Opinion
No. S1 04 Cr. 391 (DAB).
March 29, 2005
MEMORANDUM AND ORDER
Defendants are charged in a fourteen-count Superseding Indictment with tax evasion, making false statements in federal income tax returns, and structuring financial transactions in order to evade federal transaction reporting requirements. Defendants Joseph Morelli and Michael Morelli, Jr. ("Moving Defendants") now move for severance pursuant to Federal Rule of Criminal Procedure 14 and United States v. Finkelstein, 526 F.2d 517 (2d Cir. 1975), on grounds that Co-Defendant Michelino Morelli ("Morelli Sr.") will only offer exculpatory testimony on their behalf if he is tried separately. For the reasons stated below, Defendants' severance motion is GRANTED.
I. BACKGROUND
On April 26, 2004, Defendant Michelino Morelli was indicted by a federal grand jury on four counts of tax evasion, in violation of 26 U.S.C. § 7201. He allegedly failed to report as income on his 1997-2000 individual federal tax returns over $650,000 in cash receipts from the VIP Beach and Tennis Club (the "Club") in New Rochelle, New York. Defendant Michelino Morelli was part-owner and chief operating officer of the club from which he had allegedly diverted the funds into his own personal bank accounts. (Indictment ¶ 1; Affirmation of David Wikstrom ["Wikstrom Aff."], Ex. A (Affidavit of Michelino Morelli) ¶ 2). Subsequently, on August 18, 2004, the grand jury issued a Superseding Indictment, which additionally charged both of his sons, Joseph- the Club's assistant manager- and Michael Jr.- the Club's night manager and director of finance- with three counts of tax evasion for allegedly failing to report as income tens of thousands of dollars in Club corporate receipts diverted into their own personal bank and credit card accounts. (Superseding Indictment ["Sup. Ind"] ¶¶ 2, 9-10, 18, 20, 22). The Superseding Indictment also charged Morelli Sr. with three counts of filing false federal income tax returns on behalf of the Club, in violation of 26 U.S.C. § 7206, and one count of structuring financial transactions to evade federal reporting requirements, in violation of 31 U.S.C. § 5324. (Id. ¶¶ 12, 16).
The Indictments resulted from a Government investigation into the aforementioned cash transfers. (Wikstrom Aff. ¶ 5). As part of the investigation, federal agents went to Morelli Sr.'s home on December 21, 2001 to interview him regarding the transfers, but he refused and instead asked to speak with his attorney at the time, David Lenefsky, Esq. (Id., Ex. B (Memorandum of Interview, dated December 21, 2001)). After discussing the matter with Mr. Lenefsky and his newly-retained accountants, S. Buxbaum Co., P.C., Morelli Sr. decided to amend his and the Club's federal tax returns for the 1997-2000 period to include as income the Club receipts he had received, and instructed his sons to do the same on their tax returns for these years. (Wikstrom Aff. ¶ 8, Ex. A ¶ 5). However, Robert Castro, Morelli Sr.'s former accountant and the accountant for his sons and the Club during the relevant tax years, allegedly prepared Joseph and Michael Jr.'s amended returns with financial information provided exclusively by Morelli Sr. and without speaking to the sons about the underlying financial facts contained therein. (Id. ¶ 7, Ex. A ¶ 5).
Joseph Morelli and Michael Morelli Jr. now move for severance, arguing that only if Morelli Sr. is tried separately will he testify at their trial that (a) the cash transfers they received from him were actually gifts, not income, and (b) he, not they, instructed their accountant to amend their tax returns to reflect such gifts as income.
II. DISCUSSION
Under Rule 14, when multiple defendants have been otherwise properly joined under one indictment, the district court may nevertheless "sever the defendants' trials, or provide any other relief that justice requires" when such joinder "appears to prejudice a defendant or the government." Fed.R.Crim.P. 14(a). Defendants seeking severance have a difficult standard to meet. As the Supreme Court has emphasized:
[t]here is a preference in the federal system for joint trials of defendants who are indicted together. Joint trials play a vital role in the criminal justice system. They promote efficiency and serve the interests of justice by avoiding the scandal and inequity of inconsistent verdicts . . . When defendants properly have been joined under Rule 8(b), a district court should grant severance under Rule 14 only if there is a serious risk that a joint trial would compromise specific trial rights of one of the defendants, or prevent the jury from making a reliable judgment about guilt or innocence . . . When the risk of prejudice is high, a district court is more likely to determine that separate trials are necessary, but . . . less drastic measures, such as limiting instructions, often will suffice to cure any risk of prejudice.
It is well settled that defendants are not entitled to severance merely because they may have a better chance of acquittal in separate trials. Rules 8(b) and 14 are designed to promote economy and efficiency and to avoid a multiplicity of trials, [so long as] these objectives can be achieved without substantial prejudice to the right of the defendants to a fair trial. Zafiro v. United States, 506 U.S. 534, 537-40, 113 S.Ct. 933, 122 L.Ed.2d 317 (1993) (citations and internal quotations omitted); see also United States v. Cardascia, 951 F.2d 474, 482 (2d Cir. 1991) ("[T]he burden on a defendant to establish that severance was improperly denied is not an easy one to carry. The defendant must establish prejudice so great as to deny him a fair trial.") In addition, the district court enjoys broad discretion in determining whether to sever a criminal proceeding, see United States v. Locasio, 6 F.3d 924, 947 (2d Cir. 1993), and that decision is "virtually unreviewable." United States v. Lasanta, 978 F.2d 1300, 1306 (2d Cir. 1992).
More specifically, when a defendant seeks severance so that a co-defendant will offer exculpatory testimony on his behalf, the district court, in determining whether such severance is warranted, must consider four factors enumerated by the Second Circuit in United States v. Finkelstein, 526 F.2d 517 (2d Cir. 1975), cert denied, 425 U.S. 960, 96 S.Ct. 1742, 48 L.Ed.2d 205 (1976): (1) the sufficiency of the showing that the co-defendant would testify at a severed trial and waive his Fifth Amendment privilege against self-incrimination; (2) the degree to which the exculpatory testimony would be cumulative, (3) the counter-arguments of judicial economy; and (4) the likelihood that the testimony would be subject to substantial, damaging impeachment. Id. at 523-24; see also United States v. Wilson, 11 F.3d 346, 354 (2d Cir. 1993) (same) (quoting Finkelstein), cert. denied, 511 U.S. 1130, 114 S.Ct. 2142, 128 L.Ed.2d 870 (1994).
The Court will address each of the Finkelstein factors in turn.
A. Showing of Co-Defendant's Willingness to Testify
In support of their Motion, the Moving Defendants have submitted a sworn affidavit from Morelli Sr. himself, in which he states that he would waive his Fifth Amendment Privilege against self-incrimination and testify at the separate trial of his sons that (1) the money he transferred to their personal accounts from 1997 through 2000 were "cash gifts" to them, (2) he instructed his sons to amend their 1997-2000 federal tax returns, and (3) it was he, not they, who "told the accountants what amounts should be used in preparation of [their] amended income returns." (Wikstrom Aff., Ex. A ¶¶ 4-6). Such a specific, written promise by the co-Defendant himself clearly constitutes a sufficient showing of his willingness to offer exculpatory testimony at the Moving Defendants' severed trial. See United States v. DePalma, 466 F.Supp. 920, 922 (S.D.N.Y. 1979) (holding that first Finkelstein factor was satisfied where co-defendant submitted affidavit stating he would testify at separate trial of moving defendant and setting forth substance of his proposed testimony);United States v. Stella, No. 90 Cr. 95, 1990 WL 128918, at * 7 (S.D.N.Y. Aug. 27, 1990) (same) (citing DePalma); United States v. Gardell, No. 00 Cr. 632, 2001 WL 1135948, at *9 (S.D.N.Y. Sep. 25, 2001) (noting that "[c]ourts have required a factual showing that demonstrates with a modest degree of definiteness the exculpatory nature and effect of the co-defendant's testimony") (listing cases). The Government does not attempt to argue otherwise. (Gov't Mem. at 18).
Accordingly, the first Finkelstein factor clearly weighs in favor of severance.
B. Extent to Which Exculpatory Testimony Would be Cumulative
Moving Defendants contend that Morelli Sr.'s exculpatory testimony would not be cumulative because "it cannot be obtained from any other source." (Def. Mem. at 7). Specifically, they argue that Morelli Sr. "is in the best position" to describe the true nature of his transactions with his sons, i.e., whether he gave them money in exchange for goods and services, as wages, or as gifts, the details of his meetings with Mr. Lanefsky and his accountants, and his precise instructions to his sons about amending their tax returns. (Id.). Meanwhile, the Moving Defendants note, without Morelli Sr.'s testimony, Lanefsky's potential testimony about any discussions regarding amendment of the tax returns would necessarily be limited, if not foreclosed altogether, by the attorney-client privilege, while accountant Castro would be barred by hearsay rules from testifying about anything Morelli Sr. might have said about giving gifts to his sons. (Id.). Finally, although Moving Defendants acknowledge they could testify themselves about several of these matters, they argue that their testimony would be attacked by the Government as self-serving and uncorroborated, while Morelli Sr.'s testimony would not be. (Id. at 7-8).
The Government argues that there are several other witnesses who could testify about the above-mentioned matters, starting with the Moving Defendants themselves, who the Government contends could testify both "that they believed the cash payments from their father were gifts, rather than income" and "that they amended their income tax returns to falsely state that the cash they received was income based on their father's advice." (Gov't Mem. at 14). The Government also argues that the Moving Defendants "can subpoena employees of the Club, friends, and family members who can testify that [Morelli Sr.] regularly gave cash gifts to his sons," and can call the aforementioned accountants and Lanefsky to testify about the advice they gave Morelli Sr. regarding his sons' tax returns, "to the extent that such testimony is not hearsay and otherwise admissible." (Id. at 14-15).
The Court finds the Moving Defendants' arguments more persuasive. As Moving Defendants correctly point out, if Morelli Sr. does not testify on their behalf, no one with first-hand knowledge of the discussions between him, his attorneys, and accountants regarding the amendment of the tax returns could testify because attorney client privilege would bar Lanesky's testimony and the hearsay rules would bar much, if not all, of the accountants' testimony. Indeed, the Government appears to acknowledge as much when it concedes that Lanefsky and the accountants could testify "to the extent such testimony is not hearsay and otherwise admissible" (Gov't Mem. at 15). Further, the Moving Defendants' own testimony would not be an adequate substitute for Michelino Morelli's because it is much more likely to be attacked as self-serving, and the Moving Defendants would likely be precluded by the hearsay rules and their lack of personal knowledge from offering any testimony about the financial information their father provided to Castro to amend their tax returns.
Indeed, these discussions are not statements against interest of a party opponent under Federal Rule of Evidence 801, and do not appear to fall under any of the categories of hearsay exceptions in FRE 803 or 804.
Federal Rule of Evidence 602 prohibits a witness from testifying about a matter of which he or she does not have personal knowledge.
Finally, the Court does not share the Government's confidence that "there are plenty" of witnesses "who can testify that [Morelli] Sr. regularly gave cash gifts to his sons." (Gov't Mem. at 14). Considering the nature of the charges in this case, which include diversion of Club funds, it is not clear to the Court how the Government expects non-defendant Club employees and Morelli family members to be able to testify either about the nature of the payments to the Moving Defendants or the source. Such casual and unfounded references to others who could testify by the Government are not persuasive to the Court.
Accordingly, the Court finds that Morelli Sr.'s exculpatory testimony would not be cumulative, and thus the secondFinkelstein factor also weighs in favor of severance.
C. Judicial Economy
The third Finkelstein factor reflects the policy of the federal courts "favoring joinder of trials," under which any "slight prejudice to codefendants" that may be caused by joinder is "deemed outweighed by the judicial economies resulting from the avoidance of duplicative trials" and obviation of "the risk of inconsistent verdicts resulting from separate trials." Cardascia, 951 F.2d at 482-83 (citing Richardson v. Marsh, 481 U.S. 200, 209-10, 1078 S.Ct. 1702, 95 L.Ed.2d 176 (1987)). These policy rationales are especially compelling where "the crime[s] charged involve a common plan or scheme." Id. at 482; United States v. Girard, 601 F.2d 69, 72 (2d Cir. 1979) ("Where, as here, the crime charged involves a common scheme or plan, a joint trial of the participants is proper, absent a clear showing of prejudice.") (citations omitted).
The Moving Defendants argue that severing their trial from that of Morelli Sr. "would not significantly impair judicial economy" because they and Morelli Sr. are not charged with conspiring or acting in concert to divert club funds into their personal accounts but are instead charged "in their own counts with their own conduct," and therefore there is only a slight overlap in the evidence the Government will use against each of them. (Def. Mem. at 5, 8; Def. Reply Letter, dated March 9, 2005, at 3). Moving Defendants also claim that their separate trial would not be lengthy and would be made even quicker because they plan to stipulate to the authenticity of the Government's documentary evidence, which they contend constitutes the vast majority of the evidence the Government plans to introduce. (Id. at 8-9).
The Government, however, argues that while the three Defendants are not charged together in a conspiracy, each one's alleged wrongful conduct was part of "a single fraudulent scheme" that involved taking cash from the Club, depositing it in numerous bank accounts, failing to pay income tax on it, and making false statements on their income tax returns. (Gov't Mem. at 15). Their conduct was "obviously so closely intertwined," the Government contends, that "virtually all of the same evidence would have to be presented in two separate trials if severed." (Id. at 16-17).
As an initial matter, Moving Defendants' argument that their separate trial would be short carries little weight, for, as this Court has previously emphasized, "what matters is not the absolute length of the trial but the objective of `promot[ing] . . . economy and efficiency and . . . avoiding multiplicity of trials." United States v. Wang, No. 98 Cr. 1999 (DAB), 1998 WL 989332, at *3 (S.D.N.Y. Dec. 22, 1998) (quoting Zafiro v. United States, 506 U.S. at 539). Moreover, the Court does not agree with the Moving Defendants' contention that there is minimal overlap between the evidence against them and the evidence against Morelli Sr. After all, the cash payments they allegedly received from their father were among the over-220 illegal transfers he is charged with making, while the same accountant, Castro, prepared all three Defendants' allegedly false federal tax returns and would likely have to testify at both trials if severance is granted.
At the same time, however, the three Defendants' alleged crimes are not so intertwined that the same evidence will be used to prove all of them. Although there is a clear overlap in evidence with respect to the Moving Defendants' alleged tax evasion charged in Counts Nine through Fourteen of the Superseding Indictment and some of the 220 alleged illegal cash transfers Morelli Sr. is charged with making in Count Four, the remaining seven counts against Michelino Morelli for tax evasion and filing false federal tax returns do not allege any involvement by the Moving Defendants. Thus, to convict Morelli Sr. on these latter seven counts, the Government will likely rely on different bank statements, tax returns and other documentary evidence than it will use to prove its case against the Moving Defendants on the tax evasion counts.
Such partial evidentiary overlap in turn does not, by itself, preclude severance. As the Finkelstein court itself noted:
While we are not unmindful of the necessity to husband scarce and overburdened judicial resources, we also must acknowledge that duplication of proof is often inevitable in situations meriting separate trials. The counter-argument of judicial economy is, indeed, a serious consideration, but by itself does not foreclose further inquiry.526 F.2d at 524.
The Court also notes that despite the Government's contention that a conspiracy does not have be charged for the presumption in favor of joinder of defendants to apply (Gov't Mem. at 16-17), all of the cases it cites in which such presumption is mentioned involved at least one alleged conspiracy. See Girard, 601 F.2d at 70 (conspiracy to make an unauthorized sale of government property); United States v. Ventura, 724 F.2d 305 (2d Cir. 1983) (conspiracy to commit fraud); Cardascia, 951 F.2d at 477 (conspiracy to commit fraud); Wilson, 11 F. 3d at 348 (narcotics conspiracy); United States v. Solomon, No. 95 Cr. 154, 1996 WL 399814, at * 1 (S.D.N.Y. July 16, 1996) (conspiracy to violate immigration laws).
Moreover, the danger of inconsistent verdicts would be no greater if the Moving Defendants' trial is severed from Morelli Sr.'s. There would be nothing inconsistent about one jury convicting Morelli Sr. of tax evasion, filing false tax returns, and making unreported cash transfers to the Moving Defendants, while a second jury, convinced by Morelli Sr.'s testimony that the transfers to his sons were gifts, acquitted the Moving Defendants on their tax evasion charges. Indeed, the same result could very well occur if all three Defendants are tried together because whether a cash transfer must comply with federal reporting requirements is not determinative of whether or not such transfer is a gift to the transferee, and whether or not Morelli Sr. omitted certain income from his own and/or the Club's federal tax returns does not conclusively prove one way or the other that the Moving Defendants did the same thing on their own tax returns.
Thus, on balance, the judicial economy factor is neutral with respect to severance.
D. Danger of Impeachment
Finally, the Government argues that the fourth Finkelstein factor weighs against severance because Morelli Sr.'s proffered exculpatory testimony would be subject to "substantial, damaging impeachment." (Gov't Mem. at 11). Specifically, the Government contends that Morelli Sr.'s testimony that the payments he made to his sons were gifts is "clearly contradicted" by their tax returns which state the payments were income. (Id.). The Government also argues that such testimony is "so implausible as to be laughable" because it would require the jury to believe that Morelli Sr. made approximately 140 gift payments to his sons during the time they were employees at the Club and he, as their boss, was also paying their salaries, and that the Moving Defendants-"both full-grown, well-educated men-blindly followed their father's advice to supersede their truthful, accurate tax returns with false amended tax returns that required them to pay thousands of dollars they did not really owe." (Id. at 12-13). Finally, the Government reasons, the proffered testimony is impeachable because "it clearly motivated by [Morelli Sr.'s] obvious desire to exculpate his own sons" and because, if tried separately, he would most likely be testifying after having been convicted himself. (Id. at 13).
The Government's arguments are unavailing. To begin with, to the extent the Moving Defendants' amended tax returns would contradict Morelli Sr.'s proffered testimony, the testimony itself-specifically, his explanation of the circumstances surrounding the decision to amend the returns-would provide an explanation for this apparent contradiction. Moreover, the fact that the alleged payments Morelli Sr. made to the Moving Defendants were in addition to the salaries that he was already paying them as employees of the Club seems to bolster rather than undermine Defendants' claim that the payments were something other than income derived from employment. Similarly, the Court does not find it completely implausible that the Moving Defendants would follow their father's advice about amending their tax returns because, as Morelli Sr. would testify, this advice originally came from his attorney and new accountants, who are professionals with an expertise in tax law on which "educated adults" like the Moving Defendants regularly rely. Finally, while the Court acknowledges that Morelli Sr.'s status as a parent of the Moving Defendants and a convicted felon could undermine his credibility as a witness, the credibility evaluation itself is for a jury to make, and the Moving Defendants should therefore have the opportunity to present their father's proffered testimony to a jury.
Thus, overall, the Finkelstein factors appear to weigh in favor of severance. More generally, the Moving Defendants have satisfied their heavy burden under Zafiro by demonstrating that, one the one hand, joinder would severely prejudice them by preventing them from offering testimonial evidence that is not available from any other source and that, if believed, would constitute a complete defense to the charges against them, while severance, on the other hand, would only slightly impair interests of judicial economy. Accordingly, the Court finds that the severance of the Moving Defendants' trial from that of Michelino Morelli is warranted.
III. CONCLUSION
For the foregoing reasons, Defendants Joseph Morelli and Michael Morelli, Jr.'s Motion to Sever is GRANTED. A pretrial status conference with respect to Defendant Michelino Morelli shall take place on April 18, 2005 at 11:00am, and the next status conference for Defendants Joseph Morelli and Michael Morelli, Jr. shall take place on April 25, 2005 at 11:00am. In the interests of justice, time is excluded under the Speedy Trial Act for each Defendant until the scheduled date of his next pretrial conference. 18 U.S.C. § 3161(h) (8).
SO ORDERED.