and restaurants. The money-laundering counts were based on payments by Santos to the runners and collectors who helped operate the lottery, and to the concluded operating lottery that an these illegal winners themselves. payments lottery, The involved and could the lower court proceeds therefore of constitute grounds for money-laundering convictions. Five Justice members plurality of the Supreme concluded that Court the disagreed. term A proceeds fourin the money-laundering statute was ambiguous -- it could mean either receipts or profits -- and invoked the rule of lenity to resolve the ambiguity in favor of the defendant. 9 Id. at 514 (plurality opinion). money-laundering The statute plurality only covers profits of criminal activity. In rejecting the thus concluded transactions that the involving Id. at 524. statute s broader interpretation, the plurality found that construing proceeds to mean receipts would create a merger problem. Id. at 515. The plurality explained that those who run illegal gambling businesses must necessarily pay their accomplices and the lottery s winners. If a defendant could commit money laundering merely by paying the expenses of his illegal activity, all illegal gambling businesses would involve money laundering, and the Government could punish a defendant twice intended to punish only once. for an offense that Congress Id. at 517. This merger problem, the plurality noted, is not limited to illegal gambling. Writing for the plurality, Justice Scalia explained: Few crimes are entirely free of cost, and costs are not always paid in advance. Anyone who pays for the costs of a crime with its proceeds -- for example, the felon who uses the stolen money to pay for the rented getaway car -- would violate the money-laundering statute. And any wealth-acquiring crime with multiple participants would become money laundering when the initial recipient of the wealth gives his confederates their shares. Generally speaking, any specified unlawful activity, an episode of which includes transactions which are not elements of the offense and in which a participant passes receipts on to someone else, would merge with money laundering. 10 Id. at 516. The plurality concluded that interpreting proceeds to mean profits would resolve the merger problem by ensuring that defendants cannot be convicted of money laundering merely for paying the essential crime-related expenses of the predicate crime. Id. at 515. Justice Scalia devoted much of the plurality opinion to challenging the dissent s prediction that applying the profits interpretation would undermine the viability of the very cases that money cases laundering involving statutes large-scale principally criminal over a substantial period of time. (Alito, J., dissenting). plurality s approach, target, operations that that is, continue Santos, 553 U.S. at 538-39 The dissent warned that, following the the money-laundering statute could not reach long-term criminal enterprises in which the distinction between payments of essential expenses and payments dispensing criminal profits may often be unclear. But dismissed the dissent s concerns as baseless. plurality, determining the lifespan of a the plurality According to the long-term criminal enterprise, for purposes of evaluating whether the enterprise produced profits, would raise no difficulties because an enterprise lasts as long as the Government chooses to charge. Id. at 520 n.7 (plurality opinion). Because the Government selects the lifespan of the predicate crime, it must prove that payments charged as money laundering 11 during that lifespan involved profits, predicate crime. rather than essential expenses, of the Id. Justice Stevens provided the crucial fifth vote to reverse Santos s money-laundering convictions, but did not endorse the plurality s view that proceeds always means profits. Rather, Justice Stevens concluded that courts should resolve the scope of the term proceeds on a reference to congressional intent. concurring). case-by-case basis by Id. at 525 (Stevens, J., Justice Stevens grounded his conclusion on the merger problem identified by the plurality. He concluded that using funds earned through an illegal lottery business to pay the essential expenses money laundering. that there was of Id. at 528. no that business cannot constitute And he agreed with the plurality explanation for why Congress would have wanted a transaction that is a normal part of a crime it had duly considered Criminal Code, crime. Id. and to appropriately radically punished increase the elsewhere sentence in for the that Justice Stevens concluded that Congress could not have intended such a perverse result. Id. B. Congress amended the money-laundering statute in May 2009; that amendment effectively overruled Santos, defining proceeds to include gross receipts. Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111 21, § 2(f)(1), 123 Stat. 1617, 1618 12 (2009) (codified at 18 U.S.C. § 1956(c)(9)). However, because the amendment was not enacted at the time of the conduct giving rise to Simmons s money-laundering convictions, this expanded definition of proceeds does not apply in this case. We are therefore called on to wade into the murky Santos waters, as we have in three previous published opinions. In United States v. Halstead, we considered the reach of Santos in the context of a defendant convicted of healthcare fraud and money laundering. 634 F.3d 270 (4th Cir. 2011). Halstead s fraud convictions arose from his scheme to capitalize on his patients healthcare benefits by making phony medical diagnoses. His money-laundering conviction, by contrast, arose from his transfer of the illicit gains into his personal bank account. He claimed that Santos prohibited his money-laundering conviction because transferring his ill-gotten gains into his own coffers constituted an essential expense[] of operating his healthcare fraud. Santos, 553 U.S. at 528 (Stevens, J., concurring). To resolve exactly, Santos disposition. Halstead s argument held task -- a we first complicated by examined the what, fractured Relying on Marks v. United States, 430 U.S. 188 (1977), we interpreted Santos narrowly to bind lower courts only in cases where illegal gambling constituted the predicate for the defendant s money-laundering conviction. 13 Halstead, 634 F.3d at 279. force But, because the merger problem provided the driving behind both the plurality s and Justice Stevens s opinions, we recognized that Santos compelled us to construe the money-laundering statute so as to avoid punishing a defendant twice for the same offense. Id. at 278-79. We concluded that a defendant cannot be convicted of money laundering merely for paying the crime. essential expenses of operating the Id. at 278 (quotation marks omitted). underlying But if the financial transactions of the predicate offense are different from the transactions prosecuted as money laundering no merger problem arises. Applying Id. at 279-80. this rule to Halstead, we held problem tainted his money-laundering conviction. fraud was complete as soon healthcare reimbursements. into own his account as he received Transferring thereafter these constituted that no merger His healthcare the ill-gotten reimbursements an altogether separate offense that the Government properly prosecuted as money laundering. Id. at 280. After Halstead, we twice returned to Santos and its elusive merger problem. In United States v. Cloud, we considered a defendant convicted of mortgage fraud -- for fraudulently luring home-buyers into making bad real-estate investments -- and money laundering -- for paying kickbacks to the accomplices who helped him locate his victims. 680 F.3d 396 (4th Cir. 2012). 14 We reversed Cloud s money-laundering convictions, concluding that the kickbacks constituted essential expenses of the mortgagefraud scheme because Cloud s mortgage fraud depended on the help of others, and their help, in turn, depended upon payments from Cloud. Id. at 406. Because Cloud s scheme could not have succeeded without the kickbacks, we held that convicting him separately for these transactions would present the very same merger problem identified in Santos. Id. at 407. A few months ago, in United States v. Abdulwahab, we again relied on Santos convictions. to reverse a defendant s money-laundering 715 F.3d 521 (4th Cir. 2013). Abdulwahab had committed an elaborate investment fraud, and the jury convicted him of money laundering based on payments he made to his coconspirators to carry out that fraud. Cloud, we found that these payments Id. at 506-07. were for As in services that played a critical role in the underlying fraud scheme because they persuaded confederates to participate in the crime. 531. Id. at Abdulwahab resembled the paradigmatic felon, recognized by the Santos plurality, who uses stolen money to pay for the rented getaway car. Id. We therefore concluded that the same merger problem presented in Santos barred his money-laundering convictions. Id. 15 III. Simmons argues that Santos, Halstead, Cloud, and Abdulwahab require that we reverse his money-laundering convictions. He claims that his payments to investors did not involve proceeds of criminal activity but rather maintaining his Ponzi scheme. him separately of money essential expenses of And he maintains that convicting laundering for payments that were essential to accomplishing his fraud would raise the same fatal merger problem identified in Santos. The Government, by contrast, argues that Simmons s fraud did not depend on payments to investors and that these payments were not essential to the fraud. The Government therefore maintains that Simmons s money- laundering convictions should be affirmed. A. After considering the record in this case, the parties arguments, and controlling money-laundering admitted at law, convictions Simmons s ongoing success of earlier investors, his trial we conclude cannot stand. irrefutably Ponzi including scheme those that Simmons s The evidence established depended payments on that payments charged in the to the money-laundering counts. The evidence against Simmons confirmed the commonsense notion that people generally do not send money into unproven investment schemes without some 16 evidence that they will see their money again. Early payments from Simmons provided his victims with just such evidence. that Simmons paid to early Thus, the $9 million dollars investors was essential to perpetuating the fraud scheme that ultimately earned him more than $35 million. Indeed, James Bazluki -- the victim whose payment basis formed the of Simmons s first money-laundering count -- testified that the fact that he was able to request money out of the account convinced him that this was a good place to have [his] money and prompted him to make further investments. Simmons s And Till Lux -- whose payment formed the basis of other money-laundering count -- testified that the fact that he was able to withdraw from his account made him 100 percent confident in his investment, convinced him that his gains were not just friends to invest. on paper, and made him encourage his In sum, the very victims who received the payments that formed the basis for Simmons s money-laundering charges unequivocally testified to the critical importance of those payments in fostering the (misplaced) confidence necessary to perpetuate the fraud. That Simmons s fraud continued for five months after the payments to existing investors stopped does not alter this fact. When payments ceased in July 2009, Simmons managed to attract only one new investor. And, as soon as the payments ceased, existing investors started demanding the answers that led to the 17 scheme s prompt unraveling. That Simmons managed, through lies and dissembling, to extend a fraud that had endured for more than two years for an additional five months without paying any new returns to investors does not prove that those payments were unnecessary to the scheme. the Ponzi scheme when If anything, the rapid unraveling of the payments ceased suggests just the opposite. Furthermore, this case, investors as indictment transfers the we note Government essential to characterized to that wire ponzi throughout itself treated Simmons s the wire payment its the fraud. fraud to prosecution payments The offense investors of to superseding as and including to their intermediaries in other States -- the very transactions that the Government later prosecuted as money laundering. closing argument, the Government contended that And in its payments to investors were necessary to the fraud because they g[a]ve the investors confidence that their investment was sound and induce[d] them to put even more money back into the scheme. The Government explained that the payments were one of the ways the defendant kept the scheme going. In addition to the evidence proving that this particular Ponzi scheme payments are Ponzi schemes. relied on understood payments to to constitute early investors, essential such features of In fact, we have defined a Ponzi scheme as one 18 in which early investors are paid off with money received from later investors in order to prevent discovery and to encourage additional and larger investments. 107 F.3d 257, 259 n.1 (4th Cir. United States v. Loayza, 1997). The Oxford English Dictionary similarly defines a Ponzi scheme as a form of fraud in which belief in the success of a non-existent enterprise is fostered by payment of quick returns to first investors using money invested by others. Ponzi Scheme, Oxford English Dictionary (2013). Given these definitions, it is hardly surprising that the only other appellate court to decide a case involving a Ponzischeme operator convicted of both fraud and money laundering has reached the same conclusion as we do. In United States v. Van Alstyne, the the purported Circuit convictions laundering Ninth on returns to reversed the early ground investors defendant s that were convictions payments inherent defendant s underlying scheme to defraud. (9th Cir. 2009). the money- to of the 584 F.3d 803, 815 The court concluded that the money-laundering suffered from a merger problem because the very nature of a Ponzi scheme require[s] some payments to investors for it to be at all successful. Finally, we note that Id. at 815. when Congress amended the money- laundering statute in 2009 to include gross receipts within the law s definition of proceeds, 19 the Senate Report acknowledged that Ponzi scheme payments could not be prosecuted as money laundering under the existing statute. The Report bluntly stated that, given the Santos Court s interpretation of the existing statute, the proceeds of Ponzi schemes like the Bernard Madoff case, which by their very nature do not include any profit, would be out of the reach of the money laundering statutes. S. Rep. No. 111-10, at 4 (2009). Of course, the Senate s interpretation of Supreme Court case law does not bind us. of It does, however, accord with our conclusion that payments purported constitute returns to essential early expenses investors of Ponzi are understood schemes rather to than transactions dispensing a Ponzi scheme s profits. B. The Government concedes that this case involves a difficult line-drawing issue, Gov t Br. at 57, but nonetheless contends principal that we must arguments affirm. as to The why Government Simmons s raises three money-laundering convictions present no merger problem. First, the Government contends that Simmons s returns to investors constitute the reinvestment of profit to finance future fraud rather than essential expenses of an ongoing fraud. Gov t Br. criminal profits to at 56. finance Although a future the line fraud between and using using gross receipts to pay the expenses of an ongoing fraud is less than 20 self-evident, see Santos, dissenting), Santos both 553 U.S. requires us at to 544 draw (Alito, this line J., and offers useful guidance as to where the line falls in this case. Santos s gambling scheme and Simmons s Ponzi scheme resemble each other in virtually all material respects. constituted ongoing transactions. schemes rather than discrete Both criminal The indictments in both cases charged underlying conduct that spanned a number of years rather than a single illegal act. And both schemes required occasional payments to third parties to sustain the crime during its lifespan. Santos paid his lottery winners, presumably hoping that reliable paydays would induce winners, losers, and new players alike to test their luck during the next round of play. course, Santos could instead pocketed the have declined cash. Had to he pay done his so, Of winners and however, his gambling scheme would have been short-lived; it could not have lasted the six years charged in the indictment. A majority of the Supreme Court therefore agreed that Santos s payments to winners did not amount to the reinvestment of profit to finance new, discrete gambling crimes. Rather, these payments constituted expenses necessary to further a crime that, by its very nature, required periodic payments to survive. The same is true in this case. winners in the hopes of attracting 21 Like a bookie who pays his new and repeat gamblers during the course of an ongoing lottery, Simmons paid early investors in the hopes of attracting new and repeat investors during the course of an ongoing fraud. Although Simmons could have absconded with the early investors money before paying any returns, had he done so, his scheme certainly could not have lasted for indictment. the nearly three-year period charged in the See Santos, 553 U.S. at 520 n.7 (plurality opinion) (a criminal enterprise s profitability must be proved for as long as the Government chooses to charge ). Given this case s similarity to Santos, we must decline the Government s invitation to divide Simmons s Ponzi scheme into a successive series of past, present, and future frauds. Rather, Santos requires that we hold that Simmons s Ponzi scheme, like the lottery enterprise scheme that the in Santos, defendant represented could a sustain single, only by ongoing making limited payouts. The Government next argues that payments to innocent third parties -- rather than to coconspirators -- cannot constitute essential expenses of a criminal scheme. The Government notes that in both Cloud and Abdulwahab, the payments we deemed to be essential were made to the defendant s criminal accomplices rather than to innocent outsiders like Simmons s Ponzi victims. According to the Government, while paying one s accomplices is a typical expense of criminal activity akin to paying for a rented 22 getaway car, paying investors in order to maintain a Ponzi scheme is a different matter entirely. This argument ignores the very facts of Santos itself. Santos, payments formed the 553 were believe of U.S. collectors, the at accomplices winners were not. 3 not runners, basis convictions. collectors to and defendant s 509. to Although Santos s lottery In winners money-laundering the runners crime, the and lottery Manifestly, the Supreme Court therefore did that the merger problem arises only defendant pays his co-conspirators or accomplices. when the See Santos, 553 U.S. at 515-16 (plurality opinion) ( Since few lotteries, if any, will illegal not pay lotteries statute. ). For their would our winners, merge part, we the with have statute criminalizing the money-laundering repeatedly explained in interpreting Santos that the essential nature of the payment -rather than the identity of the payment s recipient -- dictates whether a given transaction raises a merger problem. See Cloud, 680 F.3d at 407; Halstead, 634 F.3d at 279. 3 That these winners participated in an illegal lottery, and were therefore not strictly innocent, did not make them accomplices to Santos s crime. The illegal gambling statute criminalizes conduct[ing], financ[ing], manag[ing], supervis[ing], direct[ing], or own[ing] a gambling operation that violates state law. 18 U.S.C. § 1955 (2006). The statute thus criminalizes the management of -- rather than the mere participation in -- an illegal gambling venture. Just like Simmons s victims, the lottery winners were therefore not participants or co-conspirators in Santos s crime. 23 Finally, payments in stretches to perhaps this recognizing case and distinguish those them by the in similarity Santos, pointing between the the Government the assertedly to unscheduled, discretionary nature of the Ponzi payments. The Government maintains that although regular payments to lottery winners -- as in Santos -- can constitute essential expenses of a criminal scheme, payments in discretionary amounts made on no schedule in particular -- assertedly as in this case -- cannot. Gov t Br. at 57. It is not at all clear that the payments in Santos were more scheduled or less discretionary than those here. 4 But even assuming that Santos made payments according to a strict schedule, and that Simmons made them at whim, the Government raises a distinction without a difference. If a criminal scheme requires certain payments to succeed, it makes no difference whether these payment need Simmons s payments not Ponzi be arrive regularly predictable scheme depended 4 to on or be sporadically. essential. periodic A Because payments to The payments here were governed by a contract permitting investors to withdraw funds on the first business day of each month. To be sure, Simmons failed to honor this contract. But his ultimate failure to honor his contractual obligations does not necessarily render the payments that he did make unscheduled. For its part, the Santos Court never specified whether Santos paid his winners on a particular schedule. In any event, in neither case can the payments be characterized as discretionary given that both schemes depended on the payments to survive. 24 investors, these payments constituted essential expenses of his criminal enterprise regardless of whether they accrued on a specified timetable. IV. Simmons s fraudulent scheme, like any typical Ponzi scheme, depended on attracting new investments payouts to existing investors. through occasional Without these payouts, there would have been no new investments and, consequently, no Ponzi scheme. The Government conceded -- indeed, trumpeted -- this fact throughout the trial proceedings -- both in its charging documents and its arguments to the jury. And Congress itself recognized as much when it amended the money-laundering statute in 2009 to ensure that Ponzi disbursements like the ones at issue here could henceforth be punishable as money laundering. Simmons s payments to investors, like Santos s payments to lottery winners, constitute essential expenses of his underlying fraud. Punishing Simmons separately for these payments therefore raises the same merger problem identified in Santos. For these convictions, reasons, we while must we reverse 25 affirm his Simmons s two two fraud money-laundering convictions, vacate his sentence, and remand for further proceedings consistent with this opinion. 5 AFFIRMED IN PART, REVERSED IN PART, VACATED IN PART, AND REMANDED 5 We need not address Simmons s contention that his fiftyyear sentence was procedurally and substantively unreasonable. And, given that Simmons s procedural challenge to his sentence rests on an asserted misapplication of a money-laundering sentence enhancement, this challenge should be moot on remand in light of our reversal of the money-laundering convictions on which it is based. 26 NIEMEYER, Circuit Judge, dissenting: During the course of this Ponzi scheme, Simmons obtained money through wire fraud and securities fraud from investing customers and used a portion of the money so obtained -- the proceeds of the fraud -- to return $150,000 to James Bazluki and $16,000 to Till Lux in an effort to conceal the fraud he had committed on them. By so investing the proceeds of the fraud, Simmons was able to engage in additional fraud from which he obtained additional proceeds, because the payments to Bazluki and Lux deflected potential suspicion that otherwise might arise with respect to his initial fraudulent transactions. Under these facts, when Simmons returned money to Bazluki and Lux, he engaged in transactions that constituted money laundering, in violation of 18 U.S.C. § 1956(a)(1)(A)(i) (prohibiting financial transactions involving the proceeds of specific unlawful activity (i.e., in this case, wire fraud and securities fraud)). And obtaining investors money completed when Simmons the fraud was a received committed distinct, the by Simmons antecedent money. In in crime, these circumstances, I submit, the two crimes (money laundering and wire or securities fraud) did not merge so that Simmons was subjected to punishment twice for the same conduct. See United States v. Santos, 553 U.S. 507, 517 (2008) (observing that a merger problem would allow prosecutors, in their discretion, 27 to seek the higher penalty for the two merged crimes or both penalties); United States v. Halstead, 634 F.3d 270, 278-79 (4th Cir. 2011) (same). Disagreeing with the majority s analysis, I would conclude that the payments to Bazluki and Lux were not the essential expenses of Simmons wire fraud. See Santos, 553 U.S. at 528. The wire fraud did indeed have expenses in marketing and selling the scheme and paying employees to work the office. But once the and fraudulent statements were made to customers the customers sent money to Simmons based on the statements, the fraud was complete, and Simmons would then be punishable for violating the wire fraud statute, 18 U.S.C. § 1343. The subsequent payments back to the investors, who had earlier been defrauded, were not expenses of the fraudulent act -- they were not necessary as a matter of fact or law. Rather, they were acts of money-laundering that indeed would have the effect of covering up the fraud and thus promoting future frauds. Our decision in United States v. Cloud, 680 F.3d 396 (4th Cir. 2012), makes clear the distinction between an expense of the fraud and a payment to conceal the fraud and promote future frauds. employed In Cloud, the proceeds recruiters, as coconspirators helped perpetuate the fraud. of the of Id. at 408. fraud the were paid defendant, to who We noted that the payments to these recruited coconspirators were the essential 28 expenses of Cloud s underlying fraud, thus presenting a merger problem. Id. at 407. We thus found it essential that the payments be made to conspiring employees, distinguishing those payments from payments made to investors for cover-up and future frauds. As we stated: In utilizing monies from previous properties to finance future purchases, Cloud was not paying the essential expenses of the underlying crime. Cloud, 680 F.3d at 408; see also United States v. Abdulwahab, 715 F.3d 521, 531 payments made played critical a to (4th the Cir. 2013) defendant s role in the (likewise agents underlying for holding that services that fraud scheme were essential expenses of the fraud and recognizing the distinction made in Cloud that payments to nonparticipating persons to promote future frauds were not essential expenses ). In this case, Bazluki and Lux were not recruiters, confederates, or coconspirators in the fraudulent scheme. To the contrary, they were innocent victims of Simmons wire or securities fraud, and the payments made to them were to cover up Simmons past fraud and promote future fraud. Simmons ability to obtain investments based on fraudulent statements subjected him to punishment under 18 U.S.C. § 1343, as well as 15 U.S.C. § 78j(b), and his payments of the fraudulently obtained monies to victims of the fraud were separate transactions that subjected him to punishment for money laundering under 18 U.S.C. 29 § 1956(a)(1)(A)(i). In this circumstance, there is no risk of penalizing Simmons twice for the same conduct. The majority could only make its analysis work if Simmons were convicted of some single crime prohibiting a Ponzi scheme because under fraudulent a transactions transactions. scheme, are Simmons was a Ponzi scheme; he crimes of laundering, and his wire fraud, payment the used But prohibiting distinct Ponzi of proceeds to not was earlier in future engage charged charged securities monies from to with with fraud, a crime committing and investors money who had already been defrauded was not an expense of the fraud; it was a transaction of money laundering. Accordingly, I would not find that a merger problem exists in this case and would affirm on all counts. 30
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